UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20222023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to ___________
Commission file number 000-55778
MOODY NATIONAL REIT II, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 47-1436295 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
9655 Katy Freeway, Suite 600 Houston, Texas | 77024 |
| (Address of Principal Executive Offices) | (Zip Code) |
(713) 977-7500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | None | None |
| Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No | ☐ |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | ☑ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | Smaller reporting company | ☑ | |
| Emerging Growth Company |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☑ |
| As of May 8, |
MOODY NATIONAL REIT II, INC.
INDEX
PART I — FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
MOODY NATIONAL REIT II, INC.
CCONSOLIDATEDONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
| March 31, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||||
| Investment in hotel properties, net | $ | 409,410 | $ | 412,972 | $ | 396,523 | $ | 399,477 | ||||||||
| Cash and cash equivalents | 5,500 | 6,049 | 6,569 | 4,912 | ||||||||||||
| Restricted cash | 11,992 | 13,232 | 13,457 | 16,291 | ||||||||||||
| Accounts receivable, net of allowance of $35 as of March 31, 2022 and December 31, 2021 | 1,781 | 1,015 | ||||||||||||||
| Accounts receivable, net of allowance of $35 as of March 31, 2023 and December 31, 2022 | 1,497 | 802 | ||||||||||||||
| Prepaid expenses and other assets | 2,904 | 2,890 | 3,147 | 2,927 | ||||||||||||
| Deferred franchise costs, net of accumulated amortization of $403 and $383 at March 31, 2022 and December 31, 2021, respectively | 664 | 684 | ||||||||||||||
| Deferred franchise costs, net of accumulated amortization of $487 and $466 at March 31, 2023 and December 31, 2022, respectively | 655 | 676 | ||||||||||||||
| Total Assets | $ | 432,251 | $ | 436,842 | $ | 421,848 | $ | 425,085 | ||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Note payable, net of unamortized debt issuance costs of $1,769 and $1,937 as of March 31, 2022 and December 31, 2021 | $ | 238,479 | $ | 239,739 | ||||||||||||
| Note payable, net of unamortized debt issuance costs of $1,103 and $1,260 as of March 31, 2023 and December 31, 2022 | $ | 233,913 | $ | 235,060 | ||||||||||||
| Notes payable to related party | 29,770 | 28,474 | 39,000 | 30,111 | ||||||||||||
| Accounts payable and accrued expenses | 13,342 | 14,128 | 17,251 | 16,856 | ||||||||||||
| Due to related parties, net | 3,392 | 953 | 2,801 | 8,144 | ||||||||||||
| Dividends payable | 70 | 70 | 70 | 70 | ||||||||||||
| Total Liabilities | 285,053 | 283,364 | 293,035 | 290,241 | ||||||||||||
| Special Limited Partnership Interests | 1 | 1 | 1 | 1 | ||||||||||||
| Equity: | ||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock, $ par value per share; shares authorized; shares issued and outstanding | — | — | ||||||||||||||
| Common stock, $ par value per share; shares authorized, shares issued and outstanding at March 31, 2022 and December 31, 2021 | 136 | 136 | ||||||||||||||
| Preferred stock, $ par value per share; shares authorized; shares issued and outstanding | — | — | ||||||||||||||
| Common stock, $ par value per share; shares authorized, shares issued and outstanding at March 31, 2023 and December 31, 2022 | 136 | 136 | ||||||||||||||
| Additional paid-in capital | 305,586 | 305,562 | 305,641 | 305,641 | ||||||||||||
| Accumulated deficit | (161,144 | ) | (154,983 | ) | (179,166 | ) | (173,272 | ) | ||||||||
| Total stockholders’ equity | 144,578 | 150,715 | 126,611 | 132,505 | ||||||||||||
| Noncontrolling interests in Operating Partnership | 2,619 | 2,762 | 2,201 | 2,338 | ||||||||||||
| Total Equity | 147,197 | 153,477 | 128,812 | 134,843 | ||||||||||||
| Total Liabilities and Equity | $ | 432,251 | $ | 436,842 | $ | 421,848 | $ | 425,085 | ||||||||
See accompanying notes to consolidated financial statements.
3
MOODY NATIONAL REIT II, INC.
CCONSOLIDATEDONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three months ended March 31, | Three months ended March 31, | |||||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Revenue | ||||||||||||||||
| Room revenue | $ | 14,792 | $ | 8,987 | $ | 17,233 | $ | 14,792 | ||||||||
| Other hotel revenue | 928 | 683 | 1,203 | 928 | ||||||||||||
| Total hotel revenue | 15,720 | 9,670 | 18,436 | 15,720 | ||||||||||||
| Interest and dividend income | — | 1 | ||||||||||||||
| Total revenue | 15,720 | 9,671 | ||||||||||||||
| Expenses | ||||||||||||||||
| Hotel operating expenses | 11,011 | 8,251 | 13,373 | 11,011 | ||||||||||||
| Property taxes, insurance and other | 1,676 | 1,896 | 1,569 | 1,676 | ||||||||||||
| Depreciation and amortization | 3,939 | 3,865 | 3,962 | 3,939 | ||||||||||||
| Corporate general and administrative | 1,854 | 1,989 | 1,747 | 1,854 | ||||||||||||
| Total expenses | 18,480 | 16,001 | 20,651 | 18,480 | ||||||||||||
| Operating loss | (2,760 | ) | (6,330 | ) | (2,215 | ) | (2,760 | ) | ||||||||
| Other expenses | ||||||||||||||||
| Interest expense and amortization of debt issuance costs | 3,514 | 2,934 | 3,791 | 3,514 | ||||||||||||
| Loss on sale of marketable securities | — | 245 | ||||||||||||||
| Unrealized gain on change in fair value of investment in marketable securities | — | (397 | ) | |||||||||||||
| Total other expenses | 3,514 | 2,782 | ||||||||||||||
| Loss before income taxes | (6,274 | ) | (9,112 | ) | (6,006 | ) | (6,274 | ) | ||||||||
| Income tax expense (benefit) | 30 | (81 | ) | |||||||||||||
| Income tax expense | 25 | 30 | ||||||||||||||
| Net loss | (6,304 | ) | (9,031 | ) | (6,031 | ) | (6,304 | ) | ||||||||
| Loss attributable to noncontrolling interests in Operating Partnership | 143 | 205 | 137 | 143 | ||||||||||||
| Net loss attributable to common stockholders | $ | (6,161 | ) | $ | (8,826 | ) | $ | (5,894 | ) | $ | (6,161 | ) | ||||
| Per-share information - basic and diluted: | ||||||||||||||||
| Net loss attributable to common stockholders | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding | ||||||||||||||||
See accompanying notes to consolidated financial statements.
4
MOODY NATIONAL REIT II, INC.
CCONSOLIDATEDONSOLIDATED STATEMENTS OF EQUITY
Three months ended March 31, 20222023 and 20212022
(in thousands)
(unaudited)
| Preferred Stock | Common Stock | Noncontrolling Interests in Operating Partnership | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par | Number | Par | Additional | Accumulated | Number | Value | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | — | $ | — | 13,630 | $ | 136 | $ | 305,446 | $ | (127,686 | ) | 316 | $ | 3,395 | $ | 181,291 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 5 | — | 32 | — | — | — | 32 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,826 | ) | — | (205 | ) | (9,031 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | — | $ | — | 13,635 | $ | 136 | $ | 305,478 | $ | (136,512 | ) | 316 | $ | 3,190 | $ | 172,292 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Noncontrolling Interests in Operating Partnership | Preferred Stock | Common Stock | Noncontrolling Interests in Operating Partnership | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par | Number | Par | Additional | Accumulated | Number | Value | Total | Number of Shares | Par | Number | Par | Additional | Accumulated | Number | Value | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | — | 13,640 | $ | 136 | $ | 305,562 | $ | (154,983 | ) | 316 | $ | 2,762 | $ | 153,477 | — | $ | — | 13,640 | $ | 136 | $ | 305,562 | $ | (154,983 | ) | 316 | $ | 2,762 | $ | 153,477 | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 24 | — | — | — | 24 | — | — | — | — | 24 | — | — | — | 24 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (6,161 | ) | — | (143 | ) | (6,304 | ) | — | — | — | — | — | (6,161 | ) | — | (143 | ) | (6,304 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | — | $ | — | 13,640 | $ | 136 | $ | 305,586 | $ | (161,144 | ) | 316 | $ | 2,619 | $ | 147,197 | — | $ | — | 13,640 | $ | 136 | $ | 305,586 | $ | (161,144 | ) | 316 | $ | 2,619 | $ | 147,197 | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Noncontrolling Interests in Operating Partnership | ||||||||||||||||||||||||||
| Number of Shares | Par | Number | Par | Additional | Accumulated | Number | Value | Total | ||||||||||||||||||||
| Balance at December 31, 2022 | — | $ | — | 13,640 | $ | 136 | $ | 305,641 | $ | (173,272 | ) | 316 | $ | 2,338 | $ | 134,843 | ||||||||||||
| Net loss | — | — | — | — | — | (5,894 | ) | — | (137 | ) | (6,031 | ) | ||||||||||||||||
| Balance at March 31, 2023 | — | $ | — | 13,640 | $ | 136 | $ | 305,641 | $ | (179,166 | ) | 316 | $ | 2,201 | $ | 128,812 | ||||||||||||
See accompanying notes to consolidated financial statements.
5
MOODY NATIONAL REIT II, INC.
CCONSOLIDATEDONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three months ended March 31, | Three months ended March 31, | |||||||||||||||
| 2022 | 2021 | 2023 | 2022 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net loss | $ | (6,304 | ) | $ | (9,031 | ) | $ | (6,031 | ) | $ | (6,304 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 3,939 | 3,865 | 3,962 | 3,939 | ||||||||||||
| Amortization of debt issuance costs | 168 | 168 | 157 | 168 | ||||||||||||
| Loss on sale of securities | — | 245 | ||||||||||||||
| Unrealized gain on change in fair value of investment in marketable securities | — | (397 | ) | |||||||||||||
| Stock-based compensation | 24 | 32 | — | 24 | ||||||||||||
| Changes in operating assets and liabilities | ||||||||||||||||
| Accounts receivable | (766 | ) | (446 | ) | (695 | ) | (766 | ) | ||||||||
| Prepaid expenses and other assets | (14 | ) | 137 | (220 | ) | (14 | ) | |||||||||
| Accounts payable and accrued expenses | (786 | ) | (1,694 | ) | 395 | (786 | ) | |||||||||
| Due to related parties | 2,439 | (3,055 | ) | (5,343 | ) | 2,439 | ||||||||||
| Net cash used in operating activities | (1,300 | ) | (10,176 | ) | (7,775 | ) | (1,300 | ) | ||||||||
| Cash flows from investing activities | ||||||||||||||||
| Proceeds of sales of marketable securities | — | 2,188 | ||||||||||||||
| Improvements and additions to hotel properties | (357 | ) | (30 | ) | (987 | ) | (357 | ) | ||||||||
| Net cash (used in) provided by investing activities | (357 | ) | 2,158 | |||||||||||||
| Net cash used in investing activities | (987 | ) | (357 | ) | ||||||||||||
| Cash flows from financing activities | ||||||||||||||||
| Repayment of notes payable | (1,428 | ) | (901 | ) | (1,304 | ) | (1,428 | ) | ||||||||
| Proceeds of notes payable to related party | 1,296 | 8,000 | 8,889 | 1,296 | ||||||||||||
| Net cash (used in) provided by financing activities | (132 | ) | 7,099 | |||||||||||||
| Net cash provided by (used in) financing activities | 7,585 | (132 | ) | |||||||||||||
| Net change in cash and cash equivalents and restricted cash | (1,789 | ) | (919 | ) | (1,177 | ) | (1,789 | ) | ||||||||
| Cash and cash equivalents and restricted cash at beginning of period | 19,281 | 10,502 | 21,203 | 19,281 | ||||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 17,492 | $ | 9,583 | $ | 20,026 | $ | 17,492 | ||||||||
| Supplemental Disclosure of Cash Flow Activity | ||||||||||||||||
| Interest paid | $ | 3,046 | $ | 3,166 | $ | 2,728 | $ | 3,046 | ||||||||
| Income tax refund received | $ | 87 | — | |||||||||||||
| Supplemental Disclosure of Non-Cash Financing Activity | ||||||||||||||||
| Dividends payable | $ | 70 | $ | 70 | ||||||||||||
See accompanying notes to consolidated financial statements.
6
MOODY NATIONAL REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20222023
(unaudited)
| 1. | Organization |
As discussed in Note 5, “Equity,” Moody National REIT II, Inc. (the “Company”) was initially capitalized by Moody National REIT Sponsor, LLC (the “Sponsor”). The Company’s fiscal year end is December 31.
As of March 31, 2022,2023, the Company owned interests in fifteen hotel properties located in six states comprising a total of 2,123 rooms. For more information on the Company’s real estate investments, see Note 3, “Investment in Hotel Properties.”
On January 20, 2015, the Securities and Exchange Commission (the “SEC”) declared the Company’s registration statement on Form S-11 effective, and the Company commenced its initial public offering of up to $1.1 billion in shares of common stock consisting of up to $1.01.0 billion in shares of the Company’s common stock offered to the public, and up to $100.0100.0 million in shares offered to the Company’s stockholders pursuant to its distribution reinvestment plan (the “DRP”).
On June 26, 2017, the Company reallocated the Company’s shares of common stock as Class A common stock, $ par value per share (“Class A Shares”), Class D common stock, $ par value per share (“Class D Shares”), Class I common stock, $ par value per share (“Class I Shares”), and Class T common stock, $ par value per share (“Class T Shares” and, together with the Class A Shares, the Class D Shares and the Class I Shares, the “Shares”). On January 16, 2018, the Advisor (as defined below) assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees paid in connection with the Company’s public offering; provided, however, that the Advisor intends to recoup the selling commissions, dealer manager fees and stockholder servicing fees that it funds through an increased acquisition fee, or “Contingent Advisor Payment,” as described in Note 6, “Related Party Arrangements.”
On January 18, 2018, the Company filed a registration statement on Form S-11 (Registration No. 333-222610) registering $.0 million in any combination of the Shares to be sold on a “best efforts” basis in the Company’s follow-on public offering. The SEC declared the registration statement effective on July 19, 2018.
The Company’s follow-on public offering was terminated (including pursuant to the DRP) effective as of March 25, 2020 due to the impact that the spread of COVID-19, pandemica disease caused by a novel strain of coronavirus is having and is expected to continue to have in the Company’s hotel properties. The Company accepted investors’ subscriptions for and issued an aggregate of million shares in the Company’s initial public offering and follow-on offering, excluding shares issued in connection with the Company’s merger with Moody National REIT I, Inc. and including shares pursuant to the DRP, resulting in gross offering proceeds of $ million.. The Company accepted investors’ subscriptions for and issued million shares in the follow-on offering, including shares pursuant to the DRP, resultingresulting in gross offering proceeds of $million for the follow-on offering.
The Company’s advisor is Moody National Advisor II, LLC (the “Advisor”), a Delaware limited liability company and an affiliate of the Sponsor. Pursuant to an advisory agreement among the Company, the OP (defined below) and the Advisor (the “Advisory Agreement”), and subject to certain restrictions and limitations therein, the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company.
Substantially all of the Company’s business is conducted through Moody National Operating Partnership II, LP, a Delaware limited partnership (the “OP”). The Company is the sole general partner of the OP. The initial limited partners of the OP were Moody OP Holdings II, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Moody Holdings II”), and Moody National LPOP II, LLC (“Moody LPOP II”), an affiliate of the Advisor. Moody Holdings II initially invested $1,000 in the OP in exchange for limited partnership interests, and Moody LPOP II invested $1,000 in the OP in exchange for a separate class of limited partnership interests (the “Special Limited Partnership Interests”). As the Company accepted subscriptions for shares of common stock, it transferred substantially all of the net proceeds from such sales to the OP as a capital contribution. The limited partnership agreement of the OP provides that the OP will be operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the OP will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the OP being taxed as a corporation, rather than as a partnership. In addition to the administrative and operating costs and expenses incurred by the OP in acquiring and operating real properties, the OP pays all of the Company’s administrative costs and expenses, and such expenses are treated as expenses of the OP.
7
COVID-19 Pandemic
The global COVID-19 pandemic has had, and is expected tomay in the future continue to have, a significant adverse effect on the Company’s financial condition and operating results. Since its discovery in December 2019, COVID-19 has spread globally, including to every state in the United States. The spread of COVID-19 has beenwas declared a pandemic by the World Health Organization and in the United States the Health and Human Services Secretary has declared a public health emergency with respect to COVID-19. Many governments, included at the federal, state and local level in the United States, have instituted a wide variety of measures intended to control the spread of COVID-19, including states of emergency, mandatory quarantines, “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings. Although in many cases these measures have been modified or lifted entirely, they may be reinstated in whole or in part and additional, more restrictive measures may be implemented in the future. The COVID-19 pandemic has adversely impacted numerous industries, including transportation and hospitality, and triggered a material global economic slowdown.
Although vaccines forThe COVID-19 are being made available to the general public in the United States and around the world, it will take time for the distribution of vaccines to materially affect the spread of the virus and the outbreak could have a continued adverse impact on economic and market conditions despite the distribution of vaccines. The length and severity of the pandemic will be worsened to the extent that a significant portion of the population, in the United States and globally, is reluctant to be vaccinated, fails to complete required multi-step vaccination protocol or is unable to become vaccinated due to shortages in vaccine supply or suspensions in the distribution of vaccines due to safety concerns or other issues. The length of the pandemic is also dependent upon the degree to which more contagious variants of the virus continue to spread, particularly among areas of the country in which overall full vaccination rates are relatively low, and overall rates of new COVID-19 cases continue to rise. Further, new and worsening outbreaks of COVID-19 in other countries may impact global vaccine supplies and lead to the emergence of new variants of the virus which are more contagious, more deadly or against which currently available vaccines are less effective.
