UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
SOTHERLY HOTELS INC.
(Exact name of registrant as specified in its charter)
| 001-32379 | 20-1531029 |
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
SOTHERLY HOTELS LP
(Exact name of registrant as specified in its charter)
| 001-36091 | 20-1965427 |
(State or Other Jurisdiction of Incorporation or Organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
410 West Francis306 South Henry Street, Suite 100
Williamsburg, Virginia 23185
(757) 229-5648
(Address and Telephone Number of Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Sotherly Hotels Inc. Yes ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
Sotherly Hotels Inc. Yes ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act. (Check one):
Sotherly Hotels Inc.
Large Accelerated Filer | ☐ |
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| Accelerated Filer | ☒ |
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Non-accelerated Filer | ☐ |
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| Smaller Reporting Company | ☒ |
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Emerging Growth Company | ☐ |
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Sotherly Hotels LP
Large Accelerated Filer | ☐ |
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| Accelerated Filer | ☐ |
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Non-accelerated Filer | ☒ |
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| Smaller Reporting Company | ☐ |
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Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Sotherly Hotels Inc. Yes ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒
As of May 3, 2019,June 22, 2020, there were 14,222,37814,823,580 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | SOHO | The NASDAQ Stock Market LLC |
8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHOB | The NASDAQ Stock Market LLC |
7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHOO | The NASDAQ Stock Market LLC |
8.25% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value | SOHON | The NASDAQ Stock Market LLC |
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We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common stock as “common stock,” the Company’s preferred stock as “preferred stock,” and the Operating Partnership’s common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “preferred interest.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.
As previously disclosed in our Current Report on Form 8-K filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on May 8, 2020, the Company relied on the SEC order (Release No. 34-88318), as modified and superseded by a new SEC order (Release No. 34-88465) (the “SEC Order”), issued under Section 36 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) in filing this Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”). The SEC Order provides conditional relief to public companies that are unable to timely comply with certain filing obligations as a result of the ongoing novel coronavirus (“COVID-19”). The SEC Order provides that a registrant subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such registrant, is exempt from any requirement to file or furnish materials with the SEC under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, if certain conditions are satisfied.
The Company and the Operating Partnership relied on the SEC Order to delay the filing of our Quarterly Report due to the significant impacts and disruptions of the COVID-19 pandemic. The effects of the ongoing COVID-19 pandemic and the resultant state orders, including in Virginia, where the Company’s headquarters is located, have limited access to our facilities and impacted normal working patterns as they required the majority of our staff to stay at home and transition to a remote working environment on very short notice. At the same time, the Company’s attention and resources have been focused on addressing the severe impacts of the COVID-19 pandemic on our business and operations as described in further detail below. These factors delayed our ability to complete and file our Quarterly Report by May 11, 2020.
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 March 31, 20192020 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:
combined reports better reflect how management and investors view the business as a single operating unit;
combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings inof time, effort and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
Consolidated Financial Statements;
the following Notes to Consolidated Financial Statements:
Note 7 – Preferred Stock and Units;
Note 8 – Common Stock and Units;
Note 13 – IncomeLoss Per Share and Per Unit; and
Note 14 – Subsequent Events;
Part I, Item 4 - Controls and Procedures; and
Part II, Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds; and
3
Part II, Item 6 - Certifications of CEO and CFO Pursuantpursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.
34
SOTHERLY HOTELS LP
INDEX
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Item 1. |
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| Consolidated Balance Sheets as of March 31, |
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| Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March 31, |
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| Consolidated Balance Sheets as of March 31, |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4 |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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45
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| March 31, 2019 |
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| December 31, 2018 |
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| (unaudited) |
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ASSETS |
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Investment in hotel properties, net |
| $ | 441,261,072 |
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| $ | 435,725,814 |
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Cash and cash equivalents |
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| 29,004,070 |
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| 33,792,773 |
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Restricted cash |
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| 4,407,557 |
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| 4,075,508 |
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Accounts receivable, net |
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| 10,346,796 |
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| 6,766,696 |
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Accounts receivable - affiliate |
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| 237,710 |
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| 262,572 |
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Prepaid expenses, inventory and other assets |
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| 5,688,031 |
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| 5,262,884 |
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Favorable lease assets, net |
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| — |
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| 2,465,421 |
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Deferred income taxes |
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| 4,846,500 |
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| 5,131,179 |
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TOTAL ASSETS |
| $ | 495,791,736 |
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| $ | 493,482,847 |
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LIABILITIES |
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Mortgage loans, net |
| $ | 363,636,230 |
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| $ | 364,828,845 |
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Unsecured notes, net |
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| 24,025,056 |
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| 23,894,658 |
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Accounts payable and accrued liabilities |
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| 23,714,256 |
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| 16,268,096 |
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Advance deposits |
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| 2,351,972 |
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| 2,815,283 |
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Dividends and distributions payable |
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| 3,414,285 |
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| 3,409,593 |
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TOTAL LIABILITIES |
| $ | 417,141,799 |
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| $ | 411,216,475 |
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Commitments and contingencies (See Note 6) |
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| — |
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| — |
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EQUITY |
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Sotherly Hotels Inc. stockholders’ equity |
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Preferred stock, $0.01 par value, 11,000,000 shares authorized; |
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8.0% Series B cumulative redeemable perpetual preferred stock, liquidation preference $25 per share, 1,610,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 16,100 |
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| 16,100 |
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7.875% Series C cumulative redeemable perpetual preferred stock, liquidation preference $25 per share, 1,352,141 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 13,521 |
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| 13,521 |
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Common stock, par value $0.01, 49,000,000 shares authorized, 14,222,378 shares and 14,209,378 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 142,223 |
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| 142,093 |
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Additional paid-in capital |
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| 147,184,199 |
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| 147,085,112 |
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Unearned ESOP shares |
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| (4,312,508 | ) |
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| (4,379,742 | ) |
Distributions in excess of retained earnings |
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| (64,406,087 | ) |
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| (61,052,418 | ) |
Total Sotherly Hotels Inc. stockholders’ equity |
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| 78,637,448 |
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| 81,824,666 |
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Noncontrolling interest |
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| 12,489 |
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| 441,706 |
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TOTAL EQUITY |
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| 78,649,937 |
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| 82,266,372 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 495,791,736 |
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| $ | 493,482,847 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| Three Months Ended |
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| Three Months Ended |
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| March 31, 2019 |
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| March 31, 2018 |
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| �� | (unaudited) |
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REVENUE |
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Rooms department |
| $ | 32,951,871 |
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| $ | 28,285,445 |
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Food and beverage department |
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| 9,723,124 |
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| 8,351,983 |
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Other operating departments |
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| 4,715,309 |
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| 5,098,128 |
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Total revenue |
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| 47,390,304 |
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| 41,735,556 |
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EXPENSES |
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Hotel operating expenses |
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Rooms department |
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| 7,781,439 |
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| 6,700,381 |
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Food and beverage department |
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| 7,136,833 |
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| 6,395,076 |
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Other operating departments |
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| 1,910,135 |
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| 1,528,327 |
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Indirect |
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| 17,389,680 |
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| 15,233,256 |
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Total hotel operating expenses |
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| 34,218,087 |
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| 29,857,040 |
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Depreciation and amortization |
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| 6,028,735 |
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| 5,634,190 |
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(Gain) loss on disposal of assets |
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| (4,008 | ) |
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| 3,739 |
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Corporate general and administrative |
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| 1,684,444 |
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| 1,546,300 |
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Total operating expenses |
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| 41,927,258 |
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| 37,041,269 |
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NET OPERATING INCOME |
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| 5,463,046 |
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| 4,694,287 |
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Other income (expense) |
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Interest expense |
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| (5,305,114 | ) |
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| (4,177,019 | ) |
Interest income |
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| 99,296 |
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| 81,704 |
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Unrealized (loss) gain on hedging activities |
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| (490,611 | ) |
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| 12,730 |
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Gain on involuntary conversion of assets |
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| 161,334 |
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| 870,741 |
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Net (loss) income before income taxes |
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| (72,049 | ) |
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| 1,482,443 |
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Income tax provision |
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| (318,156 | ) |
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| (305,955 | ) |
Net (loss) income |
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| (390,205 | ) |
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| 1,176,488 |
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Less: Net loss attributable to noncontrolling interest |
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| 206,949 |
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| 30,013 |
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Net (loss) income attributable to the Company |
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| (183,256 | ) |
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| 1,206,501 |
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Distributions to preferred stockholders |
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| (1,470,507 | ) |
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| (1,444,844 | ) |
Net loss available to common stockholders |
| $ | (1,653,763 | ) |
| $ | (238,343 | ) |
Net loss per share available to common stockholders |
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Basic |
| $ | (0.12 | ) |
| $ | (0.02 | ) |
Weighted average number of common shares outstanding |
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Basic |
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| 13,610,750 |
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| 13,472,444 |
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| March 31, 2020 |
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| December 31, 2019 |
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ASSETS |
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Investment in hotel properties, net |
| $ | 440,610,440 |
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| $ | 443,267,448 |
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Cash and cash equivalents |
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| 14,736,207 |
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| 23,738,066 |
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Restricted cash |
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| 7,339,713 |
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| 4,246,170 |
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Accounts receivable, net |
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| 4,248,338 |
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| 4,812,479 |
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Accounts receivable - affiliate |
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| 265,401 |
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| 101,771 |
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Prepaid expenses, inventory and other assets |
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| 7,562,732 |
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| 5,648,772 |
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Deferred income taxes |
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| — |
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| 5,412,084 |
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TOTAL ASSETS |
| $ | 474,762,831 |
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| $ | 487,226,790 |
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LIABILITIES |
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Mortgage loans, net |
| $ | 357,314,587 |
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| $ | 358,633,884 |
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Accounts payable and accrued liabilities |
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| 27,098,417 |
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| 20,189,903 |
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Advance deposits |
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| 2,070,309 |
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| 2,785,338 |
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Dividends and distributions payable |
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| 4,217,385 |
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| 4,210,494 |
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TOTAL LIABILITIES |
| $ | 390,700,698 |
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| $ | 385,819,619 |
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Commitments and contingencies (See Note 6) |
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| — |
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| — |
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EQUITY |
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Sotherly Hotels Inc. stockholders’ equity |
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Preferred stock, $0.01 par value, 11,000,000 shares authorized: |
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8.0% Series B cumulative redeemable perpetual preferred stock, liquidation preference $25 per share, 1,610,000 shares each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
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| 16,100 |
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| 16,100 |
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7.875% Series C cumulative redeemable perpetual preferred stock, liquidation preference $25 per share, 1,554,610 shares each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
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| 15,546 |
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| 15,546 |
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8.25% Series D cumulative redeemable perpetual preferred stock, liquidation preference $25 per share, 1,200,000 shares each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
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| 12,000 |
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| 12,000 |
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Common stock, par value $0.01, 69,000,000 shares authorized, 14,823,580 shares issued and outstanding at March 31, 2020 and 14,272,378 shares issued and outstanding at December 31, 2019. |
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| 148,235 |
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| 142,723 |
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Additional paid-in capital |
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| 180,258,406 |
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| 180,515,861 |
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Unearned ESOP shares |
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| (4,036,308 | ) |
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| (4,105,637 | ) |
Distributions in excess of retained earnings |
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| (90,134,337 | ) |
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| (73,990,690 | ) |
Total Sotherly Hotels Inc. stockholders’ equity |
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| 86,279,642 |
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| 102,605,903 |
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Noncontrolling interest |
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| (2,217,509 | ) |
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| (1,198,732 | ) |
TOTAL EQUITY |
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| 84,062,133 |
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| 101,407,171 |
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TOTAL LIABILITIES AND EQUITY |
| $ | 474,762,831 |
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| $ | 487,226,790 |
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The accompanying notes are an integral part of these consolidated financial statements.
6
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITYOPERATIONS
(unaudited)
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| Additional |
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| Unearned |
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| Distributions |
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| Preferred Stock |
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| Common Stock |
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| Paid- |
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| ESOP |
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| in Excess of |
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| Noncontrolling |
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| Shares |
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| Par Value |
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| Shares |
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| Par Value |
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| In Capital |
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| Shares |
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| Retained Earnings |
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| Interest |
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| Total |
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Balances at December 31, 2017 |
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| 2,910,000 |
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| $ | 29,100 |
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| 14,078,831 |
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| $ | 140,788 |
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| $ | 146,249,339 |
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| $ | (4,633,112 | ) |
| $ | (48,765,860 | ) |
| $ | 1,154,775 |
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| $ | 94,175,030 |
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Net income |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 1,206,501 |
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| (30,013 | ) |
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| 1,176,488 |
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Issuance of unrestricted common stock awards |
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| — |
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| — |
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| 2,250 |
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| 23 |
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| 13,454 |
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| — |
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| — |
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| — |
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| 13,477 |
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Issuance of restricted common stock awards |
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| — |
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| — |
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| 40,000 |
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| 400 |
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| 89,450 |
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| — |
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| — |
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| — |
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| 89,850 |
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Amortization of ESOP shares |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 60,170 |
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| — |
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| — |
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| 60,170 |
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Amortization of restricted stock award |
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| — |
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| — |
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| — |
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| — |
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| 8,025 |
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| — |
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| — |
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| — |
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| 8,025 |
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Preferred stock dividends declared |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (1,444,844 | ) |
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| — |
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| (1,444,844 | ) |
Common stockholders' dividends and distributions declared |
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| — |
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| — |
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| — |
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| — |
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| — |
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|
| — |
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|
| (1,553,864 | ) |
|
| (204,486 | ) |
|
| (1,758,350 | ) |
Balances at March 31, 2018 (unaudited) |
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| 2,910,000 |
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| $ | 29,100 |
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|
| 14,121,081 |
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| $ | 141,211 |
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| $ | 146,360,268 |
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| $ | (4,572,942 | ) |
| $ | (50,558,067 | ) |
| $ | 920,276 |
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| $ | 92,319,846 |
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Balances at December 31, 2018 |
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| 2,962,141 |
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| $ | 29,621 |
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| 14,209,378 |
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| $ | 142,093 |
|
| $ | 147,085,112 |
|
| $ | (4,379,742 | ) |
| $ | (61,052,418 | ) |
| $ | 441,706 |
|
| $ | 82,266,372 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (183,256 | ) |
|
| (206,949 | ) |
|
| (390,205 | ) |
Issuance of restricted common stock awards |
|
| — |
|
|
| — |
|
|
| 13,000 |
|
|
| 130 |
|
|
| 92,203 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 92,333 |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,141 | ) |
|
| 67,234 |
|
|
| — |
|
|
| — |
|
|
| 66,093 |
|
Amortization of restricted stock award |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,025 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,025 |
|
Preferred stock dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,470,507 | ) |
|
| — |
|
|
| (1,470,507 | ) |
Common stockholders' dividends and distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,699,906 | ) |
|
| (222,268 | ) |
|
| (1,922,174 | ) |
Balances at March 31, 2019 (unaudited) |
|
| 2,962,141 |
|
| $ | 29,621 |
|
|
| 14,222,378 |
|
| $ | 142,223 |
|
| $ | 147,184,199 |
|
| $ | (4,312,508 | ) |
| $ | (64,406,087 | ) |
| $ | 12,489 |
|
| $ | 78,649,937 |
|
|
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
|
|
|
| (unaudited) |
|
| (unaudited) |
| ||
REVENUE |
|
|
|
|
|
|
|
|
|
|
Rooms department |
|
|
| $ | 24,744,923 |
|
| $ | 32,951,871 |
|
Food and beverage department |
|
|
|
| 8,143,974 |
|
|
| 9,723,124 |
|
Other operating departments |
|
|
|
| 4,319,568 |
|
|
| 4,715,309 |
|
Total revenue |
|
|
|
| 37,208,465 |
|
|
| 47,390,304 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses |
|
|
|
|
|
|
|
|
|
|
Rooms department |
|
|
|
| 7,083,191 |
|
|
| 7,781,439 |
|
Food and beverage department |
|
|
|
| 6,612,306 |
|
|
| 7,136,833 |
|
Other operating departments |
|
|
|
| 2,271,629 |
|
|
| 1,910,135 |
|
Indirect |
|
|
|
| 16,181,841 |
|
|
| 17,389,680 |
|
Total hotel operating expenses |
|
|
|
| 32,148,967 |
|
|
| 34,218,087 |
|
Depreciation and amortization |
|
|
|
| 4,982,876 |
|
|
| 6,028,735 |
|
Gain on disposal of assets |
|
|
|
| — |
|
|
| (4,008 | ) |
Corporate general and administrative |
|
|
|
| 1,880,125 |
|
|
| 1,684,444 |
|
Total operating expenses |
|
|
|
| 39,011,968 |
|
|
| 41,927,258 |
|
NET OPERATING (LOSS) INCOME |
|
|
|
| (1,803,503 | ) |
|
| 5,463,046 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
| (4,561,840 | ) |
|
| (5,305,114 | ) |
Interest income |
|
|
|
| 60,365 |
|
|
| 99,296 |
|
Unrealized loss on hedging activities |
|
|
|
| (1,585,632 | ) |
|
| (490,611 | ) |
Gain on involuntary conversion of assets |
|
|
|
| 12,439 |
|
|
| 161,334 |
|
Net loss before income taxes |
|
|
|
| (7,878,171 | ) |
|
| (72,049 | ) |
Income tax provision |
|
|
|
| (5,454,034 | ) |
|
| (318,156 | ) |
Net loss |
|
|
|
| (13,332,205 | ) |
|
| (390,205 | ) |
Less: Net loss attributable to noncontrolling interest |
|
|
|
| 1,197,416 |
|
|
| 206,949 |
|
Net loss attributable to the Company |
|
|
|
| (12,134,789 | ) |
|
| (183,256 | ) |
Distributions to preferred stockholders |
|
|
|
| (2,188,910 | ) |
|
| (1,470,507 | ) |
Net loss available to common stockholders |
|
|
| $ | (14,323,699 | ) |
| $ | (1,653,763 | ) |
Net loss per share available to common stockholders |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
| $ | (1.01 | ) |
| $ | (0.12 | ) |
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
| 14,246,216 |
|
|
| 13,610,750 |
|
The accompanying notes are an integral part of these consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN EQUITY
(unaudited)
| Three Months Ended |
|
| Three Months Ended |
| ||
| March 31, 2019 |
|
| March 31, 2018 |
| ||
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net (loss) income | $ | (390,205 | ) |
| $ | 1,176,488 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
| 6,028,735 |
|
|
| 5,634,190 |
|
Amortization of deferred financing costs |
| 276,561 |
|
|
| 186,694 |
|
Amortization of mortgage premium |
| (6,170 | ) |
|
| (6,170 | ) |
Gain on involuntary conversion of assets |
| (161,334 | ) |
|
| (870,741 | ) |
Unrealized loss (gain) on derivative instrument |
| 490,611 |
|
|
| (12,730 | ) |
(Gain) loss on disposal of assets |
| (4,008 | ) |
|
| 3,739 |
|
ESOP and stock - based compensation |
| 166,451 |
|
|
| 171,523 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
| (3,580,100 | ) |
|
| (3,837,620 | ) |
Prepaid expenses, inventory and other assets |
| (933,647 | ) |
|
| 1,075,655 |
|
Deferred income taxes |
| 284,679 |
|
|
| 260,262 |
|
Accounts payable and other accrued liabilities |
| 3,817,060 |
|
|
| 2,441,901 |
|
Advance deposits |
| (463,311 | ) |
|
| 998,247 |
|
Accounts receivable - affiliate |
| 24,862 |
|
|
| 86,675 |
|
Net cash provided by operating activities |
| 5,550,184 |
|
|
| 7,308,113 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Acquisitions of hotel properties |
| — |
|
|
| (80,479,137 | ) |
Improvements and additions to hotel properties |
| (5,453,080 | ) |
|
| (5,851,104 | ) |
Proceeds from involuntary conversion |
| 161,334 |
|
|
| 870,741 |
|
Proceeds from the disposal of assets |
| 4,362 |
|
|
| — |
|
Net cash used in investing activities |
| (5,287,384 | ) |
|
| (85,459,500 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds of mortgage debt |
| — |
|
|
| 62,000,000 |
|
Proceeds of unsecured debt |
| — |
|
|
| 25,000,000 |
|
Payments on mortgage loans |
| (1,332,608 | ) |
|
| (1,649,012 | ) |
Payments of deferred financing costs |
| — |
|
|
| (2,006,021 | ) |
Dividends and distributions paid |
| (1,916,339 | ) |
|
| (1,602,830 | ) |
Preferred dividends paid |
| (1,470,507 | ) |
|
| (1,444,844 | ) |
Net cash (used in) provided by financing activities |
| (4,719,454 | ) |
|
| 80,297,293 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
| (4,456,654 | ) |
|
| 2,145,906 |
|
Cash, cash equivalents and restricted cash at the beginning of the period |
| 37,868,281 |
|
|
| 33,429,042 |
|
Cash, cash equivalents and restricted cash at the end of the period | $ | 33,411,627 |
|
| $ | 35,574,948 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
Cash paid during the period for interest | $ | 4,252,662 |
|
| $ | 3,831,409 |
|
Cash paid during the period for income taxes | $ | 61,303 |
|
| $ | 13,437 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Change in amount of improvements to hotel property in accounts payable and accrued liabilities | $ | 179,050 |
|
| $ | 94,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Unearned |
|
| Distributions |
|
|
|
|
|
|
|
|
| |||
|
| Preferred Stock |
|
| Common Stock |
|
| Paid- |
|
| ESOP |
|
| in Excess of |
|
| Noncontrolling |
|
|
|
|
| ||||||||||||||
|
| Shares |
|
| Par Value |
|
| Shares |
|
| Par Value |
|
| In Capital |
|
| Shares |
|
| Retained Earnings |
|
| Interest |
|
| Total |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019 |
|
| 4,364,610 |
|
| $ | 43,646 |
|
|
| 14,272,378 |
|
| $ | 142,723 |
|
| $ | 180,515,861 |
|
| $ | (4,105,637 | ) |
| $ | (73,990,690 | ) |
| $ | (1,198,732 | ) |
| $ | 101,407,171 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,134,789 | ) |
|
| (1,197,416 | ) |
|
| (13,332,205 | ) |
Issuance of common stock |
|
| — |
|
|
| — |
|
|
| 2,250 |
|
|
| 22 |
|
|
| 14,153 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,175 |
|
Issuance of restricted common stock awards |
|
| — |
|
|
| — |
|
|
| 60,000 |
|
|
| 600 |
|
|
| 93,900 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 94,500 |
|
Conversion of units in Operating Partnership to shares of common stock |
|
| — |
|
|
| — |
|
|
| 488,952 |
|
|
| 4,890 |
|
|
| (370,890 | ) |
|
| — |
|
|
| 26,266 |
|
|
| 339,734 |
|
|
| — |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,813 | ) |
|
| 69,329 |
|
|
| — |
|
|
| — |
|
|
| 56,516 |
|
Amortization of restricted stock award |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,195 |
|
Preferred stock dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock, $0.50/share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (805,000 | ) |
|
| — |
|
|
| (805,000 | ) |
Series C Preferred Stock, $0.492188/share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (765,160 | ) |
|
| — |
|
|
| (765,160 | ) |
Series D Preferred Stock, $0.515625/share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (618,750 | ) |
|
| — |
|
|
| (618,750 | ) |
Common stock, $0.13/share dividends and distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,846,214 | ) |
|
| (161,095 | ) |
|
| (2,007,309 | ) |
Balances at March 31, 2020 (unaudited) |
|
| 4,364,610 |
|
| $ | 43,646 |
|
|
| 14,823,580 |
|
| $ | 148,235 |
|
| $ | 180,258,406 |
|
| $ | (4,036,308 | ) |
| $ | (90,134,337 | ) |
| $ | (2,217,509 | ) |
| $ | 84,062,133 |
|
The accompanying notes are an integral part of these consolidated financial statements.
