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 quarterly period ended March 31, 2023
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 000-56082
LODGING FUND REIT III, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | |
Maryland |
| 83-0556111 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
| | |
1635 43rd Street South, Suite 205 Fargo, North Dakota |
| 58103 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(701) 630-6500
(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 |
None | N/A | N/A |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 August 23, 2024, there were 9,997,390 outstanding shares of common stock of Lodging Fund REIT III, Inc.
LODGING FUND REIT III, INC.
Table of Contents
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LODGING FUND REIT III, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Assets |
| |
|
| |
|
Investment in hotel properties, net of accumulated depreciation and amortization of $20,158,741 and $17,512,882 | | $ | 289,649,372 | | $ | 290,217,642 |
Cash and cash equivalents | |
| 6,250,268 | |
| 6,193,449 |
Restricted cash | |
| 9,444,771 | |
| 10,732,832 |
Accounts receivable, net | |
| 1,762,695 | |
| 1,468,732 |
Franchise fees, net | |
| 2,319,850 | |
| 2,363,114 |
Prepaid expenses and other assets | |
| 1,553,697 | |
| 1,409,993 |
Total Assets (variable interest entities - $23,272,848 and $24,924,626) | | $ | 310,980,653 | | $ | 312,385,762 |
| | | | | | |
Liabilities and Equity | |
|
| |
|
|
Debt, net | | $ | 192,037,237 | | $ | 189,678,547 |
Finance lease liabilities | | | 12,963,743 | | | 13,026,849 |
Accounts payable | |
| 3,720,956 | |
| 3,034,148 |
Accrued expenses | |
| 4,690,289 | |
| 5,853,519 |
Distributions payable | | | 694,952 | | | 678,867 |
Due to related parties | |
| 8,612,456 | |
| 6,277,432 |
Other liabilities | |
| 4,772,307 | |
| 4,843,854 |
Total liabilities (variable interest entities - $17,840,524 and $18,390,067) | |
| 227,491,940 | |
| 223,393,216 |
| | | | | | |
| | | | | | |
Equity | |
|
| |
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized; no shares issued and outstanding | |
| — | |
| — |
Common stock, $0.01 par value, 900,000,000 shares authorized; 9,709,070 and 9,607,463 shares issued and outstanding | |
| 97,090 | |
| 96,074 |
Additional paid-in capital | |
| 94,829,444 | |
| 93,798,070 |
Accumulated deficit | |
| (72,287,723) | |
| (67,239,693) |
Total stockholders' equity | | | 22,638,811 | |
| 26,654,451 |
Non-controlling interest – Series B LP Units | |
| (3,126,315) | |
| (2,841,056) |
Non-controlling interest – Series GO LP Units | | | 13,774,651 | | | 14,688,392 |
Non-controlling interest – Series T LP Units | | | 45,739,120 | | | 45,739,120 |
Non-controlling interest – Common LP Units | | | 4,462,446 | | | 4,751,639 |
Total equity | |
| 83,488,713 | |
| 88,992,546 |
Total Liabilities and Equity | | $ | 310,980,653 | | $ | 312,385,762 |
See accompanying notes to unaudited consolidated financial statements.
2
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | |
| | For the Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Revenues | | |
| | |
|
Room revenue | | $ | 15,215,668 | | $ | 8,814,095 |
Other revenue | |
| 1,012,562 | |
| 481,708 |
Total revenue | |
| 16,228,230 | |
| 9,295,803 |
| | | | | | |
Expenses | |
|
| |
|
|
Property operations | |
| 8,018,226 | |
| 4,780,473 |
General and administrative | |
| 2,370,060 | |
| 2,224,467 |
Sales and marketing | |
| 1,096,678 | |
| 580,366 |
Franchise fees | |
| 1,384,921 | |
| 817,196 |
Management fees | |
| 1,197,584 | |
| 795,096 |
Acquisition expense | |
| 8,766 | |
| 13,517 |
Depreciation and amortization | |
| 2,649,028 | |
| 1,624,240 |
Total expenses | |
| 16,725,263 | |
| 10,835,355 |
| | | | | | |
Other Income (Expense) | |
|
| |
|
|
Other expense, net | |
| (46,121) | |
| (199,393) |
Interest expense | |
| (3,512,934) | |
| (2,413,092) |
Total other expense | |
| (3,559,055) | |
| (2,612,485) |
| | | | | | |
Net Loss Before Income Taxes | |
| (4,056,088) | |
| (4,152,037) |
| | | | | | |
Income tax (expense) benefit | |
| 129,914 | |
| 651,602 |
| | | | | | |
Net Loss | |
| (3,926,174) | |
| (3,500,435) |
| | | | | | |
Net loss attributable to non-controlling interest - Series B LP Units | |
| (196,267) | |
| (175,006) |
Net loss attributable to non-controlling interest - Series GO LP Units | | | (640,192) | | | (624,093) |
Net loss attributable to non-controlling interest - Common LP Units | | | (182,076) | | | (178,639) |
| | | | | | |
Net Loss Attributable to Common Stockholders | | $ | (2,907,639) | | $ | (2,522,697) |
| | | | | | |
Basic and Diluted Net Loss Per Share of Common Stock | | $ | (0.30) | | $ | (0.30) |
Weighted-average Shares of Common Stock Outstanding, Basic and Diluted | |
| 9,661,217 | |
| 8,489,024 |
See accompanying notes to unaudited consolidated financial statements.
3
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | Non-Controlling Interest | | | | ||||||||||||||||
| | | | | | | Additional | | | | | Total | | | | | | | | | | | | ||||||
| | | | Par | | Paid-In | | Accumulated | | Stockholders' | | Series B | | Series GO | | Series T | | Common | | Total | |||||||||
|
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| LP Units | | LP Units | | LP Units | | LP Units |
| Equity | |||||||||
Balance at December 31, 2021 | | 8,348,310 | | $ | 83,481 | | $ | 81,655,994 | | $ | (43,586,952) | | $ | 38,152,523 | | $ | (1,563,489) | | $ | 12,498,527 | | $ | 21,931,757 | | $ | 1,437,082 | | $ | 72,456,400 |
Issuance of common stock | | 275,378 | | | 2,754 | | | 2,657,100 | | | — | |
| 2,659,854 | |
| — | | | — | | | — | | | — | |
| 2,659,854 |
Issuance of stock-based compensation | | 1,500 | | | 15 | | | 14,985 | | | — | | | 15,000 | | | — | | | — | | | — | | | — | | | 15,000 |
Issuance of GO Units | | — | | | — | | | — | | | — | | | — | | | — | | | 6,138,291 | | | — | | | — | | | 6,138,291 |
Issuance of T Units | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,729,291 | | | — | | | 9,729,291 |
Issuance of Common LP Units | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,600,000 | | | 4,600,000 |
Offering costs | | — | | | — | | | — | | | (730,836) | |
| (730,836) | |
| — | | | (463,548) | | | — | | | — | |
| (1,194,384) |
Distributions declared ($0.175 per share) | | — | | | — | | | — | | | (1,478,078) | |
| (1,478,078) | |
| (78,230) | | | — | | | — | | | (98,783) | |
| (1,655,091) |
Distributions reinvested | | 59,709 | | | 597 | | | 566,643 | | | — | | | 567,240 | | | — | | | — | | | — | | | — | | | 567,240 |
Redemptions | | (64,306) | | | (643) | | | (637,531) | | | — | | | (638,174) | | | — | | | — | | | — | | | — | | | (638,174) |
Net loss | | — | | | — | | | — | | | (2,522,697) | |
| (2,522,697) | |
| (175,006) | | | (624,093) | | | — | | | (178,639) | |
| (3,500,435) |
Balance at March 31, 2022 | | 8,620,591 | | $ | 86,204 | | $ | 84,257,191 | | $ | (48,318,563) | | $ | 36,024,832 | | $ | (1,816,725) | | $ | 17,549,177 | | $ | 31,661,048 | | $ | 5,759,660 | | $ | 89,177,992 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2022 | | 9,607,463 | | $ | 96,074 | | $ | 93,798,070 | | $ | (67,239,693) | | $ | 26,654,451 | | $ | (2,841,056) | | $ | 14,688,392 | | $ | 45,739,120 | | $ | 4,751,639 | | $ | 88,992,546 |
Issuance of common stock | | 61,190 | | | 612 | | | 625,388 | | | — | | | 626,000 | | | — | | | — | | | — | | | — | | | 626,000 |
Issuance of stock-based compensation | | 1,000 | | | 10 | | | 10,560 | | | — | | | 10,570 | | | — | | | — | | | — | | | — | | | 10,570 |
Offering costs | | — | | | — | | | — | | | (449,537) | | | (449,537) | | | — | | | (2,665) | | | — | | | — | | | (452,202) |
Distributions declared ($0.175 per share) | | — | | | — | | | — | | | (1,690,854) | | | (1,690,854) | | | (88,992) | | | (270,884) | | | — | | | (107,117) | | | (2,157,847) |
Distributions reinvested | | 39,418 | | | 394 | | | 395,426 | | | — | | | 395,820 | | | — | | | — | | | — | | | — | | | 395,820 |
Net loss | | — | | | — | | | — | | | (2,907,639) | | | (2,907,639) | | | (196,267) | | | (640,192) | | | — | | | (182,076) | | | (3,926,174) |
Balance at March 31, 2023 | | 9,709,071 | | $ | 97,090 | | $ | 94,829,444 | | $ | (72,287,723) | | $ | 22,638,811 | | $ | (3,126,315) | | $ | 13,774,651 | | $ | 45,739,120 | | $ | 4,462,446 | | $ | 83,488,713 |
See accompanying notes to unaudited consolidated financial statements.
4
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
| | For the Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash Flows from Operating Activities: |
| |
|
| |
|
Net loss | | $ | (3,926,174) | | $ | (3,500,435) |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | |
| | |
| |
Depreciation | |
| 2,429,729 | |
| 1,624,240 |
Stock-based compensation expense | | | 10,570 | | | 15,000 |
Amortization | |
| 715,828 | |
| 196,942 |
Loss on disposal of fixed assets | | | 18,894 | | | (9,151) |
Deferred tax (liabilities) assets, net | | | (129,914) | | | (646,997) |
Change in operating assets and liabilities: | |
| | | | |
Accounts receivable | |
| (293,963) | |
| (18,257) |
Franchise fees | |
| — | |
| (475,000) |
Prepaid expenses and other assets | |
| 3,147,197 | |
| 156,828 |
Increase in finance lease liability | | | (63,106) | | | 47,727 |
Accounts payable | |
| 665,548 | |
| 193,788 |
Accrued expenses | |
| (1,163,230) | |
| (168,778) |
Due to related parties | |
| 2,076,238 | |
| 393,683 |
Other liabilities | |
| (3,232,534) | |
| (1,055,044) |
Net cash provided by (used in) operating activities | |
| 255,083 | |
| (3,245,454) |
Cash Flows from Investing Activities: | |
|
| |
|
|
Acquisitions of hotel properties | |
| — | |
| (940,636) |
Improvements and additions to hotel properties | |
| (2,099,652) | |
| (1,828,334) |
Net cash used in investing activities | |
| (2,099,652) | |
| (2,768,970) |
Cash Flows from Financing Activities: | |
|
| |
|
|
Proceeds from mortgage debt | |
| — | |
| 7,400,000 |
Proceeds from lines of credit | | | 2,554,844 | | | 1,250,000 |
Principal payments on mortgage debt | |
| (475,645) | |
| (7,543,501) |
Principal payments on lines of credit | | | (95,000) | | | (500,000) |
Payments of deferred financing costs | |
| (78,774) | |
| (503,818) |
Proceeds from issuance of common stock | |
| 626,000 | |
| 2,659,854 |
Proceeds from issuance of GO Units | | | — | | | 6,138,291 |
Payments of offering costs | |
| (244,697) | |
| (1,097,095) |
Distributions paid | |
| (1,673,401) | |
| (933,464) |
Net cash provided by financing activities | |
| 613,327 | |
| 6,870,267 |
Net change in cash, cash equivalents, and restricted cash | |
| (1,231,242) | |
| 855,843 |
Beginning Cash, Cash Equivalents, and Restricted Cash | |
| 16,926,281 | |
| 14,336,400 |
Ending Cash, Cash Equivalents, and Restricted Cash | | $ | 15,695,039 | | $ | 15,192,243 |
See accompanying notes to unaudited consolidated financial statements.
5
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
| | | | | | |
| | For the Three Months Ended March 31, | ||||
| | 2023 |
| 2022 | ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
Interest paid | | $ | 3,578,952 | | $ | 1,288,186 |
Income taxes paid | | $ | 42,158 | | $ | — |
| | | | | | |
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | |
|
| |
|
|
Issuance of T Units for Fargo Property | | $ | — | | $ | 4,091,291 |
Issuance of T Units for Lakewood Property | | $ | — | | $ | 5,638,000 |
Issuance of Common LP Units for El Paso Airport Property | | $ | — | | $ | 4,600,000 |
Debt assumed for acquisition of Fargo Property | | $ | — | | $ | 7,198,709 |
Debt issued for acquisition of El Paso Airport Property | | $ | — | | $ | 9,990,000 |
Debt issued for acquisition of Lakewood Property | | $ | — | | $ | 13,081,364 |
Offering costs included in accounts payable | | $ | 21,260 | | $ | 30,539 |
Offering costs included in due to related parties | | $ | 186,245 | | $ | 66,749 |
Distributions included in due to related parties | | $ | 72,541 | | $ | 78,230 |
Redemptions included in other liabilities | | $ | — | | $ | 638,174 |
Reinvested distributions | | $ | 395,820 | | $ | 567,240 |
Initial ASC 842 adoption of right-of-use asset | | $ | — | | $ | 2,478,696 |
| | | | | | |
Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | | | | | | |
Cash and cash equivalents, beginning of period | | $ | 6,193,449 | | $ | 7,866,401 |
Restricted cash, beginning of period | | | 10,732,832 | | | 6,469,999 |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 16,926,281 | | $ | 14,336,400 |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 6,250,268 | | $ | 8,707,306 |
Restricted cash, end of period | | | 9,444,771 | | | 6,484,937 |
Cash, cash equivalents, and restricted cash, end of period | | $ | 15,695,039 | | $ | 15,192,243 |
See accompanying notes to unaudited consolidated financial statements.
6
LODGING FUND REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Lodging Fund REIT III, Inc. (“LF REIT III”), was formed on April 9, 2018 as a Maryland corporation. LF REIT III, together with its subsidiaries (the “Company”), was formed for the principal purpose of acquiring, through purchase or contribution, direct or indirect ownership interests in a diverse portfolio of limited-service, select-service, full-service and extended stay hotel properties located primarily in “America’s Heartland,” which the Company defines as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. LF REIT III has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2018. The Company’s business activities are directed and managed by Legendary Capital REIT III, LLC (the “Advisor”) and its affiliates, which are related parties through common management, pursuant to the Amended and Restated Advisory Agreement (the “Advisory Agreement”), dated June 1, 2018. The Company has no foreign operations or assets, and its operating structure includes only one operating and reportable segment.
Substantially all of the Company’s assets and liabilities are held by, and substantially all of its operations are conducted through, Lodging Fund REIT III OP, LP (the “Operating Partnership,” or “OP”), a subsidiary of LF REIT III. The OP has three voting classes of partnership units, Common General Partnership Units (“GP Units”), Interval Units and Common Limited Partnership Units (“Common LP Units”), and three classes of non-voting partnership units, Series B Limited Partnership Units (“Series B LP Units”), Series Growth & Opportunity (“GO”) Limited Partnership Units (“Series GO LP Units”) and Series T Limited Partnership Units (“Series T LP Units”). LF REIT III was the sole general partner of the OP, as of March 31, 2023 and December 31, 2022. As of March 31, 2023, there were 612,100 outstanding Common LP Units, no outstanding Interval Units, 1,000 outstanding Series B LP Units, all of which were owned by the Advisor, 3,124,503 Series GO LP Units and 5,073,506 Series T LP Units.
On June 1, 2018, the Company commenced a private offering of shares of common stock, $0.01 par value per share, with a maximum offering of $100,000,000, which was increased to $150,000,000 in shares of the Company’s common stock in December 2021 (the “Offering”). The Offering is to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. In addition to sales of common shares for cash, the Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company. As of March 31, 2023, the Company had issued and sold 9,996,595 shares of common stock, including 1,057,878 shares attributable to the DRIP, and received aggregate proceeds of $97.7 million. As of March 31, 2023, the Company had repurchased 287,525 shares, which represents an original investment of $2,858,355 for $2,794,469 under the Company’s Share Repurchase Plan. As of March 31, 2023, all of the redemption proceeds have been paid.
On April 29, 2020, the Company classified and designated 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, as shares of “Interval Common Stock,” to be part of the Offering. The offering of the Interval Common Stock was a maximum offering of $30,000,000, which could be increased to $60,000,000 in the sole discretion of the Company’s board of directors, (the “Interval Share Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Company’s board of directors allowed the Interval Share Offering to expire on March 31, 2022. The Company did not issue or sell any shares of Interval Common Stock in the Offering.
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $20,000,000, which could be increased to $30,000,000 in the sole discretion of LF REIT III as the General Partner of the Operating Partnership, (the “GO Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. The Company’s board of directors terminated the GO Unit Offering as of February 14, 2022. The Company’s board of directors
7
approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. As of March 31, 2023, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received gross aggregate proceeds of $21.5 million.
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning either 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan (“PIP”) and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of the conversion. As of March 31, 2023, the Company had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions.
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2023, the Operating Partnership had issued and sold 612,100 Common LP Units, with a then-current value of $10.57 per unit, in connection with property contributions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation—The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC applicable to annual financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022. The consolidated financial statements include the accounts of LF REIT III, the OP, its wholly-owned subsidiaries and entities in which the Company has a controlling financial interest, including variable interest entities (“VIEs”) where the Company is the primary beneficiary. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of the rights held by other interests. If the entity is considered to be a VIE, the Company determines whether the Company is the primary beneficiary, and then consolidates those VIEs for which the Company has determined that the Company is the primary beneficiary. If the entity in which the Company holds an interest does not meet the definition of a VIE, the Company evaluates whether the Company has a controlling financial interest through the Company’s voting interest in the entity. The Company consolidates entities when the Company owns more than 50 percent of the voting shares of a company or otherwise has a controlling financial interest. References in these financial statements to the net (loss) income attributable to stockholders do not include non-controlling interests, which represent the outside ownership interests of the Company’s consolidated, non-wholly owned entities and are presented separately in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of the Company’s consolidated financial statements and the accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Revenue Recognition—Revenues consist of amounts derived from hotel operations, including room sales and other hotel revenues, and are presented on a disaggregated basis in the Company’s consolidated statements of operations. These revenues are recorded net of any sales and occupancy taxes collected from the hotel guests. All revenues are recorded on an accrual basis as they are earned. Any cash received prior to a guest’s arrival is recorded as an advance deposit from the guest and recognized as revenue at the time of the guest’s occupancy at the hotel property.
Investment in Hotel Properties—The Company evaluates whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of the Company’s acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions are capitalized and transaction costs associated with business combinations would be expensed as incurred.
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, the Company allocates the purchase price among the assets acquired and the liabilities assumed on a relative fair value basis at the date of acquisition. The Company determines the fair value of assets acquired and liabilities assumed with the assistance of third-party valuation specialists, using cash flow analysis as well as available market and cost data. The determination of fair value includes making numerous estimates and assumptions.
The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed debt liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 40 years for buildings and building improvements and 3 to 7 years for FF&E. Maintenance and repair costs are expensed in the period incurred and major renewals or improvements to the hotel properties are capitalized.
The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the property to the estimated future undiscounted cash flows of the property, which take into account current market conditions, and the Company’s intent with respect to holding or disposing of the hotel properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the industry and the economy in general and the Company’s expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and the Company’s ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.
Advertising Costs—The Company expenses advertising costs as incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and expenses that are directly attributable to advertising and promotion. Advertising expense was $542,053 and $238,022 for the three months ended March 31, 2023 and 2022, respectively, and is included in sales and marketing in the consolidated statements of operations.
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Non-controlling Interest—Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the Company. Non-controlling interests are reported in the consolidated balance sheets within equity, separate from stockholders’ equity. Revenue and expenses attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations, with net income or loss attributable to non-controlling interests reported separately from net income or loss attributable to the Company.
Cash and Cash Equivalents—Cash and cash equivalents include cash in bank accounts as well as highly liquid investments with an original maturity of three months or less. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed FDIC insured levels.
Restricted Cash—Restricted cash primarily consists of earnest money deposits related to hotel property acquisitions, as well as certain funds maintained in escrow accounts to fund future payments for insurance, property tax obligations, and reserves for future capital expenditures, as required by our debt agreements.
Accounts Receivable—Accounts receivable consist primarily of receivables due from hotel guests for room stays and meeting and banquet room rentals, which are uncollateralized customer obligations. Management determines the likelihood of collectability of receivables on an individual customer basis, based on the amount of time the balance has been outstanding, likelihood of collecting, and the customer’s current economic status. The carrying amount of the accounts receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.
