S
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2022
OR
◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-56272
PROCACCIANTI HOTEL REIT, INC.
(Exact name of registrant as specified in its charter)
Maryland |
| 81-3661609 |
(State or Other jurisdiction of |
| (I.R.S Employer |
|
|
|
1140 Reservoir Avenue, Cranston, RI |
| 02920-6320 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(401) 946-4600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol(s) |
| Name of each exchange on which registered: |
NA | | NA | | NA |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ◻ |
| Accelerated filer | ◻ |
Non-accelerated filer | ⌧ |
| Smaller reporting company | ⌧ |
Emerging growth company | ⌧ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧
As of November 10, 2022, there were 3,913,388 shares of the Registrant’s Class K common stock issued and outstanding, 1,345,518 shares of the Registrant’s Class K-I common stock issued and outstanding, 47,617 shares of the Registrant’s Class K-T common stock issued and outstanding, 581,410 shares of the Registrant’s Class A common stock issued and outstanding and 125,000 shares of the Registrant’s Class B common stock issued and outstanding.
PROCACCIANTI HOTEL REIT, INC.
INDEX
PART I - FINANCIAL INFORMATION | Page | |
|
|
|
3 | ||
| Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 | 3 |
| 4 | |
| 5 | |
| 7 | |
| 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |
52 | ||
52 | ||
|
| |
54 | ||
|
| |
54 | ||
54 | ||
54 | ||
58 | ||
58 | ||
58 | ||
58 | ||
|
| |
| 60 |
2
PROCACCIANTI HOTEL REIT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
ASSETS |
| |
|
| |
|
Property and equipment, net | | $ | 101,685,940 | | $ | 102,236,979 |
Cash | |
| 9,212,533 | |
| 6,850,026 |
Restricted cash | |
| 3,404,796 | |
| 2,988,376 |
Accounts receivable, net | |
| 404,956 | |
| 453,979 |
Due from related parties | |
| 318,139 | |
| 153,113 |
Prepaid expenses and other assets, net | |
| 1,349,418 | |
| 978,905 |
Total Assets | | $ | 116,375,782 | | $ | 113,661,378 |
LIABILITIES AND EQUITY | |
|
| |
|
|
Liabilities | |
|
| |
|
|
Mortgage notes payable, net | | $ | 65,074,166 | | $ | 64,141,964 |
Other debt | | | — | | | 942,605 |
Accounts payable, accrued expenses and other, net | |
| 3,357,067 | |
| 2,700,281 |
Due to related parties | |
| 2,086,289 | |
| 1,885,559 |
Total Liabilities | |
| 70,517,522 | |
| 69,670,409 |
Commitments and Contingencies | |
|
| |
|
|
Noncontrolling interest of the Operating Partnership | | | 1,328,009 | | | 1,226,417 |
Stockholders’ Equity | |
| | |
| |
Class K common stock, $0.01 par value per share; 55,500,000 shares authorized, 3,909,144 and 3,947,642 shares issued and outstanding, respectively | |
| 39,091 | |
| 39,477 |
Class K-I common stock, $0.01 par value per share; 55,500,000 shares authorized, 1,337,250 and 1,315,534 shares issued and outstanding, respectively | |
| 13,372 | |
| 13,155 |
Class K-T common stock, $0.01 par value per share; 116,000,000 shares authorized, 56,919 and 62,946 shares issued and outstanding, respectively | |
| 569 | |
| 629 |
Class A common stock, $0.01 par value per share; 21,000,000 shares authorized, 581,410 shares issued and outstanding | |
| 5,814 | |
| 5,814 |
Class B common stock, $0.01 par value per share; 125,000 shares authorized, issued and outstanding | |
| 1,250 | |
| 1,250 |
Additional paid-in capital | |
| 47,671,267 | |
| 47,930,212 |
Cumulative income (loss) | |
| 1,275,668 | |
| (3,500,228) |
Cumulative distributions | |
| (10,279,117) | |
| (7,428,718) |
Total Stockholders’ Equity | |
| 38,727,914 | |
| 37,061,591 |
Noncontrolling interest | |
| 5,802,337 | |
| 5,702,961 |
Total Equity | |
| 44,530,251 | |
| 42,764,552 |
Total Liabilities and Stockholders’ Equity | | $ | 116,375,782 | | $ | 113,661,378 |
The accompanying notes are an integral part of these condensed consolidated financial statements
3
PROCACCIANTI HOTEL REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Revenues |
| |
|
| |
|
| |
|
| |
|
|
Rooms | | $ | 9,652,212 | | $ | 9,131,968 | | $ | 20,916,938 | | $ | 17,384,237 | |
Food and beverage | |
| 1,038,870 | |
| 976,812 | |
| 2,036,163 | |
| 1,638,012 | |
Other operating | |
| 260,906 | |
| 202,177 | |
| 1,417,920 | |
| 475,218 | |
Total revenues | |
| 10,951,988 | |
| 10,310,957 | |
| 24,371,021 | |
| 19,497,467 | |
Expenses | |
|
| |
|
| |
|
| |
|
| |
Rooms | |
| 1,684,324 | |
| 1,697,376 | |
| 3,190,483 | |
| 3,466,570 | |
Food and beverage | | | 643,022 | | | 574,608 | | | 1,378,905 | | | 1,018,965 | |
Other property expenses | | | 2,845,813 | | | 2,678,659 | | | 7,487,453 | | | 6,130,213 | |
Property management fees to affiliates | |
| 328,867 | |
| 309,697 | |
| 706,587 | |
| 585,439 | |
Corporate general and administrative | | | 348,781 | | | 354,591 | | | 1,052,282 | | | 979,892 | |
Other fees to affiliates | |
| 262,628 | |
| 484,583 | |
| 702,442 | |
| 866,224 | |
Depreciation and amortization | |
| 990,626 | |
| 883,605 | |
| 2,852,336 | |
| 2,443,246 | |
Total expenses | |
| 7,104,061 | |
| 6,983,119 | |
| 17,370,488 | |
| 15,490,549 | |
Operating income | |
| 3,847,927 | |
| 3,327,838 | |
| 7,000,533 | |
| 4,006,918 | |
Gain on loan extinguishment | |
| — | |
| — | |
| 942,605 | |
| 635,317 | |
Loss on disposal of fixed assets | | | (10,535) | | | — | | | (10,535) | | | — | |
Interest expense, net | |
| (716,108) | |
| (681,293) | |
| (2,026,484) | |
| (1,985,870) | |
Gain on interest rate cap/swap | |
| 62,109 | |
| 86,161 | |
| 147,218 | |
| 289,412 | |
Net income before income taxes | |
| 3,183,393 | |
| 2,732,706 | |
| 6,053,337 | |
| 2,945,777 | |
Income tax expense | |
| (200,498) | |
| (24,514) | |
| (243,473) | |
| (25,864) | |
Net income | |
| 2,982,895 | |
| 2,708,192 | |
| 5,809,864 | |
| 2,919,913 | |
Net income attributable to noncontrolling interest | |
| 214,792 | |
| 173,426 | |
| 1,033,968 | |
| 443,746 | |
Net income attributable to common stockholders | | $ | 2,768,103 | | $ | 2,534,766 | | $ | 4,775,896 | | $ | 2,476,167 | |
Net income attributable to Class K common stockholders – basic and diluted | | $ | 1,815,882 | | $ | 1,693,748 | | $ | 3,157,834 | | $ | 1,733,290 | |
Net income per Class K common share – basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 | |
Weighted average number of Class K common shares outstanding – basic and diluted | |
| 3,915,774 | |
| 3,920,423 | |
| 3,930,059 | |
| 3,775,288 | |
Net income attributable to Class K-I common stockholders – basic and diluted | | $ | 618,844 | | $ | 532,104 | | $ | 1,065,864 | | $ | 461,006 | |
Net income per Class K-I common share – basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 | |
Weighted average number of Class K-I common shares outstanding – basic and diluted | |
| 1,334,480 | |
| 1,231,632 | |
| 1,326,513 | |
| 1,004,120 | |
Net income attributable to Class K-T common stockholders – basic and diluted | | $ | 27,845 | | $ | 25,777 | | $ | 50,037 | | $ | 24,316 | |
Net income per Class K-T common share – basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 | |
Weighted average number of Class K-T common shares outstanding – basic and diluted | |
| 60,046 | |
| 59,670 | |
| 62,274 | |
| 52,969 | |
Net income attributable to Class A common stockholders – basic and diluted | | $ | 269,620 | | $ | 251,188 | | $ | 467,168 | | $ | 265,611 | |
Net income per Class A common share – basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 | |
Weighted average number of Class A common shares outstanding – basic and diluted | |
| 581,410 | |
| 581,410 | | | 581,410 | |
| 578,347 | |
Net income (loss) attributable to Class B common stockholders – basic and diluted | | $ | 35,912 | | $ | 31,949 | | $ | 34,993 | | $ | (8,056) | |
Net income (loss) per Class B common share – basic and diluted | | $ | 0.29 | | $ | 0.26 | | $ | 0.28 | | $ | (0.06) | |
Weighted average number of Class B common shares outstanding – basic and diluted | |
| 125,000 | |
| 125,000 | |
| 125,000 | |
| 125,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
4
PROCACCIANTI HOTEL REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional | | | | | | | | Total Procaccianti |
|
| |
|
| | |||||||||||||||||||||||||
| | Class K | | Class K-I | | Class K-T | | Class A | | Class B | | Paid-in | | Cumulative | | Cumulative | | Hotel REIT, Inc. | | Noncontrolling | | Total | |||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Distributions |
| Stockholders' Equity |
| Interest |
| Equity | |||||||||||
BALANCE, December 31, 2021 | | 3,947,642 | | $ | 39,477 |
| 1,315,534 | | $ | 13,155 |
| 62,946 | | $ | 629 |
| 581,410 | | $ | 5,814 |
| 125,000 | | $ | 1,250 | | $ | 47,930,212 | | $ | (3,500,228) | | $ | (7,428,718) |
| $ | 37,061,591 | | $ | 5,702,961 | | $ | 42,764,552 |
Conversion of common stock | | 500 | |
| 5 |
| — | |
| — |
| (500) | |
| (5) |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
| | — | |
| — | |
| — |
Issuance of common stock pursuant to distribution reinvestment plan | | 12,344 | |
| 123 |
| 7,993 | |
| 80 |
| 753 | |
| 8 |
| — | |
| — |
| — | |
| — | |
| 197,195 | |
| — | |
| — |
| | 197,406 | |
| — | |
| 197,406 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| (1,429) | |
| — | |
| — |
| | (1,429) | |
| — | |
| (1,429) |
Repurchase of common stock | | (7,500) | |
| (75) |
| (1,613) | |
| (16) |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| (84,617) | |
| — | |
| — |
| | (84,708) | |
| — | |
| (84,708) |
Net (Loss) Income | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| (316,458) | |
| — |
| | (316,458) | |
| 314,391 | |
| (2,067) |
Distributions paid | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| — | |
| (958,121) |
| | (958,121) | |
| (122,500) | |
| (1,080,621) |
BALANCE, March 31, 2022 | | 3,952,986 | | | 39,530 |
| 1,321,914 | | | 13,219 |
| 63,199 | | | 632 |
| 581,410 | | | 5,814 |
| 125,000 | | | 1,250 | | | 48,041,361 | | | (3,816,686) | | | (8,386,839) |
| | 35,898,281 | | | 5,894,852 | | | 41,793,133 |
Issuance of common stock pursuant to distribution reinvestment plan | | 12,261 | | | 122 | | 8,053 | | | 81 | | 762 | | | 8 | | — | | | — | | — | | | — | | | 197,069 | | | — | | | — | | | 197,280 | | | — | | | 197,280 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (1,440) | | | — | | | — | | | (1,440) | | | — | | | (1,440) |
Repurchase of common stock | | (37,500) | | | (375) | | | | | | | | | | | | | | | | | | | | | | | (369,000) | | | | | | | | | (369,375) | | | | | | (369,375) |
Net Income | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 2,324,251 | | | — | | | 2,324,251 | | | 462,063 | | | 2,786,314 |
Distributions paid | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (941,800) | | | (941,800) | | | (355,250) | | | (1,297,050) |
BALANCE, June 30, 2022 | | 3,927,747 | | | 39,277 |
| 1,329,967 | | | 13,300 |
| 63,961 | | | 640 |
| 581,410 | | | 5,814 |
| 125,000 | | | 1,250 | | | 47,867,990 | | | (1,492,435) | | | (9,328,639) |
| | 37,107,197 | | | 6,001,665 | | | 43,108,862 |
Conversion of common stock | | 6,775 | | | 68 | | — | | | — | | (6,775) | | | (68) | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Issuance of common stock pursuant to distribution reinvestment plan | | 11,924 | | | 119 | | 7,940 | | | 79 | | 733 | | | 7 | | — | | | — | | — | | | — | | | 201,212 | | | — | | | — | | | 201,417 | | | — | | | 201,417 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (1,409) | | | — | | | — | | | (1,409) | | | — | | | (1,409) |
Repurchase of common stock | | (37,302) | | | (373) | | (657) | | | (7) | | (1,000) | | | (10) | | — | | | — | | — | | | — | | | (396,526) | | | — | | | — | | | (396,916) | | | — | | | (396,916) |
Net Income | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 2,768,103 | | | — | | | 2,768,103 | | | 155,922 | | | 2,924,025 |
Distributions paid | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (950,478) | | | (950,478) | | | (355,250) | | | (1,305,728) |
BALANCE, September 30, 2022 | | 3,909,144 | | $ | 39,091 |
| 1,337,250 | | $ | 13,372 |
| 56,919 | | $ | 569 |
| 581,410 | | $ | 5,814 |
| 125,000 | | $ | 1,250 | | $ | 47,671,267 | | $ | 1,275,668 | | $ | (10,279,117) |
| $ | 38,727,914 | | $ | 5,802,337 | | $ | 44,530,251 |
5
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional | | | | | | | | Total Procaccianti | | | | | | | |||||||||||||||||||||||||
| | Class K | | Class K-I | | Class K-T | | Class A | | Class B | | Paid-in | | Cumulative | | Cumulative | | Hotel REIT, Inc. | | Noncontrolling | | Total | |||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Distributions |
| Stockholders' Equity |
| Interest |
| Equity | |||||||||||
BALANCE, December 31, 2020 | | 3,608,062 | | $ | 36,081 |
| 666,728 | | $ | 6,668 |
| 47,769 | | $ | 478 |
| 537,410 | | $ | 5,374 |
| 125,000 | | $ | 1,250 | | $ | 40,343,076 | | $ | (6,092,421) | | $ | (3,528,321) |
| $ | 30,772,185 | | $ | 5,888,390 | | $ | 36,660,575 |
Issuance of common stock | | 80,181 | |
| 801 |
| 156,830 | |
| 1,568 |
| — | |
| — |
| 44,000 | |
| 440 |
| — | |
| — | |
| 2,368,158 | |
| — | |
| — |
| | 2,370,967 | |
| — | |
| 2,370,967 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| (104,773) | |
| — | |
| — |
| | (104,773) | |
| — | |
| (104,773) |
Repurchase of common stock | | (1,000) | |
| (10) |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| (7,910) | |
| — | |
| — |
| | (7,920) | |
| — | |
| (7,920) |
Other offering costs to affiliates | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| (250,872) | |
| — | |
| — |
| | (250,872) | |
| — | |
| (250,872) |
Net Loss | | — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| (1,110,673) | |
| — |
| | (1,110,673) | |
| (47,782) | |
| (1,158,455) |
BALANCE March 31, 2021 | | 3,687,243 | | | 36,872 | | 823,558 | | | 8,236 | | 47,769 | | | 478 | | 581,410 | | | 5,814 | | 125,000 | | | 1,250 | | | 42,347,679 | | $ | (7,203,094) | | $ | (3,528,321) | | $ | 31,668,914 | | $ | 5,840,608 | | $ | 37,509,522 |
Issuance of common stock | | 210,150 | | | 2,101 | | 302,562 | | | 3,025 | | 9,930 | | | 99 | | — | | | — | | — | | | — | | | 4,315,087 | | | — | | | — | | | 4,320,312 | | | — | | | 4,320,312 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (254,489) | | | — | | | — | | | (254,489) | | | — | | | (254,489) |
Repurchase of common stock | | (34,700) | | | (347) | | | | | | | | | | | | | | | | | | | | | | | (289,074) | | | | | | | | | (289,421) | | | | | | (289,421) |
Other offering costs to affiliates | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (393,558) | | | — | | | — | | | (393,558) | | | — | | | (393,558) |
Net Income | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 1,052,074 | | | — | | | 1,052,074 | | | 321,364 | | | 1,373,438 |
Distributions paid | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (591,430) | | | (591,430) |
BALANCE June 30, 2021 | | 3,862,693 | | | 38,626 | | 1,126,120 | | | 11,261 | | 57,699 | | | 577 | | 581,410 | | | 5,814 | | 125,000 | | | 1,250 | | | 45,725,645 | | $ | (6,151,020) | | $ | (3,528,321) | | $ | 36,103,832 | | $ | 5,570,542 | | $ | 41,674,374 |
Issuance of common stock | | 108,627 | | | 1,087 | | 166,777 | | | 1,668 | | 2,538 | | | 25 | | — | | | — | | — | | | — | | | 2,601,250 | | | — | | | — | | | 2,604,030 | | | — | | | 2,604,030 |
Issuance of common stock pursuant to distribution reinvestment plan | | 12,495 | | | 125 | | 6,628 | | | 66 | | 901 | | | 9 | | — | | | — | | — | | | — | | | 187,221 | | | — | | | — | | | 187,421 | | | — | | | 187,421 |
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (147,733) | | | — | | | — | | | (147,733) | | | — | | | (147,733) |
Repurchase of common stock | | (59,979) | | | (600) | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (571,476) | | | — | | | — | | | (572,076) | | | — | | | (572,076) |
Other offering costs to affiliates | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (270,985) | | | — | | | — | | | (270,985) | | | — | | | (270,985) |
Net Income | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 2,534,766 | | | — | | | 2,534,766 | | | 118,550 | | | 2,653,316 |
Distributions paid | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,229,010) | | | (1,229,010) | | | (54,390) | | | (1,283,400) |
BALANCE September 30, 2021 |
| 3,923,836 | | $ | 39,238 | | 1,299,525 | | $ | 12,995 | | 61,138 | | $ | 611 | | 581,410 | | $ | 5,814 | | 125,000 | | $ | 1,250 | | $ | 47,523,922 | | $ | (3,616,254) | | $ | (4,757,331) | | $ | 39,210,245 | | $ | 5,634,702 | | $ | 44,844,947 |
The accompanying notes are an integral part of these condensed consolidated financial statements
6
PROCACCIANTI HOTEL REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash Flows from Operating Activities: |
| |
|
| |
|
Net income | | $ | 5,809,864 | | $ | 2,919,913 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
|
Depreciation and amortization | |
| 2,852,336 | |
| 2,443,246 |
Amortization of deferred financing costs and debt discount as interest | |
| (20,875) | |
| (1,876) |
Amortization of key money loans | |
| (40,125) | |
| (43,404) |
Gain on loan extinguishment | | | (942,605) | | | (635,317) |
Gain on interest rate cap/swap | |
| (147,218) | |
| (289,412) |
Loss on disposal of fixed assets | | | 10,535 | | | |
Changes in operating assets and liabilities: | |
| | |
|
|
Accounts receivable | |
| 49,023 | |
| (194,338) |
Due from related parties | |
| (165,026) | |
| (56,950) |
Prepaid expenses and other assets | |
| (382,270) | |
| (326,593) |
Accounts payable, accrued expenses and other | |
| 844,129 | |
| 927,188 |
Due to related parties | |
| 200,730 | |
| 1,055,340 |
Net cash provided by operating activities | |
| 8,068,498 | |
| 5,797,797 |
Cash Flows from Investing Activities: | |
|
| |
|
|
Acquisition of hotel property, net | |
| — | |
| (15,062,376) |
Loan receivable funding | |
| — | |
| (7,689,594) |
Loan receivable payment | | | — | | | 7,689,594 |
Capital improvements | |
| (2,300,075) | |
| (538,782) |
Net cash used in investing activities | |
| (2,300,075) | |
| (15,601,158) |
Cash Flows from Financing Activities: | |
|
| |
|
|
Proceeds from issuance of common stock | |
| — | |
| 9,295,309 |
Payment of commissions and dealer manager fees and stockholder servicing fees | |
| (4,278) | |
| (506,995) |
Payment of other offering costs to affiliates | | | — | | | (766,217) |
Proceeds from mortgage note | |
| 1,270,226 | |
| 4,000,000 |
Proceeds from other debt | | | — | | | 1,426,672 |
Payments of mortgage notes principal | |
| (275,915) | |
| (298,580) |
Payment of deferred financing costs | |
| (41,234) | |
| (83,301) |
Distributions to stockholders | |
| (2,254,296) | |
| (1,041,589) |
Distributions to noncontrolling interest | |
| (833,000) | |
| (645,820) |
Repurchase of common stock | |
| (850,999) | |
| (869,417) |
Net cash (used in) provided by financing activities | |
| (2,989,496) | |
| 10,510,062 |
Increase in cash and cash equivalents and restricted cash | |
| 2,778,927 | |
| 706,701 |
Cash and cash equivalents and restricted cash, beginning of period | |
| 9,838,402 | |
| 10,269,947 |
Cash and cash equivalents and restricted cash, end of period | | $ | 12,617,329 | | $ | 10,976,648 |
The accompanying notes are an integral part of these condensed consolidated financial statements
7
Supplemental Disclosure of Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount shown in the consolidated statements of cash flows:
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash | | $ | 9,212,533 | | $ | 7,389,675 |
Restricted cash | |
| 3,404,796 | |
| 3,586,973 |
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows | | $ | 12,617,329 | | $ | 10,976,648 |
The Company paid the following amounts for interest and income taxes:
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Cash paid for interest | | $ | 1,888,748 | | $ | 1,982,821 |
Cash paid for income taxes | | $ | 49,760 | | $ | 1,750 |
Supplemental Disclosure of Noncash Transactions
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Common stock issued pursuant to distribution reinvestment plan | | $ | 596,103 | | $ | 187,421 |
The accompanying notes are an integral part of these condensed consolidated financial statements
8
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Organization and Description of Business
Procaccianti Hotel REIT, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on August 24, 2016. The Company used the proceeds from its Private Offering (defined below) and its Public Offering (defined below), which terminated on August 13, 2021, to acquire a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States (“U.S.”). The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2018. Substantially all of the Company’s business is conducted through Procaccianti Hotel REIT, L.P., a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company is externally managed by Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an Advisory Agreement by and among the Company, its Operating Partnership and PHA. PHA is an affiliate of Procaccianti Companies, Inc., the Company’s sponsor (the “Sponsor”).
