UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
SOTHERLY HOTELS INC.
(Exact name of registrant as specified in its charter)
| 001-32379 | 20-1531029 |
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
SOTHERLY HOTELS LP
(Exact name of registrant as specified in its charter)
| 001-36091 | 20-1965427 |
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
410 West Francis306 South Henry Street, Suite 100
Williamsburg, Virginia23185
(757) (757) 229-5648
(Address and Telephone Number of Principal Executive Offices)
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.
Sotherly Hotels Inc.Yes☒ No ☐Sotherly Hotels LPYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Sotherly Hotels Inc.Yes☒ No ☐Sotherly Hotels LPYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Securities Exchange Act. (Check one):
Sotherly Hotels Inc.
Large Accelerated Filer | ☐ |
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| Accelerated Filer | ☐ |
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Non-accelerated Filer |
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| Smaller Reporting Company | ☒ |
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Emerging Growth Company | ☐ |
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Sotherly Hotels LP
Large Accelerated Filer | ☐ |
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| Accelerated Filer | ☐ |
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Non-accelerated Filer | ☒ |
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| Smaller Reporting Company | ☐ |
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Emerging growth company | ☐ |
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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).
Sotherly Hotels Inc. Yes ☐ No ☒Sotherly Hotels LP Yes ☐ No ☒
As of November 4, 2017,August 5, 2022, there were 13,823,45918,414,750 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | SOHO | The NASDAQ Stock Market LLC |
8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHOB | The NASDAQ Stock Market LLC |
7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHOO | The NASDAQ Stock Market LLC |
8.25% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHON | The NASDAQ Stock Market LLC |
EXPLANATORY NOTE
We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common stock as “Common Stock,“common stock,” the Company’s preferred stock as “Preferred Stock,“preferred stock,” and the Operating Partnership’s common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “Preferred Interest.“preferred units.” References to “we” and “our” mean the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.
This report combines the Quarterly Reports on Form 10-Q for the period ended SeptemberJune 30, 20172022 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:
combined reports better reflect how management and investors view the business as a single operating unit;
combined reports enhance investors'investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings inof time, effort and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
Consolidated Financial Statements;
the following Notes to Consolidated Financial Statements:
Note 7 – Preferred Stock and Units;
Note 8 – Common Stock and Units;
Note 9 – Related Party Transactions; and
Note 13 – IncomeLoss Per Share and Per Unit;
Part I, Item 4 - Controls and Procedures; and
Part II, Item 6 - Certifications of CEO and CFO Pursuantpursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.
3
2
SOTHERLY HOTELS LP
INDEX
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Item 1. |
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Consolidated Balance Sheets as of |
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Consolidated Balance Sheets as of |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4 |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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34
PART I
Item 1. Consolidated Financial Statements
SOTHERLY HOTELS INC.
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| September 30, 2017 |
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| December 31, 2016 |
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| (Unaudited) |
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ASSETS |
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Investment in hotel properties, net |
| $ | 357,645,087 |
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| $ | 348,593,912 |
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Investment in hotel properties held for sale, net |
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| - |
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| 5,333,000 |
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Cash and cash equivalents |
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| 32,651,893 |
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| 31,766,775 |
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Restricted cash |
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| 6,115,997 |
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| 4,596,145 |
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Accounts receivable, net |
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| 5,580,895 |
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| 4,127,748 |
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Accounts receivable - affiliate |
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| 493,895 |
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| 4,175 |
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Prepaid expenses, inventory and other assets |
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| 6,228,659 |
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| 4,648,469 |
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Deferred income taxes |
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| 7,729,111 |
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| 6,949,340 |
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TOTAL ASSETS |
| $ | 416,445,537 |
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| $ | 406,019,564 |
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LIABILITIES |
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Mortgage loans, net |
| $ | 298,429,955 |
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| $ | 282,708,289 |
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Unsecured notes, net |
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| 24,560,735 |
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| 24,308,713 |
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Accounts payable and accrued liabilities |
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| 16,110,521 |
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| 12,970,960 |
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Advance deposits |
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| 2,317,658 |
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| 2,315,787 |
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Dividends and distributions payable |
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| 2,520,249 |
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| 2,376,527 |
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TOTAL LIABILITIES |
| $ | 343,939,118 |
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| $ | 324,680,276 |
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Commitments and contingencies (See Note 6) |
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| — |
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| — |
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EQUITY |
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Sotherly Hotels Inc. stockholders’ equity |
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8% Series B cumulative redeemable perpetual preferred stock, par value $0.01, 11,000,000 shares authorized, liquidation preference $25 per share, 1,610,000 shares issued and outstanding at September 30, 2017 and December 31, 2016 |
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| 16,100 |
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| 16,100 |
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Common stock, par value $0.01, 49,000,000 shares authorized, 13,823,459 shares and 14,468,551 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
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| 138,234 |
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| 144,685 |
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Additional paid-in capital |
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| 118,502,294 |
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| 118,395,082 |
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Unearned ESOP shares |
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| (4,693,282 | ) |
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| — |
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Distributions in excess of retained earnings |
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| (43,293,677 | ) |
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| (39,545,754 | ) |
Total Sotherly Hotels Inc. stockholders’ equity |
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| 70,669,669 |
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| 79,010,113 |
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Noncontrolling interest |
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| 1,836,750 |
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| 2,329,175 |
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TOTAL EQUITY |
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| 72,506,419 |
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| 81,339,288 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 416,445,537 |
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| $ | 406,019,564 |
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|
| June 30, 2022 |
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| December 31, 2021 |
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| (unaudited) |
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ASSETS |
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Investment in hotel properties, net |
| $ | 369,481,882 |
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| $ | 375,885,224 |
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Investment in hotel properties held for sale, net |
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| — |
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| 22,870,487 |
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Cash and cash equivalents |
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| 23,969,135 |
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| 13,166,883 |
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Restricted cash |
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| 7,383,626 |
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| 12,411,654 |
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Accounts receivable, net |
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| 4,088,159 |
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| 4,822,187 |
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Prepaid expenses, inventory and other assets |
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| 8,175,184 |
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| 6,894,228 |
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TOTAL ASSETS |
| $ | 413,097,986 |
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| $ | 436,050,663 |
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LIABILITIES |
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Mortgage loans, net |
| $ | 325,650,322 |
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| $ | 351,170,883 |
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Secured notes, net |
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| — |
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| 19,128,330 |
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Unsecured notes, net |
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| 7,609,934 |
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| 7,609,934 |
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Accounts payable and accrued liabilities |
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| 29,784,182 |
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| 35,960,293 |
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Advance deposits |
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| 1,891,767 |
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| 1,552,942 |
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Dividends and distributions payable |
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| 4,089,347 |
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| 4,125,351 |
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TOTAL LIABILITIES |
| $ | 369,025,552 |
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| $ | 419,547,733 |
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Commitments and contingencies (See Note 6) |
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| — |
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| — |
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EQUITY |
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Sotherly Hotels Inc. stockholders’ equity |
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Preferred stock, $0.01 par value, 11,000,000 shares authorized: |
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8.0% Series B cumulative redeemable perpetual preferred stock, |
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| 14,881 |
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| 15,100 |
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7.875% Series C cumulative redeemable perpetual preferred stock, |
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| 13,564 |
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| 13,846 |
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8.25% Series D cumulative redeemable perpetual preferred stock, |
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| 11,650 |
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| 11,650 |
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Common stock, par value $0.01, 69,000,000 shares authorized, 18,206,673 |
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| 182,067 |
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| 174,410 |
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Additional paid-in capital |
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| 178,066,395 |
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| 177,651,954 |
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Unearned ESOP shares |
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| (2,982,307 | ) |
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| (3,083,398 | ) |
Distributions in excess of retained earnings |
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| (127,843,207 | ) |
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| (153,521,704 | ) |
Total Sotherly Hotels Inc. stockholders’ equity |
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| 47,463,043 |
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| 21,261,858 |
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Noncontrolling interest |
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| (3,390,609 | ) |
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| (4,758,928 | ) |
TOTAL EQUITY |
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| 44,072,434 |
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| 16,502,930 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 413,097,986 |
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| $ | 436,050,663 |
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The accompanying notes are an integral part of these consolidated financial statements.
45
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| Three Months Ended |
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| Three Months Ended |
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| Nine Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
| Three Months Ended |
| Six Months Ended |
| Six Months Ended |
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| September 30, 2017 |
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| September 30, 2016 |
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| September 30, 2017 |
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| September 30, 2016 |
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| June 30, 2022 |
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| June 30, 2021 |
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| June 30, 2022 |
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| June 30, 2021 |
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| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
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REVENUE |
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Rooms department |
| $ | 25,093,226 |
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| $ | 26,665,132 |
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| $ | 81,366,731 |
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| $ | 83,896,833 |
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| $ | 32,545,588 |
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| $ | 24,045,910 |
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| $ | 57,398,973 |
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| $ | 39,539,514 |
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Food and beverage department |
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| 7,997,818 |
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| 8,412,842 |
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| 24,904,934 |
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| 26,240,932 |
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| 7,712,310 |
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| 3,501,875 |
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| 13,330,046 |
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| 5,045,114 |
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Other operating departments |
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| 3,678,427 |
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| 2,197,338 |
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| 9,835,322 |
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| 6,772,647 |
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| 6,912,361 |
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| 6,835,524 |
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| 14,793,842 |
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| 12,434,212 |
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Total revenue |
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| 36,769,471 |
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| 37,275,312 |
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| 116,106,987 |
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| 116,910,412 |
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| 47,170,259 |
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| 34,383,309 |
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| 85,522,861 |
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| 57,018,840 |
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EXPENSES |
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Hotel operating expenses |
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Rooms department |
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| 6,826,822 |
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| 7,126,673 |
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| 20,252,889 |
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| 21,330,914 |
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| 7,205,585 |
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| 5,917,880 |
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| 13,155,343 |
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| 9,914,496 |
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Food and beverage department |
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| 6,039,174 |
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| 5,820,000 |
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| 17,919,142 |
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| 18,250,542 |
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| 5,256,164 |
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| 2,106,487 |
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| 9,136,781 |
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| 3,016,751 |
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Other operating departments |
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| 705,111 |
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| 642,219 |
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| 1,928,662 |
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| 1,880,618 |
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| 2,599,372 |
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| 2,648,387 |
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| 5,083,479 |
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| 4,587,264 |
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Indirect |
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| 15,209,249 |
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| 14,603,034 |
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| 45,019,742 |
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| 43,827,294 |
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| 17,337,585 |
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| 14,050,076 |
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| 33,400,946 |
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| 25,639,153 |
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Total hotel operating expenses |
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| 28,780,356 |
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| 28,191,926 |
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| 85,120,435 |
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| 85,289,368 |
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| 32,398,706 |
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| 24,722,830 |
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| 60,776,549 |
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| 43,157,664 |
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Depreciation and amortization |
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| 4,427,738 |
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| 3,790,872 |
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| 12,708,548 |
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| 11,260,987 |
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| 4,619,743 |
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| 4,969,669 |
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| 9,184,815 |
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| 9,951,685 |
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Loss on disposal of assets |
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| - |
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| 189,267 |
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| 51,569 |
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| 329,461 |
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| 520,156 |
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| 17,221 |
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| 490,613 |
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| 17,221 |
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Corporate general and administrative |
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| 1,335,192 |
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| 1,367,848 |
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| 4,882,541 |
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| 4,331,896 |
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| 1,432,366 |
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| 1,530,438 |
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| 2,946,393 |
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| 2,831,396 |
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Total operating expenses |
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| 34,543,286 |
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| 33,539,913 |
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| 102,763,093 |
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| 101,211,712 |
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| 38,970,971 |
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| 31,240,158 |
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| 73,398,370 |
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| 55,957,966 |
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NET OPERATING INCOME |
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| 2,226,185 |
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| 3,735,399 |
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| 13,343,894 |
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| 15,698,700 |
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| 8,199,288 |
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| 3,143,151 |
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| 12,124,491 |
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| 1,060,874 |
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Other income (expense) |
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Interest expense |
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| (4,139,267 | ) |
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| (4,626,333 | ) |
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| (11,827,061 | ) |
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| (13,872,129 | ) |
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| (5,342,940 | ) |
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| (5,526,595 | ) |
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| (11,056,144 | ) |
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| (11,446,118 | ) | |
Interest income |
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| 53,314 |
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| 44,485 |
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| 126,241 |
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| 63,523 |
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| 27,486 |
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| 36,308 |
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| 51,934 |
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| 74,907 |
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Loss on early debt extinguishment |
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| — |
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| (1,087,395 | ) |
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| (228,087 | ) |
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| (1,157,688 | ) | |||||||||||||||||
Unrealized loss on hedging activities |
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| (3,542 | ) |
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| (492 | ) |
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| (30,748 | ) |
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| (66,567 | ) | |||||||||||||||||
Gain (loss) on sale of assets |
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| (23,000 | ) |
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| — |
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| 77,807 |
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| — |
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Loss on early extinguishment of debt |
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| (5,944,881 | ) |
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| — |
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| (5,944,881 | ) |
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| — |
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Unrealized gain on hedging activities |
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| 572,497 |
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| 303,181 |
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| 1,534,760 |
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| 693,367 |
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Gain on sale of assets |
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| 30,053,977 |
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| — |
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| 30,053,977 |
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| — |
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Gain on involuntary conversion of assets |
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| — |
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|
| — |
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| 1,041,815 |
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|
| — |
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| 51,547 |
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|
| 496,957 |
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| 51,547 |
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| 496,957 |
| |
Net income (loss) before income taxes |
|
| (1,886,310 | ) |
|
| (1,934,336 | ) |
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| 2,503,861 |
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|
|
|
| 665,839 |
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| 27,616,974 |
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|
| (1,546,998 | ) |
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| 26,815,684 |
|
|
| (9,120,013 | ) |
Income tax benefit |
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| 950,310 |
|
|
| 385,145 |
|
|
| 581,890 |
|
|
|
|
| 308,398 |
| ||||||||||||||||
Income tax provision |
|
| (11,615 | ) |
|
| (6,972 | ) |
|
| (21,269 | ) |
|
| (9,581 | ) | ||||||||||||||||||
Net income (loss) |
|
| (936,000 | ) |
|
| (1,549,191 | ) |
|
| 3,085,751 |
|
|
|
| 974,237 |
|
|
| 27,605,359 |
|
|
| (1,553,970 | ) |
|
| 26,794,415 |
|
|
| (9,129,594 | ) | |
Less: Net loss (income) attributable to noncontrolling interest |
|
| 190,445 |
|
|
| 172,846 |
|
|
| (73,366 | ) |
|
|
|
| (106,377 | ) | ||||||||||||||||
Net income (loss) attributable to the Company |
|
| (745,555 | ) |
|
| (1,376,345 | ) |
|
| 3,012,385 |
|
|
|
|
| 867,860 |
| ||||||||||||||||
Distributions to preferred stockholders |
|
| (805,000 | ) |
|
| (339,889 | ) |
|
| (2,415,000 | ) |
|
|
|
| (339,889 | ) | ||||||||||||||||
Less: Net (income) loss attributable to noncontrolling interest |
|
| (1,529,940 | ) |
|
| 179,638 |
|
|
| (1,368,319 | ) |
|
| 879,176 |
| ||||||||||||||||||
Net income (loss) available to the Company |
|
| 26,075,419 |
|
|
| (1,374,332 | ) |
|
| 25,426,096 |
|
|
| (8,250,418 | ) | ||||||||||||||||||
Declared and undeclared distributions to preferred stockholders |
|
| (1,889,470 | ) |
|
| (1,529,613 | ) |
|
| (3,826,086 | ) |
|
| (3,718,524 | ) | ||||||||||||||||||
Gain on extinguishment of preferred stock |
|
| 83,500 |
|
|
| 93,342 |
|
|
| 161,675 |
|
|
| 93,342 |
| ||||||||||||||||||
Net income (loss) available to common stockholders |
| $ | (1,550,555 | ) |
| $ | (1,716,234 | ) |
| $ | 597,385 |
|
|
|
| $ | 527,971 |
|
| $ | 24,269,449 |
|
| $ | (2,810,603 | ) |
| $ | 21,761,685 |
|
| $ | (11,875,600 | ) |
Net income (loss) per share available to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Basic |
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
|
| $ | 0.04 |
|
| $ | 1.36 |
|
| $ | (0.19 | ) |
| $ | 1.24 |
|
| $ | (0.82 | ) | |
Diluted |
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
|
| $ | 0.04 |
|
| $ | 1.32 |
|
| $ | (0.19 | ) |
| $ | 1.20 |
|
| $ | (0.82 | ) | |
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
|
| 13,822,543 |
|
|
| 14,949,651 |
|
|
| 13,873,175 |
|
|
| 14,897,595 |
|
|
| 17,762,513 |
|
|
| 14,635,701 |
|
|
| 17,436,975 |
|
|
| 14,530,316 |
| ||
Diluted |
|
| 13,822,543 |
|
|
| 14,949,651 |
|
|
| 13,885,290 |
|
|
| 14,897,595 |
|
|
| 18,304,508 |
|
|
| 14,635,701 |
|
|
| 18,031,381 |
|
|
| 14,530,316 |
|
The accompanying notes are an integral part of these consolidated financial statements.
56
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Distributions |
|
|
|
|
|
|
|
|
| ||
| Preferred Stock |
|
| Common Stock |
|
| Paid- |
|
| Unearned ESOP |
|
| in Excess of |
|
| Noncontrolling |
|
|
|
|
| ||||||||||||||
| Shares |
|
| Par Value |
|
| Shares |
|
| Par Value |
|
| In Capital |
|
| Shares |
|
| Retained Earnings |
|
| Interest |
|
| Total |
| |||||||||
Balances at December 31, 2016 |
| 1,610,000 |
|
| $ | 16,100 |
|
|
| 14,468,551 |
|
| $ | 144,685 |
|
| $ | 118,395,082 |
|
| $ | - |
|
| $ | (39,545,754 | ) |
| $ | 2,329,175 |
|
| $ | 81,339,288 |
|
Net income |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,012,385 |
|
|
| 73,366 |
|
|
| 3,085,751 |
|
Issuance of restricted common stock awards |
| — |
|
|
| — |
|
|
| 12,000 |
|
|
| 120 |
|
|
| 89,040 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89,160 |
|
Purchase of shares by ESOP |
| — |
|
|
| — |
|
|
| (682,500 | ) |
|
| (6,825 | ) |
|
| 6,825 |
|
|
| (4,874,758 | ) |
|
| — |
|
|
| — |
|
|
| (4,874,758 | ) |
Amortization of ESOP shares |
| — |
|
|
| — |
|
|
| 25,408 |
|
|
| 254 |
|
|
| (3,593 | ) |
|
| 181,476 |
|
|
| — |
|
|
| — |
|
|
| 178,137 |
|
Amortization of restricted stock award |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,940 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,940 |
|
Preferred stock dividends declared |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,415,000 | ) |
|
| — |
|
|
| (2,415,000 | ) |
Common stockholders' dividends and distributions declared |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,345,308 | ) |
|
| (565,791 | ) |
|
| (4,911,099 | ) |
Balances at September 30, 2017 (Unaudited) |
| 1,610,000 |
|
| $ | 16,100 |
|
|
| 13,823,459 |
|
| $ | 138,234 |
|
| $ | 118,502,294 |
|
| $ | (4,693,282 | ) |
| $ | (43,293,677 | ) |
| $ | 1,836,750 |
|
| $ | 72,506,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Unearned |
|
| Distributions |
|
|
|
|
|
|
| |||||||||
|
| Preferred Stock |
|
| Common Stock |
|
| Paid- |
|
| ESOP |
|
| in Excess of |
|
| Noncontrolling |
|
|
|
| |||||||||||||||
|
| Shares |
|
| Par Value |
|
| Shares |
|
| Par Value |
|
| In Capital |
|
| Shares |
|
| Retained Earnings |
|
| Interest |
|
| Total |
| |||||||||
Balances at December 31, 2021 |
|
| 4,059,610 |
|
| $ | 40,596 |
|
|
| 17,441,058 |
|
| $ | 174,410 |
|
| $ | 177,651,954 |
|
| $ | (3,083,398 | ) |
| $ | (153,521,704 | ) |
| $ | (4,758,928 | ) |
| $ | 16,502,930 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (649,323 | ) |
|
| (161,621 | ) |
|
| (810,944 | ) |
Issuance of common stock |
|
| — |
|
|
| — |
|
|
| 175,268 |
|
|
| 1,752 |
|
|
| 355,760 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 357,512 |
|
Issuance of restricted |
|
| — |
|
|
| — |
|
|
| 15,000 |
|
|
| 151 |
|
|
| 30,149 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30,300 |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (36,391 | ) |
|
| 50,547 |
|
|
| — |
|
|
| — |
|
|
| 14,156 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
Extinguishment of preferred stock |
|
| (22,500 | ) |
|
| (225 | ) |
|
| 217,775 |
|
|
| 2,178 |
|
|
| 9,222 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,175 |
|
Balances at March 31, 2022 |
|
| 4,037,110 |
|
| $ | 40,371 |
|
|
| 17,849,101 |
|
| $ | 178,491 |
|
| $ | 178,028,889 |
|
| $ | (3,032,851 | ) |
| $ | (154,171,027 | ) |
| $ | (4,920,549 | ) |
| $ | 16,123,324 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 26,075,419 |
|
|
| 1,529,940 |
|
|
| 27,605,359 |
|
Issuance of common stock |
|
| — |
|
|
| — |
|
|
| 37,428 |
|
|
| 374 |
|
|
| 64,002 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 64,376 |
|
Issuance of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of units in Operating |
|
| — |
|
|
| — |
|
|
| 50,000 |
|
|
| 500 |
|
|
| (500 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30,590 | ) |
|
| 50,544 |
|
|
| — |
|
|
| — |
|
|
| 19,954 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
Extinguishment of preferred stock |
|
| (27,600 | ) |
|
| (276 | ) |
|
| 270,144 |
|
|
| 2,702 |
|
|
| (13,601 | ) |
|
| — |
|
|
| 252,401 |
|
|
| — |
|
|
| 241,226 |
|
Balances at June 30, 2022 |
|
| 4,009,510 |
|
| $ | 40,095 |
|
|
| 18,206,673 |
|
| $ | 182,067 |
|
| $ | 178,066,395 |
|
| $ | (2,982,307 | ) |
| $ | (127,843,207 | ) |
| $ | (3,390,609 | ) |
| $ | 44,072,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
67
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN EQUITY
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Unearned |
|
| Distributions |
|
|
|
|
|
|
| |||||||||
|
| Preferred Stock |
|
| Common Stock |
|
| Paid- |
|
| ESOP |
|
| in Excess of |
|
| Noncontrolling |
|
|
|
| |||||||||||||||
|
| Shares |
|
| Par Value |
|
| Shares |
|
| Par Value |
|
| In Capital |
|
| Shares |
|
| Retained Earnings |
|
| Interest |
|
| Total |
| |||||||||
Balances at December 31, 2020 |
|
| 4,364,610 |
|
| $ | 43,646 |
|
|
| 15,023,850 |
|
| $ | 150,238 |
|
| $ | 180,292,440 |
|
| $ | (3,636,026 | ) |
| $ | (127,300,230 | ) |
| $ | (5,348,763 | ) |
| $ | 44,201,305 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,876,085 | ) |
|
| (699,539 | ) |
|
| (7,575,624 | ) |
Issuance of common stock |
|
| — |
|
|
| — |
|
|
| 136,281 |
|
|
| 1,363 |
|
|
| 399,303 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 400,666 |
|
Issuance of restricted |
|
| — |
|
|
| — |
|
|
| 15,000 |
|
|
| 150 |
|
|
| 43,950 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,100 |
|
Conversion of units in Operating |
|
| — |
|
|
| — |
|
|
| 100 |
|
|
| 1 |
|
|
| (566 | ) |
|
| — |
|
|
| — |
|
|
| 565 |
|
|
| — |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (33,853 | ) |
|
| 55,939 |
|
|
| — |
|
|
| — |
|
|
| 22,086 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
Balances at March 31, 2021 |
|
| 4,364,610 |
|
| $ | 43,646 |
|
|
| 15,175,231 |
|
| $ | 151,752 |
|
| $ | 180,719,469 |
|
| $ | (3,580,087 | ) |
| $ | (134,176,315 | ) |
| $ | (6,047,737 | ) |
| $ | 37,110,728 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,374,332 | ) |
|
| (179,638 | ) |
|
| (1,553,970 | ) |
Extinguishment of preferred stock |
|
| (220,000 | ) |
|
| (2,200 | ) |
|
| 1,542,727 |
|
|
| 15,427 |
|
|
| (106,570 | ) |
|
| — |
|
|
| 203,227 |
|
|
| — |
|
|
| 109,884 |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (33,852 | ) |
|
| 55,939 |
|
|
| — |
|
|
| — |
|
|
| 22,087 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
Balances at June 30, 2021 |
|
| 4,144,610 |
|
| $ | 41,446 |
|
|
| 16,717,958 |
|
| $ | 167,179 |
|
| $ | 180,597,242 |
|
| $ | (3,524,148 | ) |
| $ | (135,347,420 | ) |
| $ | (6,227,375 | ) |
| $ | 35,706,924 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 3,085,751 |
|
| $ | 974,237 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 12,708,548 |
|
|
| 11,260,987 |
|
Amortization of deferred financing costs |
|
| 616,390 |
|
|
| 939,122 |
|
Amortization of mortgage premium |
|
| (18,511 | ) |
|
| (18,511 | ) |
Gain on involuntary conversion of assets |
|
| (1,041,815 | ) |
|
| — |
|
Unrealized loss on derivative instrument |
|
| 30,748 |
|
|
| 66,567 |
|
Loss on disposal of assets |
|
| 51,569 |
|
|
| 329,461 |
|
Gain on sale of assets |
|
| (77,807 | ) |
|
| — |
|
Loss on early extinguishment of debt |
|
| 228,087 |
|
|
| 1,157,688 |
|
Share - based compensation |
|
| 282,237 |
|
|
| 206,702 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
| (2,401,869 | ) |
|
| (2,409,252 | ) |
Accounts receivable |
|
| (1,453,147 | ) |
|
| (481,741 | ) |
Prepaid expenses, inventory and other assets |
|
| (1,699,380 | ) |
|
| (617,601 | ) |
Deferred income taxes |
|
| (779,771 | ) |
|
| (456,188 | ) |
Accounts payable and other accrued liabilities |
|
| 3,962,544 |
|
|
| 3,535,914 |
|
Advance deposits |
|
| 1,871 |
|
|
| 787,257 |
|
Accounts receivable - affiliate |
|
| (489,720 | ) |
|
| 35,819 |
|
Net cash provided by operating activities |
|
| 13,005,725 |
|
|
| 15,310,461 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of hotel properties |
|
| (3,986,849 | ) |
|
| — |
|
Improvements and additions to hotel properties |
|
| (17,483,257 | ) |
|
| (11,223,268 | ) |
Funding of restricted cash reserves |
|
| (3,501,192 | ) |
|
| (3,970,657 | ) |
Proceeds of restricted cash reserves |
|
| 4,383,209 |
|
|
| 6,307,518 |
|
Proceeds from the sale of hotel property |
|
| 5,434,856 |
|
|
| — |
|
Proceeds from insurance conversion |
|
| 1,041,815 |
|
|
| — |
|
Proceeds from the sale of assets |
|
| 3,355 |
|
|
| 211,400 |
|
Net cash used in investing activities |
|
| (14,108,063 | ) |
|
| (8,675,007 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds of mortgage debt |
|
| 40,500,000 |
|
|
| 45,700,000 |
|
Proceeds from mortgage loan receivable |
|
| — |
|
|
| 2,600,711 |
|
Proceeds from the sale of preferred stock |
|
| — |
|
|
| 37,774,229 |
|
Settlement of repurchase of common stock |
|
| (1,103,130 | ) |
|
| — |
|
Payments on mortgage loans |
|
| (24,767,275 | ) |
|
| (44,453,440 | ) |
Redemption of unsecured notes |
|
| — |
|
|
| (27,600,000 | ) |
Payments of deferred financing costs |
|
| (585,004 | ) |
|
| (1,455,645 | ) |
Funding of ESOP stock purchase |
|
| (4,874,758 | ) |
|
| — |
|
Dividends and distributions paid |
|
| (7,182,377 | ) |
|
| (4,262,691 | ) |
Net cash provided by financing activities |
|
| 1,987,456 |
|
|
| 8,303,164 |
|
Net increase in cash and cash equivalents |
|
| 885,118 |
|
|
| 14,938,618 |
|
Cash and cash equivalents at the beginning of the period |
|
| 31,766,775 |
|
|
| 11,493,914 |
|
Cash and cash equivalents at the end of the period |
| $ | 32,651,893 |
|
| $ | 26,432,532 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
| $ | 11,227,980 |
|
| $ | 12,948,885 |
|
Cash paid during the period for income taxes |
| $ | 155,077 |
|
| $ | 29,925 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Change in amount of hotel property improvements in accounts payable and accrued liabilities |
| $ | 77,843 |
|
| $ | 307,098 |
|
The accompanying notes are an integral part of these consolidated financial statements.