COVID-19 has dramatically reduced travel, which has had an unprecedented adverse impact on the hotel industry. As a result, the COVID-19 pandemic has had and is expected to continue to have, a significant adverse effect on the operating results of the Company’s hotel properties, which depend primarily upon revenues driven by business and leisure travel, and on the Company’s business, financial performance and operating results. Since March 2020, the Company has experienced a significant decline in bookings, occupancy and revenues across the Company’s hotel properties, which the Company expects to continue for an indefinite period of time.properties. The Company’s hotel properties have operated at a property net operating loss since the outbreak of COVID-19, which has had an adverse impact on the Company’s results of operations and cash flow from operations. In addition, the Company has reduced certain services and amenities at the Company’s hotel properties. Although all of the Company’s hotel properties are currently open and operational, the Company may be required, or elect, to temporarily suspend operations at one or more of the Company’s hotel properties in the future depending on the length and severity of the COVID-19 pandemic and its related effects. If operations at any of the Company’s hotel properties are suspended, the Company cannot give any assurance as to when operations at such hotel properties will resume at a full or reduced level.
Each of the Company’s hotel properties is subject to a mortgage loan secured by the Company’s ownership interest in the property. If the Company is unable to service the mortgage loan secured by a hotel property due to decreased revenues generated by such property, the lender with respect to such mortgage loan may initiate foreclosure procedures with respect to the property or initiate other available remedies. As of the date of this Quarterly Report, the Company is current with respect to the payments due under the mortgage loans secured by the Company’s hotel properties and or is in compliance with the modified terms of certain mortgage loans as agreed to with the lenders and other accommodations. As discussed in Note 4, “Debt,” during 2021 certain lenders have already agreed to limited loan modifications, including temporary deferrals of interest and principal payments and agreements to forebear the enforcement of default remedies available under the terms of the loan documents. As of the date of this Quarterly Report, no lenders have accelerated the maturity of any of the loans secured by the Company’s properties or initiated foreclosure procedures with respect to any of the Company’s properties.
In accordance with local government recommendations and guidance, many of the employees of the Advisor have been working remotely since March 2020. Although the Advisor has implemented protocols for remote work and is leveraging technology to ensure that its employees remain connected and productive, there can be no guarantee that such work conditions will not have an adverse impact on the ability of the Advisor to effectively perform its duties.
In response to the COVID-19 pandemic, the Company terminated its public offering of common stock (including pursuant to the DRP), effective as of March 2020. The Company is not currently raising capital through the sale of its securities and the Company does not intend to begin to do so in the near term. The Company has also indefinitely suspended the payment of distributions to stockholders effective as of March 2020 and the operation of the Company’s share repurchase program effective as of April 2020. The Board and the Company’s management continue to evaluate the Company’s financial condition and the overall economic environment to determine if and when the Company will seek to resume raising capital, resume the payment of distributions and reinstate the Company’s share repurchase program. Specifically, the Board, in consultation with management, will continue to monitor the Company’s operations and intends to resume distributions at a time and level determined to be prudent in relation to the Company’s other cash requirements or in order to maintain the Company’s REIT status for federal income tax purposes. However, it is impossible to predict if or when the Company will be able to resume the payment of distributions or return to normal operations.
8
The COVID-19 pandemic is a continually evolving situation that presents material uncertainty and risk. The extent and duration of the impacts of COVID-19 on the Company’s business, financial condition, results of operations and cash flows is dependent on future developments that are highly uncertain and cannot be accurately predicted at this time, including without limitation the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the speed of the development and distribution of vaccines for COVID-19 and the efficacy and availability of such vaccines, the extent to which the general population is willing to be vaccinated, the effectiveness of currently available vaccines against emerging variants of COVID-19, the potential for hotel closures that may be mandated or advisable, whether based on increased COVID-19 cases, new variants or other factors, the reduction or reversal of previously implemented containment measures in certain states and cities, and the direct and indirect economic effects of the pandemic. As a result, the Company cannot provide an estimate of the overall impact of COVID-19 on the Company’s business, financial condition, results of operations and cash flows or when, if at all, the Company will be able to resume pre-COVID-19 levels of operations.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements include its accounts and the accounts of its subsidiaries over which it has control. All intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Organization and Offering Costs
Organization and offering costs of the Company are paid directly by the Company or incurred by the Advisor on behalf of the Company. Pursuant to the Advisory Agreement between the Company and the Advisor, the Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs incurred by the Advisor associated with each of the Company’s public offerings, provided that within 60 days of the last day of the month in which a public offering ends, the Advisor is obligated to reimburse the Company to the extent aggregate organization and offering costs incurred by the Company in connection with the completed public offering exceed 15.0% of the gross offering proceeds from the sale of the Company’s shares of common stock in the completed public offering. Such organization and offering costs include selling commissions and dealer manager fees paid to a dealer manager, legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of the Advisor’s employees and employees of the Advisor’s affiliates and others. Any reimbursement of the Advisor or its affiliates for organization and offering costs will not exceed actual expenses incurred by the Advisor. The Company’s organization and offering costs incurred in connection with the Company’s initial public offering did not exceed 15% of the gross offering proceeds from the sale of shares of common stock in such offering.
All offering costs, including selling commissions and dealer manager fees, are recorded as an offset to additional paid-in-capital, and all organization costs are recorded as an expense when the Company has an obligation to reimburse the Advisor.
As of March 31, 2022,2023, total offering costs for the initial public offering and the follow-on offering were $21.1 million, comprised of $12.3 million of offering costs incurred directly by the Company and $8.8 million in offering costs incurred by and reimbursable to the Advisor. Total offering costs for the initial public offering were $18.4 million, comprised of $12.3 million of offering costs incurred directly by the Company and $6.1 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2022,2023, total offering costs for the follow-on offering were $2.7 million, comprised of $0 of offering costs incurred directly by the Company and $2.7 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2022,2023, the Company had $0 due to the Advisor for reimbursable offering costs.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 2016. The Company did not meet all of the qualifications to be a REIT under the Internal Revenue Code for the years ended December 31, 2015 and 2014, including not having shareholders for a sufficient number of days in 2015. Prior to qualifying to be taxed as a REIT, the Company was subject to normal federal and state corporation income taxes.
9
Provided that the Company continues to qualify as a REIT, it generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to its stockholders, so long as it distributes at least 90% of its REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) and satisfies the other organizational and operational requirements for qualification as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income. The Company leases the hotels it acquires to a wholly-owned taxable REIT subsidiary (“TRS”) that is subject to federal, state and local income taxes.
The Company accounts for income taxes of its TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period prior to when the new rates become effective. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized.
The Company has reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the consolidated financial statements if it is more likely than not that the tax position will be sustained upon examination. The Company had no material uncertain tax positions as of March 31, 2022.2023.
The preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company will account for interest and penalties relating to uncertain tax positions in the current period results of operations, if necessary. The Company has tax years 20172018 through 20212022 remaining subject to examination by various federal and state tax jurisdictions. For more information, see Note 10, “Income Taxes.”
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| Level 1: | Observable inputs such as quoted prices in active markets. | |
| Level 2: | Directly or indirectly observable inputs, other than quoted prices in active markets. | |
| Level 3: | Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. |
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
| Market approach: | Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. | |
| Cost approach: | Amount required to replace the service capacity of an asset (replacement cost). | |
| Income approach: | Techniques used to convert future income amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models). |
The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
The Company has elected the fair value option in recording its investment in marketable securities whereby unrealized holding gains and losses on available-for-sale securities are included in earnings. With the exception of the Company’s fixed-rate notes payable, the carrying amounts of other financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, notes receivable, notes payable, and accounts payable and accrued expenses, approximate their fair values due to their short-term nature. For the fair value of the Company’s notes payable, see Note 4, “Debt.”
10
Concentration of Risk
As of March 31, 2022,2023, the Company had cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. The Company diversifies its cash and cash equivalents with several banking institutions in an attempt to minimize exposure to any one of these institutions. The Company regularly monitors the financial stability of these financial institutions along with the balances there on deposit to minimize the Company’s potential risk and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
The Company holds cash accounts at several institutions in excess of the Federal Deposit Insurance Corporations (the “FDIC”) protection limits of $250,000. The Company’s exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. At March 31, 2023, the Company’s cash accounts exceeded federally insured limits by approximately $2.8 million and the Company’s restricted cash accounts exceeded federally insured limits by approximately $9.8 million.
The Company is exposed to geographic risk in that nine of its fifteen hotel properties are located in one state, Texas.
Valuation and Allocation of Hotel Properties — Acquisition
Upon acquisition, the purchase price of hotel properties is allocated to the tangible assets acquired, consisting of land, buildings and furniture, fixtures and equipment, any assumed debt, identified intangible assets and asset retirement obligations, if any, based on their fair values. Acquisition costs are charged to expense as incurred. Initial valuations are subject to change during the measurement period, but the measurement period ends as soon as the information is available. The measurement period shall not exceed one year from the acquisition date.
Land values are derived from appraisals and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. The value of furniture, fixtures and equipment is based on their fair value using replacement costs less depreciation. Any difference between the fair value of the hotel property acquired and the purchase price of the hotel property is recorded as goodwill or gain on acquisition of hotel property.
The Company determines the fair value of any assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that the Company believes it could obtain at the date of acquisition. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan as a component of interest expense.
In allocating the purchase price of each of the Company’s properties, the Company makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets and discount rates used to determine present values. The Company uses Level 3 inputs to value acquired properties. Many of these estimates are obtained from independent third-party appraisals. However, the Company is responsible for the source and use of these estimates. These estimates require judgment and are subject to being imprecise; accordingly, if different estimates and assumptions were derived, the valuation of the various categories of the Company’s hotel properties or related intangibles could in turn result in a difference in the depreciation or amortization expense recorded in the Company’s consolidated financial statements. These variances could be material to the Company’s results of operations and financial condition.
Valuation and Allocation of Hotel Properties — Ownership
Investment in hotel properties is recorded at cost less accumulated depreciation. Major improvements that extend the life of an asset are capitalized and depreciated over a period equal to the shorter of the life of the improvement or the remaining useful life of the asset. The costs of ordinary repairs and maintenance are charged to expense when incurred.
Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
| Estimated Useful Lives (years) | ||||
| Buildings and improvements | 39-40 | |||
| Exterior improvements | 10-20 | |||
| Furniture, fixtures and equipment | 5-10 |
Impairments
The Company monitors events and changes in circumstances indicating that the carrying amount of a hotel property may not be recoverable. When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset from operating activities and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss to adjust the carrying amount of the asset to estimated fair value for assets held for use and fair value less costs to sell for assets held for sale. There were no such impairment losses for the three months ended March 31, 20222023 and 2021.2022.
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In evaluating a hotel property for impairment, the Company makes several estimates and assumptions, including, but not limited to, the projected date of disposition of the property, the estimated future cash flows of the property during the Company’s ownership and the projected sales price of the property. A change in these estimates and assumptions could result in a change in the estimated undiscounted cash flows or fair value of the Company’s hotel property which could then result in different conclusions regarding impairment and material changes to the Company’s consolidated financial statements.
Revenue Recognition
Hotel revenues, including room, food, beverage and other ancillary revenues, are recognized as the related services are delivered. Revenue is recorded net of any sales and other taxes collected from customers. Interest income is recognized when earned. Amounts received prior to guest arrival are recorded as advances from the customer and are recognized at the time of occupancy.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand or held in banks and short-term investments with an initial maturity of yearsone year or less at the date of purchase.
Restricted Cash
Restricted cash includes reserves for property taxes, as well as reserves for property improvements, replacement of furniture, fixtures, and equipment and debt service, as required by certain management or mortgage and term debt agreements restrictions and provisions.
Investment in Marketable Securities
AllThe following is a reconciliation of the Company’s investmentcash and cash equivalents and restricted cash to the total presented in marketable securities were sold during the three months endedunaudited consolidated statement of cash flows as of March 31, 2021. For the three months ended March 31, 2021, unrealized gain on change in fair value of investment in marketable securities was $397,0002023 and the realized loss on sale of marketable securities was $245,000.2022 (in thousands):
| March 31, | |||||||
| 2023 | 2022 | ||||||
| Cash and cash equivalents | $ | 6,569 | $ | 5,500 | |||
| Restricted cash | 13,457 | 11,992 | |||||
| Total cash and cash equivalents and restricted cash | $ | 20,026 | $ | 17,492 | |||
Dividend income is recognized when earned. For the three months ended March 31, 2021, dividend income of $1,000, was recognized and is included in interest and dividend income on the consolidated statements of operations.
Accounts Receivable
The Company takes into consideration certain factors that require judgments to be made as to the collectability of receivables. Collectability factors taken into consideration are the amounts outstanding, payment history and financial strength of the customer, which, taken as a whole, determines the valuation. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Deferred Franchise Costs
Deferred franchise costs are recorded at cost and amortized over the term of the respective franchise contract on a straight-line basis. Accumulated amortization of deferred franchise costs was $403,000487,000 and $383,000466,000 as of March 31, 20222023 and December 31, 2021,2022, respectively.
Expected future amortization of deferred franchise costs as of March 31, 20222023 is as follows (in thousands):
| Years Ending December 31, | ||||||||
| 2022 | $ | 62 | ||||||
| 2023 | 77 | $ | 63 | |||||
| 2024 | 77 | 85 | ||||||
| 2025 | 77 | 85 | ||||||
| 2026 | 76 | 84 | ||||||
| 2027 | 75 | |||||||
| Thereafter | 295 | 263 | ||||||
| Total | $ | 664 | $ | 655 | ||||
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Debt Issuance Costs
Debt issuance costs are presented as a direct deduction from the carrying value of the notes payable on the consolidated balance sheets. Debt issuance costs are amortized as a component of interest expense over the term of the related debt using the straight-line method, which approximates the interest method. Accumulated amortization of debt issuance costs was $5.66.2 million and $5.46.1 million as of March 31, 20222023 and December 31, 2021,2022, respectively. Expected future amortization of debt issuance costs as of March 31, 20222023 is as follows (in thousands):
| Years Ending December 31, | ||||||||
| 2022 | $ | 509 | ||||||
| 2023 | 632 | $ | 475 | |||||
| 2024 | 440 | 440 | ||||||
| 2025 | 152 | 154 | ||||||
| 2026 | 36 | 34 | ||||||
| 2027 | — | |||||||
| Thereafter | — | |||||||
| Total | $ | 1,769 | $ | 1,103 | ||||
Earnings (loss) per share (“EPS”) is calculated based on the weighted average number of shares outstanding during each period. Basic and diluted EPS are the same for all periods presented. Non-vestedThere were non-vested shares of restricted common stock totaling and shares as of March 31, 20222023 and December 31, 2021, respectively,2022 held by the Company’s independent directors are included in the calculation of basic EPS because such shares have been issued and participate in dividends.directors.