8
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CHANGES IN EQUITY
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||
|
| (unaudited) |
|
|
|
|
| |
ASSETS |
|
|
|
|
|
|
|
|
Investment in hotel properties, net |
| $ | 441,261,072 |
|
| $ | 435,725,814 |
|
Cash and cash equivalents |
|
| 29,004,070 |
|
|
| 33,792,773 |
|
Restricted cash |
|
| 4,407,557 |
|
|
| 4,075,508 |
|
Accounts receivable, net |
|
| 10,346,796 |
|
|
| 6,766,696 |
|
Accounts receivable - affiliate |
|
| 237,710 |
|
|
| 262,572 |
|
Loan receivable - affiliate |
|
| 4,390,122 |
|
|
| 4,446,410 |
|
Prepaid expenses, inventory and other assets |
|
| 5,688,031 |
|
|
| 5,262,884 |
|
Favorable lease assets, net |
|
| — |
|
|
| 2,465,421 |
|
Deferred income taxes |
|
| 4,846,500 |
|
|
| 5,131,179 |
|
TOTAL ASSETS |
| $ | 500,181,858 |
|
| $ | 497,929,257 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Mortgage loans, net |
| $ | 363,636,230 |
|
| $ | 364,828,845 |
|
Unsecured notes, net |
|
| 24,025,056 |
|
|
| 23,894,658 |
|
Accounts payable and other accrued liabilities |
|
| 23,714,256 |
|
|
| 16,268,100 |
|
Advance deposits |
|
| 2,351,972 |
|
|
| 2,815,283 |
|
Dividends and distributions payable |
|
| 3,470,572 |
|
|
| 3,466,136 |
|
TOTAL LIABILITIES |
| $ | 417,198,086 |
|
| $ | 411,273,022 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 6) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
PARTNERS’ CAPITAL |
|
|
|
|
|
|
|
|
Preferred units, $0.01 par value, 11,000,000 units authorized; |
|
|
|
|
|
|
|
|
8.0% Series B cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,610,000 units issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
|
| 37,766,531 |
|
|
| 37,766,531 |
|
7.875% Series C cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,352,141 units issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
|
| 31,493,723 |
|
|
| 31,493,723 |
|
General Partner: 160,006 units and 159,876 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively |
|
| 417,663 |
|
|
| 452,165 |
|
Limited Partners: 15,840,512 units and 15,827,642 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively |
|
| 13,305,855 |
|
|
| 16,943,816 |
|
TOTAL PARTNERS’ CAPITAL |
|
| 82,983,772 |
|
|
| 86,656,235 |
|
TOTAL LIABILITIES AND PARTNERS’ CAPITAL |
| $ | 500,181,858 |
|
| $ | 497,929,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 2018 |
|
| 2,962,141 |
|
| $ | 29,621 |
|
|
| 14,209,378 |
|
| $ | 142,093 |
|
| $ | 147,085,112 |
|
| $ | (4,379,742 | ) |
| $ | (61,052,418 | ) |
| $ | 441,706 |
|
| $ | 82,266,372 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (183,256 | ) |
|
| (206,949 | ) |
|
| (390,205 | ) |
Issuance of restricted common stock awards |
|
| — |
|
|
| — |
|
|
| 13,000 |
|
|
| 130 |
|
|
| 92,203 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 92,333 |
|
Amortization of ESOP shares |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,141 | ) |
|
| 67,234 |
|
|
| — |
|
|
| — |
|
|
| 66,093 |
|
Amortization of restricted stock award |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,025 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,025 |
|
Preferred stock dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock, $0.50/share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (805,000 | ) |
|
| — |
|
|
| (805,000 | ) |
Series C Preferred Stock, $0.492188/share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (665,507 | ) |
|
| — |
|
|
| (665,507 | ) |
Common stock, $0.125/share dividends and distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,699,906 | ) |
|
| (222,268 | ) |
|
| (1,922,174 | ) |
Balances at March 31, 2019 (unaudited) |
|
| 2,962,141 |
|
| $ | 29,621 |
|
|
| 14,222,378 |
|
| $ | 142,223 |
|
| $ | 147,184,199 |
|
| $ | (4,312,508 | ) |
| $ | (64,406,087 | ) |
| $ | 12,489 |
|
| $ | 78,649,937 |
|
The accompanying notes are an integral part of these consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS
(unaudited)
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
REVENUE |
|
|
|
|
|
|
|
|
Rooms department |
| $ | 32,951,871 |
|
| $ | 28,285,445 |
|
Food and beverage department |
|
| 9,723,124 |
|
|
| 8,351,983 |
|
Other operating departments |
|
| 4,715,309 |
|
|
| 5,098,128 |
|
Total revenue |
|
| 47,390,304 |
|
|
| 41,735,556 |
|
EXPENSES |
|
|
|
|
|
|
|
|
Hotel operating expenses |
|
|
|
|
|
|
|
|
Rooms department |
|
| 7,781,439 |
|
|
| 6,700,381 |
|
Food and beverage department |
|
| 7,136,833 |
|
|
| 6,395,076 |
|
Other operating departments |
|
| 1,910,135 |
|
|
| 1,528,327 |
|
Indirect |
|
| 17,389,680 |
|
|
| 15,233,256 |
|
Total hotel operating expenses |
|
| 34,218,087 |
|
|
| 29,857,040 |
|
Depreciation and amortization |
|
| 6,028,735 |
|
|
| 5,634,190 |
|
(Gain) loss on disposal of assets |
|
| (4,008 | ) |
|
| 3,739 |
|
Corporate general and administrative |
|
| 1,684,444 |
|
|
| 1,546,300 |
|
Total operating expenses |
|
| 41,927,258 |
|
|
| 37,041,269 |
|
NET OPERATING INCOME |
|
| 5,463,046 |
|
|
| 4,694,287 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
| (5,305,114 | ) |
|
| (4,177,019 | ) |
Interest income |
|
| 99,296 |
|
|
| 81,704 |
|
Unrealized (loss) gain on hedging activities |
|
| (490,611 | ) |
|
| 12,730 |
|
Gain on involuntary conversion of assets |
|
| 161,334 |
|
|
| 870,741 |
|
Net (loss) income before income taxes |
|
| (72,049 | ) |
|
| 1,482,443 |
|
Income tax provision |
|
| (318,156 | ) |
|
| (305,955 | ) |
Net (loss) income |
|
| (390,205 | ) |
|
| 1,176,488 |
|
Distributions to preferred unit holder |
|
| (1,470,507 | ) |
|
| (1,444,844 | ) |
Net loss available to operating partnership unit holders |
| $ | (1,860,712 | ) |
| $ | (268,356 | ) |
Net loss attributable per operating partner unit |
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.12 | ) |
| $ | (0.02 | ) |
Weighted average number of operating partner units outstanding |
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 15,994,565 |
|
|
| 15,892,513 |
|
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
|
|
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
| $ | (13,332,205 | ) |
| $ | (390,205 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
| 4,982,876 |
|
|
| 6,028,735 |
|
Amortization of deferred financing costs |
|
|
| 141,391 |
|
|
| 276,561 |
|
Amortization of mortgage premium |
|
|
| (6,170 | ) |
|
| (6,170 | ) |
Gain on involuntary conversion of assets |
|
|
| (12,439 | ) |
|
| (161,334 | ) |
Unrealized loss on hedging activities |
|
|
| 1,585,632 |
|
|
| 490,611 |
|
Loss on disposal of assets |
|
|
| — |
|
|
| (4,008 | ) |
ESOP and stock - based compensation |
|
|
| 183,386 |
|
|
| 166,451 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
| 564,141 |
|
|
| (3,580,100 | ) |
Prepaid expenses, inventory and other assets |
|
|
| (1,943,351 | ) |
|
| (933,647 | ) |
Deferred income taxes |
|
|
| 5,412,084 |
|
|
| 284,679 |
|
Accounts payable and other accrued liabilities |
|
|
| 4,823,067 |
|
|
| 3,817,060 |
|
Advance deposits |
|
|
| (715,029 | ) |
|
| (463,311 | ) |
Accounts receivable - affiliate |
|
|
| (163,630 | ) |
|
| 24,862 |
|
Net cash provided by operating activities |
|
|
| 1,519,753 |
|
|
| 5,550,184 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Improvements and additions to hotel properties |
|
|
| (1,796,662 | ) |
|
| (5,453,080 | ) |
Proceeds from involuntary conversion |
|
|
| 12,439 |
|
|
| 161,334 |
|
Proceeds from the disposal of assets |
|
|
| - |
|
|
| 4,362 |
|
Net cash used in investing activities |
|
|
| (1,784,223 | ) |
|
| (5,287,384 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Payments on mortgage loans |
|
|
| (1,370,018 | ) |
|
| (1,332,608 | ) |
Payments of deferred financing costs |
|
|
| (84,500 | ) |
|
| — |
|
Dividends on common stock and distributions paid |
|
|
| (2,000,418 | ) |
|
| (1,916,339 | ) |
Preferred dividends paid |
|
|
| (2,188,910 | ) |
|
| (1,470,507 | ) |
Net cash used in financing activities |
|
|
| (5,643,846 | ) |
|
| (4,719,454 | ) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
| (5,908,316 | ) |
|
| (4,456,654 | ) |
Cash, cash equivalents and restricted cash at the beginning of the period |
|
|
| 27,984,236 |
|
|
| 37,868,281 |
|
Cash, cash equivalents and restricted cash at the end of the period |
|
| $ | 22,075,920 |
|
| $ | 33,411,627 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
| $ | 3,681,239 |
|
| $ | 4,252,662 |
|
Cash paid (received) during the period for income taxes |
|
| $ | 3,845 |
|
| $ | 61,303 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
Change in amount of improvements to hotel property in accounts payable and accrued liabilities |
|
| $ | 518,733 |
|
| $ | 179,050 |
|
Initial recognition of non-cash operating lease right of use assets and lease liability |
|
| $ | - |
|
| $ | 3,896,872 |
|
The accompanying notes are an integral part of these consolidated financial statements.
10
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITALBALANCE SHEETS
| Preferred Units |
|
| General Partner |
|
| Limited Partner |
|
|
|
|
| |||||||||||||||||||||
| Units |
|
| Series B Amounts |
|
| Series C Amounts |
|
| Units |
|
|
|
| Amounts |
|
| Units |
|
| Amounts |
|
| Total |
| ||||||||
Balances at December 31, 2017 |
| 2,910,000 |
|
| $ | 37,766,531 |
|
| $ | 30,488,660 |
|
|
| 158,570 |
|
|
|
| $ | 586,725 |
|
|
| 15,698,401 |
|
| $ | 29,938,539 |
|
| $ | 98,780,455 |
|
Issuance of common partnership units |
| — |
|
|
| — |
|
|
| — |
|
|
| 423 |
|
|
|
|
| 1,034 |
|
|
| 41,827 |
|
|
| 102,294 |
|
|
| 103,328 |
|
Amortization of restricted units award |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| 8,025 |
|
|
| 8,025 |
|
Unit based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| 87,267 |
|
|
| 87,267 |
|
Preferred units distributions declared |
| — |
|
|
| (1,444,844 | ) |
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,444,844 | ) |
Partnership units distributions declared |
| — |
|
|
| - |
|
|
| — |
|
|
| — |
|
|
|
|
| (18,285 | ) |
|
| — |
|
|
| (1,810,125 | ) |
|
| (1,828,410 | ) |
Net income |
| — |
|
|
| 1,444,844 |
|
|
| — |
|
|
| — |
|
|
|
|
| 11,765 |
|
|
| — |
|
|
| (280,121 | ) |
|
| 1,176,488 |
|
Balances at March 31, 2018 (unaudited) |
| 2,910,000 |
|
| $ | 37,766,531 |
|
| $ | 30,488,660 |
|
|
| 158,993 |
|
|
|
| $ | 581,239 |
|
|
| 15,740,228 |
|
| $ | 28,045,879 |
|
| $ | 96,882,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2018 |
| 2,962,141 |
|
| $ | 37,766,531 |
|
| $ | 31,493,723 |
|
|
| 159,876 |
|
|
|
| $ | 452,165 |
|
|
| 15,827,642 |
|
| $ | 16,943,816 |
|
| $ | 86,656,235 |
|
Issuance of common partnership units |
| — |
|
|
| — |
|
|
| — |
|
|
| 130 |
|
|
|
|
| 923 |
|
|
| 12,870 |
|
|
| 91,410 |
|
|
| 92,333 |
|
Amortization of restricted units award |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| 80 |
|
|
| — |
|
|
| 7,945 |
|
|
| 8,025 |
|
Unit based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| 908 |
|
|
| — |
|
|
| 89,860 |
|
|
| 90,768 |
|
Preferred units distributions declared |
| — |
|
|
| (805,000 | ) |
|
| (665,507 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,470,507 | ) |
Partnership units distributions declared |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| (17,806 | ) |
|
| — |
|
|
| (1,985,071 | ) |
|
| (2,002,877 | ) |
Net loss |
| — |
|
|
| 805,000 |
|
|
| 665,507 |
|
|
| — |
|
|
|
|
| (18,607 | ) |
|
| — |
|
|
| (1,842,105 | ) |
|
| (390,205 | ) |
Balances at March 31, 2019 (unaudited) |
| 2,962,141 |
|
| $ | 37,766,531 |
|
| $ | 31,493,723 |
|
|
| 160,006 |
|
|
|
| $ | 417,663 |
|
|
| 15,840,512 |
|
| $ | 13,305,855 |
|
| $ | 82,983,772 |
|
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investment in hotel properties, net |
| $ | 440,610,440 |
|
| $ | 443,267,448 |
|
Cash and cash equivalents |
|
| 14,736,207 |
|
|
| 23,738,066 |
|
Restricted cash |
|
| 7,339,713 |
|
|
| 4,246,170 |
|
Accounts receivable, net |
|
| 4,248,338 |
|
|
| 4,812,479 |
|
Accounts receivable - affiliate |
|
| 265,401 |
|
|
| 101,771 |
|
Loan receivable - affiliate |
|
| 4,149,946 |
|
|
| 4,209,630 |
|
Prepaid expenses, inventory and other assets |
|
| 7,562,732 |
|
|
| 5,648,772 |
|
Deferred income taxes |
|
| — |
|
|
| 5,412,084 |
|
TOTAL ASSETS |
| $ | 478,912,777 |
|
| $ | 491,436,420 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Mortgage loans, net |
| $ | 357,314,587 |
|
| $ | 358,633,884 |
|
Accounts payable and other accrued liabilities |
|
| 27,098,417 |
|
|
| 20,189,903 |
|
Advance deposits |
|
| 2,070,309 |
|
|
| 2,785,338 |
|
Dividends and distributions payable |
|
| 4,277,070 |
|
|
| 4,268,978 |
|
TOTAL LIABILITIES |
| $ | 390,760,383 |
|
| $ | 385,878,103 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 6) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
PARTNERS’ CAPITAL |
|
|
|
|
|
|
|
|
Preferred units, 11,000,000 units authorized; |
|
|
|
|
|
|
|
|
8.0% Series B cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,610,000 units each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
|
| 37,766,531 |
|
|
| 37,766,531 |
|
7.875% Series C cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,554,610 units each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
|
| 36,461,955 |
|
|
| 36,461,955 |
|
8.25% Series D cumulative redeemable perpetual preferred units, liquidation preference $25 per unit, 1,200,000 units each issued and outstanding at March 31, 2020 and December 31, 2019, respectively. |
|
| 28,377,509 |
|
|
| 28,377,509 |
|
General Partner:160,629 units and 160,006 units issued and outstanding as of March 31, 2020 and December 31, 2019, respectively. |
|
| 143,369 |
|
|
| 315,959 |
|
Limited Partners: 15,902,140 units and 15,840,512 units issued and outstanding as of March 31, 2020 and December 31, 2019, respectively. |
|
| (14,596,970 | ) |
|
| 2,636,363 |
|
TOTAL PARTNERS’ CAPITAL |
|
| 88,152,394 |
|
|
| 105,558,317 |
|
TOTAL LIABILITIES AND PARTNERS’ CAPITAL |
| $ | 478,912,777 |
|
| $ | 491,436,420 |
|
The accompanying notes are an integral part of these consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
(unaudited)
| Three Months Ended |
|
| Three Months Ended |
| ||
| March 31, 2019 |
|
| March 31, 2018 |
| ||
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net (loss) income | $ | (390,205 | ) |
| $ | 1,176,488 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
| 6,028,735 |
|
|
| 5,634,190 |
|
Amortization of deferred financing costs |
| 276,561 |
|
|
| 186,694 |
|
Amortization of mortgage premium |
| (6,170 | ) |
|
| (6,170 | ) |
Gain on involuntary conversion of assets |
| (161,334 | ) |
|
| (870,741 | ) |
Unrealized loss (gain) on derivative instrument |
| 490,611 |
|
|
| (12,730 | ) |
(Gain) loss on disposal of assets |
| (4,008 | ) |
|
| 3,739 |
|
ESOP and unit - based compensation |
| 191,125 |
|
|
| 198,619 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
| (3,580,100 | ) |
|
| (3,837,620 | ) |
Prepaid expenses, inventory and other assets |
| (933,647 | ) |
|
| 1,075,655 |
|
Deferred income taxes |
| 284,679 |
|
|
| 260,262 |
|
Accounts payable and other accrued liabilities |
| 3,817,060 |
|
|
| 2,441,901 |
|
Advance deposits |
| (463,311 | ) |
|
| 998,247 |
|
Accounts receivable - affiliate |
| 24,862 |
|
|
| 86,675 |
|
Net cash provided by operating activities |
| 5,574,858 |
|
|
| 7,335,209 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Acquisitions of hotel properties |
| — |
|
|
| (80,479,137 | ) |
Improvements and additions to hotel properties |
| (5,453,080 | ) |
|
| (5,851,104 | ) |
ESOP loan payments received |
| 56,287 |
|
|
| 44,256 |
|
Proceeds from involuntary conversion |
| 161,334 |
|
|
| 870,741 |
|
Proceeds from the disposal of assets |
| 4,362 |
|
|
| — |
|
Net cash used in investing activities |
| (5,231,097 | ) |
|
| (85,415,244 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds of mortgage debt |
| — |
|
|
| 62,000,000 |
|
Proceeds of unsecured debt |
| — |
|
|
| 25,000,000 |
|
Payments on mortgage loans |
| (1,332,608 | ) |
|
| (1,649,012 | ) |
Payments of deferred financing costs |
| — |
|
|
| (2,006,021 | ) |
Distributions and dividends paid |
| (1,997,300 | ) |
|
| (1,674,182 | ) |
Preferred dividends paid |
| (1,470,507 | ) |
|
| (1,444,844 | ) |
Net cash(used in) provided by financing activities |
| (4,800,415 | ) |
|
| 80,225,941 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash |
| (4,456,654 | ) |
|
| 2,145,906 |
|
Cash, cash equivalents and restricted cash at the beginning of the period |
| 37,868,281 |
|
|
| 33,429,042 |
|
Cash, cash equivalents and restricted cash at the end of the period | $ | 33,411,627 |
|
| $ | 35,574,948 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
Cash paid during the period for interest | $ | 4,251,925 |
|
| $ | 3,831,409 |
|
Cash paid during the period for income taxes | $ | 61,303 |
|
| $ | 13,437 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Change in amount of improvements to hotel property in accounts payable and accrued liabilities | $ | 179,050 |
|
| $ | 94,122 |
|
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
|
|
| (unaudited) |
|
| (unaudited) |
| ||
REVENUE |
|
|
|
|
|
|
|
|
|
Rooms department |
|
| $ | 24,744,923 |
|
| $ | 32,951,871 |
|
Food and beverage department |
|
|
| 8,143,974 |
|
|
| 9,723,124 |
|
Other operating departments |
|
|
| 4,319,568 |
|
|
| 4,715,309 |
|
Total revenue |
|
|
| 37,208,465 |
|
|
| 47,390,304 |
|
EXPENSES |
|
|
|
|
|
|
|
|
|
Hotel operating expenses |
|
|
|
|
|
|
|
|
|
Rooms department |
|
|
| 7,083,191 |
|
|
| 7,781,439 |
|
Food and beverage department |
|
|
| 6,612,306 |
|
|
| 7,136,833 |
|
Other operating departments |
|
|
| 2,271,629 |
|
|
| 1,910,135 |
|
Indirect |
|
|
| 16,181,841 |
|
|
| 17,389,680 |
|
Total hotel operating expenses |
|
|
| 32,148,967 |
|
|
| 34,218,087 |
|
Depreciation and amortization |
|
|
| 4,982,876 |
|
|
| 6,028,735 |
|
Gain on disposal of assets |
|
|
| - |
|
|
| (4,008 | ) |
Corporate general and administrative |
|
|
| 1,880,125 |
|
|
| 1,684,444 |
|
Total operating expenses |
|
|
| 39,011,968 |
|
|
| 41,927,258 |
|
NET OPERATING (LOSS) INCOME |
|
|
| (1,803,503 | ) |
|
| 5,463,046 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
| (4,561,840 | ) |
|
| (5,305,114 | ) |
Interest income |
|
|
| 60,365 |
|
|
| 99,296 |
|
Unrealized loss on hedging activities |
|
|
| (1,585,632 | ) |
|
| (490,611 | ) |
Gain on involuntary conversion of assets |
|
|
| 12,439 |
|
|
| 161,334 |
|
Net loss before income taxes |
|
|
| (7,878,171 | ) |
|
| (72,049 | ) |
Income tax provision |
|
|
| (5,454,034 | ) |
|
| (318,156 | ) |
Net loss |
|
|
| (13,332,205 | ) |
|
| (390,205 | ) |
Distributions to preferred unit holder |
|
|
| (2,188,910 | ) |
|
| (1,470,507 | ) |
Net loss available to general and limited partnership unit holders |
|
| $ | (15,521,115 | ) |
| $ | (1,860,712 | ) |
Net loss attributable per general and limited partner unit |
|
|
|
|
|
|
|
|
|
Basic |
|
| $ | (0.97 | ) |
| $ | (0.12 | ) |
Weighted average number of general and limited partner units outstanding |
|
|
|
|
|
|
|
|
|
Basic |
|
|
| 16,052,721 |
|
|
| 15,994,565 |
|
The accompanying notes are an integral part of these consolidated financial statements.
