| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis
of Presentation and Principles of Consolidation The
Company’s consolidated financial statements include its accounts and the accounts of its subsidiaries over which it has
control. All intercompany balances and transactions are eliminated in consolidation. The
Company prepares its consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Act
of 1934, as amended (the “Exchange Act”). Accordingly, the consolidated financial statements do not include all of
the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included.
Results for the three months ended March 31, 2018 may not be indicative of the results that may be expected for the full year
of 2018. For further information, please read the consolidated financial statements included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2017. The
Company includes the accounts of certain entities in its consolidated financial statements when the Company is the primary beneficiary
for entities deemed to be variable interest entities (“VIEs”) through which the Company has a controlling interest.
Interests in entities acquired are evaluated based on GAAP, which requires the consolidation of VIEs in which the Company is deemed
to have the controlling financial interest. The Company has the controlling financial interest if the Company has the power to
direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or
receive benefits from the VIE that could be significant to the Company. If the interest in the entity is determined not to be
a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which the Company
has control and/or substantive participating rights under the respective ownership agreement. There are judgments and estimates
involved in determining if an entity in which the Company has an investment is a VIE. The entity is evaluated to determine if
it is a VIE by, among other things, determining if the equity investors as a group have a controlling financial interest in the
entity and if the entity has sufficient equity at risk to finance its activities without additional subordinated financial support.
The Company did not have any VIE interests as of March 31, 2018 or December 31, 2017. Use
of Estimates The
preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Organization
and Offering Costs Organization
and offering costs of the Company are paid directly by the Company or incurred by the Advisor on behalf of the Company. Pursuant
to the Advisory Agreement between the Company and the Advisor, the Company is obligated to reimburse the Advisor or its affiliates,
as applicable, for organization and offering costs incurred by the Advisor associated with each of the Company’s public
offerings, provided that within 60 days of the last day of the month in which a public offering ends, the Advisor is obligated
to reimburse the Company to the extent aggregate organization and offering costs incurred by the Company in connection with the
completed public offering exceed 15.0% of the gross offering proceeds from the sale of the Company’s shares of common stock
in the completed public offering. Such organization and offering costs include selling commissions and dealer manager fees paid
to a dealer manager, legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses
of the Advisor’s employees and employees of the Advisor’s affiliates and others. Any reimbursement of the Advisor
or its affiliates for organization and offering costs will not exceed actual expenses incurred by the Advisor. All
offering costs, including selling commissions and dealer manager fees, are recorded as an offset to additional paid-in-capital,
and all organization costs are recorded as an expense when the Company has an obligation to reimburse the Advisor. As
of March 31, 2018, total offering costs for the Offering were $17,997,679, comprised of $12,333,647 of offering costs incurred
directly by the Company and $5,664,032 in offering costs incurred by and reimbursable to the Advisor. As of March 31, 2018, the
Company had $235,973 due to the Advisor for reimbursable offering costs. Income
Taxes The
Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable
year ended December 31, 2016. The Company did not meet all of the qualifications to be a REIT under the Internal Revenue Code
for the years ended December 31, 2015 and 2014, including not having 100 shareholders for a sufficient number of days in 2015.
Prior to qualifying to be taxed as a REIT, the Company is subject to normal federal and state corporation income taxes. Provided
that the Company continues to qualify as a REIT, it generally will not be subject to federal corporate income tax to the extent
it distributes its REIT taxable income to its stockholders, so long as it distributes at least 90% of its REIT taxable income
(which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net
income as calculated in accordance with GAAP) and satisfies the other organizational and operational requirements for qualification
as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income
and property, and federal income and excise taxes on its undistributed income. The Company leases the hotels it acquires to a
wholly-owned taxable REIT subsidiary (“TRS”) that is subject to federal, state and local income taxes. The
Company accounts for income taxes of its TRS 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. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities from a change in tax rates is recognized in earnings in the period prior to when the new rates become
effective. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized. The
Company has reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and
measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial
statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized
in the consolidated financial statements if it is more likely than not that the tax position will be sustained upon examination.
The Company had no material uncertain tax positions as of March 31, 2018. The
preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes.
These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment
of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected
to be material. The Company will account for interest and penalties relating to uncertain tax positions in the current period
results of operations, if necessary. The Company has tax years 2013 through 2017 remaining subject to examination by various federal
and state tax jurisdictions. For more information, see Note 11, “Income Taxes.” Fair
Value Measurement Fair
value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
Level
1: Observable inputs such as quoted prices in active
markets.