Deferred Financing Costs—Deferred financing costs represent origination fees, legal fees, and other costs associated with obtaining financing. Deferred financing costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The Company expenses unamortized deferred financing costs when the associated financing agreement is refinanced or repaid before maturity unless certain criteria are met that would allow for the carryover of such costs to the refinanced agreement. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed.
Offering Costs—The Company has incurred certain costs related directly to the Company’s private offerings consisting of, among other costs, commissions, legal, due diligence costs, printing, marketing, filing fees, postage, data processing fees, and other offering related costs. These costs are capitalized and recorded as a reduction of equity proceeds on the accompanying consolidated balance sheets.
Property Operations Expenses—Property operations expenses consist of expenses related to room rental, food and beverage sales, telephone usage, and other miscellaneous service costs, as well as all costs of operating the Company’s hotel properties such as building repairs, maintenance, property taxes, utilities, and other related costs.
Property Management Fees—Property management fees include expenses incurred for management services provided for the day-to-day operations of our hotel properties, which are generally charged at a rate of 4% of gross revenues. Property management fees also include asset management fees, which may be charged at an annual rate of up to 0.75% of gross assets and are paid to the Advisor.
Franchise Fees—The Company pays initial fees related to hotel franchise rights prior to acquiring a hotel property. The fees are included in prepaid expenses and other assets until the time the related hotel property is acquired. Initial franchise fees related to hotel properties that are acquired are amortized on a straight-line basis over the life of the agreement. Initial franchise fees related to hotel properties that are not acquired are refunded to the Company, net of any associated fees, and any fees are expensed as incurred. Franchise fees on the accompanying consolidated statements of operations include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, and reservation fees and other related costs.
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Acquisition Costs—The Company incurs costs during the review of potential hotel property acquisitions including legal fees, environmental reviews, market studies, financial advisory services, and other professional service fees. If the Company does complete a property acquisition, an acquisition fee of up to 1.4% is charged by the Advisor, based on the purchase price of the property plus any estimated PIP costs. For transactions determined to be asset acquisitions, these costs are capitalized as part of the overall cost of the project. For transactions determined to be business combinations, these costs would be expensed in the period incurred. Acquisition-related and acquisition due diligence costs that relate to a property that is not acquired, are expensed and included in acquisition costs on the accompanying consolidated statements of operations. Prior to the ultimate determination of whether a property will be acquired or not, acquisition-related and acquisition due diligence costs are recorded as, and included in, prepaid expenses and other assets on the accompanying consolidated balance sheets.
Stock-Based Compensation—During 2022, the Company began compensating its independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and the Company recognizes stock-based compensation expense based on the award’s fair value at the grant date. Compensation expense related to stock awards is determined on the grant date based on the offering price of our common stock and is charged to earnings when issued. Stock-based compensation expense was $10,570 and $15,000 for the three months ended March 31, 2023 and 2022, respectively, and is included in general and administrative expense in the consolidated statements of operations.
Net Loss Per Share of Common Stock—Basic net loss per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net loss per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net loss per common share were the same for the periods presented.
Income Taxes—The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.
As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates and it may not be able to qualify as a REIT for four subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to U.S. federal income and excise taxes on undistributed taxable income. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”) is subject to U.S. federal, state, and local income taxes at the applicable rates.
The TRS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company performs periodic reviews for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements.
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Fair Value Measurement—The Company establishes fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs such as quoted prices in active markets.
Level 2—Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3—Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
Recent Accounting Pronouncements—The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer the adoption of new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (“ASU No. 2016-02”) (Topic 842), which replaces Leases (Topic 840), and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance under Leases (Topic 840), for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The Company adopted this standard effective January 1, 2022, electing to recognize and measure its leases prospectively at the beginning of the period of adoption, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company’s historical accounting policy.
At adoption of the new standard, the Company recorded a right-of-use asset and lease liability for its Sheraton Northbrook, Illinois hotel property (the "Northbrook Property") ground lease measured at the estimated present value of the remaining minimum lease payments under the lease. The Company’s ground lease is classified as a financing lease under Topic 842. For this finance lease, effective January 1, 2022, the Company began recognizing depreciation and amortization expense and interest expense in the Company’s consolidated statements of operations instead of ground lease rent expense. While the total expense recognized over the life of a lease is unchanged, the timing of expense recognition for finance leases results in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. In addition to recording operating and financing right-of-use assets and lease liabilities, the Company also reclassified at adoption its intangible liability for its above market ground lease to the beginning right-of-use asset. See Note 3 for more information regarding the Company’s lease assets and liabilities.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU No. 2016-13 using the modified retrospective approach and the adoption did not have a material impact on the Company’s consolidated financial statements.
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3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Land and land improvements | | $ | 32,650,698 | | $ | 32,650,698 |
Building and building improvements | |
| 241,278,409 | |
| 241,278,409 |
Furniture, fixtures, and equipment | |
| 22,160,062 | |
| 21,884,508 |
Right-of-use asset - ground lease | | | 7,340,868 | | | 7,340,868 |
Construction in progress | | | 6,378,076 | | | 4,576,041 |
Investment in hotel properties, at cost | | | 309,808,113 | |
| 307,730,524 |
Less: accumulated depreciation and amortization | |
| (20,158,741) | |
| (17,512,882) |
Investment in hotel properties, net | | $ | 289,649,372 | | $ | 290,217,642 |
As of March 31, 2023, the Company consolidated nineteen hotel properties, consisting of eighteen hotel properties owned by the Company and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property, with an aggregate of 2,261 rooms located in ten states.
On August 10, 2022, the Company consolidated a variable interest entity (“VIE”) that owns one hotel in El Paso, Texas (the “El Paso University Property”). The Company is the primary beneficiary of this VIE as the Company has the power to direct the activities that most significantly affect its economic performance. Additionally, the Company has the obligation to absorb its losses and the right to receive benefits that could be significant to it. Accordingly, the Company initially recognized the VIE’s assets, liabilities, and noncontrolling interest at fair value. The Company’s condensed consolidated balance sheet includes the following assets and liabilities of this entity:
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Assets |
| |
|
| |
|
Investment in hotel properties, net of accumulated depreciation of $687,349 and $471,491 | | $ | 21,736,003 | | $ | 22,036,289 |
Cash and cash equivalents | |
| 628,495 | |
| 493,056 |
Restricted cash | |
| 734,870 | |
| 2,173,237 |
Accounts receivable, net | |
| 128,507 | |
| 154,976 |
Prepaid expenses and other assets | |
| 44,973 | |
| 67,068 |
Total Assets | | $ | 23,272,848 | | $ | 24,924,626 |
| | | | | | |
Liabilities | |
|
| |
|
|
Debt, net | | $ | 12,205,481 | | $ | 12,244,068 |
Finance lease liability | | | 4,750,889 | | | 4,862,172 |
Accounts payable | |
| 216,590 | |
| 182,692 |
Accrued expenses | |
| 30,447 | |
| 445,763 |
Other liabilities | |
| 637,117 | |
| 655,372 |
Total liabilities | | $ | 17,840,524 | | $ | 18,390,067 |
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Acquisitions of Hotel Properties
The Company acquired no properties during the three months ended March 31, 2023. The Company acquired seven properties and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property during the year ended December 31, 2022. Each of the Company’s hotel acquisitions to date have been determined to be asset acquisitions.
The table below outlines the details of the properties acquired during the year ended December 31, 2022.
| | | | | | | | | | | | | | | | | | | | |
2022 Acquisitions | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
|
| |
| |
| |
| Number |
| | |
| | |
| | |
| |
|
| | | | | | Date | | of Guest | | Purchase | | Transaction | | | | | % |
| ||
Hotel | | Property Type | | Location | | Acquired | | Rooms | | Price | | Costs | | Total | | Interest |
| |||
Hampton Inn & Suites | | Limited-Service | | Fargo, ND | | January 18, 2022 | | 90 | | $ | 11,440,000 | (1) | $ | 302,222 | | $ | 11,742,222 | | 100 | % |
Courtyard by Marriott | | Select-Service | | El Paso, TX | | February 8, 2022 | | 90 | | | 15,120,000 | (2) | | 333,234 | | | 15,453,234 | | 100 | % |
Fairfield Inn & Suites | | Limited-Service | | Lakewood, CO | | March 29, 2022 | | 142 | | | 18,800,000 | (3) | | 862,117 | | | 19,662,117 | | 100 | % |
Residence Inn | | Extended-Stay | | Fort Collins, CO | | August 3, 2022 | | 113 | | | 15,800,000 | (4) | | 546,009 | | | 16,346,009 | | 100 | % |
Hilton Garden Inn | | Select-Service | | Pineville, NC | | August 25, 2022 | | 113 | | | 10,930,000 | (5) | | 347,149 | | | 11,277,149 | | 100 | % |
Hilton Garden Inn | | Select-Service | | Charlotte, NC | | August 25, 2022 | | 112 | | | 15,440,000 | (6) | | 416,387 | | | 15,856,387 | | 100 | % |
Holiday Inn | | Limited-Service | | Wichita, KS | | December 22, 2022 | | 84 | | | 7,400,000 | (7) | | 234,310 | | | 7,634,310 | | 100 | % |
| | | | | | |
| 744 | | $ | 94,930,000 | | $ | 3,041,428 | | $ | 97,971,428 | | | |
(1) | Includes the issuance of $4,091,291 in Series T LP Units of the Operating Partnership. |
(2) | Includes the issuance of $4,600,000 in Common Limited Partnership Units of the Operating Partnership. |
(3) | Includes the issuance of $5,638,000 in Series T LP Units of the Operating Partnership. |
(4) | Includes the issuance of $3,703,690 in Series T LP Units of the Operating Partnership. |
(5) | Includes the issuance of $2,729,211 in Series T LP Units of the Operating Partnership. |
(6) | Includes the issuance of $6,427,546 in Series T LP Units of the Operating Partnership. |
(7) | Includes the issuance of $1,217,625 in Series T LP Units of the Operating Partnership. |
In addition, on August 10, 2022, the Company acquired a 24.9% equity and profits interest in High Desert Garden Holdings, LLC, which is the parent of the entity which holds a leasehold interest in the Hilton Garden Inn, located in El Paso, Texas (the “El Paso University Property”) in exchange for a capital contribution of $3.2 million. The El Paso University Property is a select-service hotel with 153 guest rooms. See “—2022 Business Combinations” below for additional information regarding this transaction.
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The allocation of the aggregate purchase price in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combinations, of the assets and liabilities acquired at their relative fair values of their acquisition dates, is as follows:
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2023 | | 2022 | ||
Land and land improvements | | $ | — | | $ | 12,538,514 |
Building and building improvements | |
| — | |
| 79,702,403 |
Furniture, fixtures, and equipment | |
| — | |
| 5,730,511 |
Total assets acquired | |
| — | |
| 97,971,428 |
| | | | | | |
Above market ground lease(1) | |
| — | |
| — |
Total liabilities assumed | | | — | | | — |
Total purchase price(2) | | $ | — | | $ | 97,971,428 |
| | | | | | |
Assumed mortgage debt | | | — | | | 7,198,709 |
| | | | | | |
Net purchase price | | $ | — | | $ | 90,772,719 |
(1) | The above market ground lease is recognized on the consolidated balance sheet within Other Liabilities as of December 31, 2021. See Northbrook Property Above Market Ground Lease discussion below. |
(2) | Total purchase price includes purchase price plus all transaction costs. |
All acquisitions completed during the year ended December 31, 2022 were considered asset acquisitions under ASC 805.
Eleven of the hotel properties owned by the Company as of March 31, 2023 are subject to management agreements with NHS, LLC dba National Hospitality Services (“NHS”) with an initial term expiring on December 31 of the fifth full calendar year following the effective date of the agreement, which will automatically renew for successive five-year periods unless terminated earlier in accordance with its terms. NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. The Pineville Property was being managed on a day-to-day basis by Beacon IMG, Inc. (“Beacon”), an affiliate of the seller of the Pineville Property, pursuant to a sub-management agreement. On February 1, 2023, day-to-day management was transferred to HP Hotel Management, Inc. The Southaven Property is subject to a management agreement with Vista Host Inc. (“Vista”) with an initial term expiring on February 21 of the fifth full calendar year following the effective date of the agreement. The agreement will automatically renew for two (2) successive five-year periods unless terminated earlier in accordance with its terms. The Houston Property, El Paso Airport Property and El Paso University Property are subject to a management agreement with Interstate Management Company, LLC (“Aimbridge”). The Aimbridge agreement for the Houston Property has an initial term expiring on August 3 of the third full calendar year following the effective date of the agreement. The agreement will automatically renew for additional successive terms of one year each unless terminated earlier in accordance with its terms. The Aimbridge agreement for the El Paso Airport Property and the El Paso University Property each has an initial five (5) year term and will automatically renew for one (1) year periods unless terminated earlier in accordance with its terms. The Charlotte Property and the Pineville HGI Property are each subject to a management agreement with HP Hotel Management, Inc. (“HP”). Each HP agreement has an initial term expiring three years after its effective date, which automatically renews for successive three-year periods, unless terminated in accordance with its terms. The Fargo Property and the Wichita Property are each subject to a management agreement with KAJ Hospitality Inc. Each KAJ agreement has an initial term of five years after its effective date, which automatically renews for successive one-year periods, unless terminated in accordance with its terms.
The seller of the Pineville Property, an affiliate of Beacon, was entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income (“NOI”) for a selected 12-month period of time. At any time during the period beginning April 1, 2021 through the date of the final NOI determination (on or about April 30, 2023), the seller of the property could have made a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, was based on the excess of the property’s actual NOI over a base NOI for the applicable 12-month calculation period divided by the stated cap rate for such calculation period. As of March 31, 2023, no amounts were owed or paid to the seller of the Pineville Property, and
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no election to receive the additional consideration had been made. As of the date of this filing, the period to elect to receive additional consideration has passed with no election being made.
2022 Acquisitions
Hampton Inn & Suites Fargo Medical Center – Fargo, North Dakota
On January 18, 2022, the Operating Partnership acquired a Hampton Inn & Suites hotel property in Fargo, North Dakota (the “Fargo Property”) for contractual consideration comprised of $7.2 million in debt, $150,000 in cash and the issuance of $4.1 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, after January 18, 2022, at which point the value will be calculated pursuant to the terms of an Amended and Restated Contribution Agreement, dated January 18, 2022. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $11.4 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
Courtyard El Paso Airport – El Paso, Texas
On February 8, 2022, the Operating Partnership acquired a Courtyard by Marriott hotel property in El Paso, Texas (the “El Paso Airport Property”) for contractual consideration comprised of $10.0 million in debt, $620,000 in cash and the issuance of $4.6 million in Common LP Units.
Fairfield Inn & Suites Denver Southwest Lakewood – Lakewood, Colorado
On March 29, 2022, the Operating Partnership acquired a Fairfield Inn & Suites hotel property in Lakewood, Colorado (the “Lakewood Property”) for contractual consideration of $12.6 million in debt, $552,000 in cash and approximately $6.2 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, up to 48 months, after March 29, 2022, at which point the value will be calculated pursuant to the terms of an Amended and Restated Contribution Agreement, dated March 29, 2022. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $18.8 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
Residence Inn by Marriott Fort Collins – Fort Collins, Colorado
On August 3, 2022, the Operating Partnership acquired a Residence Inn by Marriott hotel property in Fort Collins, Colorado (the “Fort Collins Property”) for contractual consideration comprised of $11.5 million in debt, the issuance of 560,369 Series T LP Units of the Operating Partnership, and approximately $600,000 in cash at closing. The Series T Limited Units will convert into Common Limited Units of the Operating Partnership beginning 36 months, or at the option of the contributor, up to 48 months, after the closing, or upon the sale of the Fort Collins RI property or substantially all of the Operating Partnership’s assets, at which point the value will be calculated pursuant to the terms of the Fort Collins RI Amended Contribution Agreement. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $15.8 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
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Hilton Garden Charlotte North – Charlotte, North Carolina
On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Charlotte, North Carolina (the “Charlotte Property”) for contractual consideration comprised of the payoff of the existing loan secured by the Charlotte Property in the amount of $8.7 million, refinanced with a new term loan by subsidiaries of the Operating Partnership with Western Alliance Bank (the “Charlotte HGI Lender”) in the original principal amount of $9.8 million secured by the Charlotte Property (the “Charlotte HGI Loan Agreement”), the issuance by the Operating Partnership of 598,755 Series T Limited Units of the Operating Partnership, and the payment by the Operating Partnership of $0.4 million in cash. The Series T LP Units will convert into Common Limited Units of the Operating Partnership beginning 24 months after the closing. The number of Common Limited Units to be issued to the Contributor upon conversion will be calculated pursuant to the terms of the Charlotte HGI Contribution Agreement, which may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $15.4 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
Hilton Garden Pineville – Pineville, North Carolina
On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Pineville, North Carolina (the “Pineville HGI Property”) for contractual consideration comprised of the payoff of the existing loan secured by the Pineville HGI in the amount of $7.8 million, refinanced with a new $7.0 million loan by subsidiaries of the Operating Partnership with Western Alliance Bank (the “Pineville HGI Lender”) secured by the Pineville HGI (the “Pineville HGI Loan Agreement”), the issuance by the Operating Partnership of 249,921 Series T Limited Units of the Operating Partnership, and the payment by the Operating Partnership of $0.4 million in cash. The Series T Limited Units will convert into Common Limited Units of the Operating Partnership beginning 24 months after the closing. The number of Common Limited Units to be issued to the Contributor upon conversion will be calculated pursuant to the terms of the Pineville HGI Contribution Agreement, which may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $10.9 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
Holiday Inn Express & Suites - Wichita Airport
On December 22, 2022, the Operating Partnership acquired a Holiday Inn Express & Suites hotel property in Wichita, Kansas (the “Wichita Property”) for contractual consideration comprised of the origination of a new loan by subsidiaries of the Operating Partnership with Choice Financial Group (the “Wichita HIEX Lender”) for $5.6 million, secured by the Wichita Property the issuance by the Operating Partnership of 121,762 Series T Limited Units of the Operating Partnership, and the payment by the Operating Partnership of $0.5 million in cash, a portion of which was used to pay off the portion of the Wichita Contributor’s existing loan not covered by the proceeds of the new loan with the Wichita HIEX Lender. The Series T Limited Units will convert into Common Limited Units of the Operating Partnership 36 months after the closing. The number of Common Limited Units to be issued to the Wichita Contributor upon conversion will be calculated pursuant to the terms of the Pineville HGI Contribution Agreement, which may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $7.4 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable.
2022 Business Combinations
Hilton Garden Inn El Paso University – El Paso, Texas
On August 10, 2022, the Operating Partnership acquired an equity and profits interest in High Desert Garden Holdings, LLC, a Delaware limited liability company (“HDGH”), the parent of the entity which holds a leasehold interest in a Hilton Garden Inn located in El Paso, Texas (the “El Paso University Property”) pursuant to a Reorganization and Membership Interest Purchase Agreement dated as of August 10, 2022 by and among the Operating Partnership, Roma Commercial, Inc., ASI Capital, LLC, and VB Hotel Group A, LLC and pursuant toa First Amendment to the Fourth Amended and Restated Operating Agreement of High Desert Garden Holdings, LLC (collectively and as amended (the “El Paso
17
University Amended Agreements”)). High Desert Investors, LP, a Delaware limited partnership (“HDI”), a wholly-owned subsidiary of HDGH, holds a leasehold interest in real estate and the El Paso University Property located on such real estate.
Pursuant to the El Paso University Amended Agreements, the Operating Partnership acquired a 24.9% membership interest in HDGH in exchange for a capital contribution of $3.2 million. The Operating Partnership has the unconditional right, at any time prior to December 31, 2027 and at its discretion, to acquire all membership interest in HDGH on the terms and conditions as provided in the El Paso University Amended Agreements. After paying any member loans, the Operating Partnership will receive 100% of distributions from operations, subject to annual cash distributions for members that existed before the El Paso University Amended Agreements (the “Prior Members”), which are entitled to up to 6.0% of the value of the Prior Member’s ownership percentage, depending upon the net operating income (“NOI”) of the El Paso University Hotel Property during each such applicable year. The Operating Partnership will fund any capital requirements for HDGH and has the option to fund such requirements by making a loan to HDGH at a 12% per annum interest rate. HDI is the borrower (“Borrower”) under a loan in the original principal amount of $14.4 million which is secured by HDI’s leasehold interest in the El Paso University Property and the real estate on which it is located. The loan has a fixed interest rate of 4.939% per annum and matures on August 6, 2025. In connection with the transactions effected through the El Paso University Amended Agreements, Corey Maple, a director and executive officer of the Company, entered into a guaranty with the lender to guarantee payment, when due, of the loan amount and the performance of agreements by Borrower contained in the loan documents, as further described in the guaranty.
