Sotherly Hotels 10-Q 2015 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

MARYLAND	001-32379	20-1531029
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

DELAWARE	001-36091	20-1965427
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

410 West Francis Street

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  x    No  ¨Sotherly Hotels LP    Yes  x    No  ¨

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

Sotherly Hotels Inc.    Yes  x    No  ¨Sotherly Hotels LP    Yes  x    No  ¨

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

Sotherly Hotels Inc.

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-accelerated Filer	¨	Smaller Reporting Company	x

Sotherly Hotels LP

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-accelerated Filer	x	Smaller Reporting Company	¨

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  xSotherly Hotels LP    Yes  ¨    No  x

As of August 10, 2015, there were 14,290,714 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.  

EXPLANATORY NOTE

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

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

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2015 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 in 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 – Equity; and

· Note 13 – Income (Loss) Per Share and Per Unit;

· Item 4 - Controls and Procedures; and

· Item 6 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.

2

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

		Page
PART I
Item 1.	Financial Statements	4
	Sotherly Hotels Inc.	4
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	4
	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	5
	Consolidated Statement of Changes in Equity (unaudited) for the Six Months Ended June 30, 2015	6
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014	7
	Sotherly Hotels LP	8
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	8
	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	9
	Consolidated Statement of Changes in Partners’ Capital (unaudited) for the Six Months Ended June 30, 2015	10
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014	11
	Notes to Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4	Controls and Procedures	40
PART II
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

3

PART I

Item 1. Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Investment in hotel properties, net	$	263,831,439		$	260,192,153
Investment in joint venture		1,880,824			1,982,107
Cash and cash equivalents		17,274,676			16,634,499
Restricted cash		6,817,281			6,621,864
Accounts receivable		4,203,338			1,908,762
Accounts receivable-affiliate		156,940			197,674
Prepaid expenses, inventory and other assets		3,792,347			3,334,401
Deferred income taxes		3,134,491			3,543,295
Deferred financing costs, net		4,331,736			5,405,288
TOTAL ASSETS	$	305,423,072		$	299,820,043
LIABILITIES
Mortgage loans	$	208,434,927		$	205,291,657
Unsecured notes		52,900,000			52,900,000
Accounts payable and accrued expenses		12,439,225			12,044,886
Advance deposits		1,628,919			1,220,729
Dividends and distributions payable		995,408			852,914
TOTAL LIABILITIES	$	276,398,479		$	272,310,186
Commitments and contingencies (see Note 6)		—			—
EQUITY
Sotherly Hotels Inc. stockholders’ equity
Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares    issued and outstanding		—			—
Common stock, par value $0.01, 49,000,000 shares authorized,    10,855,714 shares and 10,570,932 shares issued and outstanding    at June 30, 2015 and December 31, 2014, respectively		108,557			105,709
Additional paid in capital		59,854,743			58,659,799
Distributions in excess of retained earnings		(34,938,539	)		(35,388,313	)
Total Sotherly Hotels Inc. stockholders’ equity		25,024,761			23,377,195
Noncontrolling interest		3,999,832			4,132,662
TOTAL EQUITY		29,024,593			27,509,857
TOTAL LIABILITIES AND OWNERS' EQUITY	$	305,423,072		$	299,820,043

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

4

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
REVENUE
Rooms department	$	26,351,371		$	25,416,248		$	47,687,785		$	42,869,437
Food and beverage department		8,605,316			9,020,055			16,332,123			15,271,738
Other operating departments		1,908,421			1,903,398			3,820,830			3,208,915
Total revenue		36,865,108			36,339,701			67,840,738			61,350,090
EXPENSES
Hotel operating expenses
Rooms department		6,498,077			6,278,583			12,341,017			11,030,109
Food and beverage department		5,700,236			5,936,451			11,105,621			10,006,821
Other operating departments		362,987			335,502			701,166			537,008
Indirect		12,332,869			12,189,910			23,801,212			21,673,784
Total hotel operating expenses		24,894,169			24,740,446			47,949,016			43,247,722
Depreciation and amortization		3,304,906			2,988,968			6,209,297			5,423,296
Corporate general and administrative		1,490,380			1,391,206			2,941,604			2,698,997
Total operating expenses		29,689,455			29,120,620			57,099,917			51,370,015
NET OPERATING INCOME		7,175,653			7,219,081			10,740,821			9,980,075
Other income (expense)
Interest expense		(3,840,435	)		(3,925,428	)		(7,614,970	)		(6,808,867	)
Interest income		15,308			5,267			25,409			7,156
Equity income in joint venture		24,368			17,417			498,717			404,968
Loss on early debt extinguishment		(698,083	)		-			(698,083	)		-
Gain on involuntary conversion of asset		37,833			-			37,833			-
Net income before income taxes		2,714,644			3,316,337			2,989,727			3,583,332
Income tax (provision) benefit		(955,535	)		(563,782	)		(516,760	)		171,537
Net income		1,759,109			2,752,555			2,472,967			3,754,869
Less: Net income attributable to the noncontrolling interest		(327,999	)		(585,866	)		(466,523	)		(805,178	)
Net income attributable to the Company	$	1,431,110		$	2,166,689		$	2,006,444		$	2,949,691
Net income per share attributable to the Company
Basic and diluted	$	0.13		$	0.21		$	0.19		$	0.29
Weighted average number of shares outstanding
Basic and diluted		10,768,730			10,353,677			10,682,743			10,290,047

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

5

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

					Additional		Distributions
	Common Stock				Paid-		in Excess of			Noncontrolling
	Shares		Par Value		In Capital		Retained Earnings			Interest			Total
Balances at December 31, 2014		10,570,932	$	105,709	$	58,659,799	$	(35,388,313	)	$	4,132,662		$	27,509,857
Issuance of unrestricted common stock awards		26,350		263		193,936		-			-			194,199
Issuance of restricted common stock awards		9,750		98		71,760		-			-			71,858
Issuance of common stock from ATM sales		98,682		987		681,223		-			-			682,210
Conversion of units into common stock		150,000		1,500		238,065		-			(239,565	)		-
Amortization of restricted stock award		-		-		9,960		-			-			9,960
Dividends and distributions declared		-		-		-		(1,556,670	)		(359,788	)		(1,916,458	)
Net income		-		-		-		2,006,444			466,523			2,472,967
Balances at June 30, 2015		10,855,714	$	108,557	$	59,854,743	$	(34,938,539	)	$	3,999,832		$	29,024,593

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

6

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014
Cash flows from operating activities:
Net income	$	2,472,967		$	3,754,869
Adjustments to reconcile net income to net cash provided by    operating activities:
Depreciation and amortization		6,209,297			5,423,296
Equity income in joint venture		(498,717	)		(404,968	)
Amortization of deferred financing costs		1,384,332			613,279
Charges related to equity-based compensation		276,016			235,605
Changes in assets and liabilities:
Restricted cash		(417,603	)		(1,018,062	)
Accounts receivable		(2,294,576	)		(1,705,481	)
Prepaid expenses, inventory and other assets		(467,358	)		(1,063,887	)
Deferred income taxes		408,804			(307,245	)
Accounts payable and other accrued liabilities		1,844,024			6,455,198
Advance deposits		408,191			438,763
Accounts receivable - affiliate		40,734			(55,559	)
Net cash provided by operating activities		9,366,111			12,365,808
Cash flows from investing activities:
Acquisition of hotel properties		-			(61,106,085	)
Improvements and additions to hotel properties		(10,702,570	)		(2,559,086	)
Distributions from joint venture		600,000			750,000
Funding of restricted cash reserves		(3,715,397	)		(1,652,014	)
Proceeds from involuntary conversion of assets		37,833			-
Proceeds of restricted cash reserves		3,937,582			1,727,194
Net cash used in investing activities		(9,842,552	)		(62,839,991	)
Cash flows from financing activities:
Proceeds of mortgage debt		47,000,000			45,600,000
Proceeds of loans		-			19,000,000
Proceeds from the sale of common stock		682,210			-
Dividends and distributions paid		(1,773,965	)		(1,178,049	)
Payment of deferred financing costs		(934,897	)		(1,686,615	)
Payments on mortgage debt and loans		(43,856,730	)		(2,712,097	)
Net cash provided by financing activities		1,116,618			59,023,239
Net increase in cash and cash equivalents		640,177			8,549,056
Cash and cash equivalents at the beginning of the period		16,634,499			9,376,628
Cash and cash equivalents at the end of the period	$	17,274,676		$	17,925,684
Supplemental disclosures:
Cash paid during the period for interest	$	6,019,832		$	5,515,200
Cash paid during the period for income taxes	$	97,200		$	221,157
Non-cash investing and financing activities:
Proceeds of mortgage debt contributed to restricted cash reserves	$	-		$	1,500,000
Change in amount of hotel property improvements in accounts payable and    accrued liabilities	$	633,167		$	-
Change in amount of deferred financing and deferred offering cost in accounts    payable and accrued liabilities	$	-		$	-

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

7

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

	June 30, 2015		December 31, 2014
	(unaudited)
ASSETS
Investment in hotel properties, net	$	263,831,439	$	260,192,153
Investment in joint venture		1,880,824		1,982,107
Cash and cash equivalents		17,274,676		16,634,499
Restricted cash		6,817,281		6,621,864
Accounts receivable, net		4,203,338		1,908,762
Accounts receivable-affiliate		156,940		197,674
Prepaid expenses, inventory and other assets		3,792,347		3,334,401
Deferred income taxes		3,134,491		3,543,295
Deferred financing costs, net		4,331,736		5,405,288
TOTAL ASSETS	$	305,423,072	$	299,820,043
LIABILITIES
Mortgage loans	$	208,434,927	$	205,291,657
Unsecured notes		52,900,000		52,900,000
Accounts payable and other accrued liabilities		12,439,225		12,044,886
Advance deposits		1,628,919		1,220,729
Dividends and distributions payable		995,408		852,914
TOTAL LIABILITIES	$	276,398,479	$	272,310,186
Commitments and contingencies (see Note 6)
PARTNERS’ CAPITAL
General Partner: 132,573 and 131,218 units issued and outstanding as of    June 30, 2015 and December 31, 2014, respectively		536,014		520,791
Limited Partners: 13,123,968 and 12,990,541 units issued and outstanding    as of June 30, 2015 and December 31, 2014, respectively		28,488,579		26,989,066
TOTAL PARTNERS’ CAPITAL		29,024,593		27,509,857
TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	305,423,072	$	299,820,043

