Summary of Significant Accounting Policies (Policies) | 9 Months Ended |
Sep. 30, 2014 |
Accounting Policies [Abstract] | ' |
Basis of Presentation | ' |
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. The balance sheets as of December 31, 2013 were derived from the audited consolidated financial statements of the Company and the Operating Partnership and they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All significant inter-company balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. |
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement. |
Investment in Hotel Properties | ' |
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Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost 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. |
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Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. |
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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 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 exceed 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. |
Assets Held For Sale | ' |
Assets Held For Sale – The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. |
Investment in Joint Venture | ' |
Investment in Joint Venture – Investment in joint venture represents our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract. Carlyle owns a 75.0% controlling indirect interest in these entities. We account for our investment in the joint venture under the equity method of accounting and are entitled to receive our pro rata share of operating cash flow. We also have the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. |
Cash and Cash Equivalents | ' |
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 | ' |
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 – 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 | ' |
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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 – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis. |
Franchise License Fees | ' |
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2014 and December 31, 2013 were $164,364 and $196,989, respectively. Amortization expense for each of the three month periods ended September 30, 2014 and 2013 totaled $10,875 and for each of the nine month periods ended September 30, 2014 and 2013 totaled $32,625 |
Deferred Financing Costs | ' |
Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations. |
Derivative Instruments | ' |
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Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the balance sheet 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. |
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We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we primarily used an interest-rate swap, which was required under the then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments without exchange of the underlying principal amount. We valued the 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 use derivative instruments in the Company’s stock to obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes. |
Fair Value Measurements | ' |
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Fair Value Measurements – |
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We classify the inputs used to measure fair value into the following hierarchy: |
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Level 1 | | Unadjusted quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | |
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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. | | | | | | | | | | |
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Level 3 | | Unobservable inputs for the asset or liability. | | | | | | | | | | |
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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 debt instruments measured at fair value and the basis for that measurement: |
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| | Level 1 | | | Level 2 | | | Level 3 | |
December 31, 2013 | | | | | | | | | | | | |
Mortgage loans(1) | | $ | — | | | $ | (162,841,165 | ) | | $ | — | |
Unsecured notes(2) | | $ | (28,770,240 | ) | | $ | — | | | $ | — | |
September 30, 2014 | | | | | | | | | | | | |
Mortgage loans(1) | | $ | — | | | $ | (205,583,876 | ) | | $ | — | |
Unsecured notes(2) | | $ | (48,024,160 | ) | | $ | — | | | $ | — | |
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-1 | Mortgage loans are reflected at carrying value on our Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013. | | | | | | | | | | | |
-2 | Unsecured notes are recorded at historical cost on our Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013. | | | | | | | | | | | |
Noncontrolling Interest in Operating Partnership | ' |
Noncontrolling Interest in Operating Partnership – Certain hotel properties have been 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 Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. |
Income Taxes | ' |
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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. |
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We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2014, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2014, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include the calendar years 2010 through 2013. In addition, as of September 30, 2014, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally include the calendar years 2004 through 2009. |
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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 | ' |
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Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options, restricted stock and performance share compensation awards to its employees 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. |
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Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except for 24,000 shares which were issued to the Chief Financial Officer upon execution of his employment contract. These shares are to vest pro rata on each of the next four anniversaries of the effective date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested. |
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Under the 2013 Plan, the Company has made issuances totaling 36,750 shares, consisting of 24,000 non-restricted shares issued to certain executives and 12,000 restricted shares and 750 non-restricted shares issued to its independent directors. All of the restricted shares will vest at the end of 2014. |
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The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Previously, under the 2004 Plan, and currently, under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of September 30, 2014, no performance-based stock awards have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan and 2013 Plan totaled $24,551 and $73,654, respectively for the three months and nine months ended September 30, 2014 and $17,880 and $60,731, respectively, for the three months and nine months ended September 30, 2013. |
Comprehensive Income (Loss) | ' |
Comprehensive Income (Loss) – Comprehensive income (loss) includes all changes in equity (net assets) during a period from non-owner sources. We do not have any items of comprehensive income (loss) other than net income (loss). |
Segment Information | ' |
Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership. |
Use of Estimates | ' |
Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Reclassifications | ' |
Reclassifications – Certain reclassifications have been made to the prior period balances to conform to the current period presentation. |
New Accounting Pronouncements | ' |
New Accounting Pronouncements – There are no recent accounting pronouncements which we believe will have a material impact on our consolidated financial statements. |