Level
2: Directly or indirectly observable inputs, other
than quoted prices in active markets.
Level
3: Unobservable inputs in which there is little
or no market data, which require a reporting entity to develop its own assumptions.
Assets
and liabilities measured at fair value are based on one or more of the following valuation techniques:
Market
approach: Prices and other relevant information generated
by market transactions involving identical or comparable assets or liabilities.
Cost
approach: Amount required to replace the service capacity
of an asset (replacement cost).
Income
approach: Techniques used
to convert future income amounts to a single amount based on market expectations (including present-value, option-pricing,
and excess-earnings models). The
Company’s estimates of fair value were determined using available market information and appropriate valuation methods.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions
or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities
in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The
Company elected not to use the fair value option in recording its financial instruments, which include cash and cash equivalents,
restricted cash, accounts receivable, notes receivable, notes payable, and accounts payable and accrued expenses. With the exception
of the Company’s fixed-rate notes receivable from related parties and notes payable, the carrying amounts of these financial
instruments approximate their fair values due to their short-term nature. For the fair value of the Company’s note receivable
from related parties and notes payable, see Note 4, “Notes Receivable from Related Parties” and Note 5, “Debt.”
Additionally, for the fair value information related to purchase accounting for the Mergers, see Note 3, “Investment in
Hotel Properties.” Concentration
of Risk As
of March 31, 2018, the Company had cash and cash equivalents and restricted cash deposited in certain financial institutions in
excess of federally insured levels. The Company diversifies its cash and cash equivalents with several banking institutions in
an attempt to minimize exposure to any one of these institutions. The Company regularly monitors the financial stability of these
financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted
cash. The
Company is also exposed to credit risk with respect to its notes receivable from related parties. The failure of any of the
borrowers on the notes receivable from related parties to make payments of interest and principal when due, or any other event
of default under the notes receivable from related parties, would have an adverse impact on the Company’s results of operations. The
Company is exposed to geographic risk in that eight of its fourteen hotel properties are located in one state, Texas. Valuation
and Allocation of Hotel Properties — Acquisition Upon
acquisition, the purchase price of hotel properties is allocated to the tangible assets acquired, consisting of land, buildings
and furniture, fixtures and equipment, any assumed debt, identified intangible assets and asset retirement obligations, if any,
based on their fair values. Acquisition costs are charged to expense as incurred. Initial valuations are subject to change during
the measurement period, but the measurement period ends as soon as the information is available. The measurement period shall
not exceed one year from the acquisition date. Land
values are derived from appraisals and building values are calculated as replacement cost less depreciation or estimates of the
relative fair value of these assets using discounted cash flow analyses or similar methods. The value of furniture, fixtures and
equipment is based on their fair value using replacement costs less depreciation. Any difference between the fair value of the
hotel property acquired and the purchase price of the hotel property is recorded as goodwill or gain on acquisition of hotel property. The
Company determines the fair value of any assumed debt by calculating the net present value of the scheduled mortgage payments
using interest rates for debt with similar terms and remaining maturities that the Company believes it could obtain at the date
of acquisition. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium
and amortized over the remaining life of the loan as interest expense. In
allocating the purchase price of each of the Company’s properties, the Company makes assumptions and uses various estimates,
including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets and discount rates
used to determine present values. The Company uses Level 3 inputs to value acquired properties. Many of these estimates are obtained
from independent third party appraisals. However, the Company is responsible for the source and use of these estimates. These
estimates require judgment and are subject to being imprecise; accordingly, if different estimates and assumptions were derived,
the valuation of the various categories of the Company’s hotel properties or related intangibles could in turn result in
a difference in the depreciation or amortization expense recorded in the Company’s consolidated financial statements. These
variances could be material to the Company’s results of operations and financial condition. Valuation
and Allocation of Hotel Properties — Ownership Investment
in hotel properties is recorded at cost less accumulated depreciation. Major improvements that extend the life of an asset are
capitalized and depreciated over a period equal to the shorter of the life of the improvement or the remaining useful life of
the asset. The costs of ordinary repairs and maintenance are charged to expense when incurred. Depreciation
expense is computed using the straight-line method based upon the following estimated useful lives:
Estimated Useful
Lives (years)
Buildings and improvements 39-40
Exterior improvements 10-20
Furniture, fixtures and equipment 5-10 Impairments The
Company monitors events and changes in circumstances indicating that the carrying amount of a hotel property may not be recoverable.
