Docoh
Loading...

SOHO Sotherly Hotels

Filed: 16 Aug 21, 4:06pm

 

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 June 30, 2021

 

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)

 

 

Maryland

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)

 

 

Delaware

001-36091

20-1965427

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

 

306 South Henry Street, Suite 100

Williamsburg, Virginia 23185

(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 LP    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)

Sotherly Hotels Inc.    Yes      No       Sotherly Hotels LP    Yes      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.

Sotherly Hotels Inc.

 

Large Accelerated Filer

 

 

Accelerated Filer

 

 

 

 

 

 

Non-accelerated Filer

 

 

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

 

 

 

 

Sotherly Hotels LP

 

Large Accelerated Filer

 

 

Accelerated Filer

 

 

 

 

 

 

Non-accelerated Filer

 

 

Smaller Reporting Company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 


 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Sotherly Hotels Inc.    Yes      No   Sotherly Hotels LP    Yes      No  

 

As of August 5, 2021, there were 16,717,958 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,” the Company’s preferred stock as “preferred stock,” and the Operating Partnership’s common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “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 June 30, 2021 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' 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 of 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 6 – Preferred Stock and Units;

 

Note 7 – Common Stock and Units;

 

Note 12 – Loss Per Share and Per Unit; and

 

Part I, Item 4 - Controls and Procedures; and

 

Part II, Item 6 - Certifications of CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.

 

 

3


 

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I

Item 1.

 

Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

Sotherly Hotels Inc.

 

 

 

 

Consolidated Balance Sheets as of June 30, 2021(unaudited) and December 31, 2020

 

5

 

 

Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2021 and 2020

 

6

 

 

Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March and June 30, 2021 and 2020

 

7

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2021 and 2020

 

9

 

 

 

 

 

 

 

Sotherly Hotels LP

 

 

 

 

Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020

 

10

 

 

Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2021 and 2020

 

11

 

 

Consolidated Statements of Changes in Partners’ Capital (unaudited) for the Three Months Ended March and June 30, 2021 and 2020

 

12

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2021 and 2020

 

14

 

 

Notes to Consolidated Financial Statements

 

15

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

53

Item 4

 

Controls and Procedures

 

54

 

 

 

 

 

PART II

Item 1.

 

Legal Proceedings

 

56

Item 1A.

 

Risk Factors

 

56

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 3.

 

Defaults Upon Senior Securities

 

56

Item 4.

 

Mine Safety Disclosures

 

57

Item 5.

 

Other Information

 

57

Item 6.

 

Exhibits

 

58

 

4


 

PART I

 

 

Item 1.

Consolidated Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

419,425,216

 

 

$

427,824,585

 

Cash and cash equivalents

 

 

21,822,863

 

 

 

25,297,771

 

Restricted cash

 

 

11,709,866

 

 

 

10,002,775

 

Accounts receivable, net

 

 

2,790,785

 

 

 

1,779,776

 

Accounts receivable - affiliate

 

 

298,114

 

 

 

401,924

 

Prepaid expenses, inventory and other assets

 

 

9,169,082

 

 

 

7,726,980

 

TOTAL ASSETS

 

$

465,215,926

 

 

$

473,033,811

 

LIABILITIES

 

 

 

 

 

 

 

 

Mortgage loans, net

 

$

355,064,731

 

 

$

357,545,977

 

Secured notes, net

 

 

18,910,413

 

 

 

18,694,355

 

Unsecured notes, net

 

 

10,719,100

 

 

 

10,719,100

 

Accounts payable and accrued liabilities

 

 

38,949,954

 

 

 

35,631,931

 

Advance deposits

 

 

1,697,617

 

 

 

1,964,073

 

Dividends and distributions payable

 

 

4,167,187

 

 

 

4,277,070

 

TOTAL LIABILITIES

 

$

429,509,002

 

 

$

428,832,506

 

Commitments and contingencies (See Note 5)

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Sotherly Hotels Inc. stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 11,000,000 shares authorized:

 

 

 

 

 

 

 

 

8.0% Series B cumulative redeemable perpetual preferred stock,

   1,510,000 and 1,610,000 shares issued and outstanding; aggregate liquidation

    preference $42,280,000 and $42,655,000, at June 30, 2021 and December 31,

    2020, respectively.

 

 

15,100

 

 

 

16,100

 

7.875% Series C cumulative redeemable perpetual preferred stock,

    1,469,610 and 1,554,610 shares issued and outstanding; aggregate liquidation

    preference $41,080,196 and $41,160,731, at June 30, 2021 and December 31,

    2020, respectively.

 

 

14,696

 

 

 

15,546

 

8.25% Series D cumulative redeemable perpetual preferred stock,

   1,165,000 and 1,200,000 shares issued and outstanding; aggregate liquidation

   preference $32,729,219 and $31,856,250, at June 30, 2021 and December

   31, 2020, respectively.

 

 

11,650

 

 

 

12,000

 

Common stock, par value $0.01, 69,000,000 shares authorized, 16,717,958

   shares issued and outstanding at June 30, 2021 and 15,023,850

   shares issued and outstanding at December 31, 2020.

 

 

167,179

 

 

 

150,238

 

Additional paid-in capital

 

 

180,494,501

 

 

 

180,189,699

 

Unearned ESOP shares

 

 

(3,524,148

)

 

 

(3,636,026

)

Distributions in excess of retained earnings

 

 

(135,244,679

)

 

 

(127,197,489

)

Total Sotherly Hotels Inc. stockholders’ equity

 

 

41,934,299

 

 

 

49,550,068

 

Noncontrolling interest

 

 

(6,227,375

)

 

 

(5,348,763

)

TOTAL EQUITY

 

 

35,706,924

 

 

 

44,201,305

 

TOTAL LIABILITIES AND EQUITY

 

$

465,215,926

 

 

$

473,033,811

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

$

24,045,910

 

 

$

3,885,820

 

 

$

39,539,514

 

 

$

28,630,743

 

Food and beverage department

 

 

3,501,875

 

 

 

155,192

 

 

 

5,045,114

 

 

 

8,299,166

 

Other operating departments

 

 

6,835,524

 

 

 

1,252,895

 

 

 

12,434,212

 

 

 

5,572,462

 

Total revenue

 

 

34,383,309

 

 

 

5,293,907

 

 

 

57,018,840

 

 

 

42,502,371

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

 

5,917,880

 

 

 

1,751,374

 

 

 

9,914,496

 

 

 

8,834,565

 

Food and beverage department

 

 

2,106,487

 

 

 

119,901

 

 

 

3,016,751

 

 

 

6,732,207

 

Other operating departments

 

 

2,648,387

 

 

 

701,608

 

 

 

4,587,264

 

 

 

2,973,236

 

Indirect

 

 

14,050,076

 

 

 

7,929,765

 

 

 

25,639,153

 

 

 

24,111,606

 

Total hotel operating expenses

 

 

24,722,830

 

 

 

10,502,648

 

 

 

43,157,664

 

 

 

42,651,614

 

Depreciation and amortization

 

 

4,969,669

 

 

 

4,993,107

 

 

 

9,951,685

 

 

 

9,975,983

 

Loss (Gain) on disposal of assets

 

 

17,221

 

 

 

(451

)

 

 

17,221

 

 

 

(451

)

Corporate general and administrative

 

 

1,530,438

 

 

 

1,227,808

 

 

 

2,831,396

 

 

 

3,107,933

 

Total operating expenses

 

 

31,240,158

 

 

 

16,723,112

 

 

 

55,957,966

 

 

 

55,735,079

 

NET OPERATING INCOME (LOSS)

 

 

3,143,151

 

 

 

(11,429,205

)

 

 

1,060,874

 

 

 

(13,232,708

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(5,526,595

)

 

 

(4,719,796

)

 

 

(11,446,118

)

 

 

(9,281,636

)

Interest income

 

 

36,308

 

 

 

72,001

 

 

 

74,907

 

 

 

132,366

 

Unrealized gain (loss) on hedging activities

 

 

303,181

 

 

 

(214,876

)

 

 

693,367

 

 

 

(1,800,508

)

Gain on involuntary conversion of assets

 

 

496,957

 

 

 

14,168

 

 

 

496,957

 

 

 

26,607

 

Net loss before income taxes

 

 

(1,546,998

)

 

 

(16,277,708

)

 

 

(9,120,013

)

 

 

(24,155,879

)

Income tax provision

 

 

(6,972

)

 

 

(23,362

)

 

 

(9,581

)

 

 

(5,477,396

)

Net loss

 

 

(1,553,970

)

 

 

(16,301,070

)

 

 

(9,129,594

)

 

 

(29,633,275

)

Less: Net loss attributable to noncontrolling interest

 

 

179,638

 

 

 

1,365,368

 

 

 

879,176

 

 

 

2,562,783

 

Net loss attributable to the Company

 

 

(1,374,332

)

 

 

(14,935,702

)

 

 

(8,250,418

)

 

 

(27,070,492

)

Declared and undeclared distributions to preferred stockholders

 

 

(1,529,613

)

 

 

(2,188,910

)

 

 

(3,718,524

)

 

 

(4,377,821

)

Gain on extinguishment of preferred stock

 

 

93,342

 

 

 

 

 

 

93,342

 

 

 

 

Net loss attributable to common stockholders

 

$

(2,810,603

)

 

$

(17,124,612

)

 

$

(11,875,600

)

 

$

(31,448,313

)

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19

)

 

$

(1.20

)

 

$

(0.81

)

 

$

(2.20

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,850,282

 

 

 

14,303,119

 

 

 

14,733,649

 

 

 

14,274,668

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

180,189,699

 

 

$

(3,636,026

)

 

$

(127,197,489

)

 

$

(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

   common stock awards

 

 

 

 

 

 

 

 

15,000

 

 

 

150

 

 

 

43,950

 

 

 

 

 

 

 

 

 

 

 

 

44,100

 

Conversion of units in Operating

   Partnership to shares of

   common stock

 

 

 

 

 

 

 

 

100

 

 

 

1

 

 

 

(566

)

 

 

 

 

 

 

 

 

565

 

 

 

 

Amortization of ESOP shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,853

)

 

 

55,939

 

 

 

 

 

 

 

 

 

22,086

 

Amortization of restricted

   stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

Balances at March 31, 2021

     (unaudited)

 

 

4,364,610

 

 

$

43,646

 

 

 

15,175,231

 

 

$

151,752

 

 

$

180,616,728

 

 

$

(3,580,087

)

 

$

(134,073,574

)

 

$

(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

   stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

Balances at June 30, 2021

     (unaudited)

 

 

4,144,610

 

 

$

41,446

 

 

 

16,717,958

 

 

$

167,179

 

 

 

180,494,501

 

 

$

(3,524,148

)

 

 

(135,244,679

)

 

$

(6,227,375

)

 

$

35,706,924

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

7


 

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

 

4,364,610

 

 

$

43,646

 

 

 

14,272,378

 

 

$

142,723

 

 

$

180,515,861

 

 

$

(4,105,637

)

 

$

(73,990,690

)

 

$

(1,198,732

)

 

$

101,407,171

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,134,789

)

 

 

(1,197,416

)

 

 

(13,332,205

)

Issuance of common stock

 

 

 

 

 

 

 

 

2,250

 

 

 

22

 

 

 

14,153

 

 

 

 

 

 

 

 

 

 

 

 

14,175

 

Issuance of restricted common

   stock awards

 

 

 

 

 

 

 

 

60,000

 

 

 

600

 

 

 

93,900

 

 

 

 

 

 

 

 

 

 

 

 

94,500

 

Conversion of units in Operating

   Partnership to shares of

   common stock

 

 

 

 

 

 

 

 

488,952

 

 

 

4,890

 

 

 

(370,890

)

 

 

 

 

 

26,266

 

 

 

339,734

 

 

 

 

Amortization of ESOP shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,813

)

 

 

69,329

 

 

 

 

 

 

 

 

 

56,516

 

Amortization of restricted

   stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

Preferred stock dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Preferred Stock,

   $0.50/share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(805,000

)

 

 

 

 

 

(805,000

)

Series C Preferred Stock,

   $0.492188/share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(765,160

)

 

 

 

 

 

(765,160

)

Series D Preferred Stock,

   $0.515625/share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(618,750

)

 

 

 

 

 

(618,750

)

Common stock, $0.13/share

   dividends and distributions

   declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,846,214

)

 

 

(161,095

)

 

 

(2,007,309

)

Balances at March 31, 2020

   (unaudited)

 

 

4,364,610

 

 

$

43,646

 

 

 

14,823,580

 

 

$

148,235

 

 

$

180,258,406

 

 

$

(4,036,308

)

 

$

(90,134,337

)

 

$

(2,217,509

)

 

$

84,062,133

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,935,702

)

 

 

(1,365,368

)

 

 

(16,301,070

)

Conversion of units in Operating

   Partnership to shares of

   common stock

 

 

 

 

 

 

 

 

57,687

 

 

 

577

 

 

 

(33,092

)

 

 

59,684

 

 

 

(59,685

)

 

 

32,516

 

 

 

 

Amortization of ESOP shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43,045

)

 

 

(327

)

 

 

 

 

 

 

 

 

(43,372

)

Amortization of restricted

   stock awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

 

 

 

 

 

 

 

 

 

 

 

18,195

 

Balances at June 30, 2020

   (unaudited)

 

 

4,364,610

 

 

$

43,646

 

 

 

14,881,267

 

 

$

148,812

 

 

$

180,200,464

 

 

$

(3,976,951

)

 

$

(105,129,724

)

 

$

(3,550,361

)

 

$

67,735,886

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

8


 

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

 

$

(9,129,594

)

 

$

(29,633,275

)

Adjustments to reconcile net loss to net cash

      provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

9,951,685

 

 

 

9,975,983

 

Amortization of deferred financing costs

 

 

 

516,814

 

 

 

284,943

 

Amortization of mortgage premium

 

 

 

(12,341

)

 

 

(12,341

)

Gain on involuntary conversion of assets

 

 

 

(496,957

)

 

 

(26,607

)

Unrealized (gain) loss on hedging activities

 

 

 

(693,367

)

 

 

1,800,508

 

(Gain) loss on disposal of assets

 

 

 

17,221

 

 

 

(451

)

ESOP and stock - based compensation

 

 

 

525,329

 