The Company accounted for this transaction as a business combination in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combination. As such, the Company recognized a gain for the difference between the sum of the fair value of any consideration paid, the fair value of the noncontrolling interest, and the net fair value of identifiable assets and liabilities of the VIE. The assets of the Company’s VIE are only available to settle the obligation of this entity. The Company has expensed all transaction costs as an acquisition expense on the Company’s Consolidated Statement of Operations amounting to $571,198. The fair value of the investment in the hotel was determined by an independent appraisal and debt was determined by calculating the present value of the principal and interest payments, using discount rates that best reflect current market interest rates for financings with similar characteristics and credit quality, and assuming the loan is outstanding through its maturity. The fair values were based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs were categorized as Level 3, as defined in the GAAP fair value hierarchy. Level 3 valuations incorporate subjective judgements and consider assumptions that are not observable in the market.
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In connection with this transaction, the Company allocated the purchase price of HDGH based on the estimated fair value of assets acquired and liabilities assumed as follows:
| | | |
|
| August 10, | |
| | 2022 | |
Assets |
| |
|
Building | | $ | 16,700,000 |
Furniture, fixtures & equipment | | | 900,000 |
Right-of-use asset - ground lease | | | 4,862,172 |
Cash and cash equivalents | |
| 36,790 |
Restricted cash | |
| 1,305,636 |
Accounts receivable, net | |
| 168,974 |
Prepaid expenses and other assets | |
| 107,291 |
Total Assets | | $ | 24,080,863 |
| | | |
Liabilities | |
|
|
Debt | | $ | 12,781,084 |
Finance lease liability | | | 4,862,172 |
Accounts payable | |
| 237,636 |
Accrued expenses | |
| 1,970,554 |
Other liabilities | |
| 419,336 |
Total liabilities | | $ | 20,270,782 |
| | | |
Assets in excess of liabilities (gain on acquisition of VIE) | | $ | 3,810,081 |
Northbrook Property Above Market Ground Lease
On December 3, 2021, in connection with the purchase of the Northbrook Property, the Company recognized an above market ground lease liability of $5,497,061, which was recognized on the consolidated balance sheet within Other Liabilities. The Company assumed the ground lease 15 years into a 61-year lease maturing in 2067. The yearly base rent, paid monthly, increases 3% every year through maturity. As of March 31, 2023, the Company’s finance lease had a discount rate of 7.75%.
Upon adoption of ASU No. 2016-02 on January 1, 2022, the Company derecognized the above market ground lease liability by reclassifying it as a partial offset to the beginning right-of-use asset related to this financing lease. At adoption of the new standard, the Company recognized a lease liability of $7,975,757 and a right-of-use asset of $2,478,696, which included the derecognition of the above-market ground lease liability. For the three months ended March 31, 2023, the Company recognized interest expense of $158,500 and right-of-use amortization expense of $13,471 related to the finance lease.
El Paso University Property Ground Lease
On August 10, 2022, in connection with the El Paso University Property, the Company recognized a finance lease liability of $4,862,172 and a right-of-use asset of $4,862,172 related to a ground lease assumed. The Company assumed the ground lease with a remaining term of 32 years, maturing in 2054. Annual rentals are comprised of a base rent due at the beginning of the year plus, if applicable, a percent of revenue in excess of the base rent. The annual base rent is adjusted every five years by an average of a percent of the annual revenue in preceding years. If revenue remains below the previous five-year base rent, then there is no change to base rent. As of March 31, 2023, the finance lease had a discount rate of 9.00%.
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The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the finance lease liability included in the Company’s consolidated balance sheet as of March 31, 2023.
| | | |
2023 |
| $ | 338,693 |
2024 | |
| 610,237 |
2025 | |
| 624,112 |
2026 | |
| 645,791 |
2027 | |
| 660,511 |
Thereafter | |
| 44,016,797 |
Total finance lease payments | | | 46,896,141 |
Interest | | | (33,932,398) |
Present value of finance lease liabilities | | $ | 12,963,743 |
4. DEBT
Lines of Credit & Loans
Revolving Line of Credit - Western State Bank
On February 10, 2020, the Company entered into a $5.0 million revolving line of credit with Western State Bank (the “Western Revolving Line of Credit”). The Western Revolving Line of Credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. On January 19, 2021, the Western Revolving Line of Credit was amended to extend the maturity date to May 10, 2021. The Western Revolving Line of Credit had a variable interest rate equal to the U.S. Prime Rate, plus 0.50%. On May 6, 2021, the Western Revolving Line of Credit was amended to extend the maturity date to May 10, 2022. On that date, the interest rate was also amended to incorporate an interest rate floor equal to 4.00%. On May 5, 2022, the Western Revolving Line of Credit was amended to extend the maturity date to December 15, 2022. On December 15, 2022, the Western Line of Credit was amended to extend the maturity to April 15, 2023. Additionally, through the amendment on December 15, 2022, the Western Line of Credit is secured by the Company’s Hampton Inn hotel property in Eagan, Minnesota, the Company’s Holiday Inn Express hotel property in Cedar Rapids, Iowa, the Company’s Hampton Inn hotel property in Fargo, North Dakota and limited partnership units of the Operating Partnership. No other changes were made to the Western Line of Credit as a result of the amendments.
The interest rate as of March 31, 2023 was 8.50% per annum. As of March 31, 2023, the Western Revolving Line of Credit was secured by the Company’s Cedar Rapids Property and Eagan Property, and Fargo Property which are also subject to term loans with the same lender, and 300,000 Common LP Units of the Operating Partnership. The Western Line of Credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property, the Eagan Property, and the Fargo Property as well as future loan agreements that the Company may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The Western Line of Credit, including all cross-collateralized debt, is guaranteed by Corey Maple. As of March 31, 2023, there was a $5.0 million balance outstanding on the Western Line of Credit. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments to the Western Line of Credit subsequent to March 31, 2023.
Revolving Line of Credit – Legendary A-1 Bonds, LLC
On August 10, 2022, the Operating Partnership entered into a $5.0 million revolving line of credit loan agreement (the “A-1 Line of Credit”) with Legendary A-1 Bonds, LLC (“A-1 Bonds”), which is an affiliate of the Advisor which is owned by Norman Leslie, a director and officer of the Company and principal of the Advisor and Corey Maple, a director of the Company and principal of the Advisor. The A-1 Revolving Line of Credit requires monthly payments of interest only beginning September 1, 2022, with all outstanding principal and interest amounts being due and payable at maturity on December 31, 2022. On January 12, 2023, the A-1 Revolving Line of Credit was amended to increase the line of credit to $10.0 million, increased the number of Common LP Units of the Operating Partnership securing the A-1 Revolving Line
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of Credit to 1,000,000 unissued Common LP Units and extended the maturity date to December 31, 2023. The A-1 Revolving Line of Credit has a fixed interest rate of 7.00% per annum. Outstanding amounts under the A-1 Revolving Line of Credit may be prepaid in whole or in part without penalty. As of March 31, 2023, there was a $9,240,000 balance outstanding on the A-1 Revolving Line of Credit. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments to the A-1 Line of Credit subsequent to March 31, 2023.
NHS Loan
On March 6, 2023, the Company entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. The NHS Loan requires the payment of monthly interest beginning on April 6, 2023, with all outstanding principal and interest amounts being due and payable at maturity on July 6, 2023. The NHS Loan has a fixed interest rate of 7.0% per annum. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership. As of March 31, 2023, there was a $600,000 balance outstanding on the NHS Loan. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments to the NHS Loan subsequent to March 31, 2023.
Mortgage Debt
As of March 31, 2023, the Company had $179.8 million in outstanding mortgage debt secured by each of its nineteen consolidated properties, with maturity dates ranging from May 2023 to April 2029. Seventeen of the loans have fixed interest rates ranging from 3.70% to 7.00%. One loan is a variable interest loan at a rate of LIBOR plus 6.0% per annum, provided that LIBOR shall not be less than 1.0%, resulting in an effective rate of 10.68% as of March 31, 2023. Another loan is a variable interest loan at a rate of LIBOR or an equivalent rate plus 6.25%, provided that the variable rate shall not be less than 0.75%, resulting in an effective rate of 10.93% as of March 31, 2023. Collectively, the weighted-average interest rate is 5.80%. The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period following origination, and generally require a balloon payment due at maturity. As of March 31, 2023 and December 31, 2022, certain mortgage debt was guaranteed by the members of the Advisor. See Note 7 “Related Party Transactions” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding debt that was guaranteed by members of the Advisor. As part of the consolidated outstanding mortgage debt above, the owner of the leasehold interest in the El Paso University Property is the borrower under a $14.4 million loan secured by the lease hold interest in the El Paso University Property, Corey Maple entered into a guaranty and environmental indemnity in connection with the loan. The loan has a fixed interest rate of 4.94% per annum and matures on August 6, 2025. There were no mortgage loan amendments during the three months ended March 31, 2023. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of changes to mortgage debt occurring subsequent to March 31, 2023.
As of March 31, 2023, the Company was not in compliance with the required financial covenants under the terms of its promissory note secured by the Pineville Property and related loan documents (the “Pineville Loan”), which constitutes an event that puts the Company into a trigger period pursuant to the loan documents. On July 23, 2024, the Company sold the Pineville Property and no waiver of the financial covenants is needed. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of the sale of the Pineville Property subsequent to March 31, 2023. Except as described above for the Pineville Loan, the Company was in compliance with all debt covenants as of March 31, 2023.
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The following table sets forth the hotel properties securing the Company’s hotel mortgage debt and revolving lines of credit as of March 31, 2023 and December 31, 2022.
| | | | | | | | | | |
|
| Interest | | | | Outstanding | | Outstanding | ||
| | Rate as of | | | | Balance as of | | Balance as of | ||
| | March 31, | | Maturity | | March 31, | | December 31, | ||
| | 2023 | | Date | | 2023 | | 2022 | ||
Holiday Inn Express - Cedar Rapids(1) | | 5.33% |
| 9/1/2024 | | $ | 5,773,939 | | $ | 5,799,804 |
Hampton Inn & Suites - Pineville(2) | | 5.13% |
| 6/6/2024 | |
| 8,526,998 | |
| 8,580,586 |
Hampton Inn - Eagan | | 4.60% |
| 1/1/2025 | |
| 9,007,115 | |
| 9,063,528 |
Home2 Suites - Prattville | | 4.13% |
| 8/1/2024 | |
| 9,145,453 | |
| 9,199,041 |
Home2 Suites - Lubbock | | 4.69% | | 10/6/2026 | | | 7,283,638 | | | 7,343,948 |
Fairfield Inn & Suites - Lubbock | | 4.93% | | 4/6/2029 | | | 8,930,077 | | | 8,971,430 |
Homewood Suites - Southaven | | 3.70% | | 3/3/2025 | | | 12,920,065 | | | 13,007,706 |
Courtyard by Marriott - Aurora(3)(4) | | 10.68% | | 2/5/2024(5) | | | 15,000,000 | | | 15,000,000 |
Holiday Inn - El Paso(4) | | 5.00% | | 5/15/2023(6) | | | 7,900,000 | | | 7,900,000 |
Hilton Garden Inn - Houston(7) | | 3.85% | | 9/2/2026 | | | 13,947,217 | | | 13,947,217 |
Sheraton - Northbrook(4)(8) | | 10.93% | | 12/5/2024 | | | 3,766,639 | | | 3,766,639 |
Hampton Inn - Fargo(9) | | 4.00% | | 3/1/2027 | | | 7,230,112 | | | 7,275,480 |
Courtyard by Marriott - El Paso(10)(11) | | 6.01% | | 5/13/2027 | | | 9,990,000 | | | 9,990,000 |
Fairfield Inn & Suites - Lakewood(4)(12) | | 7.00% | | 3/28/2024 | | | 13,845,000 | | | 13,845,000 |
Residence Inn - Fort Collins(13)(14) | | 7.00% | | 8/3/2023 | | | 11,500,000 | | | 11,500,000 |
Hilton Garden Inn - El Paso | | 4.94% | | 8/6/2025 | | | 12,562,351 | | | 12,613,869 |
Hilton Garden Inn - Pineville(15) | | 6.20% | | 8/25/2027 | | | 7,020,000 | | | 7,020,000 |
Hilton Garden Inn - Charlotte(15) | | 6.20% | | 8/25/2027 | | | 9,805,000 | | | 9,805,000 |
Holiday Inn Express - Wichita(10) | | 6.41% | | 12/21/2027 | | | 5,642,000 | | | 5,642,000 |
Total Mortgage Debt | | | | | |
| 179,795,603 | |
| 180,271,248 |
Premium on assumed debt, net | | | | | |
| 201,008 | |
| 221,082 |
Deferred financing costs, net | | | | | | | (2,799,374) | | | (3,193,939) |
Net Mortgage | | | | | | | 177,197,237 | | | 177,298,391 |
| | | | | | | | | | |
$5.0 million revolving line of credit - Western(16) | | 8.50% | | 4/15/2023(18) | | | 5,000,000 | | | 5,000,000 |
$10.0 million revolving line of credit - A-1 Bonds(17) | | 7.00% | | 12/31/2023 | | | 9,240,000 | | | 7,380,156 |
$0.6 million loan - NHS | | 7.00% | | 1/31/2024(19) | | | 600,000 | | | — |
Total Other Debt | | | | | | | 14,840,000 | | | 12,380,156 |
| | | | | | | | | | |
Debt, net | | | | | | $ | 192,037,237 | | $ | 189,678,547 |
(1) | Loan was interest-only through April 30, 2022 and is at a fixed rate of interest. |
(2) | On July 23, 2024, the Hampton Inn & Suites Pineville was sold and the loan was repaid on the closing date. |
(3) | Variable interest rate equal to 30-day LIBOR plus 6.00%, provided that LIBOR shall not be less than 1.00%. |
(4) | Loan is interest-only until maturity. |
(5) | The Company has notified the lender of its intention to exercise the option under the loan agreement to extend the maturity date to February 5, 2025. |
(6) | On May 15, 2023, the maturity date was extended to May 15, 2024. On May 15, 2024, the maturity date extended to November 15, 2024 along with a new interest rate of 9.00%. See Note 11 “Subsequent Events.” |
(7) | Loan is interest-only for the first 24 months after origination. |
(8) | Variable interest rate equal to 30-day LIBOR or equivalent rate plus 6.25%, provided that LIBOR or equivalent rate shall not be less than 0.75%. |
(9) | Proceeds of this loan were used to repay in full the original loan secured by the Fargo Property entered into on January 24, 2022 with A-1 Bonds. |
(10) | Loan is interest-only for the first 18 months after origination. |
(11) | Proceeds of this loan were used to repay in full the original loan secured by the El Paso Airport Property entered into on February 14, 2022 with A-1 Bonds. |
(12) | On March 27, 2024, this loan was repaid in full and refinanced with two new loans secured by the Lakewood Property and unissued common limited partnership units of the Operating Partnership. See Note 11 “Subsequent Events.” |
(13) | Tranche 3’s maturity date is August 2, 2028. Tranche 1 is interest-only until maturity, beginning six months after the issuance of the loan. Tranche 3’s payments are deferred until a certain appraised value is attained in accordance with the terms of the loan. |
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(14) | On April 18, 2023, Tranche 1 and Tranche 2 were repaid in full and refinanced with a new loan secured by the Fort Collins Property. See Note 11 “Subsequent Events.” |
(15) | Loan is interest-only through February 25, 2024. |
(16) | Variable interest rate equal to U.S. Prime plus 0.50% |
(17) | On April 18, 2023, this line of credit was increased to $13.3 million. On March 27, 2024, this line of credit was increased to $15.5 million and the maturity date was extended to December 31, 2024. See Note 7, - Legendary A-1 Bonds, LLC (“A-1 Bonds”) and Note 11 “Subsequent Events.” |
(18) | On April 15, 2023, the maturity date was extended to June 15, 2023. On July 31, 2023, the maturity date was extended to September 15, 2023. On October 9, 2023, the maturity date was extended to November 15, 2023, On December 27, 2023, the maturity date was extended to April 30, 2024. On May 10, 2024, the maturity date was extended to June 5, 2024. See Note 11 “Subsequent Events.” |
(19) | On December 28, 2023, the maturity date was extended to January 31, 2024. On August 21, 2024, the maturity date was extended to September 30, 2025. See Note 11 “Subsequent Events.” |
Future Minimum Payments
As of March 31, 2023, the future minimum principal payments on the Company’s debt were as follows:
| | | |
2023 |
| $ | 27,613,111 |
2024 | |
| 53,616,109 |
2025 | |
| 47,183,316 |
2026 | |
| 20,677,037 |
2027 | |
| 37,472,452 |
Thereafter | |
| 8,073,578 |
| | | 194,635,603 |
| | | |
Premium on assumed debt, net | |
| 201,008 |
Deferred financing costs, net | |
| (2,799,374) |
| | $ | 192,037,237 |
The $27.6 million of future minimum principal payments due in 2023 includes the maturities of the mortgage debt secured individually by the Fort Collins Property of $11.5 million along with the A-1 and Western Lines of Credit. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments and refinancing subsequent to March 31, 2023.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments as of March 31, 2023 and December 31, 2022 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, lines of credit, and mortgage debt. With the exception of the Company’s mortgage debt, the carrying amounts of the financial instruments presented in the consolidated financial statements approximate their fair value as of March 31, 2023. The fair value of the Company’s mortgage debt was estimated by discounting each loan’s future cash flows over the remaining term of the mortgage using current borrowing rates for debt instruments with similar terms and maturities, which are Level 3 inputs in the fair value hierarchy. As of March 31, 2023, the estimated fair value of the Company’s mortgage debt was $176.1 million, compared to the gross carrying value $179.8 million. As of December 31, 2022, the estimated fair value of the Company’s mortgage debt was $175.8 million, compared to the gross carrying value $180.3 million.
6. INCOME TAXES
The Company’s earnings (losses), other than those generated by the Company’s TRS, are not generally subject to federal corporate and state income taxes due to the Company’s REIT election. The Company did not pay any federal and state income taxes for the period ended March 31, 2023 and did not pay any federal and state income taxes for the period ended March 31, 2022. The Company did not have any uncertain tax positions as of March 31, 2023 or December 31, 2022.
The Company’s TRS generated a net operating loss (“NOL”) for the three months ended March 31, 2023 and the year ended December 31, 2022, which can be carried forward to offset future taxable income. As of March 31, 2023, the Company expects its TRS to generate additional NOL during the year ended December 31, 2023, and as a result, the
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Company has recognized a full valuation allowance against its deferred tax assets of $8.2 million, resulting in a net deferred tax liability of $3.2 million. As of December 31, 2022, the Company had recorded a net deferred tax liability of $3.3 million, primarily attributable to its NOLs generated in the current year and prior periods, net of temporary differences primarily related to deprecation. The net deferred tax liability is recognized on the consolidated balance sheet within Other Liabilities. The Company’s NOLs will expire in 2038 through 2042 for state tax purposes and will not expire for federal tax purposes. As of March 31, 2023, and December 31, 2022, the Company had deferred tax assets attributable to NOL carryforwards for federal income tax purposes of $6.9 million and $6.3 million, respectively, and NOL carryforwards for state income tax purposes of $1.4 million and $1.0 million, respectively. The Company recorded a valuation allowance of $7.3 million against the deferred tax asset in 2022. As of March 31, 2023, the tax years 2019 through 2023 remain subject to examination by the U.S. Internal Revenue Service (“IRS”) and various state tax jurisdictions.
The CARES Act contains numerous income tax provisions, such as temporarily relaxing limitations on the deductibility of interest expense, accelerating depreciable lives of certain qualified building improvements, and allowing for NOL’s arising in tax years beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the preceding 5-year periods. In addition, for tax years beginning prior to 2021, the CARES Act removed the 80% absorption limitation previously enacted under the Tax Cuts and Jobs Act of 2017. The income tax aspects of the CARES Act are not expected to have a material impact on the Company’s financial statements.
7. RELATED PARTY TRANSACTIONS
Legendary Capital REIT III, LLC— Substantially all of the Company’s business is managed by the Advisor and its affiliates, pursuant to the Advisory Agreement. The Advisor is owned by Corey R. Maple and Norman H. Leslie. The Company has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services. The Company reimburses the Advisor and its affiliates, at cost, for certain expenses incurred on behalf of the Company, as described in more detail below. The Advisory Agreement has a term of 10 years, ending in December 2028.
The Advisor earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor will also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing, and a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, and real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty amount, payable on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B Limited Partnership Unit (“Series B LP Unit”) holders) have received a 6% cumulative, but not compounded, return per annum.
Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements. In years other than the year of liquidation, after the Company’s common stockholders have received a 6% cumulative but not compounded return on their original capital contributions, the Advisor receives distributions equal to 5% of the total distributions made. In the year of liquidation, termination, merger or other cessation of the general partner, or the liquidation of the Operating Partnership, holders of the Series B LP Units shall be distributed an amount equal to 5% of the limited partners’ capital contributions after the common stockholders and the limited partners have received a return of their original capital contributions plus a 6% cumulative but not compounded return. In the year of liquidation, termination, merger or other cessation of the general partner, or the liquidation of the Operating Partnership holders of the Series B LP Units shall also be distributed an amount equal to 20% of the net proceeds from the sale of the properties, after the common stockholders
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and the limited partners have received a return of their original capital contributions plus a 6% cumulative but not compounded return from all distributions.
The Advisor and its affiliates may be reimbursed by the Company for certain organization and offering expenses in connection with the Company’s securities offerings, including legal, printing, marketing and other offering related costs and expenses. Following the termination of the Offering, the Advisor will reimburse the Company for any such amounts incurred by the Company in excess of 15% of the gross proceeds of the Offering. In addition, the Company may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to the Company, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.
Fees and reimbursements earned and payable to the Advisor and its affiliates, for the three months ended March 31, 2023 and 2022, were as follows:
| | | | | | |
| | Incurred | ||||
| | For the Three Months Ended March 31, | ||||
| | 2023 | | 2022 | ||
Fees: | | |
|
| |
|
Acquisition fees | | $ | — | | $ | 681,317 |
Financing fees | |
| — | |
| 841,421 |
Asset management fees | |
| 613,742 | |
| 409,762 |
| | $ | 613,742 | | $ | 1,932,500 |
| | | | | | |
Reimbursements: | | |
|
| |
|
Offering costs | | $ | 384,190 | | $ | 598,596 |
General and administrative | |
| 634,447 | |
| 834,484 |
Sales and marketing | |
| 34,672 | |
| 71,451 |
Acquisition costs | | | 14,726 | | | 21,178 |
| | $ | 1,068,035 | | $ | 1,525,709 |
For the three months ended March 31, 2023, the Operating Partnership recorded distributions payable to the Advisor in the amount of $88,992 in connection with the Advisor’s ownership of Series B LP Units. For the three months ended March 31, 2022, the Operating Partnership recorded distributions payable to the Advisor in the amount of $78,230. As of March 31, 2023 and December 31, 2022, the Company had distributions payable to the Advisor in the amount of $417,609 and $334,417, respectively. For the three months ended March 31, 2023 and 2022, the Company paid distributions in the amount of $10,031 and $10,031, respectively, to Corey Maple and Norman Leslie in connection with their ownership of 57,319 shares each, of the Company’s common stock.
The members of the Advisor personally guaranty certain loans of the Company and may receive a guarantee fee of up to 1.0% per annum of the guaranty amount. As of March 31, 2023, Corey Maple, is a guarantor of the Company’s loans secured by the hotel properties located in Prattville, Alabama, Southaven, Mississippi, and Fargo, North Dakota, which had original loan amounts of $9.6 million, $13.5 million, and $7.4 million, respectively, is a guarantor of 50% of the loan secured by the Houston Property, which had an original loan amount of $13.9 million, is a guarantor of 50% of the loan secured by the Wichita Property, is a guarantor of the new loan secured by the Fort Collins Property, which had an original loan amount of $11.2 million, and is a guarantor of the Company’s $5.0 million line of credit which is secured by the hotel properties located in Cedar Rapids, Iowa and Eagan, Minnesota, and 100,000 Common LP Units of Lodging Fund REIT III OP, LP. Mr. Maple is also a guarantor of the loan secured by the El Paso University Property, which had an original principal loan amount of $14.4 million. Norman Leslie is a guarantor of the Company’s loan secured by the Company’s hotel property in Pineville, North Carolina, which had an original loan amount of $9.3 million. For the three months ended March 31, 2023 and 2022, the Company accrued guarantee fees in the amount of $38,317 and $39,278 respectively to each Mr. Maple and Mr. Leslie. The total amount accrued of $1,018,391 remained unpaid at March 31, 2023 and is included in Due to related parties on the accompanying consolidated balance sheet. See Note 11, “Subsequent Events,” for a description of additional guarantees entered into subsequent to March 31, 2023.
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As of March 31, 2023 and December 31, 2022, the Company had amounts due and payable to the Advisor and its affiliates of $6,902,260 and $5,612,134, respectively, which is included in Due to related parties on the accompanying consolidated balance sheets.
NHS, LLC dba National Hospitality Services — NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. NHS provides property management and hotel operations management services for the Company’s hotel properties, pursuant to individual management agreements. The agreements have an initial term expiring on December 31st of the fifth full calendar year following the effective date of the agreement, which automatically renews for a period of five years on each successive five-year period, unless terminated in accordance with its terms.
NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties, equal to up to 4% of gross revenue. NHS may also earn an accounting fee of $14.00 per room for accounting services, payable monthly, and an administrative fee equal to 0.60% of gross revenues for administrative and other services. The Company reimburses NHS for certain costs of operating the properties incurred on behalf of the Company. All reimbursements are paid to NHS at cost.
NHS also earns a flat fee of $5,000 per hotel property for due diligence services, including analyzing, evaluating, and reporting on documentation and information received by sellers or contributors during the period of due diligence. Such fee is waived if, upon acquisition by us, NHS is selected as the management company for the hotel property. NHS is also reimbursed for actual out-of-pocket costs incurred in providing the due diligence services. See Note 11 “Subsequent Events” for an additional transaction with NHS occurring subsequent to March 31, 2023.
On March 6, 2023, the Company entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. The NHS Loan requires the payment of monthly interest beginning on April 6, 2023, with all outstanding principal and interest amounts being due and payable at maturity on July 6, 2023. The NHS Loan has a fixed interest rate of 7.0% per annum. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership.
As of March 31, 2023, there was a $600,000 balance outstanding on the NHS Loan. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments to the NHS Loan subsequent to March 31, 2023.
Fees and reimbursements earned by NHS for the three months ended March 31, 2023 and 2022, and fees and reimbursements payable to NHS as of March 31, 2023 and December 31, 2022, were as follows:
| | | | | | | | | | | | |
| | Incurred | | Payable as of | ||||||||
| | For the Three Months Ended March 31, | | March 31, | | December 31, | ||||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Fees: | | |
| | | |
| |
| | | |
Management fees | | $ | 224,591 | | $ | 183,810 | | $ | 131,335 | | $ | 145,733 |
Administrative fees | |
| 26,947 | |
| 30,981 | |
| 16,710 | |
| 22,791 |
Accounting fees | |
| 46,280 | |
| 38,150 | |
| 29,094 | |
| 31,164 |
| | $ | 297,818 | | $ | 252,941 | | $ | 177,139 | | $ | 199,688 |
| | | | | | | | | | | | |
Reimbursements | | $ | 272,800 | | $ | 191,890 | | $ | 179,790 | | $ | 143,009 |
One Rep Construction, LLC (“One Rep”) — One Rep is a related party through common management and ownership, as Corey Maple, Norman Leslie, and David Ekman, each hold a 33.33% ownership interest in One Rep. One Rep is a construction management company which provided construction management services to the Company during 2023 and 2022 related to the renovation construction activities at certain hotel properties. For the services provided, One Rep is paid a construction management fee equal to 6% or 7% of the total project costs. The Company reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost. For the three months ended
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March 31, 2023 and 2022, the Company incurred $110,299 and $10,406 of construction management fees and reimbursements payable to One Rep, respectively. As of March 31, 2023 and December 31, 2022, the amounts outstanding and due to One Rep were $48,216 and $33,947, respectively, which is included in due to related parties on the accompanying consolidated balance sheets.
Legendary A-1 Bonds, LLC (“A-1 Bonds”) — A-1 Bonds is an affiliate of the Advisor which is owned by Mr. Leslie a director and executive officer of the Company and principal of the Advisor and Mr. Maple a director of the Company and principal of the Advisor. During the three months ended March 31, 2023, A-1 Bonds made no new loans to subsidiaries of the Company. During the year ended December 31, 2022, A-1 Bonds made loans with an aggregate principal amount of $42.5 million to subsidiaries of the Company secured by 4 hotel properties, of which $28.2 million was subsequently paid off prior to the date of this filing. On August 9, 2022, the Company entered into a $5.0 million revolving line of credit with A-1 Bonds, LLC (the “A-1 Revolving Line of Credit”). The A-1 Revolving Line of Credit requires monthly payments of interest only beginning September 1, 2022, with all outstanding principal and interest amounts being due and payable at maturity on December 31, 2022. On January 12, 2023, the A-1 Revolving Line of Credit was amended to increase the line of credit to $10.0 million, increased the number of Common LP Units of the Operating Partnership securing the A-1 Revolving Line of Credit to 1,000,000 unissued Common LP Units and extended the maturity date to December 31, 2023. The A-1 Revolving Line of Credit has a fixed interest rate of 7.00% per annum. Outstanding amounts under the A-1 Revolving Line of Credit may be prepaid in whole or in part without penalty. As of March 31, 2023, there was a $9,240,000 balance outstanding on the A-1 Revolving Line of Credit. See Note 4, “Debt - Lines of Credit & Loans”. See Note 11, “Subsequent Events,” for a description of amendments to the A-1 Revolving Line of Credit occurring subsequent to March 31, 2023 and a description of new loans entered into with A-1 Bond subsequent to March 31, 2023.
8. FRANCHISE AGREEMENTS
As of March 31, 2023 and December 31, 2022, all of the Company’s hotel properties were operated under franchise agreements with initial terms of 10 to 18 years. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee of 5% to 6% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs. Certain hotels are also charged a program fee of generally between 3% and 4% of room revenue. The Company paid an initial fee of $50,000 to $175,000 at the time of entering into each franchise agreement which is being amortized over the term of each agreement.
9. STOCKHOLDERS’ EQUITY
The Company is authorized to issue 900,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each share of common stock entitles the holder 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. The Interval Common Stock described below do not have voting rights. The rights of the holders of shares of preferred stock may be defined at such time any series of preferred shares are issued.
Common Stock
Initial Offering
On June 1, 2018, the Company commenced a private offering of shares of common stock, $0.01 par value per share, at a price of $10.00 per share, with a maximum offering of $100,000,000, which was increased to $150,000,000 in December 2021, to accredited investors only pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended.
Dividend Reinvestment Plan
The Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company, purchasing shares of common stock at 95% of the then-current share net asset value (“NAV”).
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Distributions
Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors.
| | | | | | | | | | | | | | | | | | |
| | | | | Distribution | | | | | | | | | | | Net Cash | ||
| | Distributions | | Declared Per | | Distributions Paid (3) | | Flows Provided By | ||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2023 | | $ | 1,779,846 | | $ | 0.175 | | $ | 1,424,802 | | $ | 395,820 | | $ | 1,820,622 | | $ | 255,083 |
| | $ | 1,779,846 | | $ | 0.175 | | $ | 1,424,802 | | $ | 395,820 | | $ | 1,820,622 | | $ | 255,083 |
| | | | | | | | | | | | | | | | | | |
| | | | | Distribution | | | | | | | | | | | Net Cash | ||
| | Distributions | | Declared Per | | Distributions Paid (3) | | Flows Provided By | ||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2022 | | $ | 1,556,308 | | $ | 0.175 | | $ | 933,464 | | $ | 567,240 | | $ | 1,500,704 | | $ | (3,245,454) |
| | $ | 1,556,308 | | $ | 0.175 | | $ | 933,464 | | $ | 567,240 | | $ | 1,500,704 | | $ | (3,245,454) |
(1) | Distributions for the period from January 1, 2022 through March 31, 2023 were payable to each stockholder as 100% in cash on a monthly basis. |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) | Distributions for the period from January 1, 2022 through March 31, 2023 were paid on a monthly basis. In general, distributions for all record dates of a given month during such period are paid on or about the tenth day of the following month. |
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable its stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The price at which the Company will repurchase shares is dependent on the amount of time the holder has owned the shares, and the then current value of the shares. There are several limitations on the Company’s ability to repurchase shares under the share repurchase plan, including, but not limited to, a limitation that during any calendar year, the maximum number of shares potentially eligible for repurchase can only be the number of shares that the Company could purchase with the amount of net proceeds from the sale of shares under the Company’s dividend reinvestment plan during the prior calendar year. The board of directors may, in its sole discretion, reject any request for repurchase and may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate its Share Repurchase Plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our Share Repurchase Plan. The Company repurchased no shares during the three months ended March 31, 2023. The Company repurchased 135,248 shares, pursuant to repurchase requests received during the year ended December 31, 2022, which represents an original investment of $1,352,472 for $1,347,319. As of March 31, 2023, all redemption proceeds had been paid. As of March 31, 2023, the Company had $1,931,014 available for eligible repurchases for the remainder of 2023.
Update to Offering Price and Share NAV
The Company’s board of directors approved a revised NAV of the Company’s assets as of December 31, 2022. As a result, the price per share of the Company’s common stock, $0.01 par value per share (each, a “Share”), in the Offering and the Share NAV were adjusted from $10.00 to $10.57 effective January 6, 2023. The issue price of the Common LP Unit and the Series T LP Unit of the Operating Partnership also increased to $10.57. The Offering price was determined by the board of directors taking into account appraisals of the Company’s real estate properties and other factors deemed relevant by the board of directors. The board of directors has not determined the NAV of the Company’s assets since December 31, 2022. As a result, the current Share NAV and Offering price per Share may not reflect an accurate estimation of the Company’s enterprise value. The Company makes no representations, whether express or implied, as to the value of the Shares offered in the Offering. In the event the Offering price per Share is increased or decreased, the number of Shares subject to the Offering will be adjusted to reflect such change and the maximum offering amount will remain unchanged.
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Interval Common Stock
Distributions
Holders of shares of Interval Common Stock will be entitled to receive, when and as authorized by the board of directors of the Company and declared by the Company, distributions at a rate equal to 86% of the distribution rate for the Company’s common stock as authorized by the board of directors and declared by the Company. Distributions on the Interval Shares may be paid in cash, capital stock of the Company or a combination of cash and capital stock of the Company as determined by the board of directors and will be paid at such times as distributions are paid to the holders of common stock.
Repurchase Plan
The board of directors has adopted a repurchase plan for the Interval Common Stock (the “Repurchase Plan”). The Repurchase Plan is generally available to holders of Interval Common Stock who have held their shares of Interval Common Stock (“Interval Shares”) for at least 1 year. The Repurchase Plan provides that so long as the Repurchase Reserve (defined below) exists, the Company will repurchase up to the lesser of (i) 5% of the aggregate value of the Interval Shares (“Interval Shares Value”) on the last day of the same calendar quarter of the preceding year and (ii) 5% of the Interval Shares Value on the last day of the preceding calendar quarter. After the Repurchase Reserve has been exhausted, the Company will limit repurchases of Interval Shares to repurchases that can be made with the net proceeds from the dividend reinvestment plan for the Interval Shares received in the prior calendar year up to the lesser of (i) 1.25% per calendar quarter and (ii) 5% per calendar year of the Interval Shares Value. The limitations described in this paragraph are referred to as the “Repurchase Limitations.”
The Company will establish a reserve (the “Repurchase Reserve”) of liquid assets in an amount equal to 20% of the aggregate gross proceeds from the Company’s private offering of Interval Shares, which will be comprised of cash and cash-like instruments, government securities, publicly traded REIT shares and other publicly traded securities (the “Reserve Assets”), but which is expected to primarily include publicly traded REIT shares. The Repurchase Reserve will be used solely to repurchase the Interval Shares. The board of directors may, but has no obligation to, increase the amount of the Repurchase Reserve at any time. The Company will have no obligation to restore any amounts resulting from a decline in value of the Reserve Assets. After the Repurchase Reserve has been exhausted, subject to the Repurchase Limitations, the Company will use only the net proceeds from the dividend reinvestment plan received in the prior calendar year to repurchase the Interval Shares. Subject to the Repurchase Limitations, on the applicable repurchase date, the Company will repurchase the Interval Shares timely submitted for repurchase for a price equal to the NAV per share of the Company’s common stock on such repurchase date as determined by the board of directors.
The board of directors may, upon 10 days’ written notice to the holders of Interval Shares, amend, suspend or terminate the Repurchase Plan at any time, and such amendment, suspension or termination may be implemented immediately. Notwithstanding the foregoing, the Repurchase Plan may not be terminated prior to the date the Repurchase Reserve is exhausted.
Interval Share Offering
The Company was offering up to 3,000,000 shares of Interval Common Stock in the Company’s ongoing private offering, which amount may be increased to up to 6,000,000 Interval Shares in the sole discretion of the board of directors. Except as otherwise provided in the offering memorandum, the initial purchase price for the Interval Shares is $10.00 per Interval Share, with Interval Shares purchased in the Company’s dividend reinvestment plan at an initial price of $9.50 per Interval Share. The Company’s board of directors allowed the Interval Share Offering to expire on March 31, 2022. The Company did not issue or sell any shares of Interval Common Stock
Non-Controlling Interests
As of March 31, 2023, the Operating Partnership had four classes of Limited Partner Units which included the Common LP Units, the Series B LP Units, the Series T LP Units and the GO Limited Units. The Series B LP Units are issued to the
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Advisor and entitle the Advisor to receive annual distributions and an incentive distribution based on the net proceeds received from the sale of the Projects (as defined below).
Non-Controlling Interest – Series T LP Units
The Series T LP Units are expected to be issued to persons who contribute their property interests in certain Projects to the Partnership in exchange for Series T LP Units. The Series T LP Units will have allocations and distributions as determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units, and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of the Series T LP Units at the time of conversion. As of March 31, 2023, the Company had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions.
Non-Controlling Interest – Series GO LP Units
Distributions
The holders of Series GO LP Units will not receive any distributions from the Operating Partnership until after they have held their Series GO LP Units for a period of 18 months. Thereafter, the Series GO Limited Partners will receive the same distributions payable to the holders of the Common LP Units and GP Units (together with the Series GO LP Units and Interval Units, the “Participating Partnership Units”), other than with respect to proceeds received upon the sale or exchange of a property which are not reinvested in additional properties.
Upon the sale of all or substantially all of the GP Units held by LF REIT III or any sale, exchange or merger of LF REIT III or the Operating Partnership (each, a “Termination Event”), or with respect to proceeds received upon the sale or exchange of a property which are not reinvested in additional properties, distributions will be made between the Series GO LP Units and the other Participating Partnership Units as follows: (i) first, to the Participating Partnership Units in proportion to their Partnership Units until the GP Units (the Common LP Units and the Interval Units) have received 70% of their original capital contributions (determined on a grossed-up basis) reduced by any prior distributions received in connection with the sale of a property in which the sale proceeds are not reinvested in additional properties; (ii) second, to the Participating Partnership Units in proportion to their Partnership Units until each Participating Partnership Unit has received a Participating Amount ($1.00 for any period after December 31, 2020, $2.00 for any period after December 31, 2021 and $3.00 for any period after December 31, 2022, determined as a singular determination and not a cumulative determination); (iii) third, to the Participating Partnership Units (other than the Series GO LP Units) in proportion to their Partnership Units until the GP Units have received any remaining unreturned original capital contributions; (iv) fourth, to the Series GO Limited Partners in proportion to their Series GO LP Units until the amount distributed to the Series GO Limited Partners per Series GO LP Unit is equal to the amount distributed to the Participating Partnership Units per Participating Partnership Unit (other than the Series GO Limited Partners) pursuant to (iii); and (v) thereafter, to the Participating Partnership Units in proportion to their Participating Partnership Units.
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $20,000,000, which may be increased to $30,000,000 in the sole discretion of LF REIT III as the General Partner of the Operating Partnership (the “GO Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. The Company’s board of directors terminated the GO Unit Offering as of February 14, 2022. The Company’s board of directors approved and ratified additional sales after February 14, 2022 in the GO Units Offering for sales which were pending as
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of that date. As of March 31, 2023, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received aggregate proceeds of $21.5 million.
Non-Controlling Interest – Series B LP Units
Distributions
Under the Operating Partnership Agreement, the Advisor, as the Series B Limited Partner, will receive from the Operating Partnership, distributions as follows: (a) for all years, an amount equal to 5.0% of the total of (i) the total distributions made to the Partners (other than the Series B Limited Partner) and (ii) the total distributions made to the Series B Limited Partner, after the Partners (other than the Series B Limited Partner) have received a 6.0% cumulative, but not compounded, return on their original capital contributions, and (b) for the year of liquidation or other cessation of the General Partner or the Partnership, an amount equal to 5.0% of the original capital contributions made by the Partners, after the Partners (other than the Series B Limited Partner) have received a return of their capital contributions plus a six percent (6%) cumulative, but not compounded return from all distributions.
Series B LP Unit Offering
As of March 31, 2023, the Operating Partnership has issued 1,000 Series B LP Units to the Advisor.
Non-Controlling Interest – Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2023, the Operating Partnership had issued and sold 612,100 Common LP Units, with a value of $10.57 per unit, in connection with the Northbrook Property and the El Paso Airport Property acquisitions.
