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.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files.)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act. ~~(Check one):~~

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).

As of ~~November 4, 2017,~~August 10, 2023, there were ~~13,823,459~~19,310,803 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.

We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common stock as ~~“Common Stock,~~“common stock,” the Company’s preferred stock as ~~“Preferred Stock,~~“preferred stock,” and the Operating Partnership’s common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the ~~“Preferred Interest.~~“preferred units.” References to “we” and “our” mean the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.

This report combines the Quarterly Reports on Form 10-Q for the period ended ~~September~~June 30, ~~2017~~2023 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

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:

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

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF ~~CHANGES IN PARTNERS’ CAPITAL~~OPERATIONS

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

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. ~~As of September 30, 2017, and December 31, 2016, deferred tax assets totaled approximately~~

~~$7.7 million and $6.9 million, respectively, of which approximately $6.8 million and $6.0 million relate to net operating losses of our TRS Lessee.~~ A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than ~~50%~~50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. We perform this analysis by evaluating future hotel revenues and expenses accounting for certain non-recurring costs and expenses during the current and prior two fiscal years as well as anticipated changes in the lease rental payments from the TRS Lessee to subsidiariesAs of ~~the Operating Partnership. We~~June 30, 2023, we have determined that it is more-likely-than-not that we will not

be able to fully utilize our deferred tax assets for future tax consequences, therefore noa 100% valuation allowance is required. As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, deferred tax assets each totaled $0, respectively.

As of June 30, 2023 and December 31, 2022, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of ~~September~~June 30, ~~2017,~~2023, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include ~~2010~~2014 through ~~2016.~~2022. In addition, as of ~~September~~June 30, ~~2017,~~2023, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject, because of open NOL carryforwards, generally include ~~2004~~2014 through ~~2016.~~2022.

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.

Use of Estimates – The preparation of the financial statements in conformity with ~~accounting principles generally accepted in the United States of America (“GAAP”)~~U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

4. Debt

Mortgage Loans, Net. As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016 consisted of the following:~~

September 30, 2017

December 31, 2016

Land and land improvements

$
—

$
1,097,096

Buildings and improvements

—

6,242,504

Furniture, fixtures and equipment

—

2,289,008

—

9,628,608

Less: accumulated depreciation and impairment

—

(4,295,608
)
Investment in Hotel Properties Held for Sale, Net

$
—

$
5,333,000

Investment in hotel properties held for sale, net represents the Crowne Plaza Hampton Marina property, which was sold on February 7, 2017 for approximately $5.6 million. After selling costs, mortgage loan payoff and associated fees we realized an approximate gain on the sale of assets of $0.1 million, as reflected in the consolidated statements of operations.

~~5. Debt~~

~~Mortgage Loans, Net. As of September 30, 2017 and December 31, 2016,~~2022, we had approximately ~~$298.4~~$319.3 million and approximately ~~$282.7~~$320.5 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

Balance Outstanding as of

September 30,

December 31,

Prepayment

Maturity
Amortization
Interest

Property

2017

2016

Penalties

Date
Provisions
Rate

Crowne Plaza Hampton Marina ⁽¹⁾

$
-

$
2,584,633

None

11/1/2019
3 years

5.00%

Crowne Plaza Tampa Westshore  ⁽²⁾

15,353,500

15,561,400

None
6/30/2019
25 years
LIBOR plus 3.75 %

The DeSoto ⁽³⁾

34,845,934

30,000,000

Yes

7/1/2026
25 years

4.25%

DoubleTree by Hilton Jacksonville
   Riverfront ⁽⁴⁾

35,422,241

19,291,716

Yes
7/11/2024
30 years

4.88%

DoubleTree by Hilton Laurel ⁽⁵⁾

9,182,987

9,329,005

Yes
8/5/2021
25 years

5.25%

DoubleTree by Hilton Philadelphia Airport⁽⁶⁾

30,646,946

31,261,991

None

4/1/2019
25 years
LIBOR plus 3.00 %

DoubleTree by Hilton Raleigh
   Brownstone University ⁽⁷⁾

14,571,181

14,773,885

n/a
8/1/2018
30 years

4.78%

DoubleTree Resort by Hilton Hollywood
   Beach ⁽⁸⁾

58,249,890

58,935,818

n/a
10/1/2025
30 years

4.913%

Georgian Terrace ⁽⁹⁾

45,230,148

45,826,038

n/a
6/1/2025
30 years

4.42%

Hilton Wilmington Riverside ⁽¹⁰⁾

30,000,000

30,000,000

Yes
1/1/2027
25 years

4.25%

Sheraton Louisville Riverside⁽¹¹⁾

11,771,942

11,977,557

Yes
12/1/2026
25 years

4.27%

The Whitehall ⁽¹²⁾

15,000,000

15,000,000

Yes
10/12/2021
18 years
LIBOR plus 3.50 %

Total Mortgage Principal Balance

$
300,274,769

$
284,542,043

Deferred financing costs, net

(2,041,958
)

(2,049,409
)

Unamortized premium on loan

197,144

215,655

Total Mortgage Loans, Net

$
298,429,955

$
282,708,289


	Balance Outstanding as of
	June 30,			December 31,			Prepayment	Maturity	Amortization	Interest
Property	2023			2022			Penalties	Date	Provisions	Rate
The DeSoto (1)	$	30,739,120		$	31,219,022		Yes	7/1/2026	25 years	4.25%
DoubleTree by Hilton Jacksonville Riverfront (2)		32,085,069			32,416,570		Yes	7/11/2024	30 years	4.88%
DoubleTree by Hilton Laurel (3)		10,000,000			7,412,107		(3)	5/6/2028	(3)	7.35%
DoubleTree by Hilton Philadelphia Airport (4)		39,044,492			39,413,672		None	10/31/2023	30 years	LIBOR plus 2.27%
DoubleTree Resort by Hilton Hollywood Beach (5)		52,106,993			52,724,475		(5)	10/1/2025	30 years	4.913%
Georgian Terrace (6)		39,972,265			40,492,622		(6)	6/1/2025	30 years	4.42%
Hotel Alba Tampa, Tapestry Collection by Hilton (7)		24,512,800			24,756,400		None	6/30/2025	(7)	SOFR plus 2.75%
Hotel Ballast Wilmington, Tapestry Collection by Hilton (8)		31,232,583			31,699,775		Yes	1/1/2027	25 years	4.25%
Hyatt Centric Arlington (9)		47,001,858			47,534,606		Yes	10/1/2028	30 years	5.25%
The Whitehall (10)	$	14,115,034			14,226,067		None	2/26/2028	25 years	PRIME plus 1.25%
Total Mortgage Principal Balance	$	320,810,214		$	321,895,316
Deferred financing costs, net		(1,575,990	)		(1,480,779	)
Unamortized premium on loan		55,225			67,566
Total Mortgage Loans, Net	$	319,289,449		$	320,482,103


(1)	AsThe note amortizes on a 25-year schedule after an initial interest-only period of ~~February 7, 2017, the note~~one year and is ~~no longer outstanding due~~subject to ~~the sale~~a pre-payment penalty except for any pre-payments made within 120 days of the ~~property.~~maturity date.
(2)	The note ~~provides initial proceeds~~is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
(3)	The note requires payments of ~~$15.7 million, with an additional $3.3 million available upon~~interest only and cannot be prepaid until the ~~satisfaction~~last 4 months of ~~certain conditions;~~the loan term.
(4)	The note bears a floating interest rate of ~~1-month~~1-month LIBOR plus ~~3.75%~~2.27%, but we entered into a swap agreement to fix the rate at 5.237% through July 31, 2023. 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)	With limited exception, the note may not be prepaid prior to June 2025.
(6)	With limited exception, the note may not be prepaid prior to February 2025.
(7)	The note bears a floating interest rate of SOFR plus 2.75% subject to a floor rate of ~~3.75%~~2.75%; with monthly principal payments of $40,600; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions. On July 11, 2022, we entered into a swap agreement to fix the rate at 5.576%. The swap agreement reflects notional amounts approximate to the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
~~(3)~~(8)	The note ~~provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions, namely, the completion of a renovation project;~~ amortizes on a ~~25-year~~25-year schedule after ~~a 1-year~~an initial interest-only ~~period;~~period of one year and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
~~(4)~~(9)	~~The~~Following a 5-year lockout, the note ~~may not~~can be prepaid ~~until August 2019, after which it is subject to a pre-payment~~with penalty ~~until March 2024. Prepayment can be made~~in years 6-10 and without penalty ~~thereafter.~~during the final 4 months of the term.
~~(5)~~(10)	The note is subject to a pre-payment penalty except for any pre-payments made either between April 2017 and August 2017, or from April 2021 through maturity of the note. The note provides that on January 5, 2018, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.
~~(6)~~	~~The note bears a minimum interest rate of 3.50%.~~
~~(7)~~	~~With limited exception, the note may not be prepaid until two months before maturity.~~

~~(8)~~	~~With limited exception, the note may not be prepaid until June 2025.~~
~~(9)~~	~~With limited exception, the note may not be prepaid until February 2025.~~
~~(10)~~	The note provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions namely, the completion of a renovation project; amortizes on a 25-year schedule after a 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.
~~(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.~~
~~(12)~~	~~The note was refinanced in October 2016, provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions;~~ bears a floating interest rate of ~~the 1-month LIBOR~~New York Prime Rate plus ~~3.5%~~1.25%, ~~subject to~~with a floor ~~rate~~ of 4.0% and is subject to prepayment penalties subject to a declining scale from 3.0% penalty on or before the first anniversary date, a 2.0% penalty during the second anniversary year and a 1.0% penalty after the third anniversary date.7.50%.

~~We were~~The mortgage on the DoubleTree by Hilton Philadelphia Airport hotel matures in ~~compliance with all debt covenants, current on all loan payments~~October 2023 and ~~not otherwise in default under any of our mortgage loans,~~ as of ~~September~~June 30, ~~2017.~~2023, the Company failed to meet certain financial covenants under that mortgage. We intend to work with the lender to receive a waiver and to amend, refinance, or extend the term of the loan prior to maturity in October 2023. Additionally, the mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures in July 2024. We intend to refinance that mortgage at the expected level of its indebtedness prior to maturity.

Total future mortgage debt maturities for the remaining six and twelve-month periods, without respect to any extension of loan maturity ~~as of September~~or loan modification after June 30, ~~2017~~2023, were as follows:

For the remaining three months ending: December 31, 2017

$
1,682,647

December 31, 2018

23,696,155

December 31, 2019

52,902,464

December 31, 2020

9,012,007

December 31, 2021

30,769,803

December 31, 2022 and thereafter

182,211,693

Total future maturities

$
300,274,769


For the remaining six months ended December 31, 2023	$	42,433,166
December 31, 2024		38,069,572
December 31, 2025		116,065,168
December 31, 2026		58,588,969
December 31, 2027		1,757,221
December 31, 2028 and thereafter		63,896,118
Total future maturities	$	320,810,214

~~7.0% Unsecured Notes.~~ ~~On November 21, 2014, the~~PPP Loans. The Operating Partnership ~~issued 7.0% senior unsecured notes~~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 had an initial term of two years, with the ability extend the loan to five years, if not forgiven, 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. As of June 30, 2023, an application for full forgiveness has been filed and is still pending.

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 December 9, 2022, the Company was notified it had received principal forgiveness in the ~~aggregate~~ amount of ~~$25.3~~approximately $4.6 million ~~(the “7% Notes”). The indenture requires quarterly~~and is required to make monthly payments of ~~interest~~$56,809 through July 1, 2025 to extinguish the loan.

On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and ~~matures on November 15, 2019. The 7% Notes are callable after November 15, 2017 at 101%~~received proceeds of ~~face value.~~$952,700 under a PPP Loan. On February 3, 2023, the Company was notified it had received principal forgiveness in the amount of approximately $268,309 and is required to make monthly payments of $13,402 through May 6, 2025 to extinguish the loan.

At June 30, 2023, the PPP loans had a cumulative balance of approximately $1.9 million.

6.5. Commitments and Contingencies

Ground, Building, Parking and ~~Submerged~~ Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the ~~third~~fourth of ~~three~~five optional five-year renewal periods expiring October 31, ~~2011, October 31, 2016 and October 31, 2021, respectively.~~2026. Rent expense for this operating lease for ~~each of~~ the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022, each totaled ~~$18,245~~$20,983, and for ~~each of~~ the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, each totaled ~~$54,738~~$41,966.

We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, ~~2086.~~2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of ~~$990~~$990 was received by the previous owner and not prorated over the life of the lease.

We lease a parking lot adjacent to the DoubleTree by Hilton Raleigh Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expired August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an exclusive and irrevocable option to purchase the leased land at fair market value at August 1, 2018, or at the end of any 10-year renewal period, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months ended September 30, 2017 and 2016, totaled $41,184 and $23,871, respectively, and for the nine months ended September 30, 2017 and 2016, totaled $88,925 and $71,612, respectively.

We lease land adjacent to the ~~Crowne Plaza~~Hotel Alba Tampa ~~Westshore~~ for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July ~~2009.~~ 2009. In May 2014, we extended the agreement for an additional five years. We signed a new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years. The new agreement expires in July ~~2019. The agreement~~2024, requires annual payments of ~~$2,432,~~$2,432, plus tax, and may be renewed for an

additional five ~~years.~~years. Rent expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2023 and ~~2016, each~~2022, totaled ~~$651~~$650 and ~~$1,952, respectively.~~$653, and for the six months ended June 30, 2023 and 2022 totaled $1,301 and $1,306.

We lease ~~5,216~~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 was $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as ~~amended, that commenced September 1, 2009 and expires August 31, 2018.~~the tenant improvement allowance is exhausted. Rent expense for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 each totaled $55,902, and ~~$22,224~~for the six months ended June 30, 2023 and ~~$22,552,~~2022 each totaled $111,804.

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 five additional renewal periods of 10 years each. The first renewal has been elected and the current maturity is 2035. Rent expense for the three months ended June 30, 2023 and 2022, was $202,392 and $163,695, respectively, and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022, totaled ~~$67,327~~$341,493 and ~~$68,451, respectively~~.$235,709, respectively.

We lease the parking garage ~~adjacent to~~and poolside cabanas associated with the Hyde ~~Resort & Residences in Hollywood~~ Beach ~~Florida.~~House. The parking ~~garage is leased under a 20-year operating~~and cabana lease ~~requiring monthly~~requires us to make rental payments of ~~$20,000, which~~$270,100 per year with increases of 5% every five years and has an initial term that expires in ~~February, 2037.~~2034 and which may be extended for four additional renewal periods of 5 years each. Rent expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2023 and 2022, each totaled ~~$60,000~~$67,750, and ~~$140,000, respectively.~~for the six months ended June 30, 2023 and 2022, each totaled $135,500.

We also lease certain storage facilities, furniture and equipment under ~~financing arrangements~~agreements expiring between ~~August 2017~~December 2023 and ~~March 2019.~~June 2026.

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

For the remaining three months ending: December 31, 2017

$
156,035

December 31, 2018

573,451

December 31, 2019

391,266

December 31, 2020

351,464

December 31, 2021

351,464

December 31, 2022 and thereafter

4,271,629

Total

$
6,095,309


For the remaining six months ended December 31, 2023	$	361,894
December 31, 2024		680,783
December 31, 2025		688,744
December 31, 2026		675,264
December 31, 2027		342,503
December 31, 2028 and thereafter		13,530,663
Total	$	16,279,851

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 ~~September~~June 30, ~~2017, each of~~2023, ourten wholly-owned hotels, and ~~the~~our two condo-hotel rental ~~program and condominium association of the Hyde Resort & Residences~~programs, operated under a management ~~agreement~~agreements with ~~Chesapeake Hospitality~~Our Town (see Note 9)8). The management agreements expire ~~between January 1, 2020 and January 30, 2022,~~on March 31, 2035 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 ~~September~~June 30, ~~2017, most~~2023, seven of our hotels ~~operated~~operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between ~~2.5%~~3.0% and ~~5.0%~~5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between ~~2.5%~~3.0% and ~~6.0%~~4.0% of ~~room~~gross revenues from the hotels. The franchise agreements currently in force expire between ~~July 2017~~October 2024 and ~~October 2030.~~March 2038. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term. On April 12, 2016 we allowed the franchise agreement on the Crowne Plaza Houston Downtown to expire. The property has been rebranded as The Whitehall. On July 31, 2017, we allowed the franchise agreement on the Hilton Savannah DeSoto to expire. The property has been rebranded as The DeSoto and operates as an independent hotel.

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the ~~Hilton Wilmington Riverside,~~Hotel Ballast, The DeSoto, ~~the DoubleTree by Hilton Raleigh Brownstone-University,~~ the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, the Hyatt Centric Arlington and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the ~~properties. We are~~properties. Several of our lenders also required ~~by several of our lenders~~us to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal ~~4.0%~~4.0% of gross revenues for the ~~Hilton Wilmington Riverside,~~Hotel Ballast, The DeSoto, ~~DoubleTree by Hilton Raleigh Brownstone–University,~~ the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal ~~4.0%~~4.0% of room revenues for the DoubleTree by Hilton Philadelphia ~~Airport.~~Airport and the Hyatt Centric Arlington. We are also required by some lenders to have a debt service reserve that approximates the aggregate amount of one year's debt service, which was initially established at approximately $1.5 million, in 2022.

