| 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. 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 15 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 June 30, 2024, total offering costs for the initial public offering and the follow-on offering were $ 21.1 12.3 8.8 18.4 12.3 6.1 2.7 0 2.7 0 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 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 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 June 30, 2024. 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 2019 through 2023 remaining subject to examination by various federal
and state tax jurisdictions. For more information, see Note 10, “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. With
the exception of the Company’s fixed-rate notes payable, the carrying amounts of other financial instruments, which include
cash and cash equivalents, restricted cash, accounts receivable, notes receivable, notes payable, and accounts payable and accrued
expenses, approximate their fair values due to their short-term nature. For the fair value of the Company’s hotel properties,
see Note 3, “Investment in Hotel Properties.” For the fair value of the Company’s notes payable, see Note 4,
“Debt.” Concentration
of Risk As
of June 30, 2024, 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 along with the balances on deposit at such institutions to minimize the Company’s potential risk
and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash. The
Company holds cash accounts at several institutions in excess of the Federal Deposit Insurance Corporations (the “FDIC”)
protection limits of $ 250,000 7.3 13.4 The
Company is exposed to geographic risk in that nine of its fifteen 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 a component of 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
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. Losses on impairment of hotel properties were $21.8 million and
$0 for the three and six months ended June 30, 2024 and 2023. 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. The Company has recorded an impairment based on management’s best estimate of fair value at June 30, 2024. This is a significant
estimate that could materially change within one year. For loss on impairment
of the Company’s hotel properties, see Note 3, “Investment in Hotel Properties.” 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. Amounts received prior to guest arrival are recorded as
advances from the customer and are recognized at the time of occupancy. 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 90 days 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. The
following is a reconciliation of the Company’s cash and cash equivalents and restricted cash to the total presented in the
unaudited consolidated statement of cash flows as of June 30, 2024 and 2023 (in thousands):
June 30,
2024 2023
Cash and cash equivalents $ 11,024 $ 9,511
Restricted cash 16,972 13,432
Total cash and cash equivalents and restricted cash $ 27,996 $ 22,943 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. 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 $ 562,000 520,000 Expected
future amortization of deferred franchise costs as of June 30, 2024 is as follows (in thousands):
Years Ending December 31,
2024 $ 42
2025 85
2026 84
2027 75
2028 75
Thereafter 188
Total $ 549 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 $ 7 6.7 Expected future amortization of debt issuance costs as of December 31, 2023 is as follows (in thousands):
Years Ending December 31,
2024 $ 235
2025 222
2026 102
2027 68
2028 41
Thereafter —
Total $ 668 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. There were no non-vested shares of restricted common stock
as of June 30, 2024 and December 31, 2023 held by the Company’s independent directors. Recently
Issued Accounting Standards In
December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” which
requires entities to expand disclosures regarding the reconciliation of income tax rate and the amount of income taxes paid, net
of refunds received, disaggregated by federal state and foreign jurisdiction. Other
recently issued accounting standards or pronouncements not disclosed in the foregoing paragraph have been excluded because they
are either not relevant to the Company, or are not expected to have, or did not have, a material effect on the Company’s
consolidated financial statements. |