10. COMMITMENTS AND CONTINGENCIES
Legal Matters —From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. After consulting with legal counsel, management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations, cash flows or financial condition, which would require accrual or disclosure of the contingency and possible range of loss, other than the matter described below.
On September 12, 2022, the Advisor and Corey R. Maple received a “Wells notice” from the SEC stating that the SEC staff had made a preliminary determination to recommend to the SEC that it bring an enforcement action against the Advisor and Mr. Maple alleging violations of securities laws in connection with the SEC’s investigation of the Company’s reimbursement of and financial accounting for certain expenses incurred by the Advisor as well as the adequacy of its disclosures related to those policies and practices. The Wells notice was neither a formal charge of wrongdoing nor a final determination that the Advisor or Mr. Maple has violated any law.
As of March 31, 2023, the Company was unable to estimate the cost of complying with the Wells notice or its outcome. The Advisor and Corey R. Maple agreed to a settlement with the SEC in connection with the action described above on August 28, 2023. See Note 11, “Subsequent Events.”
Property Acquisitions
The seller of the Pineville Property was entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income (“NOI”) for a selected 12-month period of time. At any time during the period beginning April 1, 2021 through the date of the final NOI determination (on or about April 30, 2023), the seller of the property could have made a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, was based on the excess of the property’s actual NOI over a base NOI for the applicable 12-month calculation period divided by the stated cap rate for such calculation period. As of March 31, 2023, no additional consideration had paid to the seller of the Pineville Property, and no election to receive the
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additional consideration had been made. As of the date of this filing, the period to elect to receive additional consideration has passed with no election being made.
In November 2019, the Company entered into a purchase agreement, to acquire three hotel properties in Pennsylvania, from a third party group of sellers (collectively, the “PA Sellers”), for $46.9 million plus closing costs, subject to adjustment as provided in the purchase agreement. The Company has deposited a total of $1.5 million into escrow as earnest money (the “Earnest Money”) pending the closing or termination of the purchase agreement. In July 2020, the Company and the PA Sellers exchanged written notices of default with one another in accordance with the terms of the purchase agreement. The notice from each party was based on allegations that the other party failed to perform its obligations under the purchase agreement. On October 27, 2020, the PA Sellers filed a lawsuit against Lodging Fund REIT III OP, LP in the Supreme Court of Pennsylvania alleging breach of the purchase agreement. The PA Sellers sought the full amount of the Earnest Money and recovery of fees and expenses incurred in bringing the lawsuit. The likelihood of any material loss in connection with the case could not be determined as of March 31, 2023. As a result, no amount was recorded related to this matter as of March 31, 2023, the Earnest Money remained in escrow and is included in restricted cash on the accompanying consolidated balance sheets. This litigation was resolved subsequent to March 31, 2023. See Note 11 “Subsequent Events.”
Contribution Agreements Entered into During the Three Months Ended March 31, 2023
On January 31, 2023, the Operating Partnership and CS Real Estate Holding LLC (the “College Station Voco Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “College Station Voco Contribution Agreement”), pursuant to which the College Station Voco Contributor agreed to contribute the 166-room Aggieland Boutique Hotel in College Station, Texas, which the Operating Partnership intends to convert into a Voco by IHG (the “College Station Voco Hotel Property”) to the Operating Partnership. The College Station Voco Contributor is not affiliated with the Company or Legendary Capital REIT III, LLC, the Company’s external advisor. The aggregate consideration for the College Station Voco Hotel Property under the College Station Voco Contribution Agreement is $18,500,000 plus closing costs, subject to adjustment as provided in the College Station Voco Contribution Agreement. The majority of the consideration consists of the assumption or refinancing by the Operating Partnership of existing debt secured by the College Station Voco Hotel Property. The remaining consideration consists of the issuance by the Operating Partnership of Series T Limited Units of the Operating Partnership and cash at closing. As required by the College Station Voco Contribution Agreement, the Operating Partnership will deposit $50,000 into escrow as earnest money pending the closing or termination of the College Station Voco Contribution Agreement. Except in certain circumstances described in the College Station Voco Contribution Agreement, if the Operating Partnership fails to perform its obligations under the College Station Voco Contribution Agreement, it will forfeit the earnest money. The Company terminated the College Station Voco Contribution Agreement subsequent to March 31, 2023. See Note 11, “Subsequent Events.”
11. SUBSEQUENT EVENTS
A-1 Line of Credit Amendments
On April 18, 2023, the Operating Partnership, the Company and A-1 Bonds entered into a Change in Terms Amendment in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $13.3 million and increased the number of Common LP Units of the Operating Partnership securing the A-1 Line of Credit to 1,330,000 Common LP Units.
On March 27, 2024, the Operating Partnership, the Company and A-1 Bonds entered into a Fourth Amendment to the Revolving Line of Credit Loan Agreement (the “Fourth Amendment”) in connection with the A-1 Line of Credit. The Fourth Amendment extended the maturity date of the A-1 Line of Credit to December 31, 2024 and increased the A-1 Line of Credit to $15.5 million. Through the Fourth Amendment, the A-1 Line of Credit is secured by 1,550,000 unissued common limited partnership units of the Operating Partnership. In consideration of the extension of the maturity date, the Operating Partnership paid to the A-1 Lender an extension fee in the amount of $133,000. The Fourth Amended and Restated Promissory Note (the “Amended Promissory Note”) entered into by the Operating Partnership in connection with the Fourth Amendment provides that (i) the interest rate on the A-1 Line of Credit is increased to 14.5% per annum, and (ii) the A-1 Lender will receive an exit fee equal to 1.5% of the full amount due under the Line of Credit upon the earlier
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of (a) full repayment (whether on the maturity date or prior thereto or any other date), and (b) the maturity date. No other changes were made to the A-1 Line of Credit as a result of the Fourth Amendment or the Amended Promissory Note.
As of August 23, 2024, $15.1 million is outstanding under the A-1 Line of Credit.
Western Line of Credit Amendments
On April 15, 2023, the Operating Partnership, the Company and Corey Maple entered into a Change in Terms Amendment in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 15, 2023 to June 15, 2023.
On July 31, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from June 15, 2023 to September 15, 2023. This amendment also added an additional 200,000 limited partnership units of the Operating Partnership as collateral for the loan, for a total of 300,000 limited partnership units.
On October 9, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement, effective as of October 4, 2023 in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from September 15, 2023 to November 15, 2023. This amendment also reduced the maximum credit to $4.67 million and required the Operating Partnership to pay Western State Bank a principal curtailment of $0.3 million.
On December 27, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from November 15, 2023 to April 30, 2024.
On May 10, 2024, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 30, 2024 to June 5, 2024. In addition, the Operating Partnership was required to make a principal payment in the amount of $250,000.
The Company and Western State Bank are working to finalize an extension of the Western Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
As of August 23, 2024, $4.2 million is outstanding under the Western Line of Credit.
NHS Loan
On December 28, 2023, the Company entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to January 31, 2024. This amendment also provided that in lieu of monthly interest payments, all accrued interest shall be due and payable on the maturity date with the full principal balance.
On August 21, 2024, the Company entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to September 30, 2025.
As of August 23, 2024, $0.6 million is outstanding under the NHS Loan.
Fort Collins Loan Refinancing
On April 18, 2023, pursuant to the Loan Agreement, dated as of April 18, 2023 (the “New Fort Collins Loan Agreement”), LF3 RIFC, LLC and LF3 RIFC TRS LLC (collectively, the “Fort Collins Borrower”), subsidiaries of the Operating Partnership entered into a new $11.2 million loan with Access Point Financial, LLC (“Access Point”), which is secured by the Fort Collins Property (the “New Fort Collins Loan”). Access Point is not affiliated with the Company or the Advisor. The New Fort Collins Loan is evidenced by a promissory note and has a variable interest rate per annum equal to 30-day
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secured overnight financing rate plus 6.25%. The New Fort Collins Loan matures May 4, 2025, with the option for up to three one-year extensions if requirements are met, including certain required debt service coverage ratios and the payment of an extension fee. The New Fort Collins Loan requires monthly interest-only payments through May 4, 2025, followed by monthly payments of principal and interest through any extensions, with the outstanding principal and interest due at maturity. The Fort Collins Borrower has the right to prepay up to 10% of the outstanding principal amount of the New Fort Collins Loan on certain permitted prepayment dates with a 10-day notice. If prepaid during the first 25 months of the initial term, such a prepayment would include a prepayment fee equal to the sum of 24 months of interest payments that, but for the prepayment, would have been due and payable on the prepaid principal amount had a prepayment not occurred. When the Fort Collins Borrower pays the entire remaining principal balance, whether prepaid or on maturity, the Fort Collins Borrower will incur an exit fee of $112,000. The New Fort Collins Loan includes cross-default provisions such that a default under certain other agreements of the Fort Collins Borrower, the Guarantors described below and the property manager of the Fort Collins Property constitute a default under the New Fort Collins Loan. The Fort Collins Borrower used the proceeds of the New Fort Collins Loan to repay the original $11.5 million loan with A-1 Bonds which was secured by the Fort Collins Property, pursuant to a Loan Agreement, dated as of August 3, 2022. The original loan was evidenced by three promissory notes in the amounts of $10,298,535 (“Tranche 1”), $700,000 (“Tranche 2”) and $501,465 (“Tranche 3”) and had a fixed interest rate of 7.0% per annum. On April 18, 2023, the proceeds of the New Fort Collins Loan were used to refinance the original loan, and the outstanding obligations under Tranche 1 were repaid in full and under Tranche 2 were forgiven. A 1.75% exit fee was paid on Tranche 1, and no penalty was incurred on Tranche 1 or Tranche 2. Tranche 3 remains an ongoing obligation, no longer secured by the Fort Collins Property, under the terms of the original loan and Tranche 3 promissory note. All guaranties in connection and collateral with respect to the original loan and Tranche 1, Tranche 2 and Tranche 3 promissory notes have been terminated or released, and all commitments with respect to the original loan and Tranche 1 and Tranche 2 promissory notes have been terminated or released.
Pursuant to the New Fort Collins Loan Agreement, Corey Maple and Norman Leslie entered into a Guaranty with Access Point to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, and the performance of the agreements of the Fort Collins Borrower contained in the loan documents.
El Paso HI First Loan Modification
LF3 El Paso, LLC and LF3 El Paso TRS LLC (collectively, the “El Paso HI Borrower”), subsidiaries of the Operating Partnership, entered into a $7.9 million loan (the “Holiday Inn El Paso Loan”) with EPH Development Fund LLC (“EPH”), secured by the El Paso HI Property, pursuant to a loan agreement, dated as of May 12, 2021. The Holiday Inn El Paso Loan had a maturity date of May 15, 2023.
On May 15, 2023, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a first loan modification agreement with EPH, which extended the maturity date to May 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay down $300,000 of the Holiday Inn El Paso Loan, modifying the principal outstanding balance to be $7.6 million. In addition, as a condition to the extension, the El Paso HI Borrower agreed to deposit $819,674 into an FF&E Reserve account held by EPH.
As an additional condition to the extension, the Operating Partnership and HD Sunland Park Property LLC (the “El Paso HI Contributor”) agreed to amend the Amended and Restated Contribution Agreement, dated as of May 12, 2021, to allow the Operating Partnership to offer the El Paso HI Contributor of the El Paso HI Property an adjustment in the conversion of Series T Limited Units to Common Limited Units or other financial adjustments if the Operating Partnership determines that the El Paso HI Contributor’s extension of the determination of the Series T value to 48 months after issuance to the El Paso HI Contributor may result in actual or possible financial or other loss or litigation.
El Paso HI Second Loan Modification
On May 15, 2024, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a second loan modification agreement with EPH, which extended the maturity date to November 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay a $76,000 extension fee. With the second modification agreement, the El Paso HI Borrower is entitled to an additional six-month extension, if requested. In addition, the Holiday Inn El Paso Loan has a new interest rate of 9.00%.
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Lakewood Loan Extension, Termination and New Loans
As previously disclosed, the subsidiaries of the Operating Partnership and A-1 Bonds entered into a loan agreement in the amount of $12.6 million secured by the Lakewood Property (the “Original Lakewood Loan”). Per the terms of the agreement, the subsidiaries of the Operating Partnership executed the option to extend the maturity date of the loan to March 28, 2024.
On March 27, 2024, the subsidiaries of the Operating Partnership entered into a new $12.0 million loan with Bluebird Credit EM LLC (the “New Lakewood Loan”) secured by the Lakewood Property. The New Lakewood Loan is evidenced by a promissory note and has an adjustable interest rate based on the SOFR Index plus 7.0% (increasing to 7.5% during the extension of the loan), with an initial interest rate of 12.327%; provided, however, in no event will the interest rate be adjusted to less than 11.0%. The maturity date of the New Lakewood Loan is October 5, 2025, with an option to extend the term for an additional 6 months through April 6, 2026, upon payment of a $60,000 extension fee and satisfaction of certain other conditions. The New Lakewood Loan requires monthly interest-only payments throughout the term, with the outstanding principal and interest due at maturity. The Borrower has the right to prepay the New Lakewood Loan in whole but not in part at any time, subject to a 30-day prior notice to the New Lakewood Lender and payment of an exit fee equal to $120,000 and a prepayment premium calculated pursuant to the terms of the New Lakewood Loan Agreement.
Pursuant to the New Lakewood Loan Agreement, Norman Leslie, a director and executive officer of the Company, entered into a Guaranty (the “New Lakewood Guaranty”) with the New Lakewood Lender to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, as further described in the New Lakewood Guaranty.
Additionally, on March 27, 2024, the Operating Partnership entered into a new loan in an amount up to $4,896,801 (the “New A-1 Lakewood Loan”) with the A-1 Lender, an affiliate of the Company’s Advisor. The New A-1 Lakewood Loan is evidenced by a promissory note and has a fixed interest rate of 14.5% per annum and a maturity date of March 27, 2026. The New A-1 Lakewood Loan requires monthly interest-only payments throughout the term, with the outstanding principal and interest due at maturity. The Operating Partnership has the right to prepay the New A-1 Lakewood Loan in whole or in part without charge, penalty or premium. The A-1 Lender received an origination fee of $73,452 on the effective date of the New A-1 Lakewood Loan and will receive an exit fee equal to 1.5% of the full amount of the New A-1 Lakewood Loan upon the earlier of (a) full repayment (whether on the maturity date or prior thereto or any other date), and (b) the maturity date. Pursuant to a Pledge and Security Agreement entered into by the Company with the A-1 Lender, the New A-1 Lakewood Loan is secured by 489,680 unissued common limited partnership units of the Operating Partnership.
On March 27, 2024, the proceeds from the New Lakewood Loan and the New A-1 Lakewood Loan were used to refinance the Original Lakewood Loan, and the outstanding obligations under Original Lakewood Loan were repaid in full. At the closing of the refinancing, an unpaid extension fee in the amount of $138,450 was paid to the A-1 Lender under the Original Lakewood Loan which was due but not paid in connection with the prior March 2023 extension of the Original Lakewood Loan. All guaranties in connection and collateral with respect to the Original Lakewood Loan have been terminated or released, and all commitments with respect to the Original Lakewood Loan have been terminated or released.
SEC Settlement
As mentioned in Note 10 “Commitments and Contingencies”, on August 28, 2023, the Advisor and Corey R. Maple agreed to a settlement with the SEC, in which the Advisor agreed to pay disgorgement of $463,900 to the Company.
Creation of Series GO II LP Units
April 7, 2023, the Operating Partnership established the terms of a new series of limited partner units designated as Series Growth & Opportunity II Limited Partner Units (“Series GO II LP Units”) to be issued from time to time. The Operating Partnership commenced a separate offering for the purchase of the Series GO II LP Units at a purchase price equal to 75% of the Share NAV. The purchase price based on the current Share NAV is $7.93 per Series Go II LP Unit. The Series GO II LP Units will be specially allocated all Net Income (including book-up income) in proportion to the 25% issue price shortfall, until the positive Capital Account balance of each Series GO II LP Unit is equal to the Share NAV. As a result,
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the issuance of Series GO II LP Units will be dilutive to the General Partner Units and therefore, to the shares of common stock of the Company. See “—GO II Unit Offering” below for status of the offering.
Resolution of Litigation with PA Sellers
Effective November 20, 2023, the Operating Partnership and Central PA Equities 17, LLC, Central PA Equities 19, LLC, and Springwood – FHP LP (collectively, the “PA Seller”) enter into a settlement agreement and general release of all claims (the “Settlement Agreement”) regarding the asset purchase agreement dated November 22, 2019 (as amended, the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Operating Partnership agreed to acquire the 108-room Fairfield Inn & Suites by Marriott hotel in Hershey, Pennsylvania, the 107-room Home2 Suites by Hilton hotel in York, Pennsylvania, and the 100-room Hampton Inn & Suites by Hilton hotel in York, Pennsylvania (collectively, the “Hotel Properties”) from the PA Seller for $46.9 million plus closing costs, subject to adjustment as provided in the Purchase Agreement. As required by the Purchase Agreement, the Operating Partnership deposited a total of $1.5 million into escrow as earnest money pending the closing or termination of the Purchase Agreement (the “Earnest Money Deposit”).
Pursuant to the Settlement Agreement, the PA Seller received $700,000 of the Earnest Money Deposit, and the Operating Partnership received $800,000 of the Earnest Money Deposit. Accrued interest on the Deposit was split between the parties with 7/15 of the total amount being paid to the PA Seller and 8/15 of the total amount being paid to the Operating Partnership. Incurred fees of the Escrow Agent were paid by the Operating Partnership in accordance with the Settlement Agreement. The Operating Partnership and all related entities are released and forever discharged from all claims related to or arising from the Purchase Agreement.
Distributions Paid
On April 4, 2023, the Company declared cash distributions totaling $432,563 and DRIP distributions totaling $132,987, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $93,696 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates March 1 through March 31, 2023 to holders of record on each calendar day of such period. The distribution declared for March 2023 was paid on April 10, 2023.
On May 9, 2023, the Company declared cash distributions totaling $441,332 and DRIP distributions totaling $125,684, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $102,500 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates April 1 through April 30, 2023 to holders of record on each calendar day of such period. The distribution declared for April 2023 was paid on May 10, 2023.
On June 12, 2023, the Company declared cash distributions totaling $441,771 and DRIP distributions totaling $126,101, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $113,949 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates May 1 through May 31, 2023 to holders of record on each calendar day of such period. The distribution declared for May 2023 was paid on June 15, 2023.
On July 10, 2023, the Company declared cash distributions totaling $442,403 and DRIP distributions totaling $127,081, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $125,067 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates June 1 through June 30, 2023 to holders of record on each calendar day of such period. The distribution declared for June 2023 was paid on July 14, 2023.
On August 8, 2023, the Company declared cash distributions totaling $443,331 and DRIP distributions totaling $130,236, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $138,225 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock
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in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates July 1 through July 31, 2023 to holders of record on each calendar day of such period. The distribution declared for July 2023 was paid on August 11, 2023.
On September 11, 2023, the Company declared cash distributions totaling $451,509 and DRIP distributions totaling $123,716, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $160,212 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates August 1 through August 31, 2023 to holders of record on each calendar day of such period. The distribution declared for August 2023 was paid on September 15, 2023.
On October 24, 2023, the Company declared cash distributions totaling $451,660 and DRIP distributions totaling $124,848, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $175,525 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates September 1 through September 30, 2023 to holders of record on each calendar day of such period. The distribution declared for September 2023 was paid on October 27, 2023.
On November 7, 2023, the Company declared cash distributions totaling $473,526 and DRIP distributions totaling $103,722, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $181,841 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates October 1 through October 31, 2023 to holders of record on each calendar day of such period. The distribution declared for October 2023 was paid on November 20, 2023.
On December 6, 2023, the Company declared cash distributions totaling $471,485 and DRIP distributions totaling $106,956, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,164 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates November 1 through November 30, 2023 to holders of record on each calendar day of such period. The distribution declared for November 2023 was paid on December 29, 2023.
On January 16, 2024, the Company declared cash distributions totaling $471,271 and DRIP distributions totaling $108,117, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,262 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates December 1 through December 31, 2023 to holders of record on each calendar day of such period. The distribution declared for December 2023 was paid on March 29, 2024.
On April 22, 2024, the Company declared cash distributions totaling $237,857 and DRIP distributions totaling $52,904, cash distributions totaling $17,853 for Common Limited Units of the Operating Partnership and cash distributions totaling $91,131 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.000958905 per share of Common Stock in the Company, equivalent to an annualized rate of three and one half percent (3.50%) per share based on the Company’s initial offering price of $10.00, for daily record dates March 1 through March 31, 2024 to holders of record on each calendar day of such period. The distribution declared for March 2024 was paid on April 25, 2024.
On May 20, 2024, the Company declared cash distributions totaling $271,667 and DRIP distributions totaling $60,693, cash distributions totaling $20,403 for Common Limited Units of the Operating Partnership and cash distributions totaling $104,150 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001095890 per share of Common Stock in the Company, equivalent to an annualized rate of four percent (4.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates April 1 through April 30, 2024 to holders of record on each calendar day of such period. The distribution declared for April 2024 was paid on May 23, 2024.