ESOP Loan ~~and Purchase~~ Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to ~~$5.0~~$5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed ~~$5.0~~$5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036.

~~Shares purchased by~~ At June 30, 2023, the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation. As of September 30, 2017, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market for approximately $4.9 million, which the ESOP borrowed from the Company pursuant tobalance on the loan ~~agreement. A total~~was approximately $2.6 million, leaving capacity for additional borrowing of ~~8,424 and 25,408 shares with a fair value of $60,075 and $178,137 were allocated or committed to be released from~~approximately $2.4 million under the suspense account and recognized as compensation cost during the three and nine months ended September 30, 2017, respectively. The remaining 657,092 unallocated shares have an approximate fair value of $3.9 million, as of September 30, 2017. At September 30, 2017, the ESOP held a total of 9,473 allocated shares, 15,935 committed-to-be-released shares and 657,092 suspense shares. Dividends on allocated shares are paid to the participants of the ESOP, while dividends on unallocated shares are used to pay down the ESOP loan from the Operating Partnership.commitment.

Litigation ~~–To our knowledge, no material litigation has been threatened against us. We~~ –We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.

7.6. Preferred Stock and Units

Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. ~~As of September 30, 2017, and December 31, 2016, there were 1,610,000 shares,~~The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:


	Per					Number of Shares				Quarterly
	Annum			Liquidation		Issued and Outstanding as of				Distributions
Preferred Stock - Series	Rate			Preference		June 30, 2023		December 31, 2022		Per Share
Series B Preferred Stock		8.000	%	$	25.00		1,464,100		1,464,100	$	0.500000
Series C Preferred Stock		7.875	%	$	25.00		1,346,110		1,346,110	$	0.492188
Series D Preferred Stock		8.250	%	$	25.00		1,163,100		1,163,100	$	0.515625

The Company is obligated to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the ~~Preferred Stock issued and outstanding.~~

~~On August 23, 2016, the Company issued 1,610,000 shares, $0.01 par value~~$25.00 liquidation preference per share, of its 8% Series B Preferred Stock for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred partnership units.share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. ~~The Company pays cumulative cash distributions on the preferred stock at a rate of 8.00% per annum of the $25.00 liquidation preference per share.~~ The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates.

On January 24, 2023, the Company announced its intention to resume quarterly payments of dividends on its preferred stock. Accordingly, the Company paid previously declared preferred dividends, in the amount of approximately $2.0 million, on March 15, 2023. The Company also declared preferred dividends in April 2023, and paid approximately $2.0 million on June 13, 2023. On May 30, 2023, the Company declared a "catch-up" dividend to pay previously undeclared dividends on July 14, 2023, in the amount of approximately $2.0 million.

The total undeclared and unpaid cash dividends due on the Series B Preferred ~~Units~~ ~~-The Company is~~Stock, Series C Preferred Stock and Series D Preferred Stock through June 30, 2023, are $8,052,550, $7,287,931 and $6,596,958, respectively. Undeclared preferred cumulative dividends are reported on the ~~holder~~statements of ~~the preferred partnership units issued by the Operating Partnership~~.operations but are not considered payable until declared. As of ~~September~~June 30, ~~2017, and December 31, 2016, there~~2023, the undeclared cumulative preferred dividends were ~~1,610,000 preferred partnership units issued and outstanding, respectively.~~approximately $21.9 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, 2023		December 31, 2022		Per Unit
Series B Preferred Units		8.000	%	$	25.00		1,464,100		1,464,100	$	0.500000
Series C Preferred Units		7.875	%	$	25.00		1,346,110		1,346,110	$	0.492188
Series D Preferred Units		8.250	%	$	25.00		1,163,100		1,163,100	$	0.515625

The Operating Partnership pays cumulative cash ~~dividends~~distributions on the preferred ~~partnership~~ units at ~~a rate of 8.00%~~rates in the above table per annum of the ~~$25.00~~$25.00 liquidation preference per unit. ~~For each~~The Company, which is the holder of the ~~quarters ended March 31, 2017, June 30, 2017~~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 ~~September 30, 2017,~~are not convertible into any other security of the Operating Partnership ~~has declared~~or its affiliates.

The total undeclared and ~~has paid $0.50 per~~unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through June 30, 2023, is $8,052,550, $7,287,931 and $6,596,958, respectively. Undeclared preferred ~~unit, respectively, and $0.211 per~~cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of June 30, 2023, the undeclared cumulative preferred ~~unit for the quarter ended September 30, 2016 and $0.50 per preferred unit for the quarter ended December 31, 2016.~~dividends were approximately $21.9 million.

8.7. Common Stock and Units

Common Stock – ~~The~~As of June 30, 2023, the Company iswas authorized to issue up to ~~49,000,000~~69,000,000 shares of common stock, ~~$0.01~~$0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. On December 2, 2016, the Company’s board of directors authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock, par value $0.01 per share, at prevailing prices on the open market or in privately negotiated transactions, at the discretion of management. The Company has and expects to continue to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017, unless extended by the board of directors. Through December 31, 2016 the Company repurchased 481,100 shares of common stock ~~for approximately $3.2 million~~ and the repurchased shares have been returned to the status of authorized but unissued shares of common stock. The Company did not repurchase any shares under the stock repurchase program during the three months ended September 30, 2017. Between January 3, 2017 and February 28, 2017, the ESOP purchased 682,500 shares of the Company’s common stock for approximately $4.9 million. Of the 682,500 ESOP shares purchased, 657,092 of these shares are considered unearned ESOP shares at September 30, 2017 and are excluded from the Company’s outstanding common stock on the consolidated balance sheets and the earnings per share calculations on the consolidated statements of operations.

The following is a schedule of issuances, since January 1, ~~2016,~~2022, of the Company’s common stock and related partnership units of the Operating Partnership:

On January 21, 2022 and February 15, ~~2017,~~2022, the Company was issued ~~12,000 units in the Operating Partnership and awarded 12,000 shares of restricted stock to its independent directors.~~

~~On February 2, 2016, the Company was issued 36,250~~175,268 partnership units in the Operating Partnership and awarded an ~~aggregate~~equivalent number of ~~22,000~~ shares of unrestricted stock to ~~certain executives and employees as well as 12,000 shares of restricted stock and 2,250 shares of unrestricted stock to certain of~~ its ~~independent directors.~~employees.

On ~~February 1, 2016, two holders of~~January 21, 2022, the Company was issued 15,000 partnership units in the Operating Partnership ~~redeemed 422,687~~and awarded an equivalent number of shares of restricted stock to its independent directors.

On March 24, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 7,000 shares of the Company’s Series B Preferred Stock and 3,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 96,900 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 25, 2022.

On March 31, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 5,900 shares of the Company’s Series B Preferred Stock and 6,600 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 120,875 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 31, 2022.

On April 11, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 4,000 shares of the Company's Series B Preferred Stock and 8,000 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 116,640 shares of the Company's common stock. We closed the transaction and issued the common stock on April 12, 2022.

On April 19, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 5,000 shares of the Company's Series B Preferred Stock and 10,600 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 153,504 shares of the Company's common stock. We closed the transaction and issued the common stock on April 19, 2022.

On May 19, 2022, one holder of partnership units in the Operating Partnership converted 50,000 units for an equivalent number of shares ofin the Company’s common stock.

On May 23, 2022, the Company was issued 37,428 partnership units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On July 1, 2022, one holder of partnership units in the Operating Partnership converted 40,687 units for an equivalent number of shares in the Company’s common stock.

On July 21, 2022, the Company was issued 167,390 partnership units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On August 18, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 11,000 shares of the Company's Series B Preferred Stock, 7,100 shares of the Company's Series C Preferred Stock, and 1,900 shares of the Company's Series D Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 178,800 shares of the Company's common stock. We closed the transaction and issued the common stock on August 18, 2022.

On August 23, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 13,000 shares of the Company's Series B Preferred Stock and 3,200 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 140,130 shares of the Company's common stock. We closed the transaction and issued the common stock on August 24, 2022.

On November 1, 2022, one holder of partnership units in the Operating Partnership converted 217,845 units for an equivalent number of shares in the Company’s common stock.

On January 12, 2023, the Company issued 15,000 restricted shares of common stock to its independent directors and 64,278 vested shares of common stock to its independent directors and one officer.

On January 23, 2023, the Company issued 205,000 restricted shares of common stock to certain its officers and employees pursuant to their employment agreements.

On April 28, 2023, one holder of partnership units in the Operating Partnership converted 75,000 units for an equivalent number of shares in the Company's stock.

As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the Company had ~~13,823,459~~19,310,803 and ~~14,468,551~~18,951,525 shares of common stock outstanding, respectively.

Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a ~~one-for-one~~one-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.

~~There~~Since January 1, 2022, there have been no issuances or redemptions, ~~since January 1, 2016,~~ of partnership units in the Operating Partnership other than the ~~redemptions and~~ issuances of partnership units in the Operating Partnership to the Company described above. In connection with the exchange agreements described in this section, an equivalent number of preferred units held by the Company were exchanged for partnership units in the Operating Partnership.

As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the total number of Operating Partnership units outstanding was ~~16,258,691~~20,060,991 and ~~16,246,691,~~19,776,713, respectively.

As of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, the total number of outstanding Operating Partnership units not owned by the Company was ~~1,778,140~~750,188 and ~~1,778,140,~~825,188, respectively, with a fair market value of approximately ~~$10.5~~$1.4 million and ~~$12.1~~$1.5 million, respectively, based on the price per share of the common stock on such respective dates.

As of June 30, 2023, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of approximately $2.1 million.

9.8. Related Party Transactions

~~Chesapeake Hospitality. As~~Our Town Hospitality. Our Town is currently the management company for each of September 30, 2017, the members of Chesapeake Hospitality (a company that is majority-owned and controlled by the Company’s chairman and chief executive officer, and two former members of the Company’s board of directors) owned 1,686,442 shares, approximately 12.2%, of the Company’s outstanding common stockour ten wholly-owned hotels, as well as ~~652,326 Operating Partnership units.~~the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. As of June 30, 2023, an affiliate of Andrew M. Sims, our Chairman, an affiliate of David R. Folsom, our President and Chief Executive Officer, and Andrew M. Sims Jr., our Vice President - Operations & Investor Relations, beneficially owned approximately 71.0%, 7.0%, and 15.0%, respectively, of the total outstanding ownership interests of Our Town. Mr. Sims, Mr. Folsom, and Mr. Sims Jr. serve as directors of Our Town. The following is a summary of the transactions between ~~Chesapeake Hospitality~~Our Town and us:

Accounts Receivable – At ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, we were due ~~$94,425~~approximately $0.3 million and ~~$0,~~$0.3 million, respectively, from ~~Chesapeake Hospitality.~~Our Town.

Accounts Payable – At June 30, 2023 and December 31, 2022, we owed Our Town approximately $0.9 million and $1.3 million, respectively.

Management Agreements – AsOn September 6, 2019, the Company entered into a master agreement with Our Town related to the management of ~~September 30, 2017,~~certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the management of our hotels. The hotel management agreements for each of our ten wholly-owned hotels and the ~~Hyde Resort & Residences operated under various management agreements with Chesapeake Hospitality.~~two rental programs are referred to as, individually an “OTH Hotel Management Agreement” and, together the “OTH Hotel Management Agreements”. The ~~management agreements each provide for an initial~~ term of ~~5 years and expire between January 1, 2020 and January 30, 2022,~~the OTH Hotel Management Agreements extends through March 31, 2035, and may be extended for ~~up to~~ two ~~additional~~ periods of five years ~~each subject~~each.

The OTH Master Agreement provides for an adjustment to the ~~approval~~fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of ~~both parties. Each of the individual hotel management agreements may~~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, 2035 but shall 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. We also have a master agreement with Chesapeake Hospitality that has a five-year term, but may be extended beyond 2035 for such additional periods as ~~long as~~ an ~~individual management agreement~~OTH Hotel Management Agreement remains in effect.

The base management fees for ~~The Whitehall and the Georgian Terrace were 2.00% through 2015, increased to 2.25% in 2016, and increased to 2.50% in 2017 and for~~ each ~~year thereafter. The base~~hotel under management fee for the DoubleTree Resort by Hilton Hollywood Beach was 2.00% from July 2015 through July 2016, increased to 2.25% in July 2016, and increases to 2.50% in July 2017 and each year thereafter. The base management fee for the Hyde Resort & Residenceswith Our Town is 2.00% from January 2017 through January 2018, increases to 2.25% in January 2018, and increases to 2.50% in January 2019 and for each year thereafter. The base management fees for the remaining properties in the current portfolio are 2.65% through 2017 and decreases to 2.50% thereafter.2.50%. For any new individual hotel management agreements, ~~Chesapeake Hospitality~~Our Town will receive a base management fee of ~~2.00%~~2.00% of gross revenues for the first full year from the commencement date through the anniversary date, ~~2.25%~~2.25% of gross revenues the second full year, and ~~2.50%~~2.50% of gross revenues for every year thereafter. ~~The Company~~

Base management and ~~Chesapeake Hospitality agreed to substitute the Hyde Resort & Residences~~administrative fees earned by Our Town for our properties were approximately $1.3 million and $1.0 million, for the ~~Crowne Plaza Hampton Marina~~three months ended June 30, 2023 and ~~there was no termination fee associated with~~2022, respectively, and were approximately $2.4 million and $2.1 million for the ~~termination of the Crowne Plaza Hampton Marina management agreement.~~ six months ended June 30, 2023 and 2022, respectively.

Each ~~management agreement~~OTH Hotel Management Agreement sets an incentive management fee equal to ~~10%~~10.0% of the amount by which gross operating profit, as defined in the relevant management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided,

however, that the incentive management fee payable in respect of any such year shall not exceed ~~0.25%~~0.25% of the gross revenues of the hotel included in such calculation.

~~Base~~ Incentive management ~~and administrative~~ fees earned ~~by Chesapeake Hospitality for our properties totaled $976,232 and $944,939~~ for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, were $(5,015) and $56,135, respectively and ~~$3,042,840 and $2,927,333~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016, respectively. In addition, estimated incentive~~2022, were approximately $217,943 and $314,673, respectively.

Each OTH Hotel Management Agreement provides for the payment of a termination fee upon the sale of the hotel equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees ~~of $23,634 and $13,634 were accrued~~paid for the ~~three~~number of months ~~ended September~~prior to the closing date of the hotel sale equal to the number of months remaining on the current term of the management agreement.

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 $309,511 and $211,117, as of June 30, ~~2017~~2023 and ~~2016, respectively and~~ ~~$51,751 and $60,636 were accrued for the nine months ended September~~June 30, ~~2017 and 2016, respectively~~. 2022, respectively.

Employee Medical Benefits – We purchase employee medical ~~benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitality~~coverage for ~~our employees as well as those~~eligible employees that are employed by ~~Chesapeake Hospitality that~~Our Town and who work exclusively for our ~~hotel properties.~~properties and elect to participate in Our Town’s self-insured plan. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were ~~$1,292,287~~approximately $0.9 million and ~~$3,962,161~~$0.8 million for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2023 and 2022, respectively, and for the six months ended June 30, 2023 and 2022, were approximately ~~$1,267,721~~$1.4 million and ~~$3,813,333 for the three and nine months ended September 30, 2016,~~ $1.7 million, respectively.

~~Sotherly Foundation –~~ During 2015, the Company loaned $180,000 to the Sotherly Foundation, a non-profit organization to benefit wounded American veterans living in communities near our hotels. As of September 30, 2017, and December 31, 2016, the balance of the loan was $80,000, respectively.

~~Loan Receivable - Affiliate –~~ As of September 30, 2017, approximately $4.7 million was due the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016. The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.

Others. We ~~employ~~employed Ashley S. Kirkland, the daughter of our ~~Chief Executive~~Chairman, as Corporate Counsel and Compliance Officer ~~as a legal analyst~~until her departure in January 2022 and continue to employ Robert E. Kirkland IV, her husband, as our ~~compliance officer.~~General Counsel. We also employ Andrew M. Sims Jr., the son of our ~~Chief Executive Officer,~~Chairman, as ~~a manager. Compensation~~Vice President – Operations & Investor Relations. Total compensation for all three individuals, including salary and benefits, for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016 totaled $87,915~~2022, were $138,782 and ~~$79,453,~~$119,926, respectively, and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016 totaled approximately $267,557~~2022, were $337,445 and ~~$246,084, respectively~~$252,624, ~~for all three individuals.~~ respectively.

On February 1, 2016, one current member of the Company’s board of directors redeemed 322,687 units for an equivalent number of shares of the Company’s common stock, and one previous member of the board of directors redeemed 100,000 units for an equivalent number of shares of the Company’s common stock, pursuant to the terms of the partnership agreement.