78
SOTHERLY HOTELS LPHOTELS INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (Unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
Investment in hotel properties, net | $ | 357,645,087 |
|
| $ | 348,593,912 |
|
Investment in hotel property held for sale, net |
| — |
|
|
| 5,333,000 |
|
Cash and cash equivalents |
| 32,651,893 |
|
|
| 31,766,775 |
|
Restricted cash |
| 6,115,997 |
|
|
| 4,596,145 |
|
Accounts receivable, net |
| 5,580,895 |
|
|
| 4,127,748 |
|
Accounts receivable - affiliate |
| 493,895 |
|
|
| 4,175 |
|
Loan receivable - affiliate |
| 4,697,508 |
|
|
| — |
|
Prepaid expenses, inventory and other assets |
| 6,228,659 |
|
|
| 4,648,469 |
|
Deferred income taxes |
| 7,729,111 |
|
|
| 6,949,340 |
|
TOTAL ASSETS | $ | 421,143,045 |
|
| $ | 406,019,564 |
|
LIABILITIES |
|
|
|
|
|
|
|
Mortgage loans, net | $ | 298,429,955 |
|
| $ | 282,708,289 |
|
Unsecured notes, net |
| 24,560,735 |
|
|
| 24,308,713 |
|
Accounts payable and other accrued liabilities |
| 16,110,521 |
|
|
| 12,970,960 |
|
Advance deposits |
| 2,317,658 |
|
|
| 2,315,787 |
|
Dividends and distributions payable |
| 2,593,456 |
|
|
| 2,376,527 |
|
TOTAL LIABILITIES | $ | 344,012,325 |
|
| $ | 324,680,276 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 6) |
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
PARTNERS’ CAPITAL |
|
|
|
|
|
|
|
8% Series B cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,610,000 units issued and outstanding at September 30, 2017 and December 31, 2016 |
| 37,766,531 |
|
|
| 37,766,531 |
|
General Partner: 162,587 units and 162,467 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively |
| 662,073 |
|
|
| 681,389 |
|
Limited Partners: 16,096,104 units and 16,084,224 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively |
| 38,702,116 |
|
|
| 42,891,368 |
|
TOTAL PARTNERS’ CAPITAL |
| 77,130,720 |
|
|
| 81,339,288 |
|
TOTAL LIABILITIES AND PARTNERS’ CAPITAL | $ | 421,143,045 |
|
| $ | 406,019,564 |
|
(unaudited)
|
| Six Months Ended |
|
| Six Months Ended |
| ||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net Income (loss) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 9,184,815 |
|
|
| 9,951,685 |
|
Amortization of deferred financing costs |
|
| 800,525 |
|
|
| 516,814 |
|
Amortization of mortgage premium |
|
| (12,341 | ) |
|
| (12,341 | ) |
Gain on involuntary conversion of assets |
|
| (51,547 | ) |
|
| (496,957 | ) |
Unrealized gain on hedging activities |
|
| (1,534,760 | ) |
|
| (693,367 | ) |
Loss on early extinguishment of debt |
|
| 5,944,881 |
|
|
| — |
|
Gain on sale of assets |
|
| (30,053,977 | ) |
|
| — |
|
Loss on disposal of assets |
|
| 490,613 |
|
|
| 17,221 |
|
ESOP and stock - based compensation |
|
| 522,689 |
|
|
| 525,329 |
|
Changes in assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 215,397 |
|
|
| (1,011,009 | ) |
Prepaid expenses, inventory and other assets |
|
| (1,390,225 | ) |
|
| (1,498,515 | ) |
Accounts payable and other accrued liabilities |
|
| (9,794,417 | ) |
|
| 3,893,338 |
|
Advance deposits |
|
| 338,825 |
|
|
| (266,456 | ) |
Accounts receivable - affiliate |
|
| — |
|
|
| 103,810 |
|
Net cash provided by operating activities |
|
| 1,454,893 |
|
|
| 1,899,958 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Proceeds from sale of hotel properties |
|
| 52,403,981 |
|
|
| — |
|
Improvements and additions to hotel properties |
|
| (2,598,147 | ) |
|
| (1,793,222 | ) |
Proceeds from insurance conversion |
|
| 570,179 |
|
|
| 496,957 |
|
Proceeds from sale of assets |
|
| 34,147 |
|
|
| — |
|
Net cash provided by (used in) investing activities |
|
| 50,410,160 |
|
|
| (1,296,265 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from mortgage loans |
|
| 7,777,475 |
|
|
| — |
|
Payments on mortgage loans |
|
| (33,621,590 | ) |
|
| (2,369,650 | ) |
Payments on secured notes |
|
| (20,000,000 | ) |
|
| — |
|
Payments of deferred financing costs |
|
| (246,714 | ) |
|
| (1,860 | ) |
Net cash used in financing activities |
|
| (46,090,829 | ) |
|
| (2,371,510 | ) |
Net increase/(decrease) in cash, cash equivalents and restricted cash |
|
| 5,774,224 |
|
|
| (1,767,817 | ) |
Cash, cash equivalents and restricted cash at the beginning of the period |
|
| 25,578,537 |
|
|
| 35,300,546 |
|
Cash, cash equivalents and restricted cash at the end of the period |
| $ | 31,352,761 |
|
| $ | 33,532,729 |
|
Supplemental disclosures: |
|
|
|
|
|
| ||
Cash paid during the period for interest |
| $ | 14,157,708 |
|
| $ | 10,375,892 |
|
Cash paid during the period for income taxes |
| $ | 39,908 |
|
| $ | 20,200 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
| ||
Change in amount of improvements to hotel property |
| $ | 144,220 |
|
| $ | 445,430 |
|
The accompanying notes are an integral part of these consolidated financial statements.
89
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(unaudited)
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
Investment in hotel properties, net |
| $ | 369,481,882 |
|
| $ | 375,885,224 |
|
Investment in hotel properties held for sale, net |
|
| — |
|
|
| 22,870,487 |
|
Cash and cash equivalents |
|
| 23,969,135 |
|
|
| 13,166,883 |
|
Restricted cash |
|
| 7,383,626 |
|
|
| 12,411,654 |
|
Accounts receivable, net |
|
| 4,088,159 |
|
|
| 4,822,187 |
|
Loan receivable - affiliate |
|
| 3,055,389 |
|
|
| 3,157,172 |
|
Prepaid expenses, inventory and other assets |
|
| 8,175,184 |
|
|
| 6,894,228 |
|
TOTAL ASSETS |
| $ | 416,153,375 |
|
| $ | 439,207,835 |
|
LIABILITIES |
|
|
|
|
|
| ||
Mortgage loans, net |
| $ | 325,650,322 |
|
| $ | 351,170,883 |
|
Secured loan, net |
|
| — |
|
|
| 19,128,330 |
|
Unsecured notes, net |
|
| 7,609,934 |
|
|
| 7,609,934 |
|
Accounts payable and other accrued liabilities |
|
| 29,784,182 |
|
|
| 35,960,293 |
|
Advance deposits |
|
| 1,891,767 |
|
|
| 1,552,942 |
|
Dividends and distributions payable |
|
| 4,100,522 |
|
|
| 4,125,351 |
|
TOTAL LIABILITIES |
| $ | 369,036,727 |
|
| $ | 419,547,733 |
|
|
|
|
|
|
|
| ||
Commitments and contingencies (see Note 6) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
| ||
PARTNERS’ CAPITAL |
|
|
|
|
|
| ||
Preferred units, 11,000,000 units authorized; |
|
|
|
|
|
| ||
8.0% Series B cumulative redeemable perpetual preferred unit; |
| $ | 34,907,065 |
|
| $ | 35,420,784 |
|
7.875% Series C cumulative redeemable perpetual preferred units, |
|
| 31,813,355 |
|
|
| 32,474,760 |
|
8.25% Series D cumulative redeemable perpetual preferred units, |
|
| 27,549,832 |
|
|
| 27,549,832 |
|
General Partner: 192,904 units and 185,748 units issued and outstanding as of |
|
| (187,856 | ) |
|
| (469,805 | ) |
Limited Partners: 19,097,489 units and 18,389,030 units issued and outstanding as |
|
| (46,965,748 | ) |
|
| (75,315,469 | ) |
TOTAL PARTNERS’ CAPITAL |
|
| 47,116,648 |
|
|
| 19,660,102 |
|
TOTAL LIABILITIES AND PARTNERS’ CAPITAL |
| $ | 416,153,375 |
|
| $ | 439,207,835 |
|
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department |
|
| $ | 25,093,226 |
|
| $ | 26,665,132 |
|
| $ | 81,366,731 |
|
| $ | 83,896,833 |
|
Food and beverage department |
|
|
| 7,997,818 |
|
|
| 8,412,842 |
|
|
| 24,904,934 |
|
|
| 26,240,932 |
|
Other operating departments |
|
|
| 3,678,427 |
|
|
| 2,197,338 |
|
|
| 9,835,322 |
|
|
| 6,772,647 |
|
Total revenue |
|
|
| 36,769,471 |
|
|
| 37,275,312 |
|
|
| 116,106,987 |
|
|
| 116,910,412 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department |
|
|
| 6,826,822 |
|
|
| 7,126,673 |
|
|
| 20,252,889 |
|
|
| 21,330,914 |
|
Food and beverage department |
|
|
| 6,039,174 |
|
|
| 5,820,000 |
|
|
| 17,919,142 |
|
|
| 18,250,542 |
|
Other operating departments |
|
|
| 705,111 |
|
|
| 642,219 |
|
|
| 1,928,662 |
|
|
| 1,880,618 |
|
Indirect |
|
|
| 15,209,249 |
|
|
| 14,603,034 |
|
|
| 45,019,742 |
|
|
| 43,827,294 |
|
Total hotel operating expenses |
|
|
| 28,780,356 |
|
|
| 28,191,926 |
|
|
| 85,120,435 |
|
|
| 85,289,368 |
|
Depreciation and amortization |
|
|
| 4,427,738 |
|
|
| 3,790,872 |
|
|
| 12,708,548 |
|
|
| 11,260,987 |
|
Loss on disposal of assets |
|
|
| - |
|
|
| 189,267 |
|
|
| 51,569 |
|
|
| 329,461 |
|
Corporate general and administrative |
|
|
| 1,335,192 |
|
|
| 1,367,848 |
|
|
| 4,882,541 |
|
|
| 4,331,896 |
|
Total operating expenses |
|
|
| 34,543,286 |
|
|
| 33,539,913 |
|
|
| 102,763,093 |
|
|
| 101,211,712 |
|
NET OPERATING INCOME |
|
|
| 2,226,185 |
|
|
| 3,735,399 |
|
|
| 13,343,894 |
|
|
| 15,698,700 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
| (4,139,267 | ) |
|
| (4,626,333 | ) |
|
| (11,827,061 | ) |
|
| (13,872,129 | ) |
Interest income |
|
|
| 53,314 |
|
|
| 44,485 |
|
|
| 126,241 |
|
|
| 63,523 |
|
Loss on early debt extinguishment |
|
|
| — |
|
|
| (1,087,395 | ) |
|
| (228,087 | ) |
|
| (1,157,688 | ) |
Unrealized loss on hedging activities |
|
|
| (3,542 | ) |
|
| (492 | ) |
|
| (30,748 | ) |
|
| (66,567 | ) |
Gain (loss) on sale of assets |
|
|
| (23,000 | ) |
|
| — |
|
|
| 77,807 |
|
|
| — |
|
Gain on involuntary conversion of assets |
|
|
| — |
|
|
| — |
|
|
| 1,041,815 |
|
|
| — |
|
Net income (loss) before income taxes |
|
|
| (1,886,310 | ) |
|
| (1,934,336 | ) |
|
| 2,503,861 |
|
|
| 665,839 |
|
Income tax benefit |
|
|
| 950,310 |
|
|
| 385,145 |
|
|
| 581,890 |
|
|
| 308,398 |
|
Net income (loss) |
|
|
| (936,000 | ) |
|
| (1,549,191 | ) |
|
| 3,085,751 |
|
|
| 974,237 |
|
Distributions to preferred unit holder |
|
|
| (805,000 | ) |
|
| (339,889 | ) |
|
| (2,415,000 | ) |
|
| (339,889 | ) |
Net income (loss) available to operating partnership unit holders |
|
| $ | (1,741,000 | ) |
| $ | (1,889,080 | ) |
| $ | 670,751 |
|
| $ | 634,348 |
|
Net income (loss) attributable per operating partner unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
| $ | 0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of operating partner units outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
| 16,258,691 |
|
|
| 16,727,791 |
|
|
| 16,256,713 |
|
|
| 16,723,557 |
|
The accompanying notes are an integral part of these consolidated financial statements.
910
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN PARTNERS’ CAPITALOPERATIONS
| Preferred Units |
| General Partner |
|
| Limited Partner |
|
|
|
|
| |||||||||||||||
| Units |
|
| Amount |
| Units |
|
| Amount |
|
| Units |
|
| Amounts |
|
| Total |
| |||||||
Balances at December 31, 2016 |
| 1,610,000 |
|
| $ | 37,766,531 |
|
| 162,467 |
|
| $ | 681,389 |
|
|
| 16,084,224 |
|
| $ | 42,891,368 |
|
| $ | 81,339,288 |
|
Issuance of common partnership units |
| — |
|
|
| — |
|
| 120 |
|
|
| 892 |
|
|
| 11,880 |
|
|
| 88,268 |
|
|
| 89,160 |
|
Amortization of restricted units award |
| — |
|
|
| — |
|
| — |
|
|
| 149 |
|
|
| — |
|
|
| 103,059 |
|
|
| 103,208 |
|
Amortization of ESOP units |
| — |
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 52,626 |
|
|
| 52,626 |
|
Preferred units distributions declared |
| — |
|
|
| (2,415,000 | ) |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,415,000 | ) |
Partnership units distributions declared |
| — |
|
|
| — |
|
| — |
|
|
| (51,214 | ) |
|
| — |
|
|
| (5,073,099 | ) |
|
| (5,124,313 | ) |
Net income |
| — |
|
|
| 2,415,000 |
|
| — |
|
|
| 30,857 |
|
|
| — |
|
|
| 639,894 |
|
|
| 3,085,751 |
|
Balances at September 30, 2017 (Unaudited) |
| 1,610,000 |
|
| $ | 37,766,531 |
|
| 162,587 |
|
| $ | 662,073 |
|
|
| 16,096,104 |
|
| $ | 38,702,116 |
|
| $ | 77,130,720 |
|
(unaudited)
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Rooms department |
| $ | 32,545,588 |
|
| $ | 24,045,910 |
|
| $ | 57,398,973 |
|
| $ | 39,539,514 |
|
Food and beverage department |
|
| 7,712,310 |
|
|
| 3,501,875 |
|
|
| 13,330,046 |
|
|
| 5,045,114 |
|
Other operating departments |
|
| 6,912,361 |
|
|
| 6,835,524 |
|
|
| 14,793,842 |
|
|
| 12,434,212 |
|
Total revenue |
|
| 47,170,259 |
|
|
| 34,383,309 |
|
|
| 85,522,861 |
|
|
| 57,018,840 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Hotel operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Rooms department |
|
| 7,205,585 |
|
|
| 5,917,880 |
|
|
| 13,155,343 |
|
|
| 9,914,496 |
|
Food and beverage department |
|
| 5,256,164 |
|
|
| 2,106,487 |
|
|
| 9,136,781 |
|
|
| 3,016,751 |
|
Other operating departments |
|
| 2,599,372 |
|
|
| 2,648,387 |
|
|
| 5,083,479 |
|
|
| 4,587,264 |
|
Indirect |
|
| 17,337,585 |
|
|
| 14,050,076 |
|
|
| 33,400,946 |
|
|
| 25,639,153 |
|
Total hotel operating expenses |
|
| 32,398,706 |
|
|
| 24,722,830 |
|
|
| 60,776,549 |
|
|
| 43,157,664 |
|
Depreciation and amortization |
|
| 4,619,743 |
|
|
| 4,969,669 |
|
|
| 9,184,815 |
|
|
| 9,951,685 |
|
Loss on disposal of assets |
|
| 520,156 |
|
|
| 17,221 |
|
|
| 490,613 |
|
|
| 17,221 |
|
Corporate general and administrative |
|
| 1,432,366 |
|
|
| 1,530,438 |
|
|
| 2,946,393 |
|
|
| 2,831,396 |
|
Total operating expenses |
|
| 38,970,971 |
|
|
| 31,240,158 |
|
|
| 73,398,370 |
|
|
| 55,957,966 |
|
NET OPERATING INCOME |
|
| 8,199,288 |
|
|
| 3,143,151 |
|
|
| 12,124,491 |
|
|
| 1,060,874 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| (5,342,940 | ) |
|
| (5,526,595 | ) |
|
| (11,056,144 | ) |
|
| (11,446,118 | ) |
Interest income |
|
| 27,486 |
|
|
| 36,308 |
|
|
| 51,934 |
|
|
| 74,907 |
|
Loss on early extinguishment of debt |
|
| (5,944,881 | ) |
|
| — |
|
|
| (5,944,881 | ) |
|
| — |
|
Unrealized gain on hedging activities |
|
| 572,497 |
|
|
| 303,181 |
|
|
| 1,534,760 |
|
|
| 693,367 |
|
Gain on sale of assets |
|
| 30,053,977 |
|
|
| — |
|
|
| 30,053,977 |
|
|
| — |
|
Gain on involuntary conversion of assets |
|
| 51,547 |
|
|
| 496,957 |
|
|
| 51,547 |
|
|
| 496,957 |
|
Net income (loss) before income taxes |
|
| 27,616,974 |
|
|
| (1,546,998 | ) |
|
| 26,815,684 |
|
|
| (9,120,013 | ) |
Income tax provision |
|
| (11,615 | ) |
|
| (6,972 | ) |
|
| (21,269 | ) |
|
| (9,581 | ) |
Net income (loss) |
|
| 27,605,359 |
|
|
| (1,553,970 | ) |
|
| 26,794,415 |
|
|
| (9,129,594 | ) |
Declared and undeclared distributions to preferred unit holders |
|
| (1,889,470 | ) |
|
| (1,529,613 | ) |
|
| (3,826,086 | ) |
|
| (3,718,524 | ) |
Gain on extinguishment of preferred units |
|
| 83,500 |
|
|
| 93,342 |
|
|
| 161,675 |
|
|
| 93,342 |
|
Net income (loss) available to general and limited partnership unit holders |
| $ | 25,799,389 |
|
| $ | (2,990,241 | ) |
| $ | 23,130,004 |
|
| $ | (12,754,776 | ) |
Net income (loss) attributable per general and limited partner unit: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 1.33 |
|
| $ | (0.19 | ) |
| $ | 1.21 |
|
| $ | (0.80 | ) |
Diluted |
| $ | 1.32 |
|
| $ | (0.19 | ) |
| $ | 1.20 |
|
| $ | (0.80 | ) |
Weighted average number of general and limited partner units |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 19,291,083 |
|
|
| 16,056,770 |
|
|
| 18,981,782 |
|
|
| 15,955,303 |
|
Diluted |
|
| 19,414,602 |
|
|
| 16,056,770 |
|
|
| 19,153,758 |
|
|
| 15,955,303 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1011
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN PARTNERS’ CAPITAL
(unaudited)
|
| Preferred Units |
|
| General Partner |
|
| Limited Partner |
|
|
|
| ||||||||||||||||||||||||
Balances at December 31, 2021 |
|
| 4,059,610 |
|
| $ | 35,420,784 |
|
| $ | 32,474,760 |
|
| $ | 27,549,832 |
|
|
| 185,748 |
|
| $ | (469,805 | ) |
|
| 18,389,030 |
|
| $ | (75,315,469 | ) |
| $ | 19,660,102 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| 18,013 |
|
|
| 18,195 |
|
Unit based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,903 |
|
|
| 2,227 |
|
|
| 188,365 |
|
|
| 343,194 |
|
|
| 345,421 |
|
Issuance of partnership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,178 |
|
|
| 5,389 |
|
|
| 215,597 |
|
|
| 533,548 |
|
|
| 538,937 |
|
Extinguishment of preferred units |
|
| (22,500 | ) |
|
| (302,602 | ) |
|
| (225,159 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (527,761 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,109 | ) |
|
| — |
|
|
| (802,835 | ) |
|
| (810,944 | ) |
Balances at March 31, 2022 |
|
| 4,037,110 |
|
| $ | 35,118,182 |
|
| $ | 32,249,601 |
|
| $ | 27,549,832 |
|
|
| 189,829 |
|
| $ | (470,116 | ) |
|
| 18,792,992 |
|
| $ | (75,223,549 | ) |
| $ | 19,223,950 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| 18,013 |
|
|
| 18,195 |
|
Unit based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 374 |
|
|
| 391 |
|
|
| 37,054 |
|
|
| 38,705 |
|
|
| 39,096 |
|
Issuance of partnership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,701 |
|
|
| 5,633 |
|
|
| 267,443 |
|
|
| 871,778 |
|
|
| 877,411 |
|
Extinguishment of preferred units |
|
| (27,600 | ) |
|
| (211,117 | ) |
|
| (436,246 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (647,363 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 276,054 |
|
|
| — |
|
|
| 27,329,305 |
|
|
| 27,605,359 |
|
Balances at June 30, 2022 |
|
| 4,009,510 |
|
| $ | 34,907,065 |
|
| $ | 31,813,355 |
|
| $ | 27,549,832 |
|
|
| 192,904 |
|
| $ | (187,856 | ) |
|
| 19,097,489 |
|
| $ | (46,965,748 | ) |
| $ | 47,116,648 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 3,085,751 |
|
| $ | 974,237 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 12,708,548 |
|
|
| 11,260,987 |
|
Amortization of deferred financing costs |
|
| 616,390 |
|
|
| 939,122 |
|
Amortization of mortgage premium |
|
| (18,511 | ) |
|
| (18,511 | ) |
Gain on involuntary conversion of assets |
|
| (1,041,815 | ) |
|
| — |
|
Unrealized loss on derivative instrument |
|
| 30,748 |
|
|
| 66,567 |
|
Loss on disposal of assets |
|
| 51,569 |
|
|
| 329,461 |
|
Gain on sale of assets |
|
| (77,807 | ) |
|
| — |
|
Loss on early extinguishment of debt |
|
| 228,087 |
|
|
| 1,157,688 |
|
Unit - based compensation |
|
| 244,994 |
|
|
| 206,702 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
| (2,401,869 | ) |
|
| (2,409,252 | ) |
Accounts receivable |
|
| (1,453,147 | ) |
|
| (481,741 | ) |
Prepaid expenses, inventory and other assets |
|
| (1,699,380 | ) |
|
| (617,601 | ) |
Deferred income taxes |
|
| (779,771 | ) |
|
| (456,188 | ) |
Accounts payable and other accrued liabilities |
|
| 3,962,544 |
|
|
| 3,535,914 |
|
Advance deposits | �� |
| 1,871 |
|
|
| 787,257 |
|
Accounts receivable - affiliate |
|
| (489,720 | ) |
|
| 35,819 |
|
Net cash provided by operating activities |
|
| 12,968,482 |
|
|
| 15,310,461 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of hotel properties |
|
| (3,986,849 | ) |
|
| — |
|
Improvements and additions to hotel properties |
|
| (17,483,257 | ) |
|
| (11,223,268 | ) |
Proceeds from the sale of hotel property |
|
| 5,434,856 |
|
|
| — |
|
ESOP loan advances |
|
| (4,874,758 | ) |
|
| — |
|
ESOP loan payments |
|
| 177,250 |
|
|
| — |
|
Funding of restricted cash reserves |
|
| (3,501,192 | ) |
|
| (3,970,657 | ) |
Proceeds of restricted cash reserves |
|
| 4,383,209 |
|
|
| 6,307,518 |
|
Proceeds from insurance conversion |
|
| 1,041,815 |
|
|
| — |
|
Proceeds from the sale of assets |
|
| 3,355 |
|
|
| 211,400 |
|
Net cash used in investing activities |
|
| (18,805,571 | ) |
|
| (8,675,007 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds of mortgage debt |
|
| 40,500,000 |
|
|
| 45,700,000 |
|
Proceeds from mortgage loan receivable |
|
| — |
|
|
| 2,600,711 |
|
Proceeds from the sale of preferred units |
|
| — |
|
|
| 37,774,229 |
|
Settlement of repurchased common units |
|
| (1,103,130 | ) |
|
| — |
|
Payments on mortgage loans |
|
| (24,767,275 | ) |
|
| (44,453,440 | ) |
Redemption of unsecured notes |
|
| — |
|
|
| (27,600,000 | ) |
Payments of deferred financing costs |
|
| (585,004 | ) |
|
| (1,455,645 | ) |
Distributions and dividends paid |
|
| (7,322,384 | ) |
|
| (4,262,691 | ) |
Net cash provided by financing activities |
|
| 6,722,207 |
|
|
| 8,303,164 |
|
Net increase in cash and cash equivalents |
|
| 885,118 |
|
|
| 14,938,618 |
|
Cash and cash equivalents at the beginning of the period |
|
| 31,766,775 |
|
|
| 11,493,914 |
|
Cash and cash equivalents at the end of the period |
| $ | 32,651,893 |
|
| $ | 26,432,532 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
| $ | 11,227,980 |
|
| $ | 12,948,885 |
|
Cash paid during the period for income taxes |
| $ | 155,077 |
|
| $ | 29,925 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Change in amount of hotel property improvements in accounts payable and accrued liabilities |
| $ | 77,843 |
|
| $ | 307,098 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1112
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
|
| Preferred Units |
|
| General Partner |
|
| Limited Partner |
|
|
|
| ||||||||||||||||||||||||
|
| Units |
|
| Series B |
|
| Series C |
|
| Series D |
|
| Units |
|
| Amounts |
|
| Units |
|
| Amounts |
|
| Total |
| |||||||||
Balances at December 31, 2020 |
|
| 4,364,610 |
|
| $ | 37,766,531 |
|
| $ | 36,461,955 |
|
| $ | 28,377,509 |
|
|
| 161,904 |
|
| $ | (258,538 | ) |
|
| 16,028,447 |
|
| $ | (54,399,898 | ) |
| $ | 47,947,559 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| 18,013 |
|
|
| 18,195 |
|
Unit based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (441 | ) |
|
| — |
|
|
| (43,704 | ) |
|
| (44,145 | ) |
Issuance of partnership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,513 |
|
|
| 4,448 |
|
|
| 149,768 |
|
|
| 440,318 |
|
|
| 444,766 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75,757 | ) |
|
| — |
|
|
| (7,499,867 | ) |
|
| (7,575,624 | ) |
Balances at March 31, 2021 |
|
| 4,364,610 |
|
| $ | 37,766,531 |
|
| $ | 36,461,955 |
|
| $ | 28,377,509 |
|
|
| 163,417 |
|
| $ | (330,106 | ) |
|
| 16,178,215 |
|
| $ | (61,485,138 | ) |
| $ | 40,790,751 |
|
Amortization of restricted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| 18,013 |
|
|
| 18,195 |
|
Unit based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (251 | ) |
|
| — |
|
|
| (24,795 | ) |
|
| (25,046 | ) |
Extinguishment of preferred units |
|
| (220,000 | ) |
|
| (2,345,747 | ) |
|
| (1,993,597 | ) |
|
| (827,677 | ) |
|
| 15,427 |
|
|
| 52,769 |
|
|
| 1,527,300 |
|
|
| 5,224,136 |
|
|
| 109,884 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,539 | ) |
|
| — |
|
|
| (1,538,431 | ) |
|
| (1,553,970 | ) |
Balances at June 30, 2021 |
|
| 4,144,610 |
|
| $ | 35,420,784 |
|
| $ | 34,468,358 |
|
| $ | 27,549,832 |
|
|
| 178,844 |
|
| $ | (292,945 | ) |
|
| 17,705,515 |
|
| $ | (57,806,215 | ) |
| $ | 39,339,814 |
|
The accompanying notes are an integral part of these consolidated financial statements.