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

8

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
REVENUE
Rooms department	$	26,351,371		$	25,416,248		$	47,687,785		$	42,869,437
Food and beverage department		8,605,316			9,020,055			16,332,123			15,271,738
Other operating departments		1,908,421			1,903,398			3,820,830			3,208,915
Total revenue		36,865,108			36,339,701			67,840,738			61,350,090
EXPENSES
Hotel operating expenses
Rooms department		6,498,077			6,278,583			12,341,017			11,030,109
Food and beverage department		5,700,236			5,936,451			11,105,621			10,006,821
Other operating departments		362,987			335,502			701,166			537,008
Indirect		12,332,869			12,189,910			23,801,212			21,673,784
Total hotel operating expenses		24,894,169			24,740,446			47,949,016			43,247,722
Depreciation and amortization		3,304,906			2,988,968			6,209,297			5,423,296
Corporate general and administrative		1,490,380			1,391,206			2,941,603			2,698,997
Total operating expenses		29,689,455			29,120,620			57,099,916			51,370,015
NET OPERATING INCOME		7,175,653			7,219,081			10,740,822			9,980,075
Other income (expense)
Interest expense		(3,840,435	)		(3,925,428	)		(7,614,970	)		(6,808,867	)
Interest income		15,308			5,267			25,408			7,156
Equity income in joint venture		24,368			17,417			498,717			404,968
Loss on early debt extinguishment		(698,083	)		-			(698,083	)		-
Gain on involuntary conversion of asset		37,833			-			37,833			-
Net income before income taxes		2,714,644			3,316,337			2,989,727			3,583,332
Income tax benefit  (provision)		(955,535	)		(563,782	)		(516,760	)		171,537
Net income	$	1,759,109		$	2,752,555		$	2,472,967		$	3,754,869
Net income per unit
Basic and diluted	$	0.13		$	0.21		$	0.19		$	0.29
Weighted average number of units outstanding
Basic and diluted		13,052,524			13,107,804			13,099,316			13,098,870

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

9

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

(unaudited)

	General Partner					Limited Partner
	Units		Amount			Units		Amounts			Total
Balances at December 31, 2014		131,218	$	520,791			12,990,541	$	26,989,066		$	27,509,857
Issuance of partnership units		1,355		9,607			133,427		938,660			948,267
Amortization of restricted units award		—		50			—		9,910			9,960
Distributions declared		—		(19,165	)		—		(1,897,293	)		(1,916,458	)
Net income		—		24,731			—		2,448,236			2,472,967
Balances at June 30, 2015		132,573	$	536,014			13,123,968	$	28,488,579		$	29,024,593

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

10

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014
Cash flows from operating activities:
Net income	$	2,472,967		$	3,754,869
Adjustments to reconcile net income to net cash provided by    operating activities:
Depreciation and amortization		6,209,297			5,423,296
Equity income in joint venture		(498,717	)		(404,968	)
Amortization of deferred financing costs		1,384,332			613,279
Charges related to equity-based compensation		276,016			235,605
Changes in assets and liabilities:
Restricted cash		(417,603	)		(1,018,062	)
Accounts receivable		(2,294,576	)		(1,705,481	)
Prepaid expenses, inventory and other assets		(467,358	)		(1,063,887	)
Deferred income taxes		408,804			(307,245	)
Accounts payable and other accrued liabilities		1,844,024			6,455,198
Advance deposits		408,191			438,763
Accounts receivable - affiliate		40,734			(55,559	)
Net cash provided by operating activities		9,366,111			12,365,808
Cash flows from investing activities:
Acquisition of hotel properties		-			(61,106,085	)
Improvements and additions to hotel properties		(10,702,570	)		(2,559,086	)
Distributions from joint venture		600,000			750,000
Funding of restricted cash reserves		(3,715,397	)		(1,652,014	)
Proceeds from involuntary conversion of assets		37,833			-
Proceeds of restricted cash reserves		3,937,582			1,727,194
Net cash used in investing activities		(9,842,552	)		(62,839,991	)
Cash flows from financing activities:
Proceeds of mortgage debt		47,000,000			45,600,000
Proceeds of loans		-			19,000,000
Proceeds from the issuance of units		682,210			-
Distributions paid		(1,773,965	)		(1,178,049	)
Payment of deferred financing costs		(934,897	)		(1,686,615	)
Payments on mortgage debt and loans		(43,856,730	)		(2,712,097	)
Net cash provided by financing activities		1,116,618			59,023,239
Net increase in cash and cash equivalents		640,177			8,549,056
Cash and cash equivalents at the beginning of the period		16,634,499			9,376,628
Cash and cash equivalents at the end of the period	$	17,274,676		$	17,925,684
Supplemental disclosures:
Cash paid during the period for interest	$	6,019,832		$	5,515,200
Cash paid during the period for income taxes	$	97,200		$	221,157
Non-cash investing and financing activities:
Proceeds of mortgage debt contributed to restricted cash reserves	$	-		$	1,500,000
Change in amount of hotel property improvements in accounts payable and    accrued liabilities	$	633,167		$	-
Change in amount of deferred financing and deferred offering cost in accounts    payable and accrued liabilities	$	-		$	-

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

11

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

Sotherly Hotels Inc., formerly MHI Hospitality Corporation (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.  Many of the hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn.

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, formerly MHI Hospitality, L.P. (the “Operating Partnership”).  The Company and the Operating Partnership as of June 30, 2015, also owned a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”).

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 June 30, 2015, was approximately 81.9% owned by the Company, and its subsidiaries, lease the hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in this report 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.

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

On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0 million secured loan (the “Bridge Loan”) with Richmond Hill Capital Partners, LP (“Richmond Hill”) and Essex Equity Joint Investment Vehicle, LLC (collectively with Richmond Hill, the “Bridge Lenders”).   The Bridge Loan bore interest at the rate of 10.0% per annum and was scheduled to mature on March 26, 2015.  The loan also required mandatory prepayment upon certain events, was subject to a prepayment premium if the loan was prepaid in full or in part prior to maturity and contained limited financial covenants.  The loan was secured by a lien on our interest in our subsidiary that owns the DoubleTree by Hilton Philadelphia Airport.  The Bridge Loan was repaid in full in November 2014.

On March 27, 2014, we acquired the Georgian Terrace, a 326-room hotel in Atlanta, Georgia for the aggregate purchase price of approximately $61.1 million. Also included in the acquisition was a 698-space parking structure; all personal property and equipment located in or at the hotel; and a separate 0.6 acre development parcel with related development rights and improvements located thereon.  In conjunction with the acquisition, we obtained a $41.5 million first mortgage from Bank of the Ozarks, of which $1.5 million of the proceeds was placed in a restricted cash reserve.  The mortgage had a floating rate of interest equal to LIBOR plus 3.75%, with a 4.00% floor and required monthly payments of principal and interest on a 25-year amortization schedule following a 12-month interest-only period.  The mortgage would have matured on March 27, 2017, but could have been extended for two additional 1-year period subject to certain terms and conditions.  We refinanced the mortgage on the Georgian Terrace on May 5, 2015, see below.

On March 31, 2014, we entered into a First Amendment and other amended loan documents to extend the maturity date and secure additional proceeds of approximately $5.6 million on the original $30.0 million mortgage on the DoubleTree by Hilton Philadelphia Airport hotel with its existing lender, TD Bank, N.A. Pursuant to the First Amendment and other amended loan documents, the mortgage continues to bear interest at a rate of LIBOR plus 3.0% with a 3.50% floor, requires monthly payments of principal and interest on an amortization schedule over the remainder of the 25-year period that began with the commencement of the loan in March 2012, and extends the maturity date to April 1, 2019.

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As a condition to obtaining the First Amendment to the mortgage on the Hilton Philadelphia Airport hotel, we were required to enter into a license agreement with a national hotel franchise through at least the term of the amended mortgage loan. As such, we entered into a 10-year franchise agreement with Hilton Worldwide to rebrand the Hilton Philadelphia Airport hotel as a DoubleTree by Hilton in November 2014, subject to the completion of certain product improvement requirements that were met as of October 27, 2014.

On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2016.  Under the terms of the extension, we made a principal payment of $0.8 million and are required to make monthly principal payments of $83,000 and interest payments at a rate of 5.0% per annum.

On November 21, 2014, we closed on a 7.0% unsecured note offering in the aggregate amount of $25.3 million, of which a portion of the proceeds was used to repay the $19.0 million Bridge Loan, with the remainder to be used for general corporate purposes.

On November 24, 2014, we repaid the $19.0 million Bridge Loan.

On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the Crowne Plaza Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the existing loan agreement.

On May 5, 2015, we entered into a mortgage loan agreement to secure a $47.0 million mortgage loan on the Georgian Terrace with Bank of America, N.A.  The Company used the proceeds to repay the existing first mortgage on the Georgian Terrace, to pay closing costs and the remainder of the proceeds to partially fund ongoing renovations at the Georgian Terrace and for general corporate purposes.

On June 25, 2015, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Sandler O’Neill & Partners, L.P. as representative of the several underwriters listed therein (collectively, the “Underwriters”), relating to the issuance and sale (the “Offering”) of 3,000,000 shares of the Company’s common stock, par value $0.01 per share (the “Shares”). In addition, the Underwriting Agreement provided the Underwriters a 30-day option to purchase up to an additional 450,000 shares of common stock from the Company to cover over-allotments. The issuance and sale of the Shares was completed on July 1, 2015. The net proceeds from the Offering, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $22.7 million.

2. Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.

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.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review 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

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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.

Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment of approximately $3.2 million, as of December 31, 2014.

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 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 Chesapeake Hospitality 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 annual 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 – 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 market, with cost determined on a method that approximates first-in, first-out basis.

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of June 30, 2015 and December 31, 2014 were approximately $368,639 and $394,139, respectively. Amortization expense for the three month periods ended June 30, 2015 and 2014 totaled $12,750 and $10,875, respectively, and for the six month periods ended June 30, 2015 and 2014 totaled $25,500 and $21,750, respectively.

Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in 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. Amortization of deferred offering costs occurs when the equity 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 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 our then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments without exchange of the underlying principal amount. We valued our 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 –

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.

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 mortgage loans and unsecured notes measured at fair value and the basis for that measurement:

	Level 1			Level 2			Level 3
December 31, 2014
Investment in hotel property, net(1)	$	—		$	—		$	6,396,787
Mortgage loans(2)	$	—		$	(209,994,659	)	$	—
Unsecured notes(3)	$	(53,816,320	)	$	—		$	—
June 30, 2015 (unaudited)
Mortgage loans(2)	$	—		$	(212,379,506	)	$	—
Unsecured notes(3)	$	(55,181,600	)	$	—		$	—

(1) A non-recurring fair value measurement was conducted in 2014 for our investment in hotel property, which resulted in impairment charges for the year ended December 31, 2014, which represent the amount by which the carrying value of the asset group exceeded its fair value.