~~During the three-month period ending September 30, 2017 and 2016, the Company reimbursed $26,233 and $31,803, respectively~~ ~~and during the nine-month period ending September 30, 2017 and 2016, the Company reimbursed $132,239 and $101,571, respectively, to a partnership controlled by the Chief Executive Officer for business-related air travel pursuant to the Company’s travel reimbursement policy.~~

~~10.~~9. Retirement Plans

~~401(K)~~401(k) Plan - We maintain a ~~401(K)~~401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions ~~and which requires that we match 100.0%~~include a matching employer contribution consisting of 100.0% of the first ~~3.0%~~3.0% of employee contributions and ~~50.0%~~50.0% of the next ~~2.0%~~2.0% of employee contributions. ~~All~~In addition, all employer matching funds vest ~~immediately in accordance with the “safe harbor” provision.~~immediately. Contributions to the plan totaled ~~$11,659~~$23,538 and ~~$57,516~~$28,503, for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017, respectively~~2023 and ~~$10,177~~2022, and ~~$56,122~~ for the ~~three and nine~~six months ended ~~September~~June 30, ~~2016, respectively~~.2023 and 2022, totaled $57,547 and $51,642, respectively.

Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan ~~(“ESOP”)~~ in December 2016, effective January 1, ~~2016. The ESOP~~2016, which is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to ~~$5.0~~$5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan.

Between January 3, ~~2017~~ and February 28, 2017, the Company’s ESOP had purchased 682,500 shares of the Company’s common stock ~~of an aggregate~~in the open market at a cost of ~~$4.9~~approximately $4.9 million. Shares purchased by the ESOP are held in a suspense account for allocation among ~~participants.~~ participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation.

A total of 314,424 shares with a fair value of $594,261 remained allocated or committed to be released from the suspense account, as of June 30, 2023. We recognized as compensation cost $24,913 and $28,803, during the six months ended June 30, 2023 and 2022, respectively. The remaining 351,399 unallocated shares have an approximate fair value of $664,144, as of June 30, 2023. As of June 30, 2023, the ESOP held a total of 301,646 allocated shares, 12,778 committed-to-be-released shares and 351,399 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, 2023				December 31, 2022
	Number of Shares		Fair Value		Number of Shares		Fair Value
Allocated shares		301,646	$	570,111		301,646	$	545,979
Committed to be released shares		12,778		24,150		—		—
Total Allocated and Committed-to-be-Released		314,424	$	594,261		301,646	$	545,979

Unallocated shares		351,399		664,144		364,177		659,160

Total ESOP Shares		665,823	$	1,258,405		665,823	$	1,205,139


~~September 30, 2017~~		~~December 31, 2016~~
~~Number of Shares~~	~~Fair Value~~	~~Number of Shares~~	~~Fair Value~~

Allocated shares
            9,473
$      64,321

-
$              —
Committed-to-be released shares
          15,935
       113,816

-
                 —
Total allocated and committed-to-be-released
          25,408
$    178,137

-
$              —

Unallocated shares
        657,092
   3,870,272

-
                 —

Total ESOP shares
        682,500
$ 4,048,409

                 -
$              —

~~11.~~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, 2023		June 30, 2022		June 30, 2023		June 30, 2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Sales and marketing	$	4,298,001	$	4,096,429	$	8,507,771	$	7,660,391
General and administrative		3,908,023		3,550,096		7,371,823		6,790,675
Repairs and maintenance		2,102,523		2,347,219		4,322,091		4,462,546
Utilities		1,400,833		1,426,900		2,733,548		2,742,249
Property taxes		1,303,119		1,406,138		2,302,640		3,033,077
Management fees, including incentive		1,251,835		1,102,581		2,610,875		2,377,341
Franchise fees		1,246,360		1,257,740		2,317,880		2,165,775
Insurance		1,715,721		1,046,875		2,663,381		1,993,152
Information and telecommunications		945,572		859,699		1,868,350		1,788,805
Other		290,349		243,908		511,554		386,935
Total indirect hotel operating expenses	$	18,462,336	$	17,337,585	$	35,209,913	$	33,400,946

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

(unaudited)

(unaudited)

(unaudited)

(unaudited)

General and administrative

$
3,194,007

$
2,962,097

$
9,788,564

$
9,092,373

Sales and marketing

3,397,811

3,348,577

10,547,138

10,312,982

Repairs and maintenance

1,805,103

1,825,829

5,174,066

5,527,727

Property taxes

1,539,066

1,675,917

4,518,267

4,501,154

Utilities

1,568,324

1,751,562

4,394,631

4,799,329

Franchise fees

888,460

968,801

3,061,535

3,177,780

Management fees, including incentive

999,866

958,572

3,090,515

2,987,969

Insurance

620,244

618,599

1,845,702

1,984,269

Information and telecommunications

412,714

409,631

1,243,847

1,246,670

Other

783,654

83,449

1,355,477

197,041

Total indirect hotel operating expenses

$
15,209,249

$
14,603,034

$
45,019,742

$
43,827,294

~~12.~~11. Income Taxes

The components of the income tax provision for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 are as follows:


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Current:
Federal	$	—		$	—		$	—		$	—
State		16,537			11,615			31,719			21,269
		16,537			11,615			31,719			21,269
Deferred:
Federal		357,776			478,698			97,824			(27,658	)
State		14,239			(97,195	)		145,469			(19,833	)
Subtotals		372,015			381,503			243,293			(47,491	)
Change in deferred tax valuation allowance		(372,015	)		(381,503	)		(243,293	)		47,491
		—			—			—			—
Income tax provision	$	16,537		$	11,615		$	31,719		$	21,269

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Current:

Federal

$
(10,184
)

$
—

$
—

$
—

State

97,641

63,429

197,881

147,791

87,457

63,429

197,881

147,791

Deferred:

Federal

(879,206
)

(437,390
)

(661,787
)

(429,257
)
State

(158,561
)

(11,184
)

(117,984
)

(26,932
)

(1,037,767
)

(448,574
)

(779,771
)

(456,189
)

$
(950,310
)

$
(385,145
)

$
(581,890
)

$
(308,398
)

~~A reconciliation of the statutory federal income tax provision (benefit) to the Company’s income tax provision is as follows:~~

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Statutory federal income tax provision (benefit)

$
(641,346
)

$
(650,790
)

$
851,313

$
233,267

Effect of non-taxable REIT income (loss)

(248,043
)

76,172

(1,513,100
)

(662,524
)
State income tax provision (benefit)

(60,921
)

189,473

79,897

120,859

$
(950,310
)

$
(385,145
)

$
(581,890
)

$
(308,398
)

As of September 30, 2017 and December 31, 2016, we had a net deferred tax asset of approximately $7.7 million and $6.9 million, respectively, of which, approximately $6.8 million and $6.0 million, respectively, are due to accumulated net operating losses of our TRS Lessee. These loss carryforwards will begin to expire in 2028 if not utilized by such time. As of both September 30, 2017 and December 31, 2016, approximately $0.2 million of the net deferred tax asset is attributable to our share of start-up expenses related to the DoubleTree Resort by Hilton Hollywood Beach, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation.

We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2017 and December 31, 2016, respectively. We regularly evaluate the likelihood that our TRS Lessee will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At September 30, 2017 and December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward of our TRS Lessee. A number of factors played a critical role in this determination, including:

~~a demonstrated track record of past profitability and utilization of past NOL carryforwards,~~


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax provision (benefit)	$	1,107,584		$	5,799,565		$	1,402,150		$	5,631,294
Federal tax impact of REIT election		(539,100	)		(5,236,788	)		(842,886	)		(5,489,574	)
Statutory federal income tax provision at TRS		568,484			562,777			559,264			141,720
Federal impact of PPP loan forgiveness		—			—			(56,470	)		—
State income tax provision (benefit), net of federal provision (benefit)		(179,932	)		(169,659	)		(227,782	)		(167,942	)
Change in valuation allowance		(372,015	)		(381,503	)		(243,293	)		47,491
Income tax provision	$	16,537		$	11,615		$	31,719		$	21,269

~~reasonable forecasts of future taxable income, and~~

~~anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership.~~

~~13.~~12. Income Per Share and Per Unit

Income 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 ~~partners~~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 income or loss would also be added back to net ~~income.~~income or loss. The shares of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control, and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The ~~657,092~~ non-committed, unearned ESOP shares ~~reduce~~are treated as reducing the number of issued and outstanding common shares and similarly ~~reduce~~reducing the weighted averagenumber of common shares outstanding. The ~~allocated and committed to be released~~unallocated ESOP shares have been ~~included~~excluded in the weighted average for the basic and diluted earnings per share ~~calculation, and the amount of compensation for allocated shares is reflected in net income. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit.~~ computation. The computation of basic ~~and diluted~~ net income per share is presented ~~below.~~below:

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Numerator

Net income (loss) available to common
   stockholders for basic computation

$
(1,550,555
)

$
(1,716,234
)

$
597,385

$
527,971

Denominator

Weighted average number of common shares
   outstanding for basic computation

13,822,543

14,949,651

13,873,175

14,897,595

Basic net income (loss) per share

$
(0.11
)

$
(0.11
)

$
0.04

$
0.04

Weighted average number of common shares
   outstanding for diluted computation

13,822,543

14,949,651

13,885,290

14,897,595

Diluted net income (loss) per share

$
(0.11
)

$
(0.11
)

$
0.04

$
0.04


	Three Months Ended			Three Months Ended			Six Months Ended				Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023				June 30, 2022
	(unaudited)			(unaudited)			(unaudited)				(unaudited)
Numerator
Net income	$	5,257,670		$	27,605,359		$	6,645,185			$	26,794,415
Less: Net income allocated to participating share awards		(71,282	)		(93,329	)		(81,225	)			(89,713	)
Net income attributable to non-controlling interest		(130,798	)		(1,529,940	)		(105,838	)			(1,368,319	)
Undeclared distributions to preferred stockholders		(1,994,313	)		(1,889,470	)		(3,988,625	)			(3,826,086	)
Gain on extinguishment of preferred stock		—			83,500			—				161,675
Net income attributable to common stockholders for EPS computation	$	3,061,277		$	24,176,120		$	2,469,497			$	21,671,972


Denominator
Weighted average number common shares outstanding for basic EPS computation		18,712,452			17,762,513			18,658,538				17,436,975
Effect of dilutive participating securities:
Unvested restricted shares		2,646			65,000			—		(1)		63,343
Stock compensation awards unissued		—			58,519			—				108,633
Unearned ESOP shares		—			418,476			—				422,430
Weighted average number common and common equivalent shares outstanding for diluted EPS computation		18,715,098			18,304,508			18,658,538				18,031,381


Basic net income per common share:
Undistributed income	$	0.16		$	1.36		$	0.13			$	1.24
Total basic	$	0.16		$	1.36		$	0.13			$	1.24

Diluted net income per common share:
Undistributed income	$	0.16		$	1.32		$	0.13			$	1.20
Allocation of participating share awards		—			—			—				—
Total diluted	$	0.16		$	1.32		$	0.13			$	1.20

(1) Anti-dilutive, therefore not included.

The accounting for unvested share-based payment awards included in the calculation of earnings per share changed. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are now participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees

and directors are considered participating securities, and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in the basic and diluted weighted average shares outstanding calculation.

Income Per Unit – The computation of basic ~~and diluted~~ net income per unit is presented ~~below.~~

below:

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Numerator

Net income (loss) available to common
unitholders for basic computation

$
(1,741,000
)

$
(1,889,080
)

$
670,751

$
634,348

Denominator

Weighted average number of units outstanding

16,258,691

16,727,791

16,256,713

16,723,557

Basic and diluted net income (loss) per unit

$
(0.11
)

$
(0.11
)

$
0.04

$
0.04


	Three Months Ended			Three Months Ended			Six Months Ended				Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023				June 30, 2022
	(unaudited)			(unaudited)			(unaudited)				(unaudited)
Numerator
Net income	$	5,257,670		$	27,605,359		$	6,645,185			$	26,794,415
Less: Net income allocated to participating unit awards		(71,282	)		(93,329	)		(81,225	)			(89,713	)
Undeclared distributions to preferred unitholders		(1,994,313	)		(1,889,470	)		(3,988,625	)			(3,826,086	)
Gain on extinguishment of preferred units		—			83,500			—				161,675
Net income attributable to unitholders for EPU computation	$	3,192,075		$	25,706,060		$	2,575,335			$	23,040,291


Denominator
Weighted average number of units outstanding for basic EPU computation		19,810,991			19,291,083			19,806,173				18,981,782
Effect of dilutive participating securities:
Unvested restricted units		2,646			58,519			—		(1)		108,633
Unit compensation awards unissued		—			65,000			—				63,343
Weighted average number of equivalent units outstanding for diluted EPU computation		19,813,637			19,414,602			19,806,173				19,153,758


Basic net income per unit:
Undistributed income	$	0.16		$	1.33		$	0.13			$	1.21
Total basic	$	0.16		$	1.33		$	0.13			$	1.21

Diluted net income per unit:
Undistributed income	$	0.16		$	1.32		$	0.13			$	1.20
Allocation of participating unit awards		—			—			—				—
Total diluted	$	0.16		$	1.32		$	0.13			$	1.20

(1) Anti-dilutive, therefore not included.

~~14.~~13. Subsequent Events

On ~~October 11, 2017,~~July 14, 2023, we paid a quarterly distribution of $0.50 per share (and unit) of Series B Preferred Stock (and Series B Preferred Units) to holders of the ~~Company closed~~Series B Preferred Stock (and Series B Preferred Units) of record as of June 30, 2023.

On July 14, 2023, we paid a ~~sale and issuance~~quarterly distribution of ~~1,200,000 shares~~$0.4921875 per share (and unit) of ~~its newly authorized 7.875% Series C cumulative redeemable perpetual preferred stock (the “Series C Preferred Stock”), for~~ ~~net proceeds after all estimated expenses of approximately $28.0 million. On October 17, 2017, the Company closed a sale and issuance of an additional 100,000 shares of its~~ Series C Preferred Stock ~~for net proceeds of approximately $2.4 million, pursuant to the underwriters’ partial exercise of an option granted by the Company to purchase additional shares.The Company contributed the net proceeds from the offering to its Operating Partnership for an equivalent number of~~(and Series C ~~preferred units. We intend~~Preferred Units) to ~~use~~holders of the ~~net proceeds to redeem in full the Operating Partnership’s 7.0% Senior Unsecured Notes due 2019 and for general corporate purposes, including potential future acquisitions~~Series C Preferred Stock (and Series C Preferred Units) of ~~hotel properties.~~record as of June 30, 2023.

On ~~October 11, 2017,~~July 14, 2023, we paid a quarterly ~~dividend (distribution)~~distribution of ~~$0.11~~$0.515625 per ~~common~~ share (and unit) of Series D Preferred Stock (and Series D Preferred Units) to ~~those stockholders (and unitholders~~holders of the ~~Operating Partnership) of record on September 15, 2017.~~

On October 12, 2017, the Operating Partnership notified Wilmington Trust, National Association of the Operating Partnership’s intent to redeem the entire $25.3 million aggregate principal amount of its 7.0% Notes due 2019, pursuant to the terms of the indenture. The 7% Notes will be redeemed on November 15, 2017 at a redemption price equal to 101% of the principal amount of the 7% Notes, plus any accrued and unpaid interest to, but not including, the redemption date.

~~On October 16, 2017,~~ ~~we paid a~~ ~~quarterly dividend of $0.50 per preferred share~~Series D Preferred Stock (and ~~unit) to the preferred stockholders (and preferred unitholders of the Operating Partnership)~~Series D Preferred Units) of record as of ~~September 29, 2017.~~June 30, 2023.

On ~~October 23, 2017,~~July 31, 2023, we authorized payment of a quarterly ~~dividend (distribution)~~distribution of ~~$0.11~~$0.50 per ~~common~~ share (and unit) of Series B Preferred Stock (and Series B Preferred Units) to ~~the stockholders (and unitholders~~holders of the ~~Operating Partnership)~~Series B Preferred Stock (and Series B Preferred Units) of record as of ~~December 15, 2017. The dividend (distribution) is~~August 31, 2023, to be paid on ~~January 11, 2018.~~September 15, 2023.

On ~~October 23, 2017,~~July 31, 2023, we authorized payment of a quarterly ~~dividend~~distribution of ~~$0.50~~$0.4921875 per ~~preferred~~ share (and unit) of Series C Preferred Stock (and Series C Preferred Units) to holders of the Series BC Preferred Stock ~~holders~~ (and ~~preferred unitholders of the Operating Partnership)~~Series C Preferred Units) of record as of ~~December 29, 2017. The dividend is~~August 31, 2023, to be paid on ~~January 16, 2018.~~September 15, 2023.

On ~~October 23, 2017,~~July 31, 2023, we authorized payment of a quarterly ~~dividend~~distribution of ~~$0.43203~~$0.515625 per ~~preferred~~ share (and unit) of Series D Preferred Stock (and Series D Preferred Units) to holders of the Series CD Preferred Stock ~~holders~~ (and ~~preferred unitholders of the Operating Partnership)~~Series D Preferred Units) of record as of ~~December 29, 2017. The dividend is~~August 31, 2023, to be paid on ~~January 16, 2018.~~September 15, 2023.

~~Item 2.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and ~~Results of Operations~~

~~Overview~~

Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the initial properties.