13
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| Six Months Ended |
|
| Six Months Ended |
| ||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income (loss) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 9,184,815 |
|
|
| 9,951,685 |
|
Amortization of deferred financing costs |
|
| 800,525 |
|
|
| 516,814 |
|
Amortization of mortgage premium |
|
| (12,341 | ) |
|
| (12,341 | ) |
Gain on involuntary conversion of assets |
|
| (51,547 | ) |
|
| (496,957 | ) |
Unrealized gain on hedging activities |
|
| (1,534,760 | ) |
|
| (693,367 | ) |
Loss on early extinguishment of debt |
|
| 5,944,881 |
|
|
| — |
|
Gain on sale of assets |
|
| (30,053,977 | ) |
|
| — |
|
Loss on disposal of assets |
|
| 490,613 |
|
|
| 17,221 |
|
ESOP and unit - based compensation |
|
| 420,906 |
|
|
| 411,964 |
|
Changes in assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| 215,397 |
|
|
| (1,011,009 | ) |
Prepaid expenses, inventory and other assets |
|
| (1,390,225 | ) |
|
| (1,498,515 | ) |
Accounts payable and other accrued liabilities |
|
| (9,794,417 | ) |
|
| 3,893,338 |
|
Advance deposits |
|
| 338,825 |
|
|
| (266,456 | ) |
Accounts receivable - affiliate |
|
| — |
|
|
| 103,810 |
|
Net cash provided by operating activities |
|
| 1,353,110 |
|
|
| 1,786,593 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Proceeds from sale of hotel properties |
|
| 52,403,981 |
|
|
| — |
|
Improvements and additions to hotel properties |
|
| (2,598,147 | ) |
|
| (1,793,222 | ) |
ESOP loan payments received |
|
| 101,783 |
|
|
| 113,365 |
|
Proceeds from insurance conversion |
|
| 570,179 |
|
|
| 496,957 |
|
Proceeds from sale of assets |
|
| 34,147 |
|
|
| — |
|
Net cash provided by (used in) investing activities |
|
| 50,511,943 |
|
|
| (1,182,900 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from mortgage loans |
|
| 7,777,475 |
|
|
| — |
|
Payments on mortgage loans |
|
| (33,621,590 | ) |
|
| (2,369,650 | ) |
Payments on secured notes |
|
| (20,000,000 | ) |
|
| — |
|
Payments of deferred financing costs |
|
| (246,714 | ) |
|
| (1,860 | ) |
Net cash used in financing activities |
|
| (46,090,829 | ) |
|
| (2,371,510 | ) |
Net increase/(decrease) in cash, cash equivalents and restricted cash |
|
| 5,774,224 |
|
|
| (1,767,817 | ) |
Cash, cash equivalents and restricted cash at the beginning of the period |
|
| 25,578,537 |
|
|
| 35,300,546 |
|
Cash, cash equivalents and restricted cash at the end of the period |
| $ | 31,352,761 |
|
| $ | 33,532,729 |
|
Supplemental disclosures: |
|
|
|
|
|
| ||
Cash paid during the period for interest |
| $ | 14,123,048 |
|
| $ | 10,206,965 |
|
Cash paid during the period for income taxes |
| $ | 39,908 |
|
| $ | 20,200 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
| ||
Change in amount of improvements to hotel property in |
| $ | 144,220 |
|
| $ | 445,430 |
|
The accompanying notes are an integral part of these consolidated financial statements.
14
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Sotherly Hotels Inc., (the “Company”), is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States. Currently, the. The Company ishistorically has focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. The Company’s portfolio, consistsas of June 30, 2022, consisted of investments in eleventen hotel properties, comprising 2,8382,786 rooms and the2 hotel commercial condominium unitunits and their associated rental programs. NaN of the Hyde Resort & Residences condominium hotel. All of the Company’sour hotels except for The DeSoto, the Georgian Terrace, The Whitehall and the Hyde Resort & Residences, operateoperated under the Hilton, Crowne Plaza, DoubleTree, and Sheraton brands.Hyatt brands, and 3 are independent hotels.
The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six6 hotel properties (the “initial properties”“Initial Properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP (the “Operating Partnership”).
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which at SeptemberJune 30, 2017,2022 was approximately 89.1%94.4% owned by the Company, and its subsidiaries, leases thelease its hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS”TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership. As of June 30, 2022, the MHI TRS then engagesEntities engaged Our Town Hospitality, LLC (“Our Town”), an eligible independent hotel management company, MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”), to operate the hotels under a management contract.contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.
All references in this reportthese “Notes to Consolidated Financial Statements” to “we”, “us”, “our” and “our”“Sotherly” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
Effects of COVID-19 Pandemic on Our Business
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. The pandemic and subsequent government mandates and health official recommendations have significantly impacted hotel demand. Following the initial implementation of government mandates and health official recommendations, we significantly reduced operations at all our hotels, suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control. We intend to continue those re-introductions, provided that we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.
COVID-19 had a significant negative impact on our operations and financial results in 2021, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods. We continue to experience lingering impact from COVID-19 in 2022, albeit to a lesser degree. A significant increase in leisure travel demand contributed to improved results for 2021 compared to 2020. While business travel demand has increased, it continues to lag behind pre-pandemic levels and it is not clear when and to what extent that pre-pandemic level of demand will return. As a result, although we anticipate further recovery in 2022, the Company cannot estimate with certainty when travel demand will fully recover.
15
As of June 30, 2022, we failed to meet the financial covenants under the mortgage secured by The Whitehall. We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022. While the Company believes it will be successful in obtaining waivers, loan modifications or securing refinance arrangements, it cannot provide assurance that it will be able to do so on acceptable terms or at all. Based on our current projections, following the expiration of the waiver on the financial covenants from the mortgage lender on The Whitehall, we do not anticipate that the financial performance of the property will have sufficiently recovered in order to meet the existing covenants. If we fail to obtain additional waivers from the lender, the Company would be required to make a prepayment, which we estimate at approximately $11.7 million, in order to bring the loan into compliance.
As of June 30, 2022, we had approximately $24.0 million in unrestricted cash and approximately $7.4 million in restricted cash.
U.S. generally accepted accounting principles (“U.S. GAAP”) requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Based on our current unrestricted and restricted cash on hand, our operating results and our forecast of obligations coming due 12 months from the date of this report, the Company has concluded that there are no longer conditions and events that raise substantial doubt about its ability to continue as a going concern.
Overview of Significant Transactions
Significant transactions occurring during the current period and prior fiscal year include the following:
On March 21, 2016, we entered into an agreement with the then existing lender to extend the maturity of the mortgage on The Whitehall until November 13, 2017, which was subsequently refinanced with a new lender on October 12, 2016.
On June 27, 2016,21, 2021, we entered into a promissory noteshare exchange agreement with Palogic Value Fund, L.P., a Delaware limited partnership (“Palogic”). Pursuant to that share exchange agreement, Palogic agreed to exchange 100,000 shares of the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 85,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 35,000 shares of the Company’s 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Palogic Shares”), together with all of Palogic’s rights to receive accrued and unpaid dividends on those Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share (the “Company Shares”). We closed the transaction and issued the Company Shares on June 22, 2021. The Company did not receive any cash proceeds as a result of the exchange of the Palogic Shares for the Company’s common stock, and the Palogic Shares exchanged have been retired and cancelled. The issuance of the shares of the Company’s common stock was made by the Company pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), contained in Section 3(a)(9) of such act on the basis that these offers constituted an exchange with existing holders of the Company’s securities, and 0 commission or other remuneration was paid to any party for soliciting such exchange.
On December 9, 2021, we entered into a share exchange agreement with Palogic. Pursuant to that share exchange agreement, Palogic agreed to exchange 75,000 shares of the Company’s Series C Preferred Stock, together with all of Palogic’s rights to receive accrued and unpaid dividends on those Series C Preferred Stock shares, for 620,919 shares of the Company’s common stock, par value $0.01 per share. Closing of the transaction occurred on December 9, 2021. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where 0 commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.
On February 10, 2022, Louisville Hotel Associates, LLC, a Delaware limited liability company and an affiliate of the Company, closed on the sale of the Sheraton Louisville Riverside hotel located in Jeffersonville, Indiana to Riverside Hotel, LLC, an Indiana limited liability company, for a purchase price of $11.5 million, including the assumption by the buyer of the mortgage loan documentson the hotel. There were 0 net proceeds from the sale.
On March 24, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to securethat share exchange agreement, the Company exchanged 96,900 shares of its common stock, par value $0.01 per share (the “Common Stock”) for 7,000 shares of the Series B Preferred Stock and 3,000 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on March 25, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a $35.0 million mortgagetransaction where 0 commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.
On March 31, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 120,875 shares of its Common Stock for 5,900 shares of the Series B Preferred Stock and 6,600 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B
16
Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on March 31, 2022. The DeSotocommon shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with MONY Life Insurance Company.an existing security holder in a transaction where 0 commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.
On April 11, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 116,640 shares of its Common Stock for 4,000 shares of the Series B Preferred Stock and 8,000 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 12, 2022. The mortgage term is ten years maturing July 1, 2026, subjectcommon shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where 0 commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.
On April 19, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to certain criteria.that share exchange agreement, the Company exchanged 153,504 shares of its Common Stock for 5,000 shares of the Series B Preferred Stock and 10,600 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 19, 2022. The mortgage bearscommon shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a fixed interest ratetransaction where 0 commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.
On June 10, 2022, we closed the sale of 4.25%. The mortgage amortizes on a 25-year schedule after a 1-year interest-only period.the DoubleTree by Hilton Raleigh-Brownstone University hotel. The Company used approximately $18.6 million of the net cash proceeds from the sale of the hotel to repay the existing first mortgage on the property and approximately $19.8 million of the net cash proceeds to repay a portion of the secured notes (the "Secured Notes") with KWHP SOHO, LLC and MIG SOHO, LLC (together, the “Investors”) as required by the terms of the Secured Notes. The DeSoto,Company intends to pay closing costs,use the remaining net cash proceeds to fund ongoing renovations atmake any distributions on the hotelCompany’s preferred stock that may be required in order to comply with the REIT requirements applicable to the Company related to distributions of taxable income, and for general corporate purposes. On September 2, 2017, we drew down the final $5.0The Investors received approximately $19.8 million of loanthe proceeds availablefrom the sale of the hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest reserves in the amount of approximately $1.6 million, of which approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.
On June 28, 2022, affiliates of the Company entered into amended loan documents after finalizing renovations on The DeSoto and meeting other criteria underto modify the existing mortgage loan documents.
On June 30, 2016, we entered into a loan agreement and other loan documents, including a guaranty of payment by the Operating Partnership, to secure a $19.0 million mortgage on the Crowne PlazaHotel Alba Tampa Westshore with the existing lender, Fifth Third Bank. ThePursuant to the amended loan documents, the amended mortgage termloan: (i) has an initial termincreased principal balance of three years, and$25.0 million; (ii) includes an extended maturity date of June 30, 2025, which may be further extended for two additional periods of one year each, subject to certain conditions. The mortgageconditions; (iii) bears a floating interest rate of the 30-day LIBORSOFR plus 3.75%2.75%, subject to a floor rate of 3.75%. The mortgage2.75%; (iv) amortizes on a 25-year schedule. The schedule and requires payments of monthly interest plus $40,600 monthly amortization payments; and (v) is guaranteed by the Operating Partnership up to $12.5 million, with the guaranty reducing to $6.25 million upon the successful achievement of certain performance milestones.
On June 29, 2022, the Company used the proceeds to repayfrom the existing first mortgage on the Crowne Plaza Tampa Westshore, to pay closing costs and for general corporate purposes.
On August 23, 2016, the Company sold 1,610,000 shares of its 8% Series B cumulative redeemable perpetual preferred stock (the “Series B Preferred Stock”), for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred units.
On September 30, 2016, the Operating Partnership redeemed the entire $27.6 million aggregate principal amount of its outstanding 8% senior unsecured notes.
12
On October 12, 2016, we entered into a loan agreement to secure a $20.5 million mortgage on The Whitehall with the International Bank of Commerce. Pursuant to the loan documents, the loan provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions, has a term of five years, bears a floating interest raterefinance of the one month LIBOR plus 3.50%, subject to a floor rateHotel Alba Tampa, along with approximately $0.2 million of 4.00%, amortizescash on an 18-year schedule after a 2-year interest only period, is subject to prepayment fees, and is guaranteed by Sotherly Hotels LP. The Company used the proceeds to repay the existing first mortgage on The Whitehall, to pay closing costs and for general corporate purposes.
On November 3, 2016, we entered into a loan agreement to refinance the mortgage on the Sheraton Louisville Riverside with Symetra Life Insurance Company. Pursuant to the loan documents, the loan provides proceeds of $12.0 million, has a maturity date of December 1, 2026, bears a fixed interest rate of 4.27% for the first 5 years of the loan with an option for the lender to reset that rate after 5 years, amortizes on a 25-year schedule, is subject to prepayment fees, and is guaranteed by Sotherly Hotels LP up to 50% of the unpaid principal balance, interest, and other amounts owed. The Company used the proceeds to repay the existing first mortgage on the Sheraton Louisville Riverside, to pay closing costs and for general corporate purposes.
On November 3, 2016, we entered into a loan agreement to modify and extend the mortgage on the Crowne Plaza Hampton Marina with TowneBank. Pursuant to the amended loan documents, the loan continues to bear a fixed interest rate of 5.00%, has a maturity date of November 1, 2019, and beginning on December 1, 2016 requires monthly principal payments of $15,367 plus interest.
On December 1, 2016, we entered into a promissory note and other loan documents to secure a $35.0 million mortgage on the Hilton Wilmington Riverside with MONY Life Insurance Company. Pursuant to the loan documents, the loan provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions. The mortgage term is ten years maturing November 30, 2026, subject to certain criteria. The mortgage bears a fixed interest rate of 4.25%. The mortgage amortizes on a 25-year schedule after a 1-year interest-only period. The Company used the proceeds to repay the existing first mortgage on the Hilton Wilmington Riverside and to pay closing costs, and will usehand as well as the balance of the proceeds to fund ongoing renovations at the hotel and for general corporate purposes.
On December 2, 2016, the Company’s board of directors authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock, par value $0.01 per share, at prevailing prices on the open market or in privately negotiated transactions, at the discretion of management. Through December 31, 2016 the Company repurchased 481,100 shares of common stock for approximately $3.2 million and the repurchased shares have been returned to the status of authorized but unissued shares of common stock. The Company did not repurchase any sharesinterest reserve under the stock repurchase program duringSecured Notes of approximately $0.5 million, to satisfy and pay in full the three and nine months ended September 30, 2017, respectively.Secured Notes. The Company used available working capital to fund purchasesInvestors received approximately $8.3 million in satisfaction of the Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the stock repurchase programSecured Notes, and intends to completeapproximately $0.02 million was applied toward accrued interest. Concurrent with the repurchase program prior to December 31, 2017, unless extended by the board of directors.
The Company adopted an Employee Stock Ownership Plan (“ESOP”) in December 2016, effective as of January 1, 2016. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is funded by a loan from the Company, pursuant to which the ESOP may borrow up to $5.0 million to purchase sharescancellation of the Company’s common stock. From January 3, 2017 to February 28, 2017Secured Notes, the ESOP purchased 682,500 shares of common stock at an aggregate cost of approximately $4.9 million.
Coincidentfollowing agreements were also terminated in accordance with the execution of the loan from the Company to the ESOP, the Operating Partnership committed to fund a loan to the Company to allow the Company to loan funds to the ESOP, for the purpose as stated above.
On January 30, 2017, we closed on the purchase of the commercial condominium unit of the Hyde Resort & Residences, a 400-unit condominium hotel located in the Hollywood, Florida market, for an aggregated price of approximately $4.8 million from 4111 South Ocean Drive, LLC. In connection with the closing of the transaction, the Company entered into a lease agreement for the 400-space parking garagetheir terms: (i) Note Purchase Agreement; (ii) Pledge and meeting rooms associated with the condominium hotel, agreements relating to the operationSecurity Agreement; (iii) Board Observer Agreement; and management of the hotel condominium association and a condominium unit rental program, and a pre-opening services agreement whereby the seller paid the Company a fee of approximately $0.8 million for certain pre-opening(iv) other related preparations.ancillary agreements.
On February 7, 2017, we closed on the sale of the Crowne Plaza Hampton Marina to Marina Hotels, LLC for a price of $5.6 million.
On June 1, 2017, we entered into an agreement to purchase the commercial unit of the planned Hyde Beach House Resort & Residences, a condominium hotel under development in Hollywood, Florida, for a price of $5.1 million from 4000 South Ocean Property Owner, LLLP. In connection with the agreement, we also entered into a pre-opening services agreement whereby the seller has agreed to pay the Company approximately $0.8 million in connection with certain pre-opening activities to be undertaken prior to the closing. The Company has agreed to purchase inventories at closing consistent with the management and operation of the hotel
13
and the related condominium association for an additional amount and has further agreed to enter into a lease agreement for the parking garage and poolside cabanas associated with the hotel; and to enter into a management agreement relating to the operation and management of the hotel’s condominium association. The Company anticipates that the closing of the transaction and the execution of related agreements will take place in the second quarter of 2019, once construction of the hotel has been substantially completed. The closing of the transaction is subject to various closing conditions as described in the purchase agreement.
On June 29, 2017, we entered into a promissory note and other loan documents to secure a $35.5 million mortgage on the DoubleTree by Hilton Jacksonville Riverfront with Wells Fargo Bank, N.A. Pursuant to the loan documents, the loan has a maturity date of July 11, 2024, bears a fixed interest rate of 4.88%, amortizes on a 30-year schedule, and is subject to a prepayment premium following a prepayment lockout period. The Company used a portion of the proceeds to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville Riverfront, to pay closing costs and for general corporate purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally,
17
all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on acquisition costdate and allocated to land, property and equipment and identifiable intangible assets. ReplacementsIf substantially all the fair value of the gross assets acquired are concentrated in a single identifiable asset, the asset is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired asset. We capitalize the costs of significant additions and improvements are capitalized, while repairsthat materially upgrade, increase the value of or extend the useful life of the property. These costs may include refurbishment, renovation, and maintenance are expensedremodeling expenditures, as incurred.well as certain direct internal costs related to construction projects. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project which constitute additions or improvements that extend the life of the property are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
We review ourThe Company assesses the carrying values of its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceedexceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
The Company determined that there were 0 impairments as of June 30, 2022.
Assets Held For Sale – We record The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.year.
Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
|
| Six Months Ended |
|
| Six Months Ended |
| ||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Cash and cash equivalents |
|
| 23,969,135 |
|
|
| 21,822,863 |
|
Restricted cash |
|
| 7,383,626 |
|
|
| 11,709,866 |
|
Cash, cash equivalents and restricted cash at the end of the period |
| $ | 31,352,761 |
|
| $ | 33,532,729 |
|
Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000.$250,000. Our 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. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
14
Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market,net realizable value, with cost determined on a method that approximates first-in, first-out basis.
18
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of SeptemberJune 30, 20172022 and December 31, 20162021 were $342,980$265,601 and $386,612,$294,390, respectively. Amortization expense for the three-month periods ended SeptemberJune 30, 20172022 and 20162021, totaled $11,217$12,282 and $15,331,$14,871, respectively, and for the nine-monthsix-month periods ended SeptemberJune 30, 20172022 and 20162021, totaled $35,299$ 24,289 and $45,593,$29,741, respectively.
Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in advance of issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.
Deferred offering costs are netted against our equity offerings when the offering is complete, whereby the costs are offset against the equity funds raised in the future and included in additional paid-in capital on the consolidated balance sheets, or if the offering expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and administrative expenses in the consolidated statements of operations. During the three and nine months ended September 30, 2017 the Company wrote off approximately $0 and $0.5 million of deferred offering costs, respectively.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheetsheets and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we currently use interest rate caps and an interest rate capswap which actsact as a cash flow hedgehedges and isare not designated as a hedge.hedges. We value our interest-rate capcaps and interest rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We also have used derivative instruments in the Company’s stock to obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
Level 1 |
| Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 |
| Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
Level 3 |
| Unobservable inputs for the asset or liability. |
15
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our interest rate cap, mortgage loansassets and unsecured notesliabilities measured at fair value and the basis for that measurement:
measurement (our interest rate caps and interest rate swap are the only assets or liabilities measured at fair value on a recurring basis, there were no non-recurring assets or liabilities for fair value measurements as of June 30, 2022 and there were two non-recurring assets and no non-recurring liabilities for fair value measurements as of December 31, 2021, respectively):
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap (1) |
| $ | — |
|
| $ | 33,597 |
|
| $ | — |
|
Mortgage loans (2) |
| $ | — |
|
| $ | (281,840,780 | ) |
| $ | — |
|
Unsecured notes (3) |
| $ | (26,241,160 | ) |
| $ | — |
|
| $ | — |
|
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap (1) |
| $ | — |
|
| $ | 2,849 |
|
| $ | — |
|
Mortgage loans (2) |
| $ | — |
|
| $ | (294,869,206 | ) |
| $ | — |
|
Unsecured notes (3) |
| $ | (25,836,360 | ) |
| $ | — |
|
| $ | — |
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||
December 31, 2021 |
|
|
|
|
|
|
|
|
| |||
Interest Rate Cap (1) |
| $ | — |
|
| $ | 47 |
|
| $ | — |
|
Interest Rate Swap (2) |
| $ | — |
|
| $ | (1,537,319 | ) |
| $ | — |
|
Mortgage loans (3) |
| $ | — |
|
| $ | (355,496,444 | ) |
| $ | — |
|
Investment in Hotel Properties, net(4) |
| $ | — |
|
| $ | 23,000,000 |
|
| $ | — |
|
Investment in Hotel Properties Held for Sale, net(5) |
| $ | — |
|
| $ | 11,063,952 |
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
| |||
June 30, 2022 |
|
|
|
|
|
|
|
|
| |||
Interest Rate Cap (1) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
Interest Rate Swap (2) |
| $ | — |
|
| $ | 1,311 |
|
| $ | — |
|
Mortgage loans (3) |
| $ | — |
|
| $ | (328,489,576 | ) |
| $ | — |
|
19
|
|
|
|
|
|
Noncontrolling Interest in Operating Partnership – Certain hotel properties were acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition – RevenuesRevenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the gross commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) shown on our consolidated balance sheets and recognized once the performance obligations are satisfied.
Certain of the Company’s hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and condominium hotel are recognized whenincluded in other operating revenues in the services are provided. Other hotel department revenues include cancellation charges, charges for TV, internet and telephoneCompany’s consolidated statements of operations.
The Company collects sales, use, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Management fees earned under the condominium rental program at the Hyde Resort & Residences are also reflected as other hotel operating revenue. Revenues are reported net of occupancy and othersimilar taxes collected from customers and remitted to governmental authorities.at its hotels which are presented on a net basis on the consolidated statements of operations.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease income as revenue from other operating departments within the statementconsolidated statements of operations pursuant to the terms of each lease. Lease revenue was approximately $0.4$0.3 million and $0.4 million, for the each of the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and approximately $1.3$0.7 million and $0.8 million for each of the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively.2021, respectively.
A schedule of minimum future lease payments receivable for the remaining threesix and twelve-month lease periods is as follows:
Remaining six months ending December 31, 2022 |
|
| 608,207 |
|
December 31, 2023 |
|
| 1,202,326 |
|
December 31, 2024 |
|
| 1,199,584 |
|
December 31, 2025 |
|
| 1,171,782 |
|
December 31, 2026 |
|
| 1,162,514 |
|
December 31, 2027 and thereafter |
|
| 16,419,018 |
|
Total |
| $ | 21,763,431 |
|
For the remaining three months ending: December 31, 2017 |
| $ | 425,322 |
|
December 31, 2018 |
|
| 1,112,282 |
|
December 31, 2019 |
|
| 868,289 |
|
December 31, 2020 |
|
| 832,695 |
|
December 31, 2021 |
|
| 725,244 |
|
December 31, 2022 and thereafter |
|
| 3,085,873 |
|
Total |
| $ | 7,049,705 |
|
Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.
20
We account for income taxes 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. As of September 30, 2017, and December 31, 2016, deferred tax assets totaled approximately
16
$7.7 million and $6.9 million, respectively, of which approximately $6.8 million and $6.0 million relate to net operating losses of our TRS Lessee. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. We perform this analysis by evaluating future hotel revenues and expenses accounting for certain non-recurring costs and expenses during the current and prior two fiscal years as well as anticipated changes in the lease rental payments from the TRS Lessee to subsidiariesAs of the Operating Partnership. WeJune 30, 2022, we have determined that it is more-likely-than-not that we will not be able to fully utilize our deferred tax assets for future tax consequences, therefore noa 100% valuation allowance is required. As of SeptemberJune 30, 20172022 and December 31, 2016,2020, deferred tax assets each totaled $0, respectively.
As of June 30, 2022 and December 31, 2021, we had no0 uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of SeptemberJune 30, 2017,2022, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 20102014 through 2016.2021. In addition, as of SeptemberJune 30, 2017,2022, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject, because of open NOL carryforwards, generally include 20042014 through 2016.2021.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permitpermits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 350,000 and 750,000 shares of common stock, respectively.stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.
UnderAs of June 30, 2022, under the 20042013 Plan, the Company has made cumulative stock awards totaling 337,438745,160 shares, including 255,938680,160 unrestricted shares and 65,000 restricted shares issued to certain executives and employees and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 6,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest pro rata on the next anniversary of the effective date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested. The 2004 Plan was terminated in 2013.
Under the 2013 Plan, the Company has made stock awards totaling 121,100 shares, including 74,600 non-restricted shares to certain executives and employees and 46,500 restricted shares issued to its independent directors. All awards have vested except for 12,000for: 50,000 shares issued to certain employees, which will vest over the next eight years and 15,000 shares issued to the Company’s independent directors, in February 2017, which will vest on by December 31, 2017. 2022. The remaining 4,840 shares have been deregistered, as of June 20, 2022.
Previously, underUnder the 20042013 Plan, and currently,the Company was able to issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of June 30, 2022, 0 performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended June 30, 2022 and 2021 was $82,751 and $18,195, respectively, and for the six months ended June 30, 2022 and 2021 was $488,578 and $481,156, respectively.
The Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which the Company’s stockholders approved in April 2022, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 2,000,000 shares of common stock.
Under the 2022 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of SeptemberJune 30, 2017, no2022, 0 performance-based stock awards have been granted. Total compensation cost recognizedAs of June 30, 2022, under the 20042022 Plan, and the 2013 Plan for each of the three months ended September 30, 2017 and 2016 was $4,980, and for the nine months ended September 30, 2017 and 2016 was $104,100 and $206,703, respectively.Company had 0t issued any stock awards.
Additionally, the Company sponsors and maintains an ESOPEmployee Stock Ownership Plan (“ESOP”) and related trust for the benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods in which they are committed to be released. For the three months ended June 30, 2022 and 2021, the ESOP compensation cost was $14,649 and $22,086, respectively, and for the six months ended June 30, 2022 and 2021, the ESOP compensation cost was $28,803 and $44,172, respectively. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
21
Advertising – Advertising costs, including internet advertising, were $101,788$534,734, and $138,017$454,818 for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and were $251,892 and $333,076 for the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively.2021 was $1,157,417 and $775,584, respectively. Advertising costs are expensed as incurred.
Involuntary Conversion of Assets – We record gains or losses on involuntary conversions of assets due to recovered insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds received. During the three and nine month periods ending September 30, 2017, we recognized approximately $0 and $1.0 millionThe gain on involuntary conversion of assets, respectively, which is reflected in the consolidated statements of operations.
Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.
17
Segment Information – We have determined that our business is conducted in one1 reportable segment: hotel ownership.
Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)U.S. GAAP requires management to make estimates and assumptions that 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications – Certain reclassifications in the amount of approximately $0.1 million and approximately $0.6 million for the three and nine month periods ending September 30, 2016, respectively, from rooms expense to indirect expense balances have been made to conform to the current period presentation.
RecentNew Accounting Pronouncements – In February 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The FASB issued this update to clarify the scope of Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments in this update also simplify GAAP by eliminating several accounting differences between transactions involving assets and transactions involving businesses in many transactions related to: a partial sale of real estate; a transfer of a nonfinancial asset within the scope of FASB ASC Topic 845, Nonmonetary Transactions; a contribution of a nonfinancial asset to form a joint venture; and a transfer of a nonfinancial asset to an equity method investee. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We will adopt this ASU as of January 1, 2018. We do not expect this ASU to have a material impact on the Company’s current consolidated financial position, results of operations or cash flows, however this ASU may have a significant impact on future transactions.
In January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the Definition of a Business (Topic 805). This ASU clarifies the definition of a business and adds further guidance in evaluating whether a transaction should be accounted for as an acquisition of an asset or a business. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU addresses the diversity within entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application of this ASU is permitted for all entities. We will adopt this ASU as of January 1, 2018. We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in this update. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application of this ASU is permitted for all entities. We will adopt this ASU as of January 1, 2018. We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In May 2016,March 2020, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers2020-04, Reference Rate Reform – Narrow-Scope ImprovementsFacilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and Practical Expedients (Topic 606). The amendments in this ASU provide clarificationexceptions to certain core recognition principles related to ASU No. 2014-09 including collectability, sales tax presentation, noncash consideration,the existing guidance on contract modifications and completed contracts at transition and disclosures no longer required ifhedge accounting to ease the full retrospective transition method is adopted. The amendments do not change the core principlefinancial reporting burdens of the guidance. We are continuingexpected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to evaluate all of our revenue related to contracts with customers to determine how to transition these requirements into our consolidated financial statements. We will adopt this ASUalternative reference rates, such as of January 1, 2018.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing (Topic 606). This update clarifies guidance related to identifying performance obligations and licensing implementation contained in ASU No. 2014-09. The amendments do not change the core principle of the guidance. We have analyzed all of our revenue related to contracts with customers and have determined how to transition these requirements into our consolidated
18
financial statements. We will adopt this ASU as of January 1, 2018. We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)Secured Overnight Financing Rate (“SOFR”). The FASB issued this ASU to increase transparencyupdate provides guidance in accounting for changes in contracts, hedging relationships, and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classifiedother transactions as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early applicationa result of this ASU is permitted for all entities.reference rate reform. The Company is creating an inventory of its leasesoption expedients and is analyzing its current ground lease, office lease, other right-of-use assetsexceptions contained within this update, in general, only apply to contract amendments and lease liabilities, and parking garage lease obligations that exist. The standard requires a modified retrospective approach for leases that exist or aremodifications entered into after the beginning of the earliest comparative period in the financial statements. We will adopt this ASU as of January 1, 2019.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in the U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition methods. In July 2015, the FASB voted to defer the effective dateprior to January 1, 20182023. The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with early adoption beginning January 1, 2017.lenders and the hedging contracts associated with each respective modified borrowing contract. In general, the provision of the update would benefit us by allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and not be considered debt extinguishment. As of June 30, 2022, we have not entered into any contract modification as it directly relates to reference rate reform, with the exception of a modification to the mortgages on the Whitehall in Houston, Texas, which changed the reference rate from LIBOR to the New York Prime Rate, and on Hotel Alba Tampa, Tapestry Collection in Tampa, Florida, which changed the reference rate from LIBOR to the Secured Overnight Financing Rate ("SOFR). The Company is finalizing its evaluation of each of its revenue streams underanticipates having to undertake more modifications in the new model and because of the short-term, day-to-day nature of the Company’s hotel revenues, the pattern of revenue recognition is not expected to change significantly. Additionally,future. While the Company has historically disposedanticipates the impact of this update may be to its benefit, the Company is still evaluating the overall impact.
3. Disposal of Assets
Sheraton Louisville Riverside and DoubleTree by Hilton Raleigh-Brownstone University. On February 10, 2022 and June 10, 2022, we closed on the sale of our hotel properties for cash sales with no contingenciesthe Sheraton Louisville Riverside and no future involvement in the hotel operations, and therefore, ASU 2014-09 will not impact the recognition of hotel sales. The Company expects to use the cumulative effect transition method for adoption. The Company has substantially completed its analysis and does not expect adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.
3. Acquisition of Hotel Property
Hyde Resort & Residences. On January 30, 2017, we acquired the hotel commercial condominium unit of the Hyde Resort & Residences condominium hotel, for an aggregate price including inventory and other assets of approximately $4.8 million. The allocation of the estimated purchase price based on fair values is as follows:
|
| Hyde Resort & Residences |
| |
Land and land improvements |
| $ | 500 |
|
Buildings and improvements |
|
| 4,309,500 |
|
Furniture, fixtures and equipment |
|
| 72,616 |
|
Investment in hotel properties |
|
| 4,382,616 |
|
Accrued liabilities and other costs |
|
| (866,142 | ) |
Prepaid expenses, inventory and other assets |
|
| 470,375 |
|
Net cash |
| $ | 3,986,849 |
|
DoubleTree by Hilton Raleigh-Brownstone University, respectively. The results of operations of the hotelfor these two properties are included in our consolidated financial statements fromthrough the date of acquisition.disposal. The total revenuefollowing proforma financial information presents the results of operations of the Company and net loss related to the acquisitionOperating Partnership for the periodthree and six month periods ending June 30, 2022 and 2021, respectively, as if disposed of properties, the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh-Brownstone University had taken place on January 30, 20171, 2021. The following proforma results have been prepared for comparative purposes only and do not purport to September 30, 2017 are approximately $2.8 million and $0.6 million, respectively. There is no pro forma financial information, since this is a new operation without prior historical information.be indicative of the results of operations, had the transactions taken place on January 1, 2021:
22
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Pro forma revenues |
|
| $ | 46,169,549 |
|
| $ | 32,234,939 |
|
| $ | 82,343,152 |
|
| $ | 53,499,169 |
|
Pro forma operating expenses |
|
| $ | 37,701,468 |
|
| $ | 28,326,059 |
|
| $ | 69,820,755 |
|
| $ | 50,599,106 |
|
Pro forma operating income |
|
| $ | 8,468,081 |
|
| $ | 3,908,880 |
|
| $ | 12,522,397 |
|
| $ | 2,900,063 |
|
Pro forma net income (loss) |
|
| $ | 27,875,190 |
|
| $ | (783,639 | ) |
| $ | 27,195,282 |
|
| $ | (7,285,804 | ) |
Pro forma income (loss) per basic share |
|
| $ | 1.57 |
|
| $ | (0.05 | ) |
| $ | 1.56 |
|
| $ | (0.50 | ) |
Pro forma income (loss) per diluted share |
|
| $ | 1.52 |
|
| $ | (0.05 | ) |
| $ | 1.51 |
|
| $ | (0.50 | ) |
Pro forma income (loss) per basic unit |
|
| $ | 1.44 |
|
| $ | (0.05 | ) |
| $ | 1.43 |
|
| $ | (0.46 | ) |
Pro forma income (loss) per diluted unit |
|
| $ | 1.44 |
|
| $ | (0.05 | ) |
| $ | 1.42 |
|
| $ | (0.46 | ) |
Basic common shares |
|
|
| 17,762,513 |
|
|
| 14,635,701 |
|
|
| 17,436,975 |
|
|
| 14,530,316 |
|
Diluted common shares |
|
|
| 18,304,508 |
|
|
| 14,635,701 |
|
|
| 18,031,381 |
|
|
| 14,530,316 |
|
Basic units |
|
|
| 19,291,083 |
|
|
| 16,056,770 |
|
|
| 18,981,782 |
|
|
| 15,955,303 |
|
Diluted units |
|
|
| 19,414,602 |
|
|
| 16,056,770 |
|
|
| 19,153,758 |
|
|
| 15,955,303 |
|
4.4. Investment in Hotel Properties, Net and Investment in Hotel Properties Held for Sale, Net
Investment in hotel properties, net as of SeptemberJune 30, 20172022 and December 31, 20162021 consisted of the following:
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Land and land improvements |
| $ | 60,538,005 |
|
| $ | 60,395,168 |
|
Buildings and improvements |
|
| 409,405,049 |
|
|
| 407,310,530 |
|
Right of use assets |
|
| 5,430,527 |
|
|
| 5,711,607 |
|
Furniture, fixtures and equipment |
|
| 50,890,066 |
|
|
| 50,505,902 |
|
|
|
| 526,263,647 |
|
|
| 523,923,207 |
|
Less: accumulated depreciation and impairment |
|
| (156,781,765 | ) |
|
| (148,037,983 | ) |
Investment in Hotel Properties, Net |
| $ | 369,481,882 |
|
| $ | 375,885,224 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Land and land improvements |
| $ | 59,009,041 |
|
| $ | 57,851,380 |
|
Buildings and improvements |
|
| 346,142,725 |
|
|
| 336,996,876 |
|
Furniture, fixtures and equipment |
|
| 49,056,456 |
|
|
| 43,458,781 |
|
|
|
| 454,208,222 |
|
|
| 438,307,037 |
|
Less: accumulated depreciation and impairment |
|
| (96,563,135 | ) |
|
| (89,713,125 | ) |
Investment in Hotel Properties, Net |
| $ | 357,645,087 |
|
| $ | 348,593,912 |
|
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Land and land improvements | $ |
| — |
|
| $ | 5,799,197 |
|
Buildings and improvements |
|
| — |
|
|
| 36,115,121 |
|
Furniture, fixtures and equipment |
|
| — |
|
|
| 5,743,949 |
|
|
|
| — |
|
|
| 47,658,267 |
|
Less: accumulated depreciation and impairment |
|
| — |
|
|
| (24,787,780 | ) |
Investment in Hotel Properties Held for Sale, Net | $ |
| — |
|
| $ | 22,870,487 |
|
1923
Investment in hotel properties held for sale, net as
5. Debt
Mortgage Loans, Net. As of SeptemberJune 30, 20172022 and December 31, 2016 consisted of the following:
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Land and land improvements |
| $ | — |
|
| $ | 1,097,096 |
|
Buildings and improvements |
|
| — |
|
|
| 6,242,504 |
|
Furniture, fixtures and equipment |
|
| — |
|
|
| 2,289,008 |
|
|
|
| — |
|
|
| 9,628,608 |
|
Less: accumulated depreciation and impairment |
|
| — |
|
|
| (4,295,608 | ) |
Investment in Hotel Properties Held for Sale, Net |
| $ | — |
|
| $ | 5,333,000 |
|
Investment in hotel properties held for sale, net represents the Crowne Plaza Hampton Marina property, which was sold on February 7, 2017 for approximately $5.6 million. After selling costs, mortgage loan payoff and associated fees we realized an approximate gain on the sale of assets of $0.1 million, as reflected in the consolidated statements of operations.
5. Debt
Mortgage Loans, Net. As of September 30, 2017 and December 31, 2016,2021, we had approximately $298.4$325.7 million and approximately $282.7$351.2 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
|
| Balance Outstanding as of |
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| September 30, |
|
| December 31, |
|
| Prepayment |
| Maturity |
| Amortization |
| Interest |
|
| |||
Property |
| 2017 |
|
| 2016 |
|
| Penalties |
| Date |
| Provisions |
| Rate |
|
| |||
Crowne Plaza Hampton Marina (1) |
| $ | - |
|
| $ | 2,584,633 |
|
| None |
| 11/1/2019 |
| 3 years |
|
| 5.00% |
|
|
Crowne Plaza Tampa Westshore (2) |
|
| 15,353,500 |
|
|
| 15,561,400 |
|
| None |
| 6/30/2019 |
| 25 years |
| LIBOR plus 3.75 % |
|
| |
The DeSoto (3) |
|
| 34,845,934 |
|
|
| 30,000,000 |
|
| Yes |
| 7/1/2026 |
| 25 years |
|
| 4.25% |
|
|
DoubleTree by Hilton Jacksonville Riverfront (4) |
|
| 35,422,241 |
|
|
| 19,291,716 |
|
| Yes |
| 7/11/2024 |
| 30 years |
|
| 4.88% |
|
|
DoubleTree by Hilton Laurel (5) |
|
| 9,182,987 |
|
|
| 9,329,005 |
|
| Yes |
| 8/5/2021 |
| 25 years |
|
| 5.25% |
|
|
DoubleTree by Hilton Philadelphia Airport (6) |
|
| 30,646,946 |
|
|
| 31,261,991 |
|
| None |
| 4/1/2019 |
| 25 years |
| LIBOR plus 3.00 % |
|
| |
DoubleTree by Hilton Raleigh Brownstone University (7) |
|
| 14,571,181 |
|
|
| 14,773,885 |
|
| n/a |
| 8/1/2018 |
| 30 years |
|
| 4.78% |
|
|
DoubleTree Resort by Hilton Hollywood Beach (8) |
|
| 58,249,890 |
|
|
| 58,935,818 |
|
| n/a |
| 10/1/2025 |
| 30 years |
|
| 4.913% |
|
|
Georgian Terrace (9) |
|
| 45,230,148 |
|
|
| 45,826,038 |
|
| n/a |
| 6/1/2025 |
| 30 years |
|
| 4.42% |
|
|
Hilton Wilmington Riverside (10) |
|
| 30,000,000 |
|
|
| 30,000,000 |
|
| Yes |
| 1/1/2027 |
| 25 years |
|
| 4.25% |
|
|
Sheraton Louisville Riverside (11) |
|
| 11,771,942 |
|
|
| 11,977,557 |
|
| Yes |
| 12/1/2026 |
| 25 years |
|
| 4.27% |
|
|
The Whitehall (12) |
|
| 15,000,000 |
|
|
| 15,000,000 |
|
| Yes |
| 10/12/2021 |
| 18 years |
| LIBOR plus 3.50 % |
|
| |
Total Mortgage Principal Balance |
| $ | 300,274,769 |
|
| $ | 284,542,043 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net |
|
| (2,041,958 | ) |
|
| (2,049,409 | ) |
|
|
|
|
|
|
|
|
|
|
|
Unamortized premium on loan |
|
| 197,144 |
|
|
| 215,655 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans, Net |
| $ | 298,429,955 |
|
| $ | 282,708,289 |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Outstanding as of |
|
|
|
|
|
|
|
|
|
| |||||
| June 30, |
|
| December 31, |
|
| Prepayment |
| Maturity |
| Amortization |
| Interest |
| ||
Property | 2022 |
|
| 2021 |
|
| Penalties |
| Date |
| Provisions |
| Rate |
| ||
The DeSoto (1) | $ | 31,688,851 |
|
| $ | 32,148,819 |
|
| Yes |
| 7/1/2026 |
| 25 years |
| 4.25% |
|
DoubleTree by Hilton Jacksonville |
| 32,735,638 |
|
|
| 33,051,316 |
|
| Yes |
| 7/11/2024 |
| 30 years |
| 4.88% |
|
DoubleTree by Hilton Laurel (3) |
| 7,598,227 |
|
|
| 8,175,215 |
|
| None |
| 5/5/2023 |
| 25 years |
| 5.25% |
|
DoubleTree by Hilton Philadelphia Airport (4) |
| 40,061,330 |
|
|
| 40,734,077 |
|
| None |
| 10/31/2023 |
| 30 years |
| LIBOR plus 2.27% |
|
DoubleTree by Hilton Raleigh- |
| - |
|
|
| 18,300,000 |
|
| Yes |
| 8/1/2022 |
| (5) |
| LIBOR plus 4.00% |
|
DoubleTree Resort by Hilton Hollywood |
| 53,602,163 |
|
|
| 54,253,963 |
|
| (6) |
| 10/1/2025 |
| 30 years |
| 4.913% |
|
Georgian Terrace (7) |
| 41,071,258 |
|
|
| 41,484,732 |
|
| (7) |
| 6/1/2025 |
| 30 years |
| 4.42% |
|
Hotel Alba Tampa, Tapestry Collection by Hilton (8) |
| 25,000,000 |
|
|
| 17,383,397 |
|
| None |
| 6/30/2025 |
| (8) |
| SOFR plus 2.75% |
|
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9) |
| 32,157,162 |
|
|
| 32,604,948 |
|
| Yes |
| 1/1/2027 |
| 25 years |
| 4.25% |
|
Hyatt Centric Arlington (10) |
| 48,496,016 |
|
|
| 48,990,136 |
|
| Yes |
| 10/1/2028 |
| 30 years |
| 5.25% |
|
Sheraton Louisville Riverside (11) |
| - |
|
|
| 10,947,366 |
|
| Yes |
| 12/1/2026 |
| 25 years |
| 4.27% |
|
The Whitehall (12) |
| 14,370,880 |
|
|
| 14,551,671 |
|
| Yes |
| 2/26/2023 |
| 25 years |
| PRIME plus 1.25% |
|
Total Mortgage Principal Balance | $ | 326,781,525 |
|
| $ | 352,625,640 |
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net |
| (1,211,110 | ) |
|
| (1,547,004 | ) |
|
|
|
|
|
|
|
|
|
Unamortized premium on loan |
| 79,907 |
|
|
| 92,247 |
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans, Net | $ | 325,650,322 |
|
| $ | 351,170,883 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
(2) | The note |
(3) | The note is subject to an exit fee of |
(4) | The note bears a floating interest rate of |
(5) | The hotel was sold on June 10, 2022 and the mortgage was repaid in full in connection with that sale. |
(6) | With limited exception, the note may not be prepaid prior to June 2025. |
(7) | With limited exception, the note may not be prepaid prior to February 2025. |
(8) | The note bears a floating interest rate of SOFR plus 2.75% subject to a floor rate of |
| The note |
| Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term. |
(11) | The hotel was sold on February 10, 2022. |
(12) | The note |
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
As of June 30, 2022, the Company failed to meet certain financial covenants under the mortgage secured by The Whitehall. The Company has received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022.
We were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, as of September 30, 2017.
Total future mortgage debt maturities for the remaining six and twelve-month periods, without respect to any extension of loan maturity as of Septemberor loan modification after June 30, 20172022, were as follows:
For the remaining three months ending: December 31, 2017 |
| $ | 1,682,647 |
|
December 31, 2018 |
|
| 23,696,155 |
|
December 31, 2019 |
|
| 52,902,464 |
|
December 31, 2020 |
|
| 9,012,007 |
|
December 31, 2021 |
|
| 30,769,803 |
|
December 31, 2022 and thereafter |
|
| 182,211,693 |
|
Total future maturities |
| $ | 300,274,769 |
|
Remaining six months ending December 31, 2022 |
| 3,464,599 |
|
December 31, 2023 |
| 67,635,041 |
|
December 31, 2024 |
| 37,355,389 |
|
December 31, 2025 |
| 115,740,671 |
|
December 31, 2026 |
| 57,877,486 |
|
December 31, 2027 and thereafter |
| 44,708,339 |
|
Total future maturities | $ | 326,781,525 |
|
7.0% Unsecured Notes.PPP Loans. The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of two years, which may be extended to five years
24
and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.
On November 21, 2014,April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.
On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
As of June 30, 2022, applications for loan forgiveness totaling approximately $5.2 million have been filed, but 0 forgiveness has been received. At June 30, 2022, the PPP loans had a cumulative balance of approximately $7.6 million.
Secured Notes Financing. On December 31, 2020, we entered into the following agreements with KWHP SOHO, LLC, a Delaware limited liability company (“KW”), as collateral agent and an investor, and MIG SOHO, LLC, a Delaware limited liability company (“MIG” and together with KW, the "Investors"), as an investor: (i) a Note Purchase Agreement with the Investors; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement with KW; (iv) a Board Observer Agreement with KW; and (v) other ancillary agreements. These agreements constitute a transaction whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership issued 7.0% senior unsecured notesPartnership.
On June 10, 2022, the Company used the proceeds from the sale of the Doubletree by Hilton Raleigh Brownstone-University hotel to partially repay the Secured Notes. The Investors received approximately $19.8 million of the proceeds from the sale of the hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest reserves in the aggregate amount of $25.3approximately $1.6 million, (the “7% Notes”).of which approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.
On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2 million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy and pay in full the Secured Notes. The indenture requires quarterly paymentsInvestors received approximately $8.3 million in satisfaction of interestthe Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the Secured Notes, and matures on November 15, 2019. The 7%approximately $0.1 million was applied toward accrued interest. Concurrent with the cancellation of the Secured Notes, are callable after November 15, 2017 at 101% of face value.the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.
6. Commitments and Contingencies
Ground, Building, Parking and Submerged Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the thirdfourth of threefive optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively.2026. Rent expense for this operating lease for each of the three months ended SeptemberJune 30, 20172022 and 20162021, each totaled $18,245$20,983, respectively, and for each of the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021 each totaled $54,738.$41,966, respectively.
We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086.2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. NoNaN rental income is recognized under the terms of this lease as the original lump sum rent payment of $990$990 was received by the previous owner and not prorated over the life of the lease.
We lease a parking lot adjacent to the DoubleTree by Hilton Raleigh Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expired August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an exclusive and irrevocable option to purchase the leased land at fair market value at August 1, 2018, or at the end of any 10-year renewal period, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months ended September 30, 2017 and 2016, totaled $41,184 and $23,871, respectively, and for the nine months ended September 30, 2017 and 2016, totaled $88,925 and $71,612, respectively.
We lease land adjacent to the Crowne Plaza Tampa WestshoreHotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009. 2009. In May 2014, we extended the agreement for an additional five years. We signed a
25
new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years. The new agreement expires in July 2019. The agreement2024, requires annual payments of $2,432,$2,432, plus tax, and may be renewed for an
21
additional five years.years. Rent expense for the three and nine months ended SeptemberJune 30, 20172022 and 2016, each2021, totaled $651$653 and $1,952, respectively.$641, respectively, and for the six months ended June 30, 2022 and 2021, totaled $1,306 and $1,283.
We lease 5,216approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement was $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as amended, that commenced September 1, 2009 and expires August 31, 2018.the tenant improvement allowance is exhausted. Rent expense for the three months ended SeptemberJune 30, 20172022 and 20162021, each totaled and $22,224 and $22,552,$55,902, respectively, and for the ninesix months ended SeptemberJune 30, 20172022 and 20162021, each totaled $67,327$111,804, respectively.
We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to make rental payments of $50,000 per year in base rent and $68,451,percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement. The initial term of the ground lease expires in 2025 and may be extended for 5 additional renewal periods of 10 years each. Rent expense for the three months ended June 30, 2022 and 2021, was $163,695 and $46,966, respectively,. and for the six months ended June 30, 2022 and 2021, totaled $235,709 and $89,472, respectively.
We lease the parking garage adjacent toand poolside cabanas associated with the Hyde Resort & Residences in Hollywood Beach Florida.House. The parking garage is leased under a 20-year operatingand cabana lease requiring monthlyrequires us to make rental payments of $20,000, which$270,100 per year with increases of 5% every five years and has an initial term that expires in February, 2037.2034 and which may be extended for 4 additional renewal periods of 5 years each. Rent expense for the three and nine months ended SeptemberJune 30, 20172022 and 2021, each totaled $60,000$67,750, respectively, and $140,000,for the six months ended June 30, 2022 and 2021, each totaled $135,500, respectively.
We also lease certain storage facilities, furniture and equipment under financing arrangementsagreements expiring between August 2017October 2021 and March 2019.June 2026.
A schedule of minimum future lease payments for the following threesix and twelve-month periods is as follows:
For the remaining three months ending: December 31, 2017 |
| $ | 156,035 |
|
December 31, 2018 |
|
| 573,451 |
|
December 31, 2019 |
|
| 391,266 |
|
December 31, 2020 |
|
| 351,464 |
|
December 31, 2021 |
|
| 351,464 |
|
December 31, 2022 and thereafter |
|
| 4,271,629 |
|
Total |
| $ | 6,095,309 |
|
For the six month ending December 31, 2022 |
|
| 351,100 |
|
December 31, 2023 |
|
| 671,883 |
|
December 31, 2024 |
|
| 663,585 |
|
December 31, 2025 |
|
| 663,877 |
|
December 31, 2026 |
|
| 656,534 |
|
December 31, 2027 and thereafter |
|
| 14,100,246 |
|
Total |
| $ | 17,107,225 |
|
Employment Agreements - The Company has entered into various employment contracts with employees that could result in obligations to the Company in the event of a change in control or termination without cause.
Management Agreements – As of SeptemberJune 30, 2017, each of2022, our10 wholly-owned hotels, and theour two condo-hotel rental program and condominium association of the Hyde Resort & Residencesprograms, operated under a management agreementagreements with Chesapeake HospitalityOur Town (see Note 9). The management agreements expire between January 1, 2020 and January 30, 2022,on March 31, 2025 and may be extended for up to two additional periods of five years each, subject to the approval of both parties. Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees.
Franchise Agreements – As of SeptemberJune 30, 2017,2022, most of our hotels operatedoperate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 2.5%3.0% and 5.0%5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5%3.0% and 6.0%4.0% of roomgross revenues from the hotels. The franchise agreements currently in force expire between July 2017November 2021 and October 2030.March 2038. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term. On April 12, 2016 we allowed the franchise agreement on the Crowne Plaza Houston Downtown to expire. The property has been rebranded as The Whitehall. On July 31, 2017, we allowed the franchise agreement on the Hilton Savannah DeSoto to expire. The property has been rebranded as The DeSoto and operates as an independent hotel.
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hilton Wilmington Riverside,Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties.properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0%4.0% of gross revenues for the Hilton Wilmington Riverside,Hotel Ballast, The
26
DeSoto, the DoubleTree by Hilton Raleigh Brownstone–University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0%4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport.Airport and the Hyatt Centric Arlington.
ESOP Loan and Purchase Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0$5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed $5.0$5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036.