As of September 30, 2022, the Company owned interests in five select-service hotels located in four states with a total of 559 rooms. For more information on the Company’s real estate portfolio, see Note 3 – “Investments in Hotels.”
The Company raised the equity capital for its real estate investments through a private offering (the “Private Offering”) and a public offering (the “Public Offering”, together with the Private Offering, the “Offerings”) from September 2016 through August 2021, and has offered shares through its distribution reinvestment plan (“DRIP”) pursuant to a Registration Statement on Form S-3 (the “DRIP Offering”) since August 2021.
The Company terminated the Private Offering prior to the commencement of the Public Offering, and, as of such termination, received approximately $15,582,755 in gross proceeds from the sale of shares of Class K common stock (“K Shares”) and Class A common stock (“A Shares”), including Units (which were comprised of one K Share and one A Share), in the Private Offering. Of the $15,582,755 in gross proceeds received, $2,954,095 was from the sale of A Shares to TPG Hotel REIT Investor, LLC (“THR”), an affiliate of PHA, to fund organization and offering expenses associated with the K Shares and Units.
Since the commencement of the Public Offering and through September 30, 2022 we received approximately $40,285,110 in gross proceeds from the sale of K Shares, shares of Class K-I common stock (“K-I Shares”) and shares of Class K-T common shares (“K-T Shares”) in the Public Offering, inclusive of proceeds from the sale of $885,545 of K Shares, $542,189 of K-I Shares and $57,214 of K-T Shares pursuant to the DRIP. Additionally, on October 26, 2018, June 10, 2019 and January 19, 2021, the Company received $1,500,000, $690,000 and $440,000, respectively, from the sale of A Shares to THR in private placements, the proceeds of which were used to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of the Public Offering. In addition, the Company allocated proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable estimated NAV per K-I Share and the applicable offering price of K-I Shares sold in the primary offering and (ii) any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.
On February 27, 2020, through a separate private placement and as partial consideration for the Company's acquisition of the Hilton Garden Inn hotel property located in Providence, Rhode Island (“Hilton Garden Inn Providence”), the Operating Partnership issued 128,124 Class K units of limited partnership interests in the Operating Partnership ("Class K OP Units") at $10.00 per Class K OP Unit.
9
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Novel Coronavirus (COVID-19)
In December 2019, COVID-19 was identified in Wuhan, China, subsequently spread to other regions of the world, and was declared a global pandemic by the World Health Organization in March 2020. The Company experienced significant declines in occupancy and revenue per available room (“RevPAR”) associated with COVID-19 throughout its hotel portfolio, which has had a negative impact on the Company’s operations and financial results. Given the current availability and effectiveness of the COVID-19 vaccines, in addition to a decrease in government related mandates, the Company has experienced an improvement in traveler sentiment. While such factors have helped contribute to improved conditions throughout 2021 and the first three quarters of 2022, there can be no assurances that the vaccines will contain the spread of the virus and its variants and allow the economy to fully recover. Therefore, while the Company has experienced continued improvement in its operations through the first three quarters of 2022 and expects continued improvement through the rest of the year, future results of operations, financial position and cash flow could be negatively impacted by, among other things, historical seasonal trends, an increase in COVID-19 cases, quarantines, deterioration of consumer sentiment or significant inflationary pressures.
The Company believes cash and restricted cash on hand, cash generated from operations, and borrowings from other sources, including advances from the Company’s Sponsor, if necessary, will be sufficient to meet the Company’s anticipated cash needs for at least the next 12 months.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The accompanying condensed consolidated financial statements of the Company are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair and consistent presentation, have been included in these condensed consolidated financial statements. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.
The Company consolidates variable interest entities (“VIEs”) as defined under the Consolidation Topic (“Topic 810”) of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) when it has the power to direct the activities that most significantly impact the VIE’s performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant. At September 30, 2022, the assets of our VIEs were $66,056,747, and consist primarily of land, building, furniture, fixtures, and equipment and are available to satisfy our VIEs’ obligations. The liabilities of our VIEs were $43,527,976 at September 30, 2022 and consist primarily of long-term debt. The Company has guaranteed certain obligations of its VIEs.
The Company has no foreign operations or assets, and its operating structure includes only one segment.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
10
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
of contingent assumptions and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Under GAAP, the Company is required to disclose the fair value of certain financial instruments on a recurring basis. The accompanying condensed consolidated balance sheets include the following financial instruments: cash, restricted cash, accounts receivable, accounts payable, mortgage notes payable and other debt.
The Company considers the carrying value of cash, restricted cash, accounts receivable, accounts payable and other debt to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:
● | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
● | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
● | Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
As of September 30, 2022, the estimated fair value of the mortgage notes payable was $60,167,152 compared to the carrying value of $65,286,393. These financial instruments are valued using Level 3 inputs through a discounted cash flow analysis of the contractual cash flows of the notes payable discounted at a market rate.
Revenue Recognition
Revenue is generally recognized as services are performed. Revenue represents primarily room rentals, food and beverage sales, and other fees. The Company collects sales tax from all nonexempt customers and remits the entire amount to the appropriate states upon collection from the customer. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenue and expenses. Included in other operating revenues for the three and nine months ended September 30, 2022, is $0 and $846,828, respectively, of business recovery grants awarded to the Springhill Suites Wilmington, Hotel Indigo Traverse City and the Hilton Garden Inn Providence hotels.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand or held in banks and highly liquid investments with original maturities of three months or less.
Restricted Cash
The Company maintains reserves for property taxes and capital improvements as required by its debt agreements. At September 30, 2022 and 2021, reserves for property taxes were $477,530 and $632,155, respectively, reserves for capital improvements were $2,741,033 and $2,642,088, respectively and reserves for insurance were
11
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
$42,249 and $0, respectively. The Company also included $143,984 and $123,140 of guest advance deposits as restricted cash at September 30, 2022 and 2021, respectively.
Organization and Offering Costs
Organization and offering costs (“O&O Costs”) include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and meals. The Company charged O&O Costs against additional paid in capital on the condensed consolidated balance sheet as it raised proceeds in its Public Offering, which terminated on August 13, 2021.
Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as a REIT, commencing with the taxable year ended December 31, 2018. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders (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). As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year following the year it initially elects to be taxed as a REIT, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to its stockholders.
Because the Company is prohibited from operating hotel properties pursuant to certain tax laws relating to its qualification as a REIT, the entities through which the Company owns hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays U.S. federal income tax at regular corporate rates on its taxable income.
The Company accounts for income taxes of its TRSs 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 financial statements if it is more likely than not that the tax position will be sustained upon examination. At September 30, 2022, the Company had no material uncertain tax positions.
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
12
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 2018 through 2021 remaining subject to examination by federal and various state tax jurisdictions.
Noncontrolling Interest
Noncontrolling interest represents the portion of equity of Procaccianti Convertible Fund, LLC ("PCF") held by owners other than the Company. Noncontrolling interest is reported in the condensed consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest are reported in the condensed consolidated statement of operations.
Noncontrolling Interest of the Operating Partnership
Noncontrolling interest of the Operating Partnership represents the value of the 128,124 Class K OP Units that were issued to a group of sellers in connection with the acquisition of the Hilton Garden Inn Providence. Noncontrolling interest of the Operating Partnership is reported in the mezzanine section of the condensed consolidated balance sheet, as the units are redeemable at the request of the holder for cash equal to the fair market value of a K Share as defined in the Amended and Restated Agreement of Limited Partnership of Procaccianti Hotel REIT, L.P. (the “Amended and Restated Operating Partnership Agreement”). The Company may elect to acquire any such unit presented for redemption for one K Share or cash. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest of the Operating Partnership are reported in the condensed consolidated statement of operations.
Per Share Data
The Company calculates its basic and diluted earnings per common share (“EPS”) utilizing the two-class method. Under the two-class method both basic and diluted EPS are calculated for each class of common stock considering distributions declared and accumulated and the rights of common shares and participating securities in any undistributed earnings. Undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. As of September 30, 2022, 3,750 restricted K Shares held by the Company's independent directors are included in the calculation of basic EPS because such shares have been issued and participate in distributions.
13
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s calculated earnings per share for the three and nine months ended September 30, 2022 and 2021, were as follows:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income attributable to common stockholders | | $ | 2,768,103 | | $ | 2,534,766 | | $ | 4,775,896 | | $ | 2,476,167 |
Less: Class K Common Stock dividends declared and accumulated | |
| 690,893 | |
| 691,713 | |
| 2,057,627 | |
| 1,976,596 |
Less: Class K-I Common Stock dividends declared and accumulated | |
| 235,453 | |
| 217,307 | |
| 694,511 | |
| 525,719 |
Less: Class K-T Common Stock dividends declared and accumulated | |
| 10,594 | |
| 10,526 | |
| 32,604 | |
| 27,731 |
Less: Class A Common Stock dividends declared and accumulated | |
| 102,583 | |
| 102,583 | |
| 304,404 | |
| 302,885 |
Undistributed net income (loss) | | $ | 1,728,580 | | $ | 1,512,637 | | $ | 1,686,750 | | $ | (356,764) |
Class K Common Stock: | |
|
| |
| | |
|
| |
|
|
Undistributed net income (loss) | | $ | 1,124,989 | | $ | 1,002,035 | | $ | 1,100,207 | | $ | (243,306) |
Class K Common Stock dividends declared and accumulated | |
| 690,893 | |
| 691,713 | |
| 2,057,627 | |
| 1,976,596 |
Net income | | $ | 1,815,882 | | $ | 1,693,748 | | $ | 3,157,834 | | $ | 1,733,290 |
Net income per common share, basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 |
Weighted average number of common shares outstanding, basic and diluted | |
| 3,915,774 | |
| 3,920,423 | |
| 3,930,059 | |
| 3,775,288 |
Class K-I Common Stock: | |
| | |
| | |
| | |
|
|
Undistributed net income (loss) | | $ | 383,391 | | $ | 314,797 | | $ | 371,353 | | $ | (64,713) |
Class K-I Common Stock dividends declared and accumulated | |
| 235,453 | |
| 217,307 | |
| 694,511 | |
| 525,719 |
Net income | | $ | 618,844 | | $ | 532,104 | | $ | 1,065,864 | | $ | 461,006 |
Net income per common share, basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 |
Weighted average number of common shares outstanding, basic and diluted | |
| 1,334,480 | |
| 1,231,632 | |
| 1,326,513 | |
| 1,004,120 |
Class K-T Common Stock: | |
|
| |
| | |
|
| |
|
|
Undistributed net income (loss) | | $ | 17,251 | | $ | 15,251 | | $ | 17,433 | | $ | (3,415) |
Class K-T Common Stock dividends declared and accumulated | |
| 10,594 | |
| 10,526 | |
| 32,604 | |
| 27,731 |
Net income | | $ | 27,845 | | $ | 25,777 | | $ | 50,037 | | $ | 24,316 |
Net income per common share, basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 |
Weighted average number of common shares outstanding, basic and diluted | |
| 60,046 | |
| 59,670 | |
| 62,274 | |
| 52,969 |
Class A Common Stock: | |
|
| |
| | |
|
| |
|
|
Undistributed net income (loss) | | $ | 167,037 | | $ | 148,605 | | $ | 162,764 | | $ | (37,274) |
Class A Common Stock dividends declared and accumulated | |
| 102,583 | |
| 102,583 | |
| 304,404 | |
| 302,885 |
Net income | | $ | 269,620 | | $ | 251,188 | | $ | 467,168 | | $ | 265,611 |
Net income per common share, basic and diluted | | $ | 0.46 | | $ | 0.43 | | $ | 0.80 | | $ | 0.46 |
Weighted average number of common shares outstanding, basic and diluted | |
| 581,410 | |
| 581,410 | |
| 581,410 | |
| 578,347 |
Class B Common Stock: | |
|
| |
| | |
| | |
|
|
Undistributed net income (loss) | | $ | 35,912 | | $ | 31,949 | | $ | 34,993 | | $ | (8,056) |
Net income (loss) per common share, basic and diluted | | $ | 0.29 | | $ | 0.26 | | $ | 0.28 | | $ | (0.06) |
Weighted average number of common shares outstanding, basic and diluted | |
| 125,000 | |
| 125,000 | |
| 125,000 | |
| 125,000 |
14
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 – Investments in Hotels
The following table sets forth summary information regarding the Company’s investments in hotel properties as of September 30, 2022:
| | | | | | | | | | | | | | | |
|
| |
| |
| |
| Contract |
| |
| Mortgage |
| ||
| | | | | | Ownership | | Purchase | | | | Debt |
| ||
Property Name | | Date Acquired | | Location | | Interest | | Price(1)(2) | | Rooms | | Outstanding |
| ||
Springhill Suites Wilmington |
| 05/24/2017 | (1) | Wilmington, NC |
| 51% | | $ | 18,000,000 |
| 120 | | $ | 10,863,886 | |
Staybridge Suites St. Petersburg |
| 06/29/2017 | (1) | St. Petersburg, FL |
| 51% | | $ | 20,500,000 |
| 119 | | $ | 12,853,374 | |
Hotel Indigo Traverse City |
| 08/15/2018 |
| Traverse City, MI |
| 100% | | $ | 26,050,000 |
| 107 | | $ | 15,092,000 | |
Hilton Garden Inn Providence | | 02/27/2020 | | Providence, RI | | 100% | | $ | 28,500,000 | | 137 | | $ | 16,936,901 | |
Cherry Tree Inn | | 07/30/2021 | | Traverse City, MI | | 100% | | $ | 15,000,000 | | 76 | | $ | 9,270,226 | |
1) | Represents the date and contract purchase price of PCF’s acquisition of the Springhill Suites Wilmington (the “Springhill Suites Wilmington”) and the Staybridge Suites St. Petersburg (the “Staybridge Suites St. Petersburg”). The Company exercised its option under an option agreement to purchase a 51% membership interest in PCF on March 29, 2018. |
2) | Contract purchase price excludes acquisition fees and costs. |
Investments in hotel properties consisted of the following as of September 30, 2022 and December 31, 2021:
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2022 | | 2021 | ||
Land | | $ | 14,450,538 | | $ | 14,450,538 |
Building and improvements | |
| 88,917,136 | |
| 88,767,739 |
Furniture, fixtures, and equipment | |
| 11,008,932 | |
| 8,896,732 |
Total cost | |
| 114,376,606 | |
| 112,115,009 |
Accumulated depreciation | |
| (12,690,666) | |
| (9,878,030) |
Property and equipment, net | | $ | 101,685,940 | | $ | 102,236,979 |
Depreciation expense for the three months ended September 30, 2022 and 2021 was $986,607 and $879,734, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $2,840,579 and $2,431,637, respectively.
Note 4 – Mortgage Notes Payable
Included in mortgage notes payable at September 30, 2022, is a $12,853,374 mortgage payable secured by the Staybridge Suites St. Petersburg (the “St. Petersburg Note”), a $10,863,886 mortgage payable secured by the Springhill Suites Wilmington (the “Wilmington Note”), a $15,092,000 mortgage payable secured by the Hotel Indigo Traverse City (the “TCI Note”), a $16,936,901 mortgage payable secured by the Hilton Garden Inn Providence (the “HGI Note”) and a $9,270,226 mortgage payable secured by the Cherry Tree Inn (the “CTI Note”). The mortgage notes payable each contain customary affirmative covenants, negative covenants and events of default.
The St. Petersburg Note required monthly interest payments at 4.34% through August 1, 2020, and subsequent to August 1, 2020, requires monthly principal and interest payments of $66,255 through July 1, 2024, the maturity date. The St. Petersburg Note is collateralized by the Staybridge Suites St. Petersburg, including equipment, and has been
15
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor. All required payments have been made as of September 30, 2022.