Our hotel portfolio currently consists of eleven full-service, primarily upscale and upper-upscale hotels, comprising 2,838 rooms and the hotel commercial condominium unit of the Hyde Resort & Residences. All of our properties, except for The DeSoto, the Georgian Terrace, The Whitehall and the Hyde Resort & Residences operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree and Sheraton. As of September 30, 2017, we owned the following hotel properties:

	~~Number~~
~~Property~~	~~of Rooms~~			~~Location~~	~~Date of Acquisition~~	~~Chain/Class Designation~~
~~Wholly-owned Hotels~~
~~Crowne Plaza Tampa Westshore~~		~~222~~		~~Tampa, FL~~	~~October 29, 2007~~	~~Upscale~~
~~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~~⁽²⁾		~~311~~		~~Hollywood, FL~~	~~August 9, 2007~~	~~Upscale~~
~~Georgian Terrace~~		~~326~~		~~Atlanta, GA~~	~~March 27, 2014~~	~~Upper Upscale~~⁽¹⁾
~~Hilton Wilmington Riverside~~		~~272~~		~~Wilmington, NC~~	~~December 21, 2004~~	~~Upper Upscale~~
~~Sheraton Louisville Riverside~~		~~180~~		~~Jeffersonville, IN~~	~~September 20, 2006~~	~~Upper Upscale~~
~~The Whitehall~~		~~259~~		~~Houston, TX~~	~~November 13, 2013~~	~~Upper Upscale~~⁽¹⁾
~~Hotel Rooms Subtotal~~		~~2,838~~

~~Condominium Hotel~~
~~Hyde Resort & Residences~~		~~200~~	⁽³⁾	~~Hollywood, FL~~	~~January 30, 2017~~	~~Luxury~~⁽¹⁾
~~Total Hotel & Participating Condominium Hotel Rooms~~		~~3,038~~

~~(1)~~

~~Operated as an independent hotel.~~

~~(2)~~

~~On October 25, 2017, the Company rebranded the Crowne Plaza Hollywood Beach Resort to the DoubleTree Resort by Hilton Hollywood Beach.~~

~~(3)~~

Reflects only those condominium units that were participating in the rental program as of September 30, 2017. 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.”

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 89.1% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our initial properties and related assets.

To qualify as a REIT, we cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessees, which are indirect wholly owned subsidiaries of the Operating Partnership. Our TRS Lessees then engage an eligible independent hotel management company to operate the hotels under a management agreement. Our TRS Lessees have engaged Chesapeake Hospitality to manage our wholly-owned hotels. Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

~~Key Operating Metrics~~

In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

~~Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;~~

~~Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and~~

~~Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.~~

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservation expenses), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.

~~When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences that participate in our rental program and are not reserved for owner-occupancy.~~

~~We also use FFO, Adjusted FFO and Hotel EBITDA as a measure of our operating performance. See “Non-GAAP Financial Measures.”~~

Results of Operations

The following tables illustrate the key operating metrics for the three and nine months ended September 30, 2017 and 2016, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics), as well as the eleven wholly-owned properties in the portfolio that were under the Company’s control during the three and nine months ended September 30, 2017 and the corresponding period in 2016 (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Crowne Plaza Hampton Marina which was sold in February 2017, or our interest in the Hyde Resort & Residences which was acquired on January 30, 2017. The composite portfolio metrics represent all of the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences during the three and nine months ended September 30, 2017 and the corresponding period in 2016.

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Actual Portfolio Metrics

Occupancy %

71.1
%

71.5
%

72.6
%

72.0
%
ADR

$
135.09

$
134.55

$
143.53

$
141.16

RevPAR

$
96.11

$
96.26

$
104.16

$
101.69

Same-Store Portfolio Metrics

Occupancy %

71.1
%

71.8
%

72.9
%

72.8
%
ADR

$
135.09

$
136.42

$
143.77

$
143.31

RevPAR

$
96.11

$
97.90

$
104.77

$
104.27

Composite Portfolio Metrics

Occupancy %

69.6
%

71.5
%

71.1
%

72.0
%
ADR

$
140.24

$
134.55

$
146.73

$
141.16

RevPAR

$
97.56

$
96.26

$
104.29

$
101.69

~~Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016~~

~~Revenue~~. Total revenue for the three months ended September 30, 2017 decreased approximately $0.5 million, or 1.4%, to approximately $36.8 million compared to total revenue of approximately $37.3 million for the three months ended September 30, 2016. The decrease in revenue for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $1.6 million. In addition, our properties impacted by renovation

~~activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $0.5 million.~~ Revenue decreases were also realized by our property in Philadelphia, Pennsylvania. These reductions were offset by our interest in the Hyde Resort & Residences condominium hotel, acquired on January 30, 2017, accounting for an increase of approximately $1.2 million for the period and by a net increase in revenues of approximately $0.4 million for the period for our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Houston, Texas and Atlanta, Georgia.

Room revenue decreased approximately $1.6 million, or 5.9%, to approximately $25.1 million for the three months ended September 30, 2017 compared to room revenue of approximately $26.7 million for the three months ended September 30, 2016. The decrease in room revenue for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $1.1 million and in addition our properties impacted by renovation activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $0.9 million, which reflected a 4.6% decrease in occupancy, as compared to the same period in 2016. Room revenue decreases of approximately $1.0 million were also realized by our property in Philadelphia, Pennsylvania. These decreases in room revenue for the three months ended September 30, 2017 were offset by a net increase of approximately $0.4 million resulting from increases at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Houston, Texas and Atlanta, Georgia of approximately $1.4 million.

Food and beverage revenues decreased approximately $0.4 million, or 4.9%, to approximately $8.0 million for the three months ended September 30, 2017 compared to food and beverage revenues of approximately $8.4 million for the three months ended September 30, 2016. The decrease in food and beverage revenues for the three months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $0.4 million. In addition, our property in Wilmington, North Carolina impacted by renovation activities saw a decrease in food and beverage revenues by $0.1 million. Our properties in Raleigh, North Carolina; Philadelphia, Pennsylvania; Tampa, Florida; Houston, Texas and Atlanta, Georgia also realized decreases in food and beverage revenue. These decreases for the three month period were offset by increases in food and beverage revenues at our properties in Savannah, Georgia; Laurel, Maryland; Jacksonville, Florida; Hollywood Beach, Florida and Jeffersonville, Indiana of approximately $1.0 million.

Revenue from other operating departments increased approximately $1.5 million, or 67.4%, to approximately $3.7 million for the three months ended September 30, 2017 compared to revenue from other operating departments of approximately $2.2 million for the three months ended September 30, 2016. The increase in revenue from other operating departments for the three months ended September 30, 2017 resulted mainly from the new operations at the Hyde Resort & Residences, accounting for an increase of approximately $1.2 million for the period and $0.3 million received by the Hollywood Beach, Florida property for construction interruption payments relating to the construction of a new building next to the property.

~~Hotel Operating Expenses~~. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $28.8 million for the three months ended September 30, 2017, an increase of approximately $0.6 million, or 2.1%, compared to total hotel operating expenses of approximately $28.2 million for the three months ended September 30, 2016. The increase in hotel operating expenses for the three months ended September 30, 2017 was substantially related to a decrease in expenses of approximately $1.4 million after the sale of our property in Hampton, Virginia. This decrease in hotel operating expenses was offset by a net increase in hotel operating expenses of approximately $0.8 million that resulted from increases in expenses at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida and Houston, Texas and an increase in expenses from the start of operations at the Hyde Resort & Residences, which accounted for an increase in hotel operating expenses of approximately $1.5 million for the period, that were in turn offset by decreases in hotel operating expenses of approximately $0.7 million at our properties impacted by renovation activities in Wilmington, North Carolina and Hollywood Beach, Florida and decreases in expenses at our properties in Philadelphia, Pennsylvania: Jeffersonville, Indiana and Atlanta, Georgia.

Rooms expense for the three months ended September 30, 2017 decreased approximately $0.3 million, or 4.2%, to approximately $6.8 million compared to rooms expense for the three months ended September 30, 2016 of approximately $7.1 million, after reclassifications of information and telecommunications in the prior year to indirect expenses. The net decrease in rooms expense for the three months ended September 30, 2017 partially resulted from a decrease in expenses of approximately $0.4 million after the sale of our property in Hampton, Virginia. Additionally, increases in rooms expenses of approximately $0.3 million at our properties in Savannah, Georgia; Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Hollywood Beach, Florida; Jeffersonville, Indiana and Atlanta, Georgia, were offset by approximately $0.3 million of decreases in rooms expenses at our properties in Wilmington, North Carolina; Philadelphia, Pennsylvania and Tampa, Florida.

Food and beverage expenses for the three months ended September 30, 2017 increased approximately $0.2 million, or 3.8%, to approximately $6.0 million compared to food and beverage expenses of approximately $5.8 million for the three months ended September 30, 2016. ~~The increase in~~ ~~food and beverage expenses~~ ~~for the three months ended September 30, 2017 resulted from~~

~~increases of approximately $0.7 million at our properties in~~ ~~Savannah, Georgia; Laurel, Maryland; Jacksonville, Florida and Hollywood Beach, Florida, offset by decreases in~~ ~~food and beverage expenses of approximately $0.5 million~~ ~~at our properties in~~ ~~Wilmington, North Carolina; Raleigh, North Carolina;~~ ~~Philadelphia, Pennsylvania;~~ ~~Jeffersonville, Indiana; Houston, Texas and Atlanta, Georgia.~~

Expenses from other operating departments increased approximately $0.1 million, or 9.8%, to approximately $0.7 million for the three months ended September 30, 2017 compared to expenses from other operating departments of approximately $0.6 million for the three months ended September 30, 2016. The increase in expense from other operating departments for the three months ended September 30, 2017 resulted mainly from the acquired interest and new operations in Hollywood Beach, Florida, accounting for an increase of approximately $0.2 million for the period, offset by a net decrease of approximately $0.1 million at our other properties.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2017 increased approximately $0.6 million, or 4.2%, to approximately $15.2 million compared to indirect expenses of approximately $14.6 million for the three months ended September 30, 2016, after reclassifications of information and telecommunications in the prior year to indirect expenses from rooms expense. The increase in indirect expenses for the three months ended September 30, 2017 resulted from the new operations at the Hyde Resort & Residences, accounting for an increase in indirect expenses of approximately $1.1 million for the period, that was offset by a decrease in expenses of approximately $0.7 million after the sale of our property in Hampton, Virginia. The remaining net increase in indirect expenses of approximately $0.2 million resulted from increases in general and administrative expenses and other expenses at most of the other hotel properties.

~~Depreciation and Amortization~~. Depreciation and amortization expense for the three months ended September 30, 2017 increased approximately $0.6 million, or 16.8%, to $4.4 million compared to depreciation and amortization of approximately $3.8 million for the three months ended September 30, 2016. The increase was mostly attributable to increases in the depreciation related to our properties being renovated in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida, that accounted for increases of approximately $0.6 million for the period.

~~Corporate General and Administrative.~~ Corporate general and administrative expenses for the three months ended September 30, 2017 decreased approximately $0.1 million, or 2.4% to approximately $1.3 million compared to corporate general and administrative expenses of approximately $1.4 million for the three months ended September 30, 2016. The decrease in corporate general and administrative expenses was mainly due to a one-time write down of deferred offering costs of approximately $0.5 million offset by increased professional fees for Sarbanes Oxley standards and legal costs associated with Hyde Resort & Residences.

~~Interest Expense~~. Interest expense for the three months ended September 30, 2017 decreased approximately $0.5 million, or 10.5%, to approximately $4.1 million compared to interest expense of approximately $4.6 million for the three months ended September 30, 2016. The decrease in interest expense for the three months ended September 30, 2017, was substantially related to the redemption of the 8% unsecured notes in August 2016, that accounted for a decrease of approximately $0.4 million, compared to the three-month period ending September 30, 2016.

~~Loss on Early Debt Extinguishment.~~ During the nine months ended September 30, 2017 we refinanced a variable rate mortgage loan, we had with Bank of the Ozarks on the DoubleTree by Hilton Jacksonville Riverfront, with a new fixed rate loan from Wells Fargo Bank, NA. The amount of accumulated un-amortized loan costs written off during the three months ended September 30, 2017 and 2016 was $0 and approximately $1.0 million, respectively.

~~Unrealized Loss on Hedging Activities.~~ As of September 30, 2017, the fair market value of the interest rate cap is $2,849. The unrealized loss on hedging activities during the three months ended September 30, 2017 and 2016, was $3,542 and $492, respectively.

~~Income Taxes.~~ We had an income tax benefit of approximately $1.0 million for the three months ended September 30, 2017 compared to an income tax benefit of approximately $0.4 million for the three months ended September 30, 2016. The income tax provision is primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized operating loss for the three months ended September 30, 2017 and an operating loss for the three months ended September 30, 2016.

~~Net Income~~. We realized net loss for the three months ended September 30, 2017 of approximately $0.9 million compared to net loss of approximately $1.5 million for the three months ended September 30, 2016 as a result of the operating results discussed above.

~~Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016~~

~~Revenue~~. Total revenue for the nine months ended September 30, 2017 decreased approximately $0.8 million, or 0.7%, to approximately $116.1 million compared to total revenue of approximately $116.9 million for the nine months ended September 30,

2016. The decrease in revenue for the nine months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $3.8 million. In addition, our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $1.8 million. Revenue decreases were also realized by our properties in Philadelphia, Pennsylvania and Jeffersonville, Indiana. These reductions were offset by our interest in the Hyde Resort & Residences condominium hotel, acquired on January 30, 2017, accounting for an increase of approximately $2.8 million for the period and by a net increase in revenues of approximately $2.0 million for the period at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and Atlanta, Georgia.

Room revenue decreased approximately $2.5 million, or 3.0%, to approximately $81.4 million for the nine months ended September 30, 2017 compared to room revenue of approximately $83.9 million for the nine months ended September 30, 2016. The decrease in room revenue for the nine months ended September 30, 2017 resulted mainly from the sale of our property in Hampton, Virginia which reduced revenues by approximately $2.6 million. In addition, our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida had reduced revenues of approximately $1.9 million, which reflected a 1.9% decrease in occupancy, as compared to the same period in 2016. Room revenue decreases of approximately $1.5 million were also realized by our properties in Philadelphia, Pennsylvania and Jeffersonville, Indiana. These decreases in room revenue for the nine months ended September 30, 2017 were offset by a net increase of approximately $2.0 million resulting from increases at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and Atlanta, Georgia of approximately $3.5 million.

Food and beverage revenues decreased approximately $1.3 million, or 5.1%, to approximately $24.9 million for the nine months ended September 30, 2017 compared to food and beverage revenues of approximately $26.2 million for the nine months ended September 30, 2016. The decrease in food and beverage expenses for the nine months ended September 30, 2017, resulted mainly from a decrease in expenses of approximately $1.1 million after the sale of our property in Hampton, Virginia and from our properties impacted by renovation activities in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida that had reduced food and beverage revenues of approximately $0.3 million. Our properties in Raleigh, North Carolina; Jeffersonville, Indiana; Tampa, Florida; and Atlanta, Georgia also realized food and beverage revenue decreases. These decreases were offset by a net increase in food and beverage revenues of approximately $0.1 million from increases at our properties in Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida and Houston, Texas.

Revenue from other operating departments increased approximately $3.1 million, or 45.2%, to approximately $9.8 million for the nine months ended September 30, 2017 compared to revenue from other operating departments of approximately $6.8 million for the nine months ended September 30, 2016. The increase in revenue from other operating departments for the nine months ended September 30, 2017 resulted mainly from the start of operations at the Hyde Resort & Residences, accounting for an increase of approximately $2.8 million for the period and $0.3 million received by the Hollywood Beach, Florida property for construction interruption payments relating to the construction of a new building next to the property.

~~Hotel Operating Expenses~~. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $85.1 million for the nine months ended September 30, 2017, a decrease of approximately $0.2 million, or 0.2%, compared to total hotel operating expenses of approximately $85.3 million for the nine months ended September 30, 2016. The decrease in hotel operating expenses for the nine months ended September 30, 2017 was substantially related to a decrease in expenses of approximately $3.5 million after the sale of our property in Hampton, Virginia. This decrease was offset by a net increase in hotel operating expenses of approximately $3.3 million resulting from increases in hotel operating expenses of approximately $5.5 million for the period at our properties in Savannah, Georgia; Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; Houston, Texas and the Hyde Resort & Residences condominium hotel, that were in turn offset by decreases in hotel operating expenses of approximately $2.2 million at our properties in Philadelphia, Pennsylvania; Jeffersonville, Indiana; Atlanta, Georgia and at our properties impacted by renovation activities in Wilmington, North Carolina and Hollywood Beach, Florida.

Rooms expense for the nine months ended September 30, 2017 decreased approximately $1.1 million, or 5.1%, to approximately $20.3 million compared to rooms expense for the nine months ended September 30, 2016 of approximately $21.3 million. The net decrease in rooms expense for the nine months ended September 30, 2017 resulted from a decrease in expenses of approximately $0.9 million after the sale of our property in Hampton, Virginia. The remaining net decrease in rooms expenses of approximately $0.2 million resulted from increases in rooms expenses at our properties in Laurel, Maryland; Jacksonville, Florida; Houston, Texas and Atlanta, Georgia, that were offset by decreases in rooms expenses at our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and other rooms expense decreases at properties in Raleigh, North Carolina; Tampa, Florida; Philadelphia, Pennsylvania and Jeffersonville, Indiana.