(2) Mortgage loans are reflected at outstanding principal balance on our Consolidated Balance Sheet as of June 30, 2015 and December 31, 2014.

(3) Unsecured notes are recorded at outstanding principal balance on our Consolidated Balance Sheet as of June 30, 2015 and December 31, 2014.

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 – 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. Receivables for amounts earned under various contracts are subject to audit, including a receivable for approximately $1.6 million from Starwood Resorts and Hotels.

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 statement of consolidated operations pursuant to the terms of each lease.  Lease revenue was approximately $0.4 million and $0.4 million, for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.9 million and $0.8 million, for the six months ended June 30, 2015 and 2014, respectively.

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

Remaining six months ending December 31, 2015	$	755,417
December 31, 2016		1,321,344
December 31, 2017		867,447
December 31, 2018		356,179
December 31, 2019		236,372
December 31, 2020 and thereafter		1,086,188
Total	$	4,622,947

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 June 30, 2015 and December 31, 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 June 30, 2015, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2010 through 2014. In addition, as of June 30, 2015, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally include 2004 through 2014.

The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.

Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, 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.

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 18,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest pro rata on each of the next three 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. The 2004 plan was terminated in 2013.

Under the 2013 Plan, the Company has made stock awards totaling 72,850 shares, including 50,350 non-restricted shares to certain executives and employees and 22,500 restricted shares issued to its independent directors.  All awards have vested except for 9,000 shares issued to the Company’s independent directors in January 2015, which will vest on December 31, 2015.

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. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of June 30, 2015, 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 for the three months ended June 30, 2015 and 2014 was $276,016 and $235,605, respectively.  The 2004 Plan was terminated in April 2013.

Advertising – Advertising costs were $56,799 and $69,293 for the three months ended June 30, 2015 and 2014, respectively, and were $109,655 and $113,153 for the six months ended June 30, 2015 and 2014, respectively. Advertising costs are expensed as incurred.

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.

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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 – Certain reclassifications in the amount of $69,130, from accounts receivable to accounts receivable – affiliate on the consolidated statements of cash flows, have been made to the prior period balances to conform to the current period presentation.

New Accounting Pronouncements – In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03 related to ASU Subtopic 835-30, Interest- Imputation of Interest.  To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  This guidance will be effective for annual reporting periods beginning after December 15, 2015.  Other than the change in presentation of deferred financing costs from an asset to a liability, we do not expect this ASU to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02 related to ASC Topic 810, Consolidation. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  This guidance will be effective for annual reporting periods beginning after December 15, 2017.  We do not expect this ASU to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 related to ASC Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.  As issued, this ASU is not effective until annual reporting periods beginning after December 15, 2016, however the FASB has proposed to defer the effective date of ASU 2014-09 such that it would be effective for annual reporting periods beginning after December 15, 2017.  We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

3. Acquisition of Hotel Properties

Georgian Terrace Acquisition. On March 27, 2014, we acquired the 326-room Georgian Terrace in Atlanta, Georgia, for approximately $61.1 million. The allocation of the purchase price based on fair values is as follows:

	Georgian Terrace
Land and land improvements	$	10,127,687
Buildings and improvements		45,385,939
Furniture, fixtures and equipment		5,163,135
Investment in hotel properties		60,676,761
Restricted cash		124,658
Accounts receivable		465,287
Prepaid expenses, inventory and other assets		430,997
Accounts payable and accrued liabilities		(591,618	)
Net cash	$	61,106,085

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The results of operations of the hotel are included in our consolidated financial statements from the date of acquisition. The total revenue and net loss related to the acquisition for the period March 27, 2014 to March 31, 2014 are approximately $333,000 and $172,000, respectively. The following pro forma financial information presents the results of operations of the Company and the Operating Partnership for the three and six months ended June 30, 2014, as if the acquisition of the Georgian Terrace had taken place on January 1, 2014. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2014, or of future results of operations:

	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2014
	(unaudited)		(unaudited)
Pro forma revenues	$	36,339,701	$	66,120,754
Pro forma operating expenses		29,120,620		58,222,109
Pro forma operating income		7,219,081		7,898,645
Pro forma net income (loss)		2,166,689		615,372
Pro forma earnings (loss) per basic share and unit		0.21		0.06
Pro forma earnings (loss) per diluted share and unit		0.21		0.06
Pro forma basic common shares		10,353,677		10,290,047
Pro forma diluted common shares		10,353,677		10,290,047

4. Investment in Hotel Properties

Investment in hotel properties as of June 30, 2015 and December 31, 2014 consisted of the following:

	June 30, 2015			December 31, 2014
	(unaudited)
Land and land improvements	$	37,550,809		$	37,483,400
Buildings and improvements		262,674,458			257,343,516
Furniture, fixtures and equipment		41,129,789			38,762,997
		341,355,056			333,589,913
Less: accumulated depreciation and impairment		(77,523,617	)		(73,397,760	)
	$	263,831,439		$	260,192,153

5. Debt

Mortgage Debt. As of June 30, 2015 and December 31, 2014, we had approximately $208.4 million and approximately $205.3 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

	Balance Outstanding as of
	June 30,
	2015		December 31,		Prepayment	Maturity		Amortization			Interest
Property	(unaudited)		2014		Penalties	Date		Provisions			Rate
Crowne Plaza Hampton Marina	$	4,011,500	$	4,509,500	None	6/30/2016		$	83,000	(1)	5.00%(2)
Crowne Plaza Houston Downtown	$	20,708,585		20,954,867	Yes(3)	4/12/2016	(4)	25 years				4.50%
Crowne Plaza Jacksonville Riverfront	$	16,198,315		16,358,706	None	7/10/2015	(5)	25 years			LIBOR plus 3.00 %
Crowne Plaza Tampa Westshore	$	13,167,978		13,317,684	None	6/18/2017		25 years				5.60%
DoubleTree by Hilton Raleigh Brownstone – University	$	15,171,384		15,274,284	(6)	8/1/2018		30 years				4.78%
DoubleTree by Hilton Philadelphia Airport	$	32,880,282		33,378,102	None	4/1/2019		25 years			LIBOR plus 3.00 %(7)
Georgian Terrace	$	47,000,000		41,500,000	None	6/1/2025	(8)	30 years				4.42%
Hilton Savannah DeSoto	$	20,834,269		21,050,093	Yes(9)	9/1/2017		25 years				6.06%
Hilton Wilmington Riverside	$	20,111,911		20,389,325	Yes(9)	4/1/2017		25 years				6.21%
Holiday Inn Laurel West	$	6,884,563		6,974,458	Yes(10)	8/5/2021		25 years			5.25 %(11)
Sheraton Louisville Riverside	$	11,466,140		11,584,638	(6)	1/6/2017		25 years				6.24%
Total	$	208,434,927	$	205,291,657

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(1) The Operating Partnership is required to make monthly principal payments of $83,000.

(2) The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014.

(3) The note is subject to a prepayment penalty if the loan is prepaid in full or in part prior to November 13, 2015.

(4) The note provides that the mortgage can be extended until November 2018 if certain conditions have been satisfied.

(5) The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.

(6) With limited exception, the note may not be prepaid until two months before maturity.

(7) The note bears a minimum interest rate of 3.50%.

(8) The note may not be prepaid on or prior to February 2025. Prepayment can be made without penalty thereafter with not less than 30 days and not more than 90 days, prior written notice.

(9) The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(10) Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

(11) The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.

We were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, as of June 30, 2015.

Total future mortgage debt maturities, without respect to any extension of loan maturity, as of June 30, 2015 were as follows:

The remaining six month period ending December 31, 2015	$	18,971,364
December 31, 2016	$	27,887,107
December 31, 2017	$	65,365,256
December 31, 2018	$	16,678,581
December 31, 2019	$	30,242,785
December 31, 2020 and thereafter	$	49,289,834
Total future maturities	$	208,434,927

7.0% Unsecured Notes. On November 21, 2014, the Operating Partnership issued 7.0% senior unsecured notes in the aggregate amount of $25.3 million (the “7% Notes”). The indenture requires quarterly payments of interest and matures on November 15, 2019. The 7% Notes are callable after November 15, 2017 at 101% of face value.

8.0% Unsecured Notes. On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes in the aggregate amount of $27.6 million (the “8% Notes”). The indenture requires quarterly payments of interest and matures on September 30, 2018. The 8% Notes are callable after September 30, 2016 at 101% of face value.

6. Commitments and Contingencies

Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to the Hilton Savannah 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 second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the three and six months ended June 30, 2015 and 2014 each totaled $15,866 and $31,734, respectively.

We lease, as landlord, the entire fourteenth floor of the Savannah 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 a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three and six months ended June 30, 2015 and 2014, each totaled $23,871 and $47,741, respectively..

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We lease land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2019. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for the three and six months ended June 30, 2015 and 2014, each totaled $651 and $1,301, respectively.

We lease certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year operating lease requiring annual payments of $4,961, which expired September 18, 2012. A new operating lease was executed requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the three and six months ended June 30, 2015 and 2014, each totaled $1,505 and $3,010, respectively.

We lease 5,216 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced September 1, 2009 and expires August 31, 2018.  Rent expense for the three and six months ended June 30, 2015 totaled $22,222 and $41,369, respectively, for the three months and six months ended June 30, 2014 totaled $20,398 and $40,796, respectively.

We lease 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $12,584 and $25,168 for the three and six months ended June 30, 2015, respectively, and totaled $11,046 and $22,091 for the three and six months ended June 30, 2014, respectively.

We also lease certain furniture and equipment under financing arrangements expiring between August 2015 and February 2018.

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

The remaining six month period ending December 31, 2015	$	202,195
December 31, 2016	$	358,204
December 31, 2017	$	241,609
December 31, 2018	$	176,740
December 31, 2019	$	100,480
December 31, 2020 and thereafter	$	636,547
Total	$	1,715,775

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 – At June 30, 2015, each of our wholly-owned operating hotels was operated under a management agreement with Chesapeake Hospitality.  Effective January 1, 2015, each of our wholly-owned hotels operated under a new master agreement as well as an individual hotel management agreement (see Note 8).  Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees.