22
Shares purchased by At June 30, 2022, the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation. As of September 30, 2017, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market for approximately $4.9 million, which the ESOP borrowed from the Company pursuant tobalance on the loan agreement. A totalwas approximately $3.1 million leaving capacity for additional borrowing of 8,424 and 25,408 shares with a fair value of $60,075 and $178,137 were allocated or committed to be released fromapproximately $1.9 million under the suspense account and recognized as compensation cost during the three and nine months ended September 30, 2017, respectively. The remaining 657,092 unallocated shares have an approximate fair value of $3.9 million, as of September 30, 2017. At September 30, 2017, the ESOP held a total of 9,473 allocated shares, 15,935 committed-to-be-released shares and 657,092 suspense shares. Dividends on allocated shares are paid to the participants of the ESOP, while dividends on unallocated shares are used to pay down the ESOP loan from the Operating Partnership.commitment.
Litigation –To our knowledge, no material litigation has been threatened against us. We –We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.
7. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. As of September 30, 2017, and December 31, 2016, there were 1,610,000 shares,The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:
|
| Per |
|
|
|
|
| Number of Shares |
|
| Quarterly |
| ||||||||
|
| Annum |
|
| Liquidation |
|
| Issued and Outstanding as of |
|
| Distributions |
| ||||||||
Preferred Stock - Series |
| Rate |
|
| Preference |
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| Per Share |
| |||||
Series B Preferred Stock |
|
| 8.000 | % |
| $ | 25.00 |
|
|
| 1,488,100 |
|
|
| 1,510,000 |
|
| $ | 0.500000 |
|
Series C Preferred Stock |
|
| 7.875 | % |
| $ | 25.00 |
|
|
| 1,356,410 |
|
|
| 1,384,610 |
|
| $ | 0.492188 |
|
Series D Preferred Stock |
|
| 8.250 | % |
| $ | 25.00 |
|
|
| 1,165,000 |
|
|
| 1,165,000 |
|
| $ | 0.515625 |
|
The Company is obligated to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the Preferred Stock issued and outstanding.
On August 23, 2016, the Company issued 1,610,000 shares, $0.01 par value$25.00 liquidation preference per share, of its 8% Series B Preferred Stock for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred partnership units.share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. The Company pays cumulative cash distributions on the preferred stock at a rate of 8.00% per annum of the $25.00 liquidation preference per share. The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates.
As previously announced, the record dates for the dividends on the Company’s Series B Preferred Units -The Company isStock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020, have each been declared and the holderrecord date and the payment of dividends on all classes of the Company’s preferred partnership units issued bystock has been deferred.
On March 17, 2020, the Operating Partnership.Company announced that it was deferring payment of Sotherly’s previously announced declared distributions for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020. No distributions have been declared for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending June 30, 2022.
The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through June 30, 2022, are $7,440,500, $6,676,087 and $6,007,031, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of SeptemberJune 30, 2017,2022, the undeclared cumulative preferred dividends were approximately $18.1 million and December 31, 2016, there were 1,610,000the declared unpaid preferred partnership units issued and outstanding, respectively.dividends are approximately $2.0 million.
Preferred Units - The Company is the holder of the Operating Partnership’s preferred partnership units and is entitled to receive distributions when authorized by the general partner of the Operating Partnership out of assets legally available for the payment of distributions. The Operating Partnershipfollowing table sets forth our Cumulative Redeemable Perpetual Preferred Units by series:
|
| Per |
|
|
|
|
| Number of Units |
|
| Quarterly |
| ||||||||
|
| Annum |
|
| Liquidation |
|
| Issued and Outstanding as of |
|
| Distributions |
| ||||||||
Preferred Units - Series |
| Rate |
|
| Preference |
|
| June 30, 2022 |
|
| December 31, 2021 |
|
| Per Unit |
| |||||
Series B Preferred Units |
|
| 8.000 | % |
| $ | 25.00 |
|
|
| 1,488,100 |
|
|
| 1,510,000 |
|
| $ | 0.500000 |
|
Series C Preferred Units |
|
| 7.875 | % |
| $ | 25.00 |
|
|
| 1,356,410 |
|
|
| 1,384,610 |
|
| $ | 0.492188 |
|
Series D Preferred Units |
|
| 8.250 | % |
| $ | 25.00 |
|
|
| 1,165,000 |
|
|
| 1,165,000 |
|
| $ | 0.515625 |
|
27
The Company pays cumulative cash dividendsdistributions on the preferred partnership units at a rate of 8.00%rates in the above table per annum of the $25.00$25.00 liquidation preference per unit. For eachThe Company, which is the holder of the quarters ended March 31, 2017, June 30, 2017Operating Partnership’s preferred units, is entitled to receive distributions when authorized by the Operating Partnership’s general partner out of assets legally available for the payment of distributions. The preferred units are not redeemable by the holder, have no maturity date and September 30, 2017,are not convertible into any other security of the Operating Partnership hasor its affiliates. As previously announced, the record dates for the dividends on the Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15, 2020, to unitholders of record as of March 31, 2020, have each been declared and the record date and the payment of dividends on all classes of the Operating Partnership’s preferred units has paid $0.50 perbeen deferred.
The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through June 30, 2022, is $7,440,500, $6,676,087 and $6,007,031, respectively. Undeclared preferred unit, respectively,cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of June 30, 2022, the undeclared cumulative preferred dividends were approximately $18.1 million and $0.211 perthe declared unpaid preferred unit for the quarter ended September 30, 2016 and $0.50 per preferred unit for the quarter ended December 31, 2016.dividends were approximately $2.0 million.
8.8. Common Stock and Units
Common Stock – TheAs of June 30, 2022, the Company iswas authorized to issue up to 49,000,00069,000,000 shares of common stock, $0.01$0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. On December 2, 2016, the Company’s board of directors authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock, par value $0.01 per share, at prevailing prices on the open market or in privately negotiated transactions, at the discretion of management. The Company has and expects to continue to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017, unless extended by the board of directors. Through December 31, 2016 the Company repurchased 481,100 shares of common stock for approximately $3.2 million and the repurchased shares have been returned to the status of authorized but unissued shares of common stock. The Company did not repurchase any shares under the stock repurchase program during the three months ended September 30, 2017. Between January 3, 2017 and February 28, 2017, the ESOP purchased 682,500 shares of the Company’s common stock for approximately $4.9 million. Of the 682,500 ESOP shares purchased, 657,092 of these shares are considered unearned ESOP shares at September 30, 2017 and are excluded from the Company’s outstanding common stock on the consolidated balance sheets and the earnings per share calculations on the consolidated statements of operations.
The following is a schedule of issuances, since January 1, 2016,2021, of the Company’s common stock and related units of the Operating Partnership:
On February 15, 2017,4, 2021, one holder of units in the Operating Partnership redeemed 100 units for an equivalent number of shares in the Company’s common stock.
On February 4, 2021, the Company was issued 12,000136,281 units in the Operating Partnership and awarded 12,000shares of unrestricted stock to its employees.
On February 4, 2021, the Company was issued 15,000 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
23
On February 2, 2016,June 21, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company was issued 36,250 units in the Operating Partnership and awarded an aggregate of 22,000agreed to exchange 100,000 shares of unrestricted stock to certain executives and employees as well as 12,000the Company’s Series B Preferred Stock, 85,000 shares of restricted stockthe Company’s Series C Preferred Stock, and 2,25035,000 shares of unrestrictedthe Company’s Series D Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 1,542,727 shares of the Company’s common stock. We closed the transaction and issued the common stock on June 22, 2021.
On December 3, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to certainthe share exchange agreement, the Company agreed to exchange 10,000 shares of its independent directors.the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 69,500 shares of the Company’s common stock. We closed the transaction and issued the common stock on December 9, 2021.
On February 1, 2016, two holdersDecember 9, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 75,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 620,919 shares of the Company’s common stock. We closed the transaction and issued the common stock on December 9, 2021.
On December 16, 2021, one holder of units in the Operating Partnership redeemed 422,68732,681 units for an equivalent number of shares in the Company’s common stock.
On March 24, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 7,000 shares of the Company’s Series B Preferred Stock and 3,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 96,900 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 25, 2022.
On March 31, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 5,900 shares of the Company’s Series B Preferred Stock and 6,600 shares of the
28
Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 120,875 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 31, 2022.
On May 23, 2022, one holder of units in the Operating Partnership converted 50,000 units for an equivalent number of shares in the Company’s common stock.
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had 13,823,45918,206,673 and 14,468,55117,441,058 shares of common stock outstanding, respectively.
Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one1-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.
ThereSince January 1, 2021, there have been no0 issuances or redemptions, since January 1, 2016, of units in the Operating Partnership other than the redemptions and issuances of units in the Operating Partnership to the Company described above.
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the total number of Operating Partnership units outstanding was 16,258,69119,290,393 and 16,246,691,18,574,778, respectively.
As of SeptemberJune 30, 20172022 and December 31, 2016,2021, the total number of outstanding Operating Partnership units not owned by the Company was 1,778,1401,083,720 and 1,778,140,1,133,720, respectively, with a fair market value of approximately $10.5$2.0 million and $12.1$2.4 million, respectively, based on the price per share of the common stock on such respective dates.
As of June 30, 2022, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of $2,088,160.
9.9. Related Party Transactions
ChesapeakeOur Town Hospitality. Our Town is currently the management company for each of our ten wholly owned hotels, as well as the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. Prior to February 25, 2022, our Town was a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”). As of SeptemberJune 30, 2017, the members of Chesapeake Hospitality (a company that is majority-owned2022, Andrew M. Sims, our Chairman, and controlled by the Company’s chairmanDavid R. Folsom, our President and chief executive officer,Chief Executive Officer, beneficially owned approximately 94.3% and two former members5.7%, respectively, of the Company’s board of directors) owned 1,686,442 shares, approximately 12.2%, of the Company’stotal outstanding common stock as well as 652,326 Operating Partnership units.ownership interests in Our Town. The following is a summary of the transactions between Chesapeake Hospitality and us:with Our Town:
Accounts Receivable – At SeptemberJune 30, 20172022 and December 31, 2016,2021, we were due $94,425approximately $0.2 million and $0,$0.5 million, respectively, from Chesapeake Hospitality.Our Town.
Management Agreements – AsOn September 6, 2019, the Company entered into a master agreement with Newport and Our Town related to the management of September 30, 2017, each10 of our wholly-owned hotels and the Hyde Resort & Residences operated under various management agreements with Chesapeake Hospitality. The management agreements each provide forhotels. On December 13, 2019, we entered into an initial term of 5 years and expire between January 1, 2020 and January 30, 2022, and may be extended for up to two additional periods of five years each subjectamendment to the approvalmaster agreement (as amended, the “OTH Master Agreement”), as well as a series of both parties. Each of the individual hotel management agreements may be terminated earlier thanfor the stated term uponmanagement of those 10 of our hotels. On April 1, 2020, Our Town became the salemanager of the hotel covered by the respective management agreement, in which case we may incur early termination fees. We also have a master agreement with Chesapeake Hospitality that has a five-year term, but may be extended for such additional periods as long as an individual management agreement remains in effect.
The base management fees for The Whitehall and the Georgian Terrace were 2.00% through 2015, increased to 2.25% in 2016, and increased to 2.50% in 2017 and for each year thereafter. The base management fee for theour DoubleTree Resort by Hilton Hollywood Beach was 2.00% from July 2015 through July 2016, increased to 2.25% in July 2016, and increases to 2.50% in July 2017 and each year thereafter. The base management feehotel, as well as the manager for our rental programs at the Hyde Resort & Residences is 2.00% from January 2017 through January 2018, increases to 2.25% in January 2018, and increases to 2.50% in January 2019 andthe Hyde Beach House Resort & Residences. On November 15, 2020, Our Town became the manager of our Hyatt Centric Arlington hotel. The hotel management agreements for each of our ten wholly-owned hotels and the 2 rental programs are referred to as, individually an “OTH Hotel Management Agreement” and, together the “OTH Hotel Management Agreements”. The term of the OTH Hotel Management Agreements extends through March 31, 2035, and may be extended for two periods of five years each.
The OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year thereafter.beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2035 but shall be extended beyond 2035 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for the remaining properties in the current portfolio are 2.65% through 2017 and decreases to 2.50% thereafter.each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Chesapeake HospitalityOur Town will receive a base management fee of 2.00%2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25%2.25% of gross revenues the second full year, and 2.50%2.50% of gross revenues for every year thereafter. The Company
29
Base management and Chesapeake Hospitality agreed to substitute the Hyde Resort & Residencesadministrative fees earned by Our Town for our properties were approximately $1.0 million and $0.9 million, for the Crowne Plaza Hampton Marinathree months ended June 30, 2022 and there was no termination fee associated with2021, respectively, and for the termination of the Crowne Plaza Hampton Marina management agreement. six months ended June 30, 2022 and 2022, were approximately $2.1 million and $1.5 million, respectively.
Each management agreementOTH Hotel Management Agreement sets an incentive management fee equal to 10%10.0% of the amount by which gross operating profit, as defined in the relevant management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided,
24
however, that the incentive management fee payable in respect of any such year shall not exceed 0.25%0.25% of the gross revenues of the hotel included in such calculation.
Base Incentive management and administrative fees earned by Chesapeake Hospitality for our properties totaled $976,232 and $944,939 for the three months ended Septemberending June 30, 20172022 and 2016,2021, were $56,135 and $82,427, respectively and $3,042,840 and $2,927,333 for the ninesix months ended Septemberending June 30, 20172022, were $314,673 and 2016, respectively. In addition, estimated incentive$332,594, respectively.
Each OTH Hotel Management Agreement provides for the payment of a termination fee upon the sale of the hotel equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees of $23,634 and $13,634 were accruedpaid for the threenumber of months ended Septemberprior to the closing date of the hotel sale equal to the number of months remaining on the current term of the management agreement. Coincident with the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone – University, Our Town was due $260,272 in termination fees, which amount has been paid.
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5 year renewal subject to approval by Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third-party owner of the property. Lease payments due to the Company were $211,117 and $147,217, as of June 30, 20172022 and 2016, respectively and $51,751 and $60,636 were accrued for the nine months ended September 30, 2017 and 2016, respectively. 2021, respectively.
Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitalitycoverage for our employees as well as thoseeligible employees that are employed by Chesapeake Hospitality thatOur Town and who work exclusively for our hotel properties.properties and elect to participate in Our Town’s self-insured plan. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were $1,292,287approximately $0.9 million and $3,962,161$0.7 million for the three and nine months ended SeptemberJune 30, 2017,2022 and 2021, respectively, and for the six months ended June 30, 2021 and 2020, were approximately $1,267,721$1.8 million and $3,813,333 for the three and nine months ended September 30, 2016, respectively.
Sotherly Foundation – During 2015, the Company loaned $180,000 to the Sotherly Foundation, a non-profit organization to benefit wounded American veterans living in communities near our hotels. As of September 30, 2017, and December 31, 2016, the balance of the loan was $80,000, respectively.
Loan Receivable - Affiliate – As of September 30, 2017, approximately $4.7$1.3 million, was due the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016. The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.respectively.
Others. We employemployed Ashley S. Kirkland, the daughter of our Chief ExecutiveChairman, as Corporate Counsel and Compliance Officer as a legal analystuntil her departure in January, 2022 and continue to employ Robert E. Kirkland IV, her husband, as our compliance officer.General Counsel. We also employ Andrew M. Sims Jr., the son of our Chief Executive Officer,Chairman, as a manager. CompensationVice President – Operations & Investor Relations. Total compensation for all three individuals, including salary and benefits, for the three months ended SeptemberJune 30, 20172022 and 20162021, totaled $87,915$119,926 and $79,453,$107,115, respectively, and for the ninesix months ended SeptemberJune 30, 20172022 and 2016 totaled approximately $267,5572021, were $252,624 and $246,084, respectively$212,984, for all three individuals. respectively.
On February 1, 2016, one current member of the Company’s board of directors redeemed 322,687 units for an equivalent number of shares of the Company’s common stock, and one previous member of the board of directors redeemed 100,000 units for an equivalent number of shares of the Company’s common stock, pursuant to the terms of the partnership agreement.
During the three-month period ending September 30, 2017 and 2016, the Company reimbursed $26,233 and $31,803, respectively and during the nine-month period ending September 30, 2017 and 2016, the Company reimbursed $132,239 and $101,571, respectively, to a partnership controlled by the Chief Executive Officer for business-related air travel pursuant to the Company’s travel reimbursement policy.
10. Retirement Plans
401(K)401(k) Plan - We maintain a 401(K)401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions and which requires that we match 100.0%include a matching employer contribution consisting of 100.0% of the first 3.0%3.0% of employee contributions and 50.0%50.0% of the next 2.0%2.0% of employee contributions. AllIn addition, all employer matching funds vest immediatelyimmediately. We ceased making matching employer contributions effective May 16, 2020 and reinstated them in accordance with the “safe harbor” provision.January 2022. Contributions to the plan totaled $11,659$28,503 and $57,516$0, for the three and nine months ended SeptemberJune 30, 2017,2022 and 2021, respectively, and $10,177 and $56,122 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2022 and 2021, were $51,642 and $0, respectively.
Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan (“ESOP”) in December 2016, effective January 1, 2016. The ESOP2016, which is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0$5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan.
Between January 3, 2017 and February 28, 2017, the Company’s ESOP had purchased 682,500 shares of the Company’s common stock of an aggregatein the open market at a cost of $4.9approximately $4.9 million. Shares purchased by the ESOP are held in a suspense account for allocation among participants. participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation.
A total of 254,682 shares with a fair value of $443,147 remained allocated or committed to be released from the suspense account, as of June 30, 2022. We recognized as compensation cost $28,803 and $44,172, during the six months ended June 30, 2022 and 2021, respectively. The remaining 424,621 unallocated shares have an approximate fair value of $738,840, as of June 30, 2022. As of June 30, 2022, the ESOP held a total of 247,605 allocated shares, 7,077 committed-to-be-released shares and 424,621 suspense shares. Dividends on allocated and unallocated shares are used to pay down the ESOP loan from the Operating Partnership.
30
The share allocations are accounted for at fair value on the date of allocation as follows:
|
| ||||
|
|
|
|
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||||||||||
|
| Number of Shares |
|
| Fair Value |
|
| Number of Shares |
|
| Fair Value |
| ||||
Allocated shares |
|
| 247,605 |
|
| $ | 430,833 |
|
|
| 247,606 |
|
| $ | 517,496 |
|
Committed to be released shares |
|
| 7,077 |
|
|
| 12,314 |
|
|
| - |
|
|
| - |
|
Total Allocated and Committed-to-be-Released |
|
| 254,682 |
|
| $ | 443,147 |
|
|
| 247,606 |
|
| $ | 517,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Unallocated shares |
|
| 424,621 |
|
|
| 738,840 |
|
|
| 431,697 |
|
|
| 902,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total ESOP Shares |
|
| 679,303 |
|
| $ | 1,181,987 |
|
|
| 679,303 |
|
| $ | 1,419,743 |
|
25
Allocated shares | 9,473 | $ 64,321 |
| - | $ — |
Committed-to-be released shares | 15,935 | 113,816 |
| - | — |
Total allocated and committed-to-be-released | 25,408 | $ 178,137 |
| - | $ — |
|
|
|
|
|
|
Unallocated shares | 657,092 | 3,870,272 |
| - | — |
|
|
|
|
|
|
Total ESOP shares | 682,500 | $ 4,048,409 |
| - | $ — |
11. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| |||||||||||||||||||||
Sales and marketing |
| $ | 4,096,429 |
|
| $ | 2,898,571 |
|
| $ | 7,660,391 |
|
| $ | 5,032,375 |
| |||||||||||||||||
General and administrative |
|
| $ | 3,194,007 |
|
| $ | 2,962,097 |
|
| $ | 9,788,564 |
|
| $ | 9,092,373 |
|
|
| 3,550,096 |
|
|
| 2,842,268 |
|
|
| 6,790,675 |
|
|
| 4,936,644 |
|
Sales and marketing |
|
|
| 3,397,811 |
|
|
| 3,348,577 |
|
|
| 10,547,138 |
|
|
| 10,312,982 |
| ||||||||||||||||
Repairs and maintenance |
|
|
| 1,805,103 |
|
|
| 1,825,829 |
|
|
| 5,174,066 |
|
|
| 5,527,727 |
|
|
| 2,347,219 |
|
|
| 1,896,223 |
|
|
| 4,462,546 |
|
|
| 3,303,901 |
|
Utilities |
|
| 1,426,900 |
|
|
| 1,314,988 |
|
|
| 2,742,249 |
|
|
| 2,452,204 |
| |||||||||||||||||
Property taxes |
|
|
| 1,539,066 |
|
|
| 1,675,917 |
|
|
| 4,518,267 |
|
|
| 4,501,154 |
|
|
| 1,406,138 |
|
|
| 1,514,781 |
|
|
| 3,033,077 |
|
|
| 3,309,911 |
|
Utilities |
|
|
| 1,568,324 |
|
|
| 1,751,562 |
|
|
| 4,394,631 |
|
|
| 4,799,329 |
| ||||||||||||||||
Management fees, including incentive |
|
| 1,102,581 |
|
|
| 1,001,104 |
|
|
| 2,377,341 |
|
|
| 1,878,866 |
| |||||||||||||||||
Franchise fees |
|
|
| 888,460 |
|
|
| 968,801 |
|
|
| 3,061,535 |
|
|
| 3,177,780 |
|
|
| 1,257,740 |
|
|
| 883,137 |
|
|
| 2,165,775 |
|
|
| 1,466,559 |
|
Management fees, including incentive |
|
|
| 999,866 |
|
|
| 958,572 |
|
|
| 3,090,515 |
|
|
| 2,987,969 |
| ||||||||||||||||
Insurance |
|
|
| 620,244 |
|
|
| 618,599 |
|
|
| 1,845,702 |
|
|
| 1,984,269 |
|
|
| 1,046,875 |
|
|
| 883,021 |
|
|
| 1,993,152 |
|
|
| 1,705,093 |
|
Information and telecommunications |
|
|
| 412,714 |
|
|
| 409,631 |
|
|
| 1,243,847 |
|
|
| 1,246,670 |
|
|
| 859,699 |
|
|
| 704,236 |
|
|
| 1,788,805 |
|
|
| 1,330,371 |
|
Other |
|
|
| 783,654 |
|
|
| 83,449 |
|
|
| 1,355,477 |
|
|
| 197,041 |
|
|
| 243,908 |
|
|
| 111,747 |
|
|
| 386,935 |
|
|
| 223,229 |
|
Total indirect hotel operating expenses |
|
| $ | 15,209,249 |
|
| $ | 14,603,034 |
|
| $ | 45,019,742 |
|
| $ | 43,827,294 |
|
| $ | 17,337,585 |
|
| $ | 14,050,076 |
|
| $ | 33,400,946 |
|
| $ | 25,639,153 |
|
12. Income Taxes
The components of the income tax provision for the three and ninesix months ended SeptemberJune 30, 20172022 and 20162021 are as follows:
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
State |
|
|
| 11,615 |
|
|
| 6,972 |
|
|
| 21,269 |
|
|
| 9,581 |
|
|
|
|
| 11,615 |
|
|
| 6,972 |
|
|
| 21,269 |
|
|
| 9,581 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal |
|
|
| 478,698 |
|
|
| (444,489 | ) |
|
| (27,658 | ) |
|
| (2,053,540 | ) |
State |
|
|
| (97,195 | ) |
|
| (109,552 | ) |
|
| (19,833 | ) |
|
| (429,633 | ) |
Subtotals |
|
|
| 381,503 |
|
|
| (554,041 | ) |
|
| (47,491 | ) |
|
| (2,483,173 | ) |
Change in deferred tax valuation allowance |
|
|
| (381,503 | ) |
|
| 554,041 |
|
|
| 47,491 |
|
|
| 2,483,173 |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
| $ | 11,615 |
|
| $ | 6,972 |
|
| $ | 21,269 |
|
| $ | 9,581 |
|
31
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| $ | (10,184 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
State |
|
|
| 97,641 |
|
|
| 63,429 |
|
|
| 197,881 |
|
|
| 147,791 |
|
|
|
|
| 87,457 |
|
|
| 63,429 |
|
|
| 197,881 |
|
|
| 147,791 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
| (879,206 | ) |
|
| (437,390 | ) |
|
| (661,787 | ) |
|
| (429,257 | ) |
State |
|
|
| (158,561 | ) |
|
| (11,184 | ) |
|
| (117,984 | ) |
|
| (26,932 | ) |
|
|
|
| (1,037,767 | ) |
|
| (448,574 | ) |
|
| (779,771 | ) |
|
| (456,189 | ) |
|
|
| $ | (950,310 | ) |
| $ | (385,145 | ) |
| $ | (581,890 | ) |
| $ | (308,398 | ) |
26
A reconciliation of the statutory federal income tax provision (benefit) to the Company’s income tax provision is as follows:
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Statutory federal income tax provision (benefit) |
|
| $ | (641,346 | ) |
| $ | (650,790 | ) |
| $ | 851,313 |
|
| $ | 233,267 |
|
Effect of non-taxable REIT income (loss) |
|
|
| (248,043 | ) |
|
| 76,172 |
|
|
| (1,513,100 | ) |
|
| (662,524 | ) |
State income tax provision (benefit) |
|
|
| (60,921 | ) |
|
| 189,473 |
|
|
| 79,897 |
|
|
| 120,859 |
|
|
|
| $ | (950,310 | ) |
| $ | (385,145 | ) |
| $ | (581,890 | ) |
| $ | (308,398 | ) |
As of September 30, 2017 and December 31, 2016, we had a net deferred tax asset of approximately $7.7 million and $6.9 million, respectively, of which, approximately $6.8 million and $6.0 million, respectively, are due to accumulated net operating losses of our TRS Lessee. These loss carryforwards will begin to expire in 2028 if not utilized by such time. As of both September 30, 2017 and December 31, 2016, approximately $0.2 million of the net deferred tax asset is attributable to our share of start-up expenses related to the DoubleTree Resort by Hilton Hollywood Beach, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation.