12
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
| Preferred Units |
|
| General Partner |
|
| Limited Partner |
|
|
|
|
| |||||||||||||||||||||||||
| Units |
|
| Series B Amounts |
|
| Series C Amounts |
|
| Series D Amounts |
|
| Units |
|
|
|
| Amounts |
|
| Units |
|
| Amounts |
|
| Total |
| |||||||||
Balances at December 31, 2019 |
| 4,364,610 |
|
| $ | 37,766,531 |
|
| $ | 36,461,955 |
|
| $ | 28,377,509 |
|
|
| 160,006 |
|
|
|
| $ | 315,959 |
|
|
| 15,840,512 |
|
| $ | 2,636,363 |
|
| $ | 105,558,317 |
|
Issuance of partnership units |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 623 |
|
|
|
|
| 945 |
|
|
| 61,628 |
|
|
| 107,730 |
|
|
| 108,675 |
|
Amortization of restricted unit awards |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| 182 |
|
|
| — |
|
|
| 18,013 |
|
|
| 18,195 |
|
Unit based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| 765 |
|
|
| — |
|
|
| 75,716 |
|
|
| 76,481 |
|
Preferred unit distributions declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Units, $0.50/unit |
| — |
|
|
| (805,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (805,000 | ) |
Series C Preferred Units, $0.492188/unit |
| — |
|
|
| — |
|
|
| (765,160 | ) |
|
| — |
|
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (765,160 | ) |
Series D Preferred Units, $0.515625/unit |
| — |
|
|
| — |
|
|
| — |
|
|
| (618,750 | ) |
|
| — |
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (618,750 | ) |
Partnership units, $0.13/unit distributions declared |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| (19,271 | ) |
|
| — |
|
|
| (2,068,888 | ) |
|
| (2,088,159 | ) |
Net loss |
| — |
|
|
| 805,000 |
|
|
| 765,160 |
|
|
| 618,750 |
|
|
| — |
|
|
|
|
| (155,211 | ) |
|
| — |
|
|
| (15,365,904 | ) |
|
| (13,332,205 | ) |
Balances at March 31, 2020 (unaudited) |
| 4,364,610 |
|
| $ | 37,766,531 |
|
| $ | 36,461,955 |
|
| $ | 28,377,509 |
|
|
| 160,629 |
|
|
|
| $ | 143,369 |
|
|
| 15,902,140 |
|
| $ | (14,596,970 | ) |
| $ | 88,152,394 |
|
The accompanying notes are an integral part of these consolidated financial statements.
13
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
| Preferred Units |
|
| General Partner |
|
| Limited Partner |
|
|
|
|
| |||||||||||||||||||||||
| Units |
|
| Series B Amounts |
|
| Series C Amounts |
|
| Series D Amounts |
|
| Units |
|
| Amounts |
|
| Units |
|
| Amounts |
|
| Total |
| |||||||||
Balances at December 31, 2018 |
| 2,962,141 |
|
| $ | 37,766,531 |
|
| $ | 31,493,723 |
|
| $ | — |
|
|
| 159,876 |
|
| $ | 452,165 |
|
|
| 15,827,642 |
|
| $ | 16,943,816 |
|
| $ | 86,656,235 |
|
Issuance of general and limited partnership units |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 130 |
|
|
| 923 |
|
|
| 12,870 |
|
|
| 91,410 |
|
|
| 92,333 |
|
Amortization of restricted units award |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 80 |
|
|
| — |
|
|
| 7,945 |
|
|
| 8,025 |
|
Unit based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 908 |
|
|
| — |
|
|
| 89,860 |
|
|
| 90,768 |
|
Preferred unit distributions declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Units, $0.50/unit |
| — |
|
|
| (805,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (805,000 | ) |
Series C Preferred Units, $0.492188/unit |
| — |
|
|
| — |
|
|
| (665,507 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (665,507 | ) |
Partnership units, $0.125/unit distributions declared |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17,806 | ) |
|
| — |
|
|
| (1,985,071 | ) |
|
| (2,002,877 | ) |
Net loss |
| — |
|
|
| 805,000 |
|
|
| 665,507 |
|
|
| — |
|
|
| — |
|
|
| (18,607 | ) |
|
| — |
|
|
| (1,842,105 | ) |
|
| (390,205 | ) |
Balances at March 31, 2019 (unaudited) |
| 2,962,141 |
|
| $ | 37,766,531 |
|
| $ | 31,493,723 |
|
| $ | — |
|
|
| 160,006 |
|
| $ | 417,663 |
|
|
| 15,840,512 |
|
| $ | 13,305,855 |
|
| $ | 82,983,772 |
|
The accompanying notes are an integral part of these consolidated financial statements.
14
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
|
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||
|
|
|
| (unaudited) |
|
| (unaudited) |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
| $ | (13,332,205 | ) |
| $ | (390,205 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
| 4,982,876 |
|
|
| 6,028,735 |
|
Amortization of deferred financing costs |
|
|
|
| 141,391 |
|
|
| 276,561 |
|
Amortization of mortgage premium |
|
|
|
| (6,170 | ) |
|
| (6,170 | ) |
Gain on involuntary conversion of assets |
|
|
|
| (12,439 | ) |
|
| (161,334 | ) |
Unrealized loss on hedging activities |
|
|
|
| 1,585,632 |
|
|
| 490,611 |
|
Loss on disposal of assets |
|
|
|
| — |
|
|
| (4,008 | ) |
ESOP and unit - based compensation |
|
|
|
| 203,351 |
|
|
| 191,125 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
| 564,141 |
|
|
| (3,580,100 | ) |
Prepaid expenses, inventory and other assets |
|
|
|
| (1,943,351 | ) |
|
| (933,647 | ) |
Deferred income taxes |
|
|
|
| 5,412,084 |
|
|
| 284,679 |
|
Accounts payable and other accrued liabilities |
|
|
|
| 4,823,067 |
|
|
| 3,817,060 |
|
Advance deposits |
|
|
|
| (715,029 | ) |
|
| (463,311 | ) |
Accounts receivable - affiliate |
|
|
|
| (163,630 | ) |
|
| 24,862 |
|
Net cash provided by operating activities |
|
|
|
| 1,539,718 |
|
|
| 5,574,858 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Improvements and additions to hotel properties |
|
|
|
| (1,796,662 | ) |
|
| (5,453,080 | ) |
ESOP loan payments received |
|
|
|
| 59,685 |
|
|
| 56,287 |
|
Proceeds from involuntary conversion |
|
|
|
| 12,439 |
|
|
| 161,334 |
|
Proceeds from the disposal of assets |
|
|
|
| — |
|
|
| 4,362 |
|
Net cash used in investing activities |
|
|
|
| (1,724,538 | ) |
|
| (5,231,097 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Payments on mortgage loans |
|
|
|
| (1,370,018 | ) |
|
| (1,332,608 | ) |
Payments of deferred financing costs |
|
|
|
| (84,500 | ) |
|
| — |
|
Distributions on general and limited partnership interests |
|
|
|
| (2,080,068 | ) |
|
| (1,997,300 | ) |
Distributions on preferred partnership interests |
|
|
|
| (2,188,910 | ) |
|
| (1,470,507 | ) |
Net cash used in financing activities |
|
|
|
| (5,723,496 | ) |
|
| (4,800,415 | ) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
|
| (5,908,316 | ) |
|
| (4,456,654 | ) |
Cash, cash equivalents and restricted cash at the beginning of the period |
|
|
|
| 27,984,236 |
|
|
| 37,868,281 |
|
Cash, cash equivalents and restricted cash at the end of the period |
|
|
| $ | 22,075,920 |
|
| $ | 33,411,627 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
|
| $ | 3,681,239 |
|
| $ | 4,251,925 |
|
Cash paid (received) during the period for income taxes |
|
|
| $ | 3,845 |
|
| $ | 61,303 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
Change in amount of improvements to hotel property in accounts payable and accrued liabilities |
|
|
| $ | 518,733 |
|
| $ | 179,050 |
|
Initial recognition of non-cash operating lease right of use assets and lease obligations |
|
|
| $ | - |
|
| $ | 3,896,872 |
|
The accompanying notes are an integral part of these consolidated financial statements.
15
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States. Currently, the Company is focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. The Company’s portfolio consists of investments in twelve hotel properties comprising 3,156 rooms, as well as interests in two condominium hotels and the hotel commercial condominium unit of the Hyde Resort & Residences condominium hotel. All of the Company’stheir associated rental programs. The Company owns hotels except for The DeSoto, the Georgian Terrace, The Whitehall and the Hyde Resort & Residences,that operate under the Hilton Crowne Plaza,Worldwide, Marriott International, Inc., and Hyatt and Sheraton brands.Hotels Corporation brands, as well as independent hotels.
The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six hotel properties (the “Initial Properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP (the “Operating Partnership”), which at March 31, 2019, was approximately 88.9% owned by the Company. .
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which at March 31, 2020 was approximately 92.3% owned by the Company, through its subsidiaries leases the hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries, (collectively, “MHI TRS”TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership. As of March 31, 2020, the MHI TRS then engagesEntities engaged eligible independent hotel management companies, including MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”) and, Highgate Hotels, L.P. (“Highgate Hotels”), and Our Town Hospitality, LLC (“Our Town”) to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. is treated as a taxable REIT subsidiary (“MHI TRS”) for federal income tax purposes. As of April 1, 2020, Chesapeake Hospitality no longer manages any of the Company’s hotels.
All references in this reportthese “Notes to Consolidated Financial Statements” to “we”, “us” and “our” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
COVID-19, Management’s Plans and Liquidity
In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all of our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels other than the rental programs at our condominium hotels have remained open on a limited basis in order to serve the needs of the community. The Company expects that maintaining the current limited operations will allow us to increase capacity at individual hotels as demand returns and the Centers for Disease Control (“CDC”) and state guidelines allow for an easing of travel and other business restrictions, provided we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of guests, employees and communities.
COVID-19 has had a significant negative impact on the Company’s operations and financial results both during the first quarter and in the period following, including a substantial decline in our revenues, profitability and cash flows from operations. While the full impact of the reduction in hotel demand caused by the pandemic, the contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, stay-at-home directives are lifted, consumer confidence is restored and an economic recovery commences. At a minimum, Company expects that the COVID-19 pandemic to have a significant negative impact on our results of operations, financial position and cash flow through 2020. In response to those negative impacts, we took a number of actions to reduce costs and preserve liquidity. The Company’s board of directors suspended quarterly cash dividends on shares of the Company’s common stock and deferred payment of dividends on its 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred
16
Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”). We also suspended most planned capital expenditure projects, reduced the compensation of our executive officers, board of directors and employees. Working closely with our hotel managers, we significantly reduced our hotels’ operating expenses.
The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which could increase our cost of, and limit accessibility to, capital. As a result of the negative impacts of the pandemic and the ongoing market uncertainty, in April and May, three of our wholly-owned subsidiaries sought and received funding under the federal Paycheck Protection Program (the “PPP”) provided in Section 7(a) of the Small Business Act of 1953, as amended by the Coronavirus Aid, Relief and Economic Security Act, as amended (the “CARES Act”). Pursuant to the terms of the loan agreements and promissory notes entered into with lenders under the PPP, we borrowed an aggregate amount of approximately $10.7 million (the “PPP Loans”).
We also sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties. Despite those arrangements, we were not in compliance with the financial covenants on two of our mortgages as of March 31, 2020. Neither of those non-compliance events constituted an automatic “Event of Default” under the terms of the applicable mortgage loan agreement and we subsequently entered into a loan modification agreement of the mortgage on Hotel Alba Tampa addressing the noncompliance, subject to certain conditions described in Note 5 below. However, following March 31, 2020 we failed to make principal or interest payments under the mortgages secured by our DoubleTree Resort by Hilton Hollywood Beach and Hyatt Centric Arlington hotels, each of which constituted an Event of Default, which pursuant to the terms of each mortgage loan agreement, may cause an increase in the interest rate on the outstanding loan balance for the period such Event of Default persists. Following an Event of Default, our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel properties that are security for such loans and the lenders under our Hilton Hollywood Beach and Hyatt Centric Arlington mortgages have that right. If either lender were to accelerate the payment of principal and interest on the applicable mortgage, we would likely not have sufficient funds to pay that mortgage debt. We are actively negotiating terms of proposed forbearance agreements and waivers with those lenders similar to those we have obtained from lenders secured by our other hotel properties.
The duration of the disruption on global, national and local economies cannot be reasonably estimated at this time. However, as long as the effects of the COVID-19 pandemic continue, our future business operations, including the results of operations, cash flows and financial position will be significantly affected. We believe it is probable that over the course of the next four quarters we will fail to satisfy additional financial covenants in several of our mortgage loan agreements, some of which are already the subject of waivers, forbearance agreements or loan modification arrangements with our lenders. If we fail to obtain additional waivers, forbearance arrangements or loan modifications, our lenders could declare us in default and require repayment of the outstanding balance on the mortgage loan. If that were to occur, we may not have sufficient funds to pay that mortgage debt. We believe we will be successful in obtaining waivers, forbearance arrangements or loan modifications but cannot provide assurance we will be able to do so on acceptable terms or at all.
Because any forbearance agreements, waivers or loan modifications would be granted at the sole discretion of the lenders, we have determined that there is substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. U.S. generally accepted accounting principles (“U.S. GAAP”) requires that in making this determination, we cannot consider future fundraising activities, whether through equity or debt offerings or dispositions of hotel properties, or the likelihood of obtaining forbearance agreements, covenant waivers or loan modifications, all of which are outside of the Company's control. Management believes that obtaining forbearance agreements, waivers or loan modifications from our lenders would remove the reason for the determination of substantial doubt. However, any such arrangement may lead to increased costs, increased interest rates, additional restrictive covenants and other possible lender protections. In addition to or in lieu of obtaining concessions from lenders as described above, we believe we could raise additional funds, if needed, through a combination of hotel dispositions or debt or equity financings.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
17
Overview of Significant Transactions
Significant transactions occurring during the current and prior fiscal year include the following:
On February 1, 2018, we received proceeds of $5.0 million on the Hotel Ballast mortgage loan after meeting certain requirements, per the mortgage documents.
On February 12, 2018,April 18, 2019, the Company and the Operating Partnership closed on a sale and issuance of 1,080,000 shares of its 8.25% Series D cumulative redeemable perpetual preferred stock, for gross proceeds of $27.0 million before underwriting discounts and commissions and expenses payable by the Operating PartnershipCompany. On May 1, 2019, the Company closed a sale and issuance of an aggregate $25.0additional 120,000 shares of its Series D Preferred Stock, for gross proceeds of $3.0 million of the 7.25% senior unsecured notes due 2021 (the “7.25% Notes”), unconditionally guaranteedbefore underwriting discounts and commissions and expenses payable by the Company, forin connection with the partial exercise of the underwriters’ option to purchase additional shares of the Series D Preferred Stock. Total net proceeds after all estimated expenses ofwere approximately $23.3 million. The$28.4 million, which the Company contributed to its Operating Partnership for an equivalent number of Series D preferred units. We used the net proceeds from this offering, together with existing cash on hand and $57.0 million of asset-level mortgage indebtedness, to financeredeem in full the acquisition of the Hyatt Centric ArlingtonOperating Partnership’s 7.25% Notes and for working capital.
On FebruaryApril 24, 2019, the Hyde Resort & Residences condominium association, 4111 South Ocean Drive Condominium Association, Inc., unilaterally terminated both (i) the existing Lease Agreement for the 400-space parking garage and meeting rooms associated with the condominium hotel and (ii) the Association Management Agreement relating to the operation and management of the hotel condominium association. We continue to operate our rental program at the Hyde Resort & Residences.
On April 26, 2018,2019, we entered into a First Amendmentamended loan documents to Loan Agreement, Amended and Restated Promissory Note, and other related documents with International Bank of Commerce to amendmodify the terms of theexisting mortgage loan on The Whitehall hotel located in Houston, TX. Pursuant to the amended loan documents, payments of principal and interest on a 25-year amortization schedule have begun and the maturity date was extended until February 26, 2023.
On March 1, 2018, we acquired the 318-room Hyatt Centric Arlington located in Arlington, Virginia at an aggregate purchase price of approximately $79.7 million, including seller credits (the “Arlington Acquisition”). ConcurrentlyHotel Alba with the closing, we entered into a franchise agreement with an affiliate of Hyatt Hotels Corporation for the hotel to continue operating as the Hyatt Centric Arlington, and a management agreement with Highgate Hotels for the management of the hotel. The management agreement: (i) has an initial term of three years commencing March 1, 2018; (ii) provides for a base management fee equal to 2.50% of gross revenues; and (iii) provides for an incentive management fee equal to 10% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any year shall not exceed 0.5% of the gross revenues of the hotel. The Hyatt Centric Arlington is subject to a long-term ground lease agreement that covers all of the land underlying the hotel. The ground lease requires
13
usto make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross rooms revenues in excess of certain thresholds, as defined in the agreements. The initial term of the ground lease expires in 2025 and may be extended by us for five additional renewal periods of 10 years each.
On March 1, 2018, we entered into a loan agreement, a first and second promissory note (“Note A” and “Note B”, respectively), and other loan documents, including a guarantee by the Operating Partnership, to secure an aggregate $57.0 million mortgage (the “Mortgage Loan”) on the Hyatt Centric Arlington withexisting lender, Fifth Third Bank. Pursuant to the Mortgage Loan documents, Note A had an originalmodification, the mortgage loan principal balance inremained at approximately $18.2 million; the amountmaturity date was extended to June 30, 2022, and may be extended for two additional periods of $50.0 million; had a term of 3 years, with two 1-year extension options,one year each, of which was subject to certain criteria; boreconditions; the mortgage loan continues to bear a floating interest rate of one-month1-month LIBOR plus 3.00%3.75% subject to a floor rate of 3.75%, payable monthly;with a new provision to reduce the floating interest rate to 1-month LIBOR plus 3.00% upon the successful achievement of certain performance hurdles; the mortgage loan amortizes on a 25-year schedule; and required monthlythe mortgage loan continues to be guaranteed by the Operating Partnership.
On May 20, 2019, the Operating Partnership redeemed the entire $25.0 million aggregate principal paymentsamount of $78,650. Pursuantits 7.25% Notes, at a redemption price equal to 101% of the principal amount of the 7.25% Notes, plus any accrued and unpaid interest to, but not including, the redemption date.
On September 6, 2019, we entered into a master agreement with Newport Hospitality Group, Inc., a Virginia corporation, and Our Town relating to the Mortgage Loan documents, Note B hadmanagement of ten of our hotels. On December 13, 2019, we entered into an original principal balanceamendment to the master agreement, as well as a series of individual hotel management agreements for the management of those ten hotels. On January 1, 2020 ten of our individual hotel management agreements with Chesapeake Hospitality expired and management of those hotels was transitioned to Our Town. Also 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 us, and a credit agreement with Our Town pursuant to which the Company has agreed to make a working capital line of credit of up to $850,000 available to Our Town.
On September 26, 2019, we closed on the purchase of a commercial condominium unit of the Hyde Beach House Resort & Residences, a newly constructed 342-unit condominium hotel located in Hollywood, Florida (“Hyde Beach House”), from 4000 South Ocean Property Owner, LLLP. In connection with the closing, we (i) acquired commercial unit 2 of the Hyde Beach House, along with rights to certain limited common elements appurtenant to the commercial unit, for an adjusted purchase price of approximately $5.4 million; (ii) purchased inventories and equipment for additional consideration in the amount of $7.0approximately $0.7 million; had(iii) entered into a term of 1-year,second addendum to the purchase agreement; (iv) entered into a 20-year parking and cabana management agreement for the parking garage and poolside cabanas associated with two 1-year extension options, each of which was subjectthe Hyde Beach House; (v) entered into a 20-year management agreement relating to certain criteria; bore a floating interest rate of three-month LIBOR plus 5.00%, payable monthly;the operation and required monthly principal payments of $100,000 during the initial 1-year term, $150,000 during the first 1-year extended term, and $250,000 during the second 1-year extended term, with interest payments due monthly on the outstanding principal amount during all three terms. The full amountmanagement of the loan proceeds, togetherHyde Beach House condominium association; and (vi) received a pre-opening services fee of $1.0 million. We began operating a condominium unit rental program for residential units in the facility in November 2019. Also, in connection with proceedsthe closing, our DoubleTree Resort by Hilton Hollywood Beach acquired a commercial condominium unit consisting of the 7.25% Notes offeringa 3,000 square foot ballroom and cash on hand, were used to finance the Arlington Acquisition.
On July 2, 2018, we purchased a portion ofadjacent pre-function space, as well as 200 dedicated parking spaces within the parking lot, previously leased,garage adjacent to the DoubleTree by Hilton Raleigh Brownstone-University for an aggregate purchase price of $3.5 million. hotel.
On July 27, 2018,March 24, 2020, we entered into a loancommercial agreement for deferral of principal and other documents, including a promissory note, to secure a mortgage oninterest payments with the DoubleTree by Hilton Raleigh Brownstone-University with MetLife Commercial Mortgage Originator, LLC. The mortgage has an initial principal balance of $18.3 million, with an additional $5.2 million available uponlender for the satisfaction of certain conditions. The mortgage has an initial term of 4 years with a 1-year extension and bears a floating rate of interest equal to the 1-month LIBOR rate plus 4.00%. The mortgage requires monthly interest-only payments and, following a 12-month lockout, can be prepaid with a penalty during its second year and without penalty thereafter. We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000. We used a portion of the proceeds to repay the existing first mortgage on the DoubleTree by Hilton Raleigh Brownstone-University and to pay closing costs, and intend to use the balance of the proceeds for general corporate purposes.
On July 31, 2018, we entered into a second amendment to the loan and security agreement; an amended, restated and consolidated mortgage loan note; and other related documents with our existing lender, TD Bank, N.A., to amend the terms of our mortgage loan on the DoubleTree by Hilton Philadelphia Airport. Concurrent with the loan modification, we also entered into a 5-year swap agreement with The Toronto-Dominion Bank.Laurel. Pursuant to the amended loan documents: (i) the principal balance of the loan was increased from approximately $30.0 million to $42.2 million; (ii) the loan’s maturity date was extended to July 31, 2023; (iii) the loan bears a floating interest rate equal to the 1-month LIBOR rate plus 2.27% (the “Loan Rate”); (iv) the loan amortizes on a 30-year schedule with paymentsagreement payment of principal and interest beginning immediately; (v)was deferred for payments due in April, May and June 2020; the loan can be prepaid without penalty;deferred principal and (vi)interest is due and payable at maturity; and the loan will no longer be fully guaranteed by the Operating Partnership, but the Operating Partnership has guaranteed certain standard “bad boy” carveouts. Pursuant to the swap agreement: (i) the Loan Rate has been swapped for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan; and (iii) we are responsible for any potential termination fees associated with early termination of the swap agreement. We used a portion of the proceeds to repay in full the existing Note B to the mortgage loan on our Hyatt Centric Arlington and to pay closing costs associated with the amendment and will use the balance of the proceeds for general corporate purposes.