| 3. | Investment in Hotel Properties |
The following table sets forth summary information regarding the Company’s investment in hotel properties as of March 31, 20222023 (all $ amounts in thousands):
| Property Name | Date Acquired | Location | Ownership Interest | Original Purchase Price(1) | Rooms | Mortgage Debt Outstanding(2) | ||||||||||
| Residence Inn Austin | October 15, 2015 | Austin, Texas | 100 | % | $ | 27,500 | 112 | $ | 15,388 | |||||||
| Springhill Suites Seattle | May 24, 2016 | Seattle, Washington | 100 | % | 74,100 | 234 | 41,595 | |||||||||
| Homewood Suites Woodlands | September 27, 2017(5) | The Woodlands, Texas | 100 | % | 17,356 | 91 | 8,375 | |||||||||
| Hyatt Place Germantown | September 27, 2017(5) | Germantown, Tennessee | 100 | % | 16,074 | 127 | 6,294 | |||||||||
| Hyatt Place North Charleston | September 27, 2017(5) | North Charleston, South Carolina | 100 | % | 13,806 | 113 | 6,509 | |||||||||
| Hampton Inn Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 19,328 | 123 | 9,783 | |||||||||
| Residence Inn Grapevine | September 27, 2017(5) | Grapevine, Texas | 100 | % | 25,245 | 133 | 11,289 | |||||||||
| Marriott Courtyard Lyndhurst | September 27, 2017(5) | Lyndhurst, New Jersey | -(3) | 39,547 | 227 | 17,872 | ||||||||||
| Hilton Garden Inn Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 29,288 | 138 | 16,929 | |||||||||
| Hampton Inn Great Valley | September 27, 2017(5) | Frazer, Pennsylvania | 100 | % | 15,285 | 125 | 7,388 | |||||||||
| Embassy Suites Nashville | September 27, 2017(5) | Nashville, Tennessee | 100 | % | 82,207 | 208 | 38,587 | |||||||||
| Homewood Suites Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 18,835 | 96 | 9,968 | |||||||||
| Townplace Suites Fort Worth | September 27, 2017(5) | Fort Worth, Texas | -(4) | 11,242 | 95 | 5,608 | ||||||||||
| Hampton Inn Houston | September 27, 2017(5) | Houston, Texas | 100 | % | 9,958 | 119 | 4,008 | |||||||||
| Residence Inn Houston Medical Center | April 29, 2019 | Houston, Texas | 100 | % | 52,000 | 182 | 27,923 | |||||||||
| Totals | $ | 451,771 | 2,123 | $ | 227,516 | |||||||||||
| Property Name | Date Acquired | Location | Ownership Interest | Original Purchase Price(1) | Rooms | Mortgage Debt Outstanding(2) | ||||||||||
| Residence Inn Austin | October 15, 2015 | Austin, Texas | 100 | % | $ | 27,500 | 112 | $ | 15,683 | |||||||
| Springhill Suites Seattle | May 24, 2016 | Seattle, Washington | 100 | % | 74,100 | 234 | 42,427 | |||||||||
| Homewood Suites Woodlands | September 27, 2017(5) | The Woodlands, Texas | 100 | % | 17,356 | 91 | 8,550 | |||||||||
| Hyatt Place Germantown | September 27, 2017(5) | Germantown, Tennessee | 100 | % | 16,074 | 127 | 6,478 | |||||||||
| Hyatt Place North Charleston | September 27, 2017(5) | North Charleston, South Carolina | 100 | % | 13,806 | 113 | 6,688 | |||||||||
| Hampton Inn Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 19,328 | 123 | 10,015 | |||||||||
| Residence Inn Grapevine | September 27, 2017(5) | Grapevine, Texas | 100 | % | 25,245 | 133 | 11,558 | |||||||||
| Marriott Courtyard Lyndhurst | September 27, 2017(5) | Lyndhurst, New Jersey | — (3) | 39,547 | 227 | 18,311 | ||||||||||
| Hilton Garden Inn Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 29,288 | 138 | 17,386 | |||||||||
| Hampton Inn Great Valley | September 27, 2017(5) | Frazer, Pennsylvania | 100 | % | 15,285 | 125 | 7,566 | |||||||||
| Embassy Suites Nashville | September 27, 2017(5) | Nashville, Tennessee | 100 | % | 82,207 | 208 | 39,445 | |||||||||
| Homewood Suites Austin | September 27, 2017(5) | Austin, Texas | 100 | % | 18,835 | 96 | 10,216 | |||||||||
| Townplace Suites Fort Worth | September 27, 2017(5) | Fort Worth, Texas | — (4) | 11,242 | 95 | 5,748 | ||||||||||
| Hampton Inn Houston | September 27, 2017(5) | Houston, Texas | 100 | % | 9,958 | 119 | 4,126 | |||||||||
| Residence Inn Houston Medical Center | April 29, 2019(6) | Houston, Texas | 100 | % | 52,000 | 182 | 28,551 | |||||||||
| Totals | $ | 451,771 | 2,123 | $ | 232,748 | |||||||||||
________________
| (1) | Excludes closing costs and includes gain on acquisition. |
| (2) | As of March 31, |
| (3) | The Marriott Courtyard Lyndhurst is owned by MN Lyndhurst Venture, LLC, of which the OP is a member and holds |
| (4) | The Townplace Suites Fort Worth is owned by MN Fort Worth Venture, LLC, of which the OP is a member and holds |
| (5) | Property acquired on September 27, 2017 as a result of the merger of Moody National REIT I, Inc. (“Moody I”) with and into the Company (the “Merger”) and the merger of Moody National Operating Partnership I, L.P., the operating partnership of Moody I (“Moody I OP”), with and into the OP (the “Partnership Merger,” and together with the Merger, the “Mergers”). |
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Investment in hotel properties consisted of the following at March 31, 20222023 and December 31, 20212022 (all amounts in thousands):
| March 31, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Land | $ | 76,936 | $ | 76,936 | $ | 76,936 | $ | 76,936 | ||||||||
| Buildings and improvements | 338,729 | 338,729 | 338,982 | 338,938 | ||||||||||||
| Furniture, fixtures and equipment | 61,082 | 60,725 | 63,510 | 62,567 | ||||||||||||
| Total cost | 476,747 | 476,390 | 479,428 | 478,441 | ||||||||||||
| Accumulated depreciation | (67,337 | ) | (63,418 | ) | (82,905 | ) | (78,964 | ) | ||||||||
| Investment in hotel properties, net | $ | 409,410 | $ | 412,972 | $ | 396,523 | $ | 399,477 | ||||||||
| 4. | Debt |
The Company’s aggregate borrowings are reviewed by the Board at least quarterly. Under the Company’s Articles of Amendment and Restatement (as amended, the “Charter”), the Company is prohibited from borrowing in excess of 300% of the value of the Company’s net assets. “Net assets” for purposes of this calculation is defined to be the Company’s total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, the Company may temporarily borrow in excess of 300% of the value of the Company’s net assets if such excess is approved by a majority of the Company’s independent directors and disclosed to stockholders in the Company’s next quarterly report, along with an explanation for such excess. As of March 31, 2022,2023, the Company’s debt levels did not exceed 300% of the value of the Company’s net assets, as defined above.
As of March 31, 20222023 and December 31, 2021,2022, the Company’s mortgage notes payable secured by the respective assets, consisted of the following ($ amounts in thousands):
| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Residence Inn Austin | $ | 15,683 | $ | 15,757 | 4.580 | % | November 1, 2025 | Lender forbore the collection of 75% of default interest of $1.1 million when borrower brought all loan and escrow payments current and reimbursed lender expenses and paid 25% of default interest in July 2021 | ||||||||
| Springhill Suites Seattle | 42,427 | 42,634 | 4.380 | % | October 1, 2026 | Three months deferral of interest and principal payments from June to August, 2020. Four months interest only payments from September to December, 2020. | ||||||||||
| Homewood Suites Woodlands | 8,550 | 8,594 | 4.690 | % | April 11, 2025 | |||||||||||
| Hyatt Place Germantown | 6,478 | 6,524 | 4.300 | % | May 6, 2023 | Deferral of thirteen months of interest and principal payments from September 2020 to September 2021 and eighteen months deferral escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $1.42 million as of September 30, 2021 and were paid to lender in October 2021. | ||||||||||
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| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Hyatt Place North Charleston | 6,688 | 6,730 | 5.193 | % | August 1, 2023 | Payment of $100,000 cash deposit and may make interest and principal payments from restricted cash for six months from April to September, 2020. | ||||||||||
| Hampton Inn Austin | 10,015 | 10,073 | 5.426 | % | January 6, 2024 | Deferral of thirteen months of interest and principal payments from September 2020 to September 2021 and eighteen months of deferral escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $1.99 million as of September 30, 2021 and were paid to lender in October 2021. | ||||||||||
| Residence Inn Grapevine | 11,558 | 11,625 | 5.250 | % | April 6, 2024 | Deferral of nine months of interest and principal payments from January 2021 to September 2021 and sixteen months deferral of escrow payments for tax, insurance and hotel furniture and fixtures from June 2020 to September 2021 totaled $2.35 million as of September 30, 2021. $1.41 million of the total due as of September 30,2021 was paid to lender in October 2021 and $940,0000 is to be paid from excess cash flow with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Marriott Courtyard Lyndhurst | 18,311 | 18,420 | 4.700 | % | September 27, 2024 | Six months payment of interest only from April to September, 2020. | ||||||||||
| Hilton Garden Inn Austin | 17,386 | 17,564 | 4.530 | % | December 11, 2024 | Deferral of eighteen months of interest and principal payments and escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $3.98 million as of September 30, 2021. $1.69 million of the total due as of September 30, 2021 was paid to lender in October 2021 and $2.36 million is to be paid in monthly installments with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Hampton Inn Great Valley | 7,566 | 7,617 | 4.700 | % | April 11, 2025 | Deferral of sixteen months of interest and principal payments and escrow payments for tax, insurance and hotel furniture and fixtures from June 2020 to September 2021 totaled $1.75 million as of September 30, 2021. $729,000 of the total due as of September 30, 2021 was paid to lender in October 2021 and $1.02 million is to be paid from excess cash flow with the October 2021 to September 2022 regular mortgage payments | ||||||||||
15
| Loan | Principal as of March 31, 2023 | Principal as of December 31, 2022 | Interest Rate at March 31, 2023 | Maturity Date | |||||||||||
| Residence Inn Austin | $ | 15,388 | $ | 15,465 | 4.580 | % | November 1, 2025 | ||||||||
| Springhill Suites Seattle | 41,595 | 41,812 | 4.380 | % | October 1, 2026 | ||||||||||
| Homewood Suites Woodlands | 8,375 | 8,420 | 4.690 | % | April 11, 2025 | ||||||||||
| Hyatt Place Germantown | 6,294 | 6,342 | 4.300 | % | May 6, 2023 | ||||||||||
| Hyatt Place North Charleston | 6,509 | 6,553 | 5.193 | % | August 1, 2023 | ||||||||||
| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Embassy Suites Nashville | 39,445 | 39,660 | 4.2123 | % | July 11, 2025 | April to July 2020 payment of principal and interest deferred. August 2020 to December 2020 interest only. Special servicer fee of $205,285 to be paid on or before April 30, 2021. | ||||||||||
| Homewood Suites Austin | 10,216 | 10,311 | 4.650 | % | August 11, 2025 | Deferral of seventeen months of interest and principal payments from May 2020 to September 2021 and eighteen months deferral of escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $2.73 million as of September 30, 2021. $1.14 million of the total due as of September 30, 2021 was paid in October 2021 and $1.59 million is to be paid in monthly installments with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Townplace Suites Fort Worth | 5,748 | 5,783 | 4.700 | % | September 27, 2024 | April 2020 payment was interest only. Six-month deferral of principal from April to September 2020. Two months deferral of interest payments for May and June, 2020.Three months interest only payments from July to September, 2020. | ||||||||||
| Hampton Inn Houston | 4,126 | 4,181 | 5.500 | % | April 28, 2023 | Seven-month deferral of principal and interest payments for payments due March 28, 2020 through September 28, 2020. Six months interest only for payments due October 28, 2020 through March 28, 2021. | ||||||||||
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| Loan | Principal as of March 31, 2023 | Principal as of December 31, 2022 | Interest Rate at March 31, 2023 | Maturity Date | |||||||||||
| Hampton Inn Austin | 9,783 | 9,844 | 5.426 | % | January 6, 2024 | ||||||||||
| Residence Inn Grapevine | 11,289 | 11,360 | 5.250 | % | April 6, 2024 | ||||||||||
| Marriott Courtyard Lyndhurst | 17,872 | 17,986 | 4.700 | % | September 27, 2024 | ||||||||||
| Hilton Garden Inn Austin | 16,929 | 17,026 | 4.530 | % | December 11, 2024 | ||||||||||
| Hampton Inn Great Valley | 7,388 | 7,429 | 4.700 | % | April 11, 2025 | ||||||||||
| Embassy Suites Nashville | 38,587 | 38,811 | 4.2123 | % | July 11, 2025 | ||||||||||
| Homewood Suites Austin | 9,968 | 10,022 | 4.650 | % | August 11, 2025 | ||||||||||
| Townplace Suites Fort Worth | 5,608 | 5,645 | 4.700 | % | September 27, 2024 | ||||||||||
| Hampton Inn Houston | 4,008 | 4,022 | 9.750 | % | April 28, 2023 | ||||||||||
| Residence Inn Houston Medical Center | 27,923 | 28,083 | 5.000 | % | October 1, 2024 | ||||||||||
U.S. Small Business Administration Economic Injury Disaster Loans | 7,500 | 7,500 | 3.750 | % | November 2051 | ||||||||||
| Total notes payable | 235,016 | 236,320 | |||||||||||||
| Less unamortized debt issuance costs | (1,103 | ) | (1,260 | ) | |||||||||||
| Total notes payable, net of unamortized debt issuance costs | $ | 233,913 | $ | 235,060 | |||||||||||
________________
Monthly payments of principal and interest are due and payable until the maturity date, except that monthly installments of principal and interest begin two years from the dates of the U.S. Small Business Administration Economic Injury Disaster Loans.
| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | ||||||||||
Residence Inn Houston Medical Center | 28,551 | 28,703 | 5.000 | % | October 1, 2024 | Deferral of principal and interest payments for six months from April to September, 2020. Interest only payments for an additional twelve months from October 2020 to September 2021. | |||||||||
U.S. Small Business Administration Economic Injury Disaster Loans | 7,500 | 7,500 | 3.750 | % | November 2051 | ||||||||||
Total notes payable | 240,248 | 241,676 | |||||||||||||
Less unamortized debt issuance costs | (1,769 | ) | (1,937 | ) | |||||||||||
Total notes payable, net of unamortized debt issuance costs | $ | 238,479 | $ | 239,739 | |||||||||||
Hotel properties secure their respective loans.
Scheduled maturities of the Company’s notes payable as of March 31, 20222023 are as follows (all amounts in thousands):
| Years ending December 31, | |||||||||
| 2022 | $ | 3,805 | |||||||
| 2023 | 21,605 | $ | 20,377 | ||||||
| 2024 | 90,621 | 90,498 | |||||||
| 2025 | 77,608 | 77,532 | |||||||
| 2026 | 39,141 | 39,141 | |||||||
| 2027 | 147 | ||||||||
| Thereafter | 7,468 | 7,321 | |||||||
| Total | $ | 240,248 | $ | 235,016 | |||||
Economic Injury Disaster Loans
The Company entered intoobtained fifteen Loans (“Loans”) of $500,000 each from the U.S. Small Business Administration. The Loans will be due in monthly installments of principal and interest beginning two years from the dates of the Loans with balances due 30 years from the dates of the Loans. The monthly installments are applied to accrued interest first, then to principal. The Loans bear interest at the rate of 3.75% per annum and are secured by the Company’s tangible and intangible personal property. The aggregate balance of the LoansU.S. Small Business Administration loans was $7,500,0007.5 million as of March 31, 2023 and December 31, 2022.
Notes Payable to Related Party
On March 30, 2021, Moody National Capital, LLC (“Moody Capital”), an affiliate of the Company, loaned the Company $8.08.0 million pursuant to a promissory note (the “Related Party Note”). The Related Party Note provides that the Company may borrow up to an additional $2.02.0 million from Moody Capital, for a maximum aggregate loan amount of $10.0 million10..0 million. All amounts borrowed under the Related Party Note plus all accrued interest thereon, will be due and payable in full on March 29, 2024, provided that the Company may extend such maturity date for up to two years at the Company’s discretion. Interest on the Related Party Note began to accrue effective March 30, 2021. The principal amount of the loan under the Related Party Note will bearbears interest at a rate per annum equal LIBORSOFR plus 4.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORSOFR plus 6.75% if the Related Party Note is subordinated to another lender. The effective interest rate for the Related Party Note was 9.41% as of March 31, 2023. The balance of the Related Party Note was $10.010.0 million as of March 31, 20222023 and December 31, 2021.2022.
Also, fromFrom April 2021 to August 16, 2021, Moody Capital made a series of advances to the Company to meet specific cash flow needs of the Company. Effective June 30, 2021, these advances were memorialized in a promissory note (“Second Related Party Note”) with a total maximum aggregate loan amount of $10.0 million10..0 million. All amounts borrowed under the Second Related Party Note plus all accrued interest thereon, will be due and payable in full on June 30, 2024, provided that the Company may extend such maturity date for up to two years at the Company’s discretion. Interest on the Second Related Party Note willbegan to accrue effective June 30, 2021. The principal amount of the loan under the Second Related Party Note will bearbears interest at a rate per annum equal LIBORSOFR plus 6.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORSOFR plus 8.75% if the Second Related Party Note is subordinated to another lender. The effective interest rate for the Second Related Party Note was 11.41% as of March 31, 2023. The balance of the Second Related Party Note was $10.010.0 million as of March 31, 20222023 and December 31, 2021.2022.
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From August 20, 2021 to September 30, 2021, Moody Capital made a series of advances to the Company to meet specific cash flow needs. These advances were memorialized in a promissory note (“Third Related Party Note”) with a total maximum aggregate loan amount of $10.0 million. All amounts borrowed under the Third Related Party Note plus all accrued interest thereon, will be due and payable in full on August 20, 2024, provided that the Company may extend such maturity date for up to two years at the Company’s discretion. Interest on the Third Related Party Note began to accrue effective August 20, 2021. The principal amount of the loan under the Third Related Party Note bears interest at a rate per annum equal SOFR plus 7.75%; provided, however, that such interest rate will be increased to a rate per annum equal to SOFR plus 9.75% if the Third Related Party Nate is subordinated to another lender. The effective interest rate for the Third Party Note was 12.41% as of March 31, 2023. The balance of the Third Related Party Note was $10.0 million as of March 31, 2023 and December 31, 2022.
From April 13, 2022 to March 31, 2023, Moody Capital made a series of advances to the Company to meet specific cash flow needs and has received repayments from the Company based on the Company’s specific available cash flow These advances were memorialized in a promissory note (“ThirdFourth Related Party Note”) with a total maximum aggregate loan amount of $10.0 million10..0 million. All amounts borrowed under the ThirdFourth Related Party Note plus all accrued interest thereon, will be due and payable in full on August 20, 2024April 13, 2025, provided that the Company may extend such maturity date for up to two years at the Company’s discretion. Interest on the ThirdFourth Related Party Note willbegan to accrue effective August 20, 2021.April 13, 2022. The principal amount of the loan under the ThirdFourth Related Party Note bearbears interest at a rate per annum equal LIBORto one-year SOFR plus 7.758.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORone-year SOFR plus9.75% if the ThirdFourth Related Party NateNote is subordinated to another lender. The effective interest rate for the Fourth Related Party Note was 13.41% as of March 31, 2023. The balance of Thirdthe Fourth Related Party Note was $9,770,0009.0 million and $8,474,000110,500 as of March 31, 20222023 and December 31, 2021,2022, respectively.
Interest will be paid for the Related Party Note, the Second Related Party Note, the Third Related Party Note, and the ThirdFourth Related Party Note as permitted by available cash flow of the Company, or from the excess proceeds following a sale of a property after the payment of expenses and amounts due to any senior lender, if applicable, and will be compounded semiannually. The Company expects to enter into a mutually agreeable subordination agreement with any such senior lender. The Company may prepay the amounts due under the Related Party Note, the Second Related Party Note, the Third Related Party Note, and the Third RelateFourth Related Party Note without any prepayment penalty.
The estimated fair value of the Company’s notes payable as of March 31, 20222023 and December 31, 2021,2022, was $240235 million and $242236 million, respectively. The fair value of the notes payable was estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.
| 5. | Equity |
Capitalization
Under its Charter, the Company has the authority to issue .0 billion shares of common stock and .0 million shares of preferred stock. All shares of such stock have a par value of $ per share. On August 15, 2014, the Company sold shares of common stock to the Sponsor at a purchase price of $ per share for an aggregate purchase price of $200,000, which was paid in cash. As of March 31, 2022,2023, there were a total of million shares of the Company’s common stock issued and outstanding, including million shares, net of redemptions, issued in the Company’s public offerings, million shares, net of redemptions, issued in connection with the Mergers, the shares sold to Sponsor and shares of restricted stock issued to the Company’s directors, as discussed in Note 7 “Incentive Award Plan,” as follows (in thousands):
| Class | Shares | March 31, | ||||
| Class A Shares | 13,000 | |||||
| Class T Shares | 481 | |||||
| Class I Shares | 159 | |||||
| Total | 13,640 | |||||
The Board is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.