Food and beverage expenses for the nine months ended September 30, 2017 decreased approximately $0.3 million, or 1.8%, to approximately $17.9 million compared to food and beverage expenses of approximately $18.3 million for the nine months ended

September 30, 2016. The decrease in food and beverage expenses for the nine months ended September 30, 2017, resulted mainly from a decrease in expenses of approximately $0.9 million after the sale of our property in Hampton, Virginia. The remaining net increase in rooms expenses of approximately $0.6 million resulted from an increases in rooms expenses at our properties in Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida and Houston, Texas, that were offset by decreases in rooms expenses at our properties impacted by renovation activities in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and other rooms expense decreases at properties in Raleigh, North Carolina; Tampa, Florida; Jeffersonville, Indiana and Atlanta, Georgia.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2017 increased approximately $1.2 million, or 2.7%, to approximately $45.0 million compared to indirect expenses of approximately $43.8 million for the nine months ended September 30, 2016. The increase in indirect expenses for the nine months ended September 30, 2017 resulted mainly from the new operations at the Hyde Resort & Residences, accounting for an increase in indirect expenses of approximately $1.4 million for the period. The net decrease in this amount of approximately $0.8 million that was substantially related to a decrease in indirect expenses of approximately $1.1 million after the sale of our property in Hampton, Virginia, which was in turn offset by increases in hotel operating expenses of approximately $0.03 million resulting mainly from a reclassification of information and technology costs out of rooms expense and into indirect expenses.

~~Depreciation and Amortization~~. Depreciation and amortization expense for the nine months ended September 30, 2017 increased approximately $1.4 million, or 12.9%, to $12.7 million compared to depreciation and amortization of approximately $11.3 million for the nine months ended September 30, 2016. The increase was mostly attributable to approximately $1.7 million in the depreciation related to our properties being renovated in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida and the new operations at the Hyde Resort & Residences, offset by the reduction from a decrease in depreciation expenses of approximately $0.3 million after the sale of our property in Hampton, Virginia.

~~Corporate General and Administrative.~~ Corporate general and administrative expenses for the nine months ended September 30, 2017 increased approximately $0.6 million, or 12.7% to approximately $4.9 million compared to corporate general and administrative expenses of approximately $4.3 million for the nine months ended September 30, 2016. The increase in corporate general and administrative expenses was mainly due to a one-time write down of deferred offering costs of approximately $0.5 million.

~~Interest Expense~~. Interest expense for the nine months ended September 30, 2017 decreased approximately $2.0 million, or 14.7%, to approximately $11.8 million compared to interest expense of approximately $13.9 million for the nine months ended September 30, 2016. The decrease in interest expense for the nine months ended September 30, 2017, was substantially related to the redemption of the 8% unsecured notes in August 2016 that accounted for a decrease of approximately $1.5 million, compared to the nine-month period ending September 30, 2016. We also reduced our Hampton, Virginia and Houston, Texas loans by approximately $9.0 million resulting in a reduction of interest by approximately $0.4 million.

~~Loss on Early Debt Extinguishment.~~ During the nine months ended September 30, 2017 we refinanced a variable rate mortgage loan, we had with Bank of the Ozarks on the DoubleTree by Hilton Jacksonville Riverfront, with a new fixed rate loan from Bank of America. The amount of accumulated un-amortized loan costs of $228,087 was written off during the period ending September 30, 2017 compared to approximately $1.2 million written off during the nine-month period ending September 30, 2016.

~~Unrealized Loss on Hedging Activities.~~ As of September 30, 2017, the fair market value of the interest rate cap is $2,849. The unrealized loss on hedging activities during the nine months ended September 30, 2017 and 2016, was $30,748 and $66,567, respectively.

~~Gain on Involuntary Conversion of Asset~~s. Gain on involuntary conversion of assets for the nine months ended September 30, 2017 increased approximately $1.0 million to approximately $1.0 million compared to gain on involuntary conversion of assets of $0 for the nine months ended September 30, 2016. During October 2016, hurricane Matthew damaged real and personal property at our Crowne Plaza Hampton Marina and The DeSoto properties and we had a one-time involuntary conversion in the amount of approximately $1.0 million.

~~Income Taxes.~~ We had an income tax benefit of approximately $0.6 million for the nine months ended September 30, 2017 compared to an income tax benefit of approximately $0.3 million for the nine months ended September 30, 2016. The income tax provision is primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized an operating loss for the nine months ended September 30, 2017, compared to an operating loss for the nine-month period ending September 30, 2016.

~~Net Income~~. We realized net income for the nine months ended September 30, 2017 of approximately $3.1 million compared to net income of approximately $1.0 million for the nine months ended September 30, 2016 as a result of the operating results discussed above.

~~Non-GAAP Financial Measures~~

We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.

~~FFO and Adjusted FFO.~~ Industry analysts and investors use FFO as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.

We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative than FFO of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.

~~The following is a reconciliation of net income to FFO and Adjusted FFO for the three and nine months ended September 30, 2017 and 2016:~~

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net (loss) income available to common stockholders

$
(1,550,555
)

$
(1,716,234
)

$
597,385

$
527,971

Add: Net (loss) income attributable to noncontrolling interest

(190,445
)

(172,846
)

73,366

106,377

Depreciation and amortization

4,427,738

3,790,872

12,708,548

11,260,987

Gain on involuntary conversion of assets

—

—

(1,041,815
)

—

Loss (gain) on disposal of assets

23,000

189,267

(26,238
)

329,461

FFO

$
2,709,738

$
2,091,059

$
12,311,246

$
12,224,796

Increase in deferred income taxes

(1,037,767
)

(448,574
)

(779,771
)

(456,188
)
Loss on early debt extinguishment

—

1,087,395

228,087

1,157,688

Loss on aborted offering costs

—

—

541,129

—

Loan modification fees

—

—

—

30,057

Unrealized loss on hedging activities

3,542

492

30,748

66,567

Adjusted FFO available to common stockholders

$
1,675,513

$
2,730,372

$
12,331,439

$
13,022,920

Weighted average number of shares outstanding, basic

13,822,543

14,949,651

13,873,153

14,897,595

Weighted average number of non-controlling units

1,778,140

1,778,140

1,778,140

1,825,962

Weighted average number of shares and units outstanding, basic

15,600,683

16,727,791

15,651,293

16,723,557

FFO per share and unit

$
0.17

$
0.13

$
0.79

$
0.73

Adjusted FFO per share and unit

$
0.11

$
0.16

$
0.79

$
0.78

~~Hotel EBITDA~~. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) corporate general and administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary conversions of assets and (14) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.

~~Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.~~

~~The following is a reconciliation of net income to Hotel EBITDA for the three and nine months ended September 30, 2017 and 2016:~~

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016

Net (loss) income available to common stockholders

$
(1,550,555
)

$
(1,716,234
)

$
597,385

$
527,971

Add: Net (loss) income attributable to noncontrolling interest

(190,445
)

(172,846
)

73,366

106,377

Interest expense

4,139,267

4,626,333

11,827,061

13,872,129

Interest income

(53,314
)

(44,485
)

(126,241
)

(63,523
)
Income tax benefit

(950,310
)

(385,145
)

(581,890
)

(308,398
)
Depreciation and amortization

4,427,738

3,790,872

12,708,548

11,260,987

Loss on early debt extinguishment

—

1,087,395

228,087

1,157,688

Loss (gain) on disposal of assets

23,000

189,267

(26,238
)

329,461

Gain on involuntary conversion of assets

—

—

(1,041,815
)

—

Distributions to preferred stockholders

805,000

339,889

2,415,000

339,889

EBITDA

6,650,381

7,715,046

26,073,263

27,222,581

Corporate general and administrative

1,335,192

1,367,848

4,882,541

4,331,896

Unrealized loss on hedging activities

3,542

492

30,748

66,567

Hotel EBITDA

$
7,989,115

$
9,083,386

$
30,986,552

$
31,621,044

~~Sources and Uses of Cash~~

~~Operating Activities.~~ Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the nine months ended September 30, 2017 was approximately $13.0 million. We had a net decrease in cash provided by operating activities for the nine months ended September 30, 2017 of approximately $2.3 million, compared to the nine months ended September 30, 2016. The decrease is mainly attributable to a net decrease of adjustments to reconcile cash and changes in assets and liabilities of approximately $4.4 million, that was offset by an increase in net income of approximately $2.1 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the Company’s stockholders (and unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).

~~Investing Activities.~~ During the nine months ended September 30, 2017, we used approximately $4.0 million to acquire our interest in the Hyde Resort and Residences, $17.4 million on capital expenditures, of which, approximately $3.3 million related to the routine replacement of furniture, fixtures and equipment and $14.1 million related to renovation of our hotels in Wilmington, North Carolina, Savannah, Georgia and Hollywood Beach, Florida. We also contributed approximately $3.5 million during the nine months ended September 30, 2017 into reserves required by the lenders for ten of our hotels according to the provisions of their respective loan agreements. During the nine months ended September 30, 2017, we received reimbursements from those reserves of approximately $4.4 million for capital expenditures related to those properties. The Operating Partnership’s loan to the Company had a net balance after principle payments of approximately $4.7 million. We also received approximately $5.4 million for the sale of the Crowne Plaza Hampton Riverside and proceeds from insurance conversions of approximately $1.0 million.

~~Financing Activities~~. During the nine months ended September 30, 2017, we received approximately $15.7 million for net mortgage proceeds, dividend and distribution payments of $7.2 million for the Company and $7.3 million for the Operating Partnership and the repurchase of common stock of the Company for approximately $1.1 million pursuant to the stock repurchase program and payments for deferred financing costs of approximately $0.6 million. Additionally, the Company provided approximately $4.9 million to the ESOP pursuant to the terms of its loan agreement with the ESOP.

~~Capital Expenditures~~

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry. Historically, we have aimed

to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. Below is a description of capital expenditures by property:

At the Company’s hotel in Wilmington, North Carolina, renovations of the guestrooms and public spaces totaling an estimated $8.6 million are underway in anticipation of an upcoming rebranding in early 2018. As of September 30, 2017, the Company had incurred costs totaling approximately $5.2 million toward this renovation. Renovations are expected to be completed in March 2018.

At the Company’s hotel in Savannah, Georgia, renovations of the guestrooms and public spaces totaling approximately $9.5 million are substantially complete and the Company rebranded its property from the Hilton Savannah DeSoto to The DeSoto.

At the Company’s hotel in Hollywood, Florida, renovations of the guestrooms and public spaces totaling an estimated $7.1 million is nearing completion. As of September 30, 2017, the Company had incurred costs totaling approximately $5.5 million toward this renovation.

Given our plan to complete the renovation activities at our property in Wilmington, North Carolina, and our anticipated renovation activity at our property in Tampa, Florida prior to a franchise re-licensing in March 2019, we aim to restrict all other capital expenditures at these hotels during the renovation period to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensor that are necessary to maintain our brand affiliation. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 2.50% to 3.00% of gross revenues in 2017.

We expect a substantial portion of our capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hilton Wilmington Riverside, the DoubleTree by Hilton Raleigh Brownstone-University, The Whitehall, the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.

~~Liquidity and Capital Resources~~

As of September 30, 2017, we had total cash of approximately $38.8 million, of which approximately $32.7 million was in cash and cash equivalents and approximately $6.1 million was restricted for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted. We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).

Other than monthly mortgage loan principal payments, we do not have any debt obligations maturing until August 2018. In August 2018, the mortgage on our DoubleTree by Hilton Raleigh Brownstone University matures at the amortized mortgage balance of approximately $14.4 million. We have approximately $69.2 million in debt obligations maturing in 2019, including approximately $43.9 million in mortgage debt maturities and $25.3 million of the Operating Partnership’s 7% Notes which we intend to repay in November 2017. We have notified the trustee for the 7% Notes of our intent to repay, on November 15, 2017, the entire $25.3 million aggregate principal amount of the outstanding 7% Notes, using proceeds from the Series C Preferred Stock offering.

We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.

We expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, which include the repayment of the 7% Notes (which have been called for repayment on November 15, 2017) and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. From time to time and subject to market conditions, we may also seek to refinance mortgage debt prior to maturity where appropriate. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.

~~Financial Covenants~~

~~Mortgage Loans~~

Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.

If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.

If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing.

Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.

~~As of September 30, 2017, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.~~

~~Unsecured Notes~~

The indenture for the 7% Notes contains certain covenants and restrictions that require us to meet certain financial ratios. We are not permitted to incur any Debt (other than intercompany Debt), as defined in the indenture, if, immediately after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value, as defined in the indenture, would be greater than 0.65 to 1.0. In addition, we are not permitted to incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense, both as defined in the indenture, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.

These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were applicable at September 30, 2017 and December 31, 2016, respectively.

September 30,

December 31,

2017

2016

Ratio of Stabilized Consolidated Income Available
   for Debt Service to Stabilized Consolidated
   Interest Expense

Net income⁽¹⁾

$
3,011,668

$
900,149

Interest expense⁽¹⁾

15,690,035

17,735,107

Loss on early debt extinguishment

488,304

1,417,905

Unrealized loss on hedging activities

1,566

37,384

Gain on involuntary conversion

(1,041,815
)

—

Loss (gain) on sale of assets

(41,948
)

365,319

Income tax benefit⁽¹⁾

(1,641,126
)

(1,367,634
)
Loss on disposal of assts

51,569

—

Depreciation and amortization⁽¹⁾

16,466,631

15,019,071

Corporate general and administrative expenses⁽¹⁾

6,571,710

6,021,065

Consolidated income available for debt service⁽¹⁾

39,556,594

40,128,366

Less: income of non-stabilized assets⁽¹⁾

(10,338,671
)

(10,203,893
)
Stabilized Consolidated Income Available for
   Debt Service⁽¹⁾

$
29,217,923

$
29,924,473

Interest expense^{(1) (2)}

$
15,690,035

$
18,011,107

Amortization of issuance costs⁽¹⁾

(825,132
)

(1,147,864
)
Consolidated interest expense⁽¹⁾

14,864,903

16,863,243

Less: interest expense of non-stabilized assets⁽¹⁾

(3,533,313
)

(3,417,412
)
Stabilized Consolidated Interest Expense⁽¹⁾

$
11,331,590

$
13,445,831

Ratio of Stabilized Consolidated Income Available
   for Debt Service to Stabilized Consolidated
   Interest Expense

2.58

2.23

Threshold Ratio Minimum

1.50

1.50

Ratio of Debt to Adjusted Total Asset Value:

Mortgage loans

$
300,274,769

$
284,542,043

Unsecured notes

25,300,000

25,300,000

Total debt

$
325,574,769

$
309,842,043

Stabilized Consolidated Income Available for
   Debt Service⁽¹⁾

$
29,217,923

$
29,924,473

Capitalization rate

7.5
%

7.5
%

389,572,307

398,992,973

Non-stabilized assets

154,100,000

145,400,000

Total cash

38,767,890

36,362,920

Adjusted Total Asset Value

$
582,440,197

$
580,755,893

Ratio of Debt to Adjusted Total Asset Value

0.56

0.53

Threshold Ratio Maximum

0.65

0.65

~~(1)~~

~~Represents the four preceding calendar quarters.~~

~~(2)~~

~~As permitted by the indentures, The~~ ~~DeSoto,~~ ~~DoubleTree by Hilton Laurel, DoubleTree by Hilton Jacksonville Riverfront~~ ~~and The Whitehall~~ ~~Resort, for the period ended September 30, 2017, and The~~ ~~DeSoto, DoubleTree by Hilton Laurel, DoubleTree by Hilton Jacksonville Riverfront and The Whitehall~~ ~~Resort, for the period ended December 31, 2016, are considered non-stabilized assets for purposes of the financial covenants.~~

~~Dividend Policy~~

We intend to continue to declare quarterly distributions to our stockholders. The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for

capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future.

~~In January 2017, we increased the quarterly dividend (distribution) to $0.10 per common share (and unit).~~

~~In April 2017, we increased the quarterly dividend (distribution) to $0.105 per common share (and unit).~~

~~In July 2017, we increased the quarterly dividend (distribution) to $0.11 per common share (and unit).~~

~~Off-Balance Sheet Arrangements~~

~~None.~~

~~Inflation~~

We generate revenues primarily from lease payments from our TRS Lessees and net income from the operations of our TRS Lessees. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.

~~Geographic Concentration and Seasonality~~

Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, and Texas. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.

~~Critical Accounting Policies~~

The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.

~~Investment in Hotel Properties.~~ Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties, which were contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse permanent changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a

recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of a hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss is recognized.

~~There were no charges for impairment of hotel properties recorded for the nine months ended September 30, 2017.~~

In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition. We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.

~~Revenue Recognition.~~ Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit.

~~Income Taxes.~~ We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2017 and December 31, 2016, respectively. We regularly evaluate the likelihood that our TRS Lessee will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At each of September 30, 2017 and December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. A number of factors played a critical role in this determination, including:

~~a demonstrated track record of past profitability and utilization of past NOL carryforwards,~~

~~reasonable forecasts of future taxable income, and~~

~~anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership.~~

~~Should unanticipated adverse financial trends occur, or other negative evidence develop, a valuation allowance may be necessary in the future against some or all of our deferred tax assets.~~

~~Recent Accounting Pronouncements~~

~~For a summary of recently adopted and newly issued accounting pronouncements, please refer to the~~ ~~Recent Accounting Pronouncements~~ ~~section of Note 2,~~ ~~Summary of Significant Accounting Policies,~~ ~~in the Notes to Consolidated Financial Statements.~~

Cautionary Statement Regarding Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements.