As a result of the negative impact of the COVID-19 pandemic, the Staybridge Suites St. Petersburg failed to maintain the required debt service coverage ratio as defined in the St. Petersburg Note loan documents starting with the period ended June 30, 2020. The lender approved a series of modifications of the debt service coverage tests for periods through December 31, 2021. Debt service coverage tests resumed on January 1, 2022, and as of September 30, 2022, the Staybridge Suites St. Petersburg is in compliance.
The Wilmington Note required monthly interest payments at 4.49% through June 1, 2020, and subsequent to June 1, 2020, requires monthly principal and interest payments of $57,026 through June 1, 2024, the maturity date. The Wilmington Note is collateralized by the Springhill Suites Wilmington, including equipment, and has been guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor. As of September 30, 2022, the Springhill Suites Wilmington was in compliance with its applicable covenants and all required payments have been made as agreed.
The TCI Note bears interest at the Secured Overnight Financing Rate (“SOFR”) plus a SOFR rate margin of 2.50% at September 30, 2022. The TCI Note provides for interest only monthly payments until maturity. The principal amount will be due on the maturity date, which was initially August 15, 2021; however, it was extended for two one-year periods to August 15, 2023. The maturity date may be extended by an additional one-year period, provided no default exists. The TCI Note is collateralized by the Hotel Indigo Traverse City, including equipment, and has been guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor. As of September 30, 2022, the Hotel Indigo Traverse City was compliant with its loan obligations, including applicable covenants, and all required payments have been made as agreed.
The HGI Note requires monthly interest payments at a fixed rate of 4.25% through February 15, 2023 and monthly principal and interest payments based on a 30-year amortization schedule thereafter to maturity on May 15, 2025. The HGI Note is collateralized by the Hilton Garden Inn Providence, including equipment, and has been guaranteed by the Company.
On April 23, 2020, the Operating Partnership, through its subsidiary, and the Company entered into an Omnibus Amendment and Reaffirmation Agreement (the "Hilton Garden Inn Loan Modification Agreement") with the lender, to amend the terms of the mortgage loan and loan documents on the HGI Note. Pursuant to the Hilton Garden Inn Loan Modification Agreement, interest only payments that were due on the six consecutive payment dates starting with the payment scheduled for April 2020 are deferred until the date that is twelve months after the date each payment was originally due. The HGI Note resumed interest payments in October 2020. As of September 30, 2022, the deferred interest on the HGI Note has been repaid in full. As of September 30, 2022, the Hilton Garden Inn Providence was compliant with the above referenced loan arrangements.
The CTI Note requires monthly interest payments at a fixed rate of 3.91% through November 23, 2023 and subsequent to November 23, 2023, monthly principal and interest payments of $52,601 through November 23, 2026, the maturity date. The CTI Note is collateralized by the Cherry Tree Inn & Suites, including equipment. All required payments have been made as of September 30, 2022. Annual compliance testing will commence as of December 31, 2022. In addition to the $9,270,226 outstanding as of September 30, 2022, the CTI Note allows for an additional $729,774 in borrowings for construction advances. At the time of this filing, the Company expects that $279,774 of these available borrowings will be utilized in the coming months.
Although the Company has taken steps to enhance its ability to maintain sufficient liquidity, as noted here and elsewhere in this Quarterly Report on Form 10-Q, a protracted negative economic impact resulting from the COVID-19 pandemic, inflation and rising interest rates may cause increased pressure on the Company's ability to satisfy its mortgage loan covenants.
16
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Interest expense on mortgage notes payable for the three months ended September 30, 2022 and 2021 was $729,776 and $636,582, respectively. Interest expense on mortgage notes payable for the nine months ended September 30, 2022 and 2021 was $2,013,631 and $1,912,945, respectively.
Also included in mortgage notes payable as of September 30, 2022 is $167,109 of net deferred financing costs and debt discounts and premiums. For the three months ended September 30, 2022 and 2021, the Company amortized $2,438 and $3,067, respectively, of net deferred financing costs and debt discounts and premiums as interest expense. For the nine months ended September 30, 2022 and 2021, the Company amortized $20,875 and $1,876, respectively, of net deferred financing costs and debt discounts and premiums as interest expense.
Note 5 – Other Debt
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was adopted by the Federal Government, which, among other things, provided emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. The CARES Act also included the establishment of the Paycheck Protection Program ("PPP"), a U.S. Small Business Administration (the “SBA”) loan to businesses with fewer than 500 employees that may be fully or partially forgivable. The loans’ principal and accrued interest are forgivable to the extent that the proceeds are used for eligible purposes, subject to limitations and ongoing rulemaking by the SBA, and that the Company maintains its payroll levels over a twenty-four week period following the loan date. During 2020 and 2021, the Company received PPP loans aggregating to $2,445,589, of which, $1,502,984 was forgiven during the year ended December 31, 2021. In the nine months ended September 30, 2022, the Company received forgiveness for the remaining outstanding balance of its PPP loans and recognized a gain on extinguishment of $942,605 in the consolidated statement of operations.
Note 6 – Related Party Transactions
On August 2, 2018, the Company entered into the Amended and Restated Advisory Agreement with PHA and the Operating Partnership (as amended and renewed, the “Advisory Agreement”). The Advisory Agreement has a one-year term, subject to renewals upon mutual consent of PHA and the Company’s independent directors for an unlimited number of successive one-year periods. On November 22, 2019, the Company, the Operating Partnership and PHA entered into the Second Amendment to the Advisory Agreement (the “Advisory Agreement Amendment”) in order to revise certain terms regarding the accrual of interest on deferred acquisition, disposition and asset management fees, as well as the deferral of asset management fees paid to PHA. On July 28, 2022, the board of directors of the Company, including all independent directors of the Company, after review of PHA’s performance during the last year, authorized the Company to execute a mutual consent to renew the Advisory Agreement, by and among the Company, the Operating Partnership and PHA for a one-year term effective on August 2, 2022.
Pursuant to the Advisory Agreement, PHA oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, and other administrative services. PHA also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which include maintaining required financial records and preparing reports to stockholders and filings with the SEC. In addition, PHA assists an independent valuation firm and the Company’s board of directors in calculating and determining the Company’s NAV, and assists the Company in overseeing the preparation and filing of tax returns, payment of expenses and for the performance of administrative and professional services rendered to the Company by others. The Company reimburses PHA for certain expenses and pays PHA certain fees pertaining to services provided.
17
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Operating Expenses
The Company is also required to reimburse PHA for costs incurred in providing these administrative services. PHA is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues and/or time allocations. At least annually, the Company’s board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. In the three months ended September 30, 2022 and 2021, the Company’s Sponsor requested reimbursement for $35,120 and $56,035, respectively, of such administrative service expenses. In the nine months ended September 30, 2022 and 2021, the Company’s Sponsor requested reimbursement for $122,813 and $150,134, respectively, of such administrative service expenses. These amounts are included in other fees to affiliates on the condensed consolidated statement of operations.
Acquisition Fee
The Company will pay PHA acquisition fees as described below:
Acquisition Fee: Fee for providing services including selecting, evaluating and acquiring potential investments (the “acquisition fee”). The total acquisition fee payable to PHA shall equal 1.5% of the Gross Contract Purchase Price of an investment, which as defined in the Advisory Agreement, represents the amount actually paid or allocated in respect of the purchase of an investment, inclusive of acquisition expenses and any indebtedness assumed or incurred. Payment of such fee will be deferred until the occurrence of a (i) liquidation event (i.e., any voluntary or involuntary liquidation or dissolution of the Company, including as a result of the sale of all or substantially all of the Company’s assets for cash or other consideration), (ii) the Company’s sale or merger in a transaction that provides stockholders with cash, securities or a combination of cash and securities, (iii) the listing of the Company’s shares of common stock on a national securities exchange, or (iv) the termination of the Advisory Agreement, other than for cause, or the non-renewal of the Advisory Agreement. The preceding clauses (ii) and (iii) are defined as an "Other Liquidity Event". Under the Advisory Agreement Amendment, deferred acquisition fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum until the day immediately following the Fifth Anniversary (as defined herein), at which time such interest will cease to further accrue.
There were no acquisition fees for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, the Company incurred $264,789 in acquisition fees related to the Cherry Tree Inn, which are included in other fees to affiliates on the condensed consolidated statement of operations. As of September 30, 2022 and 2021, there was $1,244,139 of deferred acquisition fees included in due to related parties on the condensed consolidated balance sheets. Interest expense on outstanding acquisition fees was $18,816 and $17,553, respectively, for the three months ended September 30, 2022 and 2021 and $55,833 and $46,693 for the nine months ended September 30, 2022 and 2021, respectively. These are included in interest expense on the condensed consolidated statement of operations and in due to related parties on the condensed consolidated balance sheets.
Asset Management Fee
The Company will pay PHA asset management fees as described below:
Asset Management Fee: Quarterly fee equal to one-fourth of 0.75% of the adjusted cost of the Company’s assets and the amounts actually paid or allocated in respect of the acquisition of loans, before reduction for depreciation, amortization, impairment charges, and cumulative acquisition costs charged to expense in accordance with GAAP (the “asset management fee”). The adjusted cost will include the purchase price, acquisition expenses, capital expenditures, and other customary capitalized costs. The Advisory Agreement Amendment clarified the duration of the asset management fee and accrual of interest on deferred asset management fees. The asset management fee will be payable to PHA quarterly in arrears, based on the adjusted cost on the last date of the prior quarter, adjusted for appropriate closing
18
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
dates for individual investments. Payment of the asset management fee will be deferred on a quarterly basis if at any time all accumulated, accrued, and unpaid 7% distributions have not been paid in full to the holders of the K Shares, K-I Shares, K-T Shares and any parity security. Any such deferred asset management fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum. If the Company has not completed a liquidation event by the fifth anniversary of the date the Company terminates the Public Offering (including any follow-on offering) (the "Fifth Anniversary"), on the day immediately following the Fifth Anniversary, (i) the asset management fees payable pursuant to the Advisory Agreement cease to accrue and (ii) interest that accrued at a non-compounded rate of 6.0% per annum on the deferred asset management fees will cease to accrue. For the avoidance of doubt, all accrued and unpaid principal and interest amounts in connection with the asset management fee at the Fifth Anniversary will remain outstanding.
For the three months ended September 30, 2022 and 2021, the Company incurred $177,812 and $163,759, respectively, in asset management fees. For the nine months ended September 30, 2022 and 2021, the Company incurred $529,933 and $451,301, respectively, in asset management fees. Asset management fees are included in other fees to affiliates on the condensed consolidated statements of operations. Interest expense on the outstanding asset management fees was $2,689 and $23,069 for the three months ended September 30, 2022 and 2021, respectively, $15,710 and $61,505 for the nine months ended September 30, 2022 and 2021, respectively and are included in interest expense on the condensed consolidated statements of operations. At September 30, 2022 and 2021, asset management fees and interest payable of $180,501 and $1,670,917, respectively, are included in due to related parties on the condensed consolidated balance sheets.
Disposition Fee
The Company will pay PHA disposition fees as described below:
Disposition Fee: Fee for providing a substantial amount of services in connection with the sale of a property or real estate-related assets, as determined by a majority of the Company’s independent directors (the “disposition fee”). The disposition fee will equal one-half of the brokerage commissions paid on the sale of an investment. In no event will the disposition fee exceed 1.5% of the sales price of each investment. Payment of the disposition fee to PHA will be deferred until the occurrence of (i) a liquidation event, (ii) an Other Liquidity Event, or (iii) the termination of the Advisory Agreement, other than for cause, or the non-renewal of the Advisory Agreement. Under the Advisory Agreement Amendment, deferred disposition fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum until the day immediately following the Fifth Anniversary, at which time such interest will cease to further accrue.
There were no disposition fees incurred for the three and nine months ended September 30, 2022 and 2021.
Acquisition Expenses
The Company will reimburse PHA for acquisition expenses actually incurred (excluding personnel costs) related to selecting, evaluating, and making investments on the Company’s behalf. All acquisition expenses as of September 30, 2022 and 2021 were paid directly by the Company and there have been no reimbursements to PHA.
Organization and Offering Costs
O&O Costs include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, as well as legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and
19
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
meals. For more information regarding selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, see Note 7 – “Stockholders’ Equity”.
Certain O&O Costs have been incurred by PHA on behalf of the Company. As of the August 13, 2021 termination of the Public Offering, the total amount of O&O Costs, exclusive of selling commissions, dealer manager fees and stockholder servicing fees, incurred by PHA and its affiliates related to the Private Offering and the Public Offering was $8,752,997, of which $1,026,564 has been reimbursed through the issuance of A Shares to an affiliate of PHA and through cash payments to PHA of $3,312,833.
The Company recorded O&O Costs as charges against additional paid in capital on the consolidated balance sheets as the Company raised proceeds in its continuous Public Offering for amounts incurred up to 15% of the gross offering proceeds of the Public Offering, the maximum amount allowed in accordance with the rules established by FINRA and the Company’s charter. The Company recognized O&O Costs of $418,718 and $1,422,409 for the three and nine months ended September 30, 2021, respectively.
Property Management Fee and Reimbursement
Wholly owned subsidiaries of PCF and the Operating Partnership entered into hotel management agreements with affiliates of the Company for the management of each of the Company's hotels. Under the terms of the management agreements, the manager operates and manages each hotel, including making all human resource decisions. The employees of the hotels are employed by the managers, however, pursuant to the management agreements, all compensation of hotel personnel is recorded as a direct operating expense of the hotel. The manager of each hotel is paid a base management fee equal to 3% of the respective hotel’s gross revenues and is also reimbursed for certain expenses and centralized service costs.
The terms of the in-place management agreements expire March 28, 2023, March 28, 2023, August 14, 2023, February 26, 2025 and June 3, 2031 for the Staybridge Suites St. Petersburg, the Springhill Suites Wilmington, the Hotel Indigo Traverse City, the Hilton Garden Inn Providence and the Cherry Tree Inn, respectively.
Aggregate property management fees incurred were $328,867 and $309,697 for the three months ended September 30, 2022 and 2021, respectively, $706,587 and $585,439 for the nine months ended September 30, 2022 and 2021, respectively, and are included in property management fees to affiliates on the condensed consolidated statements of operations. As of September 30, 2022, $92,523 of accrued property management fees payable were included in due to related parties on the condensed consolidated balance sheet. Aggregate net reimbursements for certain expenses were $161,372 and $50,490 for the three months ended September 30, 2022 and 2021, respectively, and $414,134 and $183,919 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, $49,129 of expense reimbursements were included in due to related parties on the condensed consolidated balance sheet. During the three months ended September 30, 2022 and 2021, the Company paid $334,404 and $306,114, respectively, to TPG Risk Services, LLC, an affiliate of the Sponsor, for the reimbursement of prepaid insurance at the hotel properties. During the nine months ended September 30, 2022 and 2021, the Company paid $335,358 and $495,797 respectively, to TPG Risk Services, LLC, an affiliate of the Sponsor, for the reimbursement of prepaid insurance at the hotel properties. As of September 30, 2022, the Company had a balance of $104,911 due to TPG Risk Services, LLC, which is included in the due to related parties on the condensed consolidated balance sheet.
The CARES Act provided a federal employee retention tax credit (“ERTC”), which was a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers and equal to 50% of qualified wages paid per quarter through December 31, 2020 and up to $10,000 per employee and equal to 70% of qualified wages paid per quarter through September 30, 2021. An affiliate of the Company’s hotel property managers qualified for the ERTC. During the three and nine months ended September 30, 2022, the Company received from its affiliate $817,773 of the $859,899 related to payroll expenses reimbursed by the Company pursuant to its property management
20
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
agreements and has a $42,126 receivable balance included in Due from related parties in the Company’s condensed consolidated balance sheet as of September 30, 2022. The affiliate partially offset these amounts by $49,696 for expenses incurred by the affiliate related to the reimbursements.
Construction Management Fee
The Company pays its property managers or third parties selected by PHA, after requesting bids from such parties, a construction management fee (which may include expense reimbursements) based on market rates for such services in the markets in which the hotel properties are located and will take into account the nature of the services to be performed, which generally will constitute the supervision or coordination of any construction, improvements, refurbishments, renovations, or restorations of the Company’s hotel properties. If PHA selects the property manager or another affiliate of the Sponsor to perform such services, any resulting agreement must be approved by a majority of the Company’s board of directors, including a majority of its independent directors. The Company reimbursed TPG Construction, LLC, an affiliate of the Sponsor, $431,635 and $123,989 during the three months ended September 30, 2022 and 2021, respectively, and $1,685,754 and $287,210 during the nine months ended September 30, 2022 and 2021, respectively, for capital expenditure costs incurred at the hotel properties. As of September 30, 2022 and 2021, $59,227 and $169,153, respectively, of construction reimbursements were included in the due to related parties balance. Included in the due from related parties balance at September 30, 2022, was $250,000 and $25,013 in receivables from TPG Construction, LLC relating to working capital requests to provide funding for vendors and contractor deposits at the Cherry Tree Inn and the Hilton Garden Inn Providence, respectively.
Additional Service Fees
If the Company requests that PHA or its affiliates perform other services, including but not limited to, renovation evaluations, the compensation terms for those services must be approved by a majority of the Company’s board of directors, including a majority of the independent directors. No such fees for additional services were incurred for the three and nine months ended September 30, 2022 and 2021.
Payment Upon Listing of Shares
If the Company lists any of its shares of capital stock on a national securities exchange (which automatically results in a termination of the Advisory Agreement), the Company will be obligated to pay PHA the amount PHA would be entitled to receive on account of deferred asset management fees, acquisition fees, and disposition fees (and any accrued interest thereon) as if the Company liquidated and received liquidation proceeds equal to the market value of the Company, which is limited to the excess of market value over the liquidation preference on K Shares, K-I Shares and K-T Shares.
Payment Upon a Merger or Acquisition Transaction
If the Company terminates the Advisory Agreement in connection with or in contemplation of a transaction involving a merger or acquisition, the Company would be obligated to pay PHA the amount PHA would be entitled to receive as if the Company liquidated and received net liquidation proceeds equal to the consideration paid to the stockholders in such transaction.
Payment Upon Other Advisory Agreement Termination
The Company may elect not to renew the Advisory Agreement. The Company has the right to terminate the Advisory Agreement without cause, or other than in connection with a listing of the Company’s shares or a transaction involving a merger or acquisition or other than for cause (“Non-cause Advisory Agreement Termination”). If a Non-cause Advisory Agreement Termination were to occur, the Company would be obligated to make a cash payment to
21
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PHA in the amount of any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued thereon, regardless of the value of the Company’s assets or net assets. The Company would be obligated to repurchase its A Shares for an amount equal to the greater of: (1) any accrued common ordinary distributions on the A Shares plus the stated value of the outstanding A Shares ($10.00 per A Share) or (2) the amount the holders of A Shares would be entitled to receive if the Company liquidated and received net liquidation proceeds equal to the fair market value (determined by appraisals as of the termination date) of the Company’s investments less any loans secured by such investments, limited in the case of non-recourse loans to the value of investments securing such loans. Any shares of Class B common stock, with a par value of $0.01 per share (“B Shares”), then outstanding would remain outstanding. The amounts payable on account of the repurchase of A Shares may be paid, in the discretion of a majority of the Company’s board of directors, including a majority of the Company’s independent directors, in the form of promissory notes bearing interest at the then-current rate, as determined in good faith by a majority of the Company’s independent directors.