On August 31, 2018, we entered into a Sales Agency Agreement, with Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”), under which the Company may sell from time to time through Sandler O’Neill, as sales agent, shares of the Company’s common stock, par value $0.01 per share, having an aggregate gross sales price of up to $5,000,000 and up to 400,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share. Through March 31, 2019, the Company sold 88,297 shares of common stock and 52,141 shares of Series C Preferred Stock, for an aggregate total of approximately $1.8 million in gross proceeds before recognition of offering costs.
On September 18, 2018, we entered into a loan agreement and other documents, including a promissory note, to secure a mortgage on the Hyatt Centric Arlington with MetLife Real Estate Lending LLC. Pursuant to the loan documents, the Mortgage Loan has an initial principal balance of $50.0 million; has a term of 10 years; bears a fixed interest rate of 5.25%; amortizes on a 30-year schedule; and following a 5-year lockout, can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term. The Company used the proceeds to repay the existing first mortgage on the Hyatt Centric Arlington, to pay closing costs, and for general corporate purposes.maturity date was not changed.
14
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions
18
have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on acquisition date and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 53 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or net realizable value, with cost determined on a method that approximates first-in, first-out basis.
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of March 31, 20192020 and December 31, 20182019 were $457,128$398,473 and $471,996,$413,354, respectively. Amortization expense for the three-month periods ended March 31, 2020 and 2019, totaled $14,880 and 2018, totaled $14,869, and $17,032, respectively.
Right-of-Use Assets and Lease Obligations – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over
15
the term of the lease, respectively.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842):
19
Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption.
We adopted this standard on January 1, 2019. We elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. We also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for our future obligations under the acquired operating ground lease, equipment, office space, parking and land leases for which we are the lessee. See Notes 4 and 6 to the accompanying financial statements for additional disclosures on the adoption of this standard. As of March 31, 2019,2020, we had right of use assets, net of approximately $6.2$7.2 million, and lease obligations of approximately $3.8$4.4 million. The right-of-use assets are included in investments in hotel properties, net or in prepaid expenses, inventory and other assets and the lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets.
Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in advance of issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.
Deferred offering costs are netted against our equity offerings when the offering is complete, whereby the costs are offset against the equity funds raised in the future and included in additional paid-in capital on the consolidated balance sheets, or if the offering expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and administrative expenses in the consolidated statements of operations.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheetssheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we currently use interest rate caps and an interest rate swap which act as cash flow hedges and are not designated as hedges. We value our interest-rate caps and interest rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We also have used derivative instruments in the Company’s stock to obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
| Level 3 | Unobservable inputs for the asset or liability. |
1620
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate SWAPswap are the only assets or liabilities measured at fair value on a recurring basis, and there were no non-recurring asset and liabilityassets or liabilities for fair value measurements as of March 31, 20192020 and December 31, 2018,2019, respectively):
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Interest Rate Caps (1) |
| $ | — |
|
| $ | 94,697 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,504 |
|
| $ | — |
|
Interest Rate Swap (2) |
| $ | — |
|
| $ | (984,677 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,064,709 | ) |
| $ | — |
|
Mortgage loans (3) |
| $ | — |
|
| $ | (357,279,949 | ) |
| $ | — |
|
| $ | — |
|
| $ | (363,229,617 | ) |
| $ | — |
|
Unsecured notes (4) |
| $ | (25,390,000 | ) |
| $ | — |
|
| $ | — |
| ||||||||||||
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Interest Rate Caps (1) |
| $ | — |
|
| $ | 22,110 |
|
| $ | — |
| ||||||||||||
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Interest Rate Cap (1) |
| $ | — |
|
| $ | 1,761 |
|
| $ | — |
| ||||||||||||
Interest Rate Swap (2) |
| $ | — |
|
| $ | (1,400,789 | ) |
| $ | — |
|
| $ | — |
|
| $ | (3,645,686 | ) |
| $ | — |
|
Mortgage loans (3) |
| $ | — |
|
| $ | (360,347,278 | ) |
| $ | — |
|
| $ | — |
|
| $ | (361,764,538 | ) |
| $ | — |
|
Unsecured notes (4) |
| $ | (25,744,000 | ) |
| $ | — |
|
| $ | — |
|
(1) | Interest rate |
(2) | Interest rate swap, which takes the Loan Rate and swaps it for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan. |
(3) | Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of March 31, |
|
|
Noncontrolling Interest in Operating Partnership – Certain hotel properties were acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition – Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer's hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) and recognized once the performance obligations are satisfied and shown on our consolidated balance sheets.
Certain of the Company's hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company's consolidated statements of operations.
The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease income as revenue from other operating departments within the consolidated statements of operations pursuant to the terms of each lease. Lease revenue was approximately $0.4 million and $0.5$0.4 million, for the three months ended March 31, 20192020 and 2018,2019, respectively.
1721
A schedule of minimum future lease payments receivable for the remaining nine and twelve-month periods is as follows:
For the remaining nine months ending December 31, 2019 |
| $ | 1,153,709 |
| ||||
December 31, 2020 |
|
| 1,483,574 |
| ||||
For the nine months ending December 31, 2020 |
| $ | 1,100,739 |
| ||||
December 31, 2021 |
|
| 1,426,049 |
|
|
| 1,414,461 |
|
December 31, 2022 |
|
| 1,253,067 |
|
|
| 1,342,828 |
|
December 31, 2023 |
|
| 660,847 |
|
|
| 1,343,005 |
|
December 31, 2024 and thereafter |
|
| 3,339,242 |
| ||||
December 31, 2024 |
|
| 1,348,838 |
| ||||
December 31, 2025 and thereafter |
|
| 7,459,463 |
| ||||
Total |
| $ | 9,316,488 |
|
| $ | 14,009,334 |
|
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.
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 March 31, 20192020 and December 31, 2018,2019, deferred tax assets totaled approximately $4.8 million$0 and $5.1$5.4 million, respectively, of which approximately $4.2 million$0 and $4.4$5.0 million relate to net operating losses of our MHI TRS Lessee.Entities. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%, that we 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. WeMarch 31, 2020, 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 March 31, 20192020 and December 31, 2018,2019, 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 March 31, 2019, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2015 through 2017. In addition, as of March 31, 2019, the tax years that remain subject to examination, because of NOL carryforwards, by the major tax jurisdictions to which MHI TRS is subject include the years 2009 and 2014 through 2017.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation – The Company’s 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 350,000 and 750,000 shares of common stock, respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.
Under the 2013 Plan, the Company has made stock awards totaling 176,350238,600 shares, including 143,350156,350 non-restricted shares and 33,00082,250 restricted shares issued to certain executives and employees and to its independent directors. All awards have vested except for 20,000 shares issued to one employee, which will vest over 4 years, 30,000 shares issued to one employee, which will vest over 10 years and 13,00015,000 shares issued to one employee, which will vest over 5 years and 17,250 shares issued to the Company’s independent directors in February 2019,2020, which will vest by December 31, 20192020.
Under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of March 31, 2019,2020, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended March 31, 2020 and 2019 was $126,870 and 2018 was $100,358 and $111,352, respectively.
18
Additionally, the Company sponsors and maintains an Employee Stock Ownership Plan (“ESOP”) and related trust for the benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods in which they are committed to be released. For the three months ended
22
March 31, 20192020 and 2018,2019, the ESOP compensation cost was $66,093$56,516 and $60,170,$66,093, respectively. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
Advertising – Advertising costs were $97,668$94,291 and $98,31397,668 for the three months ended March 31, 20192020 and 2018,2019, respectively. Advertising costs are expensed as incurred.
Involuntary Conversion of Assets – We record gains or losses on involuntary conversions of assets due to recovered insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds received. During each of the three-month periods ending March 31, 20192020 and 2018,2019, we recognized approximately $0.2$0.01 million and $0.9 million,$0.2, respectively, in gain on involuntary conversion of assets, which is reflected in the consolidated statements of operations.
Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.
Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership.
Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements – In July 2018,March 2020, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, The FASB decided to provide another transition method2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and practical expedients in additionexceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition method (a modified retrospective approachfrom the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The update provides guidance in accounting for leases that exist or arechanges in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into afterprior to January 1, 2023. The provisions of this update will most likely affect our financial reporting process relate to modifications of contracts with lenders and the beginningrelated hedging contracts associated with each respective modified borrowing contract. In general, the provision of the earliest comparative period in the financial statements)update would benefit us by allowing entities to initially apply the new leases standard at the adoption date (such as January 1, 2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balancemodifications of retained earnings in the period of adoption. We adopted the practical expedients alloweddebt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and retainednot be considered debt extinguishment. As of March 31, 2020, we have not entered into any contract modification as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date on January 1, 2019. We also elected not to restate prior periods forfuture. While we anticipate the impact of the adoption of the new standard and instead recognized a cumulative-effect adjustmentthis update to beginning retained earnings as of the adoption date. These standards resulted in the recognition of right-to-use assets and related liabilitiesbe to account for our future obligations under the ground lease arrangements for whichbenefit, we are still evaluating the lessee. The right of use assets and corresponding liabilities were recorded in the amount of approximately $6.3 million and $3.8 million, respectively as of January 1, 2019.overall impact.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU was permitted for all entities. We created an inventory of our leases and have recorded current ground lease, office lease, other right-of-use assets and lease liabilities. The standard required a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. This standard has been updated as noted above in ASU No. 2018-11. We adopted this ASU as of January 1, 2019. The adoption of this ASU did not have a material impact on our consolidated balance sheets, statements of operations or cash flows.
23
3. Acquisition of Hotel Properties
Hyatt Centric ArlingtonHyde Beach House Resort & Residences. On March 1, 2018,September 26, 2019, we acquired a commercial condominium unit ofthe Hyatt Centric ArlingtonHyde Beach House condominium hotel, for a total fair value of consideration transferred including inventory and other assets of approximately $79.7 million (after amendment of the initial purchase price of $81.0 million). We considered this acquisition to be an asset acquisition as opposed to a business combination, applying the screen test, as discussed in the Accounting Standards Update 2017-01 – Business Combinations – Clarifying the Definition of a Business (Topic 805).$6.3 million.
The results of operations of the hotels hotel commercial condominium unit are included in our consolidated financial statements from the date of acquisition. The total revenue and net income related to the Hyatt Centric Arlington acquisition for the period March 1, 2018 to March 31, 2018 were
19
approximately $2.1 million and $0.5 million, respectively.acquisition. The total revenue and net loss related to the Hyatt Centric Arlington acquisition for the period January 1, 20192020 to March 31, 2019 were2020 are approximately $4.5$0.6 million and $0.6 million, respectively.
There is no pro forma financial information since this is a new operation without prior historical information.
The allocationsallocation of the respective purchase price areis based on their fair value as follows:
|
| Hyatt Centric Arlington |
|
| Hyde Beach House |
| ||
Land and land improvements |
| $ | 190,916 |
|
| $ | 500 |
|
Buildings and improvements |
|
| 70,369,046 |
|
|
| 5,564,219 |
|
Furniture, fixtures and equipment |
|
| 6,229,888 |
|
|
| 347,621 |
|
Favorable lease and other intangible assets |
|
| 3,054,812 |
|
|
| — |
|
Investment in hotel properties |
|
| 79,844,662 |
|
|
| 5,912,340 |
|
Accrued liabilities and other costs |
|
| (111,946 | ) |
|
| — |
|
Prepaid expenses, inventory and other assets |
|
| — |
|
|
| 434,038 |
|
Net cash |
| $ | 79,732,716 |
|
| $ | 6,346,378 |
|
4. Investment in Hotel Properties, Net
Investment in hotel properties, net as of March 31, 20192020 and December 31, 20182019 consisted of the following:
|
| March 31, 2019 |
|
| December 31, 2018 |
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||
|
| (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Land and land improvements |
| $ | 65,264,876 |
|
| $ | 64,409,730 |
|
| $ | 66,074,810 |
|
| $ | 66,031,443 |
|
Buildings and improvements |
|
| 427,716,567 |
|
|
| 424,657,327 |
|
|
| 440,274,861 |
|
|
| 438,268,174 |
|
Right of use assets |
|
| 6,588,507 |
|
|
| — |
|
|
| 6,328,462 |
|
|
| 6,452,259 |
|
Furniture, fixtures and equipment |
|
| 58,864,164 |
|
|
| 57,830,987 |
|
|
| 55,657,776 |
|
|
| 55,392,434 |
|
|
|
| 558,434,114 |
|
|
| 546,898,044 |
|
|
| 568,335,909 |
|
|
| 566,144,310 |
|
Less: accumulated depreciation and impairment |
|
| (117,173,042 | ) |
|
| (111,172,230 | ) |
|
| (127,725,469 | ) |
|
| (122,876,862 | ) |
Investment in Hotel Properties, Net |
| $ | 441,261,072 |
|
| $ | 435,725,814 |
|
| $ | 440,610,440 |
|
| $ | 443,267,448 |
|
On January 1, 2019, we adopted ASU 842, Leases and applied it prospectively. At adoption, we also elected Our review of possible impairment during the practical expedients which permitted us to not reassess our prior conclusions about lease identification, classification, and initial direct costs. Consequently, on January 1, 2019, we recognized right-of-use assets and related liabilities related to its acquired operating ground lease, equipment, parking, office space and land leases, all of which are operating leases. Since most of our leases do not provide an implicit rate, we used incremental borrowing rates, which averaged to 8.0%. All of these leases have terms ranging from less than one year to 50 years and we included the exercise of options to extend when it is reasonably certain we will exercise such option. See Note 6 for additional information about the acquired operating ground lease, parking, office space and land leases. The right-of-use assets and liabilities are amortized to rent expense and depreciation expense over the term of the underlying lease agreements. As ofthree-month period ended March 31, 2020 and the year ended December 31, 2019, our right-of-use assets, net of approximately $6.2 million, are includedresulted in theno impairment on our investment in hotel properties, net and its related lease liabilities of approximately $3.8 million are presented in accounts payable and accrued expenses in our consolidated balance sheets. The adoption of this standard had minimal impact on our statements of operations.respectively.
20
24
Mortgage Loans, Net. As of March 31, 20192020 and December 31, 2018,2019, we had approximately $363.6$357.3 million and approximately $364.8358.6 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
| Balance Outstanding as of |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| March 31, |
|
| December 31, |
|
| Prepayment |
| Maturity |
| Amortization |
| Interest |
|
| |||||||||||||
Property | 2019 |
|
| 2018 |
|
| Penalties |
| Date |
| Provisions |
| Rate |
|
| |||||||||||||
| (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Crowne Plaza Tampa Westshore (1) | $ | 18,260,800 |
|
| $ | 18,307,000 |
|
| None |
| 6/30/2019 |
| (1) |
| LIBOR plus 3.75 % |
|
| |||||||||||
The DeSoto (2) |
| 33,683,999 |
|
|
| 33,824,350 |
|
| Yes |
| 7/1/2026 |
| 25 years |
| 4.25% |
|
| |||||||||||
DoubleTree by Hilton Jacksonville Riverfront (3) |
| 34,633,359 |
|
|
| 34,773,546 |
|
| Yes |
| 7/11/2024 |
| 30 years |
| 4.88% |
|
| |||||||||||
DoubleTree by Hilton Laurel (4) |
| 8,767,655 |
|
|
| 8,845,299 |
|
| Yes |
| 8/5/2021 |
| 25 years |
| 5.25% |
|
| |||||||||||
DoubleTree by Hilton Philadelphia Airport (5) |
| 41,859,945 |
|
|
| 42,026,986 |
|
| None |
| 7/31/2023 |
| 30 years |
| LIBOR plus 2.27 % |
|
| |||||||||||
DoubleTree by Hilton Raleigh- Brownstone University (6) |
| 18,300,000 |
|
|
| 18,300,000 |
|
| Yes |
| 7/27/2022 |
| (6) |
| LIBOR plus 4.00 % |
|
| |||||||||||
DoubleTree Resort by Hilton Hollywood Beach (7) |
| 56,886,185 |
|
|
| 57,064,824 |
|
| n/a |
| 10/1/2025 |
| 30 years |
| 4.913% |
|
| |||||||||||
Georgian Terrace (8) |
| 44,051,160 |
|
|
| 44,202,968 |
|
| n/a |
| 6/1/2025 |
| 30 years |
| 4.42% |
|
| |||||||||||
Hotel Ballast Wilmington, Tapestry Collection by Hilton(9) |
| 34,099,471 |
|
|
| 34,236,104 |
|
| Yes |
| 1/1/2027 |
| 25 years |
| 4.25% |
|
| |||||||||||
Hyatt Centric Arlington (10) |
| 49,710,721 |
|
|
| 49,885,045 |
|
| Yes |
| 9/18/2028 |
| 30 years |
| 5.25% |
|
| |||||||||||
Sheraton Louisville Riverside (11) |
| 11,365,158 |
|
|
| 11,414,300 |
|
| Yes |
| 12/1/2026 |
| 25 years |
| 4.27% |
|
| |||||||||||
The Whitehall (12) |
| 14,662,819 |
|
|
| 14,733,458 |
|
| Yes |
| 2/26/2023 |
| 25 years |
| LIBOR plus 3.50 % |
|
| |||||||||||
Total Mortgage Principal Balance | $ | 366,281,273 |
|
| $ | 367,613,880 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Deferred financing costs, net |
| (2,805,164 | ) |
|
| (2,951,327 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Unamortized premium on loan |
| 160,121 |
|
|
| 166,292 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Mortgage Loans, Net | $ | 363,636,230 |
|
| $ | 364,828,845 |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Outstanding as of |
|
|
|
|
|
|
|
|
|
|
|
| |||||
| March 31, |
|
| December 31, |
|
| Prepayment |
| Maturity |
| Amortization |
| Interest |
|
| |||
Property | 2020 |
|
| 2019 |
|
| Penalties |
| Date |
| Provisions |
| Rate |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The DeSoto (1) | $ | 32,820,733 |
|
| $ | 32,967,166 |
|
| Yes |
| 7/1/2026 |
| 25 years |
| 4.25% |
|
| |
DoubleTree by Hilton Jacksonville Riverfront (2) |
| 34,083,704 |
|
|
| 34,225,971 |
|
| Yes |
| 7/11/2024 |
| 30 years |
| 4.88% |
|
| |
DoubleTree by Hilton Laurel (3) |
| 8,454,389 |
|
|
| 8,534,892 |
|
| Yes |
| 8/5/2021 |
| 25 years |
| 5.25% |
|
| |
DoubleTree by Hilton Philadelphia Airport (4) |
| 41,262,889 |
|
|
| 41,419,590 |
|
| None |
| 7/31/2023 |
| 30 years |
| LIBOR plus 2.27 % |
|
| |
DoubleTree by Hilton Raleigh- Brownstone University (5) |
| 18,300,000 |
|
|
| 18,300,000 |
|
| Yes |
| 7/27/2022 |
| (5) |
| LIBOR plus 4.00 % |
|
| |
DoubleTree Resort by Hilton Hollywood Beach (6) |
| 55,878,089 |
|
|
| 56,057,218 |
|
| (6) |
| 10/1/2025 |
| 30 years |
| 4.913% |
|
| |
Georgian Terrace (7) |
| 43,182,499 |
|
|
| 43,335,291 |
|
| (7) |
| 6/1/2025 |
| 30 years |
| 4.42% |
|
| |
Hotel Alba Tampa, Tapestry Collection by Hilton (8) |
| 17,946,480 |
|
|
| 18,000,104 |
|
| None |
| 6/30/2022 |
| (8) |
| LIBOR plus 3.75 % |
|
| |
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9) |
| 33,259,067 |
|
|
| 33,401,622 |
|
| Yes |
| 1/1/2027 |
| 25 years |
| 4.25% |
|
| |
Hyatt Centric Arlington (10) |
| 48,990,136 |
|
|
| 49,173,836 |
|
| Yes |
| 9/18/2028 |
| 30 years |
| 5.25% |
|
| |
Sheraton Louisville Riverside (11) |
| 11,062,863 |
|
|
| 11,114,145 |
|
| Yes |
| 12/1/2026 |
| 25 years |
| 4.27% |
|
| |
The Whitehall (12) |
| 14,369,390 |
|
|
| 14,450,420 |
|
| Yes |
| 2/26/2023 |
| 25 years |
| LIBOR plus 3.50 % |
|
| |
Total Mortgage Principal Balance | $ | 359,610,238 |
|
| $ | 360,980,255 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net |
| (2,431,091 | ) |
|
| (2,487,982 | ) |
|
|
|
|
|
|
|
|
|
|
|
Unamortized premium on loan |
| 135,440 |
|
|
| 141,611 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans, Net | $ | 357,314,587 |
|
| $ | 358,633,884 |
|
|
|
|
|
|
|
|
|
|
|
|
25
(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. After March 31, 2020, the lender agreed to the following loan modifications: (a) deferral of scheduled payments of interest due between May 1, 2020 and July 1, 2020; (b) deferral of scheduled payments of principal due between May 1, 2020 and April 1, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity. The maturity date under the loan modifications remains unchanged. |
21
As of March 31, 2019, 2020, we were in compliancefailed to meet the financial covenants under the mortgages secured by the Hotel Alba Tampa and the DoubleTree Resort by Hilton Hollywood Beach. We subsequently received a waiver of the financial covenant under the Hotel Alba Tampa mortgage through December 31, 2020, provided that we maintain the cash collateral on deposit with the lender. Cash collateral on deposit with the Hotel Alba Tampa lender was approximately $2.85 million at March 31, 2020, subject to certain withdrawal privileges. However, subsequent to March 31, 2020 we failed to make the required payments of principal and interest to our lenders under the mortgages secured by the DoubleTree Resort by Hilton Hollywood Beach and the Hyatt Centric Arlington, each of which constituted an “Event of Default” under the applicable loan agreement. Under the terms of each such loan agreement, the lender may elect to accelerate all debt covenants, currentprincipal and accrued interest payments that remain outstanding under the mortgage loan and foreclose on all loan paymentsthe hotel secured by the mortgage. We are actively negotiating the terms of proposed forbearance agreements and not otherwise in default under any of our mortgage loans, as amended or modified.waivers with those lenders similar to waivers we have obtained from lenders secured by other hotel properties.
Total future mortgage debt maturities for the remaining nine and twelve monthtwelve-month periods, without respect to any extension of loan maturity or loan modification after March 31, 2020, were as follows:
For the remaining nine months ending December 31, 2019 | $ | 4,707,357 |
| |||
December 31, 2020 |
| 6,438,982 |
| |||
For the nine months ending December 31, 2020 | $ | 4,755,367 |
| |||
December 31, 2021 |
| 14,639,727 |
|
| 15,010,659 |
|
December 31, 2022 |
| 42,251,232 |
|
| 42,273,861 |
|
December 31, 2023 |
| 60,424,428 |
|
| 59,841,013 |
|
December 31, 2024 and thereafter |
| 237,819,547 |
| |||
December 31, 2024 |
| 37,643,946 |
| |||
December 31, 2025 and thereafter |
| 200,085,392 |
| |||
Total future maturities | $ | 366,281,273 |
| $ | 359,610,238 |
|
7.25% Unsecured Notes. On February 12, 2018, the Operating Partnership issued its 7.25% Notes in the aggregate amount of $25.0 million, unconditionally guaranteed by the Company. The indenture requires quarterly payments of interest and matures on February 15, 2021. The 7.25% Notes are callable after February 15, 2019 at 101% of face value. See Note 14 for more information about redemption of the 7.25% Notes.