 

 

158,209

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(1,011,009

)

 

 

2,523,019

 

Prepaid expenses, inventory and other assets

 

 

 

(1,498,515

)

 

 

(2,353,578

)

Deferred income taxes

 

 

 

 

 

 

5,412,084

 

Accounts payable and other accrued liabilities

 

 

 

3,893,338

 

 

 

8,175,235

 

Advance deposits

 

 

 

(266,456

)

 

 

(1,225,842

)

Accounts receivable - affiliate

 

 

 

103,810

 

 

 

43,216

 

Net cash provided by (used in) operating activities

 

 

 

1,899,958

 

 

 

(4,878,897

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Improvements and additions to hotel properties

 

 

 

(1,793,222

)

 

 

(3,023,276

)

Proceeds from involuntary conversion

 

 

 

496,957

 

 

 

26,607

 

Net cash used in investing activities

 

 

 

(1,296,265

)

 

 

(2,996,669

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from unsecured debt

 

 

 

 

 

 

10,719,100

 

Payments on mortgage loans

 

 

 

(2,369,650

)

 

 

(1,616,513

)

Payments of deferred financing costs

 

 

 

(1,860

)

 

 

(99,000

)

Dividends on common stock and distributions paid

 

 

 

 

 

 

(2,000,418

)

Preferred dividends paid

 

 

 

 

 

 

(2,188,910

)

Net cash (used in) provided by financing activities

 

 

 

(2,371,510

)

 

 

4,814,259

 

Net decrease in cash, cash equivalents and restricted cash

 

 

 

(1,767,817

)

 

 

(3,061,307

)

Cash, cash equivalents and restricted cash at the beginning of the period

 

 

 

35,300,546

 

 

 

27,984,236

 

Cash, cash equivalents and restricted cash at the end of the period

 

 

$

33,532,729

 

 

$

24,922,929

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

 

$

10,375,892

 

 

$

3,681,239

 

Cash paid during the period for income taxes

 

 

$

20,200

 

 

$

62,782

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Change in amount of improvements to hotel property

   in accounts payable and accrued liabilities

 

 

$

445,430

 

 

$

587,314

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9


 

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

419,425,216

 

 

$

427,824,585

 

Cash and cash equivalents

 

 

21,822,863

 

 

 

25,297,771

 

Restricted cash

 

 

11,709,866

 

 

 

10,002,775

 

Accounts receivable, net

 

 

2,790,785

 

 

 

1,779,776

 

Accounts receivable - affiliate

 

 

298,114

 

 

 

401,924

 

Loan receivable - affiliate

 

 

3,632,890

 

 

 

3,746,254

 

Prepaid expenses, inventory and other assets

 

 

9,169,082

 

 

 

7,726,980

 

TOTAL ASSETS

 

$

468,848,816

 

 

$

476,780,065

 

LIABILITIES

 

 

 

 

 

 

 

 

Mortgage loans, net

 

$

355,064,731

 

 

$

357,545,977

 

Secured loan, net

 

 

18,910,413

 

 

 

18,694,355

 

Unsecured notes, net

 

 

10,719,100

 

 

 

10,719,100

 

Accounts payable and other accrued liabilities

 

 

38,949,954

 

 

 

35,631,931

 

Advance deposits

 

 

1,697,617

 

 

 

1,964,073

 

Dividends and distributions payable

 

 

4,167,187

 

 

 

4,277,070

 

TOTAL LIABILITIES

 

$

429,509,002

 

 

$

428,832,506

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

Preferred units, 11,000,000 units authorized;

 

 

 

 

 

 

 

 

8.0% Series B cumulative redeemable perpetual preferred unit;

   1,510,000 and 1,610,000 units issued and outstanding; aggregate liquidation

   preference $42,280,000 and $42,665,000, at June 30, 2021 and December 31,

   2020, respectively.

 

 

35,420,784

 

 

 

37,766,531

 

7.875% Series C cumulative redeemable perpetual preferred units,

   1,469,610 and 1,554,610 units issued and outstanding; aggregate liquidation

   preference $41,080,196 and $41,160,731, each at June 30, 2021 and December

   31, 2020, respectively.

 

 

34,468,358

 

 

 

36,461,955

 

8.25% Series D cumulative redeemable perpetual preferred units,

   1,165,000 and 1,200,000 units issued and outstanding; aggregate liquidation

   preference $32,729,219 and $31,856,250, each at June 30, 2021 and December

   31, 2020, respectively.

 

 

27,549,832

 

 

 

28,377,509

 

General Partner:  178,844 units and 161,904 units issued and outstanding as of

   June 30, 2021 and December 31, 2020, respectively.

 

 

(292,945

)

 

 

(258,538

)

Limited Partners: 17,705,515 units and 16,028,447 units issued and outstanding as

   of June 30, 2021 and December 31, 2020, respectively.

 

 

(57,806,215

)

 

 

(54,399,898

)

TOTAL PARTNERS’ CAPITAL

 

 

39,339,814

 

 

 

47,947,559

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

468,848,816

 

 

$

476,780,065

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10


 

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

$

24,045,910

 

 

$

3,885,820

 

 

$

39,539,514

 

 

$

28,630,743

 

Food and beverage department

 

 

3,501,875

 

 

 

155,192

 

 

 

5,045,114

 

 

 

8,299,166

 

Other operating departments

 

 

6,835,524

 

 

 

1,252,895

 

 

 

12,434,212

 

 

 

5,572,462

 

Total revenue

 

 

34,383,309

 

 

 

5,293,907

 

 

 

57,018,840

 

 

 

42,502,371

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

 

5,917,880

 

 

 

1,751,374

 

 

 

9,914,496

 

 

 

8,834,565

 

Food and beverage department

 

 

2,106,487

 

 

 

119,901

 

 

 

3,016,751

 

 

 

6,732,207

 

Other operating departments

 

 

2,648,387

 

 

 

701,608

 

 

 

4,587,264

 

 

 

2,973,236

 

Indirect

 

 

14,050,076

 

 

 

7,929,765

 

 

 

25,639,153

 

 

 

24,111,606

 

Total hotel operating expenses

 

 

24,722,830

 

 

 

10,502,648

 

 

 

43,157,664

 

 

 

42,651,614

 

Depreciation and amortization

 

 

4,969,669

 

 

 

4,993,107

 

 

 

9,951,685

 

 

 

9,975,983

 

Loss (Gain) on disposal of assets

 

 

17,221

 

 

 

(451

)

 

 

17,221

 

 

 

(451

)

Corporate general and administrative

 

 

1,530,438

 

 

 

1,227,808

 

 

 

2,831,396

 

 

 

3,107,933

 

Total operating expenses

 

 

31,240,158

 

 

 

16,723,112

 

 

 

55,957,966

 

 

 

55,735,079

 

NET OPERATING INCOME (LOSS)

 

 

3,143,151

 

 

 

(11,429,205

)

 

 

1,060,874

 

 

 

(13,232,708

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(5,526,595

)

 

 

(4,719,796

)

 

 

(11,446,118

)

 

 

(9,281,636

)

Interest income

 

 

36,308

 

 

 

72,001

 

 

 

74,907

 

 

 

132,366

 

Unrealized gain (loss) on hedging activities

 

 

303,181

 

 

 

(214,876

)

 

 

693,367

 

 

 

(1,800,508

)

Gain on involuntary conversion of assets

 

 

496,957

 

 

 

14,168

 

 

 

496,957

 

 

 

26,607

 

Net loss before income taxes

 

 

(1,546,998

)

 

 

(16,277,708

)

 

 

(9,120,013

)

 

 

(24,155,879

)

Income tax provision

 

 

(6,972

)

 

 

(23,362

)

 

 

(9,581

)

 

 

(5,477,396

)

Net loss

 

 

(1,553,970

)

 

 

(16,301,070

)

 

 

(9,129,594

)

 

 

(29,633,275

)

Declared and undeclared distributions to preferred unit holders

 

 

(1,529,613

)

 

 

(2,188,910

)

 

 

(3,718,524

)

 

 

(4,377,821

)

Gain on extinguishment of preferred units

 

 

93,342

 

 

 

 

 

 

93,342

 

 

 

 

Net loss attributable to general and limited partnership

   unit holders

 

$

(2,990,241

)

 

$

(18,489,980

)

 

$

(12,754,776

)

 

$

(34,011,096

)

Net loss attributable per general and limited partner unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.18

)

 

$

(1.15

)

 

$

(0.78

)

 

$

(2.12

)

Weighted average number of general and limited partner units

   outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,511,162

 

 

 

16,062,768

 

 

 

16,398,448

 

 

 

16,057,745

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

11


 

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

 

 

Preferred Units

 

 

General Partner

 

 

Limited Partner

 

 

 

 

 

 

 

Units

 

 

Series B

Amounts

 

 

Series C

Amounts

 

 

Series D

Amounts

 

 

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

   unit awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   (unaudited)

 

 

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

   unit awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   (unaudited)

 

 

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.

12


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

 

 

 

Preferred Units

 

 

General Partner

 

 

Limited Partner

 

 

 

 

 

 

 

Units

 

 

Series B

Amounts

 

 

Series C

Amounts

 

 

Series D

Amounts

 

 

Units

 

 

Amounts

 

 

Units

 

 

Amounts

 

 

Total

 

Balances at December 31,

   2019

 

 

4,364,610

 

 

$

37,766,531

 

 

$

36,461,955

 

 

$

28,377,509

 

 

 

160,006

 

 

$

315,959

 

 

 

15,840,512

 

 

$

2,636,363

 

 

$

105,558,317

 

Issuance of partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

623

 

 

 

945

 

 

 

61,628

 

 

 

107,730

 

 

 

108,675

 

Amortization of restricted unit

   awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

18,013

 

 

 

18,195

 

Unit based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

765

 

 

 

 

 

 

75,716

 

 

 

76,481

 

Preferred unit distributions

   declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Preferred Units,

   $0.50/unit

 

 

 

 

 

(805,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(805,000

)

Series C Preferred Units,

   $0.492188/unit

 

 

 

 

 

 

 

 

(765,160

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(765,160

)

Series D Preferred Units,

   $0.515625/unit

 

 

 

 

 

 

 

 

 

 

 

(618,750

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(618,750

)

Partnership units, $0.13/unit

   distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,271

)

 

 

 

 

 

(2,068,888

)

 

 

(2,088,159

)

Net loss

 

 

 

 

 

805,000

 

 

 

765,160

 

 

 

618,750

 

 

 

 

 

 

(155,211

)

 

 

 

 

 

(15,365,904

)

 

 

(13,332,205

)

Balances at March 31, 2020

   (unaudited)

 

 

4,364,610

 

 

$

37,766,531

 

 

$

36,461,955

 

 

$

28,377,509

 

 

 

160,629

 

 

$

143,369

 

 

 

15,902,140

 

 

$

(14,596,970

)

 

$

88,152,394

 

Amortization of restricted unit

   awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

18,013

 

 

 

18,195

 

Unit based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(312

)

 

 

 

 

 

(30,989

)

 

 

(31,301

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(163,011

)

 

 

 

 

 

(16,138,059

)

 

 

(16,301,070

)

Balances at June 30, 2020

   (unaudited)

 

 

4,364,610

 

 

$

37,766,531

 

 

$

36,461,955

 

 

$

28,377,509

 

 

 

160,629

 

 

$

(19,772

)

 

 

15,902,140

 

 

$

(30,748,005

)

 

$

71,838,218

 

 

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, 2021

 

 

June 30, 2020

 

 

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

 

$

(9,129,594

)

 

$

(29,633,275

)

Adjustments to reconcile net loss to net cash

provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

9,951,685

 

 

 

9,975,983

 

Amortization of deferred financing costs

 

 

 

516,814

 

 

 

284,943

 

Amortization of mortgage premium

 

 

 

(12,341

)

 

 

(12,341

)

Gain on involuntary conversion of assets

 

 

 

(496,957

)

 

 

(26,607

)

Unrealized (gain) loss on hedging activities

 

 

 

(693,367

)

 

 

1,800,508

 

(Gain) loss on disposal of assets

 

 

 

17,221

 

 

 

(451

)

ESOP and unit - based compensation

 

 

 

411,964

 

 

 

190,245

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(1,011,009

)

 

 

2,523,019

 

Prepaid expenses, inventory and other assets

 

 

 

(1,498,515

)

 

 

(2,353,578

)

Deferred income taxes

 

 

 

 

 

 

5,412,084

 

Accounts payable and other accrued liabilities

 

 

 

3,893,338

 

 

 

8,175,235

 

Advance deposits

 

 

 

(266,456

)

 

 

(1,225,842

)

Accounts receivable - affiliate

 

 

 

103,810

 

 

 

43,216

 

Net cash provided by (used in) operating activities

 

 

 

1,786,593

 

 

 

(4,846,861

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Improvements and additions to hotel properties

 

 

 

(1,793,222

)

 

 

(3,023,276

)

ESOP loan payments received

 

 

 

113,365

 

 

 

47,614

 

Proceeds from involuntary conversion

 

 

 

496,957

 

 

 

26,607

 

Net cash used in investing activities

 

 

 

(1,182,900

)

 

 

(2,949,055

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from unsecured notes

 

 

 

 

 

 

10,719,100

 

Payments on mortgage loans

 

 

 

(2,369,650

)

 

 

(1,616,513

)

Payments of deferred financing costs

 

 

 

(1,860

)

 

 

(99,000

)

Distributions on general and limited partnership interests

 

 

 

 

 

 

(2,080,068

)

Distributions on preferred partnership interests

 

 

 

 

 

 

(2,188,910

)

Net cash (used in) provided by financing activities

 

 

 

(2,371,510

)

 

 

4,734,609

 

Net decrease in cash, cash equivalents and restricted cash

 

 

 

(1,767,817

)

 

 

(3,061,307

)

Cash, cash equivalents and restricted cash at the beginning of the period

 

 

 

35,300,546

 

 

 

27,984,236

 

Cash, cash equivalents and restricted cash at the end of the period

 

 

$

33,532,729

 

 

$

24,922,929

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

 

$

10,206,965

 

 

$

3,681,239

 

Cash paid during the period for income taxes

 

 

$

20,200

 

 

$

62,782

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Change in amount of improvements to hotel property in

   accounts payable and accrued liabilities

 

 

$

445,430

 

 

$

587,314

 

 

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 Company is 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 consists of investments in 12 hotel properties comprising 3,156 rooms, as well as interests in 2 condominium hotels and their associated rental programs.  The Company owns hotels that operate under the Hilton Worldwide, Marriott International, Inc., and Hyatt Hotels Corporation brands, as well as independent hotels.