When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future
undiscounted cash flows expected to be generated over the life of the asset from operating activities and from its eventual disposition,
to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows,
the Company recognizes an impairment loss to adjust the carrying amount of the asset to estimated fair value for assets held for
use and fair value less costs to sell for assets held for sale. There were no such impairment losses for the three months ended
March 31, 2018 and 2017. In
evaluating a hotel property for impairment, the Company makes several estimates and assumptions, including, but not limited to,
the projected date of disposition of the property, the estimated future cash flows of the property during the Company’s
ownership and the projected sales price of the property. A change in these estimates and assumptions could result in a change
in the estimated undiscounted cash flows or fair value of the Company’s hotel property which could then result in different
conclusions regarding impairment and material changes to the Company’s consolidated financial statements. Revenue
Recognition Hotel
revenues, including room, food, beverage and other ancillary revenues, are recognized as the related services are delivered. Revenue
is recorded net of any sales and other taxes collected from customers. Interest income is recognized when earned. Amounts received
prior to guest arrival are recorded as advances from the customer and are recognized at the time of occupancy. Refer to “Recent
Accounting Pronouncements” below for further discussion of revenue recognition. Cash
and Cash Equivalents Cash
and cash equivalents represent cash on hand or held in banks and short-term investments with an initial maturity of three months
or less at the date of purchase. Restricted
Cash Restricted
cash includes reserves for property taxes, as well as reserves for property improvements, replacement of furniture, fixtures,
and equipment and debt service, as required by certain management or mortgage and term debt agreements restrictions and provisions. Accounts
Receivable The
Company takes into consideration certain factors that require judgments to be made as to the collectability of receivables. Collectability
factors taken into consideration are the amounts outstanding, payment history and financial strength of the customer, which, taken
as a whole, determines the valuation. Ongoing credit evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable that is estimated to be uncollectible. Impairment
of Notes Receivable from Related Parties The
Company reviews the notes receivable from related parties for impairment in each reporting period pursuant to the applicable authoritative
accounting guidance. A loan is impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts recorded as assets on the consolidated balance sheets. The Company applies normal loan review and
underwriting procedures (as may be implemented or modified from time to time) in making that judgment. When
a loan is impaired, the Company measures impairment based on the present value of expected cash flows discounted at the loan’s
effective interest rate against the value of the asset recorded on the consolidated balance sheets. The Company may also measure
impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent.
If a loan is deemed to be impaired, the Company records a valuation allowance through a charge to earnings for any shortfall.
The Company’s assessment of impairment is based on considerable judgment and estimates. The Company did not record a valuation
allowance during the three months ended March 31, 2018 or 2017. Prepaid
Expenses and Other Assets Prepaid
expenses include prepaid property insurance and hotel operating expenses. Other assets also include the Company’s deferred
income tax asset. Deferred
Franchise Costs Deferred
franchise costs are recorded at cost and amortized over the term of the respective franchise contract on a straight-line basis.
Accumulated amortization of deferred franchise costs was $71,202 and $50,430 as of March 31, 2018 and December 31, 2017, respectively.
Expected future amortization of deferred franchise costs as of March 31, 2018 is as follows (in thousands):
Years
Ending December 31,
2018 $ 63
2019 83
2020 83
2021 83
2022 82
Thereafter 602
Total $ 996 Debt
Issuance Costs Debt
issuance costs are presented as a direct deduction from the carrying value of the notes payable on the consolidated balance sheets.
Debt issuance costs are amortized as a component of interest expense over the term of the related debt using the straight-line
method, which approximates the interest method. Accumulated amortization of debt issuance costs was $1,605,916 and $1,029,922
as of March 31, 2018 and December 31, 2017, respectively. Expected future amortization of debt issuance costs as of March 31,
2018 is as follows (in thousands):
Years
Ending December 31,
2018 $ 1,246
2019 511
2020 512
2021 511
2022 511
Thereafter 971
Total $ 4,262 Earnings
(Loss) per Share Earnings
(loss) per share (“EPS”) is calculated based on the weighted average number of shares outstanding during each period.