Payment Upon Advisory Agreement Termination for Cause
If the Company terminates the Advisory Agreement for cause, the Company would not have a current obligation to make any payments to PHA or to S2K Servicing LLC (formerly known as Colony S2K Servicing LLC), an affiliate of S2K Financial LLC (the “Dealer Manager”). However, any A Shares and B Shares held by them or their affiliates would remain outstanding. In addition, any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus any interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued thereon, would remain outstanding obligations, and the deferred fees would continue to accrue interest at a non-compounded annual rate of 6.0%. Such deferred fees and interest thereon would be payable upon a liquidation event.
Amended and Restated Operating Partnership Agreement
In connection with the Hilton Garden Inn Providence acquisition, effective February 27, 2020, the Company, as general partner of the Operating Partnership, Procaccianti Hotel REIT, LP, LLC and certain principals and affiliates of the Sponsor that were issued Class K OP Units entered into an Amended and Restated Operating Partnership Agreement.
Loans from Affiliates
The Company has combined subordinated promissory notes of $94,194 from PHA that bear interest at the current blended long term applicable federal rate (“AFR”). The blended long term AFR was 2.50% and 1.71% for the three months ended September 30, 2022 and 2021, respectively, and 2.34% and 1.69% for the nine months ended September 30, 2022 and 2021, respectively. The maturity date of the notes is the date after all outstanding K Shares have received all accumulated, accrued and unpaid distributions due and owing under the terms of the Company’s organization documents and the liquidation preference on the K Shares pursuant to the Company’s organization documents has been paid in full, as well as upon any event of default. These amounts are included in due to related parties on the condensed consolidated balance sheets at September 30, 2022 and December 31, 2021. Interest expense was $594 and $405 for the three months ended September 30, 2022 and 2021, respectively, $1,651 and $1,191 for the nine months ended September 30, 2022 and 2021, respectively, and is included in interest expense on the condensed consolidated statements of operations and in due to related parties on the condensed consolidated balance sheets.
Note 7 - Stockholders’ Equity
Under the Company’s charter, the total number of shares of capital stock authorized for issuance is 248,125,000, consisting of 55,500,000 K Shares, 55,500,000 K-I Shares, 116,000,000 K-T Shares, 21,000,000 A Shares, and 125,000 B Shares.
22
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s K Shares, K-I Shares and K-T Shares entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote and to receive distributions as authorized by the Company’s board of directors. Holders of K Shares, K-I Shares and K-T Shares will be entitled to receive cumulative cash distributions on each share at the rate of 7.0% per annum of each share's distribution base. Prior to March 31, 2020, distributions accrued at the rate of 6.0% per annum of each share’s distribution base. The distribution base will initially be $10.00 per K Share, $10.00 per K-I Share and $10.00 per K-T Share and will be reduced for distributions that the board of directors declares and pays out of net sales proceeds from the sale or disposition of assets to the extent such distributions are not used to pay accumulated, accrued, and unpaid dividends on such K Shares, K-I Shares, and K-T Shares.
K Shares, K-I Shares and K-T Shares will rank, on a pro rata basis, senior to all other classes of stock with respect to distribution rights and rights upon the Company’s liquidation. In certain situations (other than upon liquidation), the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of K Shares, K-I Shares and K-T Shares would receive 50% of any such excess cash. Holders of K Shares, K-I Shares and K-T Shares would also generally be entitled to receive 50% of any remaining liquidation cash pro rata based on the number of K Shares, K-I Shares and K-T Shares outstanding.
A Shares entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote and to receive distributions and other distributions of excess cash as authorized by the Company’s board of directors. Following the payment of all accumulated, accrued and unpaid distributions on K Shares, K-I Shares and K-T Shares and payment of any accrued asset management fees (and any interest thereon), each A Share will be entitled to receive distributions at a rate not to exceed 7.0% of the stated value of $10.00 per share from income and cash flow from ordinary operations on a cumulative basis. In certain situations (other than upon liquidation), the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of A Shares will receive 37.5% of any such excess cash on a pro rata basis. A Shares would also generally be entitled to receive 37.5% of any remaining liquidation cash pro rata based on the number of A Shares outstanding.
B Shares will have no voting rights, other than the right to vote on and approve any further issuances of or an increase in the authorized number of B Shares. In addition, if the Company were to list any shares of its common stock on a national securities exchange, the Company will repurchase its B Shares in accordance with its charter. Holders of B Shares are not entitled to distributions; however, in certain situations (other than upon liquidation) the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of B Shares would receive 12.5% of any such excess cash on a pro rata basis. Holders of B Shares would also generally be entitled to receive 12.5% of any remaining liquidation cash pro rata based on the number of B Shares outstanding.
At the termination of the Private Offering, the Company had issued 1,253,618 K Shares and 23,000 A Shares to unaffiliated investors, resulting in receipt of gross proceeds of $12,398,660 from K Share issuances and $230,000 from A Share issuances. A Shares sold to unaffiliated investors were issued as part of a Unit. As of the termination of the offering, under the Public Offering, the Company had issued 2,787,944 K Shares, 1,287,644 K-I Shares, and 60,008 K-T Shares to unaffiliated investors, resulting in receipt of gross proceeds of $26,939,836 from K Share issuances, $11,274,927 from K-I Share issuances, and $585,400 from K-T Share issuances. As of September 30, 2022, the Company had issued 95,216 K Shares, 58,198 K-I Shares and 6,176 K-T Shares pursuant to the DRIP, resulting in gross proceeds pursuant to the DRIP of $885,545, $542,189 and $57,214, respectively. As of September 30, 2022, the Company had issued 1,250 restricted K Shares to each of the Company’s three independent directors for a total of 3,750 restricted K Shares in connection with the Company’s long-term incentive plan, as described below.
As of September 30, 2022, the Company had issued 428,410 A Shares to THR, an affiliate of PHA, for aggregate proceeds of $4,284,095, or $10.00 per share. In addition, the Company issued 130,000 additional A Shares to THR in exchange for notes receivable, payable to the Company upon demand. The note receivable from THR was reduced for amounts reimbursed to PHA by the Company for certain costs incurred on the Company’s behalf, with no
23
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
remaining balance as of September 30, 2022. As of September 30, 2022, the Company sold 10 K-I Shares for aggregate proceeds of $100, or $10.00 per K-I Share and sold 10 K-T Shares for aggregate proceeds of $100, or $10.00 per K-T Share, to an affiliate of the Company. In addition, on September 29, 2016, the Company issued 125,000 B shares to S2K Servicing LLC.
On February 27, 2020, as partial consideration for the Company’s acquisition of the Hilton Garden Inn Providence, the Operating Partnership issued 128,124 Class K OP Units valued at $10.00 per Class K OP Unit. Such issuance represents a total investment of $1,281,244 in Class K OP Units of the Operating Partnership. Individuals with direct or indirect interests in the sellers of the Hilton Garden Inn Providence who are direct or indirect owners of the Company’s Sponsor and PHA received only Class K OP Units and no cash as consideration.
In response to adverse effects of the COVID-19 pandemic, the Company’s board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. On June 10, 2020, the Company’s board of directors unanimously approved the resumption of the acceptance of subscriptions and the resumption of the operation of the DRIP.
PHA was obligated to purchase sufficient A Shares to fund payment of O&O Costs associated with the Private Offering and is obligated to purchase sufficient A Shares to fund payment of O&O Costs related to the Public Offering and also to account for the difference between the applicable NAV per K-I Share and the applicable offering price per K-I Share and any amount equal to any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares (excluding volume discounts). PHA’s obligation can be fulfilled by its affiliates, including the Sponsor or entities affiliated with the Sponsor.
The Company paid the Dealer Manager, as dealer manager of the Private Offering, selling commissions of up to 7% of the gross offering proceeds from the sale of K Shares and Units in the Private Offering. The Dealer Manager re-allowed all selling commissions to participating broker-dealers. The Company also paid the Dealer Manager, through the termination of the Public Offering, a dealer manager fee of up to 3% of the gross offering proceeds from the sale of K Shares and Units. The Dealer Manager could re-allow a portion of its dealer manager fees to participating broker-dealers. Selling commissions and dealer manager fees were paid with proceeds from the sale of A Shares to PHA or its affiliates. There were no selling commissions or dealer manager fees payable on account of shares of any class purchased by PHA, S2K Servicing LLC, or their affiliates. As of September 30, 2022, the Company recognized $1,058,501 of selling commissions and dealer manager fees in connection with the Private Offering.
The Company paid the Dealer Manager selling commissions of up to 7% of the gross offering proceeds from the sale of K Shares and selling commissions of up to 3% of the gross offering proceeds from the sale of K-T Shares in the primary portion of the Public Offering. No selling commissions were payable in connection with the sale of K-I Shares. The Dealer Manager was able to re-allow all selling commissions to participating broker-dealers. The Company also paid the Dealer Manager a dealer manager fee of up to 3% of the gross offering proceeds from the sale of K Shares, K-I Shares and K-T Shares sold in the primary portion of the Public Offering. The Dealer Manager allowed a portion of its dealer manager fees to participating broker-dealers. Selling commission and dealer manager fees were generally paid with proceeds from the sale of A Shares to PHA or its affiliates. There were no selling commissions or dealer manager fees payable on account of shares of any class purchased by PHA, S2K Servicing LLC, or any K Shares, K-I Shares and K-T Shares sold pursuant to the DRIP. The selling commissions and dealer manager fees may have been reduced or waived in connection with certain categories of sales. As of September 30, 2022, the Company recognized $2,986,465 of selling commissions and dealer manager fees in connection with the Public Offering.
The Company also pays the Dealer Manager with respect to each K-T Share sold in the primary portion of the Public Offering, a stockholder servicing fee equal to 1%, annualized, of the amount of the Company’s estimated NAV per K-T Share for each K-T Share purchased in the primary portion of the Public Offering, for providing services to a
24
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
holder of K-T Shares. The stockholder servicing fee accrues daily and is payable monthly in arrears. The Dealer Manager will reallow all or a portion of the stockholder servicing fee to participating broker-dealers and servicing broker-dealers. The Company will cease paying the stockholder servicing fee with respect to K-T Shares sold in the primary portion of the Public Offering in accordance with the terms set forth in the prospectus portion of the Registration Statement. As of September 30, 2022, the Company recognized $15,053 of stockholder servicing fees in connection with the Public Offering.
If the Company’s board of directors determines, in any year, that the Company has excess cash, the Company’s board of directors will declare a special distribution entitling (a) the holders of K Shares, K-I Shares, K-T Shares to share, pro rata in accordance with the number of K Shares, K-I Shares and K-T Shares, 50% of such excess cash (or 87.5% of such excess cash if the A Shares have been repurchased in connection with a Non-cause Advisory Agreement Termination); (b) the holders of B Shares to share, pro rata in accordance with the number of B Shares, 12.5% of excess cash; and (c) the holders of A Shares (including PHA or its affiliates) to share, pro rata in accordance with the number of A Shares, 37.5% of such excess cash (unless all such A Shares previously have been repurchased in connection with a Non-cause Advisory Agreement Termination, in which case the excess cash otherwise apportioned to the A Shares would be distributed to the holders of the K Shares, K-I Shares and K-T Shares as noted above).
Upon a liquidation event, any remaining liquidation cash will be paid as a special distribution (a) to the holders of K Shares, K-I Shares and K-T Shares, pro rata in accordance with the number of K Shares, K-I Shares and K-T Shares, 50% of such excess cash (or 87.5% of such excess cash if the A Shares have been repurchased in connection with a Non-cause Advisory Agreement Termination); (b) to the holders of B Shares, pro rata in accordance with the number of B Shares, 12.5% of excess cash; and (c) to the holders of A Shares (including PHA or its affiliates), pro rata in accordance with the number of A Shares, 37.5% of such excess cash (unless all such A Shares previously have been repurchased in connection with a Non-cause Advisory Agreement Termination, in which case the excess cash otherwise apportioned to the A Shares would be distributed to the holders of the K Shares, K-I Shares and K-T Shares as noted above).
The Company established a long-term incentive plan pursuant to which the Company’s board of directors (including independent directors), officers and employees, PHA and its affiliates and their respective employees, employees of entities that provide services to the Company, managers of the Company’s advisor or directors or managers of entities that provide services to the Company and their respective employees, certain of the Company’s consultants and certain consultants to PHA and its affiliates or entities that provide services to the Company and their respective employees may be granted incentive awards in the form of restricted stock, options, and other equity-based awards.
In accordance with the Company’s long-term incentive plan, each new independent director that joins the Company’s board of directors is awarded 250 restricted K Shares in connection to his or her initial election to the board of directors. In addition, in connection with an independent director’s re-election to the Company’s board of directors at each annual meeting of stockholders, he or she will receive an additional 250 restricted K Shares. Restricted K Shares issued to independent directors will vest in equal amounts annually over a four-year period on and following the first anniversary of the date of grant in increments of 25% per annum; provided, however, that the restricted K Shares will become fully vested on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company. On February 11, 2019, the Company issued 500 restricted K Shares to each of the Company’s three independent directors for a total of 1,500 restricted K Shares. These awards were in relation to their initial election to the board of directors and their re-election. An additional 250 restricted K Shares were awarded to each independent director upon his or her re-election at the Company’s annual meetings of stockholders on July 11, 2019, November 17, 2020 and November 10, 2021, respectively.
25
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Share Repurchase Program and Redeemable Common Stock
The Company’s share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to the Company, subject to restrictions and applicable law. The Company is not required to repurchase shares. The share repurchase program is only intended to provide interim liquidity to stockholders until a liquidity event occurs, such as the commencement of execution on a plan of liquidation, the listing of the K Shares, K-I Shares or K-T Shares (or successor security) on a national securities exchange, or the Company’s merger with a listed company. The Company cannot guarantee that a liquidity event will occur.
On October 26, 2018, the Company’s board of directors approved and adopted the Amended and Restated Share Repurchase Program (the “A&R SRP”). The A&R SRP provides that the Company will not repurchase in excess of 5.0% of the weighted average number of K Shares, K-I Shares and K-T Shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which repurchases are being paid (provided, however, that while shares subject to a repurchase requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be repurchased, shares subject to a repurchase requested upon the death of a stockholder will not be subject to the percentage cap). Additionally, in the event that any stockholder fails to maintain a minimum balance of $2,000 of K Shares, K-I Shares or K-T Shares, the Company may repurchase all of the shares held by that stockholder at the per share repurchase price in effect on the date the Company determines that the stockholder has failed to meet the minimum balance, less any applicable repurchase discount. Minimum account repurchases will apply even in the event that the failure to meet the minimum balance is caused solely by a decline in the Company’s estimated NAV per share.
In addition, the Company’s repurchase of any shares will be limited to the extent that the Company does not have, as determined in the Company’s board of directors’ discretion, sufficient funds available to fund any such repurchase. Most of the Company’s assets will consist of properties which cannot be readily liquidated without affecting the Company’s ability to realize full value upon their disposition. Therefore, the Company may not have sufficient liquid resources to satisfy all repurchase requests. In addition, the Company’s board of directors may amend, suspend (in whole or in part) or terminate the A&R SRP at any time upon 30 days’ notice to stockholders. Further, the Company’s board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.
In the event the Company cannot repurchase all shares presented for repurchase in any fiscal quarter, based upon insufficient cash available and/or the limit on the number of shares it may repurchase, the Company would give first priority to the repurchase of deceased stockholders’ shares. The Company would next give priority to (i) requests of stockholders with “qualifying disabilities” (as defined in the A&R SRP), and in the discretion of the Company’s board of directors, stockholders with another involuntary exigent circumstance, such as bankruptcy, and (ii) next, to requests for full repurchases of accounts with a balance of 100 or less shares at the time the Company receives the request, in order to reduce the expense of maintaining small accounts. Thereafter, the Company will honor the remaining quarterly repurchase requests on a pro-rata basis. Unfulfilled requests will be carried over automatically to subsequent repurchase periods unless a stockholder withdraws a request pursuant to the terms of the A&R SRP.
Repurchases of K Shares, K-I Shares and K-T Shares will be made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Valid repurchase requests will be honored approximately 30 days following the end of the applicable quarter (the “Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to five business days prior to the Repurchase Date.
No shares can be repurchased under the Company’s A&R SRP until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder. Additionally, any shares purchased pursuant to the Company’s DRIP will be excluded from the one-year holding requirement. For stockholders that have made more than one purchase of K Shares, K-I Shares or K-T Shares in the Public Offering and/or Private Offering, the one-year holding period will be calculated separately with respect to each such purchase. Repurchases of K Shares, K-I Shares and K-T
26
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Shares, when requested, are at the Company’s sole discretion and generally will be made quarterly. Shares repurchased under the A&R SRP program will become unissued shares and will not be resold unless such sales are made pursuant to transactions that are registered or exempt from registration under applicable securities laws. The Company will not pay its Sponsor, board of directors, PHA or their affiliates any fees to complete transactions under the A&R SRP.
The per share repurchase price will depend on the length of time the stockholder has held such shares as follows:
| | |
Share Purchase Anniversary |
| Repurchase Price on Repurchase Date |
Less than 1 year |
| No Repurchase Allowed |
1 year |
| 92.5% of most recent Estimated Per Share NAV |
2 years |
| 95.0% of most recent Estimated Per Share NAV |
3 years |
| 97.5% of most recent Estimated Per Share NAV |
4 years |
| 100.0% of most recent Estimated Per Share NAV |
In the event of a stockholder’s death or disability |
| 100.0% of most recent Estimated Per Share NAV |
Notwithstanding the foregoing, pursuant to securities laws and regulations, at any time the Company is engaged in an offering, the repurchase amount shall never be more than the current offering price of such shares. Shares repurchased in connection with a stockholder’s bankruptcy or other exigent circumstance, in the sole discretion of the Company’s board of directors, within one year from the purchase date will be repurchased at a price per share equal to the price per share the Company would pay had the stockholder held the shares for one year from the purchase date.
The purchase price for repurchased shares will be adjusted for any stock dividends, combinations, splits, recapitalizations, or similar corporate actions with respect to the Company’s common stock. If the Company has sold any properties and have made one or more special distributions to stockholders of all or a portion of the net proceeds from such sales, the per share repurchase price will be reduced by the net sale proceeds per share distributed to stockholders prior to the Repurchase Date to the extent such distributions are not used to pay accumulated, accrued and unpaid distributions on such K Shares, K-I Shares and K-T Shares. The Company’s board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While the Company’s board of directors does not have specific criteria for determining a special distribution, the Company expects that a special distribution will occur only upon the sale of a property and the subsequent distribution of net sale proceeds.
On March 20, 2020, the Company’s board of directors decided to temporarily suspend repurchases under the A&R SRP due to the negative impact of the COVID-19 pandemic on the Company’s portfolio at the time, effective with repurchase requests that would have been processed in April 2020; provided, however, the Company continued to process repurchases due to death in accordance with the terms of the A&R SRP. On June 10, 2020, the Company’s board of directors determined to fully reopen the share repurchase program to all repurchase requests commencing with the next quarter Repurchase Date, beginning in July 2020. Shares will be repurchased subject to and upon the terms and conditions of the A&R SRP.
The Company generally repurchases shares approximately 30 days following the end of the applicable quarter in which requests were received.