Distributions
The Company first paid distributions on September 15, 2015. On March 24, 2020, the Board unanimously approved the suspension of (i) the payment of distributions to the Company’s stockholders, effective immediately, and (ii) the operation of the DRP, effective as of April 6, 2020, due to the impact that the COVID-19 pandemic is having and is expected to continue to have inhad on the Company’s hotel properties. The payment of distributions and the operation of the DRP will remain suspended until such time as the Board approves their resumption.
Noncontrolling Interest in Operating Partnership
Noncontrolling interest in the OP at March 31, 20222023 and December 31, 20212022 was $2.62.2 million and $2.82.3 million, respectively, which represented 316,037 common units in the OP issued in connection with the acquisition of the Springhill Suites Seattle and the Partnership Merger, and is reported in equity in the consolidated balance sheets. Loss from the OP attributable to these noncontrolling interests was $143,000137,000 and $205,000143,000 for the three months ended March 31, 2023 and 2022, and 2021, respectively.
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| 6. | Related Party Arrangements |
Pursuant to the Advisory Agreement, the Advisor and certain affiliates of Advisor receive fees and compensation in connection with the Company’s public offering and the acquisition, management and sale of the Company’s real estate investments. In addition, in exchange for $1,000 and in consideration of services to be provided by the Advisor, the OP has issued an affiliate of the Advisor, Moody LPOP II, a separate, special limited partnership interest, in the form of Special Limited Partnership Interests. For further detail, please see Note 8, “Subordinated Participation Interest.”
Sales Commissions and Dealer Manager Fees
From January 1, 2017 through June 12, 2017, the Company paid Moody Securities an up-front selling commission of up to 7.0% of the gross proceeds of what are now the Class A Shares sold in the primary offering and a dealer manager fee of up to 3.0% of the gross proceeds of what are now the Class A Shares sold in the primary offering. Beginning on June 12, 2017, the Company reallocated its common shares into four separate share classes, Class A Shares, Class T Shares, Class I Shares and Class D Shares, with the differing fees for each class of shares
Beginning January 16, 2018, the Advisor assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees paid in connection with the Company’s public offering; provided, however, that the Advisor intends to recoup the funding of such amounts through the Contingent Advisor Payment (described below). In connection with the implementation of the Contingent Advisor Payment, the Company reduced the up-front selling commission paid with respect to the Class A Shares from up to 7.0% to up to 6.0% of the gross proceeds of the Class A Shares sold in the primary offering and reduced the dealer manager fee paid with respect to the Class A Shares from up to 3.0% to up to 2.5% of the gross proceeds of the Class A Shares sold in the primary offering. As of March 31, 2022,2023, Advisor had paid Moody Securities $9.7 million in selling commissions, trailing stockholder servicing fees, and dealer manager fees related to the Company’s public offering, of which $8.5 million could potentially be recouped by the Advisor at a later date through the Contingent Advisor Payment.
Organization and Offering Expenses
The Advisor will receive reimbursement for organizational and offering expenses incurred on the Company’s behalf, but only to the extent that such reimbursements do not exceed actual expenses incurred by Advisor and do not cause the cumulative selling commissions, dealer manager fees, stockholder servicing fees and other organization and offering expenses borne by the Company to exceed 15.0% of gross offering proceeds from the sale of shares in the Company’s follow-on offering as of the date of reimbursement.
As of March 31, 2022,2023, total offering costs for the initial public offering and the follow-on offering were $21.1 million,, comprised of $12.3 million of offering costs incurred directly by the Company and $8.8 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2022, total offering costs for the initial public offering were $18.4 million, comprised of $12.3 million of offering costs incurred directly by the Company and $6.1 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2022, total offering costs for the follow-on offering were $2.7 million, comprised of $0 of offering costs incurred directly by the Company and $2.7 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2022,2023, total offering costs for the initial public offering were $18.4 million, comprised of $12.3 million of offering costs incurred directly by the Company and $6.1 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2023, total offering costs for the follow-on offering were $2.7 million, comprised of $0 of offering costs incurred directly by the Company and $2.7 million in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2023, the Company had $0 due to the Advisor for reimbursable offering costs.
Acquisition Fees
As of January 16, 2018, the Advisor assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees in connection with the Company’s public offering. In connection therewith, as of January 16, 2018, the acquisition fee payable to the Advisor was increased from 1.5% to up to a maximum of 3.85% of (1) the cost of all investments the Company acquires (including the Company’s pro rata share of any indebtedness assumed or incurred in respect of the investment and exclusive of acquisition and financing coordination fees), (2) the Company’s allocable cost of investments acquired in a joint venture (including the Company’s pro rata share of the purchase price and the Company’s pro rata share of any indebtedness assumed or incurred in respect of that investment and exclusive of acquisition fees and financing coordination fees) or (3) the amount funded by the Company to acquire or originate a loan or other investment, including mortgage, mezzanine or bridge loans (including any third-party expenses related to such investment and exclusive of acquisition fees and financing coordination fees). The up to 3.85% acquisition fee consists of (i) a 1.5% base acquisition fee and (ii) up to an additional 2.35% contingent acquisition fee (the “Contingent Advisor Payment”). The 1.5% base acquisition fee will always be payable upon the acquisition of an investment by the Company, unless the receipt thereof is waived by the Advisor. The amount of the Contingent Advisor Payment to be paid in connection with the closing of an acquisition will be reviewed on an acquisition-by-acquisition basis and such payment shall not exceed the then-outstanding amounts paid by the Advisor for dealer manager fees, selling commissions or stockholder servicing fees at the time of such closing. For purposes of determining the amount of Contingent Advisor Payment payable, the amounts paid by the Advisor for dealer manager fees, selling commissions or stockholder servicing fees and considered “outstanding” will be reduced by the amount of the Contingent Advisor Payment previously paid and taking into account the amount of the Contingent Advisor Holdback. The Advisor may waive or defer all or a portion of the acquisition fee at any time and from time to time, in the Advisor’s sole discretion. The Company did not incur any acquisition fees payable to Advisor for the three months ended March 31, 20222023 and 2021.2022.
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Reimbursement of Acquisition Expenses
The Advisor may also be reimbursed by the Company for actual expenses related to the evaluation, selection and acquisition of real estate investments, regardless of whether the Company actually acquires the related assets. The Company did not reimburse the Advisor for any acquisition expenses during the three months ended March 31, 20222023 and 2021.2022.
Financing Coordination Fee
The Advisor also receives financing coordination fees of 1% of the amount available under any loan or line of credit made available to the Company and 0.75% of the amount available or outstanding under any refinanced loan or line of credit. The Advisor will pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for the Company. The Company did not incur any financing coordination fees payable to the Advisor during the three months ended March 31, 20222023 and 2021.2022.
Property Management Fee
The Company pays Moody National Hospitality Management, LLC (“Property Manager”) a monthly hotel management fee equal to 4.0% of the monthly gross operating revenues from the properties managed by Property Manager for services it provides in connection with operating and managing properties. The hotel management agreements between the Company and the Property Manager generally have initial terms of ten years. Property Manager may pay some or all of the compensation it receives from the Company to a third-party property manager for management or leasing services. In the event that the Company contracts directly with a non-affiliated third-party property manager, the Company will pay Property Manager a market-based oversight fee. The Company will reimburse the costs and expenses incurred by Property Manager on the Company’s behalf, including legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, but the Company will not reimburse Property Manager for general overhead costs or personnel costs other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of the properties. For the three months ended March 31, 20222023 and 2021,2022, the Company incurred property management fees for each three month period of $892,000 and $861,000, respectively, and accounting fees for each three month period of $112,000, which are included in hotel operating expenses in the accompanying consolidated statements of operations.
The Company pays an annual incentive fee to Property Manager. Such annual incentive fee is equal to 15% of the amount by which the operating profit from the properties managed by Property Manager for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties. Property Manager may pay some or all of this annual incentive fee to third-party sub-property managers for management services. For purposes of this annual incentive fee, “total investment” means the sum of (i) the price paid to acquire a property, including closing costs, conversion costs, and transaction costs; (ii) additional invested capital and (iii) any other costs paid in connection with the acquisition of the property, whether incurred pre- or post-acquisition. As of March 31, 2022,2023, the Company had not paid any annual incentive fees to Property Manager.
Asset Management Fee
The Company pays the Advisor a monthly asset management fee of one-twelfth of 1.0% of the cost of investment of all real estate investments the Company acquires. For each of the three monthsmonth periods ended March 31, 20222023 and 2021,2022, the Company incurred asset management fees of $1.2 million payable to the Advisor, which are recorded in corporate general and administrative expenses in the accompanying consolidated statements of operations.
Disposition Fee
The Company also pays the Advisor or its affiliates a disposition fee in an amount of up to one-half of the brokerage commission paid on the sale of an asset, but in no event greater than 3% of the contract sales price of each property or other investment sold; provided, however, in no event may the aggregate disposition fees paid to the Advisor and any real estate commissions paid to unaffiliated third parties exceed 6% of the contract sales price. As of March 31, 2022,2023, the Company had not incurred any disposition fees payable to the Advisor.
Operating Expense Reimbursement
The Company will reimburse the Advisor for all expenses paid or incurred by the Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s aggregate operating expenses (including the asset management fee payable to the Advisor) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of the Company’s average invested assets, or (2) 25% of the Company’s net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Limitation”). Notwithstanding the above, the Company may reimburse the Advisor for expenses in excess of the 2%/25% Limitation if a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2022,2023, total operating expenses of the Company were $6.66.9 million,, which included $4.85.2 million in operating expenses incurred directly by the Company and $1.81.7 million incurred by the Advisor on behalf of the Company. Of the $6.66.9 million in total operating expenses incurred during the four fiscal quarters ended March 31, 2022,2023, $0 exceeded the 2%/25% Limitation. The Company reimbursed the Advisor $1.81.7 million during the four fiscal quarters ended March 31, 2022.2023. As of March 31, 2022,2023, the Company had $500,000451,000 due to the Advisor for operating expense reimbursement.
Notes Payable to Related Party
See Note 4, “Debt” to the consolidated financial statements for a description of notes payable to related party. The balance of notes payable to related party was $39.0 million.
Due to Related Parties, Net
The composition of the amounts due to related parties, net as of March 31, 2023 and December 31, 2022 is as follows (in thousands):
20
| March 31, 2023 | December 31, 2022 | ||||||
| Operating expense reimbursement | $ | 451 | $ | 252 | |||
| Asset management fee | 1,196 | 3,467 | |||||
| Accounts payable to Property Manager | 1,154 | 4,425 | |||||
| Total due to related parties, net | $ | 2,801 | $ | 8,144 | |||
| 7. | Incentive Award Plan |
The Company has adopted an incentive plan (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. Shares of common stock will be authorized and reserved for issuance under the Incentive Award Plan. The Company has also adopted an independent directors compensation plan (the “Independent Directors Compensation Plan”) pursuant to which each of the Company’s independent directors was entitled, subject to the Independent Directors Compensation Plan’s conditions and restrictions, to receive an initial grant of shares of restricted stock when the Company raised the minimum offering amount of $2,000,000in the Company’s initial public offering. Each new independent director who subsequently joins the Board will receive a grant of shares of restricted stock upon his or her election to the Board. In addition, on the date of each of the first four annual meetings of the Company’s stockholders at which an independent director is re-elected to the Board, he or she will receive an additional grant of shares of restricted stock. Subject to certain conditions, the non-vested shares of restricted stock granted pursuant to the Independent Directors Compensation Plan will vest and become non-forfeitable in four equal quarterly installments beginning on the first day of the first quarter following the date of grant; provided, however, that the restricted stock will become fully vested on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company. As of March 31, 2022,2023, there were common shares remaining available for future issuance under the Incentive Award Plan and the Independent Directors Compensation Plan.
The Company recorded compensation expense related to such shares of restricted stock of $ and $ for the three months ended March 31, 20222023 and 2021,2022, respectively. As of March 31, 2022,2023, there were non-vested shares of restricted common stock granted pursuant to the Independent Directors Compensation Plan. The remaining unrecognized compensation expense associated with the 3,750 non-vested shares of $ will be recognized during the second, third and fourth quarters of 2022.
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||
| Balance of non-vested shares as of December 31, 2020 | 5,000 | $ | 23.50 | ||||||
| Shares granted on November 12, 2021 | 5,000 | $ | 19.40 | ||||||
| Shares vested | (5,000 | ) | $ | 23.50 | |||||
| Balance of non-vested shares as of December 31, 2021 | 5,000 | $ | 19.40 | ||||||
| Shares vested | (1,250 | ) | $ | 19.40 | |||||
| Balance of non-vested shares as of March 31, 2022 | 3,750 | $ | 19.40 | ||||||
| 8. | Subordinated Participation Interest |
Pursuant to the limited partnership agreement for the OP, Moody LPOP II, the holder of the Special Limited Partnership Interests, is entitled to receive distributions equal to 15.0% of the OP’s net cash flows, whether from continuing operations, the repayment of loans, the disposition of assets or otherwise, but only after the Company’s stockholders (and current and future limited partnership interest holders of the OP other than the former limited partners of Moody I OP) have received, in the aggregate, cumulative distributions equal to their total invested capital plus a 6.0% cumulative, non-compounded annual pre-tax return on such aggregated invested capital. Former limited partners of Moody I OP must have received a cumulative annual return of 8.0%, which is equal to the same return to which such holders were entitled before distributions to the special limited partner of Moody I OP could have been paid under the limited partnership agreement of Moody I OP. In addition, Moody LPOP II is entitled to a separate payment if it redeems its Special Limited Partnership Interests. The Special Limited Partnership Interests may be redeemed upon: (1) the listing of the Company’s common stock on a national securities exchange or (2) the occurrence of certain events that result in the termination or non-renewal of the Advisory Agreement, in each case for an amount that Moody LPOP II would have been entitled to receive had the OP disposed of all of its assets at the enterprise valuation as of the date of the event triggering the redemption.
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| 9. | Commitments and Contingencies |
Restricted Cash
Under certain management and debt agreements existing at March 31, 2022,2023 the Company escrows payments required for property improvement plans, real estate taxes, replacement of hotel furniture and fixtures, debt service and rent holdback. The composition of the Company’s restricted cash as of March 31, 20222023 and December 31, 20212022 are as follows (all amounts in in thousands):
| March 31, | December 31, | |||||||||||||||
| March 31, 2022 | December 31, 2021 | 2023 | 2022 | |||||||||||||
| Real estate taxes | $ | 2,885 | $ | 4,447 | $ | 3,145 | $ | 4,499 | ||||||||
| Insurance | 100 | 382 | 44 | 376 | ||||||||||||
| Hotel furniture and fixtures | 5,502 | 5,483 | 7,791 | 8,053 | ||||||||||||
| Debt service | 3,347 | 2,762 | 2,319 | 3,205 | ||||||||||||
| Property improvement plan | 158 | 158 | 158 | 158 | ||||||||||||
| Total restricted cash | $ | 11,992 | $ | 13,232 | $ | 13,457 | $ | 16,291 | ||||||||
Franchise Agreements
As March 31, 2022,2023, all of the Company’s hotel properties, including those acquired as part of the Moody I Portfolio, are operated under franchise agreements with initial terms ranging from 10 to 20 years. The franchise agreements allow the properties to operate under the franchisor’s brand. Pursuant to the franchise agreements, the Company pays a royalty fee generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.5% and 4.3% of room revenue. The Company incurred franchise fee expense of $1.41.6 million and $856,0001.4 million for the three months ended March 31, 20222023 and 2021,2022, respectively, which amounts are included in hotel operating expenses in the accompanying consolidated statements of operations.
| 10. | Income Taxes |
The Company has formed a TRS that is treated as a C-corporation for federal income tax purposes and uses the asset and liability method of accounting for income taxes. Tax return positions are recognized in the consolidated financial statements when they are “more-likely-than-not” to be sustained upon examination by the taxing authority. Deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future periods. A valuation allowance may be placed on deferred income tax assets, if it is determined that it is more likely than not that a deferred tax asset may not be realized.
As of March 31, 2022,2023, the Company had operating loss and capital loss carry-forwards of $7.8 12.4 million and $700,000900,000, respectively.
The Company had deferred tax assets of $2.3 million as of March 31, 20222023 and December 31, 2021,2022, net of a valuation allowance of $15.518.3 million and $14.517.3 million as of March 31, 20222023 and December 31, 2021,2022, respectively, related to net operating loss carry forwards of the TRS which are included in prepaid expenses and other assets on the consolidated balance sheets. As of March 31, 2022,2023, the TRS had a net operating loss carry-forward of $80.198.3 million, of which $7.38.3 million was transferred from Moody I’s taxable REIT subsidiaries when they were merged into the Company’s TRS on the date of the closing of the Mergers.