On June 18, 2024, the Company declared cash distributions totaling $311,181 and DRIP distributions totaling $62,992,
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cash distributions totaling $22,954 for Common Limited Units of the Operating Partnership and cash distributions totaling $117,169 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001232877 per share of Common Stock in the Company, equivalent to an annualized rate of four and one half percent (4.50%) per share based on the Company’s initial offering price of $10.00, for daily record dates May 1 through May 31, 2024 to holders of record on each calendar day of such period. The distribution declared for May 2024 was paid on June 20, 2024.
On July 19, 2024, the Company declared cash distributions totaling $345,775 and DRIP distributions totaling $70,312, cash distributions totaling $25,504 for Common Limited Units of the Operating Partnership and cash distributions totaling $130,186 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001366120 per share of Common Stock in the Company, equivalent to an annualized rate of five percent (5.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates June 1 through June 30, 2024 to holders of record on each calendar day of such period. The distribution declared for June 2024 was paid on July 23, 2024.
On August 20, 2024, the Company declared cash distributions totaling $356,690 and DRIP distributions totaling $59,688, cash distributions totaling $25,504 for Common Limited Units of the Operating Partnership and cash distributions totaling $130,186 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001366120 per share of Common Stock in the Company, equivalent to an annualized rate of five percent (5.00%) per share based on the Company’s initial offering price of $10.00, for daily record dates July 1 through July 31, 2024 to holders of record on each calendar day of such period. The distribution declared for July 2024 remained unpaid at the time of this filing.
Properties Under Contract
On April 23, 2023, the Operating Partnership terminated the Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement entered into on August 16, 2022 in connection with the contribution of the 276-room Sheraton Hotel Albuquerque Airport in Albuquerque, New Mexico. Subsequent to December 31, 2022 and prior to termination, the Operating Partnership deposited an additional $150,000 into escrow as earnest money pending the closing or termination of the Sheraton Albuquerque Airport Contribution Agreement. Upon termination, $300,000 of the total earnest money deposit was returned to the Operating Partnership.
As mentioned in Note 10 “Commitments and Contingencies”, the Company terminated the College Station Voco Contribution Agreement on June 13, 2023. The earnest money deposit was fully refunded to the Operating Partnership.
On April 15, 2024, the Operating Partnership and Stow Hotel Associates, LLC (the “Stow Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Hampton Stow Contribution Agreement”) pursuant to which the Stow Contributor agreed to contribute the 84-room Hampton Stow hotel in Stow, Ohio to the Operating Partnership. The aggregate consideration for the Hampton Stow under the Hampton Stow Contribution Agreement is $10.2 million, with a majority of the consideration consisting of the assumption by the Operating Partnership of existing debt secured by the Hampton Stow and the remaining consideration consisting of the issuance by the Operating Partnership of Series T LP Units of the Operating Partnership. As required by the Hampton Stow Contribution Agreement, the Operating Partnership deposited $50,000 into an escrow as earnest money pending the closing or termination of the Hampton Stow Contribution Agreement. Except in certain circumstances described in the Hampton Stow Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Hampton Stow Contribution Agreement, it will forfeit the earnest money.
On April 15, 2024, the Operating Partnership and the Stow Contributor entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Staybridge Stow Contribution Agreement”) pursuant to which the Stow Contributor agreed to contribute the 92-room Staybridge Suites Akron-Stow-Cuyahoga Falls hotel in Stow, Ohio to the Operating Partnership. The aggregate consideration for the Staybridge Stow under the Staybridge Stow Contribution Agreement is $10.9 million, with a majority of the consideration consisting of the assumption by the Operating Partnership of existing debt secured by the Staybridge Stow and the remaining consideration consisting of the issuance by the Operating Partnership of Series T LP Units of the Operating Partnership and cash at closing. As required by the Staybridge Stow Contribution Agreement, the Operating Partnership deposited $50,000 into an escrow as earnest money pending the closing or termination of the Staybridge Stow Contribution Agreement. Except in certain circumstances described in the
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Staybridge Stow Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Staybridge Stow Contribution Agreement, it will forfeit the earnest money.
Pineville Property Sold and Loan Repaid
On July 23, 2024, the Company sold the Pineville Property to an unaffiliated purchaser for $8,850,000 in cash, subject to customary prorations and adjustments. The mortgage loan secured by the Pineville Property was repaid in full at closing from sale proceeds. All guaranties in connection with such loan and collateral with respect to such loan have been terminated or released, and all commitments with respect to such loan have been terminated or released.
Status of the Offering
Our board of directors extended the term of the Offering to May 31, 2025. As of the date of this filing, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold 10,284,915 shares of common stock, including 1,203,059 shares issued pursuant to the DRIP, resulting in the receipt of gross offering proceeds of $100.6 million.
Series T LP Units
The Operating Partnership did not issue any Series T LP Units subsequent to the three months ended March 31, 2023 through the date of this filing.
Common LP Units
The Operating Partnership did not issue any Common LP Units subsequent to the three months ended March 31, 2023 through the date of this filing.
GO II Unit Offering
On April 7, 2023, the Operating Partnership commenced an offering of Series GO II LP Units. On April 17, 2024, our Board of Directors extended the term of the GO II Unit Offering to March 31, 2025. The Operating Partnership has issued and sold 363,426 Series Go II LP Units, resulting in the receipt of gross offering proceeds of $2.7 million as of the date of this filing.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the terms “we,” “our,” “us” and “the Company” refer to Lodging Fund REIT III, Inc., a Maryland corporation, Lodging Fund REIT III OP, LP a Delaware limited partnership, which we refer to as the “Operating Partnership,” Lodging Fund REIT III TRS, Inc., a Delaware corporation, which we refer to as the “Master TRS” and their subsidiaries, except where the context otherwise requires. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of the Company and the notes thereto.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “should,” “expect,” “could,” “intend,” “anticipate,” “plan,” “estimate,” “believe,” “potential,” “continue,” “seek” or similar expressions. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth and availability of funds, and are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these statements 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 accurately predict and many of which are beyond our control. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
Summary Risk Factors
Our business faces significant risks and uncertainties. Set forth below is a summary list of the principal risk factors as of the date of the filing of this Quarterly Report on Form 10-Q that could materially and adversely affect our business, financial condition, results of operations and cash flows. This summary highlights certain of the risks and uncertainties but does not address all of the risks that we face which could cause our actual results to differ materially from those presented in our forward-looking statements.
Risks Related to Our Business
● | Our business strategy depends significantly on achieving revenue and net income growth from anticipated increases in demand for hotel rooms, which will be adversely affected by weak economic conditions, high rates of inflation and travel-related concerns, and risks associated with the ongoing COVID-19 pandemic and other possible future pandemics and similar outbreaks. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
● | We have a limited operating history and may not be successful at operating a real estate investment trust, or REIT, which may adversely affect our ability to make distributions to our stockholders. |
● | Our advisor, Legendary Capital REIT III, LLC (the “Advisor”), its executive officers and other key personnel, the employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor as well as certain of our officers and directors, whose services are essential to the Company, may be involved in other business ventures, and will face a conflict in allocating their time and other resources between us and the other activities in which they are or may become involved. Failure of the Advisor, its executive officers and key personnel, the employees of the Sponsor, and our officers and directors to devote sufficient time or resources to our operations could result in reduced returns to our stockholders. |
● | We will pay certain prescribed fees and expenses to the Advisor and its affiliates regardless of the quality of services provided. These fees were not negotiated at arm’s length and therefore may be higher than fees |
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payable to unaffiliated third parties for the same or similar services. Such fees may result in conflicts of interest between the Advisor and our stockholders due to the nature of the incentive fees and management fees. |
● | We have paid distributions from proceeds from our ongoing private offering described below (the “Offering”) and, to the extent our board of directors declares future distributions, we may continue to fund distributions with Offering proceeds. We have not established a limit on the amount of proceeds from our Offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment and the overall return to our stockholders may be reduced. We may fund distributions from other sources such as borrowings, which may constitute a return of capital. |
● | If we are unable to raise substantial funds in our securities offerings, we may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to vary more widely with the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue. |
● | We may be unable to identify properties that meet our investment criteria in a timely manner or on acceptable terms, and may be unable to consummate investment opportunities that we identify, which could result in reduced returns or reduce the amount available for distributions to our stockholders. |
● | We intend to acquire only hotel properties. As a result, we will only have limited diversification as to the type of property we own. In the event of an economic recession affecting the economies of the areas in which the properties are located or a decline in values in general, our financial performance could be materially and adversely affected, which may limit our ability to pay distributions to our stockholders. |
● | We and our hotel managers rely on information technology networks and systems, including the internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personally identifiable information, reservations, billing and operating data. It is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information, which may subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. |
● | We have been delinquent in our SEC reporting obligations for over 12 months, and continue to be delinquent with respect to several Quarterly Reports on Form 10-Q and our most recent Annual Report on Form 10-K. We cannot provide assurance that our business will not be materially adversely affected by our previous and potential future failures to file required periodic and annual reports on a timely basis. Despite the filing of this quarterly report on Form 10-Q, we face a continuing risk that the SEC will initiate an administrative proceeding to suspend or revoke the registration of our common stock under the Exchange Act due to our previous failures to timely file our annual report on Form 10-K and several quarterly reports on Form 10-Q and our continuing delinquent quarterly reports on Form 10-Q and our annual report on Form 10-K. There may be continued concern on the part of investors and employees about our financial condition and extended filing delay status, which may result in the loss of business opportunities, limitations on our ability to raise capital, and general reputational harm. Any of the foregoing could materially adversely affect our business, results of operations and financial condition. |
● | Although our board of directors has authorized management to pursue an exit strategy and position us for a sale or merger as early as 2025, there is no assurance that this process will result in the approval or completion of any specific transaction or outcome. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, |
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the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share. |
Risks Related to the Lodging Industry and Real Estate Industry
● | We may be unable to dispose of our properties on advantageous terms or at all due to various factors, including weakness in our properties’ markets, unavailability of financing, changes in the financial condition of prospective purchasers or changes in general economic conditions, which could reduce our cash flow and limit our ability to make distributions to our stockholders. |
● | Demand for our properties may be affected by various factors, including an over-supply or over-building of hotel properties in our properties’ markets and general economic conditions. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
● | Adverse economic, business or real estate developments in our markets, as well as low consumer confidence, declines in corporate budgets, high rates of inflation, and decreases in personal discretionary spending levels, may adversely affect our financial performance and the value of our properties and may limited our ability to pay distributions to our stockholders. |
● | Competition for guests, including with other hotels, resorts and vacation rental marketplaces, make reduce our hotels’ revenues and profitability. |
● | The hospitality industry is seasonal in nature. In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition. |
● | We rely on management companies to operate our hotel properties, giving us less control than if we were managing the hotels ourselves. Further, NHS, LLC dba National Hospitality Services (“NHS”), the management company currently directly or indirectly managing nine of our existing hotel properties on a day-to-day basis, is an affiliate of Norman H. Leslie, a director and officer of the Company and a principal of the Advisor. This relationship may cause conflicts of interest between the Advisor and our stockholders. |
● | Our success depends in part upon our management companies’ ability to attract, motivate and retain a sufficient number of qualified employees. Qualified individuals needed to fill these positions are in increasingly short supply in some areas. The inability to recruit and retain these individuals may adversely impact hotel operations and guest satisfaction, which could harm our business. |
Risks Related to Debt Financing
● | We have incurred significant debt in connection with our property acquisitions. Our use of leverage increases the risk of an investment in us. Our mortgage loans are collateralized by our hotel properties, which will put those investments at risk of forfeiture if we are unable to repay such debts. Principal and interest payments on these loans reduce the amount of money that would otherwise be available for distribution to our stockholders. |
● | Our ability to acquire, rehabilitate, renovate and manage our properties may be limited if we cannot obtain satisfactory financing, refinance or extend existing financing, which will depend on debt and capital markets conditions. In addition, we have loans with variable interest rates, and may incur additional variable rate debt in the future. Volatility in these markets could negatively impact such loans. Interest rates have risen recently and may continue to rise, though the timing and amount of any such future interest rate increases are uncertain. There can be no assurance that we will be able to obtain financing or refinance or extend existing financing on favorable terms, or at all. |
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Federal Income Tax Risks
● | Failure to qualify as a REIT would reduce our net earnings available for investment or distribution to our stockholders. |
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024, and in Part II, Item 1A herein.
Overview
Lodging Fund REIT III, Inc. was formed on April 9, 2018, as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of limited-service, select-service, full-service and extended-stay hotel properties (the “Projects”) located primarily in “America’s Heartland,” which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. We have elected to be taxed as a real estate investment trust, or REIT, beginning with the taxable year ended December 31, 2018, and we intend to continue to operate in such a manner. Where applicable in this Form 10-Q, “we,” “our,” “us,” and “the Company” refers to Lodging Fund REIT III, Inc., Lodging Fund REIT III OP, LP, a Delaware limited partnership and our operating partnership (the “Operating Partnership”), and its subsidiaries except where the context otherwise requires.
We conduct substantially all our business and own substantially all real estate investments through the Operating Partnership. We are the sole general partner (the “General Partner”) of the Operating Partnership. We and the Operating Partnership are advised by Legendary Capital REIT III, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement, as amended, under which the Advisor performs advisory services regarding acquisition, financing and disposition of the Projects and origination of any loans, and is responsible for managing, operating and maintaining the Projects and day-to-day management of the Company. The Advisor may, in its sole discretion, perform these duties through one or more affiliates. The Operating Partnership has issued 1,000 Series B Limited Partnership Units (“Series B LP Units”) to the Advisor as part of its compensation. See Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Overview” for further details of the compensation to the Advisor.
Our Advisor is wholly-owned by Corey Maple and Norman Leslie. To facilitate our REIT structure, the Operating Partnership formed Lodging Fund REIT III TRS, Inc., a Delaware corporation (“Master TRS”), to act as the “master” taxable REIT subsidiary (“TRS”) entity. When we acquire a Project, the Master TRS forms a separate wholly-owned TRS to act as lessee of the Project (a “TRS Lessee”). That TRS Lessee will enter into a lease agreement with a wholly-owned subsidiary of the Operating Partnership to operate the Project. We have engaged National Hospitality Services (“NHS”) to manage eleven of the Projects acquired to date; however, we can engage and have engaged third party property management companies. NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. The Advisor has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services.
We have invested and continue to invest primarily in 80 to 200 room limited-service, select-service, full-service and extended-stay hotel properties with strong mid-market brands in America’s Heartland. As of March 31, 2023, we owned 18 hotel properties and owned an equity and profits interest in the parent of an entity which holds a leasehold interest in one additional hotel property with an aggregate of 2,261 rooms located in ten states.
We have raised capital through several private offerings conducted by the Company and the Operating Partnership described below.
Initial Offering
We are currently conducting an offering (the “Offering”) of shares of our common stock under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act
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of 1933, as amended (the “Securities Act”). The Offering commenced on June 1, 2018 in an amount of up to $100,000,000 in shares of our common stock, which amount was increased to $150,000,000 in shares of our common stock in December 2021. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2025, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. In addition to sales of common stock for cash, the Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are currently offering the shares in the private offering at an initial price of $10.57 per share, with shares purchased in our dividend reinvestment plan at an initial price of $10.04 per share. See Note 9 “Stockholders’ Equity” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of the update to offering price and share NAV, effective as of January 6, 2023. As of March 31, 2023, we have issued and sold 9,996,595 shares of common stock, including 1,057,878 shares attributable to the DRIP, and received aggregate proceeds of $97.7 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, we received net offering proceeds of approximately $84.6 million. The net offering proceeds have been used principally to fund property acquisitions and pay distributions and debt service obligations. No public market exists for the shares of our common stock and none is expected to develop.
We have adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. As of March 31, 2023, we have repurchased 287,525 shares, which represents an original investment of $2,858,355 for $2,794,469. As of March 31, 2023, all of the redemption proceeds have been paid.
Interval Share Offering
On April 29, 2020, we classified and designated 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, as shares of “Interval Common Stock,” to be part of the Offering. The offering of the Interval Common Stock was a maximum offering of $30,000,000, which may be increased to $60,000,000 in the sole discretion of our board of directors, (the “Interval Share Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. Our board of directors allowed the Interval Share Offering to expire on March 31, 2022. We did not issue or sell any shares of Interval Common Stock in the Offering.
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series Growth & Opportunity Limited Partner Units (“Series GO LP Units”), with a maximum offering of $20,000,000, which could be increased to $30,000,000 in our sole discretion as the General Partner of the Operating Partnership (the “GO Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. Our board of directors terminated the GO Unit Offering as of February 14, 2022. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. As of March 31, 2023, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received aggregate proceeds of $21.5 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $19.4 million.
Series T LP Units
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount
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of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan (“PIP”) and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of conversion. As of March 31, 2023, we had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions.
Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2023, the Operating Partnership had issued and sold 612,100 Common LP Units, with a value of $10.57 per unit, in connection with two property acquisitions.
Exit Strategy
On May 7, 2024, our board of directors authorized management to pursue an exit strategy and position the Company for a sale or merger of the Company in 2025, provided that the economic environment is conducive to such a transaction, and to prepare the Company’s portfolio of hotel properties for a transaction through strategic acquisitions and dispositions with the objective of maximizing profitability at the hotel property level. There can be no assurances that we will achieve an exit strategy within the time period and in the manner anticipated. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share.
Independent Director Compensation
During 2022, we began compensating our independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and we recognize stock-based compensation expense based on the award’s fair value at the grant date. On March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022, we issued 500 shares of our common stock to each of our three independent directors. On March 31, 2023, we issued 500 shares of our common stock to each of our two independent directors. For the three months ended March 31, 2022, we recognized stock-based compensation expense of $15,000. For the three months ended March 31, 2023, we recognized stock-based compensation expense of $10,570. These grants were made in reliance upon an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act as the grants did not involve any public offering.
Key Indicators of Operating Performance
In evaluating financial condition and operating performance, important indicators on which we focus are revenue measurements, such as occupancy, ADR and RevPAR, and expenses, such as property operations expenses, general and administrative expenses and other expenses described below. Occupancy is the total number of rooms occupied for the
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period divided by the total number of available rooms for the period. ADR is equal to the total gross room revenue divided by the total number of rooms rented for the period. RevPAR is equal to the total gross room revenue divided by the total number of available rooms for the period.
Market Outlook
The hospitality industry has been significantly impacted by the COVID-19 pandemic, which began in early 2020. The pandemic caused a sharp decline in occupancy and RevPAR in 2020 and early 2021. However, the recovery of demand in our hotels accelerated in the second, third and fourth quarters of 2021, led primarily by robust leisure demand. Demand continued to recover in 2022 and 2023. For the eleven hotel properties acquired prior to January 1, 2022, RevPAR in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 increased by 14% to $74.81 from $65.82. ADR and occupancy also increased by 11% and 2%, respectively, from the three months ended March 31, 2022 to the three months ended March 31, 2023. Business transient and group demand remains well below pre-pandemic levels in most markets, but such demand could increase if corporate travel increases. During the three months ended March 31, 2023, inflation in the United States slowed from 2022 levels , but is expected to continue at an elevated level in the near-term. Beginning in 2022, in an effort to combat inflation and restore price stability, the Federal Reserve significantly raised its benchmark federal funds rate, which led to increases in interest rates in the credit markets. Higher interest rates could have an adverse impact on our financing costs as well as general and administrative expenses and property operating expenses. Further, increasing labor costs and shortages, supply chain disruptions and related commodity and other price inflation may cause an increase in renovation, construction and operating costs, may limit our access to critical operating supplies, and may continue to adversely affect our hotel operations and financial results.
We cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing. Continued improvement in operating results will be dependent on continued strength in leisure travel and a recovery of business travel, as well as moderating inflation. In addition, if in the future there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and our properties may be subject to similar risks and uncertainties as posed by COVID-19.
Liquidity and Capital Resources
Overview
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, including payments to our Advisor and property managers, capital expenditures directly associated with our hotels and distributions to our stockholders. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, operating expenses, including payments to our Advisor and property managers, and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including OP units, and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us.
We are dependent upon the net proceeds from our Offering to conduct our proposed operations. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2025, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. We had also used the net proceeds from the GO Unit Offering to conduct our operations. Our board of directors terminated the GO Unit Offering as of February 14, 2022. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. We intend to obtain the capital required to make real
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estate and real estate-related investments and conduct our operations from the proceeds of our Offering and unused proceeds from the GO Unit Offering, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of March 31, 2023, we had raised approximately $97.7 million in gross offering proceeds from the sale of shares of our common stock in the Offering and approximately $21.5 million in gross offering proceeds from the sale of the Series GO LP Units in our GO Unit Offering. If we are unable to raise substantial funds in the Offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate more significantly with the performance of the specific assets we acquire. There may be a delay between the sale of shares of our common stock and units and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Further, we will have certain fixed operating expenses regardless of whether we are able to raise substantial funds in the Offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and cash flow and limiting our ability to make distributions to our stockholders.