Franchise Agreements – As of June 30, 2015, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 2.5% 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% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between September 2015 and October 2024.  On August 7, 2014, we voluntarily terminated the franchise agreement with Holiday Hospitality Franchising, LLC (IHG) for the Crowne Plaza Jacksonville Riverfront effective September 1, 2015 and recognized a termination fee of $351,800.  The property is being rebranded as the DoubleTree by Hilton Jacksonville Riverfront.  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 Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the DoubleTree by Hilton Brownstone-University, the Sheraton Louisville Riverside and the Georgian Terrace an amount equal to ^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 Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh Brownstone–University, Crowne Plaza Houston Downtown, Crowne Plaza Hampton Marina and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport.

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Litigation – We are not involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us. 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. Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares were issued as Series A Cumulative Redeemable Preferred Stock, and subsequently redeemed in 2013.  None of the remaining authorized shares have been issued.

Common Stock – The Company is authorized to issue up to 49,000,000 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.

The following is a schedule of issuances, since January 1, 2014, of the Company’s common stock:

During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it contributed to the Operating Partnership for an equivalent number of units.

On May 1, 2015, one holder of units in the Operating Partnership redeemed a total of 50,000 units for an equivalent number of shares of the Company’s common stock.

On April 1, 2015, one holder of units in the Operating Partnership redeemed 100,000 units for an equivalent number of shares of the Company’s common stock.

On January 23, 2015, the Company was issued 36,100 units in the Operating Partnership and awarded an aggregate of 26,350 shares of unrestricted stock to certain executives and employees as well as 9,750 shares of restricted stock to certain of its independent directors.

On October 1, 2014, one holder of units in the Operating Partnership redeemed 200,000 units for an equivalent number of shares of the Company’s common stock.

During September 2014, the Company sold 16,979 shares of common stock for net proceeds of $122,793, which it contributed to the Operating Partnership for an equivalent number of units.

During August 2014, the Company sold 276 shares of common stock for net proceeds of $2,118, which it contributed to the Operating Partnership for an equivalent number of units.

On April 1, 2014, two holders of units in the Operating Partnership redeemed 110,000 units for an equivalent number of shares of the Company’s common stock.

On February 14, 2014, the Company was issued 36,750 units in the Operating Partnership and awarded an aggregate of 24,000 shares of unrestricted stock to certain executives as well as 12,000 shares of restricted stock and 750 share of unrestricted stock to certain of its independent directors.

As of June 30, 2015 and December 31, 2014, the Company had 10,855,714 and 10,570,932 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.

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The following is a schedule of issuances and redemptions, since January 1, 2014, of units in the Operating Partnership in addition to the issuances of units in the Operating Partnership to the Company described above:

On November 1, 2014, the Operating Partnership redeemed 3,300 units held by a trust controlled by two members of the Board of Directors for a total of $25,621, pursuant to the terms of the partnership agreement.

As of June 30, 2015 and December 31, 2014, the total number of Operating Partnership units outstanding was 13,256,541 and 13,121,759, respectively.

As of June 30, 2015 and December 31, 2014, the total number of outstanding Operating Partnership units not owned by the Company was 2,400,827 and 2,550,827, respectively, with a fair market value of approximately $17.0 million and $19.1 million, based on the price per share of the common stock on such respective dates.

8. Related Party Transactions

Chesapeake Hospitality. As of June 30, 2015, the members of Chesapeake Hospitality (a company that is majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer, a member of its Board of Directors and a former member of its Board of Directors) owned 1,064,404 shares, approximately 9.8%, of the Company’s outstanding common stock as well as 1,642,958 Operating Partnership units. The indirect equity owners of Chesapeake Hospitality include the Company’s chief executive officer, Andrew M. Sims, and a member of the Company’s board of directors, Kim E. Sims.  The following is a summary of the transactions between Chesapeake Hospitality and us:

Accounts Receivable – At June 30, 2015 and December 31, 2014, we were due $74,816 and $50,838, respectively, from Chesapeake Hospitality.

Shell Island Sublease – We had a sublease arrangement with Chesapeake Hospitality on our expired leasehold interests in the property at Shell Island. Leasehold revenue was $0 and $87,500 for the three month periods ended June 30, 2015 and 2014, respectively and was $0 and $175,000 for the six month periods ended June 30, 2015 and 2014.  The underlying leases at Shell Island expired on December 31, 2011.

Strategic Alliance Agreement – On December 21, 2004, we entered into a ten-year strategic alliance agreement with Chesapeake Hospitality that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by Chesapeake Hospitality. The agreement expired on December 15, 2014, in conjunction with the execution of the new management agreements.

Management Agreements – Each of the hotels that we wholly-owned at June 30, 2015 were operated by Chesapeake Hospitality under various management agreements that were to expire between December 2014 and March 2019.  Under those agreements, Chesapeake Hospitality received a base management fee of 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. The agreements also provided for an incentive management fee due annually in arrears within 90 days of the end of the fiscal year equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis for eight hotels and on an individual basis for two other hotels, for a given year exceeds the gross operating profit for the same hotel(s), for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotel(s) included in the incentive fee calculation.  The management agreement for the Crowne Plaza Houston Downtown did not provide for any incentive management fee.  Additionally, the management agreement for the Georgian Terrace provided for an administrative fee of $30,000 per year for as long as the adjacent parking garage is managed by a third party.

On December 15, 2014, we entered into a new master agreement and a series of individual hotel management agreements that became effective on January 1, 2015.  The master agreement has a five-year term, but may be extended for such additional periods as long as an individual management agreement remains in effect.  The base management fee for the Crowne Plaza Houston Downtown and the Georgian Terrace will remain at 2.00% through 2015, increases to 2.25% in 2016 and increases to 2.50% thereafter.  The base management fees for the remaining properties in the current portfolio will be 2.65% through 2017 and decreases 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.

Base management and administrative fees earned by Chesapeake Hospitality for our wholly owned properties totaled $912,540 and $1,666,437 for the three months and six months ended June 30, 2015, respectively, and $1,086,379 and $1,781,212 for the three months and six months ended June 30, 2014, respectively.  In addition, estimated incentive management fees of $59,460 and $94,808 were accrued for the three months and six months ended June 30, 2015, respectively, and estimated incentive management fees of $92,621 and $99,893 were accrued for the three months and six months ended June 30, 2014, respectively.  

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Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitality for our employees as well as those employees that are employed by Chesapeake Hospitality that work exclusively for our hotel properties. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $1,123,117 million and $2,241,674 million for the three and six months ended June 30, 2015, respectively and $996,746 and $1,811,547 for the three and six months ended June 30, 2014, respectively.

Crowne Plaza Hollywood Beach Resort.  As of June 30, 2015, we owned a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. The following is a summary of the transactions between Crowne Plaza Hollywood Beach Resort and us:

Accounts Receivable – At June 30, 2015 and December 31, 2014, we were due $73,435 and $146,836, respectively, from Crowne Plaza Hollywood Beach Resort.

Management Agreement – Crowne Plaza Hollywood Beach Resort is operated by Chesapeake Hospitality under a management agreement that was set to expire August 2017.  Under this agreement Chesapeake Hospitality received a base management fee of 3.0% of gross revenues. Base management fees earned by Chesapeake Hospitality totaled $146,869 and $358,128 for the three and six months ended June 30, 2015, respectively, and totaled $138,259 and $331,044 for the three and six months ended June 30, 2014, respectively (see Note 14).

Asset Management Fee – Also, under an asset management agreement, MHI Hospitality TRS II, LLC, an indirect subsidiary of the Company, receives a fee of 1.50% of total revenue which is due on a quarterly basis for services rendered. Asset management fees totaled $73,435 and $179,064 for the three and six months ended June 30, 2015, respectively, and totaled $69,130 and $165,569 for three and six months ended June 30, 2014, respectively.  Unpaid asset management fees included in accounts payable and accrued liabilities at June 30, 2015 and December 31, 2014 totaled $73,435 and $73,278, respectively.

Redemption of Units in Operating Partnership – During 2014, we redeemed a total of 3,300 units in our Operating Partnership held by a trust controlled by two current members and one former member of the Company’s Board of Directors for a total of $25,621 pursuant to the terms of the partnership agreement.

Bridge Lenders. A former member of the Company’s board of directors holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Equity Joint Investment Vehicle, LLC as well as Richmond Hill Capital Partners, LP. On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0 million secured Bridge Loan with the Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC.  The Bridge Loan had a maturity date of March 26, 2015; carried a fixed interest rate of 10.0% per annum; was subject to a prepayment premium if the loan was prepaid in full or in part prior to March 26, 2015; required mandatory prepayment upon certain events; contained limited financial covenants; and was secured by a lien on 100% of the limited partnership interests in the subsidiary that owns the DoubleTree by Hilton Philadelphia Airport hotel. The Bridge Loan was repaid in full in November 2014.

Others. On June 24, 2013 we hired Ashley S. Kirkland, the daughter of our Chief Executive Officer as a legal analyst and Robert E. Kirkland IV, her husband, as our compliance officer. On October 2, 2014, we hired Andrew M. Sims Jr., the son of our Chief Executive Officer, as a brand manager. Compensation for the three and six months ended June 30, 2015 totaled approximately $67,596 and $133,840, respectively, for all individuals.  Compensation for the three and six months ended June 30, 2014 totaled $33,287 and $65,617, respectively, for all individuals.

During June 2015, the Company reimbursed $25,302 to a partnership controlled by the Chief Executive Officer for business-related air travel pursuant to the Company’s travel reimbursement policy.

9. Retirement 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 $14,934 and $27,610 for the three and six months ended June 30, 2015, respectively, and $17,106 and $31,553 for the three and six months ended June 30, 2014, respectively.