The income tax expense for the three months ended March 31, 20222023 and 20212022 consisted of the following (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current expense (benefit) | $ | 30 | $ | (81 | ) | |||
| Deferred benefit | (990 | ) | (1,582 | ) | ||||
| Valuation provision for deferred benefit | 990 | 1,582 | ||||||
| Total expense (benefit) | $ | 30 | $ | (81 | ) | |||
| Federal | $ | (990 | ) | $ | (1,582 | ) | ||
| Valuation provision for federal taxes | 990 | 1,582 | ||||||
| State | 30 | (81 | ) | |||||
| Total tax expense (benefit) | $ | 30 | $ | (81 | ) | |||
22
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Current expense | $ | 25 | $ | 30 | ||||
| Deferred benefit | (1,012 | ) | (990 | ) | ||||
| Valuation provision for deferred benefit | 1,012 | 990 | ||||||
| Total expense | $ | 25 | $ | 30 | ||||
| Federal | $ | (1,012 | ) | $ | (990 | ) | ||
| Valuation provision for federal taxes | 1,012 | 990 | ||||||
| State | 25 | 30 | ||||||
| Total tax expense | $ | 25 | $ | 30 | ||||
On March 31, 2022,2023, the Company had net deferred tax assets of $2.3 million primarily due to past years’ federal and state tax operating losses of the TRS. These loss carryforwards will generally expire in 2033 through 2038 if not utilized by thenthen.. The Company analyzes state loss carryforwards on a state by state basis and records a valuation allowance when management deems it more likely than not that future results will not generate sufficient taxable income in the respective state to realize the deferred tax asset prior to the expiration of the loss carryforwards. Management believes that it is more likely than not that the results of future operations of the TRS will generate sufficient taxable income to realize the deferred tax assets, in excess of the valuation allowance, related to federal and state loss carryforwards prior to the expiration of the loss carryforwards and has determined that no valuation allowance is necessary. From time to time, the Company may be subjected to federal, state or local tax audits in the normal course of business.
| 11. | Subsequent Events |
In preparing the consolidated financial statements, the Company has evaluated all subsequent events and transactions for potential recognition or disclosure through May 12, 2023, the date the consolidated financial statements were available for issuance.
Notes Payable
The COVID-19 pandemic has had,Hampton Inn Houston note payable matured on April 28, 2023 and was extended on terms suitable to the Company. The Company is expected to continue to have, a significant adverse effectin the process of refinancing the Hyatt Place Germantown note payable which matured on the operating results of the Company’s hotel properties and overall financial condition. See Note 1, “Organization.”May 6, 2023.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Moody National REIT II, Inc. and the notes thereto. As used herein, the terms “we,” “our,” “us” and “our company” refer to Moody National REIT II, Inc. and, as required by context, Moody National Operating Partnership II, LP, a Delaware limited partnership, which we refer to as our “operating partnership,” and to their respective subsidiaries. References to “shares” and “our common stock” refer to the shares of our common stock.
Forward-Looking Statements
Certain statements included in this quarterly report on Form 10-Q, or this Quarterly Report, that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terms.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements.
The most significant factor that could cause actual outcomes to differ materially from those expressed or implied in our forward-looking statements continues to be the adverse effect of the pandemic of a novel strain of coronavirus which causes the disease known as COVID-19 (“COVID-19”), including new variants thereof, on our business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets generally. The extent and duration of the continued impacts caused by the COVID-19 pandemic on our company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including without limitation the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the speed of the development and distribution of vaccines for COVID-19 and variants thereof and the efficacy and availability of such vaccines, the willingness of the general population to be vaccinated, the duration of associated immunity and efficacy of the available vaccines against emerging variants of COVID-19, the potential for hotel closures that may be mandated or advisable, whether based on increased COVID-19 cases, the continued spread of more contagious variants or other factors, the reduction or reversal of containment measures in certain communities, and the direct and indirect economic effects of the pandemic.
In addition to COVID-19, other factors Factors that could have a material adverse effect on our operations and prospects include, but are not limited to:
| ● | whether we will be able to resume raising capital pursuant to public or private offerings of our securities; |
| ● | our ability to obtain financing on acceptable terms, satisfy our existing debt service obligations and negotiate modifications to the terms of our existing financing arrangements to the extent necessary; |
| ● | foreclosure or other actions initiated by lenders in response to our default on loans secured by our properties; |
| ● | our ability to identify and acquire real estate and real estate-related assets on terms that are favorable to us; |
| ● | risks inherent in the real estate business, including the lack of liquidity for real estate and real estate-related assets on terms that are favorable to us; |
| ● | our ability to compete in the hotel industry; |
| ● | adverse developments affecting our sponsor and its affiliates; |
| ● | the availability of cash flow from operating activities for distributions; |
| ● | changes in economic conditions generally and the real estate and debt markets specifically; |
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| ● | conflicts of interest arising out of our relationship with our advisor and its affiliates; |
| ● | legislative or regulatory changes, including changes to the laws governing the taxation of real estate investment trusts; |
| ● | the availability of capital; |
| ● | our ability to continue to qualify as a real estate investment trust; and |
| ● | changes in interest rates. |
Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon any forward-looking statements included herein. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, including, without limitation, the risks described under “Risk Factors,” the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
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Overview
We are a Maryland corporation formed on July 25, 2014 to invest in a portfolio of select-service hospitality properties with premier brands including, but not limited to, Marriott, Hilton and Hyatt. We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, beginning with our taxable year ended December 31, 2016. We own, and in the future intend to own, substantially all of our assets and conduct our operations through Moody National Operating Partnership II, LP, or our operating partnership. We are the sole general partner of our operating partnership, and the initial limited partners of our operating partnership were our subsidiary, Moody OP Holdings II, LLC, or Moody Holdings II, and Moody National LPOP II, LLC, or Moody LPOP II, an affiliate of our advisor (as defined below). Moody Holdings II invested $1,000 in our operating partnership in exchange for limited partnership interests in our operating partnership, and Moody LPOP II invested $1,000 in our operating partnership in exchange for special limited partnership interests in our operating partnership.
We are externally managed by Moody National Advisor II, LLC, a related party, which we refer to as our advisor, pursuant to an advisory agreement among us, our operating partnership and our advisor, or the advisory agreement. Our advisor was formed in July 2014. Moody National REIT Sponsor, LLC, which we refer to as our sponsor, is owned and managed by Brett C. Moody, who also serves as our Chief Executive Officer and President and the Chief Executive Officer and President of our advisor.
On January 20, 2015, we commenced our initial public offering of up to $1.1 billion in shares of common stock, consisting of up to $1.0 billion in shares of our common stock offered to the public and up to $100 million in shares offered to our stockholders pursuant to our distribution reinvestment plan, or the DRP. On June 26, 2017, we reallocated the shares of our common stock being sold in our initial public offering as Class A common stock, $0.01 par value per share, or the Class A Shares, Class I common stock, $0.01 par value per share, or the Class I Shares, and Class T common stock, $0.01 par value per share, or the Class T Shares. We collectively refer to the Class A Shares, Class I Shares and Class T Shares as our “shares.” On July 19, 2018, we commenced our follow-on public offering of up to $990 million in any combination of the three classes of our shares, consisting of up to $895 million in shares of our common stock offered to the public and up to $95 million in shares of our common stock offered to our stockholders pursuant to the DRP.
Our follow-on public offering was terminated (including pursuant to the DRP) effective as of March 25, 2020. We accepted investors’ subscriptions for and issued an aggregate of 10.2 million shares in our initial public offering and our follow-on public offering, excluding shares issued in connection with the Mergers (as defined below) and including 567,000 shares pursuant to the DRP, resulting in aggregate gross offering proceeds of $234.6 million. We accepted investors’ subscriptions for and issued 4.1 million shares in the follow-on offering, including 352,000 shares pursuant to the DRP, resulting in gross offering proceeds of $87.2 million for the follow-on public offering.
Effective January 16, 2018, our advisor assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees paid in connection with our public offering; provided, however, that our advisor intends to recoup the selling commissions, dealer manager fees and stockholder servicing fees that it funded through receipt of an increased acquisition fee (as discussed in Note 6, “Related Party Agreements-Acquisition Fees,” in the accompanying consolidated financial statements).
Moody Securities, LLC, an affiliate of our advisor, which we refer to as the “dealer manager” or “Moody Securities,” is our dealer manager and was responsible for the distribution of our common stock in our public offerings.
As of March 31, 2022,2023, our portfolio consisted of ownership interests in fifteen hotel properties located in six states, comprising a total of 2,123 rooms.
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Our principle executive offices are located at 9655 Katy Freeway, Houston, Texas 77024, and our main telephone number is (713) 977-7500.
COVID-19 Pandemic
The global COVID-19 pandemic has had, and is expected tomay in the future continue to have, a significant adverse effect on our financial condition and operating results.
Since December 2019, COVID-19 has spread globally, including to every state in the United States. The spread of COVID-19 has been declared a pandemic by the World Health Organization and in the United States the Health and Human Services Secretary has declared a public health emergency with respect to COVID-19. Many governments, including at the federal, state and local level in the United States, have instituted a wide variety of measures intended to control the spread of COVID-19, including states of emergency, mandatory quarantines, “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings. Although in many cases these measures have been modified or lifted entirely, they may be reinstated in whole or in part and additional, more restrictive measures may be implemented in the future. The COVID-19 pandemic has adversely impacted numerous industries, including transportation and hospitality, and triggered a material global economic slowdown.
Although a number of vaccines for COVID-19 are currently available to the general public in the United States and in many countries around the world, it will take time for the distribution of vaccines to materially affect the spread of COVID-19 and the ultimate effectiveness of the vaccination effort is subject to significant uncertainty. The length and severity of the pandemic will be worsened to the extent that a significant portion of the population, in the United States and globally, is reluctant to be vaccinated, fails to complete required multi-step vaccination protocol or is unable to become vaccinated due to shortages in vaccine supply or suspensions in the distribution of vaccines due to safety concerns or other issues. The length of the pandemic is also dependent upon the degree to which more contagious variants of the virus continue to spread, particularly among areas of the country in which overall full vaccination rates are relatively low, and overall rates of new COVID-19 cases continue to rise. Further, new and worsening outbreaks of COVID-19 in other countries may impact global vaccine supplies and lead to the emergence of new variants of the virus which are more contagious, more deadly or against which currently available vaccines are less effective.
COVID-19 has dramatically reduced travel, which has had an unprecedented adverse impact on the hotel industry. As a result, the COVID-19 pandemic has had and is expected to continue to have, a significant adverse effect on the operating results of our hotel properties, which depend primarily upon revenues driven by business and leisure travel, and on our business, financial performance and operating results. Since March 2020, we have experienced a significant decline in bookings, occupancy and revenues across our hotel properties, which we expect to continue for an indefinite period of time.properties. Our hotel properties have operated at a property net operating loss since the outbreak of COVID-19, which has had an adverse impact on our results of operations and cash flow from operations. In addition, we have reduced certain services and amenities at our hotel properties. Although all of our hotel properties are currently open and operational, we may be required, or elect, to temporarily suspend operations at one or more of our hotel properties in the future depending on the length and severity of the COVID-19 pandemic and its related effects. If operations at any of our hotel properties are suspended, we cannot give any assurance as to when operations at such hotel properties will resume at a full or reduced level.
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Each of our hotel properties is subject to a mortgage loan secured by our ownership interest in the property. If we are unable to service the mortgage loan secured by a hotel property due to decreased revenues generated by such property, the lender with respect to such mortgage loan may initiate foreclosure procedures with respect to the property or initiate other available remedies. As of the date of this Quarterly Report, we are current with respect to the payments due under the mortgage loans secured by our hotel properties or are in compliance with the modified terms of certain mortgage loans and other accommodations as agreed to with the lenders and other accommodations.lenders. As discussed in Note 4, “Debt,” to the consolidated financial statements included in this Quarterly Report, certain lenders have agreed to limited loan modifications, including temporary deferrals of interest and principal payments and agreements to forbearforebear the enforcement of default remedies available under the terms of the loan documents. As of the date of this Quarterly Report, no lenders have accelerated the maturity of any of the loans secured by our properties or initiated foreclosure procedures with respect to any of our properties. However, there can be no guarantee that the lenders will continue to agree to further loan modifications or accommodations and will not elect to exercise the remedies available to them under the loan documents, including acceleration or foreclosure actions. The exercise of any such remedies by a lender will have an adverse effect on our financial condition and results of operations and will impair our ability to resume the payment of distributions to our stockholders.
In accordance with local government recommendations and guidance, many of the employees of our advisor have been working remotely since March 2020. Although our advisor has implemented protocols for remote work and is leveraging technology to ensure that its employees remain connected and productive, there can be no guarantee that such work conditions will not have an adverse impact on the ability of our advisor to effectively perform its duties.
In response to the COVID-19 pandemic, we terminated our public offering of common stock (including pursuant to the DRP), effective as of March 2020. We are not currently raising capital through the sale of our securities and we do not intend to begin to do so in the near term. We also indefinitely suspended the payment of distributions to our stockholders effective as of March 2020 and the operation of our share repurchase program effective as of April 2020. Our board of directors and our management continue to evaluate our financial condition and the overall economic environment to determine if and when we will seek to resume raising capital, resume the payment of distributions and reinstate our share repurchase program. Specifically, our board of directors, in consultation with management, will continue to monitor our operations and intends to resume distributions at a time and level determined to be prudent in relation to our other cash requirements or in order to maintain our REIT status for federal income tax purposes. However, it is impossible to predict if or when we will be able to resume the payment of distributions or return to normal operations.
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The COVID-19 pandemic is a continually evolving situation that presents material uncertainty and risk. The extent and duration of the impacts of COVID-19 on our business, financial condition, results of operations and cash flows is dependent on future developments that are highly uncertain and cannot be accurately predicted at this time, including without limitation the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the speed of the development and distribution of vaccines for COVID-19 and the efficacy and availabilitytake any of such vaccines, the extent to which the general population is willing to be vaccinated, the effectiveness of currently available vaccines against emerging variants of COVID-19, the potential for hotel closures that may be mandated or advisable, whether based on increased COVID-19 cases, new variants or other factors, the reduction or reversal of previously implemented containment measures in certain states and cities, and the direct and indirect economic effects of the pandemic. As a result, we cannot provide an estimate of the overall impact of COVID-19 on our business, financial condition, results of operations and cash flows or when, if at all, we will be able to resume pre-COVID-19 levels of operations.actions.
Merger with Moody National REIT I, Inc.
On September 27, 2017, the merger of Moody National REIT I, Inc., or Moody I, with and into our company, or the Merger, and the merger of Moody National Operating Partnership I, L.P., the operating partnership of Moody I, or Moody I OP, with and into our operating partnership, or the Partnership Merger,Mergers, were completed. We refer to the Merger and the Partnership Merger herein as the “Mergers.” For additional discussion of the Mergers, see the notes to the consolidated financial statements included in this Quarterly Report.
Factors Which May Influence Results of Operations
Economic Conditions Affecting Our Target Portfolio
Adverse economic conditions affecting the hospitality sector, the geographic regions in which we plan to invest or the real estate market generally may have a material impact on our capital resources and the revenue or income to be derived from the operation of our hospitality investments. As discussed above, the COVID-19 pandemic has had and is expected to continue to have, a significant adverse effect on our hotel properties.
Offering Proceeds
Our ability to make investments depends in significant part upon the net proceeds raised from the sale of our securities and our ability to finance the acquisition of our investments. As discussed above, we terminated our public offering of common stock (including pursuant to the DRP), effective as of March 2020. Our ability to continue to acquire additional assets, satisfy our debt service obligations and pay other operating expenses will be adversely impacted until such time as we resume raising capital. If we are not able to resume raising capital, we will make fewer investments resulting in relatively less portfolio diversification and sources of income, and the likelihood of our profitability being affected by the performance of any one of our investments will increase. In addition, if we are unable to resume raising capital, our fixed operating expenses as a percentage of gross income will be relatively higher than if we do not resume raising capital, which could affect our net income and results of operations. We cannot predict if or when we will be able to resume raising capital in a public offering or that we will identify other means of raising significant additional capital.
Results of Operations
We were formed on July 25, 2014. As of both March 31, 20222023 and 2021,2022, we owned interests in fifteen hotel properties located in six states, comprising a total of 2,123 rooms.
Beginning in March 2020, COVID-19 caused widespread cancellations of both business and leisure travel throughout the United States, resulting in significant decreases in bookings, occupancy and revenues throughout our hotel portfolio and the hospitality industry as a whole. Due to the overall uncertainty surrounding the COVID-19 pandemic in the United States, it is difficult to project the duration of revenue declines for the industry and our company; however, we currently expect the decline in revenue and operating results asdeclined for the year ended December 31, 2022 compared to the year ended December 31, 2019 (the last full year prior to continue through the remainder of 2022 and potentially into subsequent years.COVID-19 pandemic). We expect a gradual recovery in revenues as the percentage of the population which has been fully vaccinated increases,state and local governments and businesses have removed restrictions on travel and public gatherings continue to be lifted and levels of travel increase. However, our future revenues and operating results could be negatively impacted if, among other things, rates of COVID-19 cases increase, more contagious or deadly variants of COVID-19 emerge and spread, state and local governments and businesses reinstate restrictions on travel and public gatherings or consumer sentiment towardtowards travel deteriorates. It is impossible to predict if or when we will be able to resume pre-COVID-19 levels of operations.has improved.
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Comparison of the three months ended March 31, 20222023 versus the three months ended March 31, 20212022
Revenue
Hotel revenue increased to $18.4 million for the three months ended March 31, 2023 from $15.7 million for the three months ended March 31, 2022 from $9.7 million for the three months ended March 31, 2021 due to increased hotel occupancies primarily resulting from an increase in travel in response to the COVID-19 vaccines. Interest and dividend income decreased to $0 for the three months ended March 31, 2022 from $1,000 for three months ended March 31, 2021 due to the sale of the marketable securities during the first quarter of 2021.travel.