The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of 6 hotel properties (the “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 expenditures 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 June 30, 2021 was approximately 93.5% owned by the Company, through its subsidiaries leases the hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership.  As of June 30, 2021, the MHI TRS Entities engaged Our Town Hospitality, LLC (“Our Town”), an eligible independent management company, to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in these “Notes to Consolidated Financial Statements” to “we”, “us”, “our” and “Sotherly” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

COVID-19, Management’s Plans and Liquidity

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. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels have remained open on a limited basis in order to serve the needs of the community, with the exception of the rental programs at our condominium hotels, which were temporarily closed during April and May of 2020. We believe that maintaining limited operations allowed us to increase capacity at individual hotels as demand has begun to return and the Centers for Disease Control (“CDC”) and state guidelines have started to permit an easing of travel and other business restrictions.  Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and 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 has had a significant negative impact on our operations and financial results, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods.  Conditions in the second quarter, however, improved significantly over the same period in the prior year, as the Company witnessed increased demand fueled predominantly by leisure travel.  Revenues, profitability, and cash flows from operations during the second quarter of 2021 exceeded our expectations but were still far below the same period in 2019, before the pandemic.  While the extent and duration of the negative effects resulting from COVID-19 on the Company’s business are highly uncertain and cannot be reasonably estimated at this time, the quarter’s operations and financial results were a marked improvement over the same period in 2020.  Notwithstanding the encouraging results recorded during the second quarter of 2021, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and business travel

15


approaches pre-pandemic levels. At a minimum, the Company expects the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow through 2021.

In response to those negative impacts, we took a number of actions to reduce costs and preserve liquidity.  The Company’s board of directors suspended quarterly cash dividends on shares of the Company’s common stock and deferred payment of dividends on the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”). We also suspended most planned capital expenditure projects, and reduced the cash compensation of our executive officers, board of directors and employees.  Working closely with our hotel managers, we significantly curtailed our hotels’ operating expenses.  We also sought and obtained forbearance and loan modification agreements with the lenders under the mortgages for all our hotel properties.

 

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage through and including June 30, 2022.   See the discussion of forbearance, modifications, and waivers in Note 4.

 

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties 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”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap”.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps”, which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.  

 

As of June 30, 2021, the Company had approximately $21.8 million in unrestricted cash and approximately $11.7 million in restricted cash.  In addition, we have the option to obtain $10.0 million in additional proceeds from the sale of additional Secured Notes to the Investors described below.

 

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note the Company paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the Company relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.  

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. The duration and extent of the reduction in hotel demand caused by the pandemic and the return to normalized operations prevents the Company from forecasting its cash flows and available liquidity to meet its obligations for operating expenses with precision and certainty.  However, based on our completed mortgage loan amendments and forbearance agreements, our current unrestricted and restricted cash, our current cash utilization, our forecast of future operating results and our anticipated ability to refinance or extend mortgage obligations maturing within the 12 months following the date of this report, we have concluded that substantial doubt of the Company’s ability to continue as a going concern has been alleviated.  Facts and circumstances could change in the future that are outside the Company’s control – such as additional government mandates, health official orders, travel restrictions and extended business shutdowns due to COVID-19.

16


Overview of Significant Transactions

Significant transactions occurring during the current and prior fiscal year include the following:

 

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 five years 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 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.

 

On December 31, 2020, we closed a transaction with KWHP SOHO, LLC, a Delaware limited liability company (“KW”), as collateral agent and a note investor, and MIG SOHO, LLC, a Delaware limited liability company (“MIG”, and together with KW, the “Investors”), as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 with the closing of such option required to take place on or before December 31, 2021.  The obligations of the Operating Partnership were guaranteed by the Company.  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.  The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option.  The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term.  Pursuant to the Pledge Agreement, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel (collectively, the “Pledged Collateral”).  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.  Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.

 

On June 21, 2021, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Palogic Value Fund, L.P., a Delaware limited partnership (“Palogic”).  Pursuant to the Share Exchange Agreement, Palogic agreed to exchange 100,000 shares of the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, 85,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Perpetual 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 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.

 

 

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, 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.

17


 

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 date and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. 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.

The Company assesses the carrying values of its investments in hotel properties 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 exceeds 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 COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on the lodging and hospitality industries, which the Company considered to be a triggering event for each of its hotels during its impairment testing for the three months ended June 30, 2021.  The Company assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash flows from the eventual disposition of the hotel. The Company also projects cash flows from the eventual disposition of the hotel based upon property-specific capitalization rates.  The Company determined that there were 0 impairments as of June 30, 2021.

Assets Held For Sale – 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.

Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

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. 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.

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 net realizable value, with cost determined on a method that approximates first-in, first-out basis.

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 June 30, 2021 and December 31, 2020 were $324,131 and $353,872, respectively. Amortization expense for the three-month periods ended June 30, 2021 and 2020, totaled $14,871 and $14,880, respectively, and for the six-month periods ended June 30, 2021 and 2020, totaled $ 29,741 and $29,761, respectively.

18


Right-of-Use Assets and Lease Obligations – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption.

As of June 30, 2021, we had right of use assets of approximately $8.1 million, net and lease obligations of approximately $6.6 million.  The right-of-use assets are included in investments in hotel properties, net and in prepaid expenses, inventory and other assets and the lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets.

Deferred Financing 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.

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheets 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 swap which act as cash flow hedges and are not designated as hedges.  We value our interest-rate caps 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 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.

19


 

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 assets and liabilities measured at fair value and the basis for that 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, 2021 and December 31, 2020, respectively):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Caps (1)

 

$

 

 

$

208

 

 

$

 

Interest Rate Swap (2)

 

$

 

 

$

(3,038,967

)

 

$

 

Mortgage loans (3)

 

$

 

 

$

(364,112,622

)

 

$

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Cap (1)

 

$

 

 

$

94

 

 

$

 

Interest Rate Swap (2)

 

$

 

 

$

(2,341,663

)

 

$

 

Mortgage loans (3)

 

$

 

 

$

(360,947,262

)

 

$

 

 

(1)

Interest rate cap, which cap the 1-month LIBOR rate at 3.25%.

(2)

Interest rate swap, which takes the Loan Rate and swaps it for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan.

(3)

Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.

 

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 – Revenue 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 included in other operating revenues in the Company’s consolidated statements of operations.

The Company collects sales, use, occupancy and similar taxes 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 consolidated statements of operations pursuant to the terms of each lease.  Lease revenue was approximately $0.4 million and $0.2 million, for the three months ended June 30, 2021 and 2020, respectively, and approximately $0.8 million and $0.6 million for the six months ended June 30, 2021 and 2020, respectively.

20


A schedule of minimum future lease payments receivable for the remaining six and twelve-month periods is as follows:

 

For the six months ending December 31, 2021

 

$

587,959

 

December 31, 2022

 

 

1,027,595

 

December 31, 2023

 

 

1,030,480

 

December 31, 2024

 

 

1,037,857

 

December 31, 2025

 

 

1,045,793

 

December 31, 2026 and thereafter

 

 

7,106,342

 

Total

 

$

11,836,026

 

 

Lessee Accounting – On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, which relates to the accounting for lease arrangements. The Company’s operating lease agreements are primarily the ground lease on the Hyatt Centric Arlington, the parking garage lease in Hollywood, Florida at the Hyde Beach House, and the corporate office lease.  The assets are classified as “right of use assets”, which represent our right to use an underlying asset and the operating lease liability, which represent our obligation to make lease payments arising from the lease, is classified within “accounts payable and other accrued liabilities”.  Right of use assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  Variable lease payments are excluded from the right of use assets and operating lease liabilities are recognized in the period in which the obligation for those payments is incurred.  As our leases do not provide an implicit rate, we use our incremental borrowing cost based on information available at the commencement date using our actual borrowing rates commensurate with the lease terms and fully levered borrowing.  Extension options on our leases are included in our minimum lease terms when they are reasonably certain to be exercised.

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.

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.  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%, 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.  As of June 30, 2021, 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 a 100% valuation allowance is required.  As of June 30, 2021 and December 31, 2020, deferred tax assets each totaled $0, respectively.  

As of June 30, 2021 and December 31, 2020, we had 0 uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2016 through 2019. In addition, as of June 30, 2021, the tax years that remain subject to examination by the major tax jurisdictions to which the MHI TRS Entities are subject, because of open NOL carryforwards, generally include 2014 through 2019.

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 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 750,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.

As of June 30, 2021, under the 2013 Plan, the Company has made cumulative stock awards totaling 517,464 shares, including 330,881 unrestricted shares and 186,583 restricted shares issued to certain executives and employees and to its independent directors.  All awards have vested except for: 129,615 shares issued to certain employees, which will vest over the next nine years and 56,968 shares issued to the Company’s independent directors, which will vest by December 31, 2021.  

Under the 2013 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

21


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, 2021, 0 performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended June 30, 2021 and 2020 was $18,195 and $18,195, respectively, and for the six months ended June 30, 2021 and 2020 was $481,156 and $145,065, respectively.

Additionally, the Company sponsors and maintains an Employee 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, 2021 and 2020, the ESOP compensation cost was $22,086 and $18,487, respectively, and for the six months ended June 30, 2021 and 2020, the ESOP compensation cost was $44,172 and $64,147, 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.

Advertising – Advertising costs, including internet advertising, were $454,818 and $64,964 for the three months ended June 30, 2021 and 2020, respectively, and were $ 775,584 and $ 565,260 for the six months ended June 30, 2021 and 2020, 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 each of the three-month periods ending June 30, 2021 and 2020, we recognized $496,957 and $14,168, respectively, and during the six-month periods ending June 30, 2021 and 2020, we recognized $496,957 and 26,607, respectively, in gain on involuntary conversion of assets, 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.

Segment Information – We have determined that our business is conducted in 1 reportable segment: hotel ownership.

Use of Estimates – The preparation of the financial statements in conformity with 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.

New Accounting Pronouncements – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”).  The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform.  The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023.  The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with 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, 2021, we have not entered into any contract modification as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future.  While the Company anticipates the impact of this update may be to its benefit, the Company is still evaluating the overall impact.

 

22


 

3. Investment in Hotel Properties, Net

Investment in hotel properties, net as of June 30, 2021 and December 31, 2020 consisted of the following:

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Land and land improvements

 

$

66,121,705

 

 

$

66,088,705

 

Buildings and improvements

 

 

443,006,453

 

 

 

442,063,950

 

Right of use assets

 

 

5,945,642

 

 

 

5,995,438

 

Furniture, fixtures and equipment

 

 

56,007,744

 

 

 

55,796,797

 

 

 

 

571,081,544

 

 

 

569,944,891

 

Less: accumulated depreciation and impairment

 

 

(151,656,328

)

 

 

(142,120,306

)

Investment in Hotel Properties, Net

 

$

419,425,216

 

 

$

427,824,585

 

 

Our review of possible impairment as of June 30, 2021 and December 31, 2020, resulted in 0 impairment on our investment in hotel properties, respectively.

 

4. Debt

Mortgage Loans, Net. As of June 30, 2021 and December 31, 2020, we had approximately $355.1 million and approximately $357.5 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

 

 

Balance Outstanding as of

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

Prepayment

 

Maturity

 

Amortization

 

Interest

 

 

Property

2021

 

 

2020

 

 

Penalties

 

Date

 

Provisions

 

Rate

 

 

The DeSoto (1)

$

32,599,133

 

 

$

32,820,733

 

 

Yes

 

7/1/2026

 

25 years

 

4.25%

 

 

DoubleTree by Hilton Jacksonville

   Riverfront (2)

 

33,354,864

 

 

 

33,655,483

 

 

Yes

 

7/11/2024

 

30 years

 

4.88%

 

 

DoubleTree by Hilton Laurel (3)

 

8,577,102

 

 

 

8,654,754

 

 

Yes

 

5/5/2022

 

25 years

 

5.25%

 

 

DoubleTree by Hilton Philadelphia Airport (4)

 

41,069,612

 

 

 

41,804,700

 

 

None

 

10/31/2023

 

30 years

 

LIBOR plus 2.27%

 

 

DoubleTree by Hilton Raleigh-

   Brownstone University (5)

 

18,300,000

 

 

 

18,300,000

 

 

Yes

 

7/27/2022

 

(5)

 

LIBOR plus 4.00%

 

 

DoubleTree Resort by Hilton Hollywood

   Beach (6)

 

55,130,817

 

 

 

55,878,089

 

 

(6)

 

10/1/2025

 

30 years

 

4.913%

 

 

Georgian Terrace (7)

 

42,037,671

 

 

 

42,507,512

 

 

(7)

 

6/1/2025

 

30 years

 

4.42%

 

 

Hotel Alba Tampa, Tapestry Collection by Hilton (8)

 

17,946,480

 

 

 

17,946,480

 

 

None

 

6/30/2022

 

(8)

 

LIBOR plus 3.75%

 

 

Hotel Ballast Wilmington, Tapestry Collection by Hilton (9)

 

33,043,336

 

 

 

33,259,067

 

 

Yes

 

1/1/2027

 

25 years

 

4.25%

 

 

Hyatt Centric Arlington (10)

 

48,990,136

 

 

 

48,990,136

 

 

Yes

 

10/1/2028

 

30 years

 

5.25%

 

 

Sheraton Louisville Riverside (11)

 

11,037,086

 

 

 

11,037,086

 

 

Yes

 

12/1/2026

 

25 years

 

4.27%

 

 

The Whitehall (12)

 

14,697,831

 

 

 

14,697,830

 

 

Yes

 

2/26/2023

 

25 years

 

PRIME plus 1.25%

 

 

Total Mortgage Principal Balance

$

356,784,068

 

 

$

359,551,870

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs, net

 

(1,823,925

)

 

 

(2,122,822

)

 

 

 

 

 

 

 

 

 

 

 

Unamortized premium on loan

 

104,588

 

 

 

116,929

 

 

 

 

 

 

 

 

 

 

 

 

Total Mortgage Loans, Net

$

355,064,731

 

 

$

357,545,977

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The note amortizes on a 25-year schedule after an initial 1 year interest only period (which expired in August 2017) and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.  