We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2017 and December 31, 2016, respectively. We regularly evaluate the likelihood that our TRS Lessee will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At September 30, 2017 and December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward of our TRS Lessee. A number of factors played a critical role in this determination, including:
a demonstrated track record of past profitability and utilization of past NOL carryforwards,
reasonable forecasts of future taxable income, and
anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership.
|
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
|
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Statutory federal income tax provision (benefit) |
|
| $ | 5,799,565 |
|
| $ | (325,282 | ) |
| $ | 5,631,294 |
|
| $ | (1,915,329 | ) |
Effect of non-taxable REIT loss |
|
|
| (5,702,370 | ) |
|
| 434,834 |
|
|
| (5,611,461 | ) |
|
| 2,344,962 |
|
State income tax provision (benefit) |
|
|
| (85,580 | ) |
|
| (102,580 | ) |
|
| 1,436 |
|
|
| (420,052 | ) |
|
|
| $ | 11,615 |
|
| $ | 6,972 |
|
| $ | 21,269 |
|
| $ | 9,581 |
|
27
13. Income (Loss) Per Share and Per Unit
Income (Loss) per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partnerspartner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income or loss would also be added back to net income.income or loss. The shares of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control, and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The 657,092 non-committed, unearned ESOP shares reduceare treated as reducing the number of issued and outstanding common shares and similarly reducereducing the weighted averagenumber of common shares outstanding. The allocated and committed to be releasedunallocated ESOP shares have been includedexcluded in the weighted average for the basic and diluted earnings per share calculation, and the amount of compensation for allocated shares is reflected in net income. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit. computation. The computation of basic and diluted net income (loss) per share is presented below.below:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders for basic computation |
| $ | (1,550,555 | ) |
| $ | (1,716,234 | ) |
| $ | 597,385 |
|
| $ | 527,971 |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for basic computation |
|
| 13,822,543 |
|
|
| 14,949,651 |
|
|
| 13,873,175 |
|
|
| 14,897,595 |
|
Basic net income (loss) per share |
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
| $ | 0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for diluted computation |
|
| 13,822,543 |
|
|
| 14,949,651 |
|
|
| 13,885,290 |
|
|
| 14,897,595 |
|
Diluted net income (loss) per share |
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
| $ | 0.04 |
|
32
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
|
| ||||
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| ||||
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) | $ | 27,605,359 |
|
| $ | (1,553,970 | ) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
|
Less: Net (income)allocated to non-vested share awards |
| (93,329 | ) |
|
| - |
| (1) |
| (89,713 | ) |
|
| - |
| (1) |
Net (income) loss attributable to non-controlling interest |
| (1,529,940 | ) |
|
| 179,638 |
|
|
| (1,368,319 | ) |
|
| 879,176 |
|
|
Declared and undeclared distributions to preferred stockholders |
| (1,889,470 | ) |
|
| (1,529,613 | ) |
|
| (3,826,086 | ) |
|
| (3,718,524 | ) |
|
Gain on extinguishment of preferred stock |
| 83,500 |
|
|
| 93,342 |
|
|
| 161,675 |
|
|
| 93,342 |
|
|
Net income (loss) attributable to common stockholders | $ | 24,176,120 |
|
| $ | (2,810,603 | ) |
| $ | 21,671,972 |
|
| $ | (11,875,600 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number common shares outstanding for basic EPS computation |
| 17,762,513 |
|
|
| 14,635,701 |
|
|
| 17,436,975 |
|
|
| 14,530,316 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Unvested restricted shares |
| 65,000 |
|
|
| - |
| (1) |
| 63,343 |
|
|
| - |
| (1) |
Stock compensation awards unissued |
| 58,519 |
|
|
| - |
| (1) |
| 108,633 |
|
|
| - |
| (1) |
Unearned ESOP shares |
| 418,476 |
|
|
| - |
| (1) |
| 422,430 |
|
|
| - |
| (1) |
Weighted average number common and common equivalent shares outstanding for dilutied EPS computation |
| 18,304,508 |
|
|
| 14,635,701 |
|
|
| 18,031,381 |
|
|
| 14,530,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Undistributed income (loss) | $ | 1.36 |
|
| $ | (0.19 | ) |
| $ | 1.24 |
|
| $ | (0.82 | ) |
|
Allocation of (income) loss to non-vested share awards |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
Total basic | $ | 1.36 |
|
| $ | (0.19 | ) |
| $ | 1.24 |
|
| $ | (0.82 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Undistributed income (loss) | $ | 1.32 |
|
| $ | (0.19 | ) |
| $ | 1.20 |
|
| $ | (0.82 | ) |
|
Allocation of (income) loss to non-vested share awards |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
Total diluted | $ | 1.32 |
|
| $ | (0.19 | ) |
| $ | 1.20 |
|
| $ | (0.82 | ) |
|
(1) Item is excluded in the calculation of diluted EPS due to its antidilutive effect.
The accounting for unvested share-based payment awards included in the calculation of earnings per share changed. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are now participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees
33
and directors are considered participating securities, and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in the basic and diluted weighted average shares outstanding calculation.
Income (Loss) Per Unit – The computation of basic and diluted net income (loss) per unit is presented below.below:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common unitholders for basic computation |
| $ | (1,741,000 | ) |
| $ | (1,889,080 | ) |
| $ | 670,751 |
|
| $ | 634,348 |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units outstanding |
|
| 16,258,691 |
|
|
| 16,727,791 |
|
|
| 16,256,713 |
|
|
| 16,723,557 |
|
Basic and diluted net income (loss) per unit |
| $ | (0.11 | ) |
| $ | (0.11 | ) |
| $ | 0.04 |
|
| $ | 0.04 |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
|
| ||||
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| ||||
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) | $ | 27,605,359 |
|
| $ | (1,553,970 | ) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
|
Less: Net (income)allocated to non-vested unit awards |
| (93,329 | ) |
|
| - |
| (1) |
| (89,713 | ) |
|
| - |
| (1) |
Declared and undeclared distributions to preferred unitholders |
| (1,889,470 | ) |
|
| (1,529,613 | ) |
|
| (3,826,086 | ) |
|
| (3,718,524 | ) |
|
Gain on extinguishment of preferred units |
| 83,500 |
|
|
| 93,342 |
|
|
| 161,675 |
|
|
| 93,342 |
|
|
Net income (loss) attributable to unitholders | $ | 25,706,060 |
|
| $ | (2,990,241 | ) |
| $ | 23,040,291 |
|
| $ | (12,754,776 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
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Denominator |
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Weighted average number of units outstanding for basic EPU computation |
| 19,291,083 |
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| 16,056,770 |
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| 18,981,782 |
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| 15,955,303 |
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Effect of dilutive securities: |
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Unvested restricted units |
| 58,519 |
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| - |
| (1) |
| 108,633 |
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| - |
| (1) |
Unit compensation awards unissued |
| 65,000 |
|
|
| - |
| (1) |
| 63,343 |
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|
| - |
| (1) |
Weighted average number of equivalent units outstanding for dilutied EPU computation |
| 19,414,602 |
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| 16,056,770 |
|
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| 19,153,758 |
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| 15,955,303 |
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Basic net income (loss) per unit: |
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Undistributed income (loss) | $ | 1.33 |
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| $ | (0.19 | ) |
| $ | 1.21 |
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| $ | (0.80 | ) |
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Allocation of (income) loss to non-vested unit awards |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
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|
Total basic | $ | 1.33 |
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| $ | (0.19 | ) |
| $ | 1.21 |
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| $ | (0.80 | ) |
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Diluted net income (loss) per unit: |
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Undistributed income (loss) | $ | 1.32 |
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| $ | (0.19 | ) |
| $ | 1.20 |
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| $ | (0.80 | ) |
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Allocation of (income) loss to non-vested unit awards |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
Total diluted | $ | 1.32 |
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| $ | (0.19 | ) |
| $ | 1.20 |
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| $ | (0.80 | ) |
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(1) Item is excluded in the calculation of diluted EPU due to its antidilutive effect.
14. Subsequent Events
On October 11, 2017,July 1, 2022, one holder of units in the Company closed a sale and issuance of 1,200,000 shares of its newly authorized 7.875% Series C cumulative redeemable perpetual preferred stock (the “Series C Preferred Stock”), for net proceeds after all estimated expenses of approximately $28.0 million. On October 17, 2017, the Company closed a sale and issuance of an additional 100,000 shares of its Series C Preferred Stock, for net proceeds of approximately $2.4 million, pursuant to the underwriters’ partial exercise of an option granted by the Company to purchase additional shares.The Company contributed the net proceeds from the offering to its Operating Partnership redeemed 40,687 units for an equivalent number of Series C preferred units. We intend to use the net proceeds to redeem in full the Operating Partnership’s 7.0% Senior Unsecured Notes due 2019 and for general corporate purposes, including potential future acquisitions of hotel properties.
On October 11, 2017, we paid a quarterly dividend (distribution) of $0.11 per common share (and unit) to those stockholders (and unitholdersshares of the Operating Partnership)Company's common stock.
On July 11, 2022, we entered into a 5-year interest rate swap agreement with Fifth Third Bank, N.A. whereby the floating rate on the mortgage loan on the Hotel Alba in Tampa, Florida is swapped for a fixed interest rate of record on September 15, 2017.
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On October 12, 2017,5.576%; notional amounts approximate the Operating Partnership notified Wilmington Trust, National Associationdeclining balance of the Operating Partnership’s intent to redeem the entire $25.3 million aggregate principal amount of its 7.0% Notes due 2019, pursuant to the terms of the indenture. The 7% Notes will be redeemed on November 15, 2017 at a redemption price equal to 101% of the principal amount of the 7% Notes, plus any accrued and unpaid interest to, but not including, the redemption date.
On October 16, 2017, we paid a quarterly dividend of $0.50 per preferred share (and unit) to the preferred stockholders (and preferred unitholders of the Operating Partnership) of record as of September 29, 2017.
On October 23, 2017, we authorized payment of a quarterly dividend (distribution) of $0.11 per common share (and unit) to the stockholders (and unitholders of the Operating Partnership) of record as of December 15, 2017. The dividend (distribution) is to be paid on January 11, 2018.
On October 23, 2017, we authorized payment of a quarterly dividend of $0.50 per preferred share (and unit) to the Series B Preferred Stock holders (and preferred unitholders of the Operating Partnership) of record as of December 29, 2017. The dividend is to be paid on January 16, 2018.
On October 23, 2017, we authorized payment of a quarterly dividend of $0.43203 per preferred share (and unit) to the Series C Preferred Stock holders (and preferred unitholders of the Operating Partnership) of record as of December 29, 2017. The dividend is to be paid on January 16, 2018.
29
Overview
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the initial properties.
Our hotel portfolio currently consists of eleven full-service, primarily upscale and upper-upscale hotels, comprising 2,838 rooms and the hotel commercial condominium unit of the Hyde Resort & Residences. All of our properties, except for The DeSoto, the Georgian Terrace, The Whitehall and the Hyde Resort & Residences operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree and Sheraton. As of September 30, 2017, we owned the following hotel properties:
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We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership,loan; and we own an approximate 89.1% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our initial properties and related assets.
To qualify as a REIT, we cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessees, which are indirect wholly owned subsidiaries of the Operating Partnership. Our TRS Lessees then engage an eligible independent hotel management company to operate the hotels under a management agreement. Our TRS Lessees have engaged Chesapeake Hospitality to manage our wholly-owned hotels. Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statementsresponsible for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
30
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;
Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and
Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservation expenses), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operatingany costs associated with higher occupancy.
When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences that participate in our rental program and are not reserved for owner-occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as a measure of our operating performance. See “Non-GAAP Financial Measures.”
Results of Operations
The following tables illustrate the key operating metrics for the three and nine months ended September 30, 2017 and 2016, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics), as well as the eleven wholly-owned properties in the portfolio that were under the Company’s control during the three and nine months ended September 30, 2017 and the corresponding period in 2016 (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performanceearly termination of the Crowne Plaza Hampton Marina which was sold in February 2017, or our interest inswap agreement.
On July 21, 2022, the Hyde Resort & Residences which was acquired on January 30, 2017. The composite portfolio metrics represent allCompany issued 167,390 shares of common stock to certain of its employees.
On July 25, 2022, the board of directors authorized the deferral of payment of the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences during the three and nine months ended September 30, 2017 and the corresponding period in 2016.
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| Three Months Ended |
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| Three Months Ended |
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| Nine Months Ended |
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| Nine Months Ended |
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| September 30, 2017 |
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| September 30, 2016 |
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| September 30, 2017 |
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| September 30, 2016 |
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Actual Portfolio Metrics |
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Occupancy % |
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| 71.1 | % |
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| 71.5 | % |
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| 72.6 | % |
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| 72.0 | % |
ADR |
| $ | 135.09 |
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| $ | 134.55 |
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| $ | 143.53 |
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| $ | 141.16 |
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RevPAR |
| $ | 96.11 |
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| $ | 96.26 |
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| $ | 104.16 |
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| $ | 101.69 |
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Same-Store Portfolio Metrics |
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Occupancy % |
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| 71.1 | % |
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| 71.8 | % |
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| 72.9 | % |
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| 72.8 | % |
ADR |
| $ | 135.09 |
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| $ | 136.42 |
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| $ | 143.77 |
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| $ | 143.31 |
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RevPAR |
| $ | 96.11 |
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| $ | 97.90 |
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| $ | 104.77 |
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| $ | 104.27 |
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Composite Portfolio Metrics |
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Occupancy % |
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| 69.6 | % |
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| 71.5 | % |
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| 71.1 | % |
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| 72.0 | % |
ADR |
| $ | 140.24 |
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| $ | 134.55 |
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| $ | 146.73 |
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| $ | 141.16 |
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RevPAR |
| $ | 97.56 |
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| $ | 96.26 |
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| $ | 104.29 |
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| $ | 101.69 |
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Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016
Revenue. Total revenuequarterly distribution for the three months ended September 30, 2017 decreased approximately $0.5 million, or 1.4%, to approximately $36.8 million compared to total revenue of approximately $37.3 million for the three months ended September 30, 2016. The decrease in revenue for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $1.6 million. In addition, our properties impacted by renovation
31
activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $0.5 million. Revenue decreases were also realized by our property in Philadelphia, Pennsylvania. These reductions were offset by our interest in the Hyde Resort & Residences condominium hotel, acquired on January 30, 2017, accounting for an increase of approximately $1.2 million for the period and by a net increase in revenues of approximately $0.4 million for the period for our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Houston, Texas and Atlanta, Georgia.
Room revenue decreased approximately $1.6 million, or 5.9%, to approximately $25.1 million for the three months ended September 30, 2017 compared to room revenue of approximately $26.7 million for the three months ended September 30, 2016. The decrease in room revenue for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $1.1 million and in addition our properties impacted by renovation activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $0.9 million, which reflected a 4.6% decrease in occupancy, as compared to the same period in 2016. Room revenue decreases of approximately $1.0 million were also realized by our property in Philadelphia, Pennsylvania. These decreases in room revenue for the three months ended September 30, 2017 were offset by a net increase of approximately $0.4 million resulting from increases at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Houston, Texas and Atlanta, Georgia of approximately $1.4 million.
Food and beverage revenues decreased approximately $0.4 million, or 4.9%, to approximately $8.0 million for the three months ended September 30, 2017 compared to food and beverage revenues of approximately $8.4 million for the three months ended September 30, 2016. The decrease in food and beverage revenues for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $0.4 million. In addition, our property in Wilmington, North Carolina impacted by renovation activities saw a decrease in food and beverage revenues by $0.1 million. Our properties in Raleigh, North Carolina; Philadelphia, Pennsylvania; Tampa, Florida; Houston, Texas and Atlanta, Georgia also realized decreases in food and beverage revenue. These decreases for the three month period were offset by increases in food and beverage revenues at our properties in Savannah, Georgia; Laurel, Maryland; Jacksonville, Florida; Hollywood Beach, Florida and Jeffersonville, Indiana of approximately $1.0 million.
Revenue from other operating departments increased approximately $1.5 million, or 67.4%, to approximately $3.7 million for the three months ended September 30, 2017 compared to revenue from other operating departments of approximately $2.2 million for the three months ended September 30, 2016. The increase in revenue from other operating departments for the three months ended September 30, 2017 resulted mainly from the new operations at the Hyde Resort & Residences, accounting for an increase of approximately $1.2 million for the period and $0.3 million received by the Hollywood Beach, Florida property for construction interruption payments relating to the construction of a new building next to the property.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $28.8 million for the three months ended September 30, 2017, an increase of approximately $0.6 million, or 2.1%, compared to total hotel operating expenses of approximately $28.2 million for the three months ended September 30, 2016. The increase in hotel operating expenses for the three months ended September 30, 2017 was substantially related to a decrease in expenses of approximately $1.4 million after the sale of our property in Hampton, Virginia. This decrease in hotel operating expenses was offset by a net increase in hotel operating expenses of approximately $0.8 million that resulted from increases in expenses at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida and Houston, Texas and an increase in expenses from the start of operations at the Hyde Resort & Residences, which accounted for an increase in hotel operating expenses of approximately $1.5 million for the period, that were in turn offset by decreases in hotel operating expenses of approximately $0.7 million at our properties impacted by renovation activities in Wilmington, North Carolina and Hollywood Beach, Florida and decreases in expenses at our properties in Philadelphia, Pennsylvania: Jeffersonville, Indiana and Atlanta, Georgia.
Rooms expense for the three months ended September 30, 2017 decreased approximately $0.3 million, or 4.2%, to approximately $6.8 million compared to rooms expense for the three months ended September 30, 2016 of approximately $7.1 million, after reclassifications of information and telecommunications in the prior year to indirect expenses. The net decrease in rooms expense for the three months ended September 30, 2017 partially resulted from a decrease in expenses of approximately $0.4 million after the sale of our property in Hampton, Virginia. Additionally, increases in rooms expenses of approximately $0.3 million at our properties in Savannah, Georgia; Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Hollywood Beach, Florida; Jeffersonville, Indiana and Atlanta, Georgia, were offset by approximately $0.3 million of decreases in rooms expenses at our properties in Wilmington, North Carolina; Philadelphia, Pennsylvania and Tampa, Florida.
Food and beverage expenses for the three months ended September 30, 2017 increased approximately $0.2 million, or 3.8%, to approximately $6.0 million compared to food and beverage expenses of approximately $5.8 million for the three months ended September 30, 2016. The increase in food and beverage expenses for the three months ended September 30, 2017 resulted from
32
increases of approximately $0.7 million at our properties in Savannah, Georgia; Laurel, Maryland; Jacksonville, Florida and Hollywood Beach, Florida, offset by decreases in food and beverage expenses of approximately $0.5 million at our properties in Wilmington, North Carolina; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jeffersonville, Indiana; Houston, Texas and Atlanta, Georgia.
Expenses from other operating departments increased approximately $0.1 million, or 9.8%, to approximately $0.7 million for the three months ended September 30, 2017 compared to expenses from other operating departments of approximately $0.6 million for the three months ended September 30, 2016. The increase in expense from other operating departments for the three months ended September 30, 2017 resulted mainly from the acquired interest and new operations in Hollywood Beach, Florida, accounting for an increase of approximately $0.2 million for the period, offset by a net decrease of approximately $0.1 million at our other properties.
Indirect expenses at our wholly-owned properties for the three months ended September 30, 2017 increased approximately $0.6 million, or 4.2%, to approximately $15.2 million compared to indirect expenses of approximately $14.6 million for the three months ended September 30, 2016, after reclassifications of information and telecommunications in the prior year to indirect expenses from rooms expense. The increase in indirect expenses for the three months ended September 30, 2017 resulted from the new operations at the Hyde Resort & Residences, accounting for an increase in indirect expenses of approximately $1.1 million for the period, that was offset by a decrease in expenses of approximately $0.7 million after the sale of our property in Hampton, Virginia. The remaining net increase in indirect expenses of approximately $0.2 million resulted from increases in general and administrative expenses and other expenses at most of the other hotel properties.
Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2017 increased approximately $0.6 million, or 16.8%, to $4.4 million compared to depreciation and amortization of approximately $3.8 million for the three months ended September 30, 2016. The increase was mostly attributable to increases in the depreciation related to our properties being renovated in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida, that accounted for increases of approximately $0.6 million for the period.
Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2017 decreased approximately $0.1 million, or 2.4% to approximately $1.3 million compared to corporate general and administrative expenses of approximately $1.4 million for the three months ended September 30, 2016. The decrease in corporate general and administrative expenses was mainly due to a one-time write down of deferred offering costs of approximately $0.5 million offset by increased professional fees for Sarbanes Oxley standards and legal costs associated with Hyde Resort & Residences.
Interest Expense. Interest expense for the three months ended September 30, 2017 decreased approximately $0.5 million, or 10.5%, to approximately $4.1 million compared to interest expense of approximately $4.6 million for the three months ended September 30, 2016. The decrease in interest expense for the three months ended September 30, 2017, was substantially related to the redemption of the 8% unsecured notes in August 2016, that accounted for a decrease of approximately $0.4 million, compared to the three-month period ending September 30, 2016.
Loss on Early Debt Extinguishment. During the nine months ended September 30, 2017 we refinanced a variable rate mortgage loan, we had with Bank of the Ozarks on the DoubleTree by Hilton Jacksonville Riverfront, with a new fixed rate loan from Wells Fargo Bank, NA. The amount of accumulated un-amortized loan costs written off during the three months ended September 30, 2017 and 2016 was $0 and approximately $1.0 million, respectively.
Unrealized Loss on Hedging Activities. As of September 30, 2017, the fair market value of the interest rate cap is $2,849. The unrealized loss on hedging activities during the three months ended September 30, 2017 and 2016, was $3,542 and $492, respectively.
Income Taxes. We had an income tax benefit of approximately $1.0 million for the three months ended September 30, 2017 compared to an income tax benefit of approximately $0.4 million for the three months ended September 30, 2016. The income tax provision is primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized operating loss for the three months ended September 30, 2017 and an operating loss for the three months ended September 30, 2016.
Net Income. We realized net loss for the three months ended September 30, 2017 of approximately $0.9 million compared to net loss of approximately $1.5 million for the three months ended September 30, 2016 as a result of the operating results discussed above.
Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
Revenue. Total revenue for the nine months ended September 30, 2017 decreased approximately $0.8 million, or 0.7%, to approximately $116.1 million compared to total revenue of approximately $116.9 million for the nine months ended September 30,
33
2016. The decrease in revenue for the nine months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $3.8 million. In addition, our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $1.8 million. Revenue decreases were also realized by our properties in Philadelphia, Pennsylvania and Jeffersonville, Indiana. These reductions were offset by our interest in the Hyde Resort & Residences condominium hotel, acquired on January 30, 2017, accounting for an increase of approximately $2.8 million for the period and by a net increase in revenues of approximately $2.0 million for the period at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and Atlanta, Georgia.
Room revenue decreased approximately $2.5 million, or 3.0%, to approximately $81.4 million for the nine months ended September 30, 2017 compared to room revenue of approximately $83.9 million for the nine months ended September 30, 2016. The decrease in room revenue for the nine months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $2.6 million. In addition, our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $1.9 million, which reflected a 1.9% decrease in occupancy, as compared to the same period in 2016. Room revenue decreases of approximately $1.5 million were also realized by our properties in Philadelphia, Pennsylvania and Jeffersonville, Indiana. These decreases in room revenue for the nine months ended September 30, 2017 were offset by a net increase of approximately $2.0 million resulting from increases at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and Atlanta, Georgia of approximately $3.5 million.
Food and beverage revenues decreased approximately $1.3 million, or 5.1%, to approximately $24.9 million for the nine months ended September 30, 2017 compared to food and beverage revenues of approximately $26.2 million for the nine months ended September 30, 2016. The decrease in food and beverage expenses for the nine months ended September 30, 2017, resulted mainly from a decrease in expenses of approximately $1.1 million after the sale of our property in Hampton, Virginia and from our properties impacted by renovation activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida that had reduced food and beverage revenues of approximately $0.3 million. Our properties in Raleigh, North Carolina; Jeffersonville, Indiana; Tampa, Florida; and Atlanta, Georgia also realized food and beverage revenue decreases. These decreases were offset by a net increase in food and beverage revenues of approximately $0.1 million from increases at our properties in Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida and Houston, Texas.
Revenue from other operating departments increased approximately $3.1 million, or 45.2%, to approximately $9.8 million for the nine months ended September 30, 2017 compared to revenue from other operating departments of approximately $6.8 million for the nine months ended September 30, 2016. The increase in revenue from other operating departments for the nine months ended September 30, 2017 resulted mainly from the start of operations at the Hyde Resort & Residences, accounting for an increase of approximately $2.8 million for the period and $0.3 million received by the Hollywood Beach, Florida property for construction interruption payments relating to the construction of a new building next to the property.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $85.1 million for the nine months ended September 30, 2017, a decrease of approximately $0.2 million, or 0.2%, compared to total hotel operating expenses of approximately $85.3 million for the nine months ended September 30, 2016. The decrease in hotel operating expenses for the nine months ended September 30, 2017 was substantially related to a decrease in expenses of approximately $3.5 million after the sale of our property in Hampton, Virginia. This decrease was offset by a net increase in hotel operating expenses of approximately $3.3 million resulting from increases in hotel operating expenses of approximately $5.5 million for the period at our properties in Savannah, Georgia; Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and the Hyde Resort & Residences condominium hotel, that were in turn offset by decreases in hotel operating expenses of approximately $2.2 million at our properties in Philadelphia, Pennsylvania; Jeffersonville, Indiana; Atlanta, Georgia and at our properties impacted by renovation activities in Wilmington, North Carolina and Hollywood Beach, Florida.
Rooms expense for the nine months ended September 30, 2017 decreased approximately $1.1 million, or 5.1%, to approximately $20.3 million compared to rooms expense for the nine months ended September 30, 2016 of approximately $21.3 million. The net decrease in rooms expense for the nine months ended September 30, 2017 resulted from a decrease in expenses of approximately $0.9 million after the sale of our property in Hampton, Virginia. The remaining net decrease in rooms expenses of approximately $0.2 million resulted from increases in rooms expenses at our properties in Laurel, Maryland; Jacksonville, Florida; Houston, Texas and Atlanta, Georgia, that were offset by decreases in rooms expenses at our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and other rooms expense decreases at properties in Raleigh, North Carolina; Tampa, Florida; Philadelphia, Pennsylvania and Jeffersonville, Indiana.
Food and beverage expenses for the nine months ended September 30, 2017 decreased approximately $0.3 million, or 1.8%, to approximately $17.9 million compared to food and beverage expenses of approximately $18.3 million for the nine months ended
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September 30, 2016. The decrease in food and beverage expenses for the nine months ended September 30, 2017, resulted mainly from a decrease in expenses of approximately $0.9 million after the sale of our property in Hampton, Virginia. The remaining net increase in rooms expenses of approximately $0.6 million resulted from an increases in rooms expenses at our properties in Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida and Houston, Texas, that were offset by decreases in rooms expenses at our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and other rooms expense decreases at properties in Raleigh, North Carolina; Tampa, Florida; Jeffersonville, Indiana and Atlanta, Georgia.
Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2017 increased approximately $1.2 million, or 2.7%, to approximately $45.0 million compared to indirect expenses of approximately $43.8 million for the nine months ended September 30, 2016. The increase in indirect expenses for the nine months ended September 30, 2017 resulted mainly from the new operations at the Hyde Resort & Residences, accounting for an increase in indirect expenses of approximately $1.4 million for the period. The net decrease in this amount of approximately $0.8 million that was substantially related to a decrease in indirect expenses of approximately $1.1 million after the sale of our property in Hampton, Virginia, which was in turn offset by increases in hotel operating expenses of approximately $0.03 million resulting mainly from a reclassification of information and technology costs out of rooms expense and into indirect expenses.
Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2017 increased approximately $1.4 million, or 12.9%, to $12.7 million compared to depreciation and amortization of approximately $11.3 million for the nine months ended September 30, 2016. The increase was mostly attributable to approximately $1.7 million in the depreciation related to our properties being renovated in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and the new operations at the Hyde Resort & Residences, offset by the reduction from a decrease in depreciation expenses of approximately $0.3 million after the sale of our property in Hampton, Virginia.
Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2017 increased approximately $0.6 million, or 12.7% to approximately $4.9 million compared to corporate general and administrative expenses of approximately $4.3 million for the nine months ended September 30, 2016. The increase in corporate general and administrative expenses was mainly due to a one-time write down of deferred offering costs of approximately $0.5 million.
Interest Expense. Interest expense for the nine months ended September 30, 2017 decreased approximately $2.0 million, or 14.7%, to approximately $11.8 million compared to interest expense of approximately $13.9 million for the nine months ended September 30, 2016. The decrease in interest expense for the nine months ended September 30, 2017, was substantially related to the redemption of the 8% unsecured notes in August 2016 that accounted for a decrease of approximately $1.5 million, compared to the nine-month period ending September 30, 2016. We also reduced our Hampton, Virginia and Houston, Texas loans by approximately $9.0 million resulting in a reduction of interest by approximately $0.4 million.
Loss on Early Debt Extinguishment. During the nine months ended September 30, 2017 we refinanced a variable rate mortgage loan, we had with Bank of the Ozarks on the DoubleTree by Hilton Jacksonville Riverfront, with a new fixed rate loan from Bank of America. The amount of accumulated un-amortized loan costs of $228,087 was written off during the period ending September 30, 2017 compared to approximately $1.2 million written off during the nine-month period ending September 30, 2016.
Unrealized Loss on Hedging Activities. As of September 30, 2017, the fair market value2022, for each of the interest rate cap is $2,849. The unrealized loss on hedging activities during the nine months ended September 30, 2017 and 2016, was $30,748 and $66,567, respectively.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets for the nine months ended September 30, 2017 increased approximately $1.0 million to approximately $1.0 million compared to gain on involuntary conversion of assets of $0 for the nine months ended September 30, 2016. During October 2016, hurricane Matthew damaged real and personal property at our Crowne Plaza Hampton Marina and The DeSoto properties and we had a one-time involuntary conversion in the amount of approximately $1.0 million.