Factors which could have a material adverse effect on ~~our~~the Company’s future operations, performance and ~~future~~ prospects include, but are not limited to:

•

national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;

•

risks associated with the hotel industry, including competition and new supply of hotel rooms, increases in wages, energy costs and other operating costs;

•

~~risks associated with adverse weather conditions, including hurricanes;~~

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

~~the Company’s intent to repurchase shares from time to time;~~

risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, and, ifas necessary, to refinance or seek an extension of the maturity of such indebtedness or ~~modify~~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;

•

our ability to successfully expand into new markets;

•

legislative/regulatory changes, including changes to laws governing taxation of ~~REITs;~~

real estate investment trusts (“REITs”);

•

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

the limitations imposed on the Company's business due to such maintenance; and

•

our ability to maintain adequate insurance coverage.

Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form ~~10-K and subsequent reports filed with the Securities and Exchange Commission.~~10-K.

These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.

Overview

Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 and focused on the acquisition, renovation, up-branding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. Sotherly may also opportunistically acquire hotels throughout the United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.

Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of June 30, 2023, our portfolio consisted of the following hotel properties:


	Number
Property	of Rooms			Location	Date of Acquisition	Chain/Class Designation
Wholly-owned Hotels
The DeSoto		246		Savannah, GA	December 21, 2004	Upper Upscale(1)
DoubleTree by Hilton Jacksonville Riverfront		293		Jacksonville, FL	July 22, 2005	Upscale
DoubleTree by Hilton Laurel		208		Laurel, MD	December 21, 2004	Upscale
DoubleTree by Hilton Philadelphia Airport		331		Philadelphia, PA	December 21, 2004	Upscale
DoubleTree Resort by Hilton Hollywood Beach		311		Hollywood, FL	August 9, 2007	Upscale
Georgian Terrace		326		Atlanta, GA	March 27, 2014	Upper Upscale(1)
Hotel Alba Tampa, Tapestry Collection by Hilton		222		Tampa, FL	October 29, 2007	Upscale
Hotel Ballast Wilmington, Tapestry Collection by Hilton		272		Wilmington, NC	December 21, 2004	Upscale
Hyatt Centric Arlington		318		Arlington, VA	March 1, 2018	Upper Upscale
The Whitehall		259		Houston, TX	November 13, 2013	Upper Upscale(1)
Hotel Rooms Subtotal		2,786

Condominium Hotels
Hyde Resort & Residences		71	(2)	Hollywood, FL	January 30, 2017	Luxury(1)
Hyde Beach House Resort & Residences		78	(2)	Hollywood, FL	September 27, 2019	Luxury(1)
Total Hotel & Participating Condominium Hotel Rooms		2,935

~~Item 3.~~

~~Quantitative and Qualitative Disclosures about Market Risk~~

(1)

Operated as an independent hotel.

(2)

Reflects only those condominium units that were participating in the rental program, as of June 30, 2023. 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.”

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 96.3% interest in our Operating Partnership, as of the date of this report, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.

To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Entities, which are indirect wholly-owned subsidiaries of the Operating Partnership. Our MHI TRS Entities then engage an eligible independent hotel management company 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.

Key Operating Metrics

•

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.”

Results of Operations

The following tables illustrate the key operating metrics for the three and six months ended June 30, 2023 and 2022, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. The ten wholly-owned properties in the portfolio that were under the Company’s control during the three and six months ended June 30, 2023 and the corresponding period in 2022 are considered same-store properties (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Sheraton Louisville Riverside which was sold in February 2022, or the DoubleTree by Hilton Raleigh-Brownstone University which was sold in June 2022. The composite portfolio metrics represent the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, during the three and six months ended June 30, 2023 and the corresponding period in 2022. The same-store (composite) portfolio metrics includes all properties with the exceptions of the Sheraton Louisville Riverside and the

DoubleTree by Hilton Raleigh-Brownstone University, during the three and six months ended June 30, 2023, and the corresponding period in 2022.


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Actual Portfolio Metrics
Occupancy %		70.6	%		68.8	%		65.6	%		61.1	%
ADR	$	185.82		$	179.18		$	186.45		$	174.22
RevPAR	$	131.16		$	123.29		$	122.27		$	106.49
Same-Store Portfolio Metrics
Occupancy %		70.6	%		69.5	%		65.6	%		62.0	%
ADR	$	185.82		$	179.75		$	186.45		$	176.25
RevPAR	$	131.16		$	124.97		$	122.27		$	109.22
Composite Portfolio Metrics
Occupancy %		69.4	%		68.0	%		64.9	%		60.8	%
ADR	$	190.15		$	189.09		$	193.35		$	188.25
RevPAR	$	131.94		$	128.63		$	125.53		$	114.46
Same-Store (Composite) Portfolio Metrics
Occupancy %		69.4	%		68.7	%		64.9	%		61.6	%
ADR	$	190.15		$	189.92		$	193.35		$	190.88
RevPAR	$	131.94		$	130.42		$	125.53		$	117.54

Comparison of the Three Months Ended June 30, 2023, to the Three Months Ended June 30, 2022

Revenue. Total revenue for the three months ended June 30, 2023, increased approximately $1.8 million, or 3.9%, to approximately $49.0 million compared to total revenue of approximately $47.2 million for the three months ended June 30, 2022. Increase in total revenue at seven of our wholly-owned properties, offset by decreases at five of our properties, resulted in an aggregate increase of approximately $2.8 million. The increase was also offset by a decrease of approximately $1.0 million related to the disposition of the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Room revenue increased approximately $0.7 million, or 2.2%, to approximately $33.2 million for the three months ended June 30, 2023, compared to room revenue of approximately $32.5 million for the three months ended June 30, 2022. RevPAR increased 6.4% from $123.29 to $131.16 driven by a 1.8% increase in occupancy and a 3.7% increase in ADR offset by a 4.0% decrease in rooms available for sale as a result of the sale of the DoubleTree by Hilton Raleigh Brownstone – University in June 2022. Increases in room revenue at seven of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset decreases at the remaining three wholly-owned properties.

Food and beverage revenues increased approximately $1.8 million, or 23.2%, to approximately $9.5 million for the three months ended June 30, 2023 compared to food and beverage revenues of approximately $7.7 million for the three months ended June 30, 2022. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at eight of our wholly-owned properties offset decreases at the remaining two wholly-owned properties.

Revenue from other operating departments decreased approximately $0.6 million, or 9.4%, to approximately $6.3 million for the three months ended June 30, 2023 compared to revenue from other operating departments of approximately $6.9 million for the three months ended June 30, 2022. Most of the decrease related to lower net revenue related to the rental programs we manage for participating unit owners at the condominium hotel properties in Hollywood, Florida.

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 $1.8 million, or 5.5%, to approximately $34.2 million for the three months ended June 30, 2023, compared to total hotel operating expenses of approximately $32.4 million for the three months ended June 30, 2022. The increase in hotel operating expenses for the three months ended June 30, 2023, resulted from an aggregate increase in total hotel operating expenses of approximately $3.2 million, offset by decreases totaling approximately $0.6 million from four of our properties and additionally approximately $0.8 million as a result from the sale of the DoubleTree by Hilton Raleigh Brownstone University in June 2022. This increase in hotel operating expenses was directly related to the increase in revenue.

Rooms expense for the three months ended June 30, 2023 decreased by approximately 0.2 million, or 2.6%, to approximately $7.0 million, compared to rooms expense for the three months ended June 30, 2022 of approximately $7.2 million. The decrease in rooms expense for the three months ended June 30, 2023, resulted mainly from the sale the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Food and beverage expenses for the three months ended June 30, 2023 increased approximately $1.1 million, or 21.6%, to approximately $6.4 million, compared to food and beverage expenses of approximately $5.3 million, for the three months ended June 30, 2022. The net increase in food and beverage expenses for the three months ended June 30, 2023, resulted from an aggregate increase of approximately $1.2 million from eight of our properties, offset by a decrease of approximately $0.1 million as a result of the sale of the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The increase was directly related to the increase in food and beverage revenue.

Expenses from other operating departments for the three months ended June 30, 2023, decreased approximately $0.3 million or 11.3%, to approximately $2.3 million, compared to other operating departments expense for the three months ended June 30, 2022 of approximately $2.6 million. The decrease in other operating departments expense for the three months ended June 30, 2023, resulted from six of our properties.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2023 increased approximately $1.1 million, or 6.5%, to approximately $18.4 million, compared to indirect expenses of approximately $17.3 million for the three months ended June 30, 2022. An increase of approximately $0.7 million driven by an increase in premiums for property and casualty coverage accounted for a majority of the increase. Increased payroll cost due to slightly increased staffing levels also contributed to the increase. These increases were offset by a decrease of approximately $0.5 million, as a result of the disposition of the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2023, increased approximately $0.4 million, or 24.9%, to approximately $1.8 million compared to corporate general and administrative expenses of approximately $1.4 million, for the three months ended June 30, 2022. A benefit of approximately $0.2 million in the prior period related to the employee retention credit as well as an increase in employee compensation, legal and other professional fees of approximately $0.4 million.

Interest Expense. Interest expense for the three months ended June 30, 2023, decreased approximately $1.0million, or 19.7%, to approximately $4.3million, as compared to interest expense of approximately $5.3 million, for the three months ended June 30, 2022. The decrease in interest expense for the three months ended June 30, 2023, was substantially related to decreases in the amount of corporate debt attributable to the sale of the DoubleTree by Hilton Raleigh Brownstone University and the extinguishment of the Secured Notes in June 2022.

Unrealized Gain on Hedging Activities. As of June 30, 2023, the fair market value of our interest rate swap assets are approximately $1.2 million. The unrealized gain on hedging activities during the three months ended June 30, 2023, was approximately $0.3 million, compared to a gain of approximately $0.6 million during the three months ended June 30, 2022. The unrealized gain on hedging activities was driven by changes in expectation of short-term rates over the term of the hedging instruments offset by any decrease in the remaining term of each instrument.

Income Taxes. We had an income tax provision of $16,537 for the three months ended June 30, 2023, compared to an income tax provision of $11,615, for the three months ended June 30, 2022. While MHI TRS realized operating income for each of the three months ended June 30, 2023 and 2022, most of the resulting tax liability was offset by unrealized net operating loss carryforwards.

Net Income. We realized a net income for the three months ended June 30, 2023, of approximately $5.3 million, compared to a net income of approximately $27.6 million, for the three months ended June 30, 2022, because of the operating results discussed above and the sale of the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Comparison of the Six Months Ended June 30, 2023, to the Six Months Ended June 30, 2022

Revenue. Total revenue for the six months ended June 30, 2023, increased approximately $7.0 million, or 8.2%, to approximately $92.5 million compared to total revenue of approximately $85.5 million for the six months ended June 30, 2022. There was a net aggregate increase in total revenue of approximately $10.2 million, at eight of our wholly-owned properties, offset mainly by decreases at our three Hollywood Beach, Florida properties. There was also a decrease of approximately $3.2 million related to the disposition of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Room revenue increased approximately $4.3 million, or 7.4%, to approximately $61.7 million for the six months ended June 30, 2023, compared to room revenue of approximately $57.4 million for the six months ended June 30, 2022. RevPAR increased 14.8% from $106.49 to $122.27 driven by a 4.5% increase in occupancy and a 7.0% increase in ADR offset by a 6.4% decrease in rooms available for sale as a result of the sale of the DoubleTree by Hilton Raleigh Brownstone – University in June 2022. Increases in room revenue at eight of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset decreases at the remaining two wholly-owned properties.

Food and beverage revenues increased approximately $4.9 million, or 36.9%, to approximately $18.2 million for the six months ended June 30, 2023, compared to food and beverage revenues of approximately $13.3 million for the six months ended June 30, 2022. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at nine of our wholly-owned properties offset the decrease at the remaining wholly-owned property.

Revenue from other operating departments revenues decreased approximately $2.2 million, or 14.8%, to approximately $12.6 million for the six months ended June 30, 2023, compared to revenue from other operating departments of approximately $14.8 million for the six months ended June 30, 2022. Most of the decrease related to lower net revenue related to the rental programs we manage for participating unit owners at the condominium hotel properties in Hollywood, Florida. Additionally, in the comparable six month period of 2022, we had received a one-time $1.0 million grant from the state of North Carolina, which was not available and which we did not receive in 2023.

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 $4.8 million, or 7.9%, to approximately $65.6 million for the six months ended June 30, 2023, compared to total hotel operating expenses of approximately $60.8 million for the six months ended June 30, 2022. The increase in hotel operating expenses for the six months ended June 30, 2023, resulted from an aggregate increase in total hotel operating expenses of approximately $7.8 million from nine of our properties, offset by decreases totaling approximately $0.7 million from three of our properties in addition to a decrease of approximately $2.3 million, as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. This increase in hotel operating expenses was directly related to the increase in revenue.

Rooms expense for the six months ended June 30, 2023, increased by approximately 0.3 million, or 2.1%, to approximately $13.4 million, compared to rooms expense for the six months ended June 30, 2022 of approximately $13.1 million. The increase in rooms expense for the six months ended June 30, 2023, resulted from an aggregate increase of approximately $1.4 million from seven of our hotel properties, offset by a decrease totaling approximately $0.5 million from three of our properties in addition to a decrease of approximately $0.6 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Food and beverage expenses for the six months ended June 30, 2023, increased approximately $3.2 million, or 34.9%, to approximately $12.3 million, compared to food and beverage expenses of approximately $9.1 million, for the six months ended June 30, 2022. The net increase in food and beverage expenses for the six months ended June 30, 2023, resulted from an aggregate increase of approximately $3.4 million, offset by a decrease totaling approximately $0.2 million, as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The increase was directly related to the increase in food and beverage revenue.

Expenses from other operating departments for the six months ended June 30, 2023, decreased approximately $0.5 million or 9.1%, to approximately $4.6 million, compared to other operating departments expense for the six months ended June 30, 2022 of approximately $5.1 million. The decrease in other operating departments expense for the six months ended June 30, 2023, resulted from an aggregate decrease of approximately $0.7 million from five of our properties, including the two disposed properties, offset by an increase totaling approximately $0.2 million from seven of our properties.

Indirect expenses at our wholly-owned properties for the six months ended June 30, 2023, increased approximately $1.8 million, or 5.4%, to approximately $35.2 million, compared to indirect expenses of approximately $33.4 million for the six months ended June 30, 2022. There was a net aggregate increase of approximately $3.7 million from nine of our properties, offset by a decrease of approximately $0.4 million from three of our properties. The increases were driven by an approximately $0.7 million increase in premiums for property and casualty coverage account and increased payroll costs due to additional staffing levels. These increases were offset by a decrease of approximately $1.5 million, as a result of the dispositions of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2023, increased approximately $0.8 million, or 27.9%, to approximately $3.7 million compared to corporate general and administrative expenses of approximately $2.9 million, for the six months ended June 30, 2022. A benefit of approximately $0.2 million in the prior

period related to the employee retention credit as well as an increase in employee compensation, audit, legal and other professional fees of approximately $1.1 million contributed to the increase.

Interest Expense. Interest expense for the six months ended June 30, 2023, decreased approximately $2.7million, or 24.0%, to approximately $8.4million, as compared to interest expense of approximately $11.1 million, for the six months ended June 30, 2022. The decrease in interest expense for the six months ended June 30, 2023, was substantially related to decreases in the amount of corporate debt attributable to the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022 and the extinguishment of the Secured Notes in June 2022.

Unrealized (Loss)/Gain on Hedging Activities. As of June 30, 2023, the fair market value of our interest rate swap assets are approximately $1.2 million. The unrealized loss on hedging activities during the six months ended June 30, 2023, was approximately 0.2 million and was approximately a $1.5 million gain during the six months ended June 30, 2022, the unrealized loss on hedging activities was driven by changes in expectation of short-term rates over the term of the hedging instruments.

Income Taxes. We had an income tax provision of $31,719 for the six months ended June 30, 2023, compared to an income tax provision of $21,269, for the six months ended June 30, 2022. While MHI TRS realized operating income for each of the six months ended June 30, 2023 and 2022.

Net Income. We realized a net income for the six months ended June 30, 2023, of approximately $6.6 million, compared to a net income of approximately $26.8 million, for the six months ended June 30, 2022, because of the operating results discussed above and the dispositions of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022, most of the resulting tax liability was offset by unrealized net operating loss carryforwards.

Non-GAAP Financial Measures

We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.

FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, gains or losses from involuntary conversions of assets, plus certain non-cash items such as real estate asset depreciation and amortization or impairment, stock compensation costs and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.

We further adjust FFO Available to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, gains on extinguishment of preferred stock, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, management contract termination costs, operating asset depreciation and amortization, change in control gains or losses, ESOP and stock compensation expenses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more

indicative than FFO of the on-going performance of our business and assets. Our calculation of adjusted FFO may be different from similar measures calculated by other REITs.