The Company's board of directors approved outstanding repurchase requests received during the three months ended March 31, 2022, and, on April 12, 2022, the Company repurchased 37,500 K Shares for $369,375, or $9.85 per K Share. The Company’s board of directors approved outstanding repurchase requests received during the three months ended June 30, 2022, and on August 5, 2022, the Company repurchased 37,302 K Shares for $380,036, or $10.19 per K Share, 657 K-I Shares for $6,590, or $10.03 per K-I Share and 1,000 K-T Shares for $10,290, or $10.29 per K-T Share. The Company’s board of directors approved outstanding repurchase requests received during the three months ended September 30, 2022, and on October 18, 2022, the Company repurchased 16,879 K Shares for $167,356, or $9.92 per K Share.
27
Procaccianti Hotel REIT, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Distributions
During the nine months ended September 30, 2022, the Company’s board of directors authorized the payment of distributions as follows:
| | | | | | | | | | | | | | |
| Shares | | | Amount | | | | | | |||||
Date | Outstanding | Date | Record | Per Share | Distributions | |||||||||
Paid | Date | Authorized | Date | Per Day | K Share | K-I Share | K-T Share | OP Units | Total | |||||
2/16/2022 | 12/31/2021 | 2/11/2022 | 2/14/22 | $0.001917808 | $ | 694,066 | $ | 230,522 | $ | 10,927 | $ | 22,606 | $ | 958,121 |
5/6/2022 | 3/31/2022 | 4/29/2022 | 5/2/2022 | $0.001917808 | | 681,294 | | 227,492 | | 10,899 | | | | 919,685 |
5/11/2022 | 3/31/2022 | 4/29/2022 | 5/2/2022 | $0.001917808 | | | | | | | | 22,115 | | 22,115 |
8/5/2022 | 6/30/2022 | 8/1/2022 | 8/3/2022 | $0.001917808 | | 685,440 | | 231,566 | | 11,112 | | 22,360 | $ | 950,478 |
| | | | | $ | 2,060,800 | $ | 689,580 | $ | 32,938 | $ | 67,081 | $ | 2,850,399 |
During the nine months ended September 30, 2021, the Company’s board of directors authorized the payment of distributions as follows:
| | | | | | | | | | | | | | |
| Shares | | | Amount | | | | | | |||||
Date | Outstanding | Date | Record | Per Share | Distributions | |||||||||
Paid | Date | Authorized | Date | Per Day | K Share | K-I Share | K-T Share | OP Units | Total | |||||
9/24/2021 | 9/30/2020 | 9/24/2021 | 9/24/2021 | $0.0013387978 | $ | 409,394 | $ | 78,393 | $ | 5,911 | $ | — | $ | 493,698 |
9/29/2021 | 12/31/2020 | 9/24/2021 | 9/24/2021 | $0.0019125683 | | 610,721 | | 116,169 | | 8,422 | | — | $ | 735,312 |
12/23/2021 | 9/30/2020 | 9/24/2021 | 9/24/2021 | $0.0019125683 | | | | | | | | 22,544 | $ | 22,544 |
12/23/2021 | 12/31/2020 | 9/24/2021 | 9/24/2021 | $0.0019125683 | | | | | | | | 22,544 | $ | 22,544 |
| | | | | $ | 1,020,115 | $ | 194,562 | $ | 14,333 | $ | 45,088 | $ | 1,274,098 |
The Company's board of directors will make determinations as to the payment of future distributions on a quarter-by-quarter basis; however, distributions will continue to accumulate pursuant to the Company's charter.
With respect to the K Shares, K-I Shares and K-T Shares outstanding as of September 30, 2022, the cumulative amount of distributions that had accumulated on a daily basis with respect to each K Share, K-I Share and K-T Share since June 30, 2022 was $690,893, or $0.001917808 per K Share per day, $235,453, or $0.001917808 per K-I Share per day, and $10,594, or $0.001917808 per K-T Share per day, respectively.
Note 8 - Income Taxes
The Company recognized consolidated income tax expense of $200,498 and $24,514 for the three months ended September 30, 2022 and 2021, respectively. The Company recognized consolidated income tax expense of $243,473 and $25,864 for the nine months ended September 30, 2022 and 2021, respectively. These amounts relate to the operations of the Company’s TRSs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. The MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.
As used herein, the terms “we,” “our” and “us” refer to Procaccianti Hotel REIT, Inc., a Maryland corporation and, as required by context, Procaccianti Hotel REIT, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their respective subsidiaries.
The following discussions and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”). The following discussion should also be read in conjunction with our audited consolidated financial statements, the notes thereto, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 25, 2022 (“Annual Report”).
Forward-Looking Statements
Certain statements included in this Quarterly Report that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements.
Factors that could have a material adverse effect on our operations and future prospectus include, but are not limited to:
● | the short- and longer-term effects of the COVID-19 pandemic and variants of COVID-19, including decreased demand for travel, transient and group business, and levels of consumer confidence; |
● | actions that governments, businesses and individuals take in response to the COVID-19 pandemic and variants of COVID-19, including limiting or banning travel, limiting the number of attendees at events, and social distancing requirements; |
● | the impact of and actions taken in response to the COVID-19 pandemic and variants of COVID-19, including the ability to provide adequate staffing levels required to effectively operate our hotel properties and meet customer needs; |
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● | the impact of supply chain disruptions on our ability to comply with brand standards and guest expectations and the ability of our third-party managers to source supplies and other items required for operations; |
● | the pace of economic and travel industry recovery following the COVID-19 pandemic and variants of COVID-19; |
● | our ability to successfully negotiate amendments and covenant waivers under our secured and unsecured indebtedness; |
● | our ability to comply with contractual covenants; |
● | business, financial and operating risks inherent to real estate investments and the hospitality industry; |
● | seasonal and cyclical volatility relating to the hospitality industry; |
● | adverse changes in specialized industries, such as the energy, technology and/or tourism industries, that result in a sustained downturn of related business and corporate spending that may negatively impact our revenues and results of operations; |
● | macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms; |
● | inflation which increases labor and other costs of providing services to guests and meeting hotel brand standards, as well as costs related to construction and other capital expenditures, property and other taxes, and insurance, which could result in reduced operating profit margins; |
● | potential recessionary pressures leading to lower economic activity which could result in a decline in consumer confidence and a corresponding drop in consumer spending; |
● | events beyond our control, such as war, terrorist or cyber-attacks, mass casualty events, government shutdowns and closures, travel-related health concerns and natural disasters; |
● | cyber incidents and information technology failures, including unauthorized access to our computer systems and/or our vendor’s computer systems, and our third-party management companies’ or franchisors’ computer systems and/or their vendors’ computer systems; |
● | changes in economic conditions generally and the real estate and debt markets specifically; |
● | our ability to obtain financing on acceptable terms; |
● | our levels of debt and the terms and limitations imposed on us by our debt agreements; |
● | our ability to successfully identify and acquire properties on terms that are favorable to us; |
● | risks inherent in the real estate business, including potential liability relating to environmental matters and the lack of liquidity of real estate investments; |
● | changes in demand for rooms at our hotel properties; |
● | the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s-length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us; |
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● | our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor; |
● | our ability to generate sufficient cash flows to pay distributions to our stockholders; |
● | legislative or regulatory changes (including changes to the laws governing the taxation of REITs (as defined below)); |
● | the availability of capital; |
● | changes in interest rates; and |
● | changes to U.S. generally accepted accounting principles ("GAAP"). |
Other risks include those described under the section entitled Item 1A. “Risk Factors” of Part I our Annual Report and subsequent quarterly reports. Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
Overview
Procaccianti Hotel REIT, Inc. was formed on August 24, 2016, under the laws of Maryland to acquire and own a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay and compact full-service hotel properties throughout the United States. As of September 30, 2022, we owned an interest in five select-service hotel properties. We elected to be taxed as, and currently operate as, a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2018.
Substantially all of our business is conducted through the Operating Partnership. We are the sole general partner of the Operating Partnership. We are externally managed by our advisor, Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an advisory agreement by and among us, our Operating Partnership and PHA, dated August 2, 2018 (as amended, the “Advisory Agreement”). PHA is an affiliate of our sponsor, Procaccianti Companies, Inc. (“Sponsor”).
Subscription proceeds from Class K common stock (“K Shares”), Class K-I common stock (“K-I Shares”) and Class K-T common stock (“K-T Shares”) in our Private Offering and our Public Offering, which terminated in August 2021, as discussed below, have been applied to investments in hotel properties or real estate-related investments relating to hotel properties.
We intend to make reserve allocations as necessary to aid our objective of preserving capital for investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties. There is no assurance that such funds will be available or, if available, that the terms will be acceptable to us.
We raised the equity capital for our real estate investments through a private offering (the “Private Offering”) and a public offering (the “Public Offering”, together with the Private Offering, the “Offerings”) from September 2016
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through August 2021, and we have offered shares through our distribution reinvestment plan (“DRIP”) pursuant to a Registration Statement on Form S-3 (the “DRIP Offering”) since August 2021.
We terminated our Private Offering prior to the commencement of the Public Offering, and, as of such termination, received approximately $15,582,755 in gross proceeds from the sale of shares of Class K common stock (“K Shares”) and Class A common stock (“A Shares”, including Units (which were comprised of one K Share and one A Share), in the Private Offering. Of the $15,582,755 in gross proceeds received, $2,954,095 was from the sale of A Shares to TPG Hotel REIT Investor, LLC (“THR”), an affiliate of PHA, to fund organization and offering expenses associated with the K Shares and Units.
Since the commencement of the Public Offering and through September 30, 2022, we received approximately $40,285,110 in gross proceeds from the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, inclusive of proceeds from the sale of $885,545 of K Shares, $542,189 of K-I Shares and $57,214 of K-T Shares pursuant to the DRIP. Additionally, on October 26, 2018, June 10, 2019 and January 19, 2021, we received $1,500,000, $690,000 and $440,000, respectively, from the sale of A Shares to THR in private placements, the proceeds of which were used to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we allocated proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable estimated NAV per K-I Share and the applicable offering price of K-I Shares sold in our primary offering and (ii) any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.
On February 27, 2020, through a separate private placement and as partial consideration for the Company's acquisition of the Hilton Garden Inn hotel property located in Providence, Rhode Island (“Hilton Garden Inn Providence”), the Operating Partnership issued 128,124 Class K units of limited partnership interests in the Operating Partnership ("Class K OP Units") at $10.00 per Class K OP Unit.
We intend to establish an estimated per share net asset value (“Estimated Per Share NAV”) on at least an annual basis. Each Estimated Per Share NAV was determined by our board of directors after consultation with our advisor and an independent third-party valuation firm. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. The following table outlines the established Estimated Per Share NAV as determined by our board of directors for the last four years as of each valuation date presented below (which were the Estimated NAV Per Shares for the K Shares, K-I Shares and K-T Shares, unless otherwise indicated):
| | | | | |
Valuation Date | | Effective Date | | Estimated Per Share NAV | |
March 31, 2022 | | June 27, 2022 | | $10.29 | (1) |
March 31, 2021 | | June 9, 2021 | | $9.85 | (2) |
March 31, 2020 | | June 10, 2020 | | $8.56 | (3) |
March 31, 2019 |
| May 23, 2019 | | $10.00 | (4) |
(1) | The Estimated Per Share NAV per A Share was $13.34 and the Estimated Per Share NAV per share of Class B capital stock (“B Share”) was $1.25. |
(2) | The Estimated Per Share NAV per K-I Share was $9.77, the Estimated Per Share NAV per A Share was $0.00 and the Estimated Per B Share was $0.00. |
(3) | The Estimated NAV Per K-I Share was $8.55, the Estimated Per Share NAV per A Share was $0.00 and the Estimated Per Share NAV per B Share was $0.00. |
(4) | The Estimated Per Share NAV per A Share was $3.97 and the Estimated Per Share NAV per B Share was $0.00. |
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S2K Financial LLC was the dealer manager for our Public Offering and was responsible for the distribution of our common stock in our Public Offering. PHA is our advisor and is an affiliate of our Sponsor. Subject to certain restrictions and limitations, PHA manages our day-to-day operations and our portfolio of properties and real estate-related assets. PHA sources and presents investment opportunities to our board of directors and provides investment management, marketing, investor relations and other administrative services on our behalf. We have no paid employees and rely on PHA to provide substantially all of our services. Pursuant to our Advisory Agreement with PHA, we will reimburse PHA for costs incurred in providing these administrative services. PHA will be required to allocate the cost of such services to us based on objective factors such as total assets, revenues and/or time allocations. At least annually, our board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. In the three months ended September 30, 2022 and 2021, the Company’s Sponsor requested reimbursement for $35,120 and $56,035, respectively, of such administrative service expenses. In the nine months ended September 30, 2022 and 2021, the Company’s Sponsor requested reimbursement for $122,813 and $150,134, respectively, of such administrative service expenses. Of these amounts, $25,362 is included in due to related parties on the condensed consolidated balance sheet as of September 30, 2022.
In addition, pursuant to provisions contained in our charter and in the Advisory Agreement, our board of directors has the ongoing responsibility of limiting our total operating expenses (as defined in our charter) for the trailing four consecutive quarters to amounts that do not exceed the greater of 2% of our average invested assets (as defined in our charter) or 25% of our net income (as defined in our charter), calculated in the manner set forth in our charter, unless a majority of the directors (including a majority of the independent directors) has made a finding that, based on unusual and non-recurring factors that they deem sufficient, a higher level of expenses is justified. In the event that a majority of the directors (including a majority of the independent directors) does not determine that such excess expenses are justified, PHA must reimburse to us the amount of the excess expenses paid or incurred (the “Excess Amount”).
We incurred operating expenses of approximately $2,500,929 and incurred an Excess Amount of approximately $415,662 during the twelve months ended September 30, 2022. Our board of directors (including a majority of our independent directors) determined that the Excess Amount for the twelve months ended September 30, 2022 was justified as unusual and non-recurring due to the continued impact of the COVID-19 pandemic on the Company’s business and assets coupled with the current macroeconomic conditions including inflation at a 20 year high.
Because we are prohibited from operating hotel properties pursuant to certain tax laws relating to our qualification as a REIT, the entities through which we own hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays federal income tax at regular corporate rates on its taxable income. The TRSs will enter into any franchise agreements to brand our hotels and will generally enter into property management agreements with one or more affiliated property management companies. These may include TPG Hotels & Resorts, Inc., an affiliate of our Sponsor and PHA, or TPG Hotels & Resorts, Inc.’s wholly owned subsidiaries, which we collectively refer to as TPG, or other affiliates or designees of TPG. We expect our property manager will operate and manage all or substantially all of our hotel properties.
We anticipate that we will acquire properties with property management agreements that can be terminated with little or no cost. In such cases, our TRSs will enter into property management agreements with one or more property management companies affiliated with our Sponsor. We expect our property manager will operate and manage all or substantially all of our hotel properties. We collectively refer to TPG and other property management companies affiliated with our Sponsor as our property manager.
PHA and affiliated property managers will be entitled to receive fees during the acquisition and operational stages of the Company, and PHA may be eligible to receive fees during the liquidation stage of the Company. S2K Financial LLC will receive fees for distribution and servicing of the DRIP Offering.
We elected to be taxed as, and currently qualify as, a REIT under the Code commencing with our taxable year ended December 31, 2018. As a REIT, we generally will not be subject to U.S. federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year following the year we initially elect to be taxed as a REIT, we will be subject to U.S. federal income tax on our taxable income at regular
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corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.
Recent Developments
COVID-19 Impact
In December 2019, COVID-19 was identified in Wuhan, China, subsequently spread to other regions of the world, and was declared a global pandemic by the World Health Organization in March 2020. The Company experienced significant declines in occupancy and revenue per available room (“RevPAR”) associated with COVID-19 throughout its hotel portfolio, which has had a negative impact on the Company’s operations and financial results. Given the current availability and effectiveness of the COVID-19 vaccines, in addition to a decrease in government related mandates, the Company has experienced an improvement in traveler sentiment. While such factors have helped contribute to improved conditions throughout 2021 and the first three quarters of 2022, there can be no assurances that the vaccines will contain the spread of the virus and its variants and allow the economy to fully recover. Therefore, while the Company has experienced continued improvement in its operations through the first three quarters of 2022 and expects continued improvement through the rest of the year, future results of operations, financial position and cash flow could be negatively impacted by, among other things, historical seasonal trends, an increase in COVID-19 cases, quarantines, deterioration of consumer sentiment or significant inflationary pressures.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the Federal Government, which, among other things, provided emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. The CARES Act also included the establishment of the Paycheck Protection Program (“PPP”), a Small Business Administration (the “SBA”) loan to businesses with fewer than 500 employees that may be partially or fully forgivable. In May 2020, we received $1,018,917 in PPP loans relating to four hotel properties. On January 11, 2021, the SBA opened an additional round of PPP funding, and we received $1,426,672 in PPP loans in the second round relating to the same four properties. As of September 30, 2022, the Company received formal written approval of forgiveness applications from the SBA for the full amount of these PPP loans.
The CARES Act also provides the ERTC, which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers and equal to 50% of qualified wages paid per quarter through December 31, 2020 and up to $10,000 per employee and equal to 70% of qualified wages paid per quarter through September 30, 2021. An affiliate of the Company’s hotel property managers qualified for the ERTC. The Company has a $42,126 receivable balance from its affiliate for amounts related to wages reimbursed by the Company pursuant to its property management agreements included in Due from related parties in the Company’s condensed consolidated balance sheet as of September 30, 2022.
In 2022, the Springhill Suites Wilmington received a Business Recovery grant from the state of North Carolina in the amount of $215,660, the Hotel Indigo Traverse City received a $381,168 Growing Michigan Business grant and the Hilton Garden Inn Providence received a $250,000 grant from the Rhode Island Rebounds program. These grants were recorded as Other operating revenue in the Company’s consolidated statement of operations.
There may also be lasting effects related to the COVID-19 pandemic. We may be impacted by, among other things, the distribution and acceptance of COVID-19 vaccines and boosters, breakthrough cases, and new variants of COVID-19, as well as the ongoing local and national response to the virus including indoor mask mandates, group size limitations and other restrictions. As the recovery continues, we expect that the pace will vary from market to market and may be uneven in nature. The market and economic challenges associated with the COVID-19 pandemic could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
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Market Outlook
The impact of the COVID-19 pandemic on the global and U.S. economy and the travel industry in particular has been unprecedented, causing a severe impact to our operations beginning in the first quarter of 2020 and continuing through 2021. The U.S. lodging industry has historically exhibited a strong correlation to U.S. GDP, which increased at an annual rate of approximately 5.7% during 2021, according to the U.S. Department of Commerce, in contrast to a decrease of approximately 3.5% during 2020. The increase in GDP during the year ended December 31, 2021 reflected increases in all major subcomponents, led by personal consumption expenditures (“PCE”), nonresidential fixed investment, exports, residential fixed investment and private inventory investment. Third quarter 2022 GDP increased by 2.6% after the first and second quarters of 2022 declined by 1.45% and 0.9%, respectively. The increase in the third quarter reflected increases in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending.
In addition, the 2022 unemployment rate stayed steady at 3.5% in September 2022, 3.6% in March 2022 and June 2022. The rate decreased from the 2021 rates of 3.9% in December 2021 and 4.8% in September 2021 and 5.9% in June 2021. The unemployment rate has declined considerably from the April 2020 high of 14.7% and has returned to the pre-pandemic rate of 3.5% in February 2020.