6. Commitments and Contingencies
Ground, Building, Parking and Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the third of threefive optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively.2021. Rent expense for this operating lease for each of the three months ended March 31, 2020 and 2019 and 2018 totaled $18,246.$18,246, respectively.
We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. 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 was received by the previous owner and not prorated over the life of the lease.
We lease land adjacent to the Crowne Plaza Tampa WestshoreHotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009. In May 2014, we extended the agreement for an additional five years. The agreement expires in July 2019. The agreement2024, requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for each of the three months ended March 31, 2020 and 2019, totaled $608 and 2018, totaled $651.$651, respectively.
We leaseleased 5,216 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced September 1, 2009 and was extended to Augustexpired on December 31, 2019. Rent expense for the three monthsthree-month period ended March 31, 2019 and 2018 totaled $26,984 and $22,552, respectively.
We$26,984. Under a new lease starting January 1, 2020, we lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the parking garage adjacentagreement is $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as the Hyde Resort & Residences in Hollywood Beach, Florida, along with meeting and office spaces. The 20-year operating lease requires monthly payments of $20,000, which expires in February 2037.tenant improvement allowance is exhausted. Rent expense for each of the three monthsthree-month period ended March 31, 2019 and 2018,2020 totaled $60,000.$55,761.
26
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. Rent expense for the three months ended March 31, 2020 and 2019, was $96,575 and 2018$131,088, respectively.
We lease parking garage and poolside cabanas associated with the Hyde Beach House. The parking and cabana lease requires us to make rental payments of $270,100 per year in base and has an initial term that expires in 2034 and which may be extended for four additional renewal periods of 5 years each. Rent expense for the three months ended March 31, 2020 and 2019, was $131,088$133,750 and $64,595,$0, respectively.
We also lease certain parking space,facilities, storage facilities, furniture and equipment under financing arrangementsagreements expiring between April 2019October 2021 and February 2037.June 2025.
22
A schedule of minimum future lease payments for the following nine and twelve-month periods is as follows:
For the remaining nine months ending December 31, 2019 |
| $ | 367,710 |
| ||||
December 31, 2020 |
|
| 386,032 |
| ||||
For the nine months ending December 31, 2020 |
| $ | 366,603 |
| ||||
December 31, 2021 |
|
| 379,181 |
|
|
| 469,811 |
|
December 31, 2022 |
|
| 356,998 |
|
|
| 425,735 |
|
December 31, 2023 |
|
| 355,682 |
|
|
| 386,682 |
|
December 31, 2024 and thereafter |
|
| 8,959,248 |
| ||||
December 31, 2024 |
|
| 386,682 |
| ||||
December 31, 2025 and thereafter |
|
| 12,045,965 |
| ||||
Total |
| $ | 10,804,851 |
|
| $ | 14,081,478 |
|
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 March 31, 2019,2020, the Hyatt Centric Arlington hotel operated under a management agreement with Highgate Hotels L.P. The management agreement has an initial term of three years expiring March 1, 2021.
As of March 31, 2019, the eleven remaining2020, ten of our wholly-owned hotels and the rental program and condominium association of the Hyde Resort & Residences operated under a management agreementagreements with Chesapeake HospitalityOur Town (see Note 9). The management agreements expire between January 1, 2020 and January 30, 2022,on March 31, 2025, and may be extended for up to two additional periods of five years each, subject to the approval of both parties. Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees.
As of March 31, 2020, the DoubleTree Resort by Hilton Hollywood Beach and the rental program and condominium association of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences operated under management agreements with Chesapeake Hospitality. Effective April 1, 2020, Chesapeake Hospitality no longer serves as manager for any of our properties and management of the remaining properties that had been managed by Chesapeake Hospitality were transitioned to Our Town.
Franchise Agreements – As of March 31, 2019, nine2020, most of our hotels operatedoperate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5%3.0% and 6.0%4.0% of roomgross revenues from the hotels. The franchise agreements currently expire between June 2019November 2021 and March 2038.October 2030. 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. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone–University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.
27
ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036.
Notice to Redeem 7.25% Unsecured Notes – See Note 14 for more information about redemption Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the 7.25% Notes.
Hyde Beach House – Purchase Commitment - On June 1, 2017, we entered into a Commercial Unit Purchase Agreement and a related addendum (collectively, the “Agreement”) to purchase the commercial unitCompany’s common stock of the planned Hyde Beach House Resort & Residences (the “Planned Hotel”), a condominium hotel under development in Hollywood, Florida, for a pricean aggregate cost of $5.10 million from 4000 South Ocean Property Owner, LLLP (the “Seller”). In connection with the Agreement, we also entered into a Pre-Opening Services Agreement whereby the Seller has agreed to pay us $0.75 million in connection with certain pre-opening activities, prior to the closing under the Agreement. In connection with the closing under the Agreement, we have agreed to purchase inventories consistent with the management and operation of the Planned Hotel and the related condominium association for an additional amount; to enter into a lease agreement for the parking garage and poolside cabanas associated with the Planned Hotel; and to enter into a management agreement relating to the operation and management of the Planned Hotel condominium association. We anticipate that the closing of the transaction under the Agreement and the execution of related agreements will take place in the third$4.9 million.
23
quarter of 2019, once construction of the Planned Hotel has been substantially completed. The closing of the transaction is subject to various closing conditions as described in the Agreement.
Litigation –We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.
7. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. As of March 31, 2019 and December 31, 2018, there were each 1,610,000 shares, respectively, of the Series BThe following table sets forth our Cumulative Redeemable Perpetual Preferred Stock (the “Seriesby series:
|
| Per |
|
|
|
| Number of Shares |
|
| Quarterly |
|
| |||||||
| Annum |
|
| Liquidation |
| Issued and Outstanding as of |
|
| Distributions |
|
| ||||||||
Preferred Stock – Series (1) |
| Rate |
|
| Preference |
| March 31, 2020 |
|
| December 31, 2019 |
|
| Per Share |
|
| ||||
Series B Preferred Stock |
|
| 8.000 | % |
| $25.00 |
|
| 1,610,000 |
|
|
| 1,610,000 |
|
| $ | 0.500000 |
|
|
Series C Preferred Stock |
|
| 7.875 | % |
| $25.00 |
|
| 1,554,610 |
|
|
| 1,554,610 |
|
| $ | 0.492188 |
|
|
Series D Preferred Stock |
|
| 8.250 | % |
| $25.00 |
|
| 1,200,000 |
|
|
| 1,200,000 |
|
| $ | 0.515625 |
|
|
(1) | As previously announced, the record dates for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020 have each been cancelled and the payment of dividends on all classes of the Company’s preferred stock has been deferred. |
The Company is required to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the $25.00 liquidation preference per share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates. When distributions on any shares of the Company’s Series B Preferred Stock”) issued and outstanding. As of March 31, 2019 and December 31, 2018, there were each 1,352,141 shares, respectively, of theStock, Series C Preferred Stock issued and outstanding.
On August 31, 2018, we entered intoSeries D Preferred Stock (collectively, the “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 Sales Agency Agreement, with Sandler O’Neill, under whichtotal 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 sell from timenot make distributions with respect to time through Sandler O’Neill, as sales agent, up to 400,000any shares of its common stock, unless and until full cumulative distributions on the Company’s 7.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share. Through the twelve months ended December 31, 2018, the Company sold 52,141 shares of Series C Preferred Stock for net proceeds of approximately $1.0 million. Forall past unpaid periods are paid or declared and a sum sufficient for the three months ended March 31, 2019, there were no shares sold.payment thereof in cash is set aside.
In October 2017, the Company issued 1,300,000 shares of Series C Preferred Stock, for net proceeds after all estimated expenses of approximately $30.5 million. The Company contributed the net proceeds from the offering to its Operating Partnership for an equivalent number of Series C Preferred Units. Holders of the Company’s Series C 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 Series C Preferred Stock at a rate of 7.875% per annum of the $25.00 liquidation preference per share. The Series C 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 August 23, 2016,31, 2018, we entered into a Sales Agency Agreement, with Sandler O’Neill, under which the Company may sell from time to time through Sandler O’Neill, as sales agent, up to 400,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share. Through the period ended December 31, 2018, the Company sold 52,141 shares of Series C Preferred Stock, for net proceeds of approximately $1.0 million. During September 2019, the Company issued 1,610,000and sold 202,469 shares of its Series BC Preferred Stock, for net proceeds after all estimated expenses of approximately $37.8$4.9 million, which itpursuant to the Sales Agency Agreement. The Company contributed the net proceeds from the offering to theits Operating Partnership for an equivalent number of preferred partnership units. HoldersSeries C Preferred Units.
In April and May 2019, the Company issued 1,200,000 shares of the Company’s Series BD Preferred Stock, are entitled to receive distributions when authorized by the Company’s boardfor net proceeds after all estimated expenses of directors out of assets legally available for the payment of distributions.approximately $28.4 million. The Company pays cumulative cash distributions oncontributed the net proceeds from the offering to its Operating Partnership for an equivalent number of Series BD Preferred Stock at a rate of 8.00% per annum of the $25.00 liquidation preference per share. The Series B 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.Units.
28
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 (1) |
| Rate |
|
| Preference |
| March 31, 2020 |
|
| December 31, 2019 |
|
| Per Unit |
|
| ||||
Series B Preferred Units |
|
| 8.000 | % |
| $25.00 |
|
| 1,610,000 |
|
|
| 1,610,000 |
|
| $ | 0.500000 |
|
|
Series C Preferred Units |
|
| 7.875 | % |
| $25.00 |
|
| 1,554,610 |
|
|
| 1,554,610 |
|
| $ | 0.492188 |
|
|
Series D Preferred Units |
|
| 8.250 | % |
| $25.00 |
|
| 1,200,000 |
|
|
| 1,200,000 |
|
| $ | 0.515625 |
|
|
(1) | As previously announced, the record dates for the dividends on the Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15, 2020 to unitholders of record as of March 31, 2020 have each been cancelled and the payment of dividends on all classes of the Operating Partnership’s preferred units has been deferred.. |
The Company pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00 liquidation preference per unit. Holders of the Operating Partnership’s preferred units are 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 holders, has no maturity date and is not convertible into any other security of the Operating Partnership or its affiliates.
In April and May 2019, the Operating Partnership issued 1,200,000 shares of 8.25% Series D Preferred Units, for net proceeds after all estimated expenses of approximately $28.4 million.
In September and December 2018, the Operating Partnership issued a total of 52,141 units of 7.875% Series C Preferred Units, for net proceeds after all estimated expenses of approximately $1.0 million.
In October 2017, the Operating Partnership issued 1,300,000 units of 7.875% Series C Preferred Units, for net proceeds after all estimated expenses of approximately $30.5 million. The Operating Partnership used the net proceeds to redeem in full the Operating Partnership’s 7.0% Senior Unsecured7% Notes due 2019 and for working capital.
On August 23, 2016, the Operating Partnership issued 1,610,000 units, $0.01 par value per unit, of its 8% Series B Cumulative Redeemable Perpetual Preferred Units (the “Series B Preferred Units”) for net proceeds after all expenses of approximately $37.8 million. The Operating Partnership used the net proceeds to redeem in full the Operating Partnership’s 8.0% senior unsecured notes and for working capital.
The Operating Partnership pays cumulative cash dividends on the preferred partnership units at a rate of 8.00% per annum of the $25.00 liquidation preference per unit for the Series B Preferred Units and pays cumulative cash dividends on the preferred partnership units at a rate of 7.875% per annum of the $25.00 liquidation preference per unit for the Series C Preferred Units.
For each of the quarters ended March 31, 2019 and 2018, the Operating Partnership has declared and has paid $0.50 per preferred unit for the Series B Preferred Units, respectively, and for each of the quarters ended March 31, 2019 and 2018, the Operating Partnership has declared and has paid approximately $0.4922 per preferred unit for the Series C Preferred Units.
8. Common Stock and Units
Common Stock – As of March 31, 2019,2020, the Company was authorized to issue up to 49,000,00069,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.
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 toThrough December 31, 2019 unless extended by the board of directors. Through December 31, 2018 the Company repurchased 882,820 shares of common stock for approximately $5.9 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 March 31, 2019.
During 2017,, the ESOP purchased 682,500 shares of the Company’s common stock for approximately $4.9 million. There have been no more purchases of shares of common stock made by the ESOP in 2018, 2019 or 2019.during the three months ended March 31, 2020.
The following is a schedule of issuances, since January 1, 2018,2019, of the Company’s common stock and related units of the Operating Partnership:
On January 1, 2018, the Company was issued 25,000 units in the Operating Partnership and awarded 25,000 shares of restricted stock to one of its employees.
On February 5, 2018,3, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded 15,000 shares of restricted stock and 2,250 shares of unrestricted stock to its independent directors.
On August 31, 2018, we entered into a Sales Agency Agreement, with Sandler O’Neill, under whichJanuary 1, 2020, the Company may sell from timewas issued 45,000 units in the Operating Partnership and awarded shares of restricted stock to time through Sandler O’Neill, as sales agent,two employees.
On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of shares in the Company’s common stock.
29
On October 1, 2019, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock, par value $0.01 per share, having an aggregate gross sales price of up to $5,000,000. Through December 31, 2018, the Company sold 88,297 shares of common stock, for net proceeds of approximately $0.6 million and none have been sold during the three months ended March 31, 2019.stock.
On February 11, 2019, the Company was issued 12,750 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
On February 22, 2019, the Company was issued 250 units in the Operating Partnership and awarded shares of restricted stock to an independent director.
As of March 31, 20192020 and December 31, 2018,2019, the Company had 14,222,37814,823,580 and 14, 209,37814,272,378 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 basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.
Since January 1, 2018,2019, there have been no issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.
As of March 31, 20192020 and December 31, 2018,2019, the total number of Operating Partnership units outstanding was 16,000,51816,062,768 and 15,987,518,16,000,518, respectively.
As of March 31, 20192020 and December 31, 2018,2019, the total number of outstanding Operating Partnership units not owned by the Company was 1,778,1401,239,188 and 1,778,140,1,728,140, respectively, with a fair market value of approximately $12.1$2.0 million and $10.0$11.7 million, respectively, based on the price per share of the common stock on such respective dates.
25
Chesapeake Hospitality. Chesapeake Hospitality is owned and controlled by individuals including Andrew M. Sims, our chairman and chief executive officer, and Kim E. Sims and Christopher L. Sims, each a former director of Sotherly and immediate family membera sibling of our chairman and chief executive officer.Chairman. As of March 31, 2019, Andrew M. Sims,2020, Kim E. Sims and Christopher L. Sims, beneficially owned, directly or indirectly, approximately 19.3375%, 20.0%,24.8% and 20.0%24.8%, respectively, of the total outstanding ownership interests of Chesapeake Hospitality. Kim E.Prior to November 2019, Andrew M. Sims, and Christopher L. Sims are currently officers and employeesour Chairman, owned approximately 19.3% of the total outstanding ownership interests of Chesapeake Hospitality.Hospitality, all of which have since been sold. The following is a summary of the transactions between Chesapeake Hospitality and us:
Accounts Receivable – At March 31, 20192020 and December 31, 2018,2019, we were due $117,414$136,658 and $91,98781,223, respectively, from Chesapeake Hospitality.
Management Agreements – As of March 31, 2019, all2020, Chesapeake Hospitality was the management company for our DoubleTree Resort by Hilton Hollywood Beach hotel, the Hyde Resort & Residences, and the Hyde Beach House Resort & Residences. Prior to January 1, 2020, Chesapeake Hospitality was the manager for each of our hotels that we wholly-owned, hotels (withwith the exception of the Hyatt Centric Arlington, hotel)under various hotel management agreements. On January 1, 2020, the management agreements for ten of our wholly-owned hotels expired. Those hotels are now managed by Our Town as described below. Effective April 1, 2020, Chesapeake Hospitality no longer serves as manager for any of our properties and management of the Hyde Resort & Residences operated under variousremaining properties that had been managed by Chesapeake Hospitality were transitioned to Our Town. Upon the termination of the last remaining individual hotel management agreements with Chesapeake Hospitality. On December 15, 2014, we entered into aHospitality, the master agreement and a serieswith Chesapeake Hospitality automatically terminated in accordance with its terms. In connection with the termination of the individual hotel management agreements that became effectivewith Chesapeake Hospitality, we paid Chesapeake Hospitality approximately $0.1 million in aggregate termination fees. The Hyatt Centric Arlington which we acquired on JanuaryMarch 1, 2015. 2018 is managed by an independent management company.
The master agreement has a five-yearwith Chesapeake Hospitality had an initial term of five-years, but may bewas automatically extended for such additional periods asso long as an individual management agreement remainsremained in effect. The base management fee for the Whitehall and the Georgian Terrace remained at 2.00% through 2015, increased to 2.25% in 2016 and increased to 2.50% thereafter. The base management fees for the remaining properties in the current portfoliomanaged by Chesapeake Hospitality was 2.65% through 2017 and decreased to 2.50% thereafter. For new individual hotel management agreements, Chesapeake Hospitality will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.
The Company and Chesapeake Hospitality agreed to substitute the Hyde Resort & Residences for the Crowne Plaza Hampton Marina and there was no termination fee associated with the termination of the Crowne Plaza Hampton Marina management agreement. 30
Each management agreement setsset an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.
Base management and administrative fees earned by Chesapeake Hospitality for our properties totaled $1,245,701was approximately $0.2 million and $1,097,7221.2 million for the three months ended March 31, 20192020 and 2018,2019, respectively. In addition, estimated incentive management fees of $151,989$(40,375) and $22,397$151,989 were accrued for the three months ended March 31, 2020 and 2019, and 2018, respectively.respectively. On July 15, 2019 we notified Chesapeake Hospitality of our intent not to renew or extend the management agreements for ten of our wholly-owned hotels when they expire on January 1, 2020.
Employee Medical Benefits – We purchasePrior to March 31, 2020, we purchased employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitality for those employees that are employed by Chesapeake Hospitality that workworked exclusively for our hotel properties.properties that were managed by Chesapeake Hospitality. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were $1,467,286each approximately $0.2 million and $1,503,825$1.5 million for the three months ended March 31, 20192020 and 2018,2019, respectively.
Workers’ Compensation Insurance – PursuantPrior to December 31. 2019, pursuant to our management agreements with Chesapeake Hospitality, we paypaid the premiums for workers’ compensation insurance under a self-insured policy owned by Chesapeake Hospitality or its affiliates, and which covers those employees of Chesapeake Hospitality that workworked exclusively for the properties managed by Chesapeake Hospitality. For the three months ended March 31, 20192020 and 2018,2019, we paid approximately 0.3$0.1 million and $ 0.1$0.3 million, respectively, in premiums for the portion of the plan covering those employees that work exclusively for our properties under our management agreements with Chesapeake Hospitality.
Our Town Hospitality. Our Town is currently the management company for eleven of our twelve wholly owned hotels. Our Town is a majority-owned subsidiary of Newport Hospitality Group, Inc (“Newport”). As of March 31, 2020, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 19.5% and 2.5%, respectively, of the total outstanding ownership interests of Our Town. Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights. The following is a summary of the transactions between Our Town and us:
Management Agreements – On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of ten of our hotels. On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements (each an “OTH Hotel Management Agreement” and, together, the “OTH Hotel Management Agreements”) for the management of ten of our hotels. On April 1, 2020, we engaged Our Town to manage one additional wholly-owned hotel and two condominium resort rental programs. Sotherly agreed to provide Our Town with initial working capital of up to $1.0 million as an advance on the management fees that we will owe to Our Town under the OTH Hotel Management Agreements. The advanced funds will be offset against future management fees otherwise payable to Our Town by means of a 25% reduction in such fees each month during 2020. Any management fee advances not recouped in such fashion will be deemed satisfied at the end of 2020. As of December 31, 2019, Sotherly had advanced approximately $0.6 million to Our Town as initial working capital. In addition, the OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2025 but shall be extended beyond 2025 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Our Town will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.
Each OTH Hotel Management Agreement sets an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.
Base management and administrative fees earned by Our Town for our properties was approximately $0.7 million and $0 for the three months ended March 31, 2020 and 2019, respectively.
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5 year renewal subject to approval by Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third party owner of the property. Lease payments due to the Company were approximately $40,295 and $0 for the three months ended March 31, 2020 and 2019, respectively.
31
Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020, pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit, the agreement, as amended, allows Our Town to borrow up to $850,000. Our Town may draw against the line of credit from time to time prior to January 1, 2021 when the facility becomes payable in full. Interest will accrue on the outstanding balance at 3.5% per annum and is payable quarterly in arrears. In the event of a default under the credit agreement, we have the right to offset any outstanding unpaid balance against amounts we owe to Our Town under the OTH Hotel Management Agreements. As of March 31, 2020, the outstanding credit balance under the credit agreement was approximately $0.6 million.
Employee Medical Benefits – We will purchase employee medical benefits through Our Town (or its affiliate) for those employees that are employed by Our Town that work exclusively for our properties, starting January 1, 2020. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $1.4 million and $0 for the three months ended March 31, 2020 and 2019, respectively.
Loan Receivable -– Affiliate –. As of March 31, 20192020 and December 31, 2018,2019, approximately $4.4$4.1 million and $4.4$4.2 million, respectively, was due to the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016. The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.
Others.Others. We employ Ashley S. Kirkland, the daughter of our Chief ExecutiveChairman, as Corporate Counsel and Compliance Officer as a legal analyst and Robert E. Kirkland IV, her husband, as our compliance officer.General Counsel. We also employ Andrew M. Sims Jr., the son of our Chief Executive Officer,Chairman, as a manager. CompensationVice President – Operations & Investor Relations. Total compensation, including salary and benefits, for the three months ended March 31, 2020 and 2019 and 2018 totaled $100,550$121,956 and $97,260100,550, respectively for all three individuals.
During the three-month period ending March 31, 20192020 and 2018,2019, the Company reimbursed $33,698$0 and $24,05233,698, respectively to a partnership controlled by the Chief Executive Officerour Chairman for business-related air travel pursuant to the Company’s travel reimbursement policy.
26
401(k) Plan - We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions and which requires that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All employer matching funds vest immediately in accordance with the “safe harbor” provision. Contributions to the plan totaled $27,861$32,853 and $26,89827,861 for the three months ended March 31, 2020 and 2019, and 2018, rrespectivelyespectively.
Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
Shares purchased by the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation. As of March 31, 2019,2020, 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 to the loan agreement. A total of 9,399114,377 and 6,53178,719 shares with a fair value of $64,007$183,002 and $41,208 were$536,076 remained allocated or committed to be released from the suspense account as of March 31, 2020 and 2019, respectively. We recognized as compensation cost $56,516 and $66,093 during the three months ended March 31, 20192020 and 2018,2019, respectively. The remaining 603,781565,111 unallocated shares have an approximate fair value of $4.1$0.9 million, as of March 31, 2019.2020. At March 31, 2019,2020, the ESOP held a total of 69,320104,625 allocated shares, 9,3999,752 committed-to-be-released shares and 603,781565,111 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:
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
| Number of Shares |
|
| Fair Value |
|
| Number of Shares |
|
| Fair Value |
| ||||
Allocated shares |
|
| 69,320 |
|
| $ | 472,069 |
|
|
| 33,832 |
|
| $ | 189,798 |
|
Committed to be released shares |
|
| 9,399 |
|
|
| 64,007 |
|
|
| 35,474 |
|
|
| 199,007 |
|
Total Allocated and Committed-to-be-Released |
|
| 78,719 |
|
| $ | 536,076 |
|
|
| 69,306 |
|
| $ | 388,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated shares |
|
| 603,781 |
|
|
| 4,111,749 |
|
|
| 613,194 |
|
|
| 3,440,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Shares |
|
| 682,500 |
|
| $ | 4,647,825 |
|
|
| 682,500 |
|
| $ | 3,828,825 |
|
32
|
| March 31, 2020 |
|
| December 31, 2019 |
| ||||||||||
|
| Number of Shares |
|
| Fair Value |
|
| Number of Shares |
|
| Fair Value |
| ||||
Allocated shares |
|
| 104,625 |
|
| $ | 167,400 |
|
|
| 66,295 |
|
| $ | 449,480 |
|
Committed to be released shares |
|
| 9,752 |
|
|
| 15,602 |
|
|
| 38,377 |
|
|
| 260,196 |
|
Total Allocated and Committed-to-be-Released |
|
| 114,377 |
|
| $ | 183,002 |
|
|
| 104,672 |
|
| $ | 709,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated shares |
|
| 565,111 |
|
|
| 904,178 |
|
|
| 574,816 |
|
|
| 3,897,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Shares |
|
| 679,488 |
|
| $ | 1,087,180 |
|
|
| 679,488 |
|
| $ | 4,606,928 |
|
11. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||
|
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Sales and marketing |
| $ | 4,233,323 |
|
| $ | 3,727,422 |
|
| $ | 3,785,132 |
|
| $ | 4,233,323 |
|
General and administrative |
|
| 3,812,473 |
|
|
| 3,442,458 |
|
|
| 3,934,015 |
|
|
| 3,812,473 |
|
Repairs and maintenance |
|
| 2,020,593 |
|
|
| 1,801,142 |
|
|
| 1,866,682 |
|
|
| 2,020,593 |
|
Utilities |
|
| 1,506,663 |
|
|
| 1,401,978 |
|
|
| 1,415,402 |
|
|
| 1,506,663 |
|
Property taxes |
|
| 1,730,466 |
|
|
| 1,537,374 |
|
|
| 1,809,357 |
|
|
| 1,730,466 |
|
Management fees, including incentive |
|
| 1,397,689 |
|
|
| 1,115,859 |
|
|
| 870,990 |
|
|
| 1,397,689 |
|
Franchise fees |
|
| 1,128,751 |
|
|
| 923,524 |
|
|
| 985,025 |
|
|
| 1,128,751 |
|
Insurance |
|
| 750,942 |
|
|
| 634,669 |
|
|
| 790,495 |
|
|
| 750,942 |
|
Information and telecommunications |
|
| 623,078 |
|
|
| 381,604 |
|
|
| 588,557 |
|
|
| 623,078 |
|
Other |
|
| 185,702 |
|
|
| 267,226 |
|
|
| 136,186 |
|
|
| 185,702 |
|
Total indirect hotel operating expenses |
| $ | 17,389,680 |
|
| $ | 15,233,256 |
|
| $ | 16,181,841 |
|
| $ | 17,389,680 |
|
27
The components of the income tax (benefit) provision for the three months ended March 31, 20192020 and 20182019 are as follows:
| Three Months Ended |
|
| Three Months Ended |
| Three Months Ended |
|
| Three Months Ended |
| ||||
| March 31, 2019 |
|
| March 31, 2018 |
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| ||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal | $ | — |
|
| $ | — |
| $ | — |
|
| $ | — |
|
State |
| 33,477 |
|
|
| 45,693 |
|
| 41,950 |
|
|
| 33,477 |
|
|
| 33,477 |
|
|
| 45,693 |
|
| 41,950 |
|
|
| 33,477 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| 199,606 |
|
|
| 207,019 |
|
| (1,396,079 | ) |
|
| 199,606 |
|
State |
| 85,073 |
|
|
| 53,243 |
|
| (233,328 | ) |
|
| 85,073 |
|
Subtotals |
| (1,629,407 | ) |
|
| 284,679 |
| |||||||
Change in deferred tax valuation allowance |
| 7,041,491 |
|
|
| - |
| |||||||
|
| 284,679 |
|
|
| 260,262 |
|
| 5,412,084 |
|
|
| 284,679 |
|
| $ | 318,156 |
|
| $ | 305,955 |
| $ | 5,454,034 |
|
| $ | 318,156 |
|
A reconciliation of the statutory federal income tax provision to the Company’s income tax provision is as follows:
| Three Months Ended |
|
| Three Months Ended |
| ||
| March 31, 2019 |
|
| March 31, 2018 |
| ||
| (unaudited) |
|
| (unaudited) |
| ||
Statutory federal income tax provision | $ | 796,024 |
|
| $ | 311,313 |
|
Effect of non-taxable REIT loss |
| (596,418 | ) |
|
| (104,294 | ) |
State income tax provision |
| 118,550 |
|
|
| 98,936 |
|
| $ | 318,156 |
|
| $ | 305,955 |
|
As of March 31, 2019 and December 31, 2018, we had a net deferred tax asset of approximately $4.8 million and $5.1 million, respectively, of which, approximately $4.2 million and $4.4 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 March 31, 2019 and December 31, 2018, the remainder of the deferred tax asset is attributable to year-to-year timing differences of approximately $0.7 million and $0.7 million, respectively, for 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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward of our TRS Lessee. A number of factors played a critical role in this determination, including:
a demonstrated track record of past profitability and utilization of past NOL carryforwards,
reasonable forecasts of future taxable income, and
changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership.
13. Income (Loss)Loss Per Share and Per Unit
Income (Loss)Loss per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited
33
partners’ share of incomeloss would also be added back to net income (loss).loss. The shares of the Series B Preferred Stock and Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The non-committed, unearned ESOP shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average number of common shares outstanding. The allocated and committed to be released shares have been included in the weighted average diluted earnings per share calculation andsince there would be an antidilutive effect from the dilution by these shares, although the amount of compensation for allocated shares is reflected in net income.loss available to common stockholder for basic computation. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit. The computation of basic and diluted net incomeloss per share is presented below.
28
|
| Three Months Ended |
|
| Three Months Ended |
| Three Months Ended |
|
| Three Months Ended |
| ||||
|
| March 31, 2019 |
|
| March 31, 2018 |
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| ||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders for basic and diluted computation |
| $ | (1,653,763 | ) |
| $ | (238,343 | ) | |||||||
Net loss available to common stockholders for basic computation | $ | (14,323,699 | ) |
| $ | (1,653,763 | ) | ||||||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
| 14,216,425 |
|
|
| 14,114,373 |
|
| 14,813,533 |
|
|
| 14,216,425 |
|
Weighted average number of Unearned ESOP Shares |
|
| (605,675 | ) |
|
| (641,929 | ) |
| (567,317 | ) |
|
| (605,675 | ) |
Total weighted average number of common shares outstanding for basic computation |
|
| 13,610,750 |
|
|
| 13,472,444 |
|
| 14,246,216 |
|
|
| 13,610,750 |
|
Basic net loss per share |
| $ | (0.12 | ) |
| $ | (0.02 | ) | $ | (1.01 | ) |
| $ | (0.12 | ) |
|
|
|
|
|
|
|
|
Income Per Unit – The computation of basic and diluted net incomeloss per unit is presented below.
|
| Three Months Ended |
|
| Three Months Ended |
| ||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Numerator |
|
|
|
|
|
|
|
|
Net loss available to common unitholders for basic computation |
| $ | (1,860,712 | ) |
| $ | (268,356 | ) |
Denominator |
|
|
|
|
|
|
|
|
Weighted average number of units outstanding |
|
| 15,994,565 |
|
|
| 15,892,513 |
|
Basic net loss per unit |
| $ | (0.12 | ) |
| $ | (0.02 | ) |
| Three Months Ended |
|
| Three Months Ended |
| ||
| March 31, 2020 |
|
| March 31, 2019 |
| ||
| (unaudited) |
|
| (unaudited) |
| ||
Numerator |
|
|
|
|
|
|
|
Net loss available to general and limited partnership unitholders for basic computation | $ | (15,521,115 | ) |
| $ | (1,860,712 | ) |
Denominator |
|
|
|
|
|
|
|
Weighted average number of general and limited partnership units outstanding |
| 16,052,721 |
|
|
| 15,994,565 |
|
Basic net loss per general and limited partnership unit | $ | (0.97 | ) |
| $ | (0.12 | ) |
14. Subsequent Events
On April 11, 2019, we paid a quarterly dividend (distribution) of $0.125 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record on March 15, 2019.
On April 15, 2019,1, 2020, we paidentered into a quarterly distributionmodification to promissory note and loan documents with the lender for the mortgage loan secured by The DeSoto. Pursuant to the modification: scheduled payments of $0.50 per share (and unit)interest are deferred from April 1, 2020 through September 1, 2020; scheduled payments of Series B Preferred Stock (and Series B Preferred Units)principal are deferred from April 1, 2020 through March 1, 2021; deferred principal and interest is due and payable at maturity; FF&E reserves are available to holdersfund operations through September 1, 2020; the maturity date was not changed; and payment of up to 5.0% of the Series B Preferred Stock (and Series B Preferred Units) of record as of April 1, 2019.indebtedness under the loan is guaranteed by the Operating Partnership.
On April 15, 2019,1, 2020, we paidentered into a quarterly distributionmodification to promissory note and loan documents with the lender for the mortgage loan on Hotel Ballast Wilmington. Pursuant to the modification: payment of $0.4921875 per share (and unit)interest is deferred from April 1, 2020 through September 1, 2020; payment of Series C Preferred Stock (and Series C Preferred Units)principal is deferred from April 1, 2020 through March 1, 2021; deferred principal and interest is due and payable at maturity; FF&E reserves are available to holdersfund operations through September 1, 2020; the maturity date was not changed; and payment of to 5.0% of the Series C Preferred Stock (and Series C Preferred Units)indebtedness under the loan is guaranteed by the Operating Partnership.
On April 8, 2020, we entered into a COVID-19 relief agreement with the lender for the mortgage loan on the DoubleTree by Hilton Philadelphia Airport. Pursuant to the agreement: payment of recordprincipal and interest under the note as ofwell as the interest-rate swap was deferred for payments due between April 1, 2019.2020 and June 30, 2020; deferred interest to be paid in 3 monthly installments beginning July 1, 2020; deferred principal is due and payable at maturity; certain escrow payments are deferred for 3 months; and the maturity date was extended by 3 months.
On April 16, 2020, we entered into a forbearance agreement with the lender for the mortgage loan on The Whitehall. Pursuant to the agreement: payment of principal and interest due between April 1, 2020 and October 12, 2020 is deferred and the deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the
34
amortization period; certain escrow payments are deferred through December 31, 2020 and reserves are released to fund operations; the interest rate is changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; the prepayment penalty is changed to: (i) 3.0% if prepaid on or before April 12, 2021; (ii) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (iii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iv) no prepayment fee if prepaid after November 26, 2022; and the maturity date was not changed.
The Operating Partnership and certain of its subsidiaries have received PPP Loans pursuant to the PPP, which was established under the CARES Act and is administered by the U.S. Small Business Administration. Each PPP Loan has a term of five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.
On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank and received proceeds of $333,500.
On April 21, 2020, we entered into a letter agreement with the lender for the mortgage loan on DoubleTree by Hilton Jacksonville Riverfront. Pursuant to the agreement: the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; FF&E deposits were deferred for the April, May, and June 2020 payment dates; released FF&E and the deferred FF&E to be repaid in 6 monthly installments beginning with the July 2020 payment; and the maturity date was not changed.
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 April 29, 2019,2020, we authorizedentered into an amendment to real estate note with the lender for the mortgage loan on Sheraton Louisville Riverside. Pursuant to the amendment: payment of interest is deferred from May 1, 2020 through July 1, 2020; payment of principal is deferred from May 1, 2020 through April 1, 2021; normal payments resume on May 1, 2021 and will be applied first to current and deferred interest and then to principal; any deferred principal is due and payable at maturity; and the maturity date was not changed.
On May 4, 2020, we entered into a quarterly dividend (distribution) of $0.13 per common share (and unit)forbearance agreement with the lender for the mortgage loan on the DoubleTree by Hilton Raleigh Brownstone. Pursuant to the stockholders (and unitholdersagreement, scheduled payments of the Operating Partnership) of record as of June 14, 2019. The dividend (distribution) isinterest due between April 1, 2020 and July 31, 2020 are deferred and are to be paid on July 11, 2019.repaid no later than August 1, 2021 as operating cash flow from the property allows.
On April 29, 2019, we authorized payment of a quarterly distribution of $0.50 per share (and unit) of Series B Preferred Stock (and Series B Preferred Units) to holders of the Series B Preferred Stock (and Series B Preferred Units) of record as of July 1, 2019, to be paid on July 15, 2019.
On April 29, 2019, we authorized payment of a quarterly distribution of $0.4921875 per share (and unit) of Series C Preferred Stock (and Series C Preferred Units) to holders of the Series C Preferred Stock (and Series C Preferred Units) of record as of July 1, 2019, to be paid on July 15, 2019.
On April 29, 2019, we authorized payment of a quarterly distribution of $0.41823 per share (and unit) of Series D Preferred Stock (and Series D Preferred Units) to holders of the Series D Preferred Stock (and Series D Preferred Units) of record as of July 1, 2019, to be paid on July 15, 2019.
29
On April 18, 2019, the Company closed a sale and issuance of 1,080,000 shares of its newly authorized 8.25% Series D cumulative redeemable perpetual preferred stock (the “Series D Preferred Stock”), for gross proceeds of $27.0 million before underwriting discounts and commissions and expenses payable by the Company. On May 1, 2019,2020, one holder of units in the Company closed a sale and issuance of an additional 120,000 shares of its Series D Preferred Stock, for gross proceeds of $3.0 million before underwriting discounts and commissions and expenses payable by the Company, in connection with the partial exercise of the underwriters’ option to purchase additional shares of the Series D Preferred Stock. The Company contributed the net proceeds from the offering to its Operating Partnership redeemed 57,687 units for an equivalent number of Series D preferred units. We intendshares of the Company’s common stock.
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
On May 14, 2020, we entered into a COVID-19 financial hardship omnibus loan document modification agreement with the lender for the mortgage loan on Hotel Alba Tampa. Pursuant to use the net proceeds to redeem in fullagreement, scheduled payments of principal due between April 1, 2020 and September 30, 2020 are deferred. Scheduled payments of interest can be paid from the Operating Partnership’s 7.25% Notes and to use any remaining net proceeds for general corporate purposes, including potential future acquisitions of hotel properties.cash collateral on deposit with the lender.
On April 18, 2019, we notified Wilmington Trust, National Association, as Trustee, of the Operating Partnership’s intent to redeem the entire $25.0 million aggregate principal amount of its 7.25% Notes, pursuant to the terms of the indenture. The 7.25% Notes redemption date is set for May 15, 2019 at a redemption price equal to 101% of the principal amount of the 7.25% Notes, plus any accrued and unpaid interest to, but not including, the redemption date.
On April 26, 2019,June 16, 2020, we entered into amended loan documents to modifya deferral agreement with the existinglender for the mortgage loan on the Crowne Plaza Tampa Westshore with the existing lender, Fifth Third Bank.DoubleTree by Hilton, Laurel. Pursuant to the modification, the mortgage loanagreement: scheduled payments of principal balance remainand interest due between July 1, 2020 and September 30, 2020 are deferred; any deferred principal is now due and payable at approximately $18.2 million;maturity; and the maturity date has been extended to June 30, 2022, and may be extended for two additional periods of one year each, subject to certain conditions; the mortgage loan continues to bear a floating interest rate of 1-month LIBOR plus 3.75%, with a new provision to reduce the floating interest rate to 1-month LIBOR plus 3.00% upon the successful achievement of certain performance hurdles; the mortgage loan amortizes on a 25-year schedule; and the mortgage loan continues to be guaranteed by Sotherly Hotels LP.was not changed.
3035
Cautionary Statement Regarding Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential increased adverse effect of COVID-19 on the Company’s business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets. The significance, extent and duration of the impacts caused by the COVID-19 outbreak on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the Company’s ability to negotiate forbearance and/or modifications agreements with its lenders on acceptable terms, or at all, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Such additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; reduced business and leisure travel due to travel-related health concerns, including the widespread outbreak of COVID-19 or any other infectious or contagious diseases in the U.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a REIT. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. Additional factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;
the adverse effect of the novel coronavirus on the U.S., regional and global economies, travel, the hospitality industry, and the financial condition and results of operation of the Company;
risks associated with civil unrest or disorder that could adversely impact demand for hotel rooms in our markets or result in damage to our hotels;
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;
risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements and, if necessary, to refinance or seek an extension of the maturity of such indebtedness or modify such debt agreements;
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; and
36
our ability to maintain adequate insurance coverage.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K, in this report and subsequent reports filed with the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
Overview
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.
Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels, comprising 3,156 rooms, as well as interests in two condominium hotels and the hotel commercial condominium unit of the Hyde Resort & Residences.their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, Crowne Plaza, Sheraton and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of March 31, 2019,2020, our portfolio consisted of the following hotel properties:
|
| Number |
|
|
|
|
|
|
| |
Property |
| of Rooms |
|
| Location |
| Date of Acquisition |
| Chain/Class Designation | |
Wholly-owned Hotels |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
The DeSoto |
|
| 246 |
|
| Savannah, GA |
| December 21, 2004 |
| Upper Upscale(1) |
DoubleTree by Hilton Jacksonville Riverfront |
|
| 293 |
|
| Jacksonville, FL |
| July 22, 2005 |
| Upscale |
DoubleTree by Hilton Laurel |
|
| 208 |
|
| Laurel, MD |
| December 21, 2004 |
| Upscale |
DoubleTree by Hilton Philadelphia Airport |
|
| 331 |
|
| Philadelphia, PA |
| December 21, 2004 |
| Upscale |
DoubleTree by Hilton Raleigh Brownstone-University |
|
| 190 |
|
| Raleigh, NC |
| December 21, 2004 |
| Upscale |
DoubleTree Resort by Hilton Hollywood Beach |
|
| 311 |
|
| Hollywood, FL |
| August 9, 2007 |
| Upscale |
Georgian Terrace |
|
| 326 |
|
| Atlanta, GA |
| March 27, 2014 |
| Upper Upscale(1) |
Hotel Alba Tampa, Tapestry Collection by Hilton | 222 | Tampa, FL | October 29, 2007 | Upscale | ||||||
Hotel Ballast Wilmington, Tapestry Collection by Hilton |
|
| 272 |
|
| Wilmington, NC |
| December 21, 2004 |
| Upscale |
Hyatt Centric Arlington |
|
| 318 |
|
| Arlington, VA |
| March 1, 2018 |
| Upper Upscale |
Sheraton Louisville Riverside |
|
| 180 |
|
| Jeffersonville, IN |
| September 20, 2006 |
| Upper Upscale |
The Whitehall |
|
| 259 |
|
| Houston, TX |
| November 13, 2013 |
| Upper Upscale(1) |
Hotel Rooms Subtotal |
|
| 3,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium Hotel |
|
|
|
|
|
|
|
|
|
|
Hyde Resort & Residences |
|
|
|
|
| Hollywood, FL |
| January 30, 2017 | Luxury(1) | |
Hyde Beach House Resort & Residences | 151 | (2) | Hollywood, FL | September 26, 2019 |
| Luxury(1) | ||||
Total Hotel & Participating Condominium Hotel Rooms |
|
|
|
|
|
|
|
|
|
|
| (1) | Operated as an independent hotel. |
| (2) | Reflects only those condominium units that were participating in the rental program as of March 31, |
37
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 88.9%92.3% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Lessees,Entities, which are indirect wholly owned subsidiaries of the Operating Partnership. Our MHI TRS LesseesEntities then engage eligible independent hotel management companies to operate the hotels under a management agreement. Our MHI TRS LesseesEntities have engaged Chesapeake HospitalityOur Town and Highgate Hotels to manage our hotels. Our MHI TRS Lessees,Entities, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
Effects of COVID-19 Pandemic on our Business
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all of our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels other than the rental programs at our condominium hotels have remained open on a limited basis in order to serve the needs of the community. The Company expects that maintaining the current limited operations will allow us to increase capacity at individual hotels as demand returns and the CDC and state guidelines allow for an easing of travel and other business restrictions, provided we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of guests, employees and communities.
COVID-19 has had a significant negative impact on the Company’s operations and financial results both during the first quarter and in the period following, including a substantial decline in our revenues, profitability and cash flows from operations. While the full impact of the reduction in hotel demand caused by the pandemic, the contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, stay-at-home directives are lifted, consumer confidence is restored and an economic recovery commences. At a minimum, Company expects that the COVID-19 pandemic to have a significant negative impact on our results of operations, financial position and cash flow through 2020. In response to the impact of COVID-19 on the Company’s operations, we have taken the following health and safety and cost-reduction measures at the property and corporate levels:
In coordination with our management company partners, we implemented aggressive cost control measures at the property level, including significantly reduced operating expenses and curtailed food & beverage operations.
We suspended most planned capital expenditure projects other than replacement of vital building systems approaching the end of their useful life.
We reduced expenses at the corporate level, including immediate reductions in compensation and benefits of all corporate staff as well as anticipated bonuses and the voluntary waiver by the Company’s board of directors of its director fees for one quarter.
Suspending our regular quarterly cash common stock dividends in order to preserve liquidity.
Entered into various forbearance and loan modification agreements regarding payments of principal and interest required under our loan agreements. Refer to Note 1, Note 5 and Note 14 to the accompanying consolidated financial statements for more information on the forbearance agreements with our lenders and current negotiations.
Deferring payment of the dividends for our Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock.
We also began discussions with our lenders regarding relief from financial covenants for current and future periods – especially those where failure to satisfy those covenants is an “Event of Default”.
The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which could increase our cost of, and limit accessibility to, capital. Despite the cost reduction initiatives discussed above, we do not expect to be able to fully, or even materially, offset revenue losses from the COVID-19 pandemic. As a result of the negative impacts of the pandemic and the ongoing market uncertainty, we applied for and received aggregate proceeds of approximately $10.7 million under the federal Paycheck Protection Program provided in Section 7(a) of the Small Business Act of 1953, as amended by the CARES Act.