Income Taxes. We had an income tax benefit of approximately $0.6 million for the nine months ended September 30, 2017 compared to an income tax benefit of approximately $0.3 million for the nine months ended September 30, 2016. The income tax provision is primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized an operating loss for the nine months ended September 30, 2017, compared to an operating loss for the nine-month period ending September 30, 2016.
Net Income. We realized net income for the nine months ended September 30, 2017 of approximately $3.1 million compared to net income of approximately $1.0 million for the nine months ended September 30, 2016 as a result of the operating results discussed above.
35
Non-GAAP Financial Measures
We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use FFO as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative than FFO of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.
36
The following is a reconciliation of net income to FFO and Adjusted FFO for the three and nine months ended September 30, 2017 and 2016:
|
| Three Months Ended |
|
| Three Months Ended |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
Net (loss) income available to common stockholders |
| $ | (1,550,555 | ) |
| $ | (1,716,234 | ) |
|
| $ | 597,385 |
|
| $ | 527,971 |
|
Add: Net (loss) income attributable to noncontrolling interest |
|
| (190,445 | ) |
|
| (172,846 | ) |
|
|
| 73,366 |
|
|
| 106,377 |
|
Depreciation and amortization |
|
| 4,427,738 |
|
|
| 3,790,872 |
|
|
|
| 12,708,548 |
|
|
| 11,260,987 |
|
Gain on involuntary conversion of assets |
|
| — |
|
|
| — |
|
|
|
| (1,041,815 | ) |
|
| — |
|
Loss (gain) on disposal of assets |
|
| 23,000 |
|
|
| 189,267 |
|
|
|
| (26,238 | ) |
|
| 329,461 |
|
FFO |
| $ | 2,709,738 |
|
| $ | 2,091,059 |
|
|
| $ | 12,311,246 |
|
| $ | 12,224,796 |
|
Increase in deferred income taxes |
|
| (1,037,767 | ) |
|
| (448,574 | ) |
|
|
| (779,771 | ) |
|
| (456,188 | ) |
Loss on early debt extinguishment |
|
| — |
|
|
| 1,087,395 |
|
|
|
| 228,087 |
|
|
| 1,157,688 |
|
Loss on aborted offering costs |
|
| — |
|
|
| — |
|
|
|
| 541,129 |
|
|
| — |
|
Loan modification fees |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| 30,057 |
|
Unrealized loss on hedging activities |
|
| 3,542 |
|
|
| 492 |
|
|
|
| 30,748 |
|
|
| 66,567 |
|
Adjusted FFO available to common stockholders |
| $ | 1,675,513 |
|
| $ | 2,730,372 |
|
|
| $ | 12,331,439 |
|
| $ | 13,022,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic |
|
| 13,822,543 |
|
|
| 14,949,651 |
|
|
|
| 13,873,153 |
|
|
| 14,897,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of non-controlling units |
|
| 1,778,140 |
|
|
| 1,778,140 |
|
|
|
| 1,778,140 |
|
|
| 1,825,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and units outstanding, basic |
|
| 15,600,683 |
|
|
| 16,727,791 |
|
|
|
| 15,651,293 |
|
|
| 16,723,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per share and unit |
| $ | 0.17 |
|
| $ | 0.13 |
|
|
| $ | 0.79 |
|
| $ | 0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted FFO per share and unit |
| $ | 0.11 |
|
| $ | 0.16 |
|
|
| $ | 0.79 |
|
| $ | 0.78 |
|
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) corporate general and administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary conversions of assets and (14) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.
37
The following is a reconciliation of net income to Hotel EBITDA for the three and nine months ended September 30, 2017 and 2016:
|
| Three Months Ended |
|
| Three Months Ended |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
Net (loss) income available to common stockholders |
| $ | (1,550,555 | ) |
| $ | (1,716,234 | ) |
|
| $ | 597,385 |
|
| $ | 527,971 |
|
Add: Net (loss) income attributable to noncontrolling interest |
|
| (190,445 | ) |
|
| (172,846 | ) |
|
|
| 73,366 |
|
|
| 106,377 |
|
Interest expense |
|
| 4,139,267 |
|
|
| 4,626,333 |
|
|
|
| 11,827,061 |
|
|
| 13,872,129 |
|
Interest income |
|
| (53,314 | ) |
|
| (44,485 | ) |
|
|
| (126,241 | ) |
|
| (63,523 | ) |
Income tax benefit |
|
| (950,310 | ) |
|
| (385,145 | ) |
|
|
| (581,890 | ) |
|
| (308,398 | ) |
Depreciation and amortization |
|
| 4,427,738 |
|
|
| 3,790,872 |
|
|
|
| 12,708,548 |
|
|
| 11,260,987 |
|
Loss on early debt extinguishment |
|
| — |
|
|
| 1,087,395 |
|
|
|
| 228,087 |
|
|
| 1,157,688 |
|
Loss (gain) on disposal of assets |
|
| 23,000 |
|
|
| 189,267 |
|
|
|
| (26,238 | ) |
|
| 329,461 |
|
Gain on involuntary conversion of assets |
|
| — |
|
|
| — |
|
|
|
| (1,041,815 | ) |
|
| — |
|
Distributions to preferred stockholders |
|
| 805,000 |
|
|
| 339,889 |
|
|
|
| 2,415,000 |
|
|
| 339,889 |
|
EBITDA |
|
| 6,650,381 |
|
|
| 7,715,046 |
|
|
|
| 26,073,263 |
|
|
| 27,222,581 |
|
Corporate general and administrative |
|
| 1,335,192 |
|
|
| 1,367,848 |
|
|
|
| 4,882,541 |
|
|
| 4,331,896 |
|
Unrealized loss on hedging activities |
|
| 3,542 |
|
|
| 492 |
|
|
|
| 30,748 |
|
|
| 66,567 |
|
Hotel EBITDA |
| $ | 7,989,115 |
|
| $ | 9,083,386 |
|
|
| $ | 30,986,552 |
|
| $ | 31,621,044 |
|
Sources and Uses of Cash
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the nine months ended September 30, 2017 was approximately $13.0 million. We had a net decrease in cash provided by operating activities for the nine months ended September 30, 2017 of approximately $2.3 million, compared to the nine months ended September 30, 2016. The decrease is mainly attributable to a net decrease of adjustments to reconcile cash and changes in assets and liabilities of approximately $4.4 million, that was offset by an increase in net income of approximately $2.1 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the Company’s stockholders (and unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).
Investing Activities. During the nine months ended September 30, 2017, we used approximately $4.0 million to acquire our interest in the Hyde Resort and Residences, $17.4 million on capital expenditures, of which, approximately $3.3 million related to the routine replacement of furniture, fixtures and equipment and $14.1 million related to renovation of our hotels in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida. We also contributed approximately $3.5 million during the nine months ended September 30, 2017 into reserves required by the lenders for ten of our hotels according to the provisions of their respective loan agreements. During the nine months ended September 30, 2017, we received reimbursements from those reserves of approximately $4.4 million for capital expenditures related to those properties. The Operating Partnership’s loan to the Company had a net balance after principle payments of approximately $4.7 million. We also received approximately $5.4 million for the sale of the Crowne Plaza Hampton Riverside and proceeds from insurance conversions of approximately $1.0 million.
Financing Activities. During the nine months ended September 30, 2017, we received approximately $15.7 million for net mortgage proceeds, dividend and distribution payments of $7.2 million for the Company and $7.3 million for the Operating Partnership and the repurchase of common stock of the Company for approximately $1.1 million pursuant to the stock repurchase program and payments for deferred financing costs of approximately $0.6 million. Additionally, the Company provided approximately $4.9 million to the ESOP pursuant to the terms of its loan agreement with the ESOP.
Capital Expenditures
We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry. Historically, we have aimed
38
to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. Below is a description of capital expenditures by property:
At the Company’s hotel in Wilmington, North Carolina, renovations of the guestrooms and public spaces totaling an estimated $8.6 million are underway in anticipation of an upcoming rebranding in early 2018. As of September 30, 2017, the Company had incurred costs totaling approximately $5.2 million toward this renovation. Renovations are expected to be completed in March 2018.
At the Company’s hotel in Savannah, Georgia, renovations of the guestrooms and public spaces totaling approximately $9.5 million are substantially complete and the Company rebranded its property from the Hilton Savannah DeSoto to The DeSoto.
At the Company’s hotel in Hollywood, Florida, renovations of the guestrooms and public spaces totaling an estimated $7.1 million is nearing completion. As of September 30, 2017, the Company had incurred costs totaling approximately $5.5 million toward this renovation.
Given our plan to complete the renovation activities at our property in Wilmington, North Carolina, and our anticipated renovation activity at our property in Tampa, Florida prior to a franchise re-licensing in March 2019, we aim to restrict all other capital expenditures at these hotels during the renovation period to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensor that are necessary to maintain our brand affiliation. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 2.50% to 3.00% of gross revenues in 2017.
We expect a substantial portion of our capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hilton Wilmington Riverside, the DoubleTree by Hilton Raleigh Brownstone-University, The Whitehall, the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.
Liquidity and Capital Resources
As of September 30, 2017, we had total cash of approximately $38.8 million, of which approximately $32.7 million was in cash and cash equivalents and approximately $6.1 million was restricted for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted. We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).
Other than monthly mortgage loan principal payments, we do not have any debt obligations maturing until August 2018. In August 2018, the mortgage on our DoubleTree by Hilton Raleigh Brownstone University matures at the amortized mortgage balance of approximately $14.4 million. We have approximately $69.2 million in debt obligations maturing in 2019, including approximately $43.9 million in mortgage debt maturities and $25.3 million of the Operating Partnership’s 7% Notes which we intend to repay in November 2017. We have notified the trustee for the 7% Notes of our intent to repay, on November 15, 2017, the entire $25.3 million aggregate principal amount of the outstanding 7% Notes, using proceeds from theSeries B, Series C, and Series D Preferred Stock offering.(and Preferred Units).
We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
We expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, which include the repayment of the 7% Notes (which have been called for repayment on November 15, 2017) and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. From time to time and subject to market conditions, we may also seek to refinance mortgage debt prior to maturity where appropriate. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
3934
Item 2. Management’s Discussion and Analysis of Financial CovenantsCondition and Results of Operations
Mortgage Loans
Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.
If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing.
Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.
As of September 30, 2017, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.
Unsecured Notes
The indenture for the 7% Notes contains certain covenants and restrictions that require us to meet certain financial ratios. We are not permitted to incur any Debt (other than intercompany Debt), as defined in the indenture, if, immediately after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value, as defined in the indenture, would be greater than 0.65 to 1.0. In addition, we are not permitted to incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense, both as defined in the indenture, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.
40
These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were applicable at September 30, 2017 and December 31, 2016, respectively.
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
|
|
|
|
|
|
|
|
Net income(1) |
| $ | 3,011,668 |
|
| $ | 900,149 |
|
Interest expense(1) |
|
| 15,690,035 |
|
|
| 17,735,107 |
|
Loss on early debt extinguishment |
|
| 488,304 |
|
|
| 1,417,905 |
|
Unrealized loss on hedging activities |
|
| 1,566 |
|
|
| 37,384 |
|
Gain on involuntary conversion |
|
| (1,041,815 | ) |
|
| — |
|
Loss (gain) on sale of assets |
|
| (41,948 | ) |
|
| 365,319 |
|
Income tax benefit(1) |
|
| (1,641,126 | ) |
|
| (1,367,634 | ) |
Loss on disposal of assts |
|
| 51,569 |
|
|
| — |
|
Depreciation and amortization(1) |
|
| 16,466,631 |
|
|
| 15,019,071 |
|
Corporate general and administrative expenses(1) |
|
| 6,571,710 |
|
|
| 6,021,065 |
|
Consolidated income available for debt service(1) |
|
| 39,556,594 |
|
|
| 40,128,366 |
|
Less: income of non-stabilized assets(1) |
|
| (10,338,671 | ) |
|
| (10,203,893 | ) |
Stabilized Consolidated Income Available for Debt Service(1) |
| $ | 29,217,923 |
|
| $ | 29,924,473 |
|
Interest expense(1) (2) |
| $ | 15,690,035 |
|
| $ | 18,011,107 |
|
Amortization of issuance costs(1) |
|
| (825,132 | ) |
|
| (1,147,864 | ) |
Consolidated interest expense(1) |
|
| 14,864,903 |
|
|
| 16,863,243 |
|
Less: interest expense of non-stabilized assets(1) |
|
| (3,533,313 | ) |
|
| (3,417,412 | ) |
Stabilized Consolidated Interest Expense(1) |
| $ | 11,331,590 |
|
| $ | 13,445,831 |
|
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
|
| 2.58 |
|
|
| 2.23 |
|
Threshold Ratio Minimum |
|
| 1.50 |
|
|
| 1.50 |
|
|
|
|
|
|
|
|
|
|
Ratio of Debt to Adjusted Total Asset Value: |
|
|
|
|
|
|
|
|
Mortgage loans |
| $ | 300,274,769 |
|
| $ | 284,542,043 |
|
Unsecured notes |
|
| 25,300,000 |
|
|
| 25,300,000 |
|
Total debt |
| $ | 325,574,769 |
|
| $ | 309,842,043 |
|
Stabilized Consolidated Income Available for Debt Service(1) |
| $ | 29,217,923 |
|
| $ | 29,924,473 |
|
Capitalization rate |
|
| 7.5 | % |
|
| 7.5 | % |
|
|
| 389,572,307 |
|
|
| 398,992,973 |
|
Non-stabilized assets |
|
| 154,100,000 |
|
|
| 145,400,000 |
|
Total cash |
|
| 38,767,890 |
|
|
| 36,362,920 |
|
Adjusted Total Asset Value |
| $ | 582,440,197 |
|
| $ | 580,755,893 |
|
Ratio of Debt to Adjusted Total Asset Value |
|
| 0.56 |
|
|
| 0.53 |
|
Threshold Ratio Maximum |
|
| 0.65 |
|
|
| 0.65 |
|
|
|
|
|
Dividend Policy
We intend to continue to declare quarterly distributions to our stockholders. The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for
41
capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future.
In January 2017, we increased the quarterly dividend (distribution) to $0.10 per common share (and unit).
In April 2017, we increased the quarterly dividend (distribution) to $0.105 per common share (and unit).
In July 2017, we increased the quarterly dividend (distribution) to $0.11 per common share (and unit).
Off-Balance Sheet Arrangements
None.
Inflation
We generate revenues primarily from lease payments from our TRS Lessees and net income from the operations of our TRS Lessees. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, and Texas. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.
Critical Accounting Policies
The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.
Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties, which were contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.
We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse permanent changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a
42
recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of a hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss is recognized.
There were no charges for impairment of hotel properties recorded for the nine months ended September 30, 2017.
In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition. We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.
Revenue Recognition. Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit.
Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2017 and December 31, 2016, respectively. We regularly evaluate the likelihood that our TRS Lessee will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At each of September 30, 2017 and December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. A number of factors played a critical role in this determination, including:
a demonstrated track record of past profitability and utilization of past NOL carryforwards,
reasonable forecasts of future taxable income, and
anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership.
Should unanticipated adverse financial trends occur, or other negative evidence develop, a valuation allowance may be necessary in the future against some or all of our deferred tax assets.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Cautionary Statement Regarding Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Factors which could have a material adverse effect on ourthe Company’s future operations, performance and future prospects include, but are not limited to:
national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;
risks associated with the hotel industry, including competition and new supply of hotel rooms, increases in wages, energy costs and other operating costs;
risks associated with adverse weather conditions, including hurricanes;
43
the availability and terms of financing and capital and the general volatility of the securities markets;
the Company’s intent to repurchase shares from time to time;
risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, including our recently negotiated forbearance agreements and ifloan modifications and, as necessary, to refinance or seek an extension of the maturity of such indebtedness or modifyfurther modification of such debt agreements;
risks associated with adverse weather conditions, including hurricanes;
risks associated with maintaining our system of internal controls;
risks associated with the conflicts of interest of the Company’s officers and directors;
risks associated with redevelopment and repositioning projects, including delays and cost overruns;
supply and demand for hotel rooms in our current and proposed market areas;
risks associated with our ability to maintain our franchise agreements with our third party franchisors;
our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;
our ability to successfully expand into new markets;
legislative/regulatory changes, including changes to laws governing taxation of REITs;
the Company’s ability to maintain its qualification as a REIT; and
our ability to maintain adequate insurance coverage.
Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.10-K.
35
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
Overview
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 and focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. Sotherly may also opportunistically acquire hotels throughout the United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.
Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of June 30, 2022, our portfolio consisted of the following hotel properties:
|
| Number |
|
|
|
|
|
|
| |
Property |
| of Rooms |
|
| Location |
| Date of Acquisition |
| Chain/Class Designation | |
Wholly-owned Hotels |
|
|
|
|
|
|
|
|
| |
The DeSoto |
|
| 246 |
|
| Savannah, GA |
| December 21, 2004 |
| Upper Upscale(1) |
DoubleTree by Hilton Jacksonville Riverfront |
|
| 293 |
|
| Jacksonville, FL |
| July 22, 2005 |
| Upscale |
DoubleTree by Hilton Laurel |
|
| 208 |
|
| Laurel, MD |
| December 21, 2004 |
| Upscale |
DoubleTree by Hilton Philadelphia Airport |
|
| 331 |
|
| Philadelphia, PA |
| December 21, 2004 |
| Upscale |
DoubleTree Resort by Hilton Hollywood Beach |
|
| 311 |
|
| Hollywood, FL |
| August 9, 2007 |
| Upscale |
Georgian Terrace |
|
| 326 |
|
| Atlanta, GA |
| March 27, 2014 |
| Upper Upscale(1) |
Hotel Alba Tampa, Tapestry Collection by Hilton |
|
| 222 |
|
| Tampa, FL |
| October 29, 2007 |
| Upscale |
Hotel Ballast Wilmington, Tapestry Collection by Hilton |
|
| 272 |
|
| Wilmington, NC |
| December 21, 2004 |
| Upscale |
Hyatt Centric Arlington |
|
| 318 |
|
| Arlington, VA |
| March 1, 2018 |
| Upper Upscale |
The Whitehall |
|
| 259 |
|
| Houston, TX |
| November 13, 2013 |
| Upper Upscale(1) |
Hotel Rooms Subtotal |
|
| 2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Condominium Hotels |
|
|
|
|
|
|
|
|
| |
Hyde Resort & Residences |
|
| 83 |
| (2) | Hollywood, FL |
| January 30, 2017 |
| Luxury(1) |
Hyde Beach House Resort & Residences |
|
| 111 |
| (2) | Hollywood, FL |
| September 27, 2019 |
| Luxury(1) |
Total Hotel & Participating Condominium Hotel Rooms |
|
| 2,980 |
|
|
|
|
|
|
|
|
36
We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 94.4% interest in our Operating Partnership, as of the date of this report, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Entities, which are indirect wholly-owned subsidiaries of the Operating Partnership. Our MHI TRS Entities then engage eligible independent hotel management companies to operate the hotels under a management agreement. Our MHI TRS Entities have engaged Our Town to manage our hotels. Our MHI TRS Entities, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
Effects of COVID-19 Pandemic on Our Business
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. The pandemic and subsequent government mandates and health official recommendations have significantly impacted hotel demand. Following the initial implementation of government mandates and health official recommendations, we significantly reduced operations at all our hotels, suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control. We intend to continue those re-introductions, provided that we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.
COVID-19 had a significant negative impact on our operations and financial results in 2021, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods. We continue to experience lingering impact from COVID-19 in 2022, albeit to a lesser degree. A significant increase in leisure travel demand contributed to improved results for 2021 compared to 2020. While business travel demand has increased, it continues to lag behind pre-pandemic levels and it is not clear when and to what extent that pre-pandemic level of demand will return. As a result, although we anticipate further recovery in 2022, the Company cannot estimate with certainty when travel demand will fully recover.
As of June 30, 2022, we failed to meet the financial covenants under the mortgage secured by The Whitehall. We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022. While the Company believes it will be successful in obtaining waivers, loan modifications or securing refinance arrangements, it cannot provide assurance that it will be able to do so on acceptable terms or at all. Based on our current projections, following the expiration of the waiver on the financial covenants from the mortgage lender on The Whitehall, we do not anticipate that the financial performance of the property will have sufficiently recovered in order to meet the existing covenants. If we fail to obtain additional waivers from the lender, we would be required to make a prepayment, which we estimate at $11.7 million, in order to bring the loan into compliance.
As of June 30, 2022, we had approximately $24.0 million in unrestricted cash and approximately $7.4 million in restricted cash.
U.S. GAAP requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Based on our current unrestricted and restricted cash on hand, our operating results and our forecast of obligations coming due 12 months from the date of this report, the Company has concluded that there are no longer conditions and events that raise substantial doubt about its ability to continue as a going concern.
Secured Note Financing
On December 31, 2020, we closed a transaction with KW, as collateral agent and a note investor, and MIG, as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership. We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements.
On June 10, 2022, the Company used the proceeds from the sale of the Doubletree by Hilton Raleigh Brownstone-University hotel to partially repay the Secured Notes. The Investors received approximately $19.8 million of the proceeds from the sale of the hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest reserves in the amount of approximately $1.6 million, of which approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.
37
On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2 million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Concurrent with the cancellation of the Secured Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.
When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences that participate in our rental programs and are not reserved for owner-occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures.”
Results of Operations
The following tables illustrate the key operating metrics for the three and six months ended June 30, 2022, 2021 and 2019, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. The ten wholly-owned properties in the portfolio that were under the Company’s control during the three and six months ended June 30, 2022 and the corresponding periods in 2021 and 2019 are considered same-store properties (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Sheraton Louisville Riverside which was sold in February 2022, or the DoubleTree by Hilton Raleigh-Brownstone University which was sold in June 2022. The composite portfolio metrics represent the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, during the three and six months ended June 30, 2022 and the corresponding periods in 2021 and 2019. The same-store (composite) portfolio metrics includes all properties with the exceptions of the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh-Brownstone University and the Hyde Beach House Resort & Residences, during the three and six months ended June 30, 2022, and the corresponding periods in 2021and 2019.
Given the drastic and unprecedented impact of the COVID-19 pandemic on our operating results in 2021 and 2020, we believe that a comparison of our results through the three and six month periods ending June 2022, to both the June 2021 and June 2019
38
comparable periods in this overview section, allows for a better understanding of the full impact of the COVID-19 pandemic and the progress of our recovery.
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||||
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2019 |
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2019 |
| ||||||
Actual Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Occupancy % |
|
| 68.8 | % |
|
| 58.6 | % |
|
| 77.4 | % |
|
| 61.1 | % |
|
| 49.9 | % |
|
| 73.8 | % |
ADR |
| $ | 179.32 |
|
| $ | 142.79 |
|
| $ | 163.48 |
|
| $ | 174.30 |
|
| $ | 138.70 |
|
| $ | 164.47 |
|
RevPAR |
| $ | 123.29 |
|
| $ | 83.73 |
|
| $ | 126.59 |
|
| $ | 106.49 |
|
| $ | 69.22 |
|
| $ | 121.33 |
|
Same-Store Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Occupancy % |
|
| 69.5 | % |
|
| 59.3 | % |
|
| 77.3 | % |
|
| 61.9 | % |
|
| 50.4 | % |
|
| 74.2 | % |
ADR |
| $ | 179.90 |
|
| $ | 147.37 |
|
| $ | 166.71 |
|
| $ | 176.33 |
|
| $ | 143.47 |
|
| $ | 168.36 |
|
RevPAR |
| $ | 124.97 |
|
| $ | 87.34 |
|
| $ | 128.85 |
|
| $ | 109.22 |
|
| $ | 72.33 |
|
| $ | 124.84 |
|
Composite Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Occupancy % |
|
| 68.0 | % |
|
| 59.0 | % |
|
| 76.3 | % |
|
| 60.8 | % |
|
| 50.4 | % |
|
| 73.1 | % |
ADR |
| $ | 189.24 |
|
| $ | 161.00 |
|
| $ | 167.87 |
|
| $ | 188.33 |
|
| $ | 159.93 |
|
| $ | 170.91 |
|
RevPAR |
| $ | 128.63 |
|
| $ | 94.93 |
|
| $ | 128.05 |
|
| $ | 114.46 |
|
| $ | 80.54 |
|
| $ | 124.97 |
|
Same-Store (Composite) Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Occupancy % |
|
| 69.3 | % |
|
| 59.8 | % |
|
| 76.0 | % |
|
| 62.0 | % |
|
| 51.0 | % |
|
| 73.4 | % |
ADR |
| $ | 185.76 |
|
| $ | 158.79 |
|
| $ | 171.54 |
|
| $ | 184.49 |
|
| $ | 157.48 |
|
| $ | 175.39 |
|
RevPAR |
| $ | 128.73 |
|
| $ | 94.88 |
|
| $ | 130.37 |
|
| $ | 114.31 |
|
| $ | 80.24 |
|
| $ | 128.73 |
|
Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021
Revenue. Total revenue for the three months ended June 30, 2022 increased approximately $12.8 million, or 37.2%, to approximately $47.2 million compared to total revenue of approximately $34.4 million for the three months ended June 30, 2021. There was an aggregate increase in total revenue of approximately $14.5 million from ten of our properties, offset by a decrease of approximately $0.5 million, at the Hyde Beach House & Resort and a decrease of approximately $1.2 million as a result of the sale of the Sheraton Louisville Riverside in February 2022. There were significant increases in demand primarily driven by the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel compared to the same period in the prior year.
Room revenue increased approximately $8.5 million, or 35.3%, to approximately $32.5 million for the three months ended June 30, 2022 compared to room revenue of approximately $24.0 million for the three months ended June 30, 2021. The increase in room revenue for the three months ended June 30, 2022 resulted from an aggregate increase of approximately $9.5 million from ten of our properties, offset by a decrease of approximately $1.0 million as a result of the sale of the Sheraton Louisville Riverside in February 2022. The improvement was mainly due to an increase in occupancy from $58.6% to 68.8% coupled with an increase in ADR from $142.79 to $179.32 and an increase in RevPAR from $83.73 to $123.29. These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel.
Food and beverage revenues increased approximately $4.2 million, or 120.2%, to approximately $7.7 million for the three months ended June 30, 2022 compared to food and beverage revenues of approximately $3.5 million for the three months ended June 30, 2021. The increase in food and beverage revenues for the three months ended June 30, 2022, resulted from an aggregate increase from ten of our properties, offset by the loss of food and beverage revenue during the quarter following the sale of the Sheraton Louisville Riverside in February 2022.
Revenue from other operating departments increased approximately $0.1 million, or 1.1%, to approximately $6.9 million for the three months ended June 30, 2022 compared to revenue from other operating departments of approximately $6.8 million for the three months ended June 30, 2021. Increases in parking revenue at our property in Atlanta and Savannah, Georgia offset a decrease in fees of approximately $0.5 million earned at the Hyde Resort in Hollywood, Florida and non-recurring $0.2 million in business interruption proceeds earned in the prior year at our property in Wilmington, North Carolina.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $7.7 million, or 31.0%, to approximately $32.4 million for
39
the three months ended June 30, 2022, compared to total hotel operating expenses of approximately $24.7 million for the three months ended June 30, 2021. The increase in hotel operating expenses for the three months ended June 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $9.3 million, with the exception of our properties in Raleigh, North Carolina, Jeffersonville, Indiana, the Hyde Resort in Hollywood, Florida and the Hyde Beach House & Resort in Hollywood, Florida, which had a decrease in hotel operating expenses of approximately $1.6 million. This was due mainly to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Rooms expense for the three months ended June 30, 2022 increased approximately $1.3 million, or 21.8%, to approximately $7.2 million, compared to rooms expense for the three months ended June 30, 2021 of approximately $5.9 million. The increase in rooms expense for the three months ended June 30, 2022, resulted from an aggregate increase of approximately $1.7 million from all of our properties, with the exception of our sold properties in Raleigh, North Carolina and Jeffersonville, Indiana which had a decrease in hotel operating expenses of approximately $0.4 million. The improvement was mainly due to increased composite occupancy of 68.0%, compared to prior year three months ending June 30, 2021, occupancy of 59.0%. This significant increase is mainly due to the above mentioned factors.