The U.S. lodging industry has been more acutely impacted by the COVID-19 pandemic than the overall U.S. economy and other industries and has not experienced the same level of recovery as the general U.S. economy which is largely due to the persistence of the COVID-19 pandemic, new variants of COVID-19, continued and reinstated governmental restrictions on travel and large gatherings in certain markets, delays in office re-openings and return to work timelines and sentiment towards business and leisure travel as a result of the pandemic. Additionally, we expect it will take longer for the lodging industry to return to pre-pandemic levels than it will for the broader economy and many other industries. Further, we continue to monitor and evaluate the challenges associated with the evolving workforce landscape, particularly related to industry-wide labor shortages and expected increases in wages as well as ongoing supply chain issues, which may impact the hotels' ability to source operating supplies and other materials.
Inflation is at a 40-year high and its impact on the U.S. economy and the impact of any measures that may be taken by government officials to curb inflation remain uncertain. Inflation may adversely affect our financial condition and results of operations. An increase in inflation could have an adverse impact on our floating rate mortgages, credit facilities, property operating expenses, and general and administrative expenses, as these costs could increase at a rate higher than our revenue. Inflation could also have an adverse effect on consumer spending, which could impact our revenues.
Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates was included in our Annual Report.
Income Taxes
We elected to be taxed as, and currently qualify as, a REIT under the Code and have operated as such commencing with our taxable year ended December 31, 2018. To qualify as a REIT for tax purposes, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (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). We must also
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meet certain asset and income tests, as well as other requirements. As a REIT, we will not be subject to U.S. federal income tax to the extent we make distributions to our stockholders equal to or in excess of our taxable income. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following 2018, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate income tax rates and generally would not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we are, and intend to continue to be, organized and operated in such a manner as to qualify for treatment as a REIT.
We lease our hotel properties to our wholly owned TRSs that are subject to federal, state and local income taxes.
We account for income taxes of our TRSs 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. We record a valuation allowance for net deferred tax assets that are not expected to be realized.
We have 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 financial statements if it is more likely than not that the tax position will be sustained upon examination. We had no material uncertain tax positions at September 30, 2022.
The preparation of our 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 our estimates may change is not expected to be material. We will account for interest and penalties relating to uncertain tax provisions in the current period’s results of operations, if necessary. We have not been assessed interest or penalties by any major tax jurisdictions. We have tax years 2019 through 2021 remaining subject to examination by various federal and state tax jurisdictions.
Distributions
Our board of directors may authorize payment of distributions in excess of those required for us to maintain REIT status as it deems appropriate. Through the first quarter of 2020, we paid regular quarterly distributions to our stockholders. As a result of the impact of the COVID-19 pandemic on our business, our board of directors may reconsider our current distribution policy and may take further action with respect to distributions for our common stock, and could consider eliminating, suspending, or significantly reducing the payment of distributions in the future. The timing and amount of distributions will be determined by our board of directors, in its sole discretion, and may vary from time to time. Our board of directors’ discretion will be influenced in substantial part by its obligation to cause us to comply with the REIT requirements of the Code. We can provide no assurance that we will be able to pay distributions on our K Shares, K-I Shares or K-T Shares. However, distributions will continue to accumulate pursuant to our charter.
Our board of directors has adopted a policy to refrain from funding distributions with offering proceeds; instead, we plan to fund distributions from cash flows from operations and capital transactions (other than the Public Offering or other securities offerings but which may include the sale of one or more assets). However, our charter does not restrict us from paying distributions from any particular source, including proceeds from securities offerings, and our board of directors has the ability to change our policy regarding the source of distributions. However, in accordance with Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; or (2) cause our total assets to be less than the sum of our total liabilities plus, unless our charter provides otherwise, senior liquidation preferences. Our charter currently provides that amounts that would be needed, if we were to dissolve at the time of such distributions, to satisfy the preferential rights upon dissolution of
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holders of K Shares, K-I Shares and K-T Shares shall not be added to our total liabilities for these purposes. Subject to the preceding, our board of directors will determine the amount of distributions we will pay to our stockholders. We have not established a minimum distribution level.
For information on distributions paid during the three months ended September 30, 2022, refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report.
We have funded distributions with operating cash flows from our hotel properties and from the issuance of common stock pursuant to the DRIP. To the extent we do not have sufficient earnings and profits, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | |
|
| Nine Months Ended September 30, |
| ||||||||
| | 2022 |
| 2021 |
| ||||||
Distributions paid in cash | | $ | 2,254,296 |
|
| | $ | 1,041,589 |
|
| |
Distributions reinvested | |
| 596,103 |
|
| |
| 187,421 |
|
| |
Total distributions | | $ | 2,850,399 |
|
| | $ | 1,229,010 |
|
| |
Source of distributions: | |
|
|
|
| |
|
|
|
| |
Cash flows provided by operations | | $ | 2,254,296 |
| 79 | % | $ | 1,041,589 |
| 85 | % |
Offering proceeds from issuance of common stock pursuant to the DRIP | |
| 596,103 |
| 21 | % |
| 187,421 |
| 15 | % |
Total sources | | $ | 2,850,399 |
| 100 | % | $ | 1,229,010 |
| 100 | % |
Although the tax composition of such distributions may be a return of capital, distributions for the nine months ended September 30, 2022 and 2021 were paid for with gross cash flow from operations. To the extent we do not have taxable income, distributions paid will be considered a return of capital to stockholders.
On March 3, 2020, our stockholders approved to amend our charter (1) to increase the rate at which cash distributions on K Shares, K-I Shares and K-T Shares automatically accumulate under our charter from 6% to 7% per annum of the K Share Distribution Base of such K Share, K-I Share Distribution Base of such K-I Share and K-T Share Distribution Base of such K-T Share, respectively, and (2) to increase the maximum rate at which distributions on A Shares may be authorized by our board of directors and declared by us from 6% to 7% of the stated value of an A Share ($10.00) from income and cash flow from ordinary operations on a cumulative basis. The changes pursuant to the Articles of Amendment to our charter became effective beginning with distributions that accumulated on March 31, 2020.
We paid quarterly distributions with respect to all four quarters of 2021 and the first three quarters of 2022, funded from the operations of our hotel properties and proceeds received pursuant to the DRIP, consistent with prior distributions. Unpaid distributions will continue to accumulate pursuant to our charter. Our board of directors will make determinations as to the payment of future distributions on a quarter by quarter basis; however, distributions will continue to accumulate pursuant to our charter.
Results of Operations
The discussion that follows is based on our consolidated results of operations for the three and nine months ended September 30, 2022 and 2021. The ability to compare one period to another is significantly affected by the inclusion of operations of the Cherry Tree Inn starting on June 3, 2021 and the effect of COVID-19. Therefore, our results of operations for the three and nine months ended September 30, 2022 are not directly comparable to those for the three and nine months ended September 30, 2021.
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Factors That May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and those risks listed in Part I, Item 1A “Risk Factors” of our Annual Report and in Part II, Item 1A. “Risk Factors” of this Quarterly Report, including but not limited to the COVID-19 pandemic, as discussed below, that may be reasonably expected to have a `material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties.
COVID-19 Pandemic
We continue to take the ongoing COVID-19 pandemic extremely seriously and are proactively taking steps to attempt to address the corresponding operational threats to our hotel properties in an effort to minimize the impact of the COVID-19 pandemic on our financial results and position us to rebound as quickly as possible once the situation has stabilized.
The negative impact on room demand at our hotel properties stemming from the COVID-19 pandemic has been significant and we continue to closely monitor the effect on occupancy and RevPAR at our hotel properties. RevPar continues to improve and exceeds pre-pandemic levels. For the three months ended September 30, 2022 and September 30, 2019, RevPAR was $182.48 and $128.41, respectively for the hotel properties owned in both periods.
Our Sponsor’s principals and senior executives, and our highly experienced property level management teams employed by TPG Hotels & Resorts, Inc., our hospitality and property management affiliate, have over three decades of experience in the hospitality industry, and have weathered many market swings, including experience dealing with the impacts of previous disruptive events such as 9/11 and the significant recession of 2008.
Our primary responsibility is to ensure the safety and security of hotel employees and the guests we serve, by facilitating healthy environments. To that end, we have equipped staff with appropriate training, tools and protocols crafted in accordance with the Centers for Disease Control and Prevention guidance and best practices. At all of our hotel properties, additional cleanliness procedures have been implemented, which include, but are not limited to:
● | Placing additional hand sanitizer dispensers throughout each property, especially around frequent contact ‘touch points’ and hard surfaces touched by numerous people, such as elevators, food and beverage areas, front desks, fitness rooms and public restroom facilities; |
● | Increased sanitizing efforts in public areas using disinfecting products, with a focus on areas touched by multiple people, such as door handles, elevator buttons and room key cards; and |
● | Implementing protocols to more frequently sanitize guest room surfaces using disinfecting products, including faucets, remote controls, pens, phones and clock radios. |
While we would expect a select-service hotel portfolio like ours to lend itself to a lesser impact than conference center hotels or resort-conference hotels, the situation is highly fluid and there is no way to currently predict the ultimate extent and duration of the impact of the COVID-19 pandemic on any of our hotel properties or our overall financial results. Accordingly, our experienced hotel management teams are implementing both best practices revenue management and significant expense cutting strategies.
● | Revenue strategies include focusing on occupancy driven revenue as opposed to rate driven revenue, which is accomplished by pursuing and accepting business that may not be in the traditional preferred rate range while continuing to maintain current and previous hotel accounts and providing incentives to rebook on future dates. |
● | Expense strategies include the implementation of cost saving measures such as: staffing optimization, limiting services, energy conservation measures, etc. |
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We cannot, however, predict with certainty, even with our best efforts in these strategies, what level of potential revenues and expense savings can be achieved overall to mitigate the decline in business our hotels have experienced. Potential expense savings may also be negatively impacted by rising inflation.
The extent and duration of the effects of COVID-19 are not yet clear. For more information, see Part I, Item 1A. “Risk Factors” included in our Annual Report.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Rooms revenues
We expect the majority of our revenues to be derived from the operation of our hotel properties. Rooms revenues are the product of the number of rooms sold and the average daily room rate. Rooms revenues increased to $9,652,212 for the three months ended September 30, 2022 from $9,131,968 for the three months ended September 30, 2021. The net increase of $520,244, or 5.7%, was largely due to significant increases in ADR.
The following presents the hotel operating results for the three months ended September 30, 2022 for the full portfolio: | | | | | | | | | | |
|
| Total Portfolio |
| |||||||
| | July |
| August |
| September |
| |||
Number of hotels |
| | 5 |
| | 5 |
| | 5 | |
Number of rooms |
| | 559 |
| | 559 |
| | 559 | |
| | | | | | | | | | |
Average Occupancy Percentage |
| | 82.15 | % | | 79.28 | % | | 72.92 | % |
ADR | | $ | 275.81 | | $ | 253.11 | | $ | 213.27 | |
RevPAR | | $ | 228.26 | | $ | 208.95 | | $ | 156.56 | |
The following presents the hotel operating results for the three months ended September 30, 2021 for the full portfolio.
| | | | | | | | | | |
|
| Total Portfolio |
| |||||||
| | July |
| August |
| September |
| |||
Number of hotels |
| | 5 |
| | 5 |
| | 5 | |
Number of rooms |
| | 559 |
| | 559 |
| | 559 | |
| | | | | | | | | | |
Average Occupancy Percentage |
| | 86.76 | % | | 78.90 | % | | 70.74 | % |
ADR | | $ | 251.73 | | $ | 235.90 | | $ | 193.91 | |
RevPAR | | $ | 225.12 | | $ | 195.79 | | $ | 142.41 | |
A comparison of hotel rooms revenues for the hotels operated continuously for the three months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase | | Increase | | ||||||
| | 2022 | | 2021 | | (Decrease) | | (Decrease) % | | ||||
Springhill Suites Wilmington | | $ | 1,446,236 | | $ | 1,442,728 | | $ | 3,508 | | | 0.24 | % |
Staybridge Suites St. Petersburg | | | 1,177,680 | | | 1,031,831 | | | 145,849 | | | 14.13 | % |
Hotel Indigo Traverse City | | | 3,234,225 | | | 3,275,207 | | | (40,982) | | | (1.25) | % |
Hilton Garden Inn, Providence | | | 1,850,985 | | | 1,570,991 | | | 279,994 | | | 17.82 | % |
Cherry Tree Inn | | | 1,943,086 | | | 1,811,211 | | | 131,875 | | | 7.28 | % |
| | $ | 9,652,212 | | $ | 9,131,968 | | $ | 520,244 | | | 5.70 | % |
The increase in rooms revenues of $3,508, or 0.24%, at the Springhill Suites Wilmington is primarily driven by increases in occupancy compared to the prior year partially offset by a decrease in ADR. Occupancy at the Springhill Suites Wilmington increased from 75.10% for the three months ended September 30, 2021, to 79.23% for the three months ended September 30, 2022. The ADR at the Springhill Suites Wilmington decreased from $170.40 for the three months ended September 30, 2021, to $164.16 for the three months ended September 30, 2022, a decrease of 3.66%.
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The increase in rooms revenues of $145,849, or 14.13%, at the Staybridge Suites St. Petersburg is primarily driven by increases in both the ADR and occupancy compared to the prior year. Occupancy at the Staybridge Suites St. Petersburg increased from 71.36% for the three months ended September 30, 2021, to 75.37% for the three months ended September 30, 2022. The ADR at the Staybridge Suites St. Petersburg increased from $131.29 for the three months ended September 30, 2021, to $142.55 for the three months ended September 30, 2022, an increase of 8.58%.
The decrease in rooms revenues of $40,982 or 1.25%, at the Hotel Indigo Traverse City is primarily driven by slight decreases in both the ADR and occupancy compared to the prior year. Occupancy at the Hotel Indigo Traverse City decreased from 90.98% for the three months ended September 30, 202,1 to 90.37% for the three months ended September 30, 2022. The ADR at the Hotel Indigo Traverse City decreased from $360.99 for the three months ended September 30, 2021 to $360.86 for the three months ended September 30, 2022, a negligible decrease.
The increase in rooms revenues of $279,994, or 17.82%, at the Hilton Garden Inn Providence is primarily driven by increases in both the ADR and occupancy compared to the prior year. Occupancy at the Hilton Garden Inn Providence increased from 65.65% for the three months ended September 30, 2021 to 68.39% for the three months ended September 30, 2022. The ADR at the Hilton Garden Inn Providence increased from $190.16 for the three months ended September 30, 2021 to $214.30 for the three months ended September 30, 2022, an increase of 12.69%.
The increase in rooms revenues of $131,875, or 5.7%, at the Cherry Tree Inn is primarily driven by increases in the ADR compared to the prior year. Occupancy at the Cherry Tree Inn decreased from 90.92% for the three months ended September 30, 2021 to 77.24% for the three months ended September 30, 2022. The ADR at the Cherry Tree Inn increased from $283.06 for the three months ended September 30, 2021 to $355.11 for the three months ended September 30, 2022, an increase of 25.45%.
Food and beverage revenues
Food and beverage revenues increased to $1,038,870 for the three months ended September 30, 2022 from $976,812 for the three months ended September 30, 2021. These amounts are comprised of revenues realized in hotel food and beverage outlets as well as catering events. The $62,058 increase from the prior year period is in line with the increase in rooms revenues.
Other operating revenues
Other operating revenues increased to $260,906 for the three months ended September 30, 2022, from $202,177 for the three months ended September 30, 2021. These amounts include ancillary hotel revenues and other items primarily driven by occupancy such as telephone/internet, parking, gift shops, and other guest services. The $58,729 increase from the prior year period is primarily due to an increase in parking and gift shop revenue.
Rooms expenses
Rooms expenses decreased to $1,684,324 for the three months ended September 30, 2022 from $1,697,376 for the three months ended September 30, 2021. The $13,052 net decrease in rooms expenses is primarily due to the slight decline in occupancy. Rooms expenses are typically primarily driven by the corresponding revenue account and occupancy. Rooms expenses of $1,684,324 and $1,697,376 represent 17.5% and 18.6% of rooms revenues for the three-month period ended September 30, 2022 and 2021, respectively.
Food and beverage expenses
Food and beverage expenses were $643,022 and $574,608 for the three months ended September 30, 2022 and 2021, respectively. The $68,414 increase in food and beverage expenses is primarily due to current inflationary pressures. Food and beverage expenses are historically primarily driven by the corresponding revenue account and occupancy. Food and beverage expenses represent 61.9% and 58.8% of food and beverage revenues for the three-month period ended September 30, 2022 and 2021, respectively. The percentage increase is primarily due to the rise in labor and consumable costs.
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Other property expenses
Other property expenses were $2,845,813 and $2,678,659, for the three months ended September 30, 2022 and 2021, respectively. The $167,154 increase in other property expenses is primarily driven by the rise in labor costs and credit card commissions. These amounts also include maintenance, utilities, sales and marketing, and general and administrative expenses of the hotel properties, as well as net franchise fees, property taxes and other taxes.
Property management fees to affiliates
Property management fees to affiliates were $328,867 and $309,697 for the three months ended September 30, 2022 and 2021, respectively. Property management fees are property level expenses equal to 3% of the hotel properties’ gross revenues and we expect them to fluctuate accordingly.
Corporate general and administrative
Corporate general and administrative expenses were $348,781 and $354,591 for the three months ended September 30, 2022 and 2021, respectively. Corporate general and administrative expenses consist primarily of transfer agent fees, fees paid to the board of directors, audit and tax fees, and other professional services fees.
Other fees to affiliates
Other fees to affiliates were $262,628 and $484,583 for the three months ended September 30, 2022 and 2021, respectively. Other fees to affiliates include acquisition fees due to an affiliate for providing services including selecting, evaluating and acquiring potential investments. This fee is equal to 1.5% of the Gross Contract Purchase Price of an investment (as defined in the Advisory Agreement). Payment of the acquisition fees is deferred until the occurrence of a liquidation event. Acquisition fees incurred for the three months ended September 30, 2021 were $264,789 and related to the purchase of the Cherry Tree Inn. Other fees to affiliates include asset management fees due to PHA that are paid quarterly in arrears equal to one-fourth of 0.75% of the adjusted cost of our assets. Asset management fees increased to $177,812 for the three months ended September 30, 2022 from $163,759 for the three months ended September 30, 2021. Other fees to affiliates also includes certain administrative fees charged to us by our Sponsor. Such administrative fees were $35,120 and $56,035 in the three months ended September 30, 2022 and 2021, respectively. Other fees to affiliates for the three months ended September 30,2022, included $49,696 of expenses incurred by an affiliate of our Sponsor related to the application for the ERTC.
Depreciation and amortization
Depreciation and amortization expenses were $990,626 and $883,605 for the three months ended September 30, 2022 and 2021, respectively. These amounts include depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization of our franchise fees and certain intangibles.
Loss on the disposal of fixed assets
Loss on disposal of fixed assets was $10,535 for the three months ended September 30, 2022, and related to the replacement of certain room furnishings at the Staybridge Suites St. Petersburg.
Interest expense, net
Interest expense, net, was $716,108 and $681,293 for the three months ended September 30, 2022 and 2021, respectively. Interest expense includes monthly fixed rate payments on the outstanding mortgage notes payable balance, accrued interest on the outstanding asset management fees, acquisition fees and promissory notes from PHA and our Sponsor, and the amortization of deferred financing costs and debt discounts or premiums. For the three months ended September 30, 2022, we incurred $30,702 of interest expense relating to the amortization of deferred financing costs and debt discounts, offset by $33,139 relating to the amortization of the fair value of debt premium.