The table below sets forth a comparison of hotel revenues for the hotels owned continuously for the three months ended March 31, 20222023 and 20212022 (all amounts in thousands) is set forth below.
| Three months ended March, | Three months ended March 31, | Increase | ||||||||||||||||||||||
| 2022 | 2021 | Increase | 2023 | 2022 | (Decrease) | |||||||||||||||||||
| Residence Inn Austin | $ | 1,166 | $ | 732 | $ | 434 | $ | 1,404 | $ | 1,166 | $ | 238 | ||||||||||||
| Springhill Suites Seattle | 1,221 | 927 | 294 | 1,392 | 1,221 | 171 | ||||||||||||||||||
| Homewood Suites Woodlands | 577 | 420 | 157 | 725 | 577 | 148 | ||||||||||||||||||
| Hyatt Place Germantown | 767 | 555 | 212 | 939 | 767 | 172 | ||||||||||||||||||
| Hyatt Place North Charleston | 637 | 302 | 335 | 558 | 637 | (79 | ) | |||||||||||||||||
| Hampton Inn Austin | 895 | 360 | 535 | 1,066 | 895 | 171 | ||||||||||||||||||
| Residence Inn Grapevine | 1,451 | 938 | 513 | 1,668 | 1,451 | 217 | ||||||||||||||||||
| Marriott Courtyard Lyndhurst | 1,167 | 614 | 553 | 1,232 | 1,167 | 65 | ||||||||||||||||||
| Hilton Garden Inn Austin | 1,084 | 675 | 409 | 1,185 | 1,084 | 101 | ||||||||||||||||||
| Hampton Inn Great Valley | 483 | 219 | 264 | 691 | 483 | 208 | ||||||||||||||||||
| Embassy Suites Nashville | 2,250 | 845 | 1,405 | 2,923 | 2,250 | 673 | ||||||||||||||||||
| Homewood Suites Austin | 1,144 | 627 | 517 | 1,187 | 1,144 | 43 | ||||||||||||||||||
| Townplace Suites Fort Worth | 651 | 457 | 194 | 727 | 651 | 76 | ||||||||||||||||||
| Hampton Inn Houston | 458 | 302 | 156 | 601 | 458 | 143 | ||||||||||||||||||
| Residence Inn Houston Medical Center | 1,769 | 1,697 | 72 | 2,138 | 1,769 | 369 | ||||||||||||||||||
| $ | 15,720 | $ | 9,670 | $ | 6,050 | $ | 18,436 | $ | 15,720 | $ | 2,716 | |||||||||||||
Revenues for all hotel properties except Hyatt Place North Charleston increased for the three months ended March 31, 20222023 compared to the three months ended March 31, 20212022 primarily due to increased hotel occupancies primarily resulting from an increase in travel in response to the COVID-19 vaccine.travel.
Hotel Operating Expenses
Hotel operating expenses increased to $13.4 million for the three months ended March 31, 2023 from $11.0 million for the three months ended March 31, 2022 from $8.3 million for the three months ended March 31, 2021.2022. Such increase was primarily due to increased occupancies for the three months ended March 31, 20222023 compared to the three months ended March 31, 20212022 primarily resulting from an increase in travel in response to the COVID-19 vaccine.travel.
Property Taxes, Insurance and Other
Property taxes, insurance and other expenses decreased to $1.6 million for the three months ended March 31, 2023 from $1.7 million for the three months ended March 31, 2022 from $1.9 million for the three months ended March 31, 2021.2022. The decrease in property taxes, insurance and other expenses was primarily due to reductions in certain state and local property taxes.
Depreciation and amortization
Depreciation and amortization wasincreased to $4.0 million for the three months ended March 31, 2023 from $3.9 million for the three months ended March 31, 2022 and 2021.2022.
Corporate General and Administrative Expenses
Corporate general and administrative expenses decreased to $1.7 million for the three months ended March 31, 2023 from $1.9 million for the three months ended March 31, 2022 from $2.0 million for the three months ended March 31, 2021.2022. These general and administrative expenses consisted primarily of asset management fees, restricted stock compensation and directors’ fees.
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Interest Expense and Amortization of Debt Issuance Costs
Interest expense and amortization of debt issuance costs increased to $3.8 million for the three months ended March 31, 2023 from $3.5 million for the three months ended March 31, 2022 from $2.9 million for the three months ended March 31, 2021. The increase in interest expense and amortization of debt issuance costs was primarily due to an increase in the balance of notes payable to related party.2022. In future periods our interest expense will vary based on the amount of our borrowings, which will depend on the availability and cost of borrowings and our ability to identify and acquire assets that meet our investment objectives.
Loss on Sale of Marketable Securities
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Loss on sale of marketable securities was $245,000 for the three months ended March 31, 2021 which resulted from the sale of our marketable securities.
Unrealized Gain on Change in Fair Value of Investment in Marketable Securities
Unrealized gain on change in fair value of investment in marketable securities was $397,000 for the three months ended March 31, 2021 which due to an increase in the value of our marketable securities.
Income Tax Expense (Benefit)
Our income tax expense was $25,000 for the three months ended March 31, 2023 compared to an income tax expense of $30,000 for the three months ended March 31, 2022 compared to an income tax benefit of $81,000 for the three months ended March 31, 2021.2022. The increasedecrease was due to an increasea decrease in state taxable income of our taxable REIT subsidiary, or TRS, for the three months ended March 31, 2021.2023.
Liquidity and Capital Resources
Our principal demand for funds is for the acquisition of real estate assets, the payment of operating expenses, principal and interest payments on our outstanding indebtedness and, to the extent we elect to resume the payment of distributions, the payment of distributions to our stockholders. To the extent that our operating results continue to be adversely impacted by the effects of the COVID-19 pandemic,an economic downturn or potential recession, our liquidity and capital resources will be adversely impacted.
Our principal short-term source of liquidity is the operating cash flows generated from our hotel properties. Historically, proceeds from our public offering supplied a significant portion of our available cash. However, our public offering has been terminated and we cannot predict if or when we will be able to resume raising capital pursuant to the sale of our securities. If we are able to resume raising capital pursuant to an offering of our securities, there may be a delay between the sale of our securities and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. As a result of declines in occupancy caused by COVID-19, we anticipate significantly reduced cash from operations until travel recovers to pre-pandemic levels in the United States. In 2022, 2021 and 2020, we took measures to preserve capital and increase liquidity, including suspending our monthly distribution and postponing non-essential capital improvements. In addition, as a result of the effects of COVID-19 on the economic environment, the lenders for certain of the mortgage loans secured by our properties granted us temporary deferrals of principal and interest payments. We anticipate funding our near-term cash needs with improving operating cash flows generated from our properties.
We may, but are not required to, establish working capital reserves out of cash flow generated by our real estate assets or out of proceeds from the sale of our real estate assets. We do not anticipate establishing a general working capital reserve; however, we may establish working capital reserves with respect to particular investments. We also may, but are not required to, establish reserves out of cash flow generated by our real estate assets or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically used to fund tenant improvements, leasing commissions and major capital expenditures. We also escrow funds for property improvements. Our lenders also may require working capital reserves. Financing agreements that we enter into may also contain various customary covenants, including but not limited to financial covenants, covenants requiring monthly deposits in respect of certain property costs, covenants imposing restrictions on indebtedness and liens, and restrictions on investments and participation in other asset disposition, merger or business combination or dissolution transactions.
Although there can be no assurances, we anticipate that available cash will be adequate to meet our near-term potential operating cash flow deficits, that may result from the effects of the COVID-19 pandemic, debt service and capital expenditures. If we are unable to satisfy our near-term anticipated cash requirements as currently planned, we may raise capital through the disposition of assets, the sale of our equity or debt securities or short-term borrowing, all of which may be more costly to us in the current economic environment.
Net Cash Used in Operating Activities
As of both March 31, 20222023 and 2021,2022, we owned interests in fifteen hotel properties. Net cash used in operating activities for the three months ended March 31, 2023 and 2022 and 2021 was $1.3$7.8 million and $10.2$1.3 million, respectively. The decreaseincrease in cash used in operating activities for the three months ended March 31, 20222023 was primarily due to the fact that amounts due to related parties increaseddecreased by $2.4$5.3 million for the three months ended March 31, 20222023 compared to a decreasean increase in amounts due to related parties of $3.1 million for the three months ended March 31, 2021. Also, such decrease in cash used in operating activities was due to a decrease in net loss from $9.0 million for the three months ended March 31, 2021 compared to a net loss of $6.3$2.4 million for the three months ended March 31, 2022.
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Net Cash (Used in) Provided byUsed in Investing Activities
For the three months ended March 31, 2022,2023, net cash used in investing activities was $357,000$987,000 compared to net cash provided by investing activities of $2.2 million$357,000 for the three months ended March 31, 2021.2022. The decrease in cash provided by investing activities for the three months ended March 31, 20222023 was due to the fact that we had proceedsan increase in improvements and additions hotel properties of sales of marketable securities of $0$987,000 during the three months ended March 31, 20222023 compared to $2.2 million$357,000 during the three months ended March 31, 2021.2022.
Net Cash Provided By (Used in) Provided by Financing Activities
For the three months ended March 31, 2022,2023, our cash flows from financing activities consisted primarily of proceeds notes payable to related party, net of repayments of notes payable. Net cash provided by (used in) provided by financing activities for the three months ended March 31, 2023 and 2022 was $7.6 million and 2021 was $(132,000) and $7.1 million,, respectively. The decreaseincrease in cash provided by financing activities for the three months ended March 31, 20222023 was primarily due to the fact that we hadreceived proceeds from notes payable to related party of $8.9 million for the three months ended March 31, 2023 compared to proceeds from notes payable to related party of $1.3 million for the three months ended March 31, 2022 compared to proceeds of notes payable to related party of $8.0 million for the three months ended March 31, 2021.2022.
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Cash and Cash Equivalents and Restricted Cash
As of March 31, 2022,2023, we had cash on hand, cash equivalents and restricted cash of $17.5$20.0 million.
Debt
We use, and intend to use in the future, secured and unsecured debt as a means of providing additional funds for the acquisition of real property, and potentially for the acquisition of real estate-related securities. By operating on a leveraged basis, we expect that we will have more funds available for investments and will be able to make more investments than would otherwise be possible, which will potentially result in enhanced investment returns and a more diversified portfolio. However, our use of leverage increases the risk of default on loan payments and the resulting foreclosure on a particular asset. In addition, lenders may have recourse to assets other than those specifically securing the repayment of the indebtedness. When debt financing is unattractive due to high interest rates or other reasons, or when financing is otherwise unavailable on a timely basis, we may purchase certain assets for cash with the intention of obtaining debt financing at a later time.
Each of our hotel properties is subject to a mortgage loan secured by our ownership interest in the property. The COVID-19 pandemic has resulted in a significant decline in the revenues generated by our hotel properties and increased the risk that we will be unable to satisfy our debt service obligations. If we are unable to service the mortgage loan secured by a hotel property, the lender may initiate foreclosure procedures with respect to the property or initiate other available remedies. As of March 31, 2022,2023, we were current with respect to the payments due under the mortgage loans secured by our hotel properties or are in compliance with the modified terms of certain mortgage loans as agreed to with the lenders and other accommodations. As discussed in Note 4, “Debt,” to the consolidated financial statements included in this Quarterly Report, certain lenders have agreed to limited loan modifications, including temporary deferrals of interest and principal payments. As of the date of this Quarterly Report, no lenders have accelerated the maturity of any of the loans secured by our properties or initiated foreclosure procedures with respect to any of our properties. However, there can be no guarantee that the lenders will continue to agree to further loan modifications or accommodations and will not elect to exercise the remedies available to them under the loan documents, including acceleration or foreclosure actions. The exercise of any such remedies by a lender will have an adverse effect on our financial condition and results of operations and will impair our ability to resume the payment of distributions to our stockholders. Several of the mortgage loans secured by our hotel properties mature during 2023.
The U.S. Federal Reserve raised interest rates repeatedly during 2022 and the first quarter of 2023 and may further increase interest rates in the remainder of 2023. Any change in the fiscal policies or stated target interest rates of the U.S. Federal Reserve or other central banking institutions, or market expectations of such change, are difficult to predict and may result in significantly higher long-term interest rates. Such a transition may be abrupt and may, among other things, reduce the availability or increase the costs of obtaining new debt and refinancing existing indebtedness. In the event that the interest rate on any of our outstanding mortgage loans or other indebtedness increases significantly, we may not have sufficient funds to pay the required interest payments.
Notes Payable to Related Party
On March 30, 2021, Moody National Capital, LLC (“Moody Capital”), an affiliate of our sponsor, loaned us $8.0$8 million pursuant to a promissory note (the “Related Party Note”). The Related Party Note provides that we may borrow up to an additional $2.0 million from Moody Capital, for a maximum aggregate loan amount of $10.0$10 million. All amounts borrowed under the Related Party Note plus all accrued interest thereon will be due and payable in full on March 29, 2024, provided that we may extend such maturity date for up to two years at our discretion. Interest on the Related Party Note began to accrue effective March 30, 2021. The principal amount of the loan under the Related Party Note will bearbears interest at a rate per annum equal LIBORto the Secured Overnight Financing Rate (“SOFR”) plus 4.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORSOFR plus 6.75% if the Related Party Note is subordinated to another lender. The effective interest rate for the Related Party Note was 9.41% as of March 31, 2023. The balance of the Related Party Note was $10.0 million as of March 31, 20222023 and December 31, 2021.2022.
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Also, fromFrom April 2021 to August 16, 2021, Moody Capital made a series of advances to us to meet our specific cash flow needs. Effective June 30, 2021, these advances were memorialized in a promissory note (“Second(the “Second Related Party Note”) with a total maximum aggregate loan amount of $10.0$10 million. All amounts borrowed under the Second Related Party Note plus all accrued interest thereon will be due and payable in full on June 30, 2024, provided that we may extend such maturity date for up to two years at our discretion. Interest on the Second Related Party Note willbegan to accrue effective June 30, 2021. The principal amount of the loan under the Second Related Party Note will bearbears interest at a rate per annum equal LIBORto SOFR plus 6.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORSOFR plus 8.75% if the Second Related Party Note is subordinated to another lender. The effective interest rate for the Second Related Party Note was 11.41% as of March 31, 2023. The balance of the Second Related Party Note was $10.0 million as of March 31, 20222023 and December 31, 2021.2022.
From August 20, 2021, to MarchDecember 31, 2022,2021, Moody Capital made a series of advances to us to meet our specific cash flow needs and has received repayments from us based on our specific available cash flow.needs. These advances were memorialized in a promissory note (“Third(the “Third Related Party Note”) with a total maximum aggregate loan amount of $10.0$10 million. All amounts borrowed under the Third Related Party Note plus all accrued interest thereon will be due and payable in full on August 20, 2024, provided that we may extend such maturity date for up to two years at our discretion. Interest on the Third Related Party Note willbegan to accrue effective August 20, 2021. The principal amount of the loan under the Third Related Party Note will bearbears interest at a rate per annum equal LIBORto SOFR plus 7.75%; provided, however, that such interest rate will be increased to a rate per annum equal to LIBORSOFR plus 9.75% if the Third Related Party Note is subordinated to another lender. The balance ofeffective interest rate for the Third Related Party Note was $9,770,000 and $8,474,00012.41% as of March 31, 20222023. The balance of the Third Related Party Note was $10 million as of as of March 31, 2023 and December 31, 2021,2022.
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From April 13, 2022, to June 30, 2022, Moody Capital made a series of advances to us to meet our specific cash flow needs and has received repayments from us based on our specific available cash flow. These advances were memorialized in a promissory note (the “Fourth Related Party Note”) with a total maximum aggregate loan amount of $10.0 million. All amounts borrowed under the Fourth Related Party Note plus all accrued interest thereon will be due and payable in full on April 13, 2025, provided that we may extend such maturity date for up to two years at our discretion. Interest on the Fourth Related Party Note began to accrue effective April 13, 2022. The principal amount of the loan under the Fourth Related Party Note bears interest at a rate per annum equal to one-year SOFR plus 8.75%; provided, however, that such interest rate will be increased to a rate per annum equal to one-year SOFR plus 9.75% if the Fourth Related Party Note is subordinated to another lender. The effective interest rate for the Fourth Related Party Note was 13.41% as of March 31, 2023. The balance of the Fourth Related Party Note was $9.0 million and $110,500 as of March 31, 2023 and December 31, 2022, respectively.
Interest will be paid for the Related Party Note, the Second Related Party Note, the Third Related Party Note, and the ThirdFourth Related Party Note as permitted by our available cash flow, or from the excess proceeds following a sale of a property after the payment of expenses and amounts due to any senior lender, if applicable, and will be compounded semiannually. We expect to enter into a mutually agreeable subordination agreement with any such senior lender. We may prepay the amounts due under the Related Party Note, the Second Related Party Note, the Third Related Party Note, and the ThirdFourth Related Party Note without any prepayment penalty.
Economic Injury Disaster Loans
We have obtained fifteen loans of $500,000 each from the U.S. Small Business Administration. The U.S. Small Business Administration loans will be due in monthly installments of principal and interest beginning two years from the dates of the loans with balances due 30 years from the dates of the loans. The monthly installments are applied to accrued interest first, then to principal. The U.S. Small Business Administration loans bear interest at the rate of 3.75% per annum and are secured by our tangible and intangible personal property. The aggregate balance of the U.S. Small Business Administration loans was $7.5 million as of March 31, 2023 and December 31, 2022.
Aggregate Indebtedness
As of March 31, 2022,2023, our outstanding indebtedness totaled $240.2$274 million, which amount includes (i) the aggregate balance of the mortgage loans secured by each of our hotel properties (including debt associated with properties acquired in the Mergers) and the loans from the U.S. Small Business Administration.Administration of $235 million, and (ii) the aggregate balance of the Related Party Note, the Second Related Party Note, the Third Related Party Note, and the Fourth Related Party Note of $39 million. Our aggregate borrowings are reviewed by our board of directors at least quarterly. Under our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets. “Net assets” for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of 300% of the value of our net assets if such excess is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with an explanation for such excess. As of March 31, 20222023 and December 31, 2021,2022, our debt levels did not exceed 300% of the value of our net assets.