Basic and diluted EPS are the same for all periods presented. Non-vested shares of restricted common stock totaling 7,500 and
11,250 shares as of March 31, 2018 and December 31, 2017, respectively, held by the Company’s independent directors are
included in the calculation of basic EPS because such shares have been issued and participate in dividends. Comprehensive
Income For
the periods presented, there were no differences between reported net loss attributable to common stockholders and comprehensive
loss. Recent Accounting Pronouncements In May 2014,
the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will
replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either
the full retrospective or modified retrospective adoption. In July 2015, the FASB voted to defer the effective date to
January 1, 2018 with early adoption beginning January 1, 2017. The Company completed its evaluation of the effect that ASU
No. 2014-09 will have on the Company’s consolidated financial statements and the Company’s evaluation of each of
the Company’s revenue streams under the new standard. Because of the short-term day-to-day nature of the Company’s hotel
revenues, the Company determined that the pattern of revenue recognition will not materially change. Under ASU No. 2014-09,
there will be a recharacterization of certain revenue streams affecting both gross and net revenue reporting due to changes
in principal versus agency guidance, which presentation is deemed immaterial for the Company and will not affect net income.
Additionally, the Company does not sell hotel properties to customers as defined by FASB, but have historically disposed of
hotel properties for cash sales with no contingencies and no future involvement in the hotel operations, and therefore, ASU
No. 2014-09 will not impact the recognition of hotel sales. The Company finalized its expanded disclosure for the notes to
the consolidated financial statements pursuant to the new requirements. The Company adopted this standard on its effective
date of January 1, 2018 under the cumulative effect transition method. No adjustment will be recorded to the Company’s
opening balance of retained earnings on January 1, 2018 as there was no impact to our net income. Additionally, comparative
information beginning in 2018 will not be restated and will continue to be reported in a manner consistent with Revenue
Recognition (Topic 605). The Company also expects that the effect of adoption of ASU No. 2014-09 will be immaterial to us on
an on-going basis. In February 2016,
the FASB issued ASU No. 2016-02, “Leases,” which changes lessee accounting to reflect the financial liability and
right-of-use assets that are inherent to leasing an asset on the balance sheet. The standard requires a modified
retrospective approach, with restatement of the prior periods presented in the year of adoption, subject to any FASB
modifications. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The
Company anticipates adopting this standard on January 1, 2019. In evaluating the effect that ASU No. 2016-02 will have on the
Company’s consolidated financial statements and related disclosures, the Company believes the impact will be minimal to
the Company’s consolidated statements of operations. In August 2016, the
FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses the Statement
of Cash Flow classification and presentation of certain cash transactions. ASU No. 2016-15 is effective for the Company’s fiscal year commencing on January 1, 2018. The effect of this amendment is to be applied retrospectively where practical and early
adoption is permitted. The Company adopted ASU No. 2016-15 for the Company’s fiscal year commencing on January 1, 2018. The
Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on the Company’s consolidated financial
position or the Company’s consolidated results of operations. In November 2016, the
FASB issued ASU No. 2016-18, “Classification of Restricted Cash,” which requires that amounts generally described as
restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. This standard will be effective for the first annual period
beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company adopted
this standard on January 1, 2018. As a result, restricted cash reserves are included with cash and cash equivalents on the
Company’s consolidated statements of cash flows. The adoption did not change the presentation of the Company’s consolidated
balance sheets. In January 2017, the
FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as an acquisition of assets or a business. ASU No. 2017-01
is effective for the Company’s fiscal year commencing on January 1, 2018. The effect of this guidance is to be applied prospectively
and early adoption is permitted. The Company does not believe that the adoption of ASU No. 2017-01 will have a material effect
on the Company’s consolidated financial position or the Company’s consolidated results of operations. In February 2017, the
FASB issued ASU No. 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the
Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,” which clarifies the scope
of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts
with non-customers. ASU No. 2017-05 will impact the recognition of gains and losses from hotel sales. This standard is effective
for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is
permitted. The Company adopted this standard on January 1, 2018 and does not anticipate that ASU No. 2017-05 will affect the Company’s
consolidated statements of operations and comprehensive income. In August 2017, the
FASB issued ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,”
which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk
management activities in its financial statements and simplifies the application of hedge accounting. This standard will be effective
for the first annual period beginning after December 15, 2018, including interim periods within those periods. Early adoption is
permitted. The Company adopted this standard on January 1, 2018 and aside from minor presentation changes in its disclosure on
derivative and hedging activities, it will not have a material effect on the Company’s consolidated financial statements. |