(2)

The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.  

(3)

Prepayment can be made on this note without penalty. On July 15, 2021, we entered into a note modification agreement whereby the maturity date was extended from August 5, 2021 to May 5, 2022.

(4)

The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237%.  Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.  

(5)

The note provides initial proceeds of $18.3 million, with an additional $5.2 million available upon the satisfaction of certain conditions; has an initial term of 4 years with a 1-year extension; bears a floating interest rate of 1-month LIBOR plus 4.00%; requires interest only monthly payments; and following a 12-month lockout, can be prepaid with penalty in year 2 and without penalty thereafter.  We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000.  

(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 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%; with monthly principal payments of $26,812; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions.  

(9)

The note amortizes on a 25-year schedule after an initial 1 year interest only period and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.  

(10)

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 note bears a fixed interest rate of 4.27% for the first 5 years of the loan, with an option for the lender to reset the interest rate after 5 years.  

23


(12)

The note bears a floating interest rate of New York Prime Rate plus 1.25% and is subject to prepayment penalty of 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022. Pre-payment can be made without penalty thereafter.

 

 

 

24


 

Mortgage Forbearance Agreements

Since the onset of the COVID-19 pandemic, we have completed mortgage forbearance agreements and/or loan modification agreements for 11 of our 12 mortgage loans secured by our hotels.  The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to fifteen months, temporary elimination of requirements to make contributions to the furniture, fixtures and equipment replacement reserve, the ability to temporarily utilize furniture, fixtures and equipment replacement reserve funds for operating expenses or to fund principal and interest and required deposits to real estate tax escrows, subject to certain restrictions and conditions, including requirements to replenish such funds used; waivers for existing quarterly financial covenants for one to six quarters; and adjustments to some covenant calculations following the waiver period.  Below is a summary of those agreements for each hotel.

The DeSoto

Starting on April 1, 2020, we entered into a series of note modification agreements with the mortgage lender for The DeSoto pursuant to which we agreed with the lender on the following: (a) deferral of scheduled principal and interest payments due from April 1, 2020 to September 1, 2020, provided that interest continued to accrue during that period; (b) additional deferral of scheduled principal and interest payments due February 1, 2021, provided that interest also continued to accrue during that period; (c) a payment of interest only on March 1, 2021 in the amount of $116,240; (d) waiver of certain FF&E requirements until February 28, 2021; (e) to pay all deferred principal and interest at maturity; and (f) a guarantee by the Operating Partnership of payment of up to 5.0% of all present and future indebtedness under the loan. The maturity date under the loan modification remains unchanged.  As a condition to the loan modification, the borrowing entity, agreed to not declare, set aside or pay any distribution or dividend until the later of March 1, 2021 or the resumption of regular principal and interest payments.

 

DoubleTree by Hilton Jacksonville Riverfront

On April 21, 2020, we entered into a letter agreement pursuant to which the lender agreed to the following: (a) the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; (b) FF&E deposits were deferred for the April, May, and June 2020 payment dates; and (c) released FF&E and the deferred FF&E was repaid in 6 monthly installments ending with the December 2020 payment. The maturity date under the loan modification remains unchanged.

DoubleTree by Hilton Laurel

Starting on March 24, 2020, we entered into a series of deferral and note modification agreements with the mortgage lender for the DoubleTree by Hilton Laurel pursuant to which we agreed with the lender on the following: (a) an initial deferral of scheduled payments of principal and interest due from April 5, 2020 to September 5, 2020; (b) an additional deferral of schedule payment of principal only from November 5, 2020 to March 5, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any and all deferred principal is due and payable at maturity.  On July 15, 2021, we entered into a note modification agreement pursuant to which we agreed with the lender of the following: (i) the maturity date was extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, the borrower will pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%.  Concurrently with the execution of the Note Modification Agreement, the borrower paid Lender the deferred interest accumulated on the loan from April 2020 through September 2020 in the amount of $226,859.  All other terms of the mortgage remain unchanged.  A nominal amount in cash consideration was provided in exchange for the note modifications and the lender also waived the application of the December 31, 2020, calculation of the debt service coverage ratio covenant.

DoubleTree by Hilton Philadelphia Airport

We have agreed with the lender to the following: (a) deferral of scheduled principal through June 1, 2021; (b) payment of regular principal and interest to resume on July 1, 2021; (c) remaining deferred interest is to be paid in 12 equal installments beginning April 1, 2021; and (d) deferred principal is due and payable at maturity; (e) a guaranty by the Operating Partnership of payment under the loan and (f) addition of a revenue per available room financial covenant for the period between March 1, 2021 and May 31, 2021.  In connection with the guarantee, the Operating Partnership entered into an acknowledgment of confession of judgment of guarantor pursuant to which the lender is authorized to enter a judgment against the Operating Partnership upon the occurrence of an event of default.  The maturity date was extended by 3 months, or until October 31, 2023.  As of June 30, 2021, we failed to meet the financial covenants under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport.  We received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021.

DoubleTree by Hilton Raleigh-Brownstone University

25


Starting on May 4, 2020, we entered into a series of forbearance and loan modification agreements with the mortgage lender for the DoubleTree by Hilton Raleigh-Brownstone University pursuant to which the lender has agreed to the following: (a) deferral of scheduled interest payments due from April 1, 2020 to July 31, 2021; (b) a one-time fee of $236,375 made in January 2021 and applied to deferred interest; and (c) deferral of the FF&E reserve deposit from April 2020 until July 2021 and (d) remainder of deferred interest, along with additional accrued interest on interest, is due and payable by maturity.  In consideration for the modification, the underlying loan agreement with the lender was amended to allow the lender to proceed against the Operating Partnership to recover damages if we fail to pay the deferred interest by August 1, 2021.  In the event that accrued interest is not paid in full by the July 27, 2022, the borrowing entity will be required to pay an exit fee equal to one percent of the total outstanding principal amount under the loan in addition to all outstanding payments of principal and interest on the loan.

DoubleTree Resort by Hilton Hollywood Beach

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note we paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the borrowing entity relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.

Georgian Terrace

On October 8, 2020, the lender agreed to the release of approximately $1.1 million from the FF&E reserve to fund up to 50% of (a) shortfall between gross revenues and operating expenses for the period April through July 31, 2020, and (b)scheduled payments of debt service, deposits to the real estate tax escrow and insurance expenses for the period April through August 2020.  The FF&E reserve must be replenished no later than December 31, 2021.  So long as there is no event of default under the terms of the loan agreement, lender agreed to defer deposits into the FF&E reserve account between November 2020 and April 2021. As consideration to entering into the loan modification agreement, the Operating Partnership agreed to guarantee full and prompt payment of the released reserves amounts.

Hotel Alba Tampa

Starting on May 14, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to: (a) the deferral of scheduled payments of principal due from April 1, 2020 to June 30, 2021; (b) waive certain financial covenants applicable to the borrowing entity and the Operating Partnership through the quarter ended December 31, 2020 and (c) repayment of deferred payments upon the earlier of (i) the maturity date or (ii) acceleration of the loan.  The borrowing entity may not, without prior written consent of the lender, make any distributions of cash or property until all the following conditions have been satisfied: (x) the deferral period has expired and deferred payments have been made; (y) certain conditions precedent for making distributions under the loan agreement have been satisfied; and (z) the PPP loans, have been repaid or forgiven. The borrowing entity is also restricted from making any payments on any subordinated indebtedness, mezzanine financing or certain other funded indebtedness, with certain limited exceptions, without prior written consent of the lender.  As of June 30, 2021, we were in compliance with the modified financial covenant under the mortgage secured by the Hotel Alba, provided that we maintain the cash collateral on deposit with the lender.  Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million as of June 30, 2021, subject to certain withdrawal privileges.

Hotel Ballast Wilmington

The lender has agreed to the following: (a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to September 1, 2020; (c) waiver of FF&E requirement until March 1, 2021; (d) deferred principal and interest will be due and payable at maturity; and (e) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership.  The maturity date under the loan modification remains unchanged.  As a condition to the modification, the borrowing entity cannot declare, set aside or pay any distributions or dividends until the later of (i) March 1, 2021 or (ii) the resumption of regular principal and interest payments.

Hyatt Centric Arlington

26


Starting on July 15, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal and interest due from April 1, 2020 to March 31, 2021; (b) deferral of scheduled payments of principal due from April 1, 2021 to December 31, 2021; (c) loan balance to be re-amortized as of January 1, 2022; (d) deferred principal and interest, along with additional accrued interest on interest, is due and payable by July 1, 2022; (e) $147,765 drawn from the reserve account to be replenished in full by December, 2021; and (f) wavier of the requirement to make deposits into FF&E reserve from April 2020 to April 1, 2021.  As a condition to the effectiveness of the first modification, the borrower under the loan paid (i) $50,000 to be deposited into the ground lease reserve account and (ii) $426,620 to be deposited into an escrow for impositions.  As a condition to the effectiveness of the second modification, the borrower paid (i) an additional $47,500 to be deposited into the ground lease reserve account and (ii) a one-time fee of $100,000 to be deposited into an escrow for impositions.  Until the borrower under the loan has fully repaid the deferred monthly payment and replenished the FF&E reserves account and the PPP loan is no longer outstanding, the borrower is not permitted make any distributions without prior written consent of the lender.

Sheraton Louisville Riverside

The lender has agreed to the following: (a) deferral of scheduled payments of interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity.  The maturity date under the loan modification remains unchanged.

The Whitehall

We entered into two forbearance agreement pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal due from April 1, 2020 to July 13, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to October 12, 2020; (c) deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the amortization period; (d) on July 14, 2021 principal and interest payments will resume based upon the original amortization; (e) the interest rate is changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; (f) payment of a loan modification fee of $54,500; and (g) the prepayment penalty is changed to: (i) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (ii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iii) 0 prepayment fee if prepaid after November 26, 2022.   The maturity date under the loan modification remains unchanged.

 

As conditions to the forbearance agreement, the parties agreed to the following during the forbearance period lasting until the earlier of (a) July 13, 2021 or (b) the occurrence of a forbearance event of default: (i) the borrowing entity, the Operating Partnership and the Company cannot declare, authorize or pay dividends or may any distribution to any person, without prior written consent of the lender; (ii) the borrower may not sell, convey, transfer or assign assets, other than in the ordinary course of business, without the lender’s consent and in the case of such sale, the lender may cause the buyer to pay all proceeds directly to the lender and (iii) the borrower shall not default on any of its obligations to third parties.  If we fail to meet the obligations under the forbearance agreements, lender has the right to exercise all remedies available under the loan agreement including the right to accelerate the maturity of the loan.

 

As of June 30, 2021, 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.  

 

Cash Trap Provisions

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties 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”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap” as well.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.

 

Total future mortgage debt maturities for the remaining six and twelve-month periods, without respect to any extension of loan maturity or loan modification after June 30, 2021, were as follows:

 

27


 

For the six months ending December 31, 2021

 

13,836,422

 

December 31, 2022

 

42,006,930

 

December 31, 2023

 

59,491,646

 

December 31, 2024

 

37,218,158

 

December 31, 2025

 

92,667,469

 

December 31, 2026 and thereafter

 

111,563,443

 

Total future maturities

$

356,784,068

 

 

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 five years 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.  As of June 30, 2021, 0 application for loan forgiveness has been filed and 0 payments have been required.

 

On 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.

Secured Notes Financing.  On December 31, 2020, we entered into the following agreements with KW, as collateral agent and an investor, and MIG, as an investor: (i) a Note Purchase Agreement with KW and MIG; (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 with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 and which option is required to be completed on or before December 31, 2021, on the terms and subject to the conditions described below.  

Note Purchase Agreement

On December 31, 2020, the Operating Partnership and the Company entered into the Note Purchase Agreement with KW and MIG, pursuant to which: (i) we agreed to issue and sell, and the Investors agreed to purchase, the Secured Notes with an aggregate face amount of US $20 million and on the terms described below; (ii) KW and MIG granted us an option, subject to certain conditions and exercisable by us on or before the first anniversary of the first closing date, pursuant to which we may issue and sell a second note to each of the Investors with an aggregate face amount of $10.0 million on substantially the same terms as the initial Secured Notes; (iii) the Company agreed to fully and unconditionally guaranty the obligations of the Operating Partnership; (iv) we entered into the Pledge Agreement and Board Observer Agreement; (v) we agreed to provide certain representations and warranties to the Investors; and (vi) we agreed to use the net proceeds to support the continued operation of the business conducted by the Operating Partnership.  We were required to pay a 1% origination fee on the amount of the initial Secured Notes in connection with the first closing and a 1% commitment fee on the committed amount of the Second Secured Notes.

Secured Notes

On December 31, 2020, the Operating Partnership issued and sold initial Secured Notes to the Investors in the amount of $20.0 million.  The Secured Notes: (i) have a maturity date of December 30, 2023, with a one-year extension option, subject to a fee in the amount of 1% of the outstanding principal amount under the Secured Notes as of such maturity date; (ii) accrue interest at a rate of 6.00% during the initial term and then at a rate of 10% following any extension; (iii) require quarterly interest payments, which shall initially be in the amount of $0.30 million; (iv) require principal repayment equal to 1.47 times the face amount of the Secured Notes if repaid on or prior to December 30, 2023 and 1.65 times the face amount of the Secured Notes if repaid after December 30, 2023; (v) may be prepaid without penalty, but subject to make-whole amounts for interest and the repayment multiplier; and (vi) rank pari passu with other notes issued under the Note Purchase Agreement and senior to all other indebtedness of the Operating Partnership.  

28


The Secured Notes require us to maintain certain cash management standards and include a broad range of covenants restricting our ability to incur additional debt, make dividend payments, transfer or acquire assets, or exceed our 2019 employee compensation levels.  They also require us to maintain certain financial thresholds, including limitations on our accounts payable and capital expenditures.

Upon an event of default or liquidity event described in the Secured Notes, the holders of the Secured Notes have the right to require and approve our selection of one or more of our hotel properties for disposition or refinancing in order to cure an event of default or liquidity event based on a process set forth in the Secured Notes.  In addition, the Secured Notes are redeemable by the holder in full upon an event of default or a change of control transaction.