For more information on our outstanding indebtedness, see Note 4, “Debt” to the consolidated financial statements included in this Quarterly Report.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of March 31, 20222023 (in thousands):
| Payments Due By Period | Payments Due By Period | |||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | 2022 | 2023-2024 | 2025-2026 | Thereafter | Total | 2023 | 2024-2025 | 2026-2027 | Thereafter | ||||||||||||||||||||||||||||||
| Long-term debt obligations(1) | $ | 240,248 | $ | 3,805 | $ | 112,226 | $ | 116,749 | $ | 7,468 | $ | 235,016 | $ | 20,377 | $ | 168,030 | $ | 39,288 | $ | 7,321 | ||||||||||||||||||||
| Interest payments on outstanding debt obligations(2) | 37,813 | 8,199 | 19,132 | 6,141 | 4,341 | 26,899 | 7,646 | 13,047 | 2,167 | 4,039 | ||||||||||||||||||||||||||||||
| Total | $ | 278,061 | $ | 12,004 | $ | 131,358 | $ | 122,890 | $ | 11,809 | $ | 261,915 | $ | 28,023 | $ | 181,077 | $ | 41,455 | $ | 11,360 | ||||||||||||||||||||
| (1) | Amounts include principal payments only. |
| (2) | Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates at March 31, |
Organization and Offering Costs
Our organization and offering expenses may be incurred directly by us or may be incurred by our advisor on our behalf. Pursuant to the advisory agreement, we will reimburse our advisor for organizational and offering expenses associated with our public offerings incurred by our advisor on our behalf, provided that within 60 days of the last day of the month in which any public offering ends, our advisor is obligated to reimburse us to the extent that organization and offering costs we have incurred in connection with such public offering exceed 15% of the gross offering proceeds from the sale of shares of our common stock in such offering. As of January 16, 2018, our advisor assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees paid in connection with our public offering. We will not reimburse our advisor for the selling commissions and fees it paid on our behalf, however our advisor intends to recoup all or a portion of such amounts over time through receipt of the contingent advisor payment, as discussed in Note 6, “Related Party Arrangements” to the consolidated financial statements included elsewhere in this Quarterly Report.
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As of March 31, 2022,2023, total organization and offering expenses for our initial public offering and follow-on offering were $21.1 million, comprised of $12.3 million of expenses incurred directly by us and $8.8 million in expenses incurred by and reimbursable to our advisor (excluding the selling commissions, dealer manager fees and stockholder servicing fees paid on our behalf by our advisor effective as of January 16, 2018). Total organization and offering expenses for the initial public offering were $18.4 million, comprised of $12.3 million of expenses incurred directly by us and $6.1 million in expenses incurred by and reimbursable to our advisor (excluding the selling commissions, dealer manager fees and stockholder servicing fees paid on our behalf by our advisor). As of March 31, 2022,2023, total organization and offering expenses for the follow-on offering were $2.7 million, comprised of $0 of expenses incurred directly by us and $2.7 million in expenses incurred by and reimbursable to our advisor (excluding the selling commissions, dealer manager fees and stockholder servicing fees paid on our behalf by our advisor). As of March 31, 2022,2023, we had $0 due to our advisor for reimbursable offering costs.
All offering costs, including selling commissions and dealer manager fees, are recorded as an offset to additional paid-in-capital, and all organization costs are recorded as an expense when we have an obligation to reimburse our advisor.
Operating Expenses
We will reimburse our advisor for all expenses paid or incurred by our advisor in connection with the services it provides to us, subject to the limitation that we will not reimburse our advisor for any amount by which our operating expenses (including the asset management fee we pay to our advisor) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of our average invested assets, or (2) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period, which we refer to as the “2%/25% Limitation.” Notwithstanding the above, we may reimburse our advisor for expenses in excess of the 2%/25% Limitation if a majority of our independent directors determine that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2022,2023, our total operating expenses were $6.6$6.9 million, which included $4.8$5.2 million in operating expenses incurred directly by us and $1.8$1.7 million in operating expenses incurred by our advisor on our behalf. Of that $6.6$6.9 million in total operating expenses incurred during four fiscal quarters ended March 31, 2022,2023, $0 exceeded the 2%/25% Limitation. We reimbursed our advisor for $1.8$1.7 million in operating expenses during four fiscal quarters ended March 31, 2022.2023. As of March 31, 2022,2023, we had $500,000$451,000 due to our advisor for operating expense reimbursements.
Critical Accounting Policies
General
We consider the accounting policies described below to be critical because they involve significant judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the consolidated financial statements or different amounts reported in the consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Income Taxes
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 2016. We did not meet all of the qualifications to be a REIT under the Internal Revenue Code for the year ended December 31, 2015 and for the period from July 25, 2014 (inception) to December 31, 2014, including not having the requisite number of shareholders for a sufficient number of days in those periods. Prior to qualifying to be taxed as a REIT we were subject to normal federal and state corporation income taxes.
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Provided that we continue to qualify as a REIT, we generally will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders, so long as we distribute at least 90% of our REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) and satisfy the other organizational and operational requirements for REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.
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We lease the hotels that we acquire to a wholly owned TRS that is subject to federal, state and local income taxes.
We account for income taxes of our TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We record a valuation allowance for net deferred tax assets that are not expected to be realized.
We have reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the consolidated financial statements if it is more likely than not that the tax position will be sustained upon examination. We had no material uncertain tax positions as of March 31, 2022.2023.
The preparation of our various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which our estimates may change is not expected to be material. We will account for interest and penalties relating to uncertain tax provisions in the current period’s results of operations, if necessary. We have tax years 20172018 through 20212022 remaining subject to examination by various federal and state tax jurisdictions.
Valuation and Allocation of Hotel Properties — Acquisitions
Upon acquisition, the purchase price of hotel properties are allocated to the tangible assets acquired, consisting of land, buildings and furniture, fixtures and equipment, any assumed debt, identified intangible assets and asset retirement obligations, if any, based on their fair values. Acquisition costs are charged to expense as incurred. Initial valuations are subject to change during the measurement period, but the measurement period ends as soon as the information is available. The measurement period shall not exceed one year from the acquisition date.
Land fair values are derived from appraisals, and building fair values are calculated as replacement cost less depreciation or our estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. The fair value of furniture, fixtures and equipment is based on their fair value using replacement costs less depreciation.
We determine the fair value of any assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that we believe we could obtain at the date of acquisition. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan as interest expense.
In allocating the purchase price of each of our properties, we make assumptions and use various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets and discount rates used to determine present values. Many of these estimates are obtained from independent third-party appraisals. However, we are responsible for the source and use of these estimates. These estimates are based on judgment and subject to being imprecise; accordingly, if different estimates and assumptions were derived, the valuation of the various categories of our hotel properties or related intangibles could, in turn, result in a difference in the depreciation or amortization expense recorded in our consolidated financial statements. These variances could be material to our results of operations and financial condition.
Valuation and Allocation of Hotel Properties — Ownership
Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
| Estimated Useful Lives (years) | ||||
| Buildings and improvements | 39-40 | |||
| Exterior improvements | 10-20 | |||
| Furniture, fixtures and equipment | 5-10 |
Impairment
We monitor events and changes in circumstances indicating that the carrying amounts of our hotel properties may not be recoverable. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset from operating activities and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value for assets held for use and fair value less costs to sell for assets held for sale. There were no such impairment losses for the three months ended March 31, 20222023 and 2021.2022.
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In evaluating our hotel properties for impairment, we make several estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership and the projected sales price of each of the properties. A change in these estimates and assumptions could result in a change in the estimated undiscounted cash flows or fair value of our hotel properties which could then result in different conclusions regarding impairment and material changes to our consolidated financial statements.
Inflation
As of March 31, 2022,2023, our investments consisted of ownership interests in fifteen hotel properties. Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. As of March 31, 2022,2023, we were not experiencing any material impact from inflation.
REIT Compliance
We elected to be taxed as a REIT commencing with the taxable year ended December 31, 2016. To qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income (determined for this purpose without regard to the dividends-paid deduction and excluding net capital gain) to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following the taxable year in which we initially elect to be taxed as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. We did not meet all of the qualifications to be a REIT under the Internal Revenue Code for the year ended December 31, 2015 and the period from July 25, 2014 (inception) to December 31, 2014.
Distributions
We first paid distributions on September 15, 2015. On March 24, 2020, our board of directors indefinitely suspended the payment of all distributions. Our board of directors, in consultation with management, will continue to monitor our operations and intends to resume distributions at a time and level determined to be prudent in relation to our other cash requirements or in order to maintain our REIT status for federal income tax purposes. However, it is impossible to predict if or when we will be able to resume the payment of distributions.
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by operations. Cash generated from operations is not equivalent to net income as determined under GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as Funds from Operations, or FFO, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition for computing FFO because, in our view, FFO is a meaningful supplemental performance measure in conjunction with net income.
Changes in the accounting and reporting rules under GAAP that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted a significant increase in the magnitude of non-cash and non-operating items included in FFO, as defined. As a result, in addition to FFO, we also calculate modified funds from operations, or MFFO, a non-GAAP supplemental financial performance measure that our management uses in evaluating our operating performance. Similar to FFO, MFFO excludes items such as depreciation and amortization. However, MFFO excludes non-cash and non-operating items included in FFO, such as amortization of certain in-place lease intangible assets and liabilities and the amortization of certain tenant incentives. Our calculation of MFFO will exclude these items, as well as the effects of straight-line rent revenue recognition, fair value adjustments to derivative instruments that do not qualify for hedge accounting treatment, non-cash impairment charges and certain other items, when applicable. Our calculation of MFFO will also include, when applicable, items such as master lease rental receipts, which are excluded from net income (loss) and FFO, but which we consider in the evaluation of the operating performance of our real estate investments.
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We believe that MFFO reflects the overall impact on the performance of our real estate investments of occupancy rates, rental rates, property operating costs and development activities, as well as general and administrative expenses and interest costs, which is not immediately apparent from net income (loss). As such, we believe MFFO, in addition to net income (loss) as defined by GAAP, is a meaningful supplemental performance measure which is used by our management to evaluate our operating performance and determine our operating, financing and dividend policies.
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Please see the limitations listed below associated with the use of MFFO as compared to net income (loss):
| ● | Our calculation of MFFO will exclude any gains (losses) related to changes in estimated values of derivative instruments related to any interest rate swaps which we hold. Although we expect to hold these instruments to maturity, if we were to settle these instruments prior to maturity, it would have an impact on our operations. We do not currently hold any such derivate instruments and thus our calculation of MFFO set forth in the table below does not reflect any such exclusion. |
| ● | Our calculation of MFFO will exclude any impairment charges related to long-lived assets that have been written down to current market valuations. Although these losses will be included in the calculation of net income (loss), we will exclude them from MFFO because we believe doing so will more appropriately present the operating performance of our real estate investments on a comparative basis. We have not recognized any such impairment charges and thus our calculation of MFFO set forth in the table below does not reflect any such exclusion. |
| ● | Our calculation of MFFO will exclude organizational and offering expenses and acquisition expenses. Although organizational and acquisition expenses reduce net income, we fund such costs with proceeds from our offering and acquisition-related indebtedness, and do not consider these expenses in the evaluation of our operating performance and determining MFFO. Offering expenses do not affect net income. Our calculation of MFFO set forth in the table below reflects the exclusion of acquisition expenses. |
We believe MFFO is useful to investors in evaluating how our portfolio might perform after our offering and acquisition stage has been completed and, as a result, may provide an indication of the sustainability of our distributions in the future. However, as described in greater detail below, MFFO should not be considered as an alternative to net income (loss) or as an indication of our liquidity. Many of the adjustments to MFFO are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities. MFFO is also more comparable in evaluating our performance over time and as compared to other real estate companies, which may not be as involved in acquisition activities or as affected by impairments and other non-operating charges.
MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. However, MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO. Investors are cautioned that, due to the fact that impairments are based on estimated future undiscounted cash flows and, given the relatively limited term of our operations, it could be difficult to recover any impairment charges.
The calculation of FFO and MFFO may vary from entity to entity because capitalization and expense policies tend to vary from entity to entity. Consequently, our presentation of FFO and MFFO may not be comparable to other similarly titled measures presented by other REITs. In addition, FFO and MFFO should not be considered as an alternative to net income (loss) or to cash flows from operating activities and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments which are increases to MFFO are, and may continue to be, a significant use of cash. MFFO also excludes impairment charges, rental revenue adjustments and unrealized gains and losses related to certain other fair value adjustments. Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements.
The table below summarizes our calculation of FFO and MFFO for the three months ended March 31, 20222023 and 20212022 and a reconciliation of such non-GAAP financial performance measures to our net income.
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Loss | $ | (6,304 | ) | $ | (9,031 | ) | ||
| Adjustments: | ||||||||
| Depreciation and amortization | 3,939 | 3,865 | ||||||
| Loss on sale of marketable securities | — | 245 | ||||||
| Funds from Operations | (2,365 | ) | (4,921 | ) | ||||
| Adjustments: | ||||||||
| Unrealized loss on change in fair value of investment in marketable securities | — | (397 | ) | |||||
| Amortization of debt issuance costs | 168 | 168 | ||||||
| Modified Funds from Operations | $ | (2,197 | ) | $ | (5,150 | ) | ||
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| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net Loss | $ | (6,031 | ) | $ | (6,304 | ) | ||
| Adjustments: | ||||||||
| Depreciation and amortization | 3,962 | 3,939 | ||||||
| Funds from Operations | (2,069 | ) | (2,365 | ) | ||||
| Adjustments: | ||||||||
| Amortization of debt issuance costs | 157 | 168 | ||||||
| Modified Funds from Operations | $ | (1,912 | ) | $ | (2,197 | ) | ||
Off-Balance Sheet Arrangements
As of March 31, 20222023 and December 31, 2021,2022, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Related Party Transactions and Agreements
We have entered into agreements with our advisor and its affiliates whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, our advisor or its affiliates in connection with the services our advisor and its affiliates provide to us. See Note 6, “Related Party Arrangements,” to the consolidated financial statements included in this Quarterly Report for a discussion of our related-party transactions, agreements and fees.
Subsequent Events
In preparing the consolidated financial statements, we evaluated all subsequent events and transactions for potential recognition or disclosure through May 12, 2023, the date the consolidated financial statements were available for issuance.
COVID-19 PandemicNotes Payable
As discussed elsewhereThe Hampton Inn Houston note payable matured on April 28, 2023 and was extended on terms suitable to us. We are in this Quarterly Report, the COVID-19 pandemic has had, and is expected to continue to have, a significant adverse effectprocess of refinancing the Hyatt Place Germantown note payable, which matured on the operating results of our hotel properties and overall financial condition.May 6, 2023.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Market Risk
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund capital expenditures and expand our real estate investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We will seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
With regard to variable rate financing, our advisor will assess our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our advisor maintains risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy will be designed to minimize the impact on our net income and funds from operations from changes in interest rates, the overall returns on an investment in our company may be reduced.
