Sotherly defaults on DoubleTree Hollywood’s $49M loan

Sotherly Hotels defaulted on its $49.2 million loan on a Hollywood resort near the ocean.

The debt on the 10-story DoubleTree Resort by Hilton Hollywood Beach with 311 keys, at 4000 South Ocean Drive, entered special servicing after missing the Oct. 1 due date to pay off the loan, according to Morningstar Credit and Sotherly’s second quarter Securities and Exchange Commission filing.

The recent default comes as Sotherly has been facing past due and impending maturities on some of its hotel loans, prompting the firm to seek extensions from lenders or face hefty paydowns on principal amid a difficult refinancing market. Williamsburg, Virginia-based Sotherly is a publicly traded real estate investment trust led by CEO Dave Folsom.

Its debt woes come amid a higher interest rate environment that’s led some lenders to retrench from issuing new loans and refinancings while they work through forbearance agreements and maturity extensions on existing debt. Generally, banks, which are under strict federal oversight, have to maintain a minimum of capital and clean up delinquencies before issuing new loans.

Sotherly didn’t return a request for comment. But its public filings shed light on how it’s tackling its loan issues.

On Monday, the firm announced it will be acquired under a merger agreement with Memphis-based Kemmons Wilson Hospitality Partners and Los Angeles-based Ascendant Capital Partners. Kemmons Wilson and Ascendant Capital will pay $2.25 per share for all outstanding Sotherly common stock, marking a 152.7 percent premium over Sotherly’s share price on Friday. The deal, which is expected to close in the first quarter, is valued at $425 million, Hotel Investment Today reported.

In its second quarter filing, Sotherly also outlined how it plans to tackle the Hollywood hotel maturity, saying it will ask the lender for an extension. If it’s unable to push the maturity on the loan, it would have to seek refinancing, Sotherly said in the filing.

But to refinance, lenders often require a paydown of the principal to reduce their risk. In that case, Sotherly expects it would have to pay down the debt by up to $12.3 million “based on current and anticipated financial performance” of the property, the firm said in its filing.

Sotherly’s recent merger could help with the paydown. Under the agreement, Kemmons Wilson will immediately provide Sotherly with a $25 million revolving line of credit at a floating interest rate, according to public filings.

The DoubleTree in Hollywood is on a strip home to upscale hotels and condo-hotels sandwiched between the Atlantic Ocean and Intracoastal Waterway. Near the DoubleTree, Sotherly also owns the 57-key Lyfe Resort & Residences at 4111 South Ocean Drive and 68-key Hyde Beach House Resort & Residences at 4010 South Ocean Drive. Both are condo-hotels.

Sotherly bought the DoubleTree in Hollywood in 2007 for $74 million, records show. The building was completed in 1973 and renovated in 2000, 2008 and most recently in 2017, when Sotherly brought it under Hilton’s DoubleTree flag.

In 2015, Sotherly scored a $57 million loan from Bank of America, bumping up the principal to $60 million later that year. Sotherly refinanced in 2021 with a group of lenders, including Morgan Stanley, Bank of America and Merrill Lynch. The loan has an interest rate of 4.9 percent and the balance is down to $49.2 million, according to the SEC filing and Morningstar Credit.

The REIT has faced on-and-off debt woes on the Hollywood property for years. In December of last year, the property had a debt service coverage ratio (DSCR) for net cash flow, a reflection of a landlord’s ability to meet debt obligations, of 0.97x, Morningstar Credit data shows. A DSCR of 1x is considered the breakeven threshold. The DSCR increased to 1.15x in June.

The loan first went into special servicing shortly after the onset of the pandemic in 2020, when mandatory lockdowns battered the hospitality industry. The loan exited special servicing in 2021, according to Morningstar Credit.

In 2023, the hotel was in trouble again because its performance declined below a threshold required by the lender, triggering a “cash trap” provision under the financing agreement that mandated all revenue be deposited into a cash management account for the benefit of the lender, according to this year’s second quarter filing. This summer, the DoubleTree in Hollywood’s performance improved, allowing it to exit the “cash trap” predicament.

Last year, the hotel’s occupancy averaged 68 percent, according to Morningstar Credit.

This summer, Sotherly also defaulted on a nearly $38 million loan on its 326-key Georgian Terrace hotel in Atlanta. The firm requested a one-year extension on the loan and if it’s unsuccessful, it would have to refinance and expects to pay down about $4 million of the debt, according to its second quarter filing.

Next year, the loans on Sotherly’s DoubleTree by Hilton Philadelphia Airport and The DeSoto in Savannah, Georgia, are scheduled to mature.

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