Pledge Agreement

On December 31, 2020, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel.  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.

 

 

5. Commitments and Contingencies

Ground, Building, Parking and 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 fourth of five optional five-year renewal periods expiring October 31, 2026. Rent expense for this operating lease for the three and six months ended June 30, 2021, totaled $20,983 and $41,966, respectively, and rent expense for this operating lease for the three and six months ended June 30, 2020, totaled $18,246 and $36,942.

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. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. NaN rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

We lease land adjacent to the Hotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009.  In May 2014, we extended the agreement for an additional five years.  We signed a 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 2024, requires annual payments of $2,432, plus tax, and may be renewed for an additional five years.  Rent expense for the three and six months ended June 30, 2021, totaled $641 and $1,283, respectively and rent expense for each of the three and six months ended June 30, 2020, totaled $651 and $1,301, respectively.

We lease approximately 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 is $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 the tenant improvement allowance is exhausted.  Rent expense for the three- and six-month periods ended June 30, 2021, totaled $55,902 and $111,804, respectively and rent expense for the three- and six-month periods ended June 30, 2020 totaled, $55,902 and $111,663, 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 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 and six months ended June 30, 2021, was $46,966 and $89,472, respectively and rent expense for the three and six months ended June 30, 2020, was $9,944 and $106,500, respectively.

We lease parking garage and poolside cabanas associated with the Hyde Beach House.  The parking and cabana lease requires us to make rental payments of $270,100 per year in base and has an initial term that expires in 2034 and which may be extended for 4 additional renewal periods of 5 years each.  Rent expense for the three months ended June 30, 2021 and 2020, was $67,750 and $133,750, respectively, and for the six months ended June 30, 2021 and 2020, was $135,500 and $267,500, respectively.

29


We also lease certain storage facilities, furniture and equipment under agreements expiring between October 2021 and June 2025.

A schedule of minimum future lease payments for the following six and twelve-month periods is as follows:

 

For the six months ending December 31, 2021

 

$

356,523

 

December 31, 2022

 

 

683,693

 

December 31, 2023

 

 

671,883

 

December 31, 2024

 

 

663,585

 

December 31, 2025

 

 

668,651

 

December 31, 2026 and thereafter

 

 

14,758,986

 

Total

 

$

17,803,321

 

 

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 June 30, 2021, our 12 wholly-owned hotels, and our two condo-hotel rental programs, operated under management agreements with Our Town (see Note 8).  The management agreements expire 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 June 30, 2021, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently in force expire between November 2021 and March 2038.   Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.  

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the 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. 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% of gross revenues for the Hotel Ballast, The 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% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.

ESOP Loan 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 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 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036.  Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.

Litigation –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.

 

 

6. Preferred Stock and Units

Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock.  The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:

 

30


 

 

 

Per

 

 

 

 

 

 

Number of Shares

 

 

Quarterly

 

 

 

Annum

 

 

Liquidation

 

 

Issued and Outstanding as of

 

 

Distributions

 

Preferred Stock - Series

 

Rate

 

 

Preference

 

 

June 30, 2021

 

 

December 31, 2020

 

 

Per Share

 

Series B Preferred Stock

 

 

8.000

%

 

$

25.00

 

 

 

1,510,000

 

 

 

1,610,000

 

 

$

0.500000

 

Series C Preferred Stock

 

 

7.875

%

 

$

25.00

 

 

 

1,469,610

 

 

 

1,554,610

 

 

$

0.492188

 

Series D Preferred Stock

 

 

8.250

%

 

$

25.00

 

 

 

1,165,000

 

 

 

1,200,000

 

 

$

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 $25.00 liquidation preference per 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 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 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 record date and the payment of dividends on all classes of the Company’s preferred stock has been deferred.

On March 17, 2020, the 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, 2021.  

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, 2021, are $4,530,000, $4,339,946 and $3,604,219, respectively.  Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared.  As of June 30, 2021, the undeclared cumulative preferred dividends were approximately $10.4 million and the declared unpaid preferred dividends are approximately $2.1 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 following 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, 2021

 

 

December 31, 2020

 

 

Per Unit

 

Series B Preferred Units

 

 

8.000

%

 

$

25.00

 

 

 

1,510,000

 

 

 

1,610,000

 

 

$

0.500000

 

Series C Preferred Units

 

 

7.875

%

 

$

25.00

 

 

 

1,469,610

 

 

 

1,554,610

 

 

$

0.492188

 

Series D Preferred Units

 

 

8.250

%

 

$

25.00

 

 

 

1,165,000

 

 

 

1,200,000

 

 

$

0.515625

 

 

 

The Company pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00 liquidation preference per unit.  The Company, which is the holder of the Operating 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 are not convertible into any other security of the Operating Partnership or 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 been 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, 2021, is $4,530,000, $4,339,946 and $3,604,219, respectively.  Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared.  As of June 30, 2021, the undeclared cumulative preferred dividends were approximately $10.4 million and the declared unpaid preferred dividends were approximately $2.1 million.  

 

 

 

7. Common Stock and Units

Common Stock – As of June 30, 2021, the Company was authorized to issue up to 69,000,000 shares of common stock, $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.

31


The following is a schedule of issuances, since January 1, 2020, of the Company’s common stock and related units of the Operating Partnership:

On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of shares in the Company’s common stock.

On January 1, 2020, the Company was issued 45,000 units in the Operating Partnership and awarded shares of restricted stock to two employees.

On February 3, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.

On May 1, 2020, one holder of units in the Operating Partnership redeemed 57,687 units for an equivalent number of shares in the Company’s common stock.

On December 1, 2020, one holder of units in the Operating Partnership redeemed 15,000 units for an equivalent number of shares in the Company’s common stock.

On December 17, 2020, the Company was issued 127,583 units in the Operating Partnership and awarded shares of restricted stock to its independent directors and employees.

On February 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 136,281 units in the Operating Partnership and awarded shares 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.

 

On June 21, 2021, we entered into a Share Exchange Agreement with Palogic.  Pursuant to the Share Exchange Agreement, Palogic agreed to exchange 100,000 shares of the Company’s Series B Preferred Stock, 85,000 shares of the Company’s Series C Preferred Stock, and 35,000 shares of the Company’s Series D Preferred Stock, together with all of Palogic’s rights to receive accrued and unpaid dividends on the remaining Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share. We closed the transaction and issued the Company Shares on June 22, 2021.

As of June 30, 2021 and December 31, 2020, the Company had 16,717,958 and 15,023,850 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 1-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.

Since January 1, 2020, there have been 0 issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.

As of June 30, 2021 and December 31, 2020, the total number of Operating Partnership units outstanding was 17,884,359 and 16,190,351, respectively.

As of June 30, 2021 and December 31, 2020, the total number of outstanding Operating Partnership units not owned by the Company was 1,166,401 and 1,166,501, respectively, with a fair market value of approximately $3.5 million and $2.9 million, respectively, based on the price per share of the common stock on such respective dates.

 

As of June 30, 2021, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of $2,088,160.

32


 

8. Related Party Transactions

Our Town Hospitality. Our Town is currently the management company for each of our 12 wholly owned hotels, as well as the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences.  Our Town is a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”).  As of June 30, 2021, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 48.5% and 1.4%, respectively, of the total outstanding ownership interests in Our Town.  Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights. Upon the satisfaction of certain conditions by Our Town, Mr. Sims and Mr. Folsom will be required to make an additional capital contribution to Our Town, which would result in them owning 51.3% and 1.5%, respectively, of the outstanding membership interests in Our Town. The following is a summary of the transactions with Our Town:

Accounts Receivable – At June 30, 2021 and 2020, we were due approximately $0.5 million and $0.8 million, respectively, from Our Town.

Management Agreements – On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of 10 of our hotels.  On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements for the management of 10 of our hotels.  On April 1, 2020, we engaged Our Town to manage 1 additional wholly-owned hotel and 2 condominium resort rental programs.  On November 15, 2020, Our Town became the manager of our Hyatt Centric Arlington hotel.  The hotel management agreements for each of our 12 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”.

We agreed to provide Our Town with initial working capital of up to $1.0 million, based on the anticipated management fees earned by Our Town under the individual hotel management agreements.  The advanced funds were to be offset against future management fees by means of a 25% reduction in the payment to Our Town, of fees earned each month during 2020.  At December 31, 2020, unreimbursed management fee advances totaled $549,900.

On June 4, 2021, the OTH Master Agreement and the related credit agreement were amended to provide for an increase in the balance outstanding under the credit agreement of $299,900 in satisfaction for an equivalent portion of unrepaid management fee advances and to provide for a guaranteed minimum incentive management fee of $250,000 for calendar year 2021 in satisfaction of the remainder of unrepaid management fee advances.

As of June 30, 2021, and December 31, 2020, Sotherly had advanced approximately $0.6 million and $0.6 million, respectively, to Our Town as initial working capital.  In addition, 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 beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2025 but shall be extended beyond 2025 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Our Town will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.

Each OTH Hotel Management Agreement sets an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.  Incentive management fees earned for the three-month period ending June 30, 2021 and 2020, were $250,166 and $0, respectively.

Base management and administrative fees earned by Our Town for our properties was $918,676 and $127,448, for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were approximately $1.5 million and $0.8 million, respectively.

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 $147,217 and $80,596, as of June 30, 2021 and 2020, respectively.

Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020, pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit.  The agreement, as amended, allows Our Town to borrow up to $894,900.  Our Town was allowed to draw against the line of credit from time to time prior to January 1, 2021,

33


when the facility became payable in full.  Interest accrues on the outstanding balance at 3.5% per annum and is payable quarterly in arrears.  In the event of a default under the credit agreement, we have the right to offset any outstanding unpaid balance against amounts we owe to Our Town under the OTH Hotel Management Agreements.  We are currently negotiating an extension to the credit agreement.  As of June 30, 2021 and 2020, the outstanding credit balance under the credit agreement was each approximately $0.6 million, respectively.

Our Town and the Company previously entered into the credit agreement effective January 1, 2020, pursuant to which the Company agreed to make a working capital line of credit of up to $500,000 available to Our Town, as amended on February 26, 2020, to increase working capital line of credit to up to $850,000 available to Our Town.  Under the credit agreement Our Town had the right draw against the facility from time to time prior to the maturity date.  The facility was to be payable in full on January 1, 2021.  Interest accrues on the outstanding balance at 3.5% per annum and is payable quarterly in arrears.  We have a right of offset against management fees and other amounts owed to Our Town under the individual hotel management agreements in the event of a default under the credit agreement.  The credit agreement was amended by the parties on June 4, 2021 such that: (i) the maximum amount of credit available is capped at $894,900; (ii) the amount of advances, as of June 4, 2021, is agreed to be $894,900; (iii) 0 additional advances are permitted; (iv) principal payments are required to be made by the borrower in the amount of $100,000 on each of December 31, 2021, December 31, 2022, December 31, 2023, December 31, 2024, and December 31, 2025;  (v) the maturity date is extended to December 31, 2026; and (vi) the aggregate unpaid principal amount and any other obligation are required to be paid at maturity.  An affiliate of Mr. Sims entered into a conditional financing commitment with Our Town to provide funding to permit repayment of the loan in the event the principal balance of the loan made to Our Town under the credit agreement has not been repaid prior to maturity and Sotherly declines to extend the maturity date.  The Company’s audit committee considered and approved the credit amendment and the terms thereof, and the related party aspects of the relationship with Our Town.

Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town that work exclusively for our 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 approximately $0.7 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were approximately $1.3 million and $1.8 million, respectively.

Loan Receivable – Affiliate. As of June 30, 2021 and December 31, 2020, approximately $3.6 million and $3.7 million, respectively, was due to 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.

Others. We employ Ashley S. Kirkland, the daughter of our Chairman, as Corporate Counsel and Compliance Officer and Robert E. Kirkland IV, her husband, as our General Counsel.  We also employ Andrew M. Sims Jr., the son of our Chairman, as Vice President – Operations & Investor Relations. Total compensation for all three individuals, including salary and benefits, for the three months ended June 30, 2021 and 2020, totaled $107,115 and $104,797, respectively, and for the six months ended June 30, 2021 and 2020, were $212,984 and $226,754, respectively.  

 

 

9. Retirement Plans

401(k) Plan - We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions include a matching employer contribution to consist of 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. In addition, all employer matching funds vest immediately. We ceased making matching employer contributions effective May 16, 2020.  Contributions to the plan totaled $0 and $9,989, for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were $0 and $42,841, respectively.

Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016.  The ESOP 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 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 purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.  