Food and beverage expenses for the three months ended June 30, 2022 increased approximately $3.1 million, or 149.5%, to approximately $5.2 million, compared to food and beverage expenses of approximately $2.1 million, for the three months ended June 30, 2021. The net increase in food and beverage expenses for the three months ended June 30, 2022 resulted from an aggregate increase of approximately $3.2 million, from all of our properties, with the exception of our sold property in Jefferson, Indiana, which had a decrease in expenses by approximately $0.1 million. This was mainly due to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Expenses from other operating departments remained relatively the same at approximately $2.6 million for the three months ended June 30, 2022 compared to expenses from other operating departments of approximately $2.6 million for the three months ended June 30, 2021.
Indirect expenses at our wholly-owned properties for the three months ended June 30, 2022 increased approximately $3.3 million, or 23.4%, to approximately $17.3 million, compared to indirect expenses of approximately $14.0 million for the three months ended June 30, 2021. The increase in indirect expenses for the three months ended June 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $4.1 million, with the exception of our properties in Raleigh, North Carolina, Jeffersonville, Indiana and the Hyde Resort in Hollywood, Florida, which had a decrease in hotel operating expenses of approximately $0.8 million. This was mainly due to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2022 decreased approximately $0.1 million, or 6.4%, to approximately $1.4 million compared to corporate general and administrative expenses of approximately $1.5 million, for the three months ended June 30, 2021. The decrease in corporate general and administrative expenses was mainly due to one-time loan modification fees in the prior period associated with the forbearance granted us related to the mortgage on the DoubleTree by Hilton Resort Hollywood Beach and receipt of payroll tax incentives offset by an increase in the current period in legal and other professional fees.
Interest Expense. Interest expense for the three months ended June 30, 2022 decreased approximately $0.2million, or 3.3%, to approximately $5.3million, as compared to interest expense of approximately $5.5 million, for the three months ended June 30, 2021. The decrease in interest expense for the three months ended June 30, 2022, was substantially related to decreases in the amount of corporate debt especially attributable to the sale of the hotel property in Jeffersonville, Indiana in February 2022.
Loss on Early Extinguishment of Debt. When the Secured Notes were extinguished in June 2022 and paid off prior to the maturity date, a loss on early extinguishment was recognized in the current period for the unamortized exit fee as well as the unamortized origination costs, which totaled approximately $6.0 million for the three months ended June 30, 2022. No prepayment of debt occurred in the three months ended June 30, 2021.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets for the three months ended June 30, 2022, decreased approximately $0.4 million, from approximately $0.5 million for the three months ended June 30, 2021 to approximately $0.1 million for the three months ended June 30, 2022. The gains were related to casualties at our properties in, Wilmington, North Carolina, Houston, Texas and Atlanta, Georgia.
40
Unrealized Gain on Hedging Activities. As of June 30, 2022, the fair market value of our interest rate cap was $0 and the fair market value of our interest rate swap liability is $1,310. The unrealized gain on hedging activities during the three months ended June 30, 2022, was approximately $0.6 million and during the three months ended June 30, 2021, the unrealized gain on hedging activities was approximately $0.3 million.
Gain on Sale of Assets. Duringthe three month period ended June 30, 2022, we sold the property in Raleigh, North Carolina for a gain of approximately $30.1 million.
Income Taxes. We had an income tax provision of $11,615 for the three months ended June 30, 2022 compared to an income tax provision of $6,972, for the three months ended June 30, 2021. MHI TRS realized operating losses for each of the three months ended June 30, 2022 and 2021.
Net Income (Loss). We realized a net income for the three months ended June 30, 2022 of approximately $27.6 million, compared to a net loss of approximately $1.6 million, for the three months ended June 30, 2021, because of the operating results discussed above.
Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021
Revenue. Total revenue for the six months ended June 30, 2022 increased approximately $28.5 million, or 50.0%, to approximately $85.5 million compared to total revenue of approximately $57.0 million for the six months ended June 30, 2021. There was an aggregate increase in total revenue of approximately $30.7 million from ten of our properties, offset by a decrease of approximately $0.6 million at the Hyde Resort in Hollywood, Florida and a decrease of approximately $1.6 million as a result of the sale of the Sheraton Louisville Riverside in February 2022. There were significant increases in demand primarily driven by the lifting of restrictions on travel, social gatherings and businesses as well as, significant increases in demand for business travel.
Room revenue increased approximately $17.9 million, or 45.2%, to approximately $57.4 million for the six months ended June 30, 2022 compared to room revenue of approximately $39.5 million for the six months ended June 30, 2021. The increase in room revenue for the six months ended June 30, 2022 resulted from an aggregate increase of approximately $19.3 million from ten of our properties, offset by a decrease of approximately $1.4 million as a result of the sale of the Sheraton Louisville Riverside in Jeffersonville, Indiana in February 2022. The improvement was due to an increase occupancy from 49.9% to 61.1% and an increase in ADR from $138.70 to $174.30. These increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel.
Food and beverage revenues increased approximately $8.3 million, or 164.2%, to approximately $13.3 million for the six months ended June 30, 2022 compared to food and beverage revenues of approximately $5.0 million for the six months ended June 30, 2021. The increase in food and beverage revenues for the six months ended June 30, 2022, resulted from an aggregate increase from ten of our properties, offset by the loss of food and beverage revenue during the quarter following the sale of the Sheraton Louisville Riverside in Jeffersonville, Indiana, in February 2022.
Revenue from other operating departments increased approximately $2.4 million, or 19.0%, to approximately $14.8 million for the six months ended June 30, 2022 compared to revenue from other operating departments of approximately $12.4 million for the six months ended June 30, 2021. Increases in parking revenue at many of our properties as well as $1.0 million received under the North Carolina Business Recovery Grant offset decreases in fees of approximately $0.6 million earned at the Hyde Resort in Hollywood, Florida; a non-recurring $0.2 million in business interruption proceeds earned in the prior year at our property in Wilmington, North Carolina; and a non-recurring COVID relief grant of approximately $0.3 million received in the prior period by our hotel in Laurel, Maryland.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $17.6 million, or 40.8%, to approximately $60.8 million for the six months ended June 30, 2022, compared to total hotel operating expenses of approximately $43.2 million for the six months ended June 30, 2021. The increase in hotel operating expenses for the six months ended June 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $19.3 million, with the exception of our properties in Jeffersonville, Indiana and the Hyde Resort in Hollywood, Florida, which had a decrease in hotel operating expenses of approximately $1.7 million. This was due mainly to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Rooms expense for the six months ended June 30, 2022 increased approximately $3.2 million, or 32.7%, to approximately $13.1 million, compared to rooms expense for the six months ended June 30, 2021 of approximately $9.9 million. The increase in rooms expense for the six months ended June 30, 2022, resulted from an aggregate increase of approximately $3.7 million from all of our
41
properties, with the exception of our sold property in Jeffersonville, Indiana which had a decrease in hotel operating expenses of approximately $0.5 million. The improvement was mainly due to increased composite occupancy of 60.8%, compared to prior year six months ending June 30, 2021, occupancy of 50.4%. This significant increase is mainly due to the above mentioned factors.
Food and beverage expenses for the six months ended June 30, 2022 increased approximately $6.1 million, or 202.9%, to approximately $9.1 million, compared to food and beverage expenses of approximately $3.0 million, for the six months ended June 30, 2021. The net increase in food and beverage expenses for the six months ended June 30, 2022 resulted from an aggregate increase of approximately $6.2 million, from all of our properties, with the exception of our sold property in Jefferson, Indiana, which had a decrease in expenses by approximately $0.1 million. This was mainly due to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Expenses from other operating departments increased approximately $0.5 million, or 10.8%, to approximately $5.1 million for the six months ended June 30, 2021, compared to expenses from other operating departments of approximately $4.6 million for the six months ended June 30, 2020. The increase in expenses from other operating departments for the six months ended June 30, 2021, resulted from an aggregate increase in other operating expenses of approximately $0.9 million from twelve of our hotel properties. Two of our properties had decreases in other operating expenses aggregating to approximately $0.4 million.
Indirect expenses at our wholly-owned properties for the six months ended June 30, 2022 increased approximately $7.8 million, or 30.3%, to approximately $33.4 million, compared to indirect expenses of approximately $25.6 million for the six months ended June 30, 2021. The increase in indirect expenses for the six months ended June 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $8.6 million, with the exception of our sold property in Jeffersonville, Indiana, which had a decrease in hotel operating expenses of approximately $0.8 million. This was mainly due to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2022 increased approximately $0.1 million, or 4.1%, to approximately $2.9 million compared to corporate general and administrative expenses of approximately $2.8 million, for the six months ended June 30, 2021. The increase in corporate general and administrative expenses was mainly due to net aggregate increases in salaries, audit fees and legal costs, offset by one-time loan modification fees in the prior period associated with the forbearance granted us related to the mortgage on the DoubleTree by Hilton Resort Hollywood Beach.
Interest Expense. Interest expense for the six months ended June 30, 2022 decreased approximately $0.4million, or 3.4%, to approximately $11.0million, as compared to interest expense of approximately $11.4 million, for the six months ended June 30, 2021. The decrease in interest expense for the six months ended June 30, 2022, was substantially related to decreases in the amount of corporate debt especially attributable to the sale of the hotel property in Jeffersonville, Indiana.
Loss on Early Extinguishment of Debt. When the Secured Notes were extinguished in June 2022 and were paid off prior to the maturity date, a loss on early extinguishment was recognized in the current period for the unamortized exit fee as well as the unamortized origination costs, which totaled approximately $6.0 million for the six months ended June 30, 2022. No prepayment of debt occurred in the three months ended June 30, 2021.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets decreased approximately $0.4 million, from approximately $0.5 million for the six months ended June 30, 2021 to approximately $0.1 million, for the six months ending June 30, 2022. The gains were related to casualties at our properties in Wilmington, North Carolina, Houston, Texas and Atlanta, Georgia.
Unrealized Gain on Hedging Activities. As of June 30, 2022, the fair market value of our interest rate cap was $0 and the fair market value of our interest rate swap liability is $1,310. The unrealized gain on hedging activities during the six months ended June 30, 2022, was approximately $1.5 million and during the six months ended June 30, 2021, the unrealized gain on hedging activities was approximately $0.7 million.
Gain on Sale of Assets. During the six month period ended June 30, 2022, we sold the property in Raleigh, North Carolina for a gain of approximately $30.1 million.
Income Taxes. We had an income tax provision of $21,269 for the six months ended June 30, 2022 compared to an income tax provision of $9,581, for the six months ended June 30, 2021. MHI TRS realized operating losses for each of the six months ended June 30, 2022 and 2021.
42
Net Income (Loss). We realized a net income for the six months ended June 30, 2022 of approximately $26.8million, compared to a net loss of approximately $9.1 million, for the six months ended June 30, 2021, because of the operating results discussed above.
Non-GAAP Financial Measures
We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, gains or losses from involuntary conversions of assets, plus certain non-cash items such as real estate asset depreciation and amortization or impairment, stock compensation costs and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
We further adjust FFO Available to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, gains on extinguishment of preferred stock, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, management contract termination costs, operating asset depreciation and amortization, change in control gains or losses, ESOP and stock compensation expenses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more
43
indicative than FFO of the on-going performance of our business and assets. Our calculation of adjusted FFO may be different from similar measures calculated by other REITs.
The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for three and six months ended June 30, 2022 and 2021:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
Net income (loss) |
| $ | 27,605,359 |
|
| $ | (1,553,970 | ) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
Depreciation and amortization - real estate |
|
| 4,605,649 |
|
|
| 4,952,169 |
|
|
| 9,156,025 |
|
|
| 9,916,685 |
|
Distributions to preferred stockholders |
|
| (1,889,470 | ) |
|
| (1,529,613 | ) |
|
| (3,826,086 | ) |
|
| (3,718,524 | ) |
Loss (gain) on disposal & sale of assets |
|
| (29,533,821 | ) |
|
| 17,221 |
|
|
| (29,563,364 | ) |
|
| 17,221 |
|
Gain on involuntary conversion of assets |
|
| (51,547 | ) |
|
| (496,957 | ) |
|
| (51,547 | ) |
|
| (496,957 | ) |
FFO attributable to common stockholders and unitholders |
|
| 736,170 |
|
|
| 1,388,850 |
|
|
| 2,509,443 |
|
|
| (3,411,169 | ) |
Amortization |
|
| 14,094 |
|
|
| 17,500 |
|
|
| 28,790 |
|
|
| 35,000 |
|
ESOP and stock - based compensation |
|
| 102,528 |
|
|
| 40,282 |
|
|
| 522,689 |
|
|
| 525,329 |
|
Loss on early extinguishment of debt |
|
| 5,944,881 |
|
|
| - |
|
|
| 5,944,881 |
|
|
| - |
|
Unrealized gain on hedging activities |
|
| (572,497 | ) |
|
| (303,181 | ) |
|
| (1,534,760 | ) |
|
| (693,367 | ) |
Adjusted FFO attributable to common stockholders and unitholders |
| $ | 6,225,176 |
|
| $ | 1,143,451 |
|
| $ | 7,471,043 |
|
| $ | (3,544,207 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of shares outstanding, basic |
|
| 17,762,513 |
|
|
| 14,635,701 |
|
|
| 17,436,975 |
|
|
| 14,530,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of non-controlling units |
|
| 1,110,093 |
|
|
| 1,166,401 |
|
|
| 1,121,841 |
|
|
| 1,166,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of shares and units outstanding, basic |
|
| 18,872,606 |
|
|
| 15,802,102 |
|
|
| 18,558,816 |
|
|
| 15,696,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
FFO per common share and unit |
| $ | 0.04 |
|
| $ | 0.09 |
|
| $ | 0.14 |
|
| $ | (0.22 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted FFO per common share and unit |
| $ | 0.33 |
|
| $ | 0.07 |
|
| $ | 0.40 |
|
| $ | (0.23 | ) |
EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) unrealized gains and losses on derivative instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) gain on exercise of development right, (11) corporate general and administrative expense, and (12) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
44
The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and six months ended June 30, 2022 and 2021:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, 2022 |
|
| June 30, 2021 |
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||||
Net income (loss) |
| $ | 27,605,359 |
|
| $ | (1,553,970 | ) |
| $ | 26,794,415 |
|
| $ | (9,129,594 | ) |
Interest expense |
|
| 5,342,940 |
|
|
| 5,526,595 |
|
|
| 11,056,144 |
|
|
| 11,446,118 |
|
Interest income |
|
| (27,486 | ) |
|
| (36,308 | ) |
|
| (51,934 | ) |
|
| (74,907 | ) |
Income tax provision |
|
| 11,615 |
|
|
| 6,972 |
|
|
| 21,269 |
|
|
| 9,581 |
|
Loss (gain) on disposal & sale of assets |
|
| (29,533,821 | ) |
|
| 17,221 |
|
|
| (29,563,364 | ) |
|
| 17,221 |
|
Depreciation and amortization |
|
| 4,619,743 |
|
|
| 4,969,669 |
|
|
| 9,184,815 |
|
|
| 9,951,685 |
|
EBITDA |
|
| 8,018,350 |
|
|
| 8,930,179 |
|
|
| 17,441,345 |
|
|
| 12,220,104 |
|
Loss on early extinguishment of debt |
|
| 5,944,881 |
|
|
| - |
|
|
| 5,944,881 |
|
|
| - |
|
Gain on involuntary conversion of assets |
|
| (51,547 | ) |
|
| (496,957 | ) |
|
| (51,547 | ) |
|
| (496,957 | ) |
Subtotal |
|
| 13,911,684 |
|
|
| 8,433,222 |
|
|
| 23,334,679 |
|
|
| 11,723,147 |
|
Corporate general and administrative |
|
| 1,432,366 |
|
|
| 1,530,438 |
|
|
| 2,946,393 |
|
|
| 2,831,396 |
|
Unrealized gain on hedging activities |
|
| (572,497 | ) |
|
| (303,181 | ) |
|
| (1,534,760 | ) |
|
| (693,367 | ) |
Hotel EBITDA |
| $ | 14,771,553 |
|
| $ | 9,660,479 |
|
| $ | 24,746,312 |
|
| $ | 13,861,176 |
|
Sources and Uses of Cash
Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage and other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and dividends. As of June 30, 2022, we had approximately $24.0 million of unrestricted cash and $7.4 million of restricted cash.
Operating Activities. Our net cash flow provided by operating activities for the six months ended June 30, 2022 was approximately $1.5 million generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the quarters and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in transient consumers, group business, and other business travel due to the lifting of restrictions on travel, social gatherings and business operations. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and positive or negative changes in working capital.
Investing Activities. Our cash provided by investing activities for the six months ended June 30, 2022, was approximately $50.4 million. Of this amount approximately $10.9 million came from the sale of Sheraton Louisville Riverside property and approximately $41.5 million came from the sale of the DoubleTree by Hilton Raleigh Brownstone University property, approximately $2.6 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $0.6 million.
Financing Activities. During the six months ended June 30, 2022, the Company and Operating Partnership received proceeds of $7.8 million from the refinance of the Hotel Alba mortgage loan, made principal payments on its mortgages of approximately $33.6 million, including the payment of the extinguishment of debt related to the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone University. In addition, the Company extinguished debt on its Secured Notes of $20.0 million.
45
Capital Expenditures
We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined through the annual budget process over which we maintain approval rights, and which are implemented or administered by our management company.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we may be required by one or more of our franchisors to complete a property improvement program (“PIP”) in order to bring the hotel up to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including restricted cash, proceeds of mortgage debt or equity offerings.
Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In response to the COVID-19 pandemic, we postponed all major non-essential capital expenditures. If travel demand, occupancy, and RevPAR increase as expected through the remainder of 2022, we expect total capital expenditures to be approximately $6.3 million for 2022.
We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. Except as temporarily provided through loan modifications and forbearance agreements, we deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, Tapestry Collection by Hilton, the DoubleTree Resort by Hilton Hollywood Beach, The DoubleTree by Hilton Jacksonville Riverside, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.
Liquidity and Capital Resources
The COVID-19 pandemic had a significant negative impact on our operations and financial results during 2020 and 2021. While the effects have moderated substantially, we continue to experience their effects and expect them to continue throughout 2022. The impact included a substantial decline in our revenues, profitability and cash flows from operations.
During 2020 and into 2021, we entered into forbearance agreements with all our mortgage lenders and negotiated extended payment terms with a few key vendors in order to preserve liquidity. Repayment of deferred amounts of interest, mortgage principal and amounts due certain vendors, which began in 2021, will continue through the end of 2022, with certain amounts being deferred until the applicable loan matures. We estimate the aggregate amount of deferred payments due in 2022 at approximately $7.5 million, of which approximately $3.4 million remained at June 30, 2022.
As of June 30, 2022, we had total cash of approximately $31.4 million. During the six months ended June 30, 2022, we generated cash, cash equivalents and restricted cash of approximately $5.8 million. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt).
In June 2022, we sold the DoubleTree by Hilton Raleigh Brownstone – University which generated net proceeds of approximately $19.8 million, which we used to repay a portion of the Secured Notes and the associated repayment factor. Also in June 2022, we refinanced the Hotel Alba mortgage and generated proceeds of approximately $7.5 million, which we used to pay the remainder of the Secured Notes and accrued interest in combination with approximately $2.3 million of unrestricted and restricted cash.
As of the date of this report, we were current on all loan payments on all other mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement (“DSCR”) covenant under the mortgage secured by The Whitehall. We have received a waiver of the financial covenants from the lender of the mortgage on The Whitehall mortgage through June 30, 2022. Based on our current projections, we do not anticipate that the financial performance of the property will have sufficiently recovered in order to meet the existing covenants. If we fail to obtain additional waivers from the lender, we may be required to make a substantial prepayment of up to an estimated $11.7 million, in order to bring the loan into compliance.
In 2023, the mortgages on The Whitehall, the DoubleTree by Hilton Laurel and the DoubleTree by Hilton Philadelphia Airport mature. We intend to refinance the mortgages maturing in 2023 at the level of their existing indebtedness or request extensions at existing terms.
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We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources, which we expect to be limited as a result of the COVID-19 outbreak. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well as the effects of the ongoing global pandemic.
As described in “Liquidity and Capital Resources”, as of June 30, 2022, we failed to meet certain financial covenants under the mortgage secured by The Whitehall. We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022.
Certain of our loan agreements also include financial covenants that trigger a “cash trap”. As of December 31, 2021, we had failed to meet the financial covenants under the mortgage secured by the DoubleTree Resort by Hilton Hollywood Beach. Without the waiver we received from the lender which waives compliance through December 31, 2022, non-compliance with the financial covenant on this and similar mortgages would have triggered a “cash trap” requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”. In addition, in order to receive forbearance from the lender on the Hyatt Centric Arlington, we agreed to a “cash trap” until the property meets the criteria in the forbearance agreement for exiting the “cash trap”.
Dividend Policy
As approved by its board of directors and announced on March 17, 2020, the Company has suspended its regular quarterly cash common stock dividends in order to preserve liquidity as a result of the impact from the COVID-19 pandemic. The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future. As previously announced, the record date for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, that were to be paid April 15, 2020, to shareholders of record as of March 31, 2020, have each been declared and the payment of dividends on all classes of the Company’s preferred stock has been deferred. The Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. Distributions on shares of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for the last twelve quarterly periods.
Off-Balance Sheet Arrangements
None.
Inflation
We generate revenues primarily from lease payments from our MHI TRS Entities and net income from the operations of our MHI TRS Entities. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates
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daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liability at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. It is also possible that actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgment on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in these critical accounting policies or the methods or assumptions we apply.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.
To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.
As of SeptemberJune 30, 2017,2022, we had approximately $264.6$295.0 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237%, and the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $61.0$39.4 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.84%4.70%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in the Prime Rate. Assuming that the aggregate amount outstanding on the mortgage on The Whitehall remains at approximately $14.4 million, the balance at June 30, 2022, the impact on our annual interest incurred and cash flows of a one percent increase in the Prime Rate, would be approximately $0.1 million.
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As of December 31, 2021, we had approximately $330.0 million of fixed-rate debt, including the mortgage on our DoubleTree by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, secured notes of $20.0 million with a fixed rate of 6.0% and including the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $50.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.77%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR. However, to the extent that 1-month LIBOR does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changesand in interest rates.Prime Rate. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore,Hotel Alba, The Whitehall and the DoubleTree by Hilton Philadelphia Airport and the mortgage on The WhitehallRaleigh Brownstone-University remains at approximately $61.0$50.2 million, the balance at September 30, 2017,December 31, 2021, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.6$0.2 million.
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As of December 31, 2016,we had approximately $228.7 million of fixed-rate debtItem 4. Controls and approximately $81.1 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.84%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR. However, to the extent that 1-month LIBOR does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore, DoubleTree by Hilton Philadelphia Airport, DoubleTree by Hilton Jacksonville Riverfront and the mortgage on The Whitehall remains at approximately $81.1 million, the balance at December 31, 2016, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.8 million.Procedures
Sotherly Hotels Inc.
Disclosure Controls and Procedures
The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of SeptemberJune 30, 2017.2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of SeptemberJune 30, 2017,2022, its disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.
Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over financial reporting.
Sotherly Hotels LP
Disclosure Controls and Procedures
The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of SeptemberJune 30, 2017.2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of SeptemberJune 30, 2017,2022, the disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
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The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels LP have been detected.
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Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels LP’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
We are not involved in any material legal proceedings, other thannor to our knowledge, is any material litigation threatened against us. We are involved in routine legal proceedings occurring inarising out of the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are notbusiness most of which is expected to be covered by insurance, and none of which is expected to have a material toimpact on our financial condition andor results of operations.
Item 1A. Risk Factors
Except as set forth below, thereThere have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2016.2021.
Holders
Item 2. Unregistered Sales of our outstanding preferred shares have dividend, liquidationEquity Securities and other rights that are senior to the rightsUse of the holders of our common shares.Proceeds
Our board of directors has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of November 7, 2017, 1,610,000 shares of our Series B Preferred Stock were issued and outstanding, and 1,300,000 shares of our Series C Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding Series B preferred shares is approximately $40.3 million, and annual dividends on our outstanding Series B preferred shares are approximately $3.2 million. The aggregate liquidation preference with respect to the outstanding Series C preferred shares is approximately $32.5 million, and annual dividends on our outstanding Series C preferred shares are approximately $2.6 million. Holders of both our Series B and Series C Preferred Stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of the Series B Preferred Stock and Series C Preferred Stock voting together as a separate class have the right to elect two additional directors to our board of directors whenever dividends on the preferred shares are in arrears in an aggregate amount equivalent to six or more quarterly dividends (whether or not consecutive). Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future preferred offerings. Thus, our stockholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interest.
The change of control conversion and redemption features of the Series B and Series C Preferred Stock may make it more difficult for a party to take over our Company or discourage a party from taking over our Company.
Upon a change of control (as defined in our charter), holders of both our Series B and Series C Preferred Stock will have the right (unless, as provided in our charter, we have provided or provide notice of our election to exercise our special optional redemption right before the relevant date) to convert some or all of their shares of preferred stock into shares of our common stock (or equivalent value of alternative consideration). Upon such a conversion, holders will be limited to a maximum number of shares equal to the share cap, subject to adjustments. If the common stock price is less than $3.015, subject to adjustment, holders will receive a maximum of 8.29187 shares of our common stock per share of Series B Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series B Preferred Stock. If the common stock price is less than $2.94, subject to adjustment, holders will receive a maximum of 8.50340 shares of our common stock per share of Series C Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series C Preferred Stock. In addition, those features of our Series B and Series C Preferred Stock may have the effect of inhibiting or discouraging a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of shares of our common stock and shares of our Series B and Series C Preferred Stock with the opportunity to realize a premium over the then current market price or that stockholders may otherwise believe is in their best interests.
From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Partnership Agreement, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.
On April 11, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 116,640 shares of its Common Stock for 4,000 shares of the Series B Preferred Stock and 8,000 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 12, 2022. Those shares of Common Stock were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such an exchange. Concurrently with the issuance of the shares of Common Stock, the Operating Partnership issued 116,640 limited partnership units to the Company in exchange for 4,000 of the Operating Partnership’s Series B Preferred Units and 8,000 of the Operating Partnership’s Series C Preferred Units.
On April 19, 2022, we entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 153,504 shares of its Common Stock for 5,000 shares of the Series B Preferred Stock and 10,600 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 19, 2022. Those shares of Common Stock were also issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such an exchange. Concurrently with the issuance of the shares of Common Stock, the Operating Partnership issued 153,504 limited partnership units to the Company in exchange for 5,000 of the Operating Partnership’s Series B Preferred Units and 10,600 of the Operating Partnership’s Series C Preferred Units.
Item 3. Defaults upon Senior Securities
Preferred Stock
The Company’s distribution on the shares of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for nine quarterly periods. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s preferred stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
The Company announced that it was deferring payment of Sotherly’s previously announced dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020, and deferring payment of dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the
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periods ending June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022, and September 30, 2022. The relevant distributions were as follows:
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The total arrearage of unpaid cash dividends declared and undeclared on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through August 12, 2022, are $7,440,500, $6,676,087, and $6,007,031, respectively.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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Not applicable.
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Item 6. Exhibits
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(+) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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