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Interest income on interest-bearing cash accounts was $228 and $197 for three months ended September 30, 2022 and 2021, respectively. Interest income on the ERTC received was $33,794 for the three months ended September 30, 2022. Interest income is presented as a reduction of the total interest expense on the consolidated income statement.
Gain on interest rate cap/swap
Unrealized gain on our interest rate cap was $62,109 for the three months ended September 30, 2022 and related to the TCI note interest rate cap which expires on August 15, 2023. Realized gain on interest rate swap was $86,161 for the three months ended September 30, 2021 representing the write off of the remaining liability balance related to the TCI note swap which expired during the third quarter of 2021.
Income tax expense
Income tax expense of $200,498 and $24,514 for the three months ended September 30, 2022 and 2021, respectively, related to taxable income at the TRSs.
Net income
For the three months ended September 30, 2022, we had net income of $2,982,895 compared to net income of $2,708,192 for the three months ended September 30, 2021. The increase in net income of $274,703 is the result of the revenue and expense changes discussed above.
Net income attributable to noncontrolling interests
Net income relating to noncontrolling interests was $214,792 for the three months ended September 30, 2022 compared to net income relating to noncontrolling interests of $173,426 for the three months ended September 30, 2021. This amount includes net income or losses attributable to a third-party’s 49% ownership interest in PCF and will fluctuate accordingly with any increases or decreases to net income of PCF. This amount also includes net income or losses attributable to the noncontrolling Operating Partnership Class K OP Units issued as part of the Hilton Garden Inn Providence acquisition. The noncontrolling Class K OP Units are allocated net income or loss attributable to the Operating Partnership based on the total outstanding Class K OP Units as a percentage of all our outstanding common stock.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Rooms revenues
We expect the majority of our revenues to be derived from the operation of our hotel properties. Rooms revenues are the product of the number of rooms sold and the average daily room rate. Rooms revenues increased to $20,916,938 for the nine months ended September 30, 2022 from $17,384,237 for the nine months ended September 30, 2021. The net increase of $3,532,701 was attributable to significant increases in ADR. In the nine months ended September 30, 2022, the rooms revenues generated by the Cherry Tree Inn was $3,164,871. Rooms revenues generated by the Cherry Tree Inn was $2,231,235 from June 3, 2021 through September 30, 2021. Excluding the impact of the Cherry Tree Inn, revenue increased 2,599,065 or 17.15% from the same period in 2021.
Food and beverage revenues
Food and beverage revenues increased to $2,036,163 for the nine months ended September 30, 2022 from $1,638,012 for the nine months ended September 30, 2021. These amounts are comprised of revenues realized in hotel food and beverage outlets as well as catering events. The $398,151 increase from the prior year period is in line with the increase in rooms revenues. In the nine months ended September 30, 2022, the food and beverage revenues generated by the Cherry Tree Inn was $6,204. Food and beverage revenues generated by the Cherry Tree Inn was $3,975 from June 3, 2021 through September 30, 2021.
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Other operating revenues
Other operating revenues increased to $1,417,920 for the nine months ended September 30, 2022 from $475,218 for the nine months ended September 30, 2021. These amounts include ancillary hotel revenues and other items primarily driven by occupancy such as telephone/internet, parking, gift shops, and other guest services. The $942,702 increase from the prior year period is primarily due to the receipt of a $215,660 Business Recovery Grant from the state of North Carolina by the Springhill Suites Wilmington, a $381,168 Growing Michigan Business grant awarded to the Hotel Indigo Traverse City and a $250,000 grant received from the Rhode Island Rebounds program by the Hilton Garden Inn Providence as well as increases in parking and gift shop revenue. In the nine months ended September 30, 2022, the other operating revenues generated by the Cherry Tree Inn was $42,995. Other operating revenues generated by the Cherry Tree Inn was $19,353 from June 3, 2021 through September 30, 2021.
Rooms expenses
Rooms expenses decreased to $3,190,483 for the nine months ended September 30, 2022 from $3,466,570 for the nine months ended September 30, 2021. The $276,087 net decrease in rooms expenses is primarily due a reduction in payroll costs as the result of $860,899 in reimbursements from an affiliate as a result of the affiliate qualifying for ERTCs related to wages reimbursed by the Company offset by the corresponding increase in rooms revenues. In the nine months ended September 30, 2021, rooms expenses generated by the Cherry Tree Inn was $698,378. In the nine months ended September 30, 2021, the rooms expenses generated by the Cherry Tree Inn from June 3, 2021 through September 30, 2021, was $395,777. Rooms expenses are typically primarily driven by the corresponding revenue account and occupancy. Excluding the impact of the ERTC, rooms expenses of $4,051,382 and $3,466,570 represent 19.4% and 19.9% of rooms revenues for the nine-month period ended September 30, 2022 and 2021, respectively.
Food and beverage expenses
Food and beverage expenses were $1,378,905 and $1,018,965 for the nine months ended September 30, 2022 and 2021, respectively. The $359,940 increase in food and beverage expenses is primarily due to current inflationary pressures. Food and beverage expenses are primarily driven by the corresponding revenue account and occupancy. Food and beverage expenses represent 67.7% and 62.2% of food and beverage revenues for the nine-month period ended September 30, 2022 and 2021, respectively. The percentage increase is primarily due to the rise in labor and consumable costs.
Other property expenses
Other property expenses were $7,487,453 and $6,130,213, for the nine months ended September 30, 2022 and 2021, respectively. The $1,357,240 increase in other property expenses is primarily driven by the rise in labor costs and credit card commissions along with the incremental other property expenses of the Cherry Tree Inn. In the nine months ended September 30, 2021, other property expenses generated by the Cherry Tree Inn was $877,160. In the nine months ended September 30, 2021, the other property expenses generated by the Cherry Tree Inn from June 3, 2021 through September 30, 2021, was $525,509. These amounts also include maintenance, utilities, sales and marketing, and general and administrative expenses of the hotel properties, as well as net franchise fees, property taxes and other taxes.
Property management fees to affiliates
Property management fees to affiliates were $706,587 and $585,439 for the nine months ended September 30, 2022 and 2021, respectively. Property management fees are property level expenses equal to 3% of the hotel properties’ gross revenues and we expect them to fluctuate accordingly. In the nine months ended September 30, 2021, property management fees to affiliates generated by the Cherry Tree Inn was $96,401. In the nine months ended September 30, 2021, the property management fees to affiliates generated by the Cherry Tree Inn from June 3, 2021 through September 30, 2021, was $67,633.
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Corporate general and administrative
Corporate general and administrative expenses were $1,052,282 and $979,892 for the nine months ended September 30, 2022 and 2021, respectively. Corporate general and administrative expenses consist primarily of transfer agent fees, fees paid to the board of directors, audit and tax fees, and other professional services fees.
Other fees to affiliates
Other fees to affiliates were $702,442 and $866,224 for the nine months ended September 30, 2022 and 2021, respectively. Other fees to affiliates include asset management fees due to PHA that are paid quarterly in arrears equal to one-fourth of 0.75% of the adjusted cost of our assets. Asset management fees increased to $529,933 for the nine months ended September 30, 2022 from $451,301 for the nine months ended September 30, 2021. Other fees to affiliates include acquisition fees due to an affiliate for providing services including selecting, evaluating and acquiring potential investments. This fee is equal to 1.5% of the Gross Contract Purchase Price of an investment (as defined in the Advisory Agreement). Payment of the acquisition fees is deferred until the occurrence of a liquidation event. Acquisition fees incurred for the nine months ended September 30, 2021 were $264,789 and related to the purchase of the Cherry Tree Inn. Other fees to affiliates also includes certain administrative fees charged to us by our Sponsor. Such administrative fees were $122,813 and $150,134 in the nine months ended September 30, 2022 and 2021, respectively. Other fees to affiliates for the nine months ended September 30,2022, included $49,696 of expenses incurred by an affiliate of our Sponsor related to the application for the ERTC.
Depreciation and amortization
Depreciation and amortization expenses were $2,852,336 and $2,443,246 for the nine months ended September 30, 2022 and 2021, respectively. These amounts include depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization of our franchise fees and certain intangibles. The $409,090 increase in depreciation and amortization expense is primarily the result of the July 30, 2021 acquisition of the Cherry Tree Inn.
Gain on loan extinguishment
Gain on loan extinguishment was $942,605 and $635,317 for the nine months ended September 30, 2022 and 2021, respectively and related to the forgiveness of PPP loans by the SBA.
Loss on the disposal of fixed assets
Loss on disposal of fixed assets was $10,535 for the nine months ended September 30, 2022, and related to the replacement of certain room furnishings at the Staybridge Suites St. Petersburg.
Interest expense, net
Interest expense, net, was $2,026,484 and $1,985,870 for the nine months ended September 30, 2022 and 2021, respectively. Interest expense includes monthly fixed rate payments on the outstanding mortgage notes payable balance, accrued interest on the outstanding asset management fees, acquisition fees and promissory notes from PHA and our Sponsor, and the amortization of deferred financing costs and debt discounts or premiums. For the nine months ended September 30, 2022, we incurred $78,361 of interest expense relating to the amortization of deferred financing costs and debt discounts, offset by $99,236 relating to the amortization of the fair value of debt premium.
Interest income on interest-bearing cash accounts was $8,110 and $37,031 for the nine months ended September 30, 2022 and 2021, respectively. Interest income on the ERTC tax credits received was $33,794 for the nine months ended September 30, 2022. Interest income is presented as a reduction of the total interest expense on the consolidated income statement.
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Gain on interest rate cap/swap
Unrealized gain on our interest rate cap was $147,218 for the nine months ended September 30, 2022 and related to the TCI note interest rate cap which expires on August 15, 2023. Gain on our interest rate swap was $289,412 for the nine months ended September 30, 2021 and related to changes in interest rates and time related to maturity of the TCI note swap which expired on August 15, 2021.
Income tax expense
Income tax expense of $243,473 and $25,864 for the nine months ended September 30, 2022 and 2021, respectively, related to taxable income at the TRSs.
Net income
For the nine months ended September 30, 2022, we had net income of $5,809,864 compared to net income of $2,919,913 for the nine months ended September 30, 2021. The increase in net income of $2,889,951 is the result of the revenue and expense changes discussed above.
Net income attributable to noncontrolling interests
Net income relating to noncontrolling interests was $1,033,968 for the nine months ended September 30, 2022 compared to net income relating to noncontrolling interests of $443,746 for the nine months ended September 30, 2021. This amount includes net income or losses attributable to a third-party’s 49% ownership interest in PCF and will fluctuate accordingly with any increases or decreases to net income of PCF. This amount also includes net income or losses attributable to the noncontrolling Operating Partnership Class K OP Units issued as part of the Hilton Garden Inn Providence acquisition. The noncontrolling Class K OP Units are allocated net income or loss attributable to the Operating Partnership based on the total outstanding Class K OP Units as a percentage of all our outstanding common stock.
Liquidity and Capital Resources
The negative impact on room demand within our portfolio stemming from the COVID-19 pandemic was significant. We experienced an initial decline in hotel revenue that began in March 2020. However, with the increased spread of the COVID-19 pandemic across the globe, the impact accelerated rapidly, and we saw a much greater effect on occupancy and hotel RevPAR throughout our hotel portfolio.
To address the significant strain on the hotels’ cash flows and the uncertainty, at the onset of the COVID-19 pandemic, we implemented cost reduction procedures at all of our hotels including significant reduction in staffing levels, discussions with vendors to extend payments terms and discount current pricing, discussions with our lenders to defer loan interest payments, and we utilized provisions from the CARES Act to provide additional liquidity from federally supported loan programs. As of December 31, 2020, we received $1,018,917 in first round PPP loans related to four hotel properties. As of September 30, 2022, we received $1,426,672 of second round PPP loans. As of September 30, 2022, the Company received formal written approval of forgiveness applications from the SBA for loans in the amount of $2,445,589. For more information, refer to Note 5 – “Other Debt” to our unaudited interim condensed consolidated financial statements.
There is still uncertainty relating to the possibility of recurrences of COVID-19 case surges that could result in further reductions in business and personal travel. The market and economic challenges associated with COVID-19 could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
On April 7, 2020, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the
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DRIP, effective as of April 17, 2020. On June 10, 2020, our board of directors determined an estimated NAV per share of all classes of our capital stock, each calculated as of March 31, 2020, as follows: (i) $8.56 per K-Share; (ii) $8.55 per K-I Share; (iii) $8.56 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. On June 10, 2020, our board of directors also unanimously approved the resumption of the acceptance of subscriptions and the resumption of the operation of the DRIP, which will be effective with the next authorized payment of distributions. On June 9, 2021, the Company’s board of directors determined an estimated NAV per share of all classes of the Company’s capital stock, each calculated as of September 30, 2021, as follows: (i) $9.85 per K Share, (ii) $9.77 per K-I Share, (iii) $9.85 per K-T Share, (iv) $0.00 per A Share, and (v) $0.00 per B Share and revised the public offering share prices. The Company, with the approval of its board of directors, terminated the Public Offering on August 13, 2021.
We paid quarterly distributions with respect to the quarters ended March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022, with operating cash flow, consistent with prior distributions. Our board of directors will make determinations as to the payment of future distributions on a quarter-by-quarter basis; however, distributions will continue to accumulate pursuant to our charter.
Our sources of funds are primarily funds equal to amounts reinvested in the DRIP, operating cash flows and borrowings. Our principal demands for funds will be for improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to and repurchases from our stockholders. Should we acquire additional assets, we intend to use cash and mortgage or other debt. PHA and its affiliates have agreed to purchase A Shares in a private placement in order to provide us with funds sufficient to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we will allocate proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable estimated NAV per K-I Share and the applicable offering price of K-I Shares sold in our primary offering and (ii) any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.
In addition, in a normal operating environment, we expect to use debt financing as a source of capital. Our charter provides that the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in accordance with Statement of Policy Regarding Real Estate Investment Trusts revised and adopted by the North American Securities Administrators Association on May 7, 2007) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit and undistributed cash flow. Note that, currently, we have not identified any additional sources of financing, aside from utilizing funds provided by the CARES Act, and there is no assurance that such sources of financings will be available on favorable terms or at all.
We believe that cash and restricted cash on hand, cash from operations after implementing cost reduction procedures and borrowings from other sources, including advances from PHA and our Sponsor, if necessary, will be sufficient to fund our operating and administrative expenses and continuing debt service obligations over the next twelve months.
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Sources and Uses of Cash
Proceeds from the sale of common stock in the Private Offering and Public Offering were partially used to fund our investments in hotel properties and the related costs associated with the transactions. The remaining proceeds are held in liquid cash accounts. Cash balances from our investments in hotel properties were consolidated during the nine months ended September 30, 2022 and 2021.
Cash Flows Provided by Operating Activities
As of September 30, 2022, we owned an interest in five hotel properties. We owned an interest in four hotel properties from January 1, 2021 through July 30, 2021. During the nine months ended September 30, 2022, net cash provided by operating activities was $8,068,498 compared to the net cash provided by operating activities of $5,797,797 for the nine months ended September 30, 2021. Our operating cash flows during the nine months ended September 30, 2022 were the result of our net income, offset by adjustments for non-cash expenses, including depreciation and amortization, the change in fair value of the interest rate cap agreement and by adjustments for receivables, other assets, gain on loan extinguishment, loss on disposal of fixed assets, amounts due to and from related parties, and accounts payable and accrued liabilities. Our operating cash flows during the nine months ended September 30, 2021 was the result of our net income, offset by adjustments for non-cash expenses, including depreciation and amortization, the change in fair value of the interest rate swap agreement, and by adjustments for receivables, other assets, gain on loan extinguishment, amounts due to and from related parties, and accounts payable and accrued liabilities.
Cash Flows Used in Investing Activities
Cash used in investing activities will vary based on the funds raised by the issuance of shares of common stock pursuant to the DRIP and how quickly we invest those funds towards acquisitions of real estate and real-estate related investments. During the nine months ended September 30, 2022, net cash used in investing activities was $2,300,075 and was the result of capital improvements at our hotel properties. During the nine months ended September 30, 2021, net cash used in investing activities was $15,601,158, which represented the investment in the Cherry Tree Inn, net, and capital improvements at our hotel properties.
Cash Flows (Used in) Provided by Financing Activities
During the nine months ended September 30, 2022, net cash used in financing activities was $2,989,496. We paid stockholder servicing fees totaling $4,278. We received $1,270,226 of mortgage note proceeds related to capital improvements at the Cherry Tree Inn. We made principal payments on the note secured by the Springhill Suites Wilmington (the “Wilmington Note”) and the note secured by the Staybridge Suites St. Petersburg (the “St. Petersburg Note”) totaling $275,915 We paid cash distributions of $2,254,296 to stockholders with proceeds from operations. Cash flow from financing activities for the nine months ended September 30, 2022, also includes $833,000 of distributions to noncontrolling interests. Additionally, we repurchased $850,999 of outstanding shares of common stock. We paid $41,234 in deferred financing cost.
During the nine months ended September 30, 2021, net cash provided by financing activities was $10,510,062. We received proceeds of $9,295,309 through the sale of common stock in our Public Offering. These proceeds are offset by the payment of offering costs consisting partially of selling commissions, dealer manager fees and stockholder servicing fees totaling $506,995 and payments to PHA for organization and offering costs (“O&O Costs”) totaling $766,217, for the nine months ended September 30, 2021. We received $4,000,000 of mortgage note proceeds relating to the acquisition of the Cherry Tree Inn. We received $1,426,672 of cash relating to the second round of PPP loans. We made principal payments on the note secured by the Springhill Suites Wilmington (the “Wilmington Note”) and the note secured by the Staybridge Suites St. Petersburg (the “St. Petersburg Note”) totaling $298,580. We paid $83,301 in deferred financing costs during the nine months ended September 30, 2021. We paid cash distributions of $1,041,589 to stockholders with proceeds from operations. Cash flow from financing activities for the nine months ended September 30, 2021, also includes $645,820 of distributions to noncontrolling interests. Additionally, we repurchased $869,417 of outstanding shares of common stock.
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Debt
We intend to maintain amounts outstanding under long-term debt arrangements or lines of credit so that we will have more funds available for investment in properties. However, the percentage of debt financing we utilize at any given time will be dependent upon various factors to be considered in the sole discretion of our board of directors, including, but not limited to, our ability to pay distributions, the availability of properties meeting our investment criteria, the availability of debt financing, and changes in the cost of debt financing. To help finance our initial acquisitions, we may utilize short-term borrowings. However, after our initial property acquisitions, as a general principle, we anticipate that the term of any debt financing we utilize will correspond to the anticipated holding period for the respective property.
We may repay borrowings under any future credit facility or under any future long-term mortgage debt with proceeds from the sale of properties, operating cash flow, long-term mortgage debt, proceeds from the Public Offering, proceeds from any future offerings, or proceeds from any other future securities offerings.
Due to the market and economic challenges impacting us and the hospitality industry as a whole as a result of the ongoing COVID-19 pandemic, which has resulted in significant declines in our hotel properties’ revenues, and the uncertainty of the rapidly developing situation, we entered into loan modification agreements with certain of our lenders to relieve some pressure on these properties during this time, as described in more detail below.