Shares purchased by 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 June 30, 2021, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market at a cost of approximately $4.9 million, which the ESOP borrowed from the Company pursuant to the loan agreement.  A total of 186,083 shares with a fair value of $558,248 remained allocated or committed to be released from the suspense account, as of June 30, 2021.  We recognized as compensation cost $44,172 and $13,144, during the six months ended June 30, 2021 and 2020, respectively.  The remaining 493,405 unallocated shares

34


have an approximate fair value of $1,480,216, as of June 30, 2021.  As of June 30, 2021, the ESOP held a total of 170,419 allocated shares, 15,664 committed-to-be-released shares and 493,405 suspense shares.  Dividends on allocated and unallocated shares are used to pay down the ESOP loan from the Operating Partnership.  The share allocations are accounted for at fair value on the date of allocation as follows:

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

Number of Shares

 

 

Fair Value

 

 

Number of Shares

 

 

Fair Value

 

Allocated shares

 

 

170,419

 

 

$

511,257

 

 

 

170,419

 

 

$

426,048

 

Committed to be released shares

 

 

15,664

 

 

 

46,991

 

 

 

-

 

 

 

-

 

Total Allocated and Committed-to-be-Released

 

 

186,083

 

 

$

558,248

 

 

 

170,419

 

 

$

426,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated shares

 

 

493,405

 

 

 

1,480,216

 

 

 

509,069

 

 

 

1,272,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ESOP shares

 

 

679,488

 

 

$

2,038,464

 

 

 

679,488

 

 

$

1,698,720

 

 

10. Indirect Hotel Operating Expenses

Indirect hotel operating expenses consists of the following expenses incurred by the hotels:

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Sales and marketing

 

 

$

2,898,571

 

 

$

1,062,253

 

 

$

5,032,375

 

 

$

4,847,385

 

General and administrative

 

 

 

2,842,268

 

 

 

1,801,298

 

 

 

4,936,644

 

 

 

5,735,313

 

Repairs and maintenance

 

 

 

1,896,223

 

 

 

968,331

 

 

 

3,303,901

 

 

 

2,835,012

 

Utilities

 

 

 

1,314,988

 

 

 

988,704

 

 

 

2,452,204

 

 

 

2,404,106

 

Property taxes

 

 

 

1,514,781

 

 

 

1,508,929

 

 

 

3,309,910

 

 

 

3,318,286

 

Management fees, including incentive

 

 

 

1,001,104

 

 

 

133,416

 

 

 

1,878,866

 

 

 

1,004,406

 

Franchise fees

 

 

 

883,137

 

 

 

216,555

 

 

 

1,466,559

 

 

 

1,201,580

 

Insurance

 

 

 

883,021

 

 

 

729,200

 

 

 

1,705,093

 

 

 

1,519,695

 

Information and telecommunications

 

 

 

704,236

 

 

 

463,958

 

 

 

1,330,371

 

 

 

1,052,515

 

Other

 

 

 

111,747

 

 

 

57,121

 

 

 

223,230

 

 

 

193,308

 

Total indirect hotel operating expenses

 

 

$

14,050,076

 

 

$

7,929,765

 

 

$

25,639,153

 

 

$

24,111,606

 

 

 

11. Income Taxes

The components of the income tax (benefit) provision for the three and six months ended June 30, 2021 and 2020 are as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

 

$

 

 

$

 

 

$

 

State

 

 

6,972

 

 

 

23,362

 

 

 

9,581

 

 

 

65,312

 

 

 

 

6,972

 

 

 

23,362

 

 

 

9,581

 

 

 

65,312

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(444,489

)

 

 

(3,524,779

)

 

 

(2,053,540

)

 

 

(4,920,858

)

State

 

 

(109,552

)

 

 

(760,339

)

 

 

(429,633

)

 

 

(993,667

)

Subtotals

 

 

(554,041

)

 

 

(4,285,118

)

 

 

(2,483,173

)

 

 

(5,914,525

)

Change in deferred tax valuation allowance

 

 

554,041

 

 

 

4,285,118

 

 

 

2,483,173

 

 

 

11,326,609

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,412,084

 

 

 

$

6,972

 

 

$

23,362

 

 

$

9,581

 

 

$

5,477,396

 

 

35


 

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Statutory federal income tax provision

 

$

(325,282

)

 

$

-

 

 

$

(1,915,329

)

 

$

(1,653,922

)

Effect of non-taxable REIT loss

 

 

434,834

 

 

 

-

 

 

 

2,344,962

 

 

 

7,299,334

 

State income tax provision

 

 

(102,580

)

 

 

23,362

 

 

 

(420,052

)

 

 

(168,016

)

 

 

$

6,972

 

 

$

23,362

 

 

$

9,581

 

 

$

5,477,396

 

 

12. Loss Per Share and Per Unit

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 partner 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 loss would also be added back to net 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 non-committed, unearned ESOP shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average number of common shares outstanding.  The allocated and committed to be released shares have been included in the weighted average diluted earnings per share calculation since there would be an antidilutive effect from the dilution by these shares, although the amount of compensation for allocated shares is reflected in net loss attributable to common stockholder for basic computation. There are 0 ESOP units, therefore there is no dilution on the calculation of earnings per unit. The computation of basic and diluted net loss per share is presented below:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders for basic computation

 

$

(2,810,603

)

 

$

(17,124,612

)

 

$

(11,875,600

)

 

$

(31,448,313

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

15,344,761

 

 

 

14,862,249

 

 

 

15,232,029

 

 

 

14,837,891

 

Weighted average number of Unearned ESOP Shares

 

 

(494,479

)

 

 

(559,130

)

 

 

(498,380

)

 

 

(563,223

)

Total weighted average number of common shares outstanding for basic computation

 

 

14,850,282

 

 

 

14,303,119

 

 

 

14,733,649

 

 

 

14,274,668

 

Basic net loss per share

 

$

(0.19

)

 

$

(1.20

)

 

$

(0.81

)

 

$

(2.20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss Per Unit – The computation of basic and diluted net loss per unit is presented below:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to general and limited partnership unitholders for basic computation

 

$

(2,990,241

)

 

$

(18,489,980

)

 

$

(12,754,776

)

 

$

(34,011,096

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of general and limited partnership units outstanding

 

 

16,511,162

 

 

 

16,062,768

 

 

 

16,398,448

 

 

 

16,057,745

 

Basic net loss per general and limited partnership unit

 

$

(0.18

)

 

$

(1.15

)

 

$

(0.78

)

 

$

(2.12

)

 

36


 

 

13. Subsequent Events

 

On July 26, 2021, the Board authorized the deferral of payment of the quarterly distribution for the period ending September 30, 2021, for each of the Company’s Series B, Series C, and Series D Preferred Stock (and Preferred Units).

 

On July 15, 2021, we entered into a note modification agreement (the “Note Modification Agreement”) to extend the maturity date on the existing mortgage on the DoubleTree by Hilton Laurel (the “Hotel”) with the existing lender, United Bank, a Virginia banking corporation and successor in interest to Bank of Georgetown (the “Lender”).  Pursuant to the Note Modification Agreement: (i) the maturity date is extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, Company shall pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%.  Concurrently with the execution of the Note Modification Agreement, the Company paid Lender the deferred interest accumulated on the loan from April 2020 through September 2020, in the amount of $226,859.  All other terms of the mortgage remain unchanged.

 

 

37


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Exchange Act, 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.

 

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the adverse effect of COVID-19 on the Company’s business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets. The significance, extent and duration of the impacts caused by the COVID-19 outbreak on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions mandated and taken to contain the pandemic or mitigate its impact, the Company’s ability to negotiate forbearance and/or modifications agreements with its lenders on acceptable terms, or at all, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Such additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; reduced business and leisure travel due to travel-related health concerns, including the widespread outbreak of COVID-19 or any other infectious or contagious diseases in the U.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a REIT. 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 which could have a material adverse effect on our operations 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 the level of our indebtedness and our ability to meet covenants in our debt agreements, including our recently negotiated forbearance agreements and loan modifications and, as necessary, to refinance or seek an extension of the maturity of such indebtedness or further modification of such debt agreements;

 

risks associated with adverse weather conditions, including hurricanes;

 

impacts on the travel industry from pandemic diseases, including COVID-19;

 

the availability and terms of financing and capital and the general volatility of the securities markets;

 

management and performance of our hotels;

 

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;

38


 

our ability to successfully expand into new markets;

 

legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);

 

the Company’s ability to maintain its qualification as a REIT; and

 

our ability to maintain adequate insurance coverage.

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, in this report and subsequent reports filed with the Securities and Exchange Commission.

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 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. 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 twelve full-service, primarily upscale and upper-upscale hotels, comprising 3,156 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, Sheraton 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, 2021, 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 by Hilton Raleigh Brownstone-University

 

 

190

 

 

Raleigh, NC

 

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

Sheraton Louisville Riverside (3)

 

 

180

 

 

Jeffersonville, IN

 

September 20, 2006

 

Upper Upscale

The Whitehall

 

 

259

 

 

Houston, TX

 

November 13, 2013

 

Upper Upscale(1)

Hotel Rooms Subtotal

 

 

3,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condominium Hotel

 

 

 

 

 

 

 

 

 

 

Hyde Resort & Residences

 

 

129

 

(2)

Hollywood, FL

 

January 30, 2017

 

Luxury(1)

Hyde Beach House Resort & Residences

 

 

135

 

(2)

Hollywood, FL

 

September 27, 2019

 

Luxury(1)

Total Hotel & Participating Condominium Hotel Rooms

 

 

3,420

 

 

 

 

 

 

 

 

39


 

 

(1)

Operated as an independent hotel.

 

(2)

Reflects only those condominium units that were participating in the rental program, as of June 30, 2021.  At any given time, some portion of the units participating in our rental program may be occupied by the unit owner(s) and unavailable for rental to hotel guests.  We sometimes refer to each participating condominium unit as a “room.”

 

(3)

The Company has entered into a purchase and sale agreement for the disposition of the Sheraton Louisville Riverside.  The closing of the sale is subject to various customary closing conditions.

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 93.5% 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, 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. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses.  All of our hotels have remained open on a limited basis in order to serve the needs of the community, with the exception of the rental programs at our condominium hotels, which were temporarily closed for April and May of 2020. We believe that maintaining limited operations allowed us to increase capacity at individual hotels as demand has begun to return and the CDC and state guidelines have allowed for an easing of travel and other business restrictions.  Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and we intend to continue those re-introductions, provided 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 has had a significant negative impact on our operations and financial results, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods.  Conditions in the second quarter, however, improved significantly over the same period in the prior year, as the Company witnessed increased demand fueled predominantly by leisure travel.  Revenues, profitability, and cash flows from operations during the second quarter of 2021 exceeded our expectations but were still far below the same period in 2019, before the pandemic.  Notwithstanding the encouraging results recorded during the second quarter of 2021, the quarter’s operations and financial results were a marked improvement over the same period in 2020.  While the duration and full extent of the reduction in hotel demand caused by the pandemic, the contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and business travel approaches pre-pandemic levels. At a minimum, we expect the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow through 2021. In response to the impact of COVID-19 on our operations, we have taken the following health and safety and cost-reduction measures at the property and corporate levels:

 

In coordination with our management company partners, we implemented aggressive cost control measures at the property level, including significantly reduced operating expenses and curtailed food & beverage operations.

 

We suspended most planned capital expenditure projects other than replacement of vital building systems approaching the end of their useful life.

 

We reduced expenses at the corporate level, including immediate reductions in compensation and benefits of all corporate staff as well as anticipated bonuses and the voluntary waiver by the Company’s board of directors of its director fees.

 

Suspending our regular quarterly cash common stock dividends in order to preserve liquidity.

 

Entered into various forbearance and loan modification agreements regarding payments of principal and interest required under our loan agreements.  Refer to Note 1, Note 4 and Note 13 to the accompanying consolidated financial statements for more information on the forbearance agreements with our lenders and current negotiations.

40


 

Deferring payment of the dividends for our Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock.

 

We have engaged in discussions with our lenders regarding relief from financial covenants for current and future periods – especially those where failure to satisfy those covenants is an “Event of Default”.

 

The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which has limited our access to capital and could increase our cost of capital during the course of the pandemic.  We have sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties as described above.  On July 27, 2021, we filed a registration statement on Form S-11 with the Securities and Exchange Commission to publicly offer for sale senior unsecured notes of the Operating Partnership, guaranteed by the Company.  As of August 16, 2021, that registration statement has not been declared effective.

 

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage through and including June 30, 2022.   See the discussion of forbearance, modifications, and waivers in Note 4 to the financial statements.

 

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties 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”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap”.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.

As of June 30, 2021, the Company had approximately $21.8 million in unrestricted cash and approximately $11.7 million in restricted cash.  In addition, we have the option to obtain $10.0 million in additional proceeds from the sale of additional Secured Notes to the Investors described below.

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note the Company paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4.0 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the Company relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.  

 

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. The duration and extent of the reduction in hotel demand caused by the pandemic and the return to normalized operations prevents the Company from forecasting its cash flows and available liquidity to meet its obligations for operating expenses with precision and certainty.  However, based on our completed mortgage loan amendments and forbearance agreements, our current unrestricted and restricted cash, our forecast of future operating results and our anticipated ability to refinance or extend mortgage obligations maturing within the 12 months following the date of this report, we have concluded that substantial doubt of the Company’s ability to continue as a going concern has been alleviated.  Facts and circumstances could change in the future that are

41


outside the Company’s control – such as additional government mandates, health official orders, travel restrictions and extended business shutdowns due to COVID-19.  

 

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 with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021, and which option is required to be completed on or before December 31, 2021.  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.  The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option.  The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term.  Certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel.  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.  Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.  We are prohibited from making any equity distributions as long as the Secured Notes are outstanding.

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 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.”

 

42


 

Results of Operations

 

The following tables illustrate the key operating metrics for the three and six months ended June 30, 2021 and 2020, respectively, for the Company’s twelve wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms at the Hyde Resort & Residences or the Hyde Beach House Resort & Residences.  The composite portfolio metrics represent all of 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, 2021, and the corresponding periods in 2020.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Actual Portfolio Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy %

 

 

58.6

%

 

 

11.5

%

 

 

49.9

%

 

 

33.0

%

ADR

 

$

142.79

 

 

$

117.60

 

 

$

138.70

 

 

$

151.23

 

RevPAR

 

$

83.73

 

 

$

13.53

 

 

$

69.22

 

 

$

49.85

 

Composite Portfolio Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy %

 

 

59.0

%

 

 

10.5

%

 

 

50.4

%

 

 

31.4

%

ADR

 

$

161.00

 

 

$

122.51

 

 

$

159.93

 

 

$

160.71

 

RevPAR

 

$

94.93

 

 

$

12.91

 

 

$

80.54

 

 

$

50.50

 

 

Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020

Revenue.  Total revenue for the three months ended June 30, 2021 increased approximately $29.1 million, or 549.5%, to approximately $34.4 million compared to total revenue of approximately $5.3 million for the three months ended June 30, 2020. There was an aggregate increase in total revenue of approximately $29.1 million from all of our properties due mainly to significant increases in demand mainly 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.

Room revenue increased approximately $20.1 million, or 518.8%, to approximately $24.0 million for the three months ended June 30, 2021 compared to room revenue of approximately $3.9 million for the three months ended June 30, 2020.  The increase in room revenue for the three months ended June 30, 2021 resulted from an aggregate increase of approximately $20.1 million from all of our properties due mainly to increased composite occupancy of 59.0%, increased ADR to $161.00 and increased RevPAR to 94.93 compared to prior year three months ending June 30, 2020, occupancy of 10.5%, ADR of $122.51 and RevPAR of $12.91, respectively.  These significant increases are mainly due to 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.