As of March 31, 2022,2023, our indebtedness, as described below, was comprised of notes secured by our hotel properties. All such notes, except the Term Loan, accrue interest at a fixed rate and, therefore, an increase or decrease in interest rates would have no effect on our interest expense with respect such notes. Interest rate changes will affect the fair value of any fixed rate instruments that we hold. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations. As of March 31, 20222023 and December 31, 2021,2022, our mortgage notes payable secured by the respective assets, consisted of the following ($ amounts in thousands):
| Loan | Principal as of March 31, 2023 | Principal as of December 31, 2022 | Interest Rate at March 31, 2023 | Maturity Date | |||||||||||
| Residence Inn Austin | $ | 15,388 | $ | 15,465 | 4.580 | % | November 1, 2025 | ||||||||
| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | Principal as of March 31, 2023 | Principal as of December 31, 2022 | Interest Rate at March 31, 2023 | Maturity Date | ||||||||||||||||||||||
| Residence Inn Austin | $ | 15,683 | $ | 15,757 | 4.580 | % | November 1, 2025 | Lender forbore the collection of 75% of default interest of $1.1 million when borrower brought all loan and escrow payments current and reimbursed lender expenses and paid 25% of default interest in July 2021 | |||||||||||||||||||||||
| Springhill Suites Seattle | 41,595 | 41,812 | 4.380 | % | October 1, 2026 | ||||||||||||||||||||||||||
| Homewood Suites Woodlands | 8,375 | 8,420 | 4.690 | % | April 11, 2025 | ||||||||||||||||||||||||||
| Hyatt Place Germantown | 6,294 | 6,342 | 4.300 | % | May 6, 2023 | ||||||||||||||||||||||||||
| Hyatt Place North Charleston | 6,509 | 6,553 | 5.193 | % | August 1, 2023 | ||||||||||||||||||||||||||
| Hampton Inn Austin | 9,783 | 9,844 | 5.426 | % | January 6, 2024 | ||||||||||||||||||||||||||
| Residence Inn Grapevine | 11,289 | 11,360 | 5.250 | % | April 6, 2024 | ||||||||||||||||||||||||||
| Marriott Courtyard Lyndhurst | 17,872 | 17,986 | 4.700 | % | September 27, 2024 | ||||||||||||||||||||||||||
| Hilton Garden Inn Austin | 16,929 | 17,026 | 4.530 | % | December 11, 2024 | ||||||||||||||||||||||||||
| Hampton Inn Great Valley | 7,388 | 7,429 | 4.700 | % | April 11, 2025 | ||||||||||||||||||||||||||
| Embassy Suites Nashville | 38,587 | 38,811 | 4.2123 | % | July 11, 2025 | ||||||||||||||||||||||||||
| Homewood Suites Austin | 9,968 | 10,022 | 4.650 | % | August 11, 2025 | ||||||||||||||||||||||||||
| Townplace Suites Fort Worth | 5,608 | 5,645 | 4.700 | % | September 27, 2024 | ||||||||||||||||||||||||||
| Hampton Inn Houston | 4,008 | 4,022 | 9.750 | % | April 28, 2023 | ||||||||||||||||||||||||||
| Residence Inn Houston Medical Center | 27,923 | 28,083 | 5.000 | % | October 1, 2024 | ||||||||||||||||||||||||||
U.S. Small Business Administration Economic Injury Disaster Loans | 7,500 | 7,500 | 3.750 | % | November 2051 | ||||||||||||||||||||||||||
| Total notes payable | 235,016 | 236,320 | |||||||||||||||||||||||||||||
| Less unamortized debt issuance costs | (1,103 | ) | (1,260 | ) | |||||||||||||||||||||||||||
| Total notes payable, net of unamortized debt issuance costs | $ | 233,913 | $ | 235,060 | |||||||||||||||||||||||||||
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| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Springhill Suites Seattle | 42,427 | 42,634 | 4.380 | % | October 1, 2026 | Three months deferral of interest and principal payments from June to August, 2020. Four months interest only payments from September to December, 2020. | ||||||||||
| Homewood Suites Woodlands | 8,550 | 8,594 | 4.690 | % | April 11, 2025 | |||||||||||
| Hyatt Place Germantown | 6,478 | 6,524 | 4.300 | % | May 6, 2023 | Deferral of thirteen months of interest and principal payments from September 2020 to September 2021 and eighteen months deferral escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $1.42 million as of September 30, 2021 and were paid to lender in October 2021. | ||||||||||
| Hyatt Place North Charleston | 6,688 | 6,730 | 5.193 | % | August 1, 2023 | Payment of $100,000 cash deposit and may make interest and principal payments from restricted cash for six months from April to September, 2020. | ||||||||||
| Hampton Inn Austin | 10,015 | 10,073 | 5.426 | % | January 6, 2024 | Deferral of thirteen months of interest and principal payments from September 2020 to September 2021 and eighteen months of deferral escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $1.99 million as of September 30, 2021 and were paid to lender in October 2021. | ||||||||||
| Residence Inn Grapevine | 11,558 | 11,625 | 5.250 | % | April 6, 2024 | Deferral of nine months of interest and principal payments from January 2021 to September 2021 and sixteen months deferral of escrow payments for tax, insurance and hotel furniture and fixtures from June 2020 to September 2021 totaled $2.35 million as of September 30, 2021. $1.41 million of the total due as of September 30,2021 was paid to lender in October 2021 and $940,0000 is to be paid from excess cash flow with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Marriott Courtyard Lyndhurst | 18,311 | 18,420 | 4.700 | % | September 27, 2024 | Six months payment of interest only from April to September, 2020. | ||||||||||
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| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Hilton Garden Inn Austin | 17,386 | 17,564 | 4.530 | % | December 11, 2024 | Deferral of eighteen months of interest and principal payments and escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $3.98 million as of September 30, 2021. $1.69 million of the total due as of September 30, 2021 was paid to lender in October 2021 and $2.36 million is to be paid in monthly installments with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Hampton Inn Great Valley | 7,566 | 7,617 | 4.700 | % | April 11, 2025 | Deferral of sixteen months of interest and principal payments and escrow payments for tax, insurance and hotel furniture and fixtures from June 2020 to September 2021 totaled $1.75 million as of September 30, 2021. $729,000 of the total due as of September 30, 2021 was paid to lender in October 2021 and $1.02 million is to be paid from excess cash flow with the October 2021 to September 2022 regular mortgage payments | ||||||||||
| Embassy Suites Nashville | 39,445 | 39,660 | 4.2123 | % | July 11, 2025 | April to July 2020 payment of principal and interest deferred. August 2020 to December 2020 interest only. Special servicer fee of $205,285 to be paid on or before April 30, 2021. | ||||||||||
| Homewood Suites Austin | 10,216 | 10,311 | 4.650 | % | August 11, 2025 | Deferral of seventeen months of interest and principal payments from May 2020 to September 2021 and eighteen months deferral of escrow payments for tax, insurance and hotel furniture and fixtures from April 2020 to September 2021 totaled $2.73 million as of September 30, 2021. $1.14 million of the total due as of September 30, 2021 was paid in October 2021 and $1.59 million is to be paid in monthly installments with the October 2021 to June 2022 regular mortgage payments. | ||||||||||
| Loan | Principal as of March 31, 2022 | Principal as of December 31, 2021 | Interest Rate at March 31, 2022 | Maturity Date | Loan Modifications | |||||||||||
| Townplace Suites Fort Worth | 5,748 | 5,783 | 4.700 | % | September 27, 2024 | April 2020 payment was interest only. Six-month deferral of principal from April to September 2020. Two months deferral of interest payments for May and June, 2020.Three months interest only payments from July to September, 2020. | ||||||||||
| Hampton Inn Houston | 4,126 | 4,181 | 5.500 | % | April 28, 2023 | Seven-month deferral of principal and interest payments for payments due March 28, 2020 through September 28, 2020. Six months interest only for payments due October 28, 2020 through March 28, 2021. | ||||||||||
| Residence Inn Houston Medical Center | 28,551 | 28,703 | 5.000 | % | October 1, 2024 | Deferral of principal and interest payments for six months from April to September, 2020. Interest only payments for an additional twelve months from October 2020 to September 2021. | ||||||||||
| U.S. Small Business Administration Economic Injury Disaster Loans | 7,500 | 7,500 | 3.750 | % | November 2051 | |||||||||||
| Total notes payable | 240,248 | 241,676 | ||||||||||||||
| Less unamortized debt issuance costs | (1,769 | ) | (1,937 | ) | ||||||||||||
| Total notes payable, net of unamortized debt issuance costs | $ | 238,479 | $ | 239,739 | ||||||||||||
| Monthly payments of principal and interest are due and payable until the maturity date, except that monthly |
Hotel properties secure their respective loans.
Credit Risk
We will also be exposed to credit risk. Credit risk in our investments in debt and securities relates to each individual borrower’s ability to make required interest and principal payments on scheduled due dates. We seek to manage credit risk through our advisor’s comprehensive credit analysis prior to making an investment, actively monitoring our asset portfolio and the underlying credit quality of our holdings and subordination and diversification of our portfolio. Our analysis is based on a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to the evaluation of credit risk inherent in a transaction.
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| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based upon, and as of the date of, the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may be party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.
| ITEM 1A. | RISK FACTORS. |
Except as set forth below, thereThere have been no material changes to the risk factors contained in Part I, Item 1A set forth in our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the SEC on March 29, 2022.2023.
The COVID-19 pandemic has, and is expected to continue to, adversely affect our financial condition and operating results.
Since its discovery in December 2019, COVID-19 has spread globally, including to every state in the United States. The spread of COVID-19 has been declared a pandemic by the World Health Organization and in the United States the Health and Human Services Secretary has declared a public health emergency in response to COVID-19. Many governments, including at the federal, state and local level in the United States, have instituted a wide variety of unprecedented measures intended to control the spread of COVID-19, including states of emergency, mandatory quarantines, “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings. Although in many cases these measures have been modified or lifted entirely, they may be reinstated in whole or in part and additional, more restrictive measures may be implemented in the future. The COVID-19 pandemic has adversely impacted numerous industries, including transportation and hospitality, and triggered a material global economic slowdown.
Although a number of vaccines for COVID-19 are currently available to the general public in the United States and in many countries around the world, it will take time for the distribution of vaccines to materially affect the spread of COVID-19 and the ultimate effectiveness of the vaccination effort is subject to significant uncertainty. The length and severity of the pandemic will be worsened to the extent that a significant portion of the population, in the United States and globally, is reluctant to be vaccinated, fails to complete required multi-step vaccination protocol or is unable to become vaccinated due to shortages in vaccine supply or suspensions in the distribution of vaccines due to safety concerns or other issues. The length of the pandemic is also dependent upon the degree to which more contagious variants of the virus continue to spread, particularly among areas of the country in which overall full vaccination rates are relatively low, and overall rates of new COVID-19 cases continue to rise. Further, new and worsening outbreaks of COVID-19 in other countries may impact global vaccine supplies and lead to the emergence of new variants of the virus which are more contagious, more deadly or against which currently available vaccines are less effective. As a result of the foregoing factors, the COVID-19 pandemic is expected to have a continued adverse impact on economic and market conditions despite the ongoing distribution of vaccines.
COVID-19 has dramatically reduced travel, which has had an unprecedented adverse impact on the hotel industry. As a result, the COVID-19 pandemic has had, and is expected to continue to have, a significant adverse effect on the operating results of our hotel properties, which depend primarily upon revenues driven by business and leisure travel, and on our business, financial performance and operating results. Since March 2020, we have experienced a significant decline in occupancy and revenues across our hotel properties, which we expect to continue for an indefinite period of time. Our hotel properties have operated at a property net operating loss since the outbreak of COVID-19, which has had an adverse impact on our results of operations and cash flow from operations. In addition, we have reduced certain services and amenities at our hotel properties. Although all of our hotel properties are currently open and operational, we may be required, or elect, to temporarily suspend operations at one or more of our hotel properties in the future depending on the length and severity of the COVID-19 pandemic and its related effects. If we suspend operations at a hotel property, we cannot give any assurance as to when operations at the property will be resumed at a full or reduced level.
In accordance with local government recommendations and guidance, many of the employees of our advisor have been working remotely since March 2020. Although our advisor has implemented protocols for remote work and is leveraging technology to ensure that its employees remain connected and productive, there can be no guarantee that such work conditions will not have an adverse impact on the ability of our advisor to effectively perform its duties.
In response to the COVID-19 pandemic, we terminated our public offering of common stock (including pursuant to the DRP) effective as of March 2020. We are not currently raising capital through the sale of our securities and we do not intend to begin to do so in the near term. We have also indefinitely suspended the payment of distributions to our stockholders effective as of March 2020 and the operation of our share repurchase program effective as of April 2020. Our board of directors and our management continue to evaluate our financial condition and the overall economic environment to determine if and when we will seek to resume raising capital, resume the payment of distributions and reinstate our share repurchase program. However, it is impossible to predict if or when we will be able to take any or all of such actions or return to normal operations.
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Although all facets of our business have been or could in the future be impacted by COVID-19, we currently believe the following impacts to be among the most important to us:
Moreover, many of the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 29, 2022, should be interpreted as heightened risks as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
The COVID-19 pandemic is a continually evolving situation that presents material uncertainty and risk. The extent and duration of the impacts of COVID-19 on our business, financial condition, results of operations and cash flows is dependent on future developments that are highly uncertain and cannot be accurately predicted at this time, including without limitation the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the speed of the development and distribution of vaccines for COVID-19 and the efficacy, and availability of such vaccines, the extent to which the general population is willing to be vaccinated, the efficacy of currently available vaccines against current and any newly emerging variants of COVID-19, the potential for hotel closures that may be mandated or advisable, whether based on increased COVID-19 cases, the spread of more infectious or deadly variants or other factors, the reduction or reversal of previously implemented containment measures in certain states and cities, and the direct and indirect economic effects of the pandemic. As a result, we cannot provide an estimate of the overall impact of COVID-19 on our business, financial condition, results of operations and cash flows or when, if at all, we will be able to resume pre-COVID-19 levels of operations.
We have paid, and may continue to pay, distributions from the proceeds of our offering. To the extent that we pay distributions from sources other than our cash flow from operations, we will have reduced funds available for investment and the overall return to our stockholders may be reduced.
Our organizational documents permit us to pay distributions from any source, including net proceeds from our public offerings, borrowings, advances from our sponsor or advisor and the deferral of fees and expense reimbursements by our advisor, in its sole discretion. Since our inception, our cash flow from operations has not been sufficient to fund all of our distributions. Of the $54.5 million in total distributions we paid during the period from our inception through March 31, 2022, including shares issued pursuant to our DRP, $0, or 0%, were paid from cash provided by operating activities and $54.5 million, or 100%, were paid from offering proceeds. If and to the extent that we resume the payment of distributions, we may continue to fund distributions from the net proceeds from our securities offerings or sources other than cash flow from operations. We have not established a limit on the amount of offering proceeds, or sources other than cash flow from operations which we may use to fund distributions.
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If we are unable to consistently fund distributions to our stockholders entirely from our cash flow from operations, the value of the shares of our common stock may be reduced, including upon a listing of our common stock, the sale of our assets or any other liquidity event should such event occur. To the extent that we fund distributions from sources other than our cash flow from operations, our funds available for investment will be reduced relative to the funds available for investment if our distributions were funded solely from cash flow from operations, our ability to achieve our investment objectives will be negatively impacted and the overall return to our stockholders may be reduced. In addition, if we make a distribution in excess of our current and accumulated earnings and profits, the distribution will be treated first as a tax-free return of capital, which will reduce the stockholder’s tax basis in its shares of common stock. The amount, if any, of each distribution in excess of a stockholder’s tax basis in its shares of common stock will be taxable as gain realized from the sale or exchange of property.
On March 24, 2020, our board of director unanimously approved the suspension of the payment of distributions to our stockholders, effective immediately, due to the impact that the COVID-19 pandemic is having and is expected to continue to have on our hotel properties. There can be no assurance when the payment of distributions will resume, it at all.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
On January 20, 2015, our Registration Statement on Form S-11 (File No. 333-198305) registering our offering of up to $1.1 billion in shares of our common stock was declared effective and we commenced our initial public offering. In our initial public offering we offered up to $1.0 billion in shares of any class of our common stock to the public in our primary offering and up to $100 million of shares of any class of our common stock to our stockholders pursuant to the DRP. Our initial public offering terminated on July 19, 2018.
On July 19, 2018, our Registration Statement on Form S-11 (File No. 333-222610) registering our follow-on public offering of up to $990 million in any combination of the three classes of our common stock was declared effective and we commenced our follow-on public offering. In our follow-on public offering we offered up $895 million in shares of any class of our common stock to the public and up to $95 million in shares of any class of our common stock to our stockholders pursuant to the DRP. Our follow-on public offering (including pursuant to the DRP) was terminated effective as of March 25, 2020.
We accepted investors’ subscriptions for and issued an aggregate of 10.2 million shares in our initial public offering and our follow-on public offering, excluding shares issued in connection with the Mergers and including 567,000 shares pursuant to the DRP, resulting in aggregate gross offering proceeds of $234.6 million. We accepted investors’ subscriptions for and issued 6.1 million shares in the initial public offering, excluding shares issued in connection with the Mergers and including 215,000 shares pursuant to the DRP, resulting in gross offering proceeds of $147.4 million for the initial public offering. We accepted investors’ subscriptions for and issued 4.1 million shares in the follow-on public offering, including 352,000 shares pursuant to the DRP, resulting in gross offering proceeds of $87.2 million for the follow-on offering.
We incurred selling commissions, dealer manager fees and other organization and offering costs in our initial public offering in the amounts set forth in the table below (in thousands). Our dealer manager reallowed all of the selling commissions and a portion of the dealer manager fees to participating broker-dealers.
| Type of Expense | Amount | Estimated/Actual | ||||||
| Selling commissions, stockholder servicing fees and dealer manager fees | $ | 11,522 | Actual | |||||
| Finders’ fees | — | — | ||||||
| Expenses paid to or for underwriters | — | — | ||||||
| Other organization and offering costs | 6,843 | Actual | ||||||
| Total expenses | $ | 18,365 | ||||||
As of March 31, 2022,2023, we had incurred selling commissions, dealer manager fees, stockholder servicing fees and other organization and offering costs in our follow-on public offering in the amounts set forth in the table below (in thousands). Effective January 16, 2018, our advisor assumed responsibility for the payment of all selling commissions, dealer manager fees and stockholder servicing fees paid in connection with our public offering.
| Type of Expense | Amount | Estimated/Actual | ||||||
| Selling commissions, dealer manager fees and stockholder servicing fees | $ | — | Actual | |||||
| Finders’ fees | — | — | ||||||
| Expenses paid to or for underwriters | — | — | ||||||
| Other organization and offering costs | 2,720 | Actual | ||||||
| Total expenses | $ | 2,720 | ||||||
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The net offering proceeds to us from our initial public offering, after deducting the total expenses incurred as described above, were $129.0 million, excluding $5.2 million in offering proceeds from shares of our common stock issued pursuant to the DRP.
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As of March 31, 2022,2023, the net offering proceeds to us from our follow-on public offering, after deducting the total expenses incurred as described above, were $84.5 million, excluding $8.2 million in offering proceeds from shares of our common stock issued pursuant to the DRP.
We intend to use the proceeds from the possible debt refinancing or sales of properties to acquire additional hotel properties located in the East Coast, the West Coast and the Sunbelt regions of the United States. To a lesser extent, we may also invest in other hospitality properties located within other markets and regions as well as real estate securities and debt-related investments related to the hospitality sector.
As of March 31, 2022,2023, we used $166.4 million of the net proceeds from our initial public offering and follow-on public offering to acquire the Residence Inn Austin, the Springhill Suites Seattle, the Moody I portfolio (pursuant to the Mergers), and the Residence Inn Houston Medical Center, to reduce the debt on Springhill Suites Seattle, to originate notes, and to reduce our borrowings. As of March 31, 2022, we had paid a cumulative amount of $16.9 million of acquisition expenses, including $13.0 million related to the Mergers.
Share Repurchase Program
In response to the COVID-19 pandemic, our board of directors indefinitely suspended our share repurchase program effective as of April 6, 2020. The ongoing effects of the COVID-19 pandemic may materially delay or prevent our ability to resume the operation of our share repurchase program. There is no way to predict when, if at all, our board of directors will determine to resume the repurchase of shares of our common stock pursuant to our share repurchase program.
If our board of directors elects to resume the repurchase of shares of our common stock pursuant to our share repurchase program, it may provide our stockholders with a limited opportunity to have their shares of our common stock repurchased by us. If reinstated, our share repurchase program will contain certain restrictions and limitations, including those relating to the number of shares of our common stock that we can repurchase at any given time. In addition, our board of directors will reserve the right to amend, suspend or terminate our share repurchase program at any time upon 10 days’ prior written notice to our stockholders.
During the three months ended March 31, 2022,2023, we did not repurchase any shares of our common stock pursuant to our share repurchase program.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
None.
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| ITEM 6. | EXHIBITS. |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MOODY NATIONAL REIT II, INC. | |||
| Date: May | By: | /s/ Brett C. Moody | |
| Brett C. Moody | |||
| Chairman of the Board, Chief Executive Officer and President | |||
| (Principal Executive Officer) | |||
| Date: May | By: | /s/ Robert W. Engel | |
| Robert W. Engel | |||
| Chief Financial Officer and Treasurer | |||
| (Principal Financial and Accounting Officer) | |||
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