The note secured by the Hotel Indigo Traverse City (“TCI Note”) provided for interest only monthly payments until maturity. However, on April 21, 2020, a subsidiary of the Operating Partnership, entered into a First Amendment to Loan Agreement and Other Loan Documents (the “Hotel Indigo Loan Modification Documents”) with its existing lender, Citizens Bank, N.A. (“Citizens Bank”), to amend the terms of the TCI Note. Pursuant to the Hotel Indigo Loan Modification Documents, the interest only payments that were scheduled to be paid on April 1, 2020, May 1, 2020 and June 1, 2020 were deferred (collectively, the “Deferred Payments”). The Deferred Payments did not accrue interest but were deemed principal to be due and payable in full on or before June 30, 2021. The Deferred Payments have been paid in full as of September 30, 2022. Regularly scheduled interest payments recommenced on July 1, 2020.
As of September 30, 2022, we believe the Operating Partnership and its subsidiary were compliant with their loan obligations, including applicable covenants, and all required payments have been made as agreed.
The note secured by the Hilton Garden Inn Providence (“HGI Note”) required monthly interest payments at a fixed rate of 4.25%. The HGI Note provided for interest only monthly payments for 36 months, with payments based on a 30-year amortization schedule thereafter. However, on April 23, 2020, we and the Operating Partnership, through its subsidiary, entered into an Omnibus Amendment and Reaffirmation Agreement (the “Hilton Garden Inn Loan Modification Agreement”) with the existing lender, to amend the terms of the mortgage loan and loan documents on the HGI Notes. Pursuant to the Hilton Garden Inn Loan Modification Agreement, interest only payments that were due on the six consecutive payment dates starting with April 2020 were deferred until the date that is twelve months after the date each payment was originally due. The deferred payments have been paid in full as of September 30, 2022.
In regards to the HGI Note, the Hilton Garden Inn Loan Modification Agreement provides that all financial covenant testing and any other requirements of the Operating Partnership to comply with such covenants were waived until the year ended December 31, 2021, and that all net worth, liquidity and financial covenant testing and any requirements of the Company as guarantor to comply with such covenants were waived until the year ended December 31, 2021. As of September 30, 2022, we believe the Operating Partnership and its subsidiary for the Hilton Garden Inn Providence were in compliance with its covenant requirements and all required payments have been made as agreed.
As a result of the negative impact of the COVID-19 pandemic, the Staybridge Suites St. Petersburg had failed to maintain the required debt service coverage ratio as defined in the St. Petersburg Note loan documents starting with the period ended June 30, 2020. The lender approved a series of modifications of the debt service coverage tests for periods through December 31, 2021. Debt service coverage tests resumed as of March 31, 2022. As of September 30, 2022, we believe the Operating Partnership and its subsidiary for the Staybridge Suites St. Petersburg were in compliance with its covenant requirements and all required payments have been made as agreed.
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Starting with December 31, 2020, as a result of the negative impact of the COVID-19 pandemic, the Operating Partnership and its subsidiary for the Springhill Suites Wilmington failed to maintain the required debt service coverage ratio as defined in the Wilmington Note loan documents. In March 2021, we received a written waiver of all debt service coverage testing through June 30, 2021, from the lender. As of September 30, 2022, we believe the Operating Partnership and its subsidiary for the Springhill Suites Wilmington were in compliance with its covenant requirements and all required payments have been made as agreed.
Contractual Obligations
We enter into contracts that contain a variety of indemnification provisions. Our maximum exposure under these arrangements is unknown; however, we have not had prior claims or losses pursuant to these contracts. Our management has reviewed our existing contracts and expects the risk of loss to us to be remote.
Our contractual obligations as of September 30, 2022 are as follows:
| | | | | | | | | | | | | | | |
| | 2022 | | 2022-2023 | | 2024-2025 | | Thereafter | | Total | |||||
Outstanding debt obligations | | $ | 105,926 | | $ | 39,157,264 | | $ | 25,753,197 | | $ | — | | $ | 65,016,387 |
Interest payments on outstanding debt obligations | |
| 952,637 | |
| 4,066,597 | |
| 631,476 | |
| — | |
| 5,650,710 |
Total | | $ | 1,058,563 | | $ | 43,223,861 | | $ | 26,384,673 | | $ | — | | $ | 70,667,097 |
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments and the corresponding expenses associated with that process are operational features of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts (“Nareit”), an industry trade group, has promulgated a measure known as funds from operations (“FFO”), which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, consistent with Nareit’s definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.
Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report its investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of its investment in real estate assets.
The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.
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In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rooms revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rooms revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date.
Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We used the proceeds from our offerings to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five to seven years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITs, the Institute for Portfolio Alternatives (“IPA”), an industry trade group, has standardized a measure known as modified FFO (“MFFO”), which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and distribution policy. MFFO is not equivalent to our net income (loss) as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (“Practice Guideline”), issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting; adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income (loss); and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our condensed consolidated statements of operations. Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us. Acquisition fees and expenses include payments to PHA or its affiliates and third parties. Such fees and expenses will not be reimbursed by PHA or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the
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sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, PHA or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying condensed consolidated statements of operations, and acquisition expenses associated with transactions determined to be an asset purchase are capitalized.
All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.
In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations in accordance with GAAP.
We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as the ADR and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed. MFFO is not a useful measure in evaluating NAV since impairment write-downs are taken into account in determining NAV but not in determining MFFO.
FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operation performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body.
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Our calculation of FFO and MFFO is presented in the following table for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||
| | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Reconciliation of net income to MFFO: |
| |
|
| |
|
| |
|
| |
|
Net income attributable to noncontrolling interests | | $ | 2,982,895 | | $ | 2,708,192 | | $ | 5,809,864 | | $ | 2,919,913 |
Depreciation and amortization | |
| 990,626 | |
| 883,605 | |
| 2,852,336 | |
| 2,443,246 |
FFO | |
| 3,973,521 | |
| 3,591,797 | |
| 8,662,200 | |
| 5,363,159 |
Less noncontrolling interest: | |
|
| |
|
| |
|
| |
|
|
Net income attributable to noncontrolling interests | |
| (214,792) | |
| (173,426) | |
| (1,033,968) | |
| (443,746) |
Depreciation and amortization attributable to noncontrolling interest | |
| (174,378) | |
| (153,488) | |
| (519,789) | |
| (494,891) |
FFO attributable to common stockholders | |
| 3,584,351 | |
| 3,264,883 | |
| 7,108,443 | |
| 4,424,522 |
Acquisition fees and expenses | |
| — | |
| 346,239 | |
| — | |
| 346,239 |
Amortization of deferred financing costs and debt discounts and premiums as interest | |
| (2,438) | |
| 596 | |
| (20,875) | |
| (1,876) |
Gain on loan extinguishment | | | — | | | — | | | (942,605) | | | (635,317) |
Gain on interest rate cap/swap | |
| (62,109) | |
| (86,161) | |
| (147,218) | |
| (289,412) |
MFFO attributable to common stockholders | | $ | 3,519,804 | | $ | 3,525,557 | | $ | 5,997,745 | | $ | 3,844,156 |
Related-Party Transactions and Agreements
We have entered into agreements with PHA and its affiliates whereby we pay or paid certain fees to, or reimburse certain expenses of, PHA or its affiliates for acquisition fees and expenses, asset management fees, disposition fees, property management fees, O&O Costs and reimbursement of certain operating costs. Refer to Note 6 – “Related Party Transactions” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we conducted an evaluation as of September 30, 2022, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief
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financial officer concluded that our disclosure controls and procedures, as of September 30, 2022, were effective at a reasonable assurance level.
(b) Changes in internal control over financial reporting. There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against the Company. From time to time, we may be party to certain legal proceedings in the ordinary course of business. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings as of the time of this Quarterly Report will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in our Annual Report, other than as set forth below, which supplements the risk factors included in our Annual Report. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
Changes in monetary policy implemented by the Federal Reserve, including its recent increases in the targeted Federal Funds Rate and its reduction of purchases of longer-term treasury securities and fixed-rate Agency mortgage backed securities (“Agency MBS”) have caused interest rates to rise and the yield curve to flatten which has negatively impacted, and may continue to impact, the market value of our investments and our borrowing costs.
In an effort to tame rising inflation levels, the Federal Reserve has been aggressively increasing the Federal Funds Rate since the first quarter of 2022, ending the third quarter of 2022 with a target range of 3.00%-3.25%, and is likely to continue the hikes through at least the end of 2022. In addition, the Federal Reserve’s quantitative tightening policies have included decreasing the pace of its large-scale purchases of Agency RMBS and U.S. Treasuries, creating net supply in the market. The combination of these actions have resulted in an increase in interest rates and a flattening of the yield curve, negatively impacting the market value of our investments since the fourth quarter of 2021 and so far into 2022. In addition, the increase in the Federal Funds Rate has significantly increased our borrowing costs, which is likely to continue through at least the remainder of 2022.
Many of our costs, such as operating and general and administrative expenses, interest expense and real estate acquisition and construction costs, could be adversely impacted by periods of heightened inflation.
In recent months, the consumer price index has increased substantially. Federal policies discussed above and recent global events, such as the rising price of oil and the conflict between Russia and Ukraine, may have exacerbated, and may continue to exacerbate, increases in the consumer price index.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
On August 14, 2018, our Registration Statement on Form S-11 (File No. 333-217579), covering a public offering of up to $550,000,000 in shares of our common stock, was declared effective by the SEC under the Securities Act. We are offering up to $550,000,000 in shares of our common stock, including $500,000,000 in shares of our common stock pursuant to our primary offering, consisting of the following three share classes: K Shares at an initial offering price of $10.00 per share (up to $125,000,000 in shares), K-I Shares at an offering price of $9.30 per share (up to $125,000,000 in shares), and K-T Shares at an initial offering price of $10.00 per share (up to $250,000,000 in shares), which reflect the estimated NAV per share of each of the K Shares, K-I Shares, and K-T Shares as of February 28, 2018, and $50,000,000 in shares of our common stock pursuant to the DRIP at $9.50 per K Share (up to $12,500,000 in shares), $9.50 per K-I Share (up to $12,500,000 in shares) and $9.50 per K-T Share (up to $25,000,000 in shares).
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On May 23, 2019, our board of directors determined an estimated NAV per share of all classes of our capital stock, each calculated as of March 31, 2019, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $3.97 per A Share; and (v) $0.00 per B Share. On March 22, 2018, our board of directors determined an estimated NAV per share of all classes of our capital stock, each calculated as of February 28, 2018, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. On April 7, 2020, in response to the COVID-19 pandemic, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. On June 10, 2020, our board of directors determined an estimated NAV per share of all classes of our capital stock, each calculated as of March 31, 2020, as follows: (i) $8.56 per K-Share; (ii) $8.55 per K-I Share; (iii) $8.56 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. On June 9, 2021, the Company’s board of directors determined an estimated NAV per share of all classes of the Company’s capital stock, each calculated as of March 31, 2021, as follows: (i) $9.85 per K Share, (ii) $9.77 per K-I Share, (iii) $9.85 per K-T Share, (iv) $0.00 per A Share, and (v) $0.00 per B Share and revised the public offering share prices.
From the commencement of the Public Offering through its termination, we sold 2,787,944 K Shares at a weighted average price of $9.66 per share for gross proceeds of $26,939,836, 1,287,644 K-I Shares at a weighted average price of $8.76 per share for gross proceeds of $11,274,927, 60,008 K-T Shares at a weighted average price of $9.76 per share for gross proceeds of $585,400, for total gross proceeds of $38,800,163 in the Public Offering. From the commencement of the Public Offering through September 30, 2022, pursuant to the DRIP, we issued 95,216 K Shares to investors at a weighted average of $9.30 per K Share for gross proceeds of $885,545, 58,198 K-I Shares at a weighted average of $9.32 per K-I Share for gross proceeds of $542,189, and 6,176 K-T Shares at a weighted average of $9.26 per K-T Share for gross proceeds of $57,214, for total gross DRIP proceeds of $1,484,948. Additionally, the Company received $2,630,000 from the sale of A Shares to THR from a private placement.
On June 24, 2021, the Company filed a Registration Statement on Form S-3 to register approximately $4,273,505 K Shares, K-I Shares or K-T Shares under the DRIP for a proposed maximum offering price of $40,000,000 in shares of common stock. The Company will continue to issue shares of common stock under the DRIP Offering until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the SEC, or the DRIP Offering is terminated by the Company’s board of directors.
From commencement of the Public Offering through the termination of the offering, we had incurred $2,995,776 of selling commissions, dealer manager fees and stockholder servicing fees in connection with the Public Offering, which were paid with proceeds from the issuance of A Shares to THR.
From inception through September 30, 2022, we recognized selling commissions, dealer manager fees, and organization and other offering costs in the Private Offering as follows:
| | | | | |
Type of Expense Amount |
| Amount |
| Estimated/Actual | |
Selling commissions and dealer manager fees | | $ | 1,058,501 |
| Actual |
Other organization and offering costs | |
| 1,083,912 |
| Actual |
Total | | $ | 2,142,413 |
|
|
The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Private Offering.
From inception through September 30, 2022, we recognized selling commissions, dealer manager fees, stockholder servicing fees, and organization and other offering costs in the Public Offering as follows:
| | | | | |
Type of Expense Amount |
| Amount |
| Estimated/Actual | |
Selling commissions, stockholder servicing fees and dealer manager fees | | $ | 3,001,518 |
| Actual |
Other organization and offering costs | |
| 3,255,484 |
| Actual |
Total | | $ | 6,257,002 |
|
|
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The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Public Offering.
As of September 30, 2022, the net offering proceeds to us from our Private Offering and our Public Offering, after deducting the total expenses incurred as described above, were approximately $50,105,131.
Subsequent to September 30, 2022 and through November 9, 2022, pursuant to the DRIP Offering, we sold approximately 11,123 K Shares at a weighted average price of $9.78 per share for gross proceeds of $108,779, approximately 8,267 K-I Shares at a weighted average price of $9.78 per share for gross proceeds of $80,855 and approximately 699 K-T Shares at a weighted average price of $9.78 per share for gross proceeds of $6,833, for total gross proceeds of $196,467 in the DRIP Offering.
We have used the net proceeds from our Offerings to acquire a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States. As of September 30, 2022, we had an ownership interest in five hotel properties with an aggregate initial purchase price of $78,403,938, inclusive of acquisition and closing costs. These hotel property acquisitions were funded from net proceeds from our Private Offering, Public Offering, and borrowings. A portion of the net proceeds from our Offerings was also used to fund capital expenditures at the hotel properties and operating expenses.
Share Repurchase Program
We have a share repurchase program that may provide an opportunity for stockholders to have their shares of common stock repurchased by us, subject to certain restrictions and limitations. On March 20, 2020, our board of directors decided to temporarily suspend repurchases under our share repurchase program effective with repurchase requests that would have been processed in April 2020 due to the negative impact of the COVID-19 pandemic on our portfolio at the time; provided, however, we continued to process repurchases due to death in accordance with the terms of our share repurchase program. On June 10, 2020, the board of directors determined to fully reopen the share repurchase program to all repurchase requests commencing in July 2020. Shares will be repurchased subject to and upon the terms and conditions of our share repurchase program and repurchase prices will be based upon the Estimated Per Share NAVs in accordance with the terms of the share repurchase program. Any unprocessed requests will automatically roll over to be considered for repurchase unless a stockholder withdraws the request for repurchase five business days prior to the next repurchase date. Refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the details of our share repurchase program.
During the three months ended September 30, 2022, we fulfilled repurchase requests and repurchased K-Shares pursuant to our share repurchase program as follows:
| | | | | | | | | |
|
| |
| Total Numbers of |
| | |
| Approximate Dollar |
| | | | Shares Purchased as | | | | | Value of Shares |
| | Total Number of | | Part of Publicly | | | | | Available that may yet |
| | Shares Requested to | | Announced Plans and | | Average Price | | be Repurchased under | |
Period | | be Repurchased (1) | | Programs |
| Paid per Share |
| the Program | |
July 2022 |
| 10,348 | | — | | $ | — |
| (2) |
August 2022 |
| 6,531 | | 38,959 | | $ | 10.19 |
| (2) |
September 2022 |
| — | | — | | $ | — |
| (2) |
|
| 16,879 | | 38,959 | |
| | | |
(1) | We generally repurchase shares within the six weeks following the end of each fiscal quarter in which repurchase requests are received. The shares repurchased in August 2022 related to repurchase requests received during the prior quarter. As of September 30, 2022, there were three outstanding and unfulfilled repurchase requests for 16,879 K Shares. |
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(2) | The number of shares that may be redeemed pursuant to the share repurchase program during any calendar year is limited to 5.0% of the weighted average number of K Shares, K-I Shares, and K-T Shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which repurchases are being paid (provided, however, that while shares subject to a repurchase requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be repurchased, shares subject to a repurchase requested upon the death of a stockholder will not be subject to the percentage cap). |
Our board of directors approved three outstanding repurchase requests received during the three months ended March 31, 2022, and, on April 12, 2022, we repurchased 37,500 K Shares for $369,375, or $9.85 per K Share. Our board of directors approved seven outstanding repurchase requests received during the three months ended June 30, 2022, and, on August 5, 2022, we repurchased 37,302 K Shares for $380,036 or $10.19 per K Share, 657 K-I Shares for $6,590 or $10.03 per K-I Share and 1,000 K-T Shares for $10,290 or $10.29 per K-T Share. Our board of directors approved three outstanding repurchase requests received during the three months ended September 30, 2022, and, on October 18, 2022, we repurchased 16,879 K Shares for $167,356 or $9.92 per K Share.
Our board of directors approved two outstanding repurchase requests received during the three months ended March 31, 2021, and, on May 7, 2021, we repurchased 34,700 K Shares for $289,421, or $8.34 per K Share. Our board of directors approved nine outstanding repurchase requests received during the three months ended June 30, 2021, and, on August 31, 2021, we repurchased 59,979 K Shares for $572,076, or $9.54 per K Share. Our board of directors approved two outstanding repurchase requests received during the three months ended September 30, 2021, and, on November 16, 2021, we repurchased 7,900 K Shares for $76,461, or $9.68 per K Share.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as a part of this report or incorporated by reference.
Exhibit No. |
| Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1 |
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4.2 |
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4.3 |
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31.1* |
| Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
| Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** |
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99.1 |
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58
|
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101.INS* |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
| Inline XBRL Schema Document. |
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101.CAL* | | Inline XBRL Calculation Linkbase Document. |
| | |
101.DEF* | | Inline XBRL Definition Linkbase Document. |
| | |
101.LAB* | | Inline XBRL Label Linkbase Document. |
| | |
101.PRE* | | Inline XBRL Presentation Linkbase Document. |
| | |
104* | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
*Filed herewith.
**Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
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Signatures
Pursuant to the requirements 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.
| PROCACCIANTI HOTEL REIT, INC. | |
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Date: November 10, 2022 | By: | /s/ James A. Procaccianti |
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| James A. Procaccianti |
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| Chief Executive Officer, President and |
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| Chairman of the Board of Directors |
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| (Principal Executive Officer) |
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Date: November 10, 2022 | By: | /s/ Gregory Vickowski |
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| Gregory Vickowski |
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| Chief Financial Officer, Treasurer |
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| and Director |
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| (Principal Accounting Officer and |
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| Principal Financial Officer) |
60