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10. Unconsolidated Joint Venture

As of June 30, 2015, we owned a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort (“JV Owner”) and (ii) the entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract (“JV Lessee”). Carlyle owns a 75.0% indirect controlling interest in all these entities (see Note 14). The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

	June 30, 2015
	(unaudited)		December 31, 2014
ASSETS
Investment in hotel property, net	$	61,987,961	$	62,823,142
Cash and cash equivalents		2,542,130		2,153,906
Restricted cash		1,033,814		874,111
Accounts receivable		251,946		328,755
Prepaid expenses, inventory and other assets		1,869,150		1,489,479
TOTAL ASSETS	$	67,685,001	$	67,669,393
LIABILITIES
Mortgage loan, net	$	57,000,000	$	57,000,000
Accounts payable and other accrued liabilities		2,673,151		2,195,613
Accounts payable and other accrued liabilities, member		71,764		146,836
Advance deposits		416,968		398,695
TOTAL LIABILITIES		60,161,883		59,741,144
TOTAL MEMBERS’ EQUITY		7,523,118		7,928,249
TOTAL LIABILITIES AND MEMBERS’  EQUITY	$	67,685,001	$	67,669,393

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	3,777,455		$	3,524,406		$	9,521,784		$	8,732,252
Food and beverage department		801,452			725,125			1,672,739			1,603,337
Other operating departments		316,738			359,121			743,081			702,368
Total revenue		4,895,645			4,608,652			11,937,604			11,037,957
Expenses
Hotel operating expenses
Rooms department		856,768			814,657			1,809,365			1,682,480
Food and beverage department		618,440			547,570			1,256,169			1,179,587
Other operating departments		153,988			163,879			320,897			326,446
Indirect		1,981,234			1,727,825			4,150,980			3,606,910
Total hotel operating expenses		3,610,430			3,253,931			7,537,411			6,795,423
Depreciation and amortization		444,403			555,272			888,979			1,110,008
General and administrative		88,806			96,884			215,951			233,596
Total operating expenses		4,143,639			3,906,087			8,642,341			8,139,027
Operating income		752,006			702,565			3,295,263			2,898,930
Interest expense		(654,534	)		(649,687	)		(1,300,394	)		(1,295,850	)
Net income	$	97,472		$	52,878		$	1,994,869		$	1,603,080

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11. Indirect Hotel Operating Expenses

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

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
General and administrative	$	2,762,342	$	2,772,076	$	5,336,446	$	4,793,073
Sales and marketing		2,877,233		2,648,968		5,522,296		4,740,190
Repairs and maintenance		1,650,878		1,647,141		3,257,548		2,975,656
Utilities		1,419,032		1,493,491		2,841,811		2,694,508
Franchise fees		1,122,728		1,105,391		2,007,492		1,989,697
Management fees, including incentive		912,540		1,086,379		1,761,246		1,781,212
Insurance		479,948		490,986		1,023,333		960,175
Property taxes		977,617		893,202		1,930,258		1,634,547
Other		130,551		52,276		120,782		104,726
Total indirect hotel operating expenses	$	12,332,869	$	12,189,910	$	23,801,212	$	21,673,784

12. Income Taxes

The components of the income tax benefit for the three and six months ended June 30, 2015 and 2014 are as follows:

	Three Months Ended		Three Months Ended			Six Months Ended		Six Months Ended
	June 30, 2015		June 30, 2014			June 30, 2015		June 30, 2014
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
Current:
Federal	$	-	$	—		$	-	$	23,000
State		50,277		115,489			107,956		115,489
		50,277		115,489			107,956		138,489
Deferred:
Federal		775,255		474,327			350,096		(257,862	)
State		130,003		(26,034	)		58,708		(52,164	)
		905,258		448,293			408,804		(310,026	)
	$	955,535	$	563,782		$	516,760	$	(171,537	)

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

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense	$	922,979		$	1,127,555		$	1,016,507		$	1,218,333
Effect of non-taxable REIT income		(147,724	)		(630,228	)		(666,411	)		(1,453,195	)
State income tax benefit		180,280			66,455			166,664			63,325
	$	955,535		$	563,782		$	516,760		$	(171,537	)

As of June 30, 2015 and December 31, 2014, we had a net deferred tax asset of approximately $3.1 million and $3.5 million, respectively, of which, approximately $2.4 million and $2.7 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2028 if not utilized by such time.  As of both June 30, 2015 and December 31, 2014, approximately $0.2 million of the net deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years.  The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation.  We believe that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

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13. Income Per Share and Per Unit

Income per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income. The computation of basic and diluted earnings per share is presented below.

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Numerator
Net income attributable to the Company for basic computation	$	1,431,110	$	2,166,689	$	2,006,444	$	2,949,691
Denominator
Weighted average number of common shares outstanding for basic computation		10,768,730		10,353,677		10,682,743		10,290,047
Basic and diluted net income per share	$	0.13	$	0.21	$	0.19	$	0.29

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

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Numerator
Net income	$	1,759,109	$	2,752,555	$	2,472,967	$	3,754,869
Denominator
Weighted average number of units outstanding		13,052,524		13,107,804		13,099,316		13,098,870
Basic and diluted net income  per unit	$	0.13	$	0.21	$	0.19	$	0.29

14. Subsequent Events

On July 1, 2015, the Company closed an equity sale and issuance of 3,000,000 shares of common stock (the “Offering”), for net proceeds of approximately $19.8 million, after deducting offering-related expenses.  On July 17, 2015, the Company closed an additional equity sale and issuance of 435,000 shares of common stock in the amount of approximately $2.9 million, net, from the exercise of an option of the underwriter to purchase additional shares from the Offering.  The Company contributed the approximately $22.7 million net proceeds of this Offering, including the proceeds from the exercise of the underwriters’ option, to the Operating Partnership in exchange for common units of partnership interest in the Operating Partnership. The Operating Partnership used the net proceeds from the Offering to partially fund the cash portion of the purchase price for the acquisition of Carlyle’s 75.0% indirect interest in the Crowne Plaza Hollywood Beach Resort and related transaction expenses.

On July 7, 2015, the Company obtained an $18.5 million mortgage with Bank of the Ozarks collateralized by a first mortgage on the Crowne Plaza Jacksonville Riverfront. The mortgage carries a four-year term, bears interest at a floating rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0% and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The maturity date is July 7, 2019, with a possible one year extension. The Company used the proceeds of the mortgage to repay the existing first mortgage on the Crowne Plaza Jacksonville Riverfront and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the Crowne Plaza Jacksonville Riverfront and for general corporate purposes.

On July 10, 2015, we paid a quarterly dividend (distribution) of $0.075 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record on June 15, 2015.

On July 27, 2015, we authorized payment of a quarterly dividend (distribution) of $0.08 per common share (and unit) to the stockholders (and unitholders of the Operating Partnership) of record as of September 15, 2015.  The dividend (distribution) is to be paid on October 9, 2015.

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On July 31, 2015, the transaction with Carlyle closed and indirect subsidiaries of the Operating Partnership acquired the remaining 75.0% interest in the entities that own the JV Owner and the JV Lessee previously owned by Carlyle.  As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort.

The purchase price for the remaining 75.0% interest in the Crowne Plaza Hollywood Beach Resort was a cash payment in the aggregate amount of approximately $26.3 million, subject to customary pro-rations. The existing mortgage loan secured by the Crowne Plaza Hollywood Beach Resort in the amount of $57.0 million issued by Bank of America, N.A. (the “Hollywood Mortgage Loan”) remains in place. The Hollywood Mortgage Loan matures in January 2017 and requires monthly payments of interest at a rate of LIBOR plus 3.95%. Pursuant to the purchase and sale agreement, the Operating Partnership was substituted for, and affiliates of Carlyle were released from, a guaranty and certain indemnification obligations relating to the Hollywood Mortgage Loan.

Concurrently with the closing of the purchase and sale of the 75.0% interest in the Crowne Plaza Hollywood Beach Resort, the Company entered into a new management agreement with Chesapeake Hospitality.  The new agreement has a 5-year term, but may be extended for two additional five-year periods.  Chesapeake Hospitality will receive a base management fee of 2.0% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues for the second full year, and 2.50% of gross revenues for every year thereafter.  In addition, Chesapeake Hospitality will be eligible to receive an incentive management fee equal to 10.0% of the amount by which the gross operating profit of the property exceeds the budgeted gross operating profit, up to a maximum incentive management fee of 0.25% of gross revenues.

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

Overview

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

Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels, comprising 3,010 rooms. All of our properties, except for the Georgian Terrace, operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree, Sheraton and Holiday Inn.  As of July 31, 2015, all twelve of these hotels are 100% owned by subsidiaries of the Operating Partnership.  During the reporting period and as of June 30, 2015, we owned a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle (prior to our acquisition of the remaining 75.0% interest in July 2015).  As of June 30, 2015, we owned the following hotel properties:

	Number
Property	of Rooms		Location	Date of Acquisition	ChainDesignation
Wholly-owned
Crowne Plaza Hampton Marina		173	Hampton, VA	April 24, 2008	Upscale
Crowne Plaza Houston Downtown		259	Houston, TX	November 13, 2013	Upscale
Crowne Plaza Jacksonville Riverfront		293	Jacksonville, FL	July 22, 2005	Upscale
Crowne Plaza Tampa Westshore		222	Tampa, FL	October 29, 2007	Upscale
DoubleTree by Hilton Brownstone-University		190	Raleigh, NC	December 21, 2004	Upscale
Georgian Terrace		326	Atlanta, GA	March 27, 2014	Independent(1)
DoubleTree by Hilton Philadelphia Airport		331	Philadelphia, PA	December 21, 2004	Upper Upscale
Hilton Savannah DeSoto		246	Savannah, GA	December 21, 2004	Upper Upscale
Hilton Wilmington Riverside		272	Wilmington, NC	December 21, 2004	Upper Upscale
Holiday Inn Laurel West		207	Laurel, MD	December 21, 2004	UpperMid-Scale
Sheraton Louisville Riverside		180	Jeffersonville, IN	September 20, 2006	Upper Upscale
		2,699
Joint Venture Property
Crowne Plaza Hollywood Beach Resort(2)		311	Hollywood, FL	August 9, 2007	Upscale
Total		3,010

(1) We believe that the Georgian Terrace would carry a chain scale designation of upper upscale if it were a branded hotel.

(2) We owned this hotel through a joint venture in which we had a 25.0% interest, as of June 30, 2015.   We acquired the remaining 75.0% interest on July 31, 2015.

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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 85.6% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our initial properties and related assets.

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

Key Operating Metrics

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

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

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

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

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

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

Results of Operations

The following tables illustrate the key operating metrics for the three and six months ended June 30, 2015 and 2014, respectively, for our wholly-owned properties during each respective reporting period (“actual” portfolio metrics) as well as for the ten wholly-owned properties in the portfolio that were under our control during the three and six months ended June 30, 2015 and the corresponding period in 2014 (“same-store” portfolio metrics).  Accordingly, the same-store data does not reflect the performance of the Georgian Terrace, which was acquired in March 2014 or for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture in August 2007 and in which we had a 25.0% indirect interest during each of the respective reporting periods (prior to our acquisition of the remaining 75.0% interest in July 2015).