As of March 31, 2023, we consolidated nineteen hotel properties, consisting of eighteen hotel properties owned by us and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property. We acquired these investments with the proceeds from the sale of our common stock in the Offering, proceeds from the GO Unit Offering and debt financing and, for all but one of the properties acquired in 2022 and the equity and profits interest acquired in 2022, the issuance of Series T LP Units to the contributor as part of the consideration. Operating cash needs during the three months ended March 31, 2023 were met through cash flow generated by these real estate investments and with proceeds from our Offering and the GO Unit Offering.
Our investments in real estate generate cash flow in the form of hotel room rentals and guest expenditures, which are reduced by operating expenditures, debt service payments and corporate general and administrative expenses. Each of our current properties is owned and future properties will be owned by a direct special purpose entity subsidiary of the Operating Partnership, which leases the properties to direct special purpose entity subsidiaries of the Master TRS, referred to as “TRS Lessees.” The TRS Lessees are or will be required to make rent payments to the owners of the properties pursuant to the lease agreements relating to each property. Such TRS Lessees’ ability to make rent payments to the owner subsidiaries and our liquidity, including our ability to make distributions to our stockholders, are dependent upon the TRS Lessees ability to generate cash flow from the operations of the hotel properties. The TRS Lessees are dependent upon the management companies with whom they have entered or will enter into management agreements with to operate the hotel properties.
Cash flow from operations from real estate investments will be primarily dependent upon the occupancy level and average daily rate, or “ADR”, of our portfolio, and how well we manage our expenditures.
We anticipate that our aggregate loan-to-value ratio will be between 35% and 65%. We will target a loan-to-value ratio for the Projects of between 35% and 70%, based on the purchase price of the Projects, however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual Project at the discretion of the board of directors. Though this is our estimated leverage, our charter does not limit us from incurring debt in excess of this amount. As of March 31, 2023, our aggregate loan-to-value ratio, based on the aggregate purchase price of the Projects, was approximately 58%.
On May 7, 2024, our board of directors authorized management to pursue an exit strategy and position the Company for a sale or merger of the Company in 2025, provided that the economic environment is conducive to such a transaction, and to prepare the Company’s portfolio of hotel properties for a transaction through strategic acquisitions and dispositions with the objective of maximizing profitability at the hotel property level. There can be no assurances that we will achieve an exit strategy within the time period and in the manner anticipated. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder
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liquidity or provide a return to stockholders that equals or exceeds our estimated value per share.
In addition to making investments in accordance with our investment objectives, we expect to use capital resources to make certain payments to the Advisor and its affiliates and NHS. These payments include the various fees and expenses to be paid to the Advisor and its affiliates in connection with the selection, acquisition and management of Projects, as well as reimbursement of certain organization and other offering expenses described below. The Advisor earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any property improvement plan (“PIP”) at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor may also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing, a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, and real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty amount, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B LP Unit holders) have received a 6% cumulative, but not compounded, return per annum. Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements.
The Advisor and its affiliates may be reimbursed by us for certain organization and offering expenses in connection with the Offering and the GO Unit Offering, including legal, printing, marketing and other offering-related costs and expenses. Following the termination of the Offering, the Advisor will reimburse us for any such amounts incurred by us in excess of 15% of the gross proceeds of the Offering. In addition, we may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to us, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.
NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties for which it serves as the property manager, in an amount up to 4% of gross revenue. NHS may also earn a monthly accounting fee of $14.00 per room for accounting services, payable monthly, and an administrative fee equal to 0.60% of gross revenues for administrative and other services. We reimburse NHS for certain costs of operating the hotel properties incurred on our behalf. All reimbursements are paid to NHS at cost. NHS also earns a flat fee of $5,000 per hotel property for due diligence services, including analyzing, evaluating, and reporting on documentation and information received from sellers or contributors during the period of due diligence. Such fee is waived if, upon acquisition by us, NHS is selected as the management company for the hotel property. NHS is also reimbursed for actual out-of-pocket costs incurred in providing the due diligence services. The majority of our current hotel properties are managed by NHS.
Our other hotel properties are managed by Vista Host Inc., Interstate Management Company, LLC (“Aimbridge”), KAJ Hospitality Inc. and HP Hotel Management Inc. These management companies earn a base management fee in an amount between 2.0% and 3.0% of gross revenue, plus monthly accounting fees and in some cases a monthly fee for customized accounting services, revenue management and digital marketing. They also may earn an incentive management fee if certain performance metrics are achieved. We also reimburse the management companies for certain costs of operating the hotel properties on our behalf. All reimbursements are paid to such management companies at cost.
One Rep, a related party, provides construction oversight, project management, and other related services to the Company. For the services provided, One Rep is paid a construction management fee equal to 6% or 7% of the total project costs. The Company also reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost.
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The franchise agreements for certain of our hotels require we provide property improvement plans to cover, among other things, replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. As of March 31, 2023, we have set aside $4.4 million for capital projects in property improvement funds, which are included in restricted cash.
We spent approximately $1.8 million on capital improvements at our operating hotels during the three months ended March 31, 2022 and approximately $2.1 million on capital improvements at our operating hotels during the three months ended March 31, 2023. Due to the COVID-19 pandemic, we canceled or deferred a significant portion of the planned capital improvements at our hotels.
Debt
Lines of Credit & Loans
Revolving Line of Credit - Western State Bank
On February 10, 2020, we entered into a $5.0 million revolving line of credit with Western State Bank (the “Western Revolving Line of Credit”). The Western Revolving Line of Credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. On January 19, 2021, the Western Revolving Line of Credit was amended to extend the maturity date to May 10, 2021. The Western Revolving Line of Credit had a variable interest rate equal to the U.S. Prime Rate, plus 0.50%. On May 6, 2021, the Western Revolving Line of Credit was amended to extend the maturity date to May 10, 2022. On that date, the interest rate was also amended to incorporate an interest rate floor equal to 4.00%. On May 5, 2022, the Western Revolving Line of Credit was amended to extend the maturity date to December 15, 2022. On December 15, 2022, the Western Line of Credit was amended to extend the maturity to April 15, 2023. Additionally, through the amendment on December 15, 2022, the Western Line of Credit is secured by our Hampton Inn hotel property in Eagan, Minnesota, our Holiday Inn Express hotel property in Cedar Rapids, Iowa, our Hampton Inn hotel property in Fargo, North Dakota and limited partnership units of the Operating Partnership. No other changes were made to the Western Line of Credit as a result of the amendments.
The interest rate as of March 31, 2023 was 8.50% per annum. As of March 31, 2023, the Western Revolving Line of Credit was secured by our Cedar Rapids Property, Eagan Property, and Fargo Property which are also subject to term loans with the same lender, and 300,000 Common LP Units of the Operating Partnership. The Western Line of Credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property, the Eagan Property, and the Fargo Property as well as future loan agreements that we may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The Western Line of Credit, including all cross-collateralized debt, is guaranteed by Corey Maple. As of March 31, 2023, there was a $5.0 million balance outstanding on the Western Line of Credit. See “- Subsequent Events” below for a description of amendments to the Western Line of Credit subsequent to March 31, 2023.
Revolving Line of Credit – Legendary A-1 Bonds, LLC
On August 10, 2022, the Operating Partnership entered into a $5.0 million revolving line of credit loan agreement (the “A-1 Line of Credit”) with Legendary A-1 Bonds, LLC (“A-1 Bonds”), which is an affiliate of the Advisor which is owned by Norman Leslie, a director and officer of the Company and principal of the Advisor and Corey Maple, a director of the Company and principal of the Advisor. The A-1 Revolving Line of Credit requires monthly payments of interest only beginning September 1, 2022, with all outstanding principal and interest amounts being due and payable at maturity on December 31, 2022. On January 12, 2023, the A-1 Revolving Line of Credit was amended to increase the line of credit to $10.0 million, increased the number of Common LP Units of the Operating Partnership securing the A-1 Revolving Line of Credit to 1,000,000 unissued Common LP Units and extended the maturity date to December 31, 2023. The A-1 Revolving Line of Credit has a fixed interest rate of 7.00% per annum. Outstanding amounts under the A-1 Revolving Line of Credit may be prepaid in whole or in part without penalty. As of March 31, 2023, there was a $9,240,000 balance outstanding on the A-1 Revolving Line of Credit. See “- Subsequent Events” below for a description of amendments to the A-1 Line of Credit subsequent to March 31, 2023.
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NHS Loan
On March 6, 2023, we entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. The NHS Loan requires the payment of monthly interest beginning on April 6, 2023, with all outstanding principal and interest amounts being due and payable at maturity on July 6, 2023. The NHS Loan has a fixed interest rate of 7.0% per annum. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership.
As of March 31, 2023, there was a $600,000 balance outstanding on the NHS Loan. See Note 11 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of amendments to the NHS Loan subsequent to March 31, 2023.
Mortgage Debt
As of March 31, 2023, we had $179.8 million in outstanding mortgage debt secured by each of our nineteen consolidated properties, with maturity dates ranging from May 2023 to April 2029. Seventeen of the loans have fixed interest rates ranging from 3.70% to 7.00%. One loan is a variable interest loan at a rate of LIBOR plus 6.0% per annum, provided that LIBOR shall not be less than 1.0%, resulting in an effective rate of 10.68% as of March 31, 2023. Another loan is a variable interest loan at a rate of LIBOR or an equivalent rate plus 6.25%, provided that the variable rate shall not be less than 0.75%, resulting in an effective rate of 10.93% as of March 31, 2023. Collectively, the weighted-average interest rate is 5.80%. Collectively, the weighted-average interest rate is 5.80%. The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period up to 18 months following origination, and generally require a balloon payment due at maturity. As of March 31, 2023 and December 31, 2022, certain mortgage debt was guaranteed by the members of the Advisor. See Note 7 “Related Party Transactions” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding debt that was guaranteed by members of the Advisor. As part of the consolidated outstanding mortgage debt above, the owner of the leasehold interest in the El Paso University Property is the borrower under a $14.4 million loan secured by the leasehold interest in the El Paso University Property. See “—Subsequent Events” below for a description of changes to mortgage debt occurring subsequent to March 31, 2023.
As of March 31, 2023, we were not in compliance with the required financial covenants under the terms of the promissory note secured by the Pineville Property and related loan documents (the “Pineville Loan”), which constitutes an event that puts us into a trigger period pursuant to the loan documents. On July 23, 2024, we sold the Pineville Property and no waiver of the financial covenants is needed. See “—Subsequent Events” below for a description of the sale of the Pineville Property subsequent to March 31, 2023. Except as described above for the Pineville Loan, we were in compliance with all debt covenants as of March 31, 2023.
See Note 4 “Debt” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding our mortgage debt and information regarding future minimum principal payments on our debt as of March 31, 2023.
Employee Retention Credit (“ERC”)
Under the provisions of the CARES Act, and the subsequent extension of the CARES Act, the Company was eligible for a refundable Employee Retention Credit (“ERC”) subject to certain criteria. During 2021, the Company applied for and received a $0.8 million employee retention credit that is included in other income (expense) in the consolidated statements of operations. The Company received the funds from the ERC in April of 2023.
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Properties Under Contract
As of March 31, 2023, we had no hotel properties under contract. See “—Subsequent Events” below for a description of purchase agreements entered into subsequent to March 31, 2023 that remain under contract as of the date of this filing.
Cash Flows
The following table provides a breakdown of the net change in our cash, cash equivalents, and restricted cash:
| | | | | | |
|
| For the Three Months Ended March 31, | ||||
| | 2023 |
| 2022 | ||
Net cash provided by (used in) operating activities | | $ | 255,083 |
| $ | (3,245,454) |
Net cash used in investing activities | | | (2,099,652) | | | (2,768,970) |
Net cash provided by financing activities | | | 613,327 | | | 6,870,267 |
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (1,231,242) | | $ | 855,843 |
Cash Flows From Operating Activities
As of March 31, 2023, we owned eighteen hotel properties and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property. During the three months ended March 31, 2023, net cash provided by operating activities was $0.3 million and during the three months ended March 31, 2022, net cash used in operating activities was $3.2 million. Our cash flows provided by operating activities generally consist of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes. See "— Results of Operations" for further discussion of our operating results for the three months ended March 31, 2023 and 2022.
Cash Flows From Investing Activities
Net cash used in investing activities was $2.1 million for the three months ended March 31, 2023 and primarily consisted of $2.1 million used for the improvements and additions to hotel properties. Net cash used in investing activities was $2.8 million for the three months ended March 31, 2022 and primarily consisted of $1.8 million used for improvements and additions to hotel properties and $0.9 million used for the acquisition of three hotel properties.
Cash Flows From Financing Activities
During the three months ended March 31, 2023, net cash provided by financing activities was $0.6 million and consisted primarily of the following:
● | $0.4 million of net cash provided by offering proceeds related to our Offering, net of payments of commissions and other offering costs of $0.2 million; |
● | $1.9 million of net cash used by debt financing as a result of proceeds from lines of credit of $2.6 million, partially offset by principal payments on debt of $0.5 million, principal payments on lines of credit of $0.1 million and payments of financing costs of $0.1 million; and |
● | $1.7 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $0.4 million. |
During the three months ended March 31, 2022, net cash provided by financing activities was $6.9 million and consisted primarily of the following:
● | $7.7 million of net cash provided by offering proceeds, net of payments of commissions and other offering costs of $1.1 million; |
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● | $0.1 million of net cash provided by debt financing as a result of proceeds from debt financing of $7.4 million and proceeds from lines of credit of $1.3 million, offset by principal payments on debt of $7.5 million, principal payments on lines of credit of $0.5 million and payments of financing costs of $0.5 million; and |
● | $0.9 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $0.6 million. |
Distributions
During our Offering, when we may raise capital more quickly than we acquire income-producing assets, and from time to time after the Offering, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from proceeds from the Offering or debt financing. Distributions declared, distributions paid, and net cash flow used in operations were as follows for the first quarter of 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | | | | Distribution | | | | | | | | | | | Net Cash | ||
| | Distributions | | Declared Per | | Distributions Paid (3) | | Flows Provided By | ||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2023 | | $ | 1,779,846 | | $ | 0.175 | | $ | 1,424,802 | | $ | 395,820 | | $ | 1,820,622 | | $ | 255,083 |
| | $ | 1,779,846 | | $ | 0.175 | | $ | 1,424,802 | | $ | 395,820 | | $ | 1,820,622 | | $ | 255,083 |
| | | | | | | | | | | | | | | | | | |
| | | | | Distribution | | | | | | | | | | | Net Cash | ||
| | Distributions | | Declared Per | | Distributions Paid (3) | | Flows Provided By | ||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2022 | | $ | 1,556,308 | | $ | 0.175 | | $ | 933,464 | | $ | 567,240 | | $ | 1,500,704 | | $ | (3,245,454) |
| | $ | 1,556,308 | | $ | 0.175 | | $ | 933,464 | | $ | 567,240 | | $ | 1,500,704 | | $ | (3,245,454) |
(1) | Distributions for the period from January 1, 2022 through March 31, 2023 were payable to each stockholder as 100% in cash on a monthly basis. |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) | Distributions for the period from January 1, 2022 through March 31, 2023 were paid on a monthly basis. In general, distributions for all record dates of a given month during such period are paid on or about the tenth day of the following month. |
For the three months ended March 31, 2023, we paid aggregate distributions of $1.8 million, including $1.4 million of distributions paid in cash and $0.4 million of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2023 was $3.9 million. Net cash flow provided in operations for the three months ended March 31, 2023 was $0.3 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.
For the three months ended March 31, 2022, we paid aggregate distributions of $1.5 million, including $0.9 million of distributions paid in cash and $0.6 million of distributions reinvested through our dividend reinvestment plan. Our net loss for the three months ended March 31, 2022 was $3.5 million. Net cash flows used in operations for the three months ended March 31, 2022 was $3.3 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.
To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.
Going forward we expect our board of directors to continue to authorize and declare distributions, if at all, based on daily record dates. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant, and may be paid in cash or in shares pursuant to the DRIP. Our board of directors has not pre-established a percentage rate of return for cash distributions or stock distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
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Results of Operations
Outlook
We expect that revenue, operating expenses, maintenance costs, real estate taxes and insurance, interest expense and management fees will each increase in future periods as a result of owning our current hotel properties for a full annual operating cycle, as well as anticipated future acquisitions of real estate investments. We also expect that revenue and operating expenses will increase in future periods as the industry recovers from the effects of COVID-19. However, future operating results could be impacted by changing market and industry factors, see “ – Market Outlook” above.
Our results of operations for the three months ended March 31, 2023 and March 31, 2022 are not indicative of those expected in future periods, as we were actively raising capital through our Offering along with acquiring hotel properties during both of these periods As of March 31, 2023 and 2022, we owned thirteen and eight properties, respectively, for a full 12-month operating cycle. After receiving all necessary third-party approvals, the Lakewood Property, acquired March 29, 2022, opened for business on August 16, 2022.
In evaluating financial condition and operating performance, we believe Revenue per Available Room (“RevPAR”), which we calculate by dividing total gross room revenue by the total number of available rooms for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for properties. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR which we calculate by dividing total gross room revenue by the total number of rooms rented for the period, measures average room price and is useful in assessing pricing levels.
Comparison of the three months ended March 31, 2023 versus the three months ended March 31, 2022
Revenue
Room revenues totaled $15.2 million and $8.8 million for the three months ended March 31, 2023 and 2022, respectively. Other revenue, which consists primarily of hotel food and beverage revenues as well as revenues from other hotel services, was $1.0 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively. Hotel occupancy, ADR, and RevPAR were 63.22%, $118.34, and $74.81, respectively, for the three months ended March 31, 2023. Hotel occupancy, ADR, and RevPAR were 61.70%, $106.61, and $65.82, respectively, for the three months ended March 31, 2022. We define our comparable hotel properties as our properties that were open throughout the periods we are comparing. For the thirteen comparable hotel properties, hotel occupancy, ADR, and RevPAR were 64.15%, $117.96, and $75.67, respectively, for the three months ended March 31, 2023. For the same thirteen properties, hotel occupancy, ADR, and RevPAR were 61.74%, $106.61, and $65.82, respectively, for the three months ended March 31, 2022. The increases in hotel occupancy rates, ADR and RevPAR were primarily due to the ongoing recovery in lodging demand from the impacts of COVID-19 during 2023. See “— Market Outlook” for a discussion of the current and expected impact of the COVID-19 pandemic and inflationary pressures on our business.
Property Operations Expenses
Property operations expenses were $8.0 million and $4.8 million for the three months ended March 31, 2023 and 2022, respectively. Property operations expenses consist primarily of hotel personnel costs, property taxes, insurance, repair and maintenance, and other costs of operating our hotel properties. The $3.2 million increase in property operations expenses was primarily due to the acquisitions of three hotel properties during the first quarter of 2022 along with three hotel properties and the acquisition of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022.
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General and Administrative Expenses
General and administrative expenses were $2.4 million and $2.2 million for the three months ended March 31, 2023 and 2022, respectively. General and administrative expenses consist primarily of administrative personnel costs, rent, professional fees and the cost of office supplies and equipment.
Sales and Marketing Expenses
Sales and marketing expenses were $1.1 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively. Sales and marketing expenses consist primarily of sales and marketing personnel costs, hotel brand loyalty program costs, advertising and other marketing costs. The $0.5 million increase in sales and marketing expenses was primarily due to the acquisitions of three hotel properties during the first quarter of 2022 along with three hotel properties and the acquisition of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022.
Franchise Fees
Franchise fees were $1.4 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. Franchise fees include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, reservation fees and other related costs. The $0.6 million increase in franchise fees was primarily due to the acquisitions of three hotel properties and the acquisition of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022.
Management Fees
Management fees were $1.2 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. Management fees include asset management fees paid to the Advisor and management fees paid to property management service providers who manage the day-to-day operations of our hotel properties. Asset management fees paid to the Advisor increased by $0.2 million and the rest was due to the acquisitions of three hotel properties during the first quarter of 2022 along with three hotel properties and the acquisition of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022.
Acquisition Expenses
Acquisition expenses were $8,766 and $13,517 for the three months ended March 31, 2023 and 2022, respectively. Acquisition expenses include acquisition-related and due diligence costs that relate to a property that is not acquired, as well as costs related to hotel property acquisition activities that are not attributable to specific property acquisitions, along with any acquisition costs associated with the acquisition of a VIE.
Depreciation
Depreciation expenses were $2.6 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively. The $1.0 million increase in depreciation expense was primarily due to the acquisitions of three hotel properties during the first quarter of 2022 along with three hotel properties and the acquisition of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022.
Other Expense, net
Other expense, net was $46,121 and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.