We also sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties. Despite those arrangements, we were not in compliance with the financial covenants on two of our mortgages as of March 31, 2020. Neither of those non-compliance events constituted an automatic “Event of Default” under the terms of the applicable mortgage loan agreement and we subsequently entered into a loan modification agreement of the mortgage on Hotel Alba
38
Tampa addressing the noncompliance, subject to certain conditions described in Note 5 to the financial statements accompanying this Quarterly Report. However, following March 31, 2020, we failed to make principal or interest payments under the mortgages secured by our DoubleTree Resort by Hilton Hollywood Beach and Hyatt Centric Arlington hotels, each of which constituted an Event of Default and resulted in an automatic increase in the interest rate on the outstanding loan balance for the period such Event of Default persists. Following an Event of Default, our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel properties that are security for such loans and the lenders under our Hilton Hollywood Beach and Hyatt Centric Arlington mortgages have that right. If either lender were to accelerate the payment of principal and interest on the applicable mortgage, we would likely not have sufficient funds to pay that mortgage debt. We are actively negotiating terms of proposed forbearance agreements and waivers with those lenders similar to those we have obtained from lenders secured by our other hotel properties.
The duration of the disruption on global, national and local economies cannot be reasonably estimated at this time. However, as long as the effects of the COVID-19 pandemic continue, our future business operations, including the results of operations, cash flows and financial position will be significantly affected. We believe it is probable that over the course of the next four quarters we will fail to satisfy additional financial covenants in several of our mortgage loan agreements, some of which are already the subject of waivers, forbearance agreements or loan modification arrangements with our lenders. If we fail to obtain additional waivers, forbearance arrangements, or loan modifications, our lenders could declare us in default and require repayment of the outstanding balance on the mortgage loan. If that were to occur, we may not have sufficient funds to pay that mortgage debt. We believe we will be successful in obtaining waivers, forbearance arrangements or loan modifications but cannot provide assurance we will be able to do so on acceptable terms or at all.
Because any forbearance agreements, loan modifications or waivers would be granted at the sole discretion of the lenders, we have determined that there is substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. U.S. GAAP requires that in making this determination, we cannot consider future fundraising activities, whether through equity or debt offerings or dispositions of hotel properties, or the likelihood of obtaining forbearance agreements or covenant waivers, all of which are outside of the Company's control. Management believes that prospectively obtaining forbearance agreements, loan modifications and waivers from our lenders may remove the reason for the determination of substantial doubt. However, any such concession may lead to increased costs, increased interest rates, additional restrictive covenants and other possible lender protections. In addition to or in lieu of obtaining waivers as described above, we believe we could raise additional funds, if needed, through a combination of hotel dispositions or debt or equity financings.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;
Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and
Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.
When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences that participate in our rental program 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 months ended March 31, 20192020 and 2018,2019, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics), as well as teneleven wholly-owned properties in the portfolio that were under the Company’s control during the three months ended March 31, 20192020 and the corresponding period in 20182019 (“same-store”
39
portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms at the Hyde Resort & Residences or the Hyde Beach House, and the same-store data does not reflect the performance of the Hyatt Centric Arlington which was acquired on March 1, 2018, or our interestinterests in the Hyde Resort & Residences.Residences and the Hyde Beach House. 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 months ended March 31, 20192020 and the corresponding periodperiods in 2018.2019. As of March 31, 2019, there were no participating condominium hotel rooms at the Hyde Beach House.
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
Actual Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy % |
| 70.1 | % |
|
| 67.6 | % |
|
| 54.4 | % |
|
| 70.1 | % |
ADR | $ | 165.57 |
|
| $ | 157.80 |
|
| $ | 158.44 |
|
| $ | 165.57 |
|
RevPAR | $ | 116.01 |
|
| $ | 106.63 |
|
| $ | 86.16 |
|
| $ | 116.01 |
|
Same-Store Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy % |
| 69.7 | % |
|
| 66.8 | % |
|
| 54.3 | % |
|
| 69.7 | % |
ADR | $ | 164.29 |
|
| $ | 155.53 |
|
| $ | 157.07 |
|
| $ | 164.29 |
|
RevPAR | $ | 114.57 |
|
| $ | 103.84 |
|
| $ | 85.35 |
|
| $ | 114.57 |
|
Composite Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy % |
| 69.9 | % |
|
| 66.5 | % |
|
| 54.2 | % |
|
| 69.9 | % |
ADR | $ | 174.24 |
|
| $ | 168.37 |
|
| $ | 166.60 |
|
| $ | 174.24 |
|
RevPAR | $ | 121.86 |
|
| $ | 112.03 |
|
| $ | 90.22 |
|
| $ | 121.86 |
|
Comparison of the Three Months Ended March 31, 20192020 to the Three Months Ended March 31, 20182019
Revenue. Total revenue for the three months ended March 31, 2019 increased2020 decreased approximately $5.7$10.2 million, or 13.5%21.5%, to approximately $47.4$37.2 million compared to total revenue of approximately $41.7$47.4 million for the three months ended March 31, 2018.2019. The increasedecrease in revenue for the three months ended March 31, 20192020, resulted mainly from the acquisitioneleven of our Hyatt Centric Arlington property, on March 1, 2018, which reflects increased revenueshotel properties affected by approximately $2.4 million for the quarter. Additionally, our propertyCOVID-19 pandemic and resulting reduction of travel by group business, event holders and conferences, transient consumers, along with the reduction of foreign travelers due to the closing of U.S. borders and closing of local businesses. These factors contributed to a reduction in Atlanta, Georgia reported an increaserevenue of approximately $2.2$11.1 million, duecompared to increased demand relating to a sporting event,the same period ending March 31, 2019. Our Tampa, Florida hotel and thererecently acquired Hyde Beach House Resort & Residences in Hollywood, Florida were aggregatethe only properties with increases at our other fully renovated and rebranded properties in Wilmington, North Carolina and Savannah, Georgiarevenues of approximately $1.5$0.9 million, which were offset by a net decrease of approximately $0.4 million atcompared to the remaining properties.same period ending March 31, 2019.
32
Room revenue increaseddecreased approximately $4.7$8.2 million, or 16.5%24.9%, to approximately $33.0$24.7 million for the three months ended March 31, 20192020 compared to room revenue of approximately $28.3$32.9 million for the three months ended March 31, 2018.2019. The increasedecrease in room revenue for the three months ended March 31, 20192020 resulted mainly from the acquisitionall of our Hyatt Centric Arlington property, on March 1, 2018, which increased room revenuesproperties being affected by approximately $1.9 million for the quarter. Additionally, our property in Atlanta, Georgia reported an increaseCOVID-19 pandemic and resulting reduction of approximately $1.9 million due to increased demand relating to a sporting event, and there were aggregate increases at our other fully renovated and rebranded properties in Wilmington, North Carolina and Savannah, Georgia of approximately $0.8 million, as well as a net increase of approximately $0.1 million at the remaining properties.hotel occupancy.
Food and beverage revenues increaseddecreased approximately $1.4$1.6 million, or 16.4%16.2%, to approximately $8.1 million for the three months ended March 31, 2020 compared to food and beverage revenues of approximately $9.7 million for the three months ended March 31, 2019 compared to food and beverage revenues of approximately $8.4 million for the three months ended March 31, 2018.2019. The increasedecrease in food and beverage revenues for the three months ended March 31, 20192020 resulted mainly from the acquisitionten of our Hyatt Centric Arlington property onproperties which were affected by the COVID-19 pandemic and resulting reduction of hotel occupancy, with a corresponding reduction in food and beverage revenue of approximately $2.0 million, compared to the same period ending March 1, 2018, which increased31, 2019. Our Tampa, Florida and Houston, Texas hotels were the only properties with increases in food and beverage revenues by approximately $0.3 million. Additionally, our property in Atlanta, Georgia reported an increase of approximately $0.3$0.4 million, duecompared to increased demand relating to a sporting event, and there were aggregate increases at our other fully renovated and rebranded properties in Wilmington, North Carolina and Savannah, Georgia of approximately $0.7 million, as well as a net increase of approximately $0.1 million at the remaining properties.same period ending March 31, 2019.
Revenue from other operating departments decreased approximately $0.4 million, or 7.5%8.4%, to approximately $4.3 million for the three months ended March 31, 2020 compared to revenue from other operating departments of approximately $4.7 million for the three months ended March 31, 2019 compared to revenue from2019. The decrease in other operating departments of approximately $5.1 millionrevenue for the three months ended March 31, 2018. The decrease2020 resulted mainly from nine of our hotel properties affected by the COVID-19 pandemic and resulting reduction of hotel occupancy, with a corresponding reduction in revenue from other operating departments forrevenue of approximately $1.1 million, compared to the three months endedsame period ending March 31, 2019 resulted mainly from a decrease2019. Our Wilmington, North Carolina, Tampa, Florida and Hollywood, Florida hotels and the recently acquired Hyde Beach House Resort & Residences in Hollywood, Florida were the only properties with increases in other operating departments revenue of approximately $0.5$0.7 million, at our Hollywood, Florida property, duecompared to higher revenues received in the three months endedsame period ending March 31, 2018 that were driven by a one-time event that did not occur this year. Our remaining properties reported a net decrease of approximately $0.1 million.2019.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, weredecreased approximately $2.1 million, or 6.1%, to approximately $32.1 million for the three months ended March 31, 2020, an decrease of approximately $2.1 million, or 6.0%, compared to total hotel operating expenses of approximately $34.2 million for the three months ended March 31, 2019, an increase of approximately $4.3 million, or 14.6%, compared to total hotel operating expenses of approximately $29.9 million for the three months ended March 31, 2018.2019. The increasedecrease in hotel operating expenses for the three months ended March 31, 20192020 resulted mainly from the acquisitioneleven of our Hyatt Centric Arlington property, on March 1, 2018, which increasedproperties affected by the COVID-19 pandemic and resulting
40
reduction of hotel occupancy, with a reduction in hotel operating expenses by approximately $2.1 million. Additionally, our property$3.9 million, compared to the same period ending March 31, 2019. Our Hollywood, Florida, Tampa, Florida and Louisville, Kentucky hotels and the recently acquired Hyde Beach House Resort & Residences in Atlanta, Georgia reported an increaseHollywood, Florida were the only properties with increases in hotel operating expenses of approximately $0.6$1.8 million, duecompared to a sporting event, and there were aggregate increases at our fully renovated and rebranded properties in Wilmington, North Carolina and Savannah, Georgia of approximately $0.8 million, as well as a net decrease of approximately $0.8 million at the remaining properties.same period ending March 31, 2019.
Rooms expense for the three months ended March 31, 2019 increased2020 decreased approximately $1.1$0.7 million, or 16.1%9.0%, to approximately $7.8$7.1 million compared to rooms expense for the three months ended March 31, 20182019 of approximately $6.7$7.8 million. The net increasedecrease in rooms expense for the three months ended March 31, 20192020 resulted mainly from the acquisitionten of our Hyatt Centric Arlington property, on March 1, 2018, which increased room expensesproperties affected by approximately $0.5 million. There was also an aggregate increasethe COVID-19 pandemic and resulting reduction of hotel occupancy, with a reduction in rooms expense by approximately $0.8 million, compared to the same period ending March 31, 2019. Our Tampa, Florida and Louisville, Kentucky hotels were the only properties with increases in rooms expense of approximately $0.6$0.1 million, at our remaining properties.compared to the same period ending March 31, 2019.
Food and beverage expenses for the three months ended March 31, 2019 increased2020 decreased approximately $0.7$0.5 million, or 11.6%7.3%, to approximately $7.1$6.6 million compared to food and beverage expenses of approximately $6.4$7.1 million for the three months ended March 31, 2018.2019. The net increasedecrease in food and beverage expenses for the three months ended March 31, 20192020 resulted mainly from the acquisitionseven of our Hyatt Centric Arlington property, on March 1, 2018, which increasedproperties affected by the COVID-19 pandemic and resulting reduction of hotel occupancy, with a reduction in food and beverage expensesexpense by approximately $0.4 million. There was also an aggregate increase$0.9 million, compared to the same period ending March 31, 2019. Five of our hotel properties had increases in food and beverage expenses of approximately $0.3 $0.4 million, at our remaining properties.compared to the same period ending March 31, 2019.
Expenses from other operating departments increased approximately $0.4 million, or 25.0%18.9%, to approximately $1.9$2.3 million for the three months ended March 31, 20192020 compared to expenses from other operating departments of approximately $1.5$1.9 million for the three months ended March 31, 2018.2019. The increase in expenseexpenses from other operating departments for the three months ended March 31, 2019 2020 resulted mainly from our interest inTampa, Florida and Arlington, Virginia hotels and the recently acquired Hyde Beach House Resort & Residences condominium hotel, which started operations on January 30, 2017 and has continued to ramp up and accounted forin Hollywood, Florida, with an increase of approximately $0.2 million for the period and from the acquisition of our Hyatt Centric Arlington property, on March 1, 2018, which increased other operating departments expensesexpense by approximately $0.1 million. There was also an aggregate increase$0.6 million, compared to the same period ending March 31, 2019. Offsetting decreases resulted mainly from eleven of our properties affected by the COVID-19 pandemic and resulting reduction of hotel occupancy, with decreases in other operating departments expenses of approximately $0.1$0.2 million, fromcompared to the remainingsame period ending March 31, 2019. properties.
Indirect expenses at our wholly-owned properties for the three months ended March 31, 2019 increased2020 decreased approximately $2.2$1.2 million, or 14.2%6.9%, to approximately $17.4$16.2 million compared to indirect expenses of approximately $15.2$17.4 million for the three months ended March 31, 2018.2019. The increasedecrease in indirect expenses for the three months ended March 31, 20192020 resulted mainly from the
33
acquisitioneleven properties with decreases in management fees, sales and marketing, franchise fees, repairs and maintenance, energy and utilities, information and communications and other indirect of our Hyatt Centric Arlington property, on March 1, 2018, which increased indirect costs by approximately $1.2$2.3 million. There was also an aggregate increase in indirect expenses of approximately $1.1 1.0million from our Hollywood, Florida, Louisville, Kentucky hotels and the remainingrecently acquired Hyde Beach House Resort & Residences in Hollywood, Florida properties.property.
Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2019 increased2020 decreased approximately $0.4$1.0 million, or 7.0%17.3%, to approximately $6.0$5.0 million compared to depreciation and amortization of approximately $5.6$6.0 million for the three months ended March 31, 2018.2019. The increasedecrease in depreciation was mostly attributable to increases in the depreciationmainly related to our property being renovatedproperties in Philadelphia, Tampa, Florida that accounted for increasesand Atlanta Georgia from prior year changes in estimated useful lives and disposals, with a decrease of approximately $0.9 million for the period and from the acquisition of our Hyatt Centric Arlington property, on March 1, 2018, which increased depreciation by approximately $0.5$1.2 million. In addition, thereThere was a netalso an aggregate decreaseincrease in depreciation and amortization of approximately $1.0 $0.2 million atfrom our remaining properties.
Corporate General and Administrative. Corporate general and administrative expenses for the three months ended March 31, 20192020 increased approximately $0.2 million, or 13.0%11.6%, to approximately $1.7$1.9 million compared to corporate general and administrative expenses of approximately $1.5$1.7 million for the three months ended March 31, 2018.2019. The increase in corporate general and administrative expenses was mainly due to increased auditlegal and professional fees from Sarbanes Oxley testing by approximately $0.1 million and increases in salaries by approximately $0.1$0.2 million.
Interest Expense. Interest expense for the three months ended March 31, 2019 increased 2020 decreasedapproximately $1.1$0.7 million, or 27.2%14.0%, to approximately $5.3$4.6 million,as compared to interest expense of approximately $4.2$5.3 million for the three months ended March 31, 2018.2019. The increasedecrease in interest expense for the three months ended March 31, 2019,2020, was substantially related to the new mortgage on our Hyatt Centric Arlington property and deferred financing costs associated with that mortgage, thatreduction of the 7.25% unsecured notes, which accounted for an increasea decrease of approximately $0.4$0.5 million compared to the three-month period ending March 31, 2018. In addition, there was also a net aggregate increase of approximately $0.7 million for interest expenses on mortgages at our remaining properties.2019.
Interest Income. Interest income for the three months ended March 31, 2019 increased $17,592,2020 decreased by $38,931, or 21.5%39.2%, to $99,296$60,365 compared to interest income of $81,704$99,296 for the three months ended March 31, 2018.2019. The increasedecrease is due to higher interest rates on thelower amounts of interest-bearing cash and cash equivalents held during the three-month period ending March 31, 20192020 compared to the three-month period ending March 31, 2018.2019.
41
Unrealized Gain (Loss) on Hedging Activities. As of March 31, 2019,2020, the fair market value of our interest rate caps is $22,110$1,761 and the fair market value of our interest rate SWAPswap liability is approximately $1.4$3.6 million. The unrealized gainloss on hedging activities during the three months ended March 31, 2019,2020, was approximately $0.5$1.6 million and during the three months ended March 31, 2018,2019, the unrealized gain on hedging activities was $12,730.approximately $0.5 million.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets for the three months ended March 31, 2020 decreased approximately $0.1 million to $12,439 compared to $161,334 gain on involuntary conversion of assets for the three months ended March 31, 2019. During September 2019, we had mechanical failure and flooding damage from failure of the sewer system resulting in damage to the boiler at The DeSoto property with a one-time involuntary conversion in the amount of approximately $0.1 million during the current period.
Income Taxes. We had an income tax provision of approximately $0.3$5.5 million for the three months ended March 31, 20192020 compared to an income tax provision of approximately $0.3 million for the three months ended March 31, 2018.2019. The income tax provision iswas primarily derived from the operationsa reduction of our deferred tax assets and through the establishment of a valuation allowance of approximately $5.4 million. Our MHI TRS Lessees. Our TRS LesseesEntities realized operating incomelosses for each of the three months ended March 31, 20192020 and 2018.2019.
Net Loss. We realized a net loss for the three months ended March 31, 20192020 of approximately $0.4$13.3 million compared to a net incomeloss of approximately $1.2$0.4 million for the three months ended March 31, 2018,2019, because of the operating results discussed above.
Non-GAAP Financial Measures
We consider FFO, Adjusted FFO, EBITDA and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by U.S. GAAP or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by U.S. GAAP.
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 U.S. GAAP, excluding extraordinary items as defined under U.S. GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
34
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, operating asset depreciation and amortization, 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.
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The following is a reconciliation of net income (loss) to FFO and Adjusted FFO for the three months ended March 31, 20192020 and 2018:2019:
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
Net loss available to common stockholders | $ | (2,067,661 | ) |
| $ | (238,343 | ) |
| $ | (14,323,699 | ) |
| $ | (1,653,763 | ) |
Add: Net loss attributable to noncontrolling interest |
| 206,949 |
|
|
| (30,013 | ) |
|
| (1,197,416 | ) |
|
| (206,949 | ) |
Depreciation and amortization - real estate |
| 6,013,866 |
|
|
| 5,617,574 |
|
|
| 4,967,449 |
|
|
| 6,013,866 |
|
Gain on involuntary conversion of assets |
| (161,334 | ) |
|
| (870,741 | ) |
|
| (12,439 | ) |
|
| (161,334 | ) |
(Gain) loss on disposal of assets |
| (4,008 | ) |
|
| 3,739 |
| ||||||||
Gain on disposal of assets |
|
| — |
|
|
| (4,008 | ) | |||||||
FFO available to common stockholders and unitholders | $ | 3,987,812 |
|
| $ | 4,482,216 |
|
| $ | (10,566,105 | ) |
| $ | 3,987,812 |
|
Decrease in deferred income taxes |
| 284,679 |
|
|
| 260,262 |
|
|
| 5,412,084 |
|
|
| 284,679 |
|
Amortization |
| 14,869 |
|
|
| 16,616 |
|
|
| 15,427 |
|
|
| 14,869 |
|
Unrealized (gain) loss on hedging activities |
| 490,611 |
|
|
| (12,730 | ) | ||||||||
Termination fee |
|
| (72,960 | ) |
|
| — |
| |||||||
Unrealized loss on hedging activities |
|
| 1,585,632 |
|
|
| 490,611 |
| |||||||
Adjusted FFO available to common stockholders and unitholders | $ | 4,777,971 |
|
| $ | 4,746,364 |
|
| $ | (3,625,922 | ) |
| $ | 4,777,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic |
| 13,610,750 |
|
|
| 13,472,444 |
|
|
| 14,246,216 |
|
|
| 13,610,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of non-controlling units |
| 1,778,140 |
|
|
| 1,778,140 |
|
|
| 1,239,188 |
|
|
| 1,778,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares and units outstanding, basic |
| 15,388,890 |
|
|
| 15,250,584 |
|
|
| 15,485,404 |
|
|
| 15,388,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share and unit | $ | 0.26 |
|
| $ | 0.29 |
|
| $ | (0.68 | ) |
| $ | 0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted FFO per common share and unit | $ | 0.31 |
|
| $ | 0.31 |
|
| $ | (0.23 | ) |
| $ | 0.31 |
|
EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) gain on exercise of development right, (12) corporate general and administrative expense, (12)(13) depreciation and amortization, (13)(14) gains and losses on involuntary conversions of assets, (14)(15) distributions to preferred stockholders and (15)(16) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.
3543
The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and three months ended March 31, 20192020 and 2018:2019:
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||
| March 31, 2019 |
|
| March 31, 2018 |
|
| March 31, 2020 |
|
| March 31, 2019 |
| ||||
Net loss available to common stockholders | $ | (2,067,661 | ) |
| $ | (238,343 | ) |
| $ | (14,323,699 | ) |
| $ | (1,653,763 | ) |
Add: Net loss attributable to noncontrolling interest |
| 206,949 |
|
|
| (30,013 | ) |
|
| (1,197,416 | ) |
|
| (206,949 | ) |
Interest expense |
| 5,305,114 |
|
|
| 4,177,019 |
|
|
| 4,561,840 |
|
|
| 5,305,114 |
|
Interest income |
| (99,296 | ) |
|
| (81,704 | ) |
|
| (60,365 | ) |
|
| (99,296 | ) |
Income tax provision |
| 318,156 |
|
|
| 305,955 |
|
|
| 5,454,034 |
|
|
| 318,156 |
|
Depreciation and amortization |
| 6,028,735 |
|
|
| 5,634,190 |
|
|
| 4,982,876 |
|
|
| 6,028,735 |
|
Distributions to preferred stockholders |
| 1,470,507 |
|
|
| 1,444,844 |
|
|
| 2,188,910 |
|
|
| 1,470,507 |
|
EBITDA |
| 11,162,504 |
|
|
| 11,211,948 |
|
|
| 1,606,180 |
|
|
| 11,162,504 |
|
(Gain) loss on disposal of assets |
| (4,008 | ) |
|
| 3,739 |
| ||||||||
Gain on disposal of assets |
|
| — |
|
|
| (4,008 | ) | |||||||
Gain on involuntary conversion of assets |
| (161,334 | ) |
|
| (870,741 | ) |
|
| (12,439 | ) |
|
| (161,334 | ) |
Subtotal |
| 10,997,162 |
|
|
| 10,344,946 |
|
|
| 1,593,741 |
|
|
| 10,997,162 |
|
Corporate general and administrative |
| 1,684,444 |
|
|
| 1,546,300 |
|
|
| 1,880,125 |
|
|
| 1,684,444 |
|
Unrealized (gain) loss on hedging activities |
| 490,611 |
|
|
| (12,730 | ) | ||||||||
Unrealized loss on hedging activities |
|
| 1,585,632 |
|
|
| 490,611 |
| |||||||
Hotel EBITDA | $ | 13,172,217 |
|
| $ | 11,878,516 |
|
| $ | 5,059,498 |
|
| $ | 13,172,217 |
|
Sources and Uses of Cash
Our principal sources of cash are net cash flow from hotel operations, sale of common and preferred stock, debt financing and proceeds from hotel dispositions. Our principal uses of cash are acquisition of hotel properties, improvements to hotel properties, debt service, share repurchases operating costs, corporate expenses and distributions to holders of common and preferred shares (and units). As of March 31, 2020, we had approximately $14.7 million of unrestricted cash and $7.3 million of restricted cash.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders of the Operating Partnership and stockholders of our preferred and common stock, as well as debt service (excluding debt maturities), is through the operations of our hotels. Cash flow provided by operating activities for the three months ended March 31, 20192020 was approximately $5.6 million. We had a net decrease in cash provided by operating activities for the three months ended March 31, 2019of approximately $1.8$1.5 million compared to the three months ended March 31, 2018. We expect that cash on hand and thegenerally consisting of net cash providedflow from hotel operations, offset by operations will be adequate to fund our continuing operations, monthlycash paid for corporate expenses 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)changes 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).working capital.