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Actual Portfolio Metrics
Occupancy %		75.4	%		77.1	%		71.9	%		72.5	%
ADR	$	142.41		$	134.24		$	135.91		$	128.33
RevPAR	$	107.33		$	103.52		$	97.65		$	93.07
Same-Store Portfolio Metrics
Occupancy %		75.6	%		76.1	%		71.3	%		70.9	%
ADR	$	141.51		$	133.37		$	131.82		$	125.80
RevPAR	$	106.95		$	101.47		$	93.96		$	89.21

Comparison of the Three Months Ended June 30, 2015 to the Three Months Ended June 30, 2014

Revenue.  Total revenue for the three months ended June 30, 2015 increased approximately $0.6 million, or 1.4%, to approximately $36.9 million compared to total revenue of approximately $36.3 million for the three months ended June 30, 2014. Increases in revenues at our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana and Atlanta, Georgia were offset by decreases in revenue at our properties impacted by renovation

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activities in Laurel, Maryland; Jacksonville, Florida and Houston, Texas as well as by the loss of rental income associated with the Shell Island which expired in December 2014.

Room revenue increased approximately $1.0 million, or 3.7%, to approximately $26.4 million for the three months ended June 30, 2015 compared to room revenue of approximately $25.4 million for the three months ended June 30, 2014.  The increase in room revenue for the three months ended June 30, 2015 resulted mainly from favorable results of a 6.1% increase in ADR and a 3.7% increase in RevPAR, offset by a 2.3% decrease in occupancy, as compared to the same period in 2014.  Our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Hampton, Virginia and Atlanta, Georgia, experienced a significant increase in room revenue, offset by decreases at our properties in Wilmington, North Carolina; Laurel, Maryland and Houston, Texas.

Food and beverage revenues decreased approximately $0.4 million, or 4.6%, to approximately $8.6 million for the three months ended June 30, 2015 compared to food and beverage revenues of approximately $9.0 million for the three months ended June 30, 2014.   The decrease in food and beverage revenues for the three months ended June 30, 2014 resulted principally from our properties in Wilmington, North Carolina; Philadelphia, Pennsylvania; Laurel, Maryland, Jacksonville, Florida, Tampa, Florida, Hampton, Virginia and Houston, Texas, which were offset by increases in food and beverage revenue at our other properties.

Revenue from other operating departments remained about the same at $1.9 million, for the three months ended June 30, 2015 compared to revenue from other operating departments of approximately $1.9 million for the three months ended June 30, 2014.  

Hotel Operating Expenses.  Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $24.9 million for the three months ended June 30, 2015, an increase of approximately $0.2 million, or 0.6%, compared to total hotel operating expenses of approximately $24.7 million for the three months ended June 30, 2014.  The increase in hotel operating expenses for the three months ended June 30, 2015 was substantially related to increases in hotel revenues, with increases in the rooms department, other operating departments and indirect costs, offset by reductions in food and beverage costs for the period.

Rooms expense for the three months ended June 30, 2015 increased approximately $0.2 million, or 3.5%, to approximately $6.5 million compared to rooms expense for the three months ended June 30, 2014 of approximately $6.3 million. The increase in rooms expense for the three months ended June 30, 2015 was substantially related to similar increases in rooms revenue.

Food and beverage expenses for the three months ended June 30, 2015 decreased approximately $0.2 million, or 4.0%, to approximately $5.7 million compared to food and beverage expenses of approximately $5.9 million for the three months ended June 30, 2014.  The decrease in food and beverage expenses for the three months ended June 30, 2015 was substantially related to similar reductions in food and beverage revenues.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2015 increased approximately $0.1 million, or 1.2%, to approximately $12.3 million compared to indirect expenses of approximately $12.2 million for the three months ended June 30, 2014.  The increase in indirect expenses for the three months ended June 30, 2015 was substantially related to our increased sales and marketing and property tax costs compared with the three months ended June 30, 2014.

Depreciation and Amortization.  Depreciation and amortization expense for the three months ended June 30, 2015 increased approximately $0.3 million, or 10.6%, to $3.3 million compared to depreciation and amortization of approximately $3.0 million for the three months ended June 30, 2014.  The increase was mostly attributable to depreciation and amortization related to our capital assets acquired in the fourth quarter of 2014 and the first quarter of 2015.

Corporate General and Administrative.  Corporate general and administrative expenses for the three months ended June 30, 2015 increased approximately $0.1 million, or 7.1%, to approximately $1.5 million compared to corporate general and administrative expenses of approximately $1.4 million for the three months ended June 30, 2014.  The increase in corporate general and administrative expenses was mainly due to additional staffing and audit fees.

Interest Expense.  Interest expense for the three months ended June 30, 2015 decreased approximately $0.1 million, or 2.2%, to approximately $3.8 million compared to interest expense of approximately $3.9 million for the three months ended June 30, 2014.  The decrease in interest expense for the three months ended June 30, 2015 was substantially related to the Bridge Loan interest during the three months ending June 30, 2014 compared to no Bridge Loan interest during the three months ending June 30, 2015 accounting for approximately $0.5 million of the decrease and offset by the increase in the 7% Notes, accounting for approximately $0.4 million.

Equity Income in Joint Venture.  Equity income in joint venture for the three months ended June 30, 2015 represented our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort.  For each of the three months ended June 30, 2015 and 2014, we realized approximately $0 net income.  For the three months ended June 30, 2015, the hotel reported occupancy of 82.0%, ADR of

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$161.28 and RevPAR of $133.54.  This compares with results reported by the hotel for the three months ended June 30, 2014 of occupancy of 83.1%, ADR of $149.91 and RevPAR of $124.56.

Loss on Early Debt Extinguishment.  During the three months ended June 30, 2015 we refinanced a variable rate mortgage loan, we had with the Bank of the Ozarks on the Georgian Terrace, with a new fixed rate loan from Bank of America.  The amount of accumulated un-amortized loan costs of $698,083 was written off during the period ending June 30, 2015.  There was no loss on early debt extinguishment during the three months ending June 30, 2014.

Gain on Disposal of Assets.  During the three months ended June 30, 2015, we recorded a gain on disposal of assets of $37,833, compared to no disposal of assets for the three months ended June 30, 2014.

Income Taxes.  We had an income tax provision of approximately $2.7 million for the three months ended June 30, 2015 compared to an income tax provision of approximately $0.6 million for the three months ended June 30, 2014.  The income tax provision is primarily derived from the operations of our TRS Lessees.  Our TRS Lessees realized a greater operating income for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.

Net Income.  We realized net income for the three months ended June 30, 2015 of approximately $1.8 million compared to total net income of approximately $2.8 million for the three months ended June 30, 2014 as a result of the operating results discussed above.

Comparison of the Six Months Ended June 30, 2015 to the Six Months Ended June 30, 2014

Revenue. Total revenue for the six months ended June 30, 2015 increased approximately $6.4 million, or 10.6%, to approximately $67.8 million compared to total revenue of approximately $61.4 million for the six months ended June 30, 2014. Approximately $5.6 million of the increase relates to the acquisition of our property in Atlanta, Georgia in March 2014.  Increases in revenues at our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana and Atlanta, Georgia were offset by decreases in revenue at our properties impacted by renovation activities in Laurel, Maryland; Jacksonville, Florida and Houston, Texas as well as by the loss of rental income associated with the Shell Island which expired in December 2014.

Room revenue increased approximately $4.8 million, or 11.2%, to approximately $47.7 million for the six months ended June 30, 2015 compared to room revenue of approximately $42.9 million for the six months ended June 30, 2014. The increase in room revenue for the six months ended June 30, 2015 resulted mainly from the acquired property in Atlanta, Georgia, accounting for an increase of approximately $3.1 million for the period.  In addition, the increase in room revenue for the six months ended June 30, 2015 resulted from a 5.9% increase in ADR and a 4.9% increase in RevPAR, offset by a 0.9% decrease in occupancy, as compared to the same period in 2014.Our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana and Atlanta, Georgia, also experienced a significant increase in room revenue, offset by decreases at our properties in Wilmington, North Carolina; Laurel, Maryland and Houston, Texas.  

Food and beverage revenues increased approximately $1.0 million, or 7.0%, to approximately $16.3 million for the six months ended June 30, 2015 compared to food and beverage revenues of approximately $15.3 million for the six months ended June 30, 2014. The increase in food and beverage revenues for the six months ended June 30, 2015 resulted principally from our recently acquired property in Atlanta, Georgia, accounting for an increase of approximately $1.9 million for the period. Additional increases in food and beverage revenue at our properties in Savannah, Georgia and Raleigh, North Carolina were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments increased approximately $0.7 million, or 22.4%, to approximately $3.8 million for the six months ended June 30, 2015 compared to revenue from other operating departments of approximately $3.1 million for the six months ended June 30, 2014.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $47.9 million for the six months ended June 30, 2015, an increase of approximately $4.7 million, or 10.9%, compared to total hotel operating expenses of approximately $43.2 million for the six months ended June 30, 2014. The increase in hotel operating expenses for the six months ended June 30, 2015 was substantially related to our recently acquired property in Atlanta, Georgia, accounting for approximately $5.0 million of the increase in expenses for the six months ended June 30, 2015, coupled by a decrease in hotel operating expenses at our same-store properties of approximately $0.3 million compared to the six months ended June 30, 2014.

Rooms expense for the six months ended June 30, 2015 increased approximately $1.3 million, or 11.2%, to approximately $12.3 million compared to rooms expense of approximately $11.0 million for the six months ended June 30, 2014. The increase in rooms expense for the six months ended June 30, 2015 was substantially related to our recently acquired property in Atlanta, Georgia, accounting for approximately $0.9 million of the increase.

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Food and beverage expenses for the six months ended June 30, 2015 increased approximately $1.6 million, or 16.7%, to approximately $11.1 million compared to food and beverage expenses of approximately $9.5 million for the six months ended June 30, 2014. The increase in food and beverage expenses for the six months ended June 30, 2015 was substantially related to our recently acquired property in Atlanta, Georgia, accounting for approximately $1.3 million of the increase.

Indirect expenses at our wholly-owned properties were approximately $23.8 million for the six months ended June 30, 2015, an increase of approximately $2.2 million, or 10.0%, compared to indirect expenses of approximately $21.6 million for the six months ended June 30, 2014. The increase in indirect expenses for the six months ended June 30, 2015 were substantially related to our recently acquired property in Atlanta, Georgia, accounting for approximately $1.7 million of the increase compared to the six months ended June 30, 2014.

Depreciation and Amortization. Depreciation and amortization expense for the six months ended June 30, 2015 increased approximately $0.8 million, or 14.5%, to $6.2 million compared to depreciation and amortization of approximately $5.4 million for the six months ended June 30, 2014. The increase was mostly attributable to depreciation and amortization related to our recently acquired property in Atlanta, Georgia and depreciation and amortization related to our capital assets acquired in the fourth quarter of 2014 and the first quarter of 2015.

Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2015 increased approximately $0.2 million, or 9.0%, to approximately $2.9 million compared to corporate general and administrative expenses of approximately $2.7 million the six months ended June 30, 2014.  The increase in corporate general and administrative expenses was mainly due to additional staffing and audit fees.

Interest Expense. Interest expense for the six months ended June 30, 2015 increased approximately $0.8 million, or 11.8%, to approximately $7.6 million compared to interest expense of approximately $6.8 million for the six months ended June 30, 2014. The increase in interest expense for the six months ended June 30, 2015 was substantially related to the additional mortgage on our recently acquired property in Atlanta, Georgia during the first quarter of 2015, the 7% Notes for the six month period ending June 30, 2015, off set by decrease in interest from the reduction of the Bridge Loan during the second quarter of 2015.

Equity Income in Joint Venture. Equity income in joint venture for the six months ended June 30, 2015 represented our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the six months ended June 30, 2015, our 25.0% share of the net income of the hotel increased approximately $0.1 million, or 23.1%, to approximately $0.5 million compared to net income of approximately $0.4 million for the six months ended June 30, 2014.  The increase primarily relates to better operating metrics.  For the six months ended June 30, 2015, the hotel reported occupancy of 84.7%, ADR of $199.69 and RevPAR of $169.15. This compares with results reported by the hotel for the six months ended June 30, 2014 of occupancy of 86.3%, ADR of $179.69 and RevPAR of $155.13.

Loss on Early Debt Extinguishment.  During the six months ended June 30, 2015 we refinanced a variable rate mortgage loan, we had with the Bank of the Ozarks on the Georgian Terrace, with a new fixed rate loan from Bank of America.  The amount of accumulated un-amortized loan costs of $698,083 was written off during the period ending June 30, 2015.  There was no loss on early debt extinguishment during the six months ending June 30, 2014.

Gain on Disposal of Assets.  During the six months ended June 30, 2015, we recorded a gain on disposal of assets of $37,833, compared to no disposal of assets for the six months ended June 30, 2014.

Income Taxes. We had an income tax provision of approximately $0.5 million for the six months ended June 30, 2015 compared to an income tax benefit of approximately $0.2 million for the six months ended June 30, 2014.  The income tax benefit (provision) is primarily derived from the operations of our TRS Lessee.  Our TRS Lessee realized a taxable operating income for the six months ended June 30, 2015 compared to taxable loss for the six months ended June 30, 2014.

Net Income (Loss).  We realized net income of approximately $2.5 million for the six months ended June 30, 2015 compared to a net income of approximately $3.8 million for the six months ended June 30, 2014, as a result of the operating results discussed above.

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Non-GAAP Financial Measures

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

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

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

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early debt extinguishment, aborted offering costs, costs associated with the departure of executive officers 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 of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended			Three Months Ended		Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014		June 30, 2015			June 30, 2014
Net income	$	1,759,109		$	2,752,555	$	2,472,967		$	3,754,869
Depreciation and amortization		3,304,906			2,988,968		6,209,297			5,423,296
Equity in depreciation and amortization of joint venture		111,101			138,818		222,245			277,502
Gain on involuntary conversion of asset		(37,833	)		—		(37,833	)		—
FFO	$	5,137,283		$	5,880,341	$	8,866,676		$	9,455,667
(Increase)/decrease in deferred income taxes		905,258			428,074		408,804			(307,245	)
Acquisition costs		—			—		—			155,187
Loss on early debt extinguishment		698,083			—		698,083			—
Adjusted FFO	$	6,740,624		$	6,308,415	$	9,973,563		$	9,303,609

Hotel EBITDA.  We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) equity in the income or loss of equity investees, (4) unrealized gains and losses on derivative instruments not included in other comprehensive income, (5) gains and losses on disposal of assets, (6) realized gains and losses on investments, (7) impairment of long-lived assets or investments, (8) loss on early debt extinguishment, (9) corporate general and administrative expense; (10) depreciation and amortization; and (11) 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.

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The following is a reconciliation of net income to Hotel EBITDA for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Net income	$	1,759,109		$	2,752,555		$	2,472,967		$	3,754,869
Interest expense		3,840,435			3,925,428			7,614,970			6,808,867
Interest income		(15,308	)		(5,267	)		(25,409	)		(7,156	)
Income tax provision (benefit)		955,535			563,782			516,760			(171,537	)
Depreciation and amortization		3,304,906			2,988,968			6,209,297			5,423,296
Equity in interest, depreciation and amortization of joint venture		274,734			297,042			547,343			597,266
Loss on early debt extinguishment		698,083			—			698,083			—
Gain on involuntary conversion of asset		(37,833	)		—			(37,833	)		—
EBITDA		10,779,661			10,522,508			17,996,178			16,405,605
Acquisition costs		—			—			—			155,127
Adjusted EBITDA		10,779,661			10,522,508			17,996,178			16,560,732
Corporate general and administrative		1,490,380			1,391,206			2,941,604			2,543,870
Equity in Adjusted EBITDA of joint venture		(299,102	)		(314,459	)		(1,046,060	)		(1,002,234	)
Net lease rental income		—			(87,500	)		—			(175,000	)
Other fee income		(73,435	)		(69,129	)		(179,064	)		(165,569	)
Hotel EBITDA	$	11,897,504		$	11,442,626		$	19,712,658		$	17,761,799

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels.  Cash flow provided by operating activities for the six months ended June 30, 2015 was approximately $9.4 million.  We had a decrease in cash provided by operating activities for the six months ended June 30, 2015 by approximately $3.0 million, compared to the six months ended June 30, 2014.  The decrease is mainly attributable to a net decrease of changes in assets and liabilities of approximately $3.2 million, a decrease in net income of approximately $1.3 million which was offset by an approximate $1.5 million increase in other adjustments to reconcile net income to net cash provided by operating activities. We expect that cash on hand and the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the Company’s stockholders (and unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).

Investing Activities.  During the six months ended June 30, 2015 we spent approximately $10.7 million on capital expenditures, of which, approximately $2.2 million related to the routine replacement of furniture, fixtures and equipment and $8.5 million related to renovation of our properties in Atlanta, Georgia; Houston, Texas; Laurel, Maryland; Philadelphia, Pennsylvania and Jacksonville, Florida.  We also contributed approximately $3.7 million during the six months ended June 30, 2015 into reserves required by the lenders for seven of our hotels according to the provisions of their respective loan agreements.  During the six months ended June 30, 2015, we received reimbursements from those reserves of approximately $3.9 million for capital expenditures related to those properties for periods ending on or before June 30, 2015.

Financing Activities. Cash flow provided by financing activities for the six months ended June 30, 2015 was approximately $1.1 million.  This inflow was mainly from net mortgage proceeds of $3.1 million and proceeds from the sale of common stock of $0.7 million, offset by dividend and distribution payments of $1.8 million and payments of deferred financing costs of $0.9 million.

Capital Expenditures

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry.  Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue.  Below is a description of capital expenditures by property:

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· We expect additional capital expenditures of $1.3 million for the remainder of 2015 related to the anticipated rebranding by September 2015 of the Crowne Plaza Jacksonville Riverfront as a DoubleTree by Hilton.

· At the Company’s hotel in Houston, Texas, renovations of the guestrooms and public spaces totaling an estimated $5.2 million are underway.  As of June 30, 2015, the Company had incurred costs totaling approximately $2.4 million toward this renovation.  Renovations are expected to be completed by March 2016.

· At the Company’s hotel in Atlanta, Georgia, an estimated $6.8 million guestroom renovation is underway.  As of June 30, 2015, the Company had incurred costs totaling approximately $4.3 million toward this renovation.  Renovations are expected to be completed in February 2016.

· At the Company’s hotel in Laurel, Maryland, an estimated $4.5 million renovation and product improvement plan is underway in anticipation of the previously announced rebranding to the DoubleTree by Hilton Laurel.  As of June 30, 2015, the Company had incurred costs totaling approximately $2.5 million toward this renovation.  Renovations are expected to be completed in December 2015.  

Given our desire to proceed with the renovation activities at our properties in Laurel, Maryland; Jacksonville, Florida; Houston, Texas and Atlanta, Georgia, we aim to restrict all other capital expenditures during the renovation period to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations.  We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 2.50% to 3.00% of gross revenues in 2015.

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

Liquidity and Capital Resources

As of June 30, 2015, we had total cash of approximately $24.1 million, of which approximately $17.3 million was in cash and cash equivalents and approximately $6.8 million was restricted for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted.  We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).

On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of the Ozarks collateralized by a first mortgage on the Crowne Plaza Jacksonville Riverfront. The mortgage term is four years maturing July 7, 2019 and may be extended for one additional period of one year, subject to certain criteria. The mortgage bears a floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0%.  The mortgage amortizes on a 25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The Company used the proceeds from the mortgage to repay the existing first mortgage on the Crowne Plaza Jacksonville Riverfront and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the Crowne Plaza Jacksonville Riverfront and for general corporate purposes.

On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America on the Georgian Terrace in Atlanta, Georgia.  The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule.  The maturity date is June 1, 2025.  The Company used the proceeds of the mortgage to repay the existing first mortgage and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the Georgian Terrace and for general corporate purposes.

We will need to, and plan to, renew, replace or extend our existing indebtedness prior to their respective maturity dates.  We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.  If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may be forced to dispose of hotel properties on disadvantageous terms.  To the extent we cannot repay our outstanding debt, we risk losing some or all of these properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.

We believe there will be more opportunities to acquire properties in the future that meet our strategic goals and provide attractive long term returns.  Given the potential for attractive acquisitions emerging from the recent economic downturn, we intend to

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pursue the acquisition of wholly-owned properties, permissible joint venture investments as well as equity or debt financing in the future to enable us to take advantage of such opportunities.  However, should permissible joint venture transactions and equity or debt financing not be available on acceptable terms, we may not be able to take advantage of such opportunities.

Beyond the funding of any required principal reduction on our existing indebtedness or acquisitions, our medium and long-term needs will generally include the repayment of the Notes (which are callable after September 30, 2016 with regard to the 8% Notes and November 15, 2017 with regard to the 7% Notes) and the retirement of maturing mortgage debt.  We remain committed to maintaining a flexible capital structure.  Accordingly, we expect to meet our long-term liquidity needs through a combination of some or all of the following:

· The issuance of additional shares of preferred stock;

· The issuance of additional shares of our common stock;

· The issuance of senior, unsecured debt;

· The issuance of additional units in the Operating Partnership;

· The incurrence by the subsidiaries of the Operating Partnership of mortgage indebtedness in connection with the acquisition or refinancing of hotel properties;

· The selective disposition of core or non-core assets;

· The sale or contribution of some of our wholly-owned properties, development projects or development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of generating additional capital through such sale or contribution; or

· The issuance by the Operating Partnership and/or subsidiary entities of secured and unsecured debt securities.