Food and beverage revenues increased approximately $3.3 million, or 2156.5%, to approximately $3.5 million for the three months ended June 30, 2021 compared to food and beverage revenues of approximately $0.2 million for the three months ended June 30, 2020.  The increase in food and beverage revenues for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $3.3 million, from all of our properties because of the significant increases in demand mainly 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.

Revenue from other operating departments increased approximately $5.6 million, or 445.6%, to approximately $6.8 million for the three months ended June 30, 2021, compared to revenue from other operating departments of approximately $1.2 million for the three months ended June 30, 2020.  The increase in other operating departments revenue for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $5.6 million, from all of our properties because of the significant increases in demand mainly 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.

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 $14.2 million, or 135.4%, to approximately $24.7 million for the three months ended June 30, 2021, compared to total hotel operating expenses of approximately $10.5 million for the three months ended June 30, 2020.  The increase in hotel operating expenses for the three months ended June 30, 2021, resulted from an aggregate increase in total hotel operating expenses of approximately $14.2 million, from all of our properties 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.  

43


Rooms expense for the three months ended June 30, 2021, increased approximately $4.2 million, or 237.9%, to approximately $5.9 million, compared to rooms expense for the three months ended June 30, 2020, of approximately $1.7 million.  The increase in rooms expense for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $4.2 million from all of our properties, due mainly to increased composite occupancy of 59.0%, increased ADR to $161.00 and increased RevPAR to 94.93, compared to prior year three months ending June 30, 2020, occupancy of 10.5%, ADR of $122.51 and RevPAR of $12.91, respectively.  These significant increases are mainly due to 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.

Food and beverage expenses for the three months ended June 30, 2021, increased approximately $2.0 million, or 1,656.9%, to approximately $2.1 million, compared to food and beverage expenses of approximately $0.1 million, for the three months ended June 30, 2020. The net increase in food and beverage expenses for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $2.0 million, from all of our properties because of 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 $1.9 million, or 277.5%, to approximately $2.6 million for the three months ended June 30, 2021, compared to expenses from other operating departments of approximately $0.7 million for the three months ended June 30, 2020.  The increase in expenses from other operating departments for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $1.9 million, from all of our properties because of 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.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2021, increased approximately $6.1 million, or 77.2%, to approximately $14.0 million, compared to indirect expenses of approximately $7.9 million for the three months ended June 30, 2020.  The increase in indirect expenses for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $6.1 million from all our properties.

Corporate General and Administrative.  Corporate general and administrative expenses for the three months ended June 30, 2021, increased approximately $0.3 million, or 24.6%, to approximately $1.5 million compared to corporate general and administrative expenses of approximately $1.2 million, for the three months ended June 30, 2020.  The increase in corporate general and administrative expenses was mainly due to increased legal and audit fees by approximately $0.3 million.

Interest Expense.  Interest expense for the three months ended June 30, 2021, increased approximately $0.8 million, or 17.1%, to approximately $5.5 million, as compared to interest expense of approximately $4.7 million, for the three months ended June 30, 2021.  The increase in interest expense for the three months ended June 30, 2021, was substantially related to the Secured Loan interest increase of approximately $1.1 million, offset by a reduction in the mortgage related to the Hotel Alba Tampa by approximately $0.3 million, compared to the three-month period ending June 30, 2020.  

Interest Income.  Interest income for the three months ended June 30, 2021, decreased by $35,693, or 49.6%, to $36,308 compared to interest income of $72,001, for the three months ended June 30, 2020.  The decrease is due to lower amounts of interest-bearing cash and cash equivalents held during the three-month period ending June 30, 2021, compared to the three-month period ending June 30, 2020.

Unrealized Gain (Loss) on Hedging Activities.  As of June 30, 2021, the fair market value of our interest rate cap is $94 and the fair market value of our interest rate swap liability is approximately $2.3 million.  The unrealized gain on hedging activities during the three months ended June 30, 2021, was approximately $0.3 million and during the three months ended June 30, 2020, the unrealized loss on hedging activities was approximately $0.2 million.

Gain on Involuntary Conversion of Assets.  Gain on involuntary conversion of assets for the three months ended June 30, 2021 increased approximately $0.5 million, compared to a $14,168 gain on involuntary conversion of assets for the three months ended June 30, 2020.  

Income Taxes.  We had an income tax provision of $6,972 for the three months ended June 30, 2021, compared to an income tax provision of $23,362, for the three months ended June 30, 2020.  Our MHI TRS Entities realized operating losses for each of the three months ended June 30, 2021 and 2020.  During the three-month period ending June 30, 2021, we increased the valuation allowance by approximately $0.6 million to approximately $17.2 million, as of June 30, 2021.

Net Loss.  We realized a net loss for the three months ended June 30, 2021, of approximately $1.6 million, compared to a net loss of approximately $16.3 million, for the three months ended June 30, 2020, because of the operating results discussed above.

44


Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020

Revenue.  Total revenue for the six months ended June 30, 2021, increased approximately $14.5 million, or 34.2%, to approximately $57.0 million, compared to total revenue of approximately $42.5 million, for the six months ended June 30, 2020. The increase in revenue for the six months ended June 30, 2021, was due to an aggregate positive increase in total revenue of approximately $17.0 million from most of our properties, with the exception of properties in Raleigh, North Carolina, Houston, Texas and Arlington, Virginia, with an offsetting aggregate decrease of approximately $2.5 million.  The net increase 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.

Room revenue increased approximately $10.9 million, or 38.1%, to approximately $39.5 million for the six months ended June 30, 2021 compared to room revenue of approximately $28.6 million, for the six months ended June 30, 2020.  The increase in room revenue for the six months ended June 30, 2021, resulted from an aggregate positive increase of approximately $12.1 million from most of our properties, with the exception of properties in Raleigh, North Carolina, Houston, Texas and Arlington, Virginia, with an offsetting aggregate decrease of approximately $1.2 million. The net aggregate increase was mainly due to increased composite occupancy of 50.4%, decreased ADR to $159.93 and increased RevPAR to $80.54 compared to prior year six months ending June 30, 2020, occupancy of 31.4%, ADR of $160.71 and RevPAR of $50.50, respectively.  These significant increases are mainly due to 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.

Food and beverage revenues decreased approximately $3.3 million, or 39.2%, to approximately $5.0 million for the six months ended June 30, 2021, compared to food and beverage revenues of approximately $8.3 million, for the six months ended June 30, 2020.   The decrease in food and beverage revenues for the six months ended June 30, 2021, resulted from all of our properties, with the exceptions of Savannah, Georgia and Hollywood, Florida properties, being affected by the COVID-19 pandemic and the resulting reduction of food and beverages being served in our hotels.

Revenue from other operating departments increased approximately $6.9 million, or 123.1%, to approximately $12.4 million for the six months ended June 30, 2021, compared to revenue from other operating departments of approximately $5.5 million, for the six months ended June 30, 2020.  The increase in other operating departments revenue for the six months ended June 30, 2020, resulted from an aggregate increase of approximately $6.9 million, from all of our properties, because of 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.

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 $0.5 million, or 1.2%, to approximately $43.2 million for the six months ended June 30, 2021, compared to total hotel operating expenses of approximately $42.7 million, for the six months ended June 30, 2020.  The increase in hotel operating expenses for the six months ended June 30, 2021, resulted from an aggregate increase in total hotel operating expenses of approximately $4.5 million from six of our properties, due mainly to 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.  Six of our hotels had decreases in hotel operating expenses aggregating to approximately $4.0 million, due to reduced staff and other operating cost increases during the period.

Rooms expense for the six months ended June 30, 2021, increased approximately $1.1 million, or 12.2%, to approximately $9.9 million compared to rooms expense for the six months ended June 30, 2020 of approximately $8.8 million.  The increase in rooms expense for the six months ended June 30, 2021, resulted from an aggregate increase of approximately $1.7 million from eight of our properties, while four of our hotel properties had decreases aggregating to approximately $0.6 million.  The net increase is due mainly to increased composite occupancy of 50.4%, decreased ADR to $159.93 and increased RevPAR to $80.54 compared to prior year six months ending June 30, 2020, occupancy of 31.4%, ADR of $160.71 and RevPAR of $50.50, respectively.  These significant increases are mainly due to 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.

Food and beverage expenses for the six months ended June 30, 2021, decreased approximately $3.7 million, or 55.2%, to approximately $3.0 million, compared to food and beverage expenses of approximately $6.7 million, for the six months ended June 30, 2020. The decrease in food and beverage expenses for the six months ended June 30, 2021, resulted from all of our properties being affected by the COVID-19 pandemic and the resulting reduction of food and beverages being served in our hotels.

45


Expenses from other operating departments increased approximately $1.6 million, or 54.3%, to approximately $4.6 million for the six months ended June 30, 2021, compared to expenses from other operating departments of approximately $3.0 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 $1.8 million from seven of our hotel properties.  Five of our properties had decreases in other operating expenses aggregating to approximately $0.2 million.

Indirect expenses at our wholly-owned properties for the six months ended June 30, 2021, increased approximately $1.5 million, or 6.3%, to approximately $25.6 million, compared to indirect expenses of approximately $24.1 million, for the six months ended June 30, 2020.  The increase in indirect expenses for the six months ended June 30, 2021, resulted from all properties with increases in management fees, sales and marketing, franchise fees, repairs and maintenance, energy and utilities, information and communications and other indirect expenses, with the exception of the Raleigh, North Carolina, Houston, Texas, Atlanta, Georgia and Arlington, Virginia, were the only property with a decrease of indirect expenses by approximately $1.0 million.

Corporate General and Administrative.  Corporate general and administrative expenses for the six months ended June 30, 2021, decreased approximately $0.3 million, or 8.9%, to approximately $2.8 million compared to corporate general and administrative expenses of approximately $3.1 million for the six months ended June 30, 2020.  The decrease in corporate general and administrative expenses was mainly due to decreased salaries.

Interest Expense.  Interest expense for the six months ended June 30, 2021, increased approximately $2.1 million, or 23.3%, to approximately $11.4 million, as compared to interest expense of approximately $9.3 million for the six months ended June 30, 2020.  The increase in interest expense for the six months ended June 30, 2021, was substantially related to the Secured Loan interest increase of approximately $1.9 million and the Arlington loan by approximately $0.5 million, offset by a decrease of approximately $0.3 million on the mortgage related to the Hotel Alba Tampa, compared to the six months ending June 30, 2020.  

Interest Income.  Interest income for the six months ended June 30, 2021, decreased by $57,459, or 43.4%, to $74,907 compared to interest income of $132,336, for the six months ended June 30, 2020.   The increase is due to lower amounts of interest-bearing cash and cash equivalents held during the six month period ending June 30, 2021, compared to the six month period ending June 30, 2020.

Unrealized Gain (Loss) on Hedging Activities.  As of June 30, 2021, the fair market value of our interest rate cap is $94 and the fair market value of our interest rate swap liability is approximately $2.3 million.  The unrealized gain on hedging activities during the six months ended June 30, 2021, was approximately $0.7 million and during the six months ended June 30, 2020, the unrealized loss on hedging activities was approximately $1.8 million.

Gain on Involuntary Conversion of Assets.  Gain on involuntary conversion of assets for the six months ended June 30, 2021, increased approximately $0.5 million, to $496,957 compared to $26,607 gain on involuntary conversion of assets, for the six months ended June 30, 2020.  We had three properties receiving payments of approximately $0.5 million, on claims during the previous year, Wilmington, North Carolina, Houston, Texas and Atlanta, Georgia.

Income Taxes.  We had an income tax provision of $9,581, for the six months ended June 30, 2021, compared to an income tax provision of approximately $5.5 million, for the six months ended June 30, 2020.  The June 30, 2020, income tax provision was primarily derived from a reduction of our deferred tax assets and through the establishment of a 100% valuation allowance of approximately $5.4 million, during the six months ending June 30, 2020.  During the six month period ending June 30, 2021, we increased the valuation allowance by approximately $2.5 million to approximately $17.2 million, as of June 30, 2021.

Our MHI TRS Entities realized operating losses, for each of the six months ended June 30, 2021 and 2020.

Net (Loss)/Income.  We realized a net loss, for the six months ended June 30, 2021, of approximately $9.1 million, compared to a net loss of approximately $29.6 million, for the six months ended June 30, 2020, because of the operating results discussed above.

Non-GAAP Financial Measures

We consider FFO Available to Common Stockholders and Unitholders, Adjusted FFO Available to Common Stockholders and Unitholders, EBITDA 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 U.S. 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 U.S. GAAP.

46


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 U.S. GAAP, excluding extraordinary items as defined under U.S. 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 U.S. 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 Available to Common Stockholders and Unitholders in the same manner as we do, and investors should not assume that FFO Available to Common Stockholders and Unitholders 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, gain 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, and change in control gains or losses. 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 Available to Common Stockholders and Unitholders may be different from similar measures calculated by other REITs.

47


The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for three and six months ended June 30, 2021 and 2020:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Net loss attributable to common stockholders

 

$

(2,810,603

)

 

$

(17,124,612

)

 

$

(11,875,600

)

 

$

(31,448,313

)

Add: Net loss attributable to noncontrolling interest

 

 

(179,638

)

 

 

(1,365,368

)

 

 

(879,176

)

 

 

(2,562,783

)

Depreciation and amortization - real estate

 

 

4,952,169

 

 

 

4,972,125

 

 

 

9,916,685

 

 

 

9,939,574

 

Gain on involuntary conversion of assets

 

 

(496,957

)

 

 

(14,168

)

 

 

(496,957

)

 

 

(26,607

)

Gain on extinguishment of preferred stock

 

 

(93,342

)

 

 

 

 

 

(93,342

)

 

 

 

(Gain) loss on disposal of assets

 

 

17,221

 

 

 

(451

)

 

 

17,221

 

 

 

(451

)

FFO attributable to common stockholders and unitholders

 

$

1,388,850

 

 

$

(13,532,474

)

 

$

(3,411,169

)

 

$

(24,098,580

)

Decrease in deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

5,412,084

 

Amortization

 

 

17,500

 

 

 

20,982

 

 

 

35,000

 

 

 

36,409

 

Contract termination fee refund

 

 

 

 

 

 

 

 

 

 

 

(72,960

)

Unrealized loss (gain) on hedging activities

 

 

(303,181

)

 

 

214,876

 

 

 

(693,367

)

 

 

1,800,508

 

Adjusted FFO attributable to common stockholders and unitholders

 

$

1,103,169

 

 

$

(13,296,616

)

 

$

(4,069,536

)

 

$

(16,922,539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding,

  basic

 

 

14,850,282

 

 

 

14,303,119

 

 

 

14,733,649

 

 

 

14,274,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of non-controlling units

 

 

1,166,401

 

 

 

1,181,501

 

 

 

1,166,420

 

 

 

1,210,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares and units

  outstanding, basic

 

 

16,016,683

 

 

 

15,484,620

 

 

 

15,900,069

 

 

 

15,485,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per common share and unit

 

$

0.09

 

 

$

(0.87

)

 

$

(0.21

)

 

$

(1.56

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted FFO per common share and unit

 

$

0.07

 

 

$

(0.86

)

 

$

(0.26

)

 

$

(1.09

)

 

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) 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) gain on extinguishment of preferred stock, (10) gains or losses on change in control, (11) gain on exercise of development right, (12) corporate general and administrative expense, (13) depreciation and amortization, (14) gains and losses on involuntary conversions of assets, (15) distributions to preferred stockholders and (16) 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.