Investing Activities. During the three months ended March 31, 2019,2020, we used approximately $5.5$1.8 million on capital expenditures of which approximately $1.9 million related to the routine replacement of furniture, fixtures and equipment, approximately $3.4 million related mainly to renovation of our hotels in Arlington, Virginia, Hollywood and Tampa, Florida.equipment. The Operating Partnership received a payment on its loan to the Company in the amount of approximately $0.1 million. We also received approximately $0.2 million for proceeds from insurance for involuntary conversions.
Financing Activities. During the three months ended March 31, 2019, we2020, the Company paid dividenddividends to holders of its common and distributionpreferred shares of approximately $4.2 million. The Operating Partnership made distributions to holders of its common and preferred units of approximately $4.3 million. The Company and Operating Partnership also made payments of deferred financing costs of approximately $3.4$0.1 million for the Company and approximately $3.5 million for the Operating Partnership and made principal payments on its mortgages of approximately $1.3$1.4 million.
Capital Expenditures
We anticipate thatintend to maintain all of our need for recurringhotels, 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 expenditures forimprovements are determined through the replacementannual budget process over which we maintain approval rights, and refurbishmentwhich are implemented or administered by our management companies.
From time to time, certain of furniture, fixturesour hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and equipment overrestaurants, in order to better compete with other hotels in our markets. In addition, we may be required by a franchisor to complete a property improvement program (“PIP”) in order to bring the next 12hotel up to 24 months will be at historical norms for our propertiesthe franchisor’s standards. Generally, we expect to fund renovations and the industry. 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 addition:
Atresponse to the Company’sCOVID-19 pandemic, we postponed all major non-essential capital expenditures. We expect total capital expenditures to be approximately $3.6 million for 2020 and will continue to evaluate our needs for replacement of furniture, fixtures and equipment, the impact of COVID-19 pandemic on hotel in Tampa, Florida, renovations ofdemand, our liquidity and the guestrooms and public spaces totaling an estimated $11.4 million has begun, in anticipation of a planned June 2019 conversion to Hotel Alba, which we expect to become a member of the Tapestry Collection by Hilton. As of March 31, 2019, the Company had incurred costs totaling approximately $10.0 million toward this renovation. overall economic environment.
We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at certain of our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors.accounts. Reserve accounts are escrowed accounts with funds deposited
44
monthly and reserved for capital improvements or
36
expenditures with respect to all of our hotels. We currentlyare required by our loan agreements to deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast, Wilmington, Tapestry Collection by Hilton, 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 and Hyatt Centric Arlington on a monthly basis.basis, except as provided in the forbearance agreements agreed to by our lenders.
Liquidity and Capital Resources
The COVID-19 pandemic has had a significant negative impact on the Company's operations and financial results both during the first quarter and in the period following, including a substantial decline in our revenues, profitability and cash flows from operations. While the full financial impact of the reduction in hotel demand caused by the pandemic, contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, stay-at-home directives are lifted, consumer confidence is restored and an economic recovery commences. At a minimum, the Company expects that the COVID-19 pandemic to have a significant impact on our results of operations, financial position and cash flow through 2020. In response to these negative impacts, we took a number of actions to reduce costs and preserve liquidity as described in this Quarterly Report and the accompanying notes to financial statements. The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which could increase our cost of, and limit accessibility to, capital.
As of March 31, 2019,2020, we had total cash of approximately $33.4$22.1 million. As described in “-- Effects of COVID-19 Pandemic on our Business” above, we borrowed an aggregate amount of approximately $10.7 million of which approximately $29.0 million was in cashPPP Loans and cash equivalentshave sought forbearances and approximately $4.4 million was restricted for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted. We expect thatloan modifications with the lenders under the loan agreements secured by our cash on hand combined with our cash flow from the operationshotels. Two of our hotels should be adequate to fund continuing operations, recurring capital expenditures forproperty-level loan agreements are currently operating under an Event of Default and the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled paymentslenders under those loans could accelerate the payment of principal and interest (excluding any balloon payments due upon maturityon those mortgages. We are actively negotiating terms of proposed forbearance agreements, waivers loan modifications for those mortgages as well as other loan agreements under which we are likely to trigger a default in over the next four quarters if the effects of the indenturesCOVID-19 pandemic on our business continue. If we fail to obtain additional waivers, forbearance arrangements or loan modifications, our lenders could declare us in default and require repayment of the outstanding balance on the mortgage debt).loan. If that were to occur, we may not have sufficient funds to pay that mortgage debt. We believe we will be successful in obtaining necessary waivers, forbearance arrangements and loan modifications from our mortgage lenders but cannot provide assurance we will be able to do so on acceptable terms or at all.
In addition, certain of our loan agreements also contain cash trap provisions that we expect will be triggered as the performance of our hotel properties secured by those agreements decline. As those provisions are triggered, substantially all of the cash flow generated by those hotel properties is deposited into a lock box account and swept into cash management accounts for the benefit of the respective lenders. This could affect our liquidity until such time the cash trap is no longer in effect.
We intend to meet our liquidity requirements resulting from the COVID-19 pandemic, for hotel property acquisitions, property redevelopment, investments in new joint ventures, the retirement of maturing mortgage debt, and other debt maturities, through:
new issuances of common and/or preferred shares,
issuances of units of limited partnership interest in our Operating Partnership,
secured and unsecured borrowings,
partial or total disposition of hotel properties,
the selective disposition of non-core assets,
cash on hand, and
other types of transactions.
Other than monthly mortgage loan principal payments, we do not have any upcoming mortgage debt obligations that are scheduled to mature in 2020. We have approximately $8.1 million in mortgage loan principal obligations maturing in August 2021, which relates to the mortgage on the DoubleTree by Hilton Laurel, after accounting anticipated reductions in future monthly principal payments. If the effects of the COVID-19 pandemic continue through the second quarter of 2021, we expect that additional capital will be required in order to repay that mortgage when it comes due.
Subject to availability of capital, 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. 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, the retirement of maturing mortgage debt, and other debt maturities, which includes the repayment of the 7.25% Notes, 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.
Other than monthly mortgage loan principal payments, we do not have any upcoming mortgage debt obligations maturing in 2019 or 2020. On April 26, 2019, we modified the approximate $18.3 million existing mortgage on our Crowne Plaza Tampa Westshore with the existing lender to extend the maturity to 2022. We have approximately $8.2 million in debt obligations maturing in 2021, which reflects the mortgage on the DoubleTree by Hilton Laurel, accounting for reductions for future monthly principal payments. On April 18, 2019, we notified Wilmington Trust, National Association (the “Trustee”) of the Operating Partnership’s intent to redeem the entire $25.0 million aggregate principal amount of the 7.25% Notes, pursuant to the terms of the indenture. The 7.25% Notes redemption date is set for May 19, 2019 at a redemption price equal to 101% of the principal amount of the 7.25% Notes, plus any accrued and unpaid interest to, but not including, the redemption date, for an aggregate redemption payment of approximately $25.3 million.
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 termsAs described in “-- Effects of COVID-19 Pandemic on our Business” and “--Liquidity and Capital Resources” above, two of our non-recourse secured mortgageproperty-level loan agreements failureare currently operating under an Event of Default and the lenders under those mortgage loans could accelerate the payment of principal and interest on those mortgages. In addition, certain of our loan agreements operate under cash trap provisions, which could negatively impact our ability to comply with the financial covenants in the loan agreement triggersaccess future cash flows from the property to be directed to the lender, which may limit our overall liquiditythose properties as that cash flow would not be available to us.
37
As of March 31, 2019, we weredescribed in compliance with all debt covenants, current on all loan payments“--Liquidity and not otherwise in default under any of our mortgage loans, as amended or modified.
Unsecured Notes
The indenture for the 7.25% Notes, issued on February 12, 2018, contains certain covenantsCapital Resources” above. Note 5 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, each 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. On April 18, 2019, we notified the trustee for the 7.25% Notes of the Operating Partnership’s intent to redeem the entire $25.0 million aggregate principal amount of the 7.25% Notes. See Note 14 to the Financial Statements for more information.
38
These financial measures are not calculated in accordancestatements accompanying this Quarterly Report describe forbearances, waivers and loan modification arrangements we have negotiated with GAAPour mortgage lenders to address the existing and are presented below for the sole purpose of evaluatingexpected failure to meet certain covenants under our compliance with the key financial covenants of our 7.25% Notes as they were applicable at March 31, 2019.
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
|
|
|
|
|
|
|
|
Net (Loss) Income (1) |
| $ | (2,174,850 | ) |
| $ | (608,157 | ) |
Interest expense(1) |
|
| 21,081,841 |
|
|
| 19,953,746 |
|
Loss on early debt extinguishment |
|
| 753,133 |
|
|
| 753,133 |
|
Unrealized (gain)loss on hedging activities |
|
| 1,312,299 |
|
|
| 808,958 |
|
Gain on involuntary conversion |
|
| (208,360 | ) |
|
| (917,767 | ) |
Loss (gain) on sale of assets |
|
| - |
|
|
| - |
|
Income tax benefit(1) |
|
| 481,550 |
|
|
| 469,349 |
|
Loss on disposal of assets |
|
| 504,002 |
|
|
| 511,749 |
|
Depreciation and amortization(1) |
|
| 21,279,188 |
|
|
| 20,884,643 |
|
Corporate general and administrative expenses(1) |
|
| 6,319,106 |
|
|
| 6,180,962 |
|
Consolidated income available for debt service(1) |
|
| 49,347,909 |
|
|
| 48,036,616 |
|
Less: income of non-stabilized assets(1) |
|
| (21,551,074 | ) |
|
| (20,946,112 | ) |
Stabilized Consolidated Income Available for Debt Service(1) |
| $ | 27,796,835 |
|
| $ | 27,090,504 |
|
Interest expense(1) (2) |
| $ | 21,081,841 |
|
| $ | 19,953,746 |
|
Amortization of issuance costs(1) |
|
| (962,562 | ) |
|
| (872,696 | ) |
Consolidated interest expense(1) |
|
| 20,119,279 |
|
|
| 19,081,050 |
|
Less: interest expense of non-stabilized assets(1) |
|
| (8,535,434 | ) |
|
| (8,138,649 | ) |
Stabilized Consolidated Interest Expense(1) |
| $ | 11,583,845 |
|
| $ | 10,942,401 |
|
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
|
| 2.40 |
|
|
| 2.48 |
|
Threshold Ratio Minimum |
|
| 1.50 |
|
|
| 1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Debt to Adjusted Total Asset Value: |
|
|
|
|
|
|
|
|
Mortgage loans |
| $ | 366,281,273 |
|
| $ | 367,613,880 |
|
Unsecured notes |
|
| 25,000,000 |
|
|
| 25,000,000 |
|
Total debt |
| $ | 391,281,273 |
|
| $ | 392,613,880 |
|
Stabilized Consolidated Income Available for Debt Service(1) |
| $ | 27,796,835 |
|
| $ | 27,090,504 |
|
Capitalization rate |
|
| 7.5 | % |
|
| 7.5 | % |
|
|
| 370,624,467 |
|
|
| 361,206,720 |
|
Non-stabilized assets |
|
| 257,000,000 |
|
|
| 287,500,000 |
|
Total cash |
|
| 33,411,627 |
|
|
| 37,868,281 |
|
Adjusted Total Asset Value |
| $ | 661,036,094 |
|
| $ | 686,575,001 |
|
Ratio of Debt to Adjusted Total Asset Value |
|
| 0.59 |
|
|
| 0.57 |
|
Threshold Ratio Maximum |
|
| 0.65 |
|
|
| 0.65 |
|
|
|
|
|
39
mortgage loans. We intend to continue to declareseek waiver, forbearances and loan modifications from the lenders under our mortgage loans for so long as the effects of the COVID-19 continue to impact our business.
Dividend Policy
As approved by its board of directors and announced on March 17, 2020, the Company has suspended its regular quarterly distributionscash common stock dividends in order to our stockholders.preserve liquidity as a result of the impact from the COVID-19 pandemic. The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future. As previously announced, the record date for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020 have each been cancelled and the payment of dividends on all classes of the Company’s preferred stock has been deferred. The Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
In January 2019, we authorized a quarterly dividend (distribution) of $0.125 per common share (and unit).
In April 2019, we increased the quarterly dividend (distribution) to $0.13 per common share (and unit).
In July 2019, we authorized a quarterly dividend (distribution) of $0.13 per common share (and unit).
In October 2019, we authorized a quarterly dividend (distribution) of $0.13 per common share (and unit).
Off-Balance Sheet Arrangements
None.
Inflation
We generate revenues primarily from lease payments from our MHI TRS LesseesEntities and net income from the operations of our MHI TRS Lessees.Entities. Therefore, we rely primarily on the performance of the individual properties and the ability of the management
46
company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period. These patterns have been disrupted by the impacts of the COVID-19 pandemic and we expect that disruption to continue throughout 2020 at a minimum.
Critical Accounting Policies
The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive and are significant to fully understand and evaluate our reported financial results.
Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels, which were acquired from third parties, contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.
We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse permanent changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a
40
recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss is recognized.
There were no charges for impairment of hotel properties recorded for the three months ended March 31, 2019.2020.
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
47
reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit.
Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our MHI TRS Lessee,Entities, we have not recorded a valuation allowance to reduce our net deferred tax asset as of March 31, 2019 and December 31, 2018, respectively.2020 to $0. We regularly evaluate the likelihood that our MHI TRS LesseeEntities will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At eachAs of March 31, 2019 and December 31, 2018,2020, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will not be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. 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 New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
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 operations and future prospects include, but are not limited to:
national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;
risks associated with the hotel industry, including competition and new supply of hotel rooms, increases in wages, energy costs and other operating costs;
risks associated with 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;
41
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;
the Company’s ability to maintain its qualification as a REIT; and
our ability to maintain adequate insurance coverage.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
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 March 31, 2019,2020, we had approximately $340.1$309.0 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237% and approximately $51.2$50.7 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.96%4.78%. 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. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore,Hotel Alba, DoubleTree by Hilton Raleigh Brownstone-University and The Whitehall remains at approximately $51.2$50.7 million, the balance at March 31, 2019,2020, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.5 million.
As of December 31, 2018,2019, we had approximately $341.3$310.2 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237% and approximately $51.3$50.8 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.96%4.78%. 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. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore,Hotel Alba, DoubleTree by Hilton Raleigh Brownstone and the mortgage on The Whitehall
42
remained at approximately $51.3$50.8 million, the balance at December 31, 2018,2019, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.5 million.
Item 4.Controls and Procedures
Sotherly Hotels Inc.
Disclosure Controls and Procedures
The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 March 31, 2019.2020. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2019,2020, 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
48
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 March 31, 2019.2020. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2019,2020, 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.
4349
We are not involved in any material legal proceedings, other thannor to our knowledge, is any material litigation threatened against us. We are involved in routine legal proceedings occurring inarising out of the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are notbusiness most of which is expected to be covered by insurance, and none of which is expected to have a material toimpact on our financial condition andor results of operations.
Except as set forth below, there have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2018.2019.
Our ownership limitations may restrict or prevent our stockholders from engaging in certain transfersThe effects of the Company’s common stock or preferred stock.COVID-19 pandemic on our operations and financial performance could be long-lasting and severe.
In order to maintainThe recent outbreak of COVID-19 throughout the Company’s REIT qualification, it cannot be closely held (i.e., more than 50.0% in value of our outstanding stock cannot be owned, directly or indirectly,world, classified by five or fewer individuals during the last half of any taxable year). To preserve the Company’s REIT qualification, the Company’s charter contains a 9.9% aggregate share ownership limit and a 9.9% common share ownership limit. Generally, any shares of the Company’s stock owned by affiliated persons will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.
If anyone transfers shares in a way that would violate the aggregate share ownership limit or the common share ownership limit, or prevent the Company from continuing to qualifyWorld Health Organization as a REIT underpandemic, is a rapidly evolving situation, has disrupted global travel and supply chains, and has adversely impacted global commercial activity across many industries. Due to travel restrictions in the federal income tax laws, those shares instead will be transferredU.S. and around world, the travel and hospitality industries are particularly facing tremendous drains on resources. The COVID-19 pandemic has had, and is expected to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or fails to preserve the Company’s continued qualification as a REIT, then the Company will consider the initial intended transfer to be null and void from the outset. The intended transferee of those shares will be deemed nevercontinue to have, owned the shares. Anyone who acquires shares in violation of the aggregate share ownership limit, the common share ownership limit or the other restrictionssignificant adverse impacts on transfer in the Company’s charter bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of the Company’s stock falls between the date of purchaseeconomic and the date of redemption or sale.
The Company’s articles supplementary establishing and fixing the rights and preferences of each of our Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock provide that no person may directly or indirectly own more than 9.9% of the aggregate number of outstanding shares of Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock, respectively, excluding any outstanding shares of Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock not treated as outstanding for federal income tax purposes. The Company’s board of directors has discretion to waive that ownership limit if, including other considerations, the board receives evidence that ownership in excess of the limit will not jeopardize the Company’s REIT status.
Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.
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 May 7, 2019, 1,610,000 shares of our Series B Preferred Stock were issued and outstanding, 1,352,141 shares of our Series C Preferred Stock were issued and outstanding, and 1,200,000 shares of our Series D Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding shares of Series B Preferred Stock is approximately $40.3 million, and annual dividends on our outstanding shares of Series B Preferred Stock are approximately $3.2 million. The aggregate liquidation preference with respect to the outstanding shares of Series C Preferred Stock is approximately $33.8 million, and annual dividends on our outstanding shares of Series C Preferred Stock are approximately $2.7 million. The aggregate liquidation preference with respect to the outstanding shares of Series D Preferred Stock is approximately $30.0 million, and annual dividends on our outstanding shares of Series D Preferred Stock are approximately $2.5 million. Holders of each of our Series B Preferred Stock, Series C Preferred Stock, and Series D 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, Series C Preferred Stock, and Series D 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 global economic contraction. The rapid development and fluidity of pandemic situations precludes any prediction as to the scale and scope of the ultimate adverse impact and longevity of the COVID-19 pandemic or any future pandemic outbreak. There also can be no guarantee that the demand for lodging, and consumer confidence in travel generally, will recover as quickly as other factorsindustries.
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beyond our control,The effects of the COVID-19 pandemic on the hotel industry are unprecedented with global demand for lodging drastically reduced and occupancy levels reaching historic lows. Due to the effects of the COVID-19 pandemic, we have experienced a severe decline in occupancy and, in turn, revenue. Due to the speed with which the situation is developing we cannot predict or estimate the amount, timing or naturefull extent and duration of any future preferred offerings. Thus,the effects of the COVID-19 pandemic on our stockholders bearoperations, although the risklonger and more severe the pandemic, the greater the material adverse effect on our financial condition, our results of our future securities issuances reducingoperations, the market price of our common shares, our ability to make distributions to our shareholders, our access to credit markets and diluting their interest.
The change of control conversion and redemption features of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock may make it more difficult for a partyour ability to take overservice our Company or discourage a party from taking over our Company.
Upon a change of control (as defined in our charter), holders of each of our Series B Preferred Stock, Series C Preferred Stock, and Series D 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. If the common stock price is less than $3.38, subject to adjustment, holders will receive a maximum of 7.39645 shares of our common stock per share of Series D Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series D Preferred Stock. In addition, those features of our Series B Preferred Stock, Series C Preferred Stock, and Series D 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 Preferred Stock, Series C Preferred Stock, and Series D 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.
indebtedness.
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.
Not applicable.Preferred Stock
The Company’s distribution on the shares of the Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares are in arrears for two quarterly periods. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s preferred stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
The Company announced that it was deferring payment of Sotherly’s previously announced dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020 and payment of Sotherly’s dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending June 30, 2020. The relevant distributions were as follows:
A regular quarterly cash dividend of $0.50 per share of beneficial interest of the Series B Preferred Stock;
A regular quarterly cash dividend of $0.4921875 per share of beneficial interest of the Series C Preferred Stock; and
A quarterly cash dividend of $0.515625 per share of beneficial interest of the Series D Preferred Stock.
The total arrearage of unpaid cash dividend due on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through June 23, 2020 is $805,000, $765,160 and $618,750, respectively.
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Mortgage Debt
As of the date of filing, we failed to make principal or interest payments under the mortgages secured by our DoubleTree Resort by Hilton Hollywood Beach (the “Hollywood Mortgage”) and Hyatt Centric Arlington hotels (the “Arlington Mortgage”), each of which constituted an Event of Default. Pursuant to the terms of each of the Hollywood Mortgage and Arlington Mortgage loan agreements, such Event of Default may cause an increase in the interest rate on the outstanding loan balance for the period such Event of Default persists. Following an Event of Default, our lenders under each of the Hollywood Mortgage and the Arlington Mortgage can elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel properties that are security for such loans. If either lender were to accelerate the payment of principal and interest on the applicable mortgage, we would likely not have sufficient funds to pay that mortgage debt. We are actively negotiating terms of proposed forbearance agreements and waivers with those lenders similar to those we have obtained from lenders secured by our other hotel properties.
The principal amount on the Hollywood Mortgage is $55,878,089. The arrearage of unpaid scheduled principal and interest due on this loan through June 23, 2020 is $956,731.
The principal amount on the Arlington Mortgage is $48,990,136. The arrearage of unpaid scheduled principal and interest due on this loan through June 23, 2020 is $828,306.
Not applicable.
Not applicable.
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The following exhibits are filed as part of this Form 10-Q:
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101.INS |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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4753
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Anthony E. Domalski |
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4854
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| SOTHERLY HOTELS INC. |
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| Anthony E. Domalski |
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| Chief Financial Officer |
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