The following is a reconciliation of net income to FFO and Adjusted FFO, for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Net income	$	5,257,670		$	27,605,359		$	6,645,185		$	26,794,415
Depreciation and amortization - real estate		4,750,322			4,605,649			9,314,947			9,156,025
Distributions to preferred stockholders		(1,994,313	)		(1,889,470	)		(3,988,625	)		(3,826,086	)
Gain on disposal of assets		—			(29,533,821	)		—			(29,563,364	)
Gain on involuntary conversion of assets		(763,169	)		(51,547	)		(779,645	)		(51,547	)
FFO attributable to common stockholders and unitholders		7,250,510			736,170			11,191,862			2,509,443
Amortization		12,871			14,094			26,557			28,790
ESOP and stock - based compensation		54,488			102,528			314,951			522,689
Loss on early debt extinguishment		—			5,944,881			—			5,944,881
Unrealized loss (gain) on hedging activities		(286,831	)		(572,497	)		155,632			(1,534,760	)
Adjusted FFO attributable to common stockholders and unitholders	$	7,031,038		$	6,225,176		$	11,689,002		$	7,471,043

Weighted average number of shares outstanding, basic		18,712,452			17,762,513			18,658,538			17,436,975

Weighted average number of non-controlling units		772,441			1,110,093			798,669			1,121,841

Weighted average number of shares and units outstanding, basic		19,484,893			18,872,606			19,457,207			18,558,816

FFO per common share and unit	$	0.37		$	0.04		$	0.58		$	0.14

Adjusted FFO per common share and unit	$	0.36		$	0.33		$	0.60		$	0.40

EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.

Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) unrealized gains and losses on derivative instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) Paycheck Protection Program (PPP) debt forgiveness, (11) gain on exercise of development right, (12) corporate general and administrative expense, and (13) 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.

The following is a reconciliation of net income to Hotel EBITDA for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Net income	$	5,257,670		$	27,605,359		$	6,645,185		$	26,794,415
Interest expense		4,288,367			5,342,940			8,401,964			11,056,144
Interest income		(222,772	)		(27,486	)		(369,437	)		(51,934	)
Income tax provision		16,537			11,615			31,719			21,269
Depreciation and amortization		4,763,193			4,619,743			9,341,504			9,184,815
EBITDA		14,102,995			37,552,171			24,050,935			47,004,709
PPP loan forgiveness		—			—			(275,494	)		—
Loss on early debt extinguishment		—			5,944,881			—			5,944,881
Gain on disposal of assets		—			(29,533,821	)		—			(29,563,364	)
Gain on involuntary conversion of assets		(763,169	)		(51,547	)		(779,645	)		(51,547	)
Subtotal		13,339,826			13,911,684			22,995,796			23,334,679
Corporate general and administrative		1,789,041			1,432,366			3,769,805			2,946,393
Unrealized loss (gain) on hedging activities		(286,831	)		(572,497	)		155,632			(1,534,760	)
Hotel EBITDA	$	14,842,036		$	14,771,553		$	26,921,233		$	24,746,312

Sources and Uses of Cash

Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage and other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and dividends. As of June 30, 2023, we had approximately $24.2 million of unrestricted cash and $8.0 million of restricted cash.

Operating Activities. Our net cash flow provided by operating activities for the six months ended June 30, 2023 was approximately $13.8 million, generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the quarter and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in leisure transient, small group and corporate business travel. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and positive or negative changes in working capital.

Investing Activities. Our cash used in investing activities for the six months ended June 30, 2023 was approximately $3.9 million. Of this amount approximately $4.5 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $0.4 million and proceeds from the grant of a utility easement of approximately $0.1 million.

Financing Activities. During the six months ended June 30, 2023, the Company and Operating Partnership received proceeds from a mortgage loan of approximately $2.7 million, made principal payments on its mortgages of approximately $3.0 million, payments on its unsecured notes of approximately $0.3 million and payments on deferred financing costs of approximately $0.4 million, and paid preferred dividends of approximately $4.0 million.

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 2020, we postponed all major non-essential capital expenditures. As travel demand returned and occupancy, and RevPAR gradually increased, we increased the level of capital expenditures. We expect total capital expenditures for 2023 to be approximately $7.4 million.

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 Laurel, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington on a monthly basis.

Liquidity and Capital Resources

As of June 30, 2023, we had total cash of approximately $32.2 million. During the three months ended June 30, 2023, we generated cash, cash equivalents and restricted cash of approximately $4.8 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).

On May 4, 2023, we secured a $10.0 million mortgage loan on the DoubleTree by Hilton Laurel hotel with Citi Real Estate Funding Inc. Pursuant to the loan documents, the loan has a maturity date of May 6, 2028; carries a fixed rate of interest of 7.35%; required monthly payments of interest only; and cannot be prepaid until the last four months of the loan term. We used a portion of the proceeds to repay the existing first mortgage on the hotel and will use the balance of the proceeds for general corporate purposes.

As of the date of this report, we were current on all loan payments on all other mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement (“DSCR”) covenant under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport. We anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport. If we are unable to obtain a waiver, we may be required to reduce the outstanding balance with a prepayment of up to approximately $3.1 million per the terms of the loan agreement.

In October 2023, the mortgage on the DoubleTree by Hilton Philadelphia Airport matures. We intend to refinance the mortgage at the expected level of the maturing indebtedness or request an extension at existing terms.

In July 2024, the mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures. We intend to refinance the mortgage at the expected level of maturing indebtedness.

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 continuing impact of the COVID-19 pandemic. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.

Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in

our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.

Financial Covenants

Mortgage Loans

Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well as the effects of the ongoing global pandemic.

As described in “Liquidity and Capital Resources”, as of June 30, 2023, we failed to meet certain financial covenants under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport. We intend to work with the lender to receive a waiver and to amend, refinance, or extend the term of the loan prior to maturity in October 2023.

Certain of our loan agreements also include financial covenants that trigger a “cash trap” requiring substantially all the revenue generated by the hotel to be deposited directly into a lockbox account and swept into a cash management account for the benefit of the lender until the property meets the criteria in the loan agreement for exiting the “cash trap”.

Dividend Policy

We may not make distributions with respect to any shares of our common stock, unless and until full cumulate 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.

On January 24, 2023, we announced that we will resume quarterly distributions to holders of our preferred stock and set a record date of February 28, 2023 with a payment date of March 15, 2023.

On April 24, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of May 31, 2023 and a payment date of June 13, 2023.

On May 30, 2023, we announced the declaration of a "catch up" distribution to holders of our preferred stock with a record date of June 30, 2023 and a payment date of July 14, 2023.

On August 1, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of August 31, 2023 and a payment date of September 15, 2023.

As of June 30, 2023, the amount of cumulative unpaid dividends on our outstanding preferred shares as approximately $23.9 million. We expect that any reduction in the level of cumulative unpaid distributions will be made in the form of a series of "catch up" distributions, such as the distribution announced on May 30, 2023. The amount, timing and frequency of distributions, including additional “catch-up” distributions, will be authorized by our board of directors and based upon a variety of factors deemed relevant by the directors. No assurance can be given that the distribution policy will not change in the future.

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.

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liability at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. It is also possible that actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgment on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes in these critical accounting policies or the methods or assumptions we apply.

Recent Accounting Pronouncements

For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.

As of ~~September~~June 30, ~~2017,~~2023, we had approximately ~~$264.6~~$308.6 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237%, mortgage on our Tampa, Florida hotel, which is fixed by an interest rate swap to approximately 5.576%, and the PPP Loans of approximately $1.9 million, with a fixed rate of 1.0% and approximately ~~$61.0~~$14.1 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was ~~4.84%~~4.91%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in the Prime Rate. Assuming that the aggregate amount outstanding on the mortgage on The Whitehall remains at approximately $14.1 million, the balance at June 30, 2023, the impact on our annual interest incurred and cash flows of a one percent increase in the Prime Rate, would be approximately $0.1 million.

As of December 31, 2022, we had approximately $310.2 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%, the mortgage on our Hotel Alba Tampa, Tapestry Collection by Hilton, which is fixed by an interest rate swap to approximately 5.576% and the PPP Loans of $2.5 million, with a fixed rate of 1.0% and approximately $14.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.83%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month ~~LIBOR. However, to the extent that 1-month~~ LIBOR, ~~does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changes~~SOFR, and in ~~interest rates.~~Prime Rate. Assuming that the aggregate amount outstanding on the ~~mortgages on the Crowne Plaza Tampa Westshore, DoubleTree by Hilton Philadelphia Airport and the~~ mortgage on The Whitehall

remains at approximately ~~$61.0~~$14.2 million, the balance at ~~September 30, 2017,~~December 31, 2022, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR, SOFR, and in Prime Rate, would be approximately ~~$0.6~~$0.1 million.

~~As of December 31, 2016,we had approximately $228.7 million of fixed-rate debt~~Item 4. Controls and approximately $81.1 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.84%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR. However, to the extent that 1-month LIBOR does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore, DoubleTree by Hilton Philadelphia Airport, DoubleTree by Hilton Jacksonville Riverfront and the mortgage on The Whitehall remains at approximately $81.1 million, the balance at December 31, 2016, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.8 million.Procedures

~~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 ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”),~~ as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of ~~September~~June 30, ~~2017.~~2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~June 30, ~~2017,~~2023, 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 ~~September~~June 30, ~~2017.~~2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~June 30, ~~2017,~~2023, 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.

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.

~~PART~~ II

PART II

~~Item 1.~~

~~Legal Proceedings~~

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

~~Item 1A.~~

~~Risk Factors~~

~~Except as set forth below, there~~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, ~~2016.~~2022.

~~Holders~~

Item 2. Unregistered Sales of ~~our outstanding preferred shares have dividend, liquidation~~Equity Securities and ~~other rights that are senior to the rights~~Use of ~~the holders of our common shares.~~Proceeds

Our board of directors has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of November 7, 2017, 1,610,000 shares of our Series B Preferred Stock were issued and outstanding, and 1,300,000 shares of our Series C Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding Series B preferred shares is approximately $40.3 million, and annual dividends on our outstanding Series B preferred shares are approximately $3.2 million. The aggregate liquidation preference with respect to the outstanding Series C preferred shares is approximately $32.5 million, and annual dividends on our outstanding Series C preferred shares are approximately $2.6 million. Holders of both our Series B and Series C Preferred Stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of the Series B Preferred Stock and Series C Preferred Stock voting together as a separate class have the right to elect two additional directors to our board of directors whenever dividends on the preferred shares are in arrears in an aggregate amount equivalent to six or more quarterly dividends (whether or not consecutive). Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future preferred offerings. Thus, our stockholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interest.

The change of control conversion and redemption features of the Series B and Series C Preferred Stock may make it more difficult for a party to take over our Company or discourage a party from taking over our Company.

Upon a change of control (as defined in our charter), holders of both our Series B and Series C Preferred Stock will have the right (unless, as provided in our charter, we have provided or provide notice of our election to exercise our special optional redemption right before the relevant date) to convert some or all of their shares of preferred stock into shares of our common stock (or equivalent value of alternative consideration). Upon such a conversion, holders will be limited to a maximum number of shares equal to the share cap, subject to adjustments. If the common stock price is less than $3.015, subject to adjustment, holders will receive a maximum of 8.29187 shares of our common stock per share of Series B Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series B Preferred Stock. If the common stock price is less than $2.94, subject to adjustment, holders will receive a maximum of 8.50340 shares of our common stock per share of Series C Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series C Preferred Stock. In addition, those features of our Series B and Series C Preferred Stock may have the effect of inhibiting or discouraging a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of shares of our common stock and shares of our Series B and Series C Preferred Stock with the opportunity to realize a premium over the then current market price or that stockholders may otherwise believe is in their best interests.

I~~tem 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

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 Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for nine quarterly periods. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s preferred stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.

As of August 11, 2023, the Company has deferred payment and is in arrears on dividends for the Company's Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the periods ending December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023, and June 30, 2023. The relevant distributions were as follows:

~~Item 3.~~

~~Defaults upon Senior Securities~~

•

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 Company has declared dividends in the respective amounts shown above for each of the Series B, Series C, and Series D Preferred Stock, for the distribution period ending December 31, 2020, payable on September 15, 2023. The total arrearage of cumulative unpaid cash dividends on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through August 11, 2023, are $8,052,550, $7,287,931, and $6,596,958, respectively.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Item 4.~~

~~Mine Safety Disclosures~~

Not applicable.

~~Item 5.~~

~~Other Information~~

~~Not applicable.~~

Item 6. Exhibits

~~Item 6.~~

E~~xhibits~~

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


Exhibit
Number		Description of Exhibit

3.1		Articles of Amendment and Restatement of the Company (incorporated by reference to the document previously filed as Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004 (File No. 333-118873)).

~~3.1A~~		Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013 (incorporated by reference to the document previously filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013).

~~3.1B~~		Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of August 12, 2016 (incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2016).

~~3.2~~		Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.3 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)).

~~3.2A~~		Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).

~~3.2B~~		Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013 (File No. 333-189821)).

~~3.2C~~		Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 23, 2016).

~~3.2D~~		Amendment No. 4 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2017).

~~3.3~~		Articles Supplementary of the Company (incorporated by reference to the document previously filed as Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).

~~3.4~~		~~Second~~Third Amended and Restated Bylaws of the Company, effective as of April 16, 2013 (incorporated by reference to the document previously filed as Exhibit 3.8 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013).July 31, 2023.

~~3.5~~ 31.1		Articles Supplementary designating the Series B Preferred Stock of the Company, effective as of August 19, 2016 (incorporated by reference to the document previously filed as Exhibit 3.5 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 22, 2016).

~~3.6~~		Articles Supplementary designating the Series C Preferred Stock of the Company, effective as of October 6, 2017 (incorporated by reference to the document previously filed as Exhibit 3.5 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 10, 2017).

~~4.0~~		Form of Common Stock Certificate (incorporated by reference to the document previously filed as Exhibit 4.0 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on March 22, 2017).

~~4.1~~		Senior Unsecured Note issued by Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 4.6 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013).

~~Exhibit~~
~~Number~~		~~Description of Exhibit~~

~~4.2~~		Indenture between Sotherly Hotels LP and Wilmington Trust, National Association, as trustee (incorporated by reference to the document previously filed as Exhibit 4.7 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013).

~~4.3~~		Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit 4.8 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014).

~~4.4~~		First Supplemental Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit 4.9 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014).
~~4.5~~		7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on April 14, 2015).

~~4.6~~		Form of Specimen Certificate of Series B Preferred Stock of the Company (incorporated by reference to the document previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 22, 2016).

~~4.7~~		Form of Specimen Certificate of Series C Preferred Stock of the Company (incorporated by reference to the document previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 10, 2017).

~~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) (+)

*	~~Denotes management contract and/or compensatory plan/arrangement.~~

50* Denotes management contract and/or compensatory plan/arrangement.

** Filed herewith

(+) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SOTHERLY HOTELS INC.

Date: ~~November 8, 2017~~August 14, 2023	By:	/s/ ~~Andrew M. Sims~~David R. Folsom
		~~Andrew M. Sims~~David R. Folsom
		President and Chief Executive Officer

	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

~~SIGNATURES~~

SIGNATURES


	SOTHERLY HOTELS LP

	By:	SOTHERLY HOTELS INC.
		Its General Partner

Date: ~~November 8, 2017~~August 14, 2023	By:	/s/ ~~Andrew M. Sims~~David R. Folsom
		~~Andrew M. Sims~~David R. Folsom
		President and Chief Executive Officer

	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

5250


Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☐☒	Smaller Reporting Company	☒

Emerging Growth Company	☐


Non-accelerated Filer	☒	Smaller Reporting Company	☐
~~Non-accelerated Filer~~	☒	~~Smaller Reporting Company~~	☐

Emerging growth company	☐


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

	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Investment in hotel properties, net	$	357,645,087		$	348,593,912
Investment in hotel properties held for sale, net		-			5,333,000
Cash and cash equivalents		32,651,893			31,766,775
Restricted cash		6,115,997			4,596,145
Accounts receivable, net		5,580,895			4,127,748
Accounts receivable - affiliate		493,895			4,175
Prepaid expenses, inventory and other assets		6,228,659			4,648,469
Deferred income taxes		7,729,111			6,949,340
TOTAL ASSETS	$	416,445,537		$	406,019,564
LIABILITIES
Mortgage loans, net	$	298,429,955		$	282,708,289
Unsecured notes, net		24,560,735			24,308,713
Accounts payable and accrued liabilities		16,110,521			12,970,960
Advance deposits		2,317,658			2,315,787
Dividends and distributions payable		2,520,249			2,376,527
TOTAL LIABILITIES	$	343,939,118		$	324,680,276
Commitments and contingencies (See Note 6)		—			—
EQUITY
Sotherly Hotels Inc. stockholders’ equity
8% Series B cumulative redeemable perpetual preferred stock, par value $0.01, 11,000,000 shares authorized, liquidation preference $25 per share, 1,610,000 shares issued and outstanding at September 30, 2017 and December 31, 2016		16,100			16,100
Common stock, par value $0.01, 49,000,000 shares authorized, 13,823,459 shares and 14,468,551 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		138,234			144,685
Additional paid-in capital		118,502,294			118,395,082
Unearned ESOP shares		(4,693,282	)		—
Distributions in excess of retained earnings		(43,293,677	)		(39,545,754	)
Total Sotherly Hotels Inc. stockholders’ equity		70,669,669			79,010,113
Noncontrolling interest		1,836,750			2,329,175
TOTAL EQUITY		72,506,419			81,339,288
TOTAL LIABILITIES AND EQUITY	$	416,445,537		$	406,019,564