48


The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and six months ended June 30, 2021 and 2020:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Net loss attributable to common stockholders

 

$

(2,810,603

)

 

$

(17,124,612

)

 

$

(11,875,600

)

 

$

(31,448,313

)

Add: Net loss attributable to

  noncontrolling interest

 

 

(179,638

)

 

 

(1,365,368

)

 

 

(879,176

)

 

 

(2,562,783

)

Interest expense

 

 

5,526,595

 

 

 

4,719,796

 

 

 

11,446,118

 

 

 

9,281,636

 

Interest income

 

 

(36,308

)

 

 

(72,001

)

 

 

(74,907

)

 

 

(132,366

)

Income tax provision

 

 

6,972

 

 

 

23,362

 

 

 

9,581

 

 

 

5,477,396

 

Depreciation and amortization

 

 

4,969,669

 

 

 

4,993,107

 

 

 

9,951,685

 

 

 

9,975,983

 

Distributions to preferred stockholders

 

 

1,529,613

 

 

 

2,188,910

 

 

 

3,718,524

 

 

 

4,377,821

 

EBITDA

 

 

9,006,300

 

 

 

(6,636,806

)

 

 

12,296,225

 

 

 

(5,030,626

)

(Gain) loss on disposal of assets

 

 

17,221

 

 

 

(451

)

 

 

17,221

 

 

 

(451

)

Gain on extinguishment of preferred stock

 

 

(93,342

)

 

 

 

 

 

(93,342

)

 

 

 

Gain on involuntary conversion of

  assets

 

 

(496,957

)

 

 

(14,168

)

 

 

(496,957

)

 

 

(26,607

)

Subtotal

 

 

8,433,222

 

 

 

(6,651,425

)

 

 

11,723,147

 

 

 

(5,057,684

)

Corporate general and administrative

 

 

1,530,438

 

 

 

1,227,808

 

 

 

2,831,396

 

 

 

3,107,933

 

Unrealized loss (gain) on hedging

  activities

 

 

(303,181

)

 

 

214,876

 

 

 

(693,367

)

 

 

1,800,508

 

Hotel EBITDA

 

$

9,660,479

 

 

$

(5,208,741

)

 

$

13,861,176

 

 

$

(149,243

)

 

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 note, proceeds of mortgage and other debt and hotel property sales.  Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt services and maturities, operating costs, corporate expenses and dividends.  As of June 30, 2021, we had approximately $21.8 million of unrestricted cash and $11.7 million of restricted cash, and also had the option to require the Investors of our Secured Notes to purchase an additional $10.0 million in additional Secured Notes.

Operating Activities.  Our net cash flow provided by operating activities for the six months ended June 30, 2021, was approximately $1.9 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 foreign travelers due to the lifting of restrictions on travel, social gatherings and businesses.  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 changes in working capital.

Investing Activities.  Our cash used in investing activities for the six months ended June 30, 2021, was approximately $1.3 million, approximately $1.8 million was related to capital expenditures for the routine replacement of furniture, fixtures and equipment.  There were proceeds received from an involuntary conversion of assets in the amount of approximately $0.5 million. The Operating Partnership received a payment on its loan to the Company relating to the ESOP totaling approximately $0.1 million.  

Financing Activities. During the six months ended June 30, 2021, the Company and Operating Partnership made principal payments on its mortgages of approximately $2.4 million.

49


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 2021, we expect total capital expenditures to be approximately $4.0 million for 2021.  

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 DoubleTree by Hilton Raleigh Brownstone-University, 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 is expected to continue until at least the end of 2021.  The impact includes a substantial decline in our revenues, profitability and cash flows from operations.  While the duration and full financial impact of the reduction in hotel demand caused by the pandemic, contraction of operations at our hotels and other effects are uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and an economic recovery is sustained.  In response to these negative impacts, we took a number of immediate actions to reduce costs and preserve liquidity including the suspension of dividends on our common and preferred stock, suspension of planned capital expenditures and reduction in compensation of our executive officers, board of directors, and corporate employees. The COVID-19 pandemic and the related economic uncertainties have led to disruption and volatility in the global capital markets, which limited our ability to access capital.

In April and May 2020, we borrowed an aggregate amount of approximately $10.7 million in PPP Loans and have sought forbearances and loan modifications with the lenders under the loan agreements secured by our hotels.  

 

On December 31, 2020, we issued two Secured Notes for aggregate proceeds of $20.0 million with an option to sell two additional Secured Notes before December 31, 2021, for aggregate proceeds of $10.0 million.  The terms are subject to the conditions as described more fully in the Section titled “Secured Note Financing” above.

As of June 30, 2021, we had total cash of approximately $33.5 million.  During the six months ended June 30, 2021, we utilized cash, cash and equivalents and restricted cash of approximately $1.8 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 or Secured Notes).  The Secured Notes mature on December 30, 2023, unless extended pursuant to their terms, and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at the Company’s option.  The Secured Notes may be prepaid in part or in full at any time without penalty so long as certain conditions are met.  The Secured Notes accrue interest at 6.0% per annum, payable quarterly during the initial 3-year term. If the maturity of the Secured Notes is extended, the Secured Notes will accrue interest at 10% per annum.

We have no debt maturing during the remainder of 2021.  In 2022, we have approximately $44.04 million in balloon payments due upon maturity related to the mortgages on the DoubleTree by Hilton Laurel, the Hotel Alba Tampa and the DoubleTree by Hilton

50


Raleigh-Brownstone University.  We intend to refinance these mortgages at the level of their existing indebtedness or request extensions at existing terms.

As of the date of filing, 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 those that contained Debt Service Coverage Ratio (“DSCR”) requirements.  Except where the DSCR requirement triggered a cash management period, we were able to obtain waivers from each of our lenders.

On July 27, 2021, we filed a registration statement on Form S-11 with the Securities and Exchange Commission to publicly offer for sale senior unsecured notes of the Operating Partnership, guaranteed by the Company.  As of August 16, 2021, that registration statement has not been declared effective.  If the registration statement is declared effective, we intend to use the net proceeds from this offering to further strengthen our balance sheet, including repaying $20.0 million of outstanding secured indebtedness under our Secured Notes, plus any accrued but unpaid interest and any make-whole amounts or premium then due and payable on such secured debt, which we estimate to be approximately $9.5 million.

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 “-- Effects of COVID-19 Pandemic on our Business”, as of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage, through June 30, 2022.

As of June 30, 2021, we were in compliance with the modified financial covenant under the mortgage secured by the Hotel Alba, provided that we maintain the cash collateral on deposit with the lender.  Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million, as of June 30, 2021.

Certain of our loan agreements also include financial covenants that trigger a “cash trap”.  As of June 30, 2021, we had failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the profit 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”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach.  In addition, in order to receive forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” until the properties meet the criteria in the forbearance agreement for exiting the “cash traps”.  Similar provisions may be a condition of additional or further lender forbearance.  We remain in negotiations with the lender and special servicer with respect to the DoubleTree by Hilton Jacksonville Riverfront “cash trap”.

Secured Notes

Our Secured Notes provide that aggregate accounts payable shall not exceed $5.0 million at any time beginning December 31, 2021, for as long as the Secured Notes are outstanding.  Failure to comply with the covenant, at December 31, 2021, shall cause the Company to Issue additional Secured Notes for aggregate proceeds of $10.0 million which shall be used to reduce the aggregate

51


accounts payable of the Company.  The Company expects cash, on hand combined with cash flows from our hotels should be adequate to reduce accounts payable so that it does not exceed $5.0 million by December 31, 2021.  In addition. we are prohibited from providing aggregate compensation to employees of the Company in excess of 2019 aggregate compensation, from capital expenditures in excess of $6.0M per annum, and from paying distributions on shares of the Company’s common stock or on shares of the Company’s preferred stock as long as the Secured Notes are outstanding.

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 Shares, Series C Preferred Shares, and Series D Preferred Shares are in arrears for the last six quarterly periods.  Pursuant to our Secured Notes, we are prohibited from making distributions on shares of the Company’s common stock or on shares of the Company’s preferred stock as long as the Secured Notes are outstanding.  

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 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, 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.  These patterns have been disrupted by the impacts of the COVID-19 pandemic and we expect that disruption to continue throughout 2021 at a minimum.

52


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, which were acquired from third parties, 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 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 the 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 six months ended June 30, 2021.

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 MHI TRS Entities, we have recorded a valuation allowance to reduce our net deferred tax asset as of June 30, 2021, to $0.  We regularly evaluate the likelihood that our MHI TRS Entities will be able to realize its deferred tax assets and the continuing need for a valuation allowance.  As of June 30, 2021, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will not be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward.  

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

53


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 June 30, 2021, we had approximately $336.6 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237%, the Secured Notes of $20.0 million, with a fixed rate of 6.0% and the PPP Loan of $10.7 Million, with a fixed rate of 1.0% and approximately $50.9 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 4.74%.  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 and in Prime Rate.  Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.9 million, the balance at June 30, 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 $0.2 million.

As of December 31, 2020, we had approximately $339.4 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 $10.7 Million, with a fixed rate of 1.0% and approximately $50.9 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 4.74%.  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 and in Prime Rate.  Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.9 million, the balance at December 31, 2020, 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 $0.2 million.

Item 4.Controls and 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 Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of June 30, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, 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 June 30, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, 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.

54


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.

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.

 

 

55


 

PART II

 

 

Item 1.

We are not involved in any material legal proceedings, nor to our knowledge, is any material litigation threatened against us.  We are involved in routine legal proceedings arising out of the ordinary course of business most of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.

 

Item 1A.

Risk Factors

Other than the risks mentioned below, there 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, 2020.  Additional risks are:

Holders of our outstanding preferred shares have the rights to elect additional board members.

As of June 30, 2021, the Company had issued and outstanding 1,510,000 shares of our Series B Preferred Stock, 1,469,610 shares of our Series C Preferred Stock, and 1,165,000 shares of our Series D Preferred Stock.  Holders of Sotherly’s preferred stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares.  Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock voting together as a separate class have the right to elect two additional directors to Sotherly’s 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).  As of June 30, 2021, distributions on Sotherly’s Preferred Stock are in arrears for the last six quarterly payments.  Therefore, the holders of Sotherly’s Series B, Series C, and Series D Preferred Stock are 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.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On June 21, 2021, the Company exchanged a total of 1,542,727 shares of its common stock for an aggregate of 220,000 shares of preferred stock with Palogic of its 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock in a privately negotiated transaction.  The issuance of the shares of the common stock was made by the Company pursuant to the exemption from the registration requirements of Section 3(a)(9) of the Securities Act on the basis that these offers constituted an exchange with an existing holder of the Company’s securities.  No commission or other remuneration was paid to any party for soliciting such exchange and the transactions did not involve a public offering.  In consideration for the common share issuances, the Company received the preferred shares from the stockholders, which preferred shares were cancelled and of no further effect.

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.

 

Item 3.

Defaults upon Senior Securities

Preferred Stock

The Company’s distribution on the shares of the Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares are in arrears for six 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.

56


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 periods ending June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021.  The relevant distributions were as follows:

 

A regular quarterly cash dividend of $0.50 per share of beneficial interest of the Series B Preferred Stock;

 

A regular quarterly cash dividend of $0.4921875 per share of beneficial interest of the Series C Preferred Stock; and

 

A regular quarterly cash dividend of $0.515625 per share of beneficial interest of the Series D Preferred Stock.

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, 2021, are $4,530,000, $4,339,946, and $3,164,687, respectively.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

 

57


 

Item 6.

Exhibits

The following exhibits are filed as part of this Form 10-Q:

 

Exhibit

 

 

Number

 

Description of Exhibit

 

 

 

  10.20

 

Second Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality (incorporated by reference to the document previously filed as Exhibit 10.20 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).

 

 

 

  10.21

 

Amendment No. 2 to Credit Agreement between Our Town Hospitality LLC and MHI Hospitality TRS, LLC (incorporated by reference to the document previously filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).

 

 

 

  10.22

 

Share Exchange Agreement between Sotherly Hotels Inc. and Palogic Value Fund, L.P. (incorporated by reference to the document previously filed as Exhibit 10.22 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2021).

 

 

 

  10.23

 

Amended and Restated Purchase and Sale Agreement between Louisville Hotel Associates, LLC and Lockwood Development Partners LLC.

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.3

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  31.4

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.3

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.4

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

58


 

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.

 

 

 

SOTHERLY HOTELS INC.

 

 

 

 

 

Date: August 16, 2021

 

By:

 

/s/ David R. Folsom

 

 

 

 

David R. Folsom

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

By:

 

/s/ Anthony E. Domalski

 

 

 

 

Anthony E. Domalski

 

 

 

 

Chief Financial Officer

59


 

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.

 

 

 

SOTHERLY HOTELS LP

 

 

 

 

 

 

 

By:

 

SOTHERLY HOTELS INC.

 

 

 

 

Its General Partner

 

 

 

 

 

Date: August 16, 2021

 

By:

 

/s/ David R. Folsom

 

 

 

 

David R. Folsom

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

By:

 

/s/ Anthony E. Domalski

 

 

 

 

Anthony E. Domalski

 

 

 

 

Chief Financial Officer

 

60