Financial Covenants

Mortgage Loans

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

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

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

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

As of June 30, 2015, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.

Unsecured Notes

The indentures for the Notes contains certain covenants and restrictions that require us to meet certain financial ratios.  We are not permitted to incur any Debt (other than intercompany Debt), as defined in the indentures, 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 indentures, 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

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Expense, both as defined in the indentures, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.

These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were applicable at June 30, 2015 and December 31, 2014, respectively.

	June 30,			December 31,
	2015			2014
Ratio of Stabilized Consolidated Income Available    for Debt Service to Stabilized Consolidated    Interest Expense
Net income (loss)(1)	$	(2,020,411	)	$	(738,509	)
Interest expense(1)		15,442,974			14,636,870
Loss on debt extinguishment		1,529,162			831,079
Provision for taxes(1)		(1,039,426	)		(1,727,723	)
Equity in (income) loss of joint venture(1)		(401,119	)		(307,370	)
Impairment of investment in hotel properties, net(1)		3,175,000			3,175,000
Depreciation and amortization(1)		12,755,284			11,969,284
Corporate general and administrative expenses(1)		5,328,556			5,085,949
Consolidated Income Available for Debt Service(1)		34,770,020			32,924,580
Less: Income of Non-Stabilized Assets (1)(2)		(4,668,995	)		(8,961,209	)
Stabilized Consolidated Income Available for    Debt Service (1)	$	30,101,025		$	23,963,371
Interest expense(1)	$	15,442,974		$	14,636,870
Loss on debt extinguishment		1,529,162			831,079
Amortization of issuance costs(1)(2)		(1,425,766	)		(1,428,674	)
Consolidated Interest Expense(1)		15,546,370			14,039,275
Less: Interest expense of Non-Stabilized Assets(1)(2)		(1,183,199	)		(2,444,937	)
Stabilized Consolidated Interest Expense(1)	$	14,363,171		$	11,594,338
Ratio of Stabilized Consolidated Income Available for    Debt Service to Stabilized Consolidated    Interest Expense		2.10			2.07
Threshold Ratio Minimum		1.50			1.50
Ratio of Debt to Adjusted Total Asset Value:
Mortgage loans	$	208,434,927		$	205,291,657
Unsecured notes		52,900,000			52,900,000
Total debt	$	261,334,927		$	258,191,657
Stabilized Consolidated Income Available for    Debt Service(1)(2)	$	30,101,025		$	23,963,361
Capitalization Rate		7.5	%		7.5	%
		401,347,000			319,511,480
Non-Stabilized Assets		70,000,000			146,440,000
Total cash		24,091,958			23,256,363
Adjusted Total Asset Value	$	495,438,958		$	489,207,843
Ratio of Debt to Adjusted Total Asset Value		0.53			0.53
Threshold Ratio Maximum		0.65			0.65

(1) Represents the four preceding calendar quarters.

(2) As permitted by the indentures, the DoubleTree by Hilton Philadelphia Airport, for the period ended June 30, 2015, and the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, for the period ended December 31, 2014, are considered non-stabilized assets for purposes of the financial covenants.

Dividend Policy

We intend to continue to declare quarterly distributions to our stockholders.  The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant.  The amount, timing and frequency of distributions will be

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authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future.

In April 2015, we increased the quarterly dividend (distribution) to $0.075 per common share (and unit).

In July 2015, we increased the quarterly dividend (distribution) to $0.08 per common share (and unit).

Off-Balance Sheet Arrangements

Through a joint venture with a Carlyle subsidiary, we owned a 25.0% indirect, noncontrolling interest in an entity (the “JV Owner”) that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida.  Pursuant to the joint venture, we had the right to receive a pro rata share of operating surpluses and we had an obligation to fund our pro rata share of operating shortfalls.  We also had the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.  The Crowne Plaza Hollywood Beach Resort was leased to another entity (the “JV Lessee”) in which we also owned a 25.0% indirect, noncontrolling interest.

Carlyle owned a 75.0% controlling interest in the JV Owner and the JV Lessee.  Carlyle had the right to dispose of the Crowne Plaza Hollywood Beach Resort without our consent.  We accounted for our noncontrolling 25.0% interest in all of these entities under the equity method of accounting.

On July 31, 2015, indirect subsidiaries of the Operating Partnership acquired the remaining 75.0% interest in the JV Owner and the JV Lessee from Carlyle.  As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort.  The property remains encumbered by a $57.0 million mortgage which matures in January 2017, requires monthly payments of interest at a rate of LIBOR plus additional interest of 3.95%. The Crowne Plaza Hollywood Beach Resort secures the mortgage.

Inflation

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

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

Geographic Concentration and Seasonality

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

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

Critical Accounting Policies

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

Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment.  In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in

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hotels acquired from third parties, which were contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis.  Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable.  Events or circumstances that may cause us to perform our review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located.  When such conditions exist, management performs a recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated proceeds from the ultimate disposition of a hotel property exceed its carrying value.  If the estimated undiscounted future cash flows are found to be less than the carrying amount of a hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss is recognized.

There were no charges for impairment of hotel properties recorded for the six months ended June 30, 2015.

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.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized.  Because of expected future taxable income of our TRS Lessees, we have not recorded a valuation allowance to reduce our net deferred tax asset as of June 30, 2015.  Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Recent Accounting Pronouncements

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

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 and Section 21E of the Securities Exchange Act of 1934, 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, increases in wages, energy costs and other operating costs;

· the magnitude and sustainability of the economic recovery in the hospitality industry and in the markets in which we operate;

· 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;

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· risks associated with remediating and 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

As of June 30, 2015, we had approximately $212.3 million of fixed-rate debt and approximately $49.1 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 5.77%.  A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows.  Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month and 3-month LIBOR.  However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50% a portion of our variable-rate debt would not be exposed to changes in interest rates.   Assuming that the aggregate amount outstanding on the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the Crowne Plaza Jacksonville Riverfront remains at approximately $49.1 million, the balance at June 30, 2015, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and 3-month LIBOR would be approximately $0.4 million.

As of December 31, 2014, we had approximately $167.0 million of fixed-rate debt and approximately $91.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.14%. 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 change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, of 0.50% and 0.25%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on our mortgage on the Georgian Terrace, the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the Crowne Plaza Jacksonville Riverfront remain at approximately $91.2 million, the balance at

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December 31, 2014, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $0.8 million.

Item 4. Controls and Procedures

Sotherly Hotels Inc.

Evaluation of 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 June 30, 2015.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting, as described in Management’s Report On Internal Controls Over Financial Reporting in Item 9A of its Annual Report on Form 10-K for the year ended December 31, 2014, which continues to exist at June 30, 2015.

Remediation of Material Weakness in Internal Control over Financial Reporting

The Company is in the process of improving its controls to remediate the material weakness that existed as of December 31, 2014.  The actions being taken are subject to ongoing senior management review, as well as audit committee oversight. These remediation actions include: (i) increasing the staffing of the Company’s internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants. While some of the remediation actions are in process, this will take time to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weakness described above will continue to exist.

Changes in Internal Control over Financial Reporting

There has been 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, except as described above.

Sotherly Hotels LP

Evaluation of Disclosure Controls and Procedures

The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of June 30, 2015.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, have concluded that the Operating Partnership’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting, as described in Management’s Report On Internal Controls Over Financial Reporting in Item 9A of its Annual Report on Form 10-K for the year ended December 31, 2014, which continues to exist at June 30, 2015.

Remediation of Material Weakness in Internal Control over Financial Reporting

The Operating Partnership is in the process of improving its controls to remediate the material weakness that existed as of December 31, 2014.  The actions being taken are subject to ongoing senior management review, as well as audit committee oversight. These remediation actions include: (i) increasing the staffing of the Operating Partnership’s internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants. While some of the remediation actions are in process, this will take time to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weakness described above will continue to exist.

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Changes in Internal Control over Financial Reporting

There has been 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, except as described above.

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PART II

Item 1. Legal Proceedings

We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of operations.

Item 1A. Risk Factors

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, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Partnership Agreement, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

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

Exhibit
Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of the Company.(1)
3.3	Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)
3.4	Articles Supplementary of the Company.(3)
3.6	Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)
3.7	Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)
3.8	Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)
3.9	Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)
4.6	Senior Unsecured Note issued by Sotherly Hotels LP. (6)
4.7	Indenture between Sotherly Hotels LP and Wilmington Trust, National Association, as trustee. (6)
4.8	Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)
4.9	First Supplemental Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)
4.10	7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP. (8)
10.53	Purchase and Sale Agreement by and between MHI Hospitality TRS II, LLC, MHI Hotel Investments Holdings LLC and CRP/MHI Holdings, L.L.C. dated as of June 19, 2015. (9)
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.3	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
31.4	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.3	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.4	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

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Exhibit
Number	Description of Exhibit
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873).

(2) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

(3) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

(4) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013.

(5) Incorporated by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013. (333-189821).

(6) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013.

(7) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014.

(8) Incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2015.

(9) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2015.

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SIGNATURES

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

	SOTHERLY HOTELS INC.
Date: August 12, 2015	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer
	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

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SIGNATURES

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

	SOTHERLY HOTELS LP
	By:	SOTHERLY HOTELS INC.
		Its General Partner
Date: August 12, 2015	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer
	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit
Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of the Company.(1)
3.3	Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)
3.4	Articles Supplementary of the Company.(3)
3.6	Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)
3.7	Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)
3.8	Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)
3.9	Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)
4.6	Senior Unsecured Note issued by Sotherly Hotels LP. (6)
4.7	Indenture between Sotherly Hotels LP and Wilmington Trust, National Association, as trustee. (6)
4.8	Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)
4.9	First Supplemental Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)
4.10	7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP. (8)
10.53	Purchase and Sale Agreement by and between MHI Hospitality TRS II, LLC, MHI Hotel Investments Holdings LLC and CRP/MHI Holdings, L.L.C. dated as of June 19, 2015. (9)
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.3	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
31.4	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.3	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.4	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document

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Exhibit
Number	Description of Exhibit
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873).

(2) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

(3) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

(4) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013.

(5) Incorporated by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013. (333-189821).

(6) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013.

(7) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014.

(8) Incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2015.

(9) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2015.

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