	June 30, 2023			December 31, 2022
	(unaudited)
ASSETS
Investment in hotel properties, net	$	360,056,196		$	365,070,725
Cash and cash equivalents		24,226,602			21,918,680
Restricted cash		7,962,807			5,422,950
Accounts receivable, net		5,247,324			5,844,904
Prepaid expenses, inventory and other assets		10,520,047			8,311,862
TOTAL ASSETS	$	408,012,976		$	406,569,121
LIABILITIES
Mortgage loans, net	$	319,289,449		$	320,482,103
Unsecured notes		1,929,073			2,545,975
Accounts payable and accrued liabilities		25,516,483			25,704,835
Advance deposits		2,703,265			2,233,013
Dividends and distributions payable		4,082,472			4,082,472
TOTAL LIABILITIES	$	353,520,742		$	355,048,398
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, 1,464,100 and 1,464,100 shares issued and outstanding; aggregate liquidation preference each $44,655,050, at June 30, 2023 and December 31, 2022, respectively.		14,641			14,641
7.875% Series C cumulative redeemable perpetual preferred stock, 1,346,110 and 1,346,110 shares issued and outstanding; aggregate liquidation preference each $40,940,681, at June 30, 2023 and December 31, 2022, respectively.		13,461			13,461
8.25% Series D cumulative redeemable perpetual preferred stock, 1,163,100 and 1,163,100 shares issued and outstanding; aggregate liquidation preference each $35,674,458, at June 30, 2023 and December 31, 2022, respectively.		11,631			11,631
Common stock, par value $0.01, 69,000,000 shares authorized, 19,310,803 shares issued and outstanding at June 30, 2023 and 18,951,525 shares issued and outstanding at December 31, 2022.		193,108			189,515
Additional paid-in capital		176,258,261			175,611,370
Unearned ESOP shares		(2,509,867	)		(2,601,134	)
Distributions in excess of retained earnings		(118,434,462	)		(120,985,183	)
Total Sotherly Hotels Inc. stockholders’ equity		55,546,773			52,254,301
Noncontrolling interest		(1,054,539	)		(733,578	)
TOTAL EQUITY		54,492,234			51,520,723
TOTAL LIABILITIES AND EQUITY	$	408,012,976		$	406,569,121


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		Page

PART I
Item 1.	Consolidated Financial Statements	45
	~~Sotherly Hotels Inc~~.	4
	Sotherly Hotels Inc.
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2023 (unaudited) and December 31, ~~2016~~2022	45
	Consolidated Statements of Operations (unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	56
	Consolidated ~~Statement~~Statements of Changes in Equity (unaudited) for the ~~Nine~~Three Months Ended ~~September~~March 31, June 30, ~~2017~~2023 and 2022	67
	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	79
	~~Sotherly Hotels LP~~	8
	Sotherly Hotels LP
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2023 (unaudited) and December 31, ~~2016~~2022	810
	Consolidated Statements of Operations (unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	911
	Consolidated ~~Statement~~Statements of Changes in Partners’ Capital (unaudited) for the ~~Nine~~Three Months Ended ~~September~~March 31, June 30, ~~2017~~2023 and 2022	1012
	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022	1114
	Notes to Consolidated Financial Statements	1215
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4445
Item 4	Controls and Procedures	4546

PART II
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	4847
Item 5.	Other Information	4847
Item 6.	Exhibits	4948


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
													(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE
Rooms department	$	25,093,226		$	26,665,132		$	81,366,731		$	83,896,833		$	33,253,523		$	32,545,588		$	61,655,211		$	57,398,973
Food and beverage department		7,997,818			8,412,842			24,904,934			26,240,932			9,500,974			7,712,310			18,249,700			13,330,046
Other operating departments		3,678,427			2,197,338			9,835,322			6,772,647			6,262,836			6,912,361			12,603,699			14,793,842
Total revenue		36,769,471			37,275,312			116,106,987			116,910,412			49,017,333			47,170,259			92,508,610			85,522,861
EXPENSES
Hotel operating expenses
Rooms department		6,826,822			7,126,673			20,252,889			21,330,914			7,016,339			7,205,585			13,429,434			13,155,343
Food and beverage department		6,039,174			5,820,000			17,919,142			18,250,542			6,390,867			5,256,164			12,326,427			9,136,781
Other operating departments		705,111			642,219			1,928,662			1,880,618			2,305,755			2,599,372			4,621,603			5,083,479
Indirect		15,209,249			14,603,034			45,019,742			43,827,294			18,462,336			17,337,585			35,209,913			33,400,946
Total hotel operating expenses		28,780,356			28,191,926			85,120,435			85,289,368			34,175,297			32,398,706			65,587,377			60,776,549
Depreciation and amortization		4,427,738			3,790,872			12,708,548			11,260,987			4,763,193			4,619,743			9,341,504			9,184,815
Loss on disposal of assets		-			189,267			51,569			329,461			—			520,156			—			490,613
Corporate general and administrative		1,335,192			1,367,848			4,882,541			4,331,896			1,789,041			1,432,366			3,769,805			2,946,393
Total operating expenses		34,543,286			33,539,913			102,763,093			101,211,712			40,727,531			38,970,971			78,698,686			73,398,370
NET OPERATING INCOME		2,226,185			3,735,399			13,343,894			15,698,700			8,289,802			8,199,288			13,809,924			12,124,491
Other income (expense)
Interest expense		(4,139,267	)		(4,626,333	)		(11,827,061	)		(13,872,129	)		(4,288,367	)		(5,342,940	)		(8,401,964	)		(11,056,144	)
Interest income		53,314			44,485			126,241			63,523			222,772			27,486			369,437			51,934
Loss on early debt extinguishment		—			(1,087,395	)		(228,087	)		(1,157,688	)
Unrealized loss on hedging activities		(3,542	)		(492	)		(30,748	)		(66,567	)
Gain (loss) on sale of assets		(23,000	)		—			77,807			—
Loss on early extinguishment of debt														—			(5,944,881	)		—			(5,944,881	)
Unrealized gain (loss) on hedging activities														286,831			572,497			(155,632	)		1,534,760
PPP loan forgiveness														—			—			275,494			—
Gain on sale of hotel properties														—			30,053,977			—			30,053,977
Gain on involuntary conversion of assets		—			—			1,041,815			—			763,169			51,547			779,645			51,547
Net income (loss) before income taxes		(1,886,310	)		(1,934,336	)		2,503,861			665,839
Income tax benefit		950,310			385,145			581,890			308,398
Net income (loss)		(936,000	)		(1,549,191	)		3,085,751			974,237
Less: Net loss (income) attributable to noncontrolling interest		190,445			172,846			(73,366	)		(106,377	)
Net income (loss) attributable to the Company		(745,555	)		(1,376,345	)		3,012,385			867,860
Distributions to preferred stockholders		(805,000	)		(339,889	)		(2,415,000	)		(339,889	)
Net income (loss) available to common stockholders	$	(1,550,555	)	$	(1,716,234	)	$	597,385		$	527,971
Net income (loss) per share available to common stockholders
Net income before income taxes														5,274,207			27,616,974			6,676,904			26,815,684
Income tax provision														(16,537	)		(11,615	)		(31,719	)		(21,269	)
Net income														5,257,670			27,605,359			6,645,185			26,794,415
Add: Net income attributable to noncontrolling interest														(130,798	)		(1,529,940	)		(105,838	)		(1,368,319	)
Net income attributable to the Company														5,126,872			26,075,419			6,539,347			25,426,096
Undeclared distributions to preferred stockholders														(1,994,313	)		(1,889,470	)		(3,988,625	)		(3,826,086	)
Gain on extinguishment of preferred stock														—			83,500			—			161,675
Net income attributable to common stockholders													$	3,132,559		$	24,269,449		$	2,550,722		$	21,761,685
Net income per share attributable to common stockholders:
Basic	$	(0.11	)	$	(0.11	)	$	0.04		$	0.04		$	0.16		$	1.36		$	0.13		$	1.24
Diluted	$	(0.11	)	$	(0.11	)	$	0.04		$	0.04		$	0.16		$	1.32		$	0.13		$	1.20
Weighted average number of common shares outstanding
Basic		13,822,543			14,949,651			13,873,175			14,897,595			18,712,452			17,762,513			18,658,538			17,436,975
Diluted		13,822,543			14,949,651			13,885,290			14,897,595			18,715,098			18,304,508			18,658,538			18,031,381

											Additional						Distributions
	Preferred Stock				Common Stock						Paid-			Unearned ESOP			in Excess of			Noncontrolling
	Shares		Par Value		Shares			Par Value			In Capital			Shares			Retained Earnings			Interest			Total
Balances at December 31, 2016		1,610,000	$	16,100		14,468,551		$	144,685		$	118,395,082		$	-		$	(39,545,754	)	$	2,329,175		$	81,339,288
Net income		—		—		—			—			—			—			3,012,385			73,366			3,085,751
Issuance of restricted common stock awards		—		—		12,000			120			89,040			—			—			—			89,160
Purchase of shares by ESOP		—		—		(682,500	)		(6,825	)		6,825			(4,874,758	)		—			—			(4,874,758	)
Amortization of ESOP shares		—		—		25,408			254			(3,593	)		181,476			—			—			178,137
Amortization of restricted stock award		—		—		—			—			14,940			—			—			—			14,940
Preferred stock dividends declared		—		—		—			—			—			—			(2,415,000	)		—			(2,415,000	)
Common stockholders' dividends and distributions declared		—		—		—			—			—			—			(4,345,308	)		(565,791	)		(4,911,099	)
Balances at September 30, 2017 (Unaudited)		1,610,000	$	16,100		13,823,459		$	138,234		$	118,502,294		$	(4,693,282	)	$	(43,293,677	)	$	1,836,750		$	72,506,419


									Additional			Unearned			Distributions
	Preferred Stock				Common Stock				Paid-			ESOP			in Excess of			Noncontrolling
	Shares		Par Value		Shares		Par Value		In Capital			Shares			Retained Earnings			Interest			Total
Balances at December 31, 2022		3,973,310	$	39,733		18,951,525	$	189,515	$	175,611,370		$	(2,601,134	)	$	(120,985,183	)	$	(733,578	)	$	51,520,723
Net income		—		—		—		—		—			—			1,412,474			(24,960	)		1,387,514
Issuance of common stock		—		—		64,278		643		120,842			—			—			—			121,485
Issuance of restricted common stock awards		—		—		220,000		2,200		101,701			—			—			—			103,901
Amortization of ESOP shares		—		—		—		—		(33,439	)		45,634			—			—			12,195
Amortization of restricted stock awards		—		—		—		—		22,883			—			—			—			22,883
Balances at March 31, 2023 (unaudited)		3,973,310	$	39,733		19,235,803	$	192,358	$	175,823,357		$	(2,555,500	)	$	(119,572,709	)	$	(758,538	)	$	53,168,701
Net income		—		—		—		—		—			—			5,126,872			130,798			5,257,670
Conversion of units in Operating Partnership to shares of common stock		—		—		75,000		750		426,049			—			—			(426,799	)		—
Preferred stock dividends declared:
Series B Preferred Stock, $0.50/share		—		—		—		—		—			—			(1,464,100	)		—			(1,464,100	)
Series C Preferred Stock, $0.492188/share		—		—		—		—		—			—			(1,325,078	)		—			(1,325,078	)
Series D Preferred Stock, $0.515625/share		—		—		—		—		—			—			(1,199,447	)		—			(1,199,447	)
Amortization of ESOP shares		—		—		—		—		(32,916	)		45,633			—			—			12,717
Amortization of restricted stock awards		—		—		—		—		41,771			—			—			—			41,771
Balances at June 30, 2023 (unaudited)		3,973,310	$	39,733		19,310,803	$	193,108	$	176,258,261		$	(2,509,867	)	$	(118,434,462	)	$	(1,054,539	)	$	54,492,234

	Preferred Units					General Partner					Limited Partner
	Units		Amount			Units		Amount			Units		Amounts			Total
Balances at December 31, 2016		1,610,000	$	37,766,531			162,467	$	681,389			16,084,224	$	42,891,368		$	81,339,288
Issuance of common partnership units		—		—			120		892			11,880		88,268			89,160
Amortization of restricted units award		—		—			—		149			—		103,059			103,208
Amortization of ESOP units		—		—			—		—			—		52,626			52,626
Preferred units distributions declared		—		(2,415,000	)		—		—			—		—			(2,415,000	)
Partnership units distributions declared		—		—			—		(51,214	)		—		(5,073,099	)		(5,124,313	)
Net income		—		2,415,000			—		30,857			—		639,894			3,085,751
Balances at September 30, 2017 (Unaudited)		1,610,000	$	37,766,531			162,587	$	662,073			16,096,104	$	38,702,116		$	77,130,720


	As of		As of
	June 30, 2023		June 30, 2022
Cash and cash equivalents	$	24,226,602	$	23,969,135
Restricted cash		7,962,807		7,383,626
Cash, cash equivalents and restricted cash at the end of the period	$	32,189,409	$	31,352,761


Level 1	~~Level 1~~	Unadjusted quoted prices in active markets for identical assets or liabilities.

	Level 1			Level 2			Level 3
December 31, 2016
Interest Rate Cap ⁽¹⁾	$	—		$	33,597		$	—
Mortgage loans ⁽²⁾	$	—		$	(281,840,780	)	$	—
Unsecured notes ⁽³⁾	$	(26,241,160	)	$	—		$	—
September 30, 2017
Interest Rate Cap ⁽¹⁾	$	—		$	2,849		$	—
Mortgage loans ⁽²⁾	$	—		$	(294,869,206	)	$	—
Unsecured notes ⁽³⁾	$	(25,836,360	)	$	—		$	—


For the remaining six months ending December 31, 2023	$	438,535
December 31, 2024		813,584
December 31, 2025		1,308,768
December 31, 2026		722,040
December 31, 2027		707,495
December 31, 2028 and thereafter		9,451,505
Total	$	13,441,927

For the remaining three months ending: December 31, 2017	$	425,322
December 31, 2018		1,112,282
December 31, 2019		868,289
December 31, 2020		832,695
December 31, 2021		725,244
December 31, 2022 and thereafter		3,085,873
Total	$	7,049,705

	Hyde Resort & Residences
Land and land improvements	$	500
Buildings and improvements		4,309,500
Furniture, fixtures and equipment		72,616
Investment in hotel properties		4,382,616
Accrued liabilities and other costs		(866,142	)
Prepaid expenses, inventory and other assets		470,375
Net cash	$	3,986,849

	Balance Outstanding as of
	September 30,			December 31,			Prepayment	Maturity	Amortization	Interest
Property	2017			2016			Penalties	Date	Provisions	Rate
Crowne Plaza Hampton Marina ⁽¹⁾	$	-		$	2,584,633		None	11/1/2019	3 years		5.00%
Crowne Plaza Tampa Westshore ⁽²⁾		15,353,500			15,561,400		None	6/30/2019	25 years	LIBOR plus 3.75 %
The DeSoto ⁽³⁾		34,845,934			30,000,000		Yes	7/1/2026	25 years		4.25%
DoubleTree by Hilton Jacksonville Riverfront ⁽⁴⁾		35,422,241			19,291,716		Yes	7/11/2024	30 years		4.88%
DoubleTree by Hilton Laurel ⁽⁵⁾		9,182,987			9,329,005		Yes	8/5/2021	25 years		5.25%
DoubleTree by Hilton Philadelphia Airport⁽⁶⁾		30,646,946			31,261,991		None	4/1/2019	25 years	LIBOR plus 3.00 %
DoubleTree by Hilton Raleigh Brownstone University ⁽⁷⁾		14,571,181			14,773,885		n/a	8/1/2018	30 years		4.78%
DoubleTree Resort by Hilton Hollywood Beach ⁽⁸⁾		58,249,890			58,935,818		n/a	10/1/2025	30 years		4.913%
Georgian Terrace ⁽⁹⁾		45,230,148			45,826,038		n/a	6/1/2025	30 years		4.42%
Hilton Wilmington Riverside ⁽¹⁰⁾		30,000,000			30,000,000		Yes	1/1/2027	25 years		4.25%
Sheraton Louisville Riverside⁽¹¹⁾		11,771,942			11,977,557		Yes	12/1/2026	25 years		4.27%
The Whitehall ⁽¹²⁾		15,000,000			15,000,000		Yes	10/12/2021	18 years	LIBOR plus 3.50 %
Total Mortgage Principal Balance	$	300,274,769		$	284,542,043
Deferred financing costs, net		(2,041,958	)		(2,049,409	)
Unamortized premium on loan		197,144			215,655
Total Mortgage Loans, Net	$	298,429,955		$	282,708,289

For the remaining three months ending: December 31, 2017	$	1,682,647
December 31, 2018		23,696,155
December 31, 2019		52,902,464
December 31, 2020		9,012,007
December 31, 2021		30,769,803
December 31, 2022 and thereafter		182,211,693
Total future maturities	$	300,274,769

For the remaining three months ending: December 31, 2017	$	156,035
December 31, 2018		573,451
December 31, 2019		391,266
December 31, 2020		351,464
December 31, 2021		351,464
December 31, 2022 and thereafter		4,271,629
Total	$	6,095,309


Allocated shares	9,473	$ 64,321	-	$ —
Committed-to-be released shares	15,935	113,816	-	—
Total allocated and committed-to-be-released	25,408	$ 178,137	-	$ —

Unallocated shares	657,092	3,870,272	-	—

Total ESOP shares	682,500	$ 4,048,409	-	$ —