Interest Expense
Interest expense was $3.5 million and $2.4 million for the three months ended March 31, 2023 and 2022, respectively. The $1.1 million increase in interest expense was primarily due to the acquisitions of three hotel properties and the acquisition
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of an equity and profits interest in the parent of an entity holding a leasehold interest in one property in the last three quarters of 2022. We expect that in future periods our interest expense will vary based on the amount of our borrowings, which will depend on the cost of borrowings, the amount of proceeds we raise in our Offering and our ability to identify and acquire real estate and real estate-related assets that meet our investment objectives.
Critical Accounting Estimates
Below is a discussion of the accounting estimates that management believes are or will be critical to our operations. We consider these estimates critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of 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.
The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer compliance with new or revised accounting standards. This allows us to adopt new or revised accounting standards as of the effective date for non-public business entities.
Investment in Hotel Properties
We evaluate whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of our acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions will be capitalized and transaction costs associated with business combinations will be expensed as incurred.
Our acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). We may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, we allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. For transactions determined to be business combination, we record the assets acquired and the liabilities assumed at their respective fair values at the date of acquisition. We determine the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
Our investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 40 years for buildings and building improvements and 3 to 7 years for FF&E. Maintenance and repairs are expensed and major renewals or improvements to the hotel properties are capitalized.
We assess the carrying value of our hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of the hotel properties. If our analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, we will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
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The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and the economy in general and our expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and our ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.
Consolidations
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a variable interest entity (“VIE”), we use judgment in determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.
Fair Value Measurement
We establish fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets.
Level 2 Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3 Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
Off-Balance Sheet Arrangements
As of March 31, 2023 and December 31, 2022, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Based on historic trends, for hotels located in non-resort markets, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, excluding any impact from the COVID-19 pandemic, we generally would expect to have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.
Subsequent Events
A-1 Line of Credit Amendments
On April 18, 2023, the Operating Partnership, the Company and A-1 Bonds entered into a Change in Terms Amendment
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in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $13.3 million and increased the number of Common LP Units of the Operating Partnership securing the A-1 Line of Credit to 1,330,000 Common LP Units.
On March 27, 2024, the Operating Partnership, the Company and A-1 Bonds entered into a Fourth Amendment to the Revolving Line of Credit Loan Agreement (the “Fourth Amendment”) in connection with the A-1 Line of Credit. The Fourth Amendment extended the maturity date of the A-1 Line of Credit to December 31, 2024 and increased the A-1 Line of Credit to $15.5 million. Through the Fourth Amendment, the A-1 Line of Credit is secured by 1,550,000 unissued common limited partnership units of the Operating Partnership. In consideration of the extension of the maturity date, the Operating Partnership paid to the A-1 Lender an extension fee in the amount of $133,000. The Fourth Amended and Restated Promissory Note (the “Amended Promissory Note”) entered into by the Operating Partnership in connection with the Fourth Amendment provides that (i) the interest rate on the A-1 Line of Credit is increased to 14.5% per annum, and (ii) the A-1 Lender will receive an exit fee equal to 1.5% of the full amount due under the Line of Credit upon the earlier of (a) full repayment (whether on the maturity date or prior thereto or any other date), and (b) the maturity date. No other changes were made to the A-1 Line of Credit as a result of the Fourth Amendment or the Amended Promissory Note.
As of August 23, 2024, $15.1 million is outstanding under the A-1 Line of Credit.
Western Line of Credit Amendments
On April 15, 2023, the Operating Partnership, the Company and Corey Maple entered into a Change in Terms Amendment in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 15, 2023 to June 15, 2023.
On July 31, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from June 15, 2023 to September 15, 2023. This amendment also added an additional 200,000 limited partnership units of the Operating Partnership as collateral for the loan, for a total of 300,000 limited partnership units.
On October 9, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement, effective as of October 4, 2023 in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from September 15, 2023 to November 15, 2023. This amendment also reduced the maximum credit to $4.67 million and required the Operating Partnership to pay Western State Bank a principal curtailment of $0.3 million.
On December 27, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from November 15, 2023 to April 30, 2024.
On May 10, 2024, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 30, 2024 to June 5, 2024. In addition, the Operating Partnership was required to make a principal payment in the amount of $250,000.
We and Western State Bank are working to finalize an extension of the Western Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
As of August 23, 2024, $4.2 million is outstanding under the Western Line of Credit.
NHS Loan
On December 28, 2023, the Company entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to January 31, 2024. This amendment also provided that in lieu of monthly interest payments, all accrued interest shall be due and payable on the maturity date with the full principal balance.
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On August 21, 2024, we entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to September 30, 2025.
As of August 23, 2024, $0.6 million is outstanding under the NHS Loan.
Fort Collins Loan Refinancing
On April 18, 2023, pursuant to the Loan Agreement, dated as of April 18, 2023 (the “New Fort Collins Loan Agreement”), LF3 RIFC, LLC and LF3 RIFC TRS LLC (collectively, the “Fort Collins Borrower”), subsidiaries of the Operating Partnership entered into a new $11.2 million loan with Access Point Financial, LLC (“Access Point”), which is secured by the Fort Collins Property (the “New Fort Collins Loan”). Access Point is not affiliated with the Company or the Advisor. The New Fort Collins Loan is evidenced by a promissory note and has a variable interest rate per annum equal to 30-day secured overnight financing rate plus 6.25%. The New Fort Collins Loan matures May 4, 2025, with the option for up to three one-year extensions if requirements are met, including certain required debt service coverage ratios and the payment of an extension fee. The New Fort Collins Loan requires monthly interest-only payments through May 4, 2025, followed by monthly payments of principal and interest through any extensions, with the outstanding principal and interest due at maturity. The Fort Collins Borrower has the right to prepay up to 10% of the outstanding principal amount of the New Fort Collins Loan on certain permitted prepayment dates with a 10-day notice. If prepaid during the first 25 months of the initial term, such a prepayment would include a prepayment fee equal to the sum of 24 months of interest payments that, but for the prepayment, would have been due and payable on the prepaid principal amount had a prepayment not occurred. When the Fort Collins Borrower pays the entire remaining principal balance, whether prepaid or on maturity, the Fort Collins Borrower will incur an exit fee of $112,000. The New Fort Collins Loan includes cross-default provisions such that a default under certain other agreements of the Fort Collins Borrower, the Guarantors described below and the property manager of the Fort Collins Property constitute a default under the New Fort Collins Loan. The Fort Collins Borrower used the proceeds of the New Fort Collins Loan to repay the original $11.5 million loan with A-1 Bonds which was secured by the Fort Collins Property, pursuant to a Loan Agreement, dated as of August 3, 2022. The original loan was evidenced by three promissory notes in the amounts of $10,298,535 (“Tranche 1”), $700,000 (“Tranche 2”) and $501,465 (“Tranche 3”) and had a fixed interest rate of 7.0% per annum. On April 18, 2023, the proceeds of the New Fort Collins Loan were used to refinance the original loan, and the outstanding obligations under Tranche 1 were repaid in full and under Tranche 2 were forgiven. A 1.75% exit fee was paid on Tranche 1, and no penalty was incurred on Tranche 1 or Tranche 2. Tranche 3 remains an ongoing obligation, no longer secured by the Fort Collins Property, under the terms of the original loan and Tranche 3 promissory note. All guaranties in connection and collateral with respect to the original loan and Tranche 1, Tranche 2 and Tranche 3 promissory notes have been terminated or released, and all commitments with respect to the original loan and Tranche 1 and Tranche 2 promissory notes have been terminated or released.
Pursuant to the New Fort Collins Loan Agreement, Corey Maple and Norman Leslie entered into a Guaranty with Access Point to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, and the performance of the agreements of the Fort Collins Borrower contained in the loan documents.
El Paso HI First Loan Modification
LF3 El Paso, LLC and LF3 El Paso TRS LLC (collectively, the “El Paso HI Borrower”), subsidiaries of the Operating Partnership, entered into a $7.9 million loan (the “Holiday Inn El Paso Loan”) with EPH Development Fund LLC (“EPH”), secured by the El Paso HI Property, pursuant to a loan agreement, dated as of May 12, 2021. The Holiday Inn El Paso Loan had a maturity date of May 15, 2023.
On May 15, 2023, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a first loan modification agreement with EPH, which extended the maturity date to May 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay down $300,000 of the Holiday Inn El Paso Loan, modifying the principal outstanding balance to be $7.6 million. In addition, as a condition to the extension, the El Paso HI Borrower agreed to deposit $819,674 into an FF&E Reserve account held by EPH.
As an additional condition to the extension, the Operating Partnership and HD Sunland Park Property LLC (the “El Paso HI Contributor”) agreed to amend the Amended and Restated Contribution Agreement, dated as of May 12, 2021, to allow
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the Operating Partnership to offer the El Paso HI Contributor of the El Paso HI Property an adjustment in the conversion of Series T Limited Units to Common Limited Units or other financial adjustments if the Operating Partnership determines that the El Paso HI Contributor’s extension of the determination of the Series T value to 48 months after issuance to the El Paso HI Contributor may result in actual or possible financial or other loss or litigation.
El Paso HI Second Loan Modification
On May 15, 2024, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a second loan modification agreement with EPH, which extended the maturity date to November 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay a $76,000 extension fee. With the second modification agreement, the El Paso HI Borrower is entitled to an additional six-month extension, if requested. In addition, the Holiday Inn El Paso Loan has a new interest rate of 9.00%.
Lakewood Loan Extension, Termination and New Loans
As previously disclosed, the subsidiaries of the Operating Partnership and A-1 Bonds entered into a loan agreement in the amount of $12.6 million secured by the Lakewood Property (the “Original Lakewood Loan”). Per the terms of the agreement, the subsidiaries of the Operating Partnership executed the option to extend the maturity date of the loan to March 28, 2024.
On March 27, 2024, the subsidiaries of the Operating Partnership entered into a new $12.0 million loan with Bluebird Credit EM LLC (the “New Lakewood Loan”) secured by the Lakewood Property. The New Lakewood Loan is evidenced by a promissory note and has an adjustable interest rate based on the SOFR Index plus 7.0% (increasing to 7.5% during the extension of the loan), with an initial interest rate of 12.327%; provided, however, in no event will the interest rate be adjusted to less than 11.0%. The maturity date of the New Lakewood Loan is October 5, 2025, with an option to extend the term for an additional 6 months through April 6, 2026, upon payment of a $60,000 extension fee and satisfaction of certain other conditions. The New Lakewood Loan requires monthly interest-only payments throughout the term, with the outstanding principal and interest due at maturity. The Borrower has the right to prepay the New Lakewood Loan in whole but not in part at any time, subject to a 30-day prior notice to the New Lakewood Lender and payment of an exit fee equal to $120,000 and a prepayment premium calculated pursuant to the terms of the New Lakewood Loan Agreement.
Pursuant to the New Lakewood Loan Agreement, Norman Leslie, a director and executive officer of the Company, entered into a Guaranty (the “New Lakewood Guaranty”) with the New Lakewood Lender to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, as further described in the New Lakewood Guaranty
Additionally, on March 27, 2024, the Operating Partnership entered into a new loan in an amount up to $4,896,801 (the “New A-1 Lakewood Loan”) with the A-1 Lender, an affiliate of the Company’s Advisor. The New A-1 Lakewood Loan is evidenced by a promissory note and has a fixed interest rate of 14.5% per annum and a maturity date of March 27, 2026. The New A-1 Lakewood Loan requires monthly interest-only payments throughout the term, with the outstanding principal and interest due at maturity. The Operating Partnership has the right to prepay the New A-1 Lakewood Loan in whole or in part without charge, penalty or premium. The A-1 Lender received an origination fee of $73,452 on the effective date of the New A-1 Lakewood Loan and will receive an exit fee equal to 1.5% of the full amount of the New A-1 Lakewood Loan upon the earlier of (a) full repayment (whether on the maturity date or prior thereto or any other date), and (b) the maturity date. Pursuant to a Pledge and Security Agreement entered into by the Company with the A-1 Lender, the New A-1 Lakewood Loan is secured by 489,680 unissued common limited partnership units of the Operating Partnership.
On March 27, 2024, the proceeds from the New Lakewood Loan and the New A-1 Lakewood Loan were used to refinance the Original Lakewood Loan, and the outstanding obligations under Original Lakewood Loan were repaid in full. At the closing of the refinancing, an unpaid extension fee in the amount of $138,450 was paid to the A-1 Lender under the Original Lakewood Loan which was due but not paid in connection with the prior March 2023 extension of the Original Lakewood Loan. All guaranties in connection and collateral with respect to the Original Lakewood Loan have been terminated or released, and all commitments with respect to the Original Lakewood Loan have been terminated or released.
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SEC Settlement
As previously disclosed, the Advisor and Corey R. Maple received a “Wells notice” from the SEC stating that the SEC staff had made a preliminary determination to recommend to the SEC that it bring an enforcement action against the Advisor and Mr. Maple alleging violations of securities laws in connection with the SEC’s investigation of the Company’s reimbursement of and financial accounting for certain expenses incurred by the Advisor as well as the adequacy of its disclosures related to those policies and practices. The Wells notice was neither a formal charge of wrongdoing nor a final determination that the Advisor or Mr. Maple has violated any law.
On August 28, 2023, the Advisor and Mr. Maple, without admitting or denying the findings, agreed to an administrative cease-and-desist order relating to Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended. A copy of the order can be found on the SEC’s website at https://www.sec.gov/files/litigation/admin/2023/33-11227.pdf. As part of the settlement, the Advisor agreed to pay disgorgement of $463,900, prejudgment interest of $85,431.50 and a civil monetary penalty of $225,000 and Mr. Maple agreed to pay a civil monetary penalty of $100,000. Additionally, the Advisor has undertaken to (a) retain a qualified independent consultant acceptable to the SEC, at the Advisor’s expense, within 60 days of the date of entry of the order to review the Advisor’s policies, procedures and controls regarding the proper allocation of expenses between the Advisor and the Company as provided in the order, (b) require the consultant to submit a report to the Advisor and the SEC staff within 120 days of the entry of the order with its findings and any recommendations for changes or improvements, and (c) adopt, implement and maintain all policies, procedures and practices recommended by the consultant’s report within 120 days of receiving the report from the consultant.
Creation of Series GO II LP Units
On April 7, 2023, the Operating Partnership established the terms of a new series of limited partner units designated as Series Growth & Opportunity II Limited Partner Units (“Series GO II LP Units”) to be issued from time to time. The Operating Partnership commenced a separate offering for the purchase of the Series GO II LP Units at a purchase price equal to 75% of the Share NAV. The purchase price based on the current Share NAV is $7.93 per Series Go II LP Unit. The Series GO II LP Units will be specially allocated all Net Income (including book-up income) in proportion to the 25% issue price shortfall, until the positive Capital Account balance of each Series GO II LP Unit is equal to the Share NAV. As a result, the issuance of Series GO II LP Units will be dilutive to the General Partner Units and therefore, to the shares of common stock of the Company. See “—GO II Unit Offering” below for status of the offering.
Resolution of Litigation with PA Sellers
Effective November 20, 2023, the Operating Partnership and Central PA Equities 17, LLC, Central PA Equities 19, LLC, and Springwood – FHP LP (collectively, the “PA Seller”) enter into a settlement agreement and general release of all claims (the “Settlement Agreement”) regarding the asset purchase agreement dated November 22, 2019 (as amended, the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Operating Partnership agreed to acquire the 108-room Fairfield Inn & Suites by Marriott hotel in Hershey, Pennsylvania, the 107-room Home2 Suites by Hilton hotel in York, Pennsylvania, and the 100-room Hampton Inn & Suites by Hilton hotel in York, Pennsylvania (collectively, the “Hotel Properties”) from the PA Seller for $46.9 million plus closing costs, subject to adjustment as provided in the Purchase Agreement. As required by the Purchase Agreement, the Operating Partnership deposited a total of $1.5 million into escrow as earnest money pending the closing or termination of the Purchase Agreement (the “Earnest Money Deposit”).
Pursuant to the Settlement Agreement, the PA Seller received $700,000 of the Earnest Money Deposit, and the Operating Partnership received $800,000 of the Earnest Money Deposit. Accrued interest on the Deposit was split between the parties with 7/15 of the total amount being paid to the PA Seller and 8/15 of the total amount being paid to the Operating Partnership. Incurred fees of the Escrow Agent were paid by the Operating Partnership in accordance with the Settlement Agreement. The Operating Partnership and all related entities are released and forever discharged from all claims related to or arising from the Purchase Agreement.
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Changes in Officers and Directors
On May 19, 2023, Mr. Corey R. Maple tendered his resignation, effective May 19, 2023, as Chief Executive Officer and Secretary of the Company, but continues to serve as the Chairman of the Board of Directors. On May 19, 2023, the Company’s Board of Directors appointed Mr. Norman H. Leslie as the Company’s Chief Executive Officer and Secretary, effective May 19, 2023.
Change in Registered Public Accounting Firm
On October 24, 2023, based on the approval of the Audit Committee of the Board of Directors of the Company, the Company dismissed Deloitte & Touche LLP as the Company’s independent registered public accounting firm, and engaged Marcum LLP as the Company’s new independent registered public accounting firm, effective October 24, 2023.
Distributions Declared or Paid
On April 4, 2023, we declared cash distributions totaling $432,563 and DRIP distributions totaling $132,987, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $93,696 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates March 1 through March 31, 2023 to holders of record on each calendar day of such period. The distribution declared for March 2023 was paid on April 10, 2023.
On May 9, 2023, we declared cash distributions totaling $441,332 and DRIP distributions totaling $125,684, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $102,500 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates April 1 through April 30, 2023 to holders of record on each calendar day of such period. The distribution declared for April 2023 was paid on May 10, 2023.
On June 12, 2023, we declared cash distributions totaling $441,771 and DRIP distributions totaling $126,101, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $113,949 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates May 1 through May 31, 2023 to holders of record on each calendar day of such period. The distribution declared for May 2023 was paid on June 15, 2023.
On July 10, 2023, we declared cash distributions totaling $442,403 and DRIP distributions totaling $127,081, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $125,067 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates June 1 through June 30, 2023 to holders of record on each calendar day of such period. The distribution declared for June 2023 was paid on July 14, 2023.
On August 8, 2023, we declared cash distributions totaling $443,331 and DRIP distributions totaling $130,236, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $138,225 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates July 1 through July 31, 2023 to holders of record on each calendar day of such period. The distribution declared for July 2023 was paid on August 11, 2023.
On September 11, 2023, we declared cash distributions totaling $451,509 and DRIP distributions totaling $123,716, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $160,212 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates August 1 through August 31, 2023 to holders of record on each calendar day of such period.
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The distribution declared for August 2023 was paid on September 15, 2023.
On October 24, 2023, we declared cash distributions totaling $451,660 and DRIP distributions totaling $124,848, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $175,525 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates September 1 through September 30, 2023 to holders of record on each calendar day of such period. The distribution declared for September 2023 was paid on October 27, 2023.
On November 7, 2023, we declared cash distributions totaling $473,526 and DRIP distributions totaling $103,722, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $181,841 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates October 1 through October 31, 2023 to holders of record on each calendar day of such period. The distribution declared for October 2023 was paid on November 20, 2023.
On December 6, 2023, we declared cash distributions totaling $471,485 and DRIP distributions totaling $106,956, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,164 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates November 1 through November 30, 2023 to holders of record on each calendar day of such period. The distribution declared for November 2023 was paid on December 29, 2023.
On January 16, 2024, we declared cash distributions totaling $471,271 and DRIP distributions totaling $108,117, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,262 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates December 1 through December 31, 2023 to holders of record on each calendar day of such period. The distribution declared for December 2023 was paid on March 29, 2024.
On April 22, 2024, we declared cash distributions totaling $237,857 and DRIP distributions totaling $52,904, cash distributions totaling $17,853 for Common Limited Units of the Operating Partnership and cash distributions totaling $91,131 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.000958905 per share of Common Stock in our company, equivalent to an annualized rate of three and one half percent (3.50%) per share based on our initial offering price of $10.00, for daily record dates March 1 through March 31, 2024 to holders of record on each calendar day of such period. The distribution declared for March 2024 was paid on April 25, 2024.
On May 20, 2024, we declared cash distributions totaling $271,667 and DRIP distributions totaling $60,693, cash distributions totaling $20,403 for Common Limited Units of the Operating Partnership and cash distributions totaling $104,150 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001095890 per share of Common Stock in our company, equivalent to an annualized rate of four percent (4.00%) per share based on our initial offering price of $10.00, for daily record dates April 1 through April 30, 2024 to holders of record on each calendar day of such period. The distribution declared for April 2024 was paid on May 23, 2024.
On June 18, 2024, we declared cash distributions totaling $311,181 and DRIP distributions totaling $62,992, cash distributions totaling $22,954 for Common Limited Units of the Operating Partnership and cash distributions totaling $117,169 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001232877 per share of Common Stock in our company, equivalent to an annualized rate of four and one half percent (4.50%) per share based on our initial offering price of $10.00, for daily record dates May 1 through May 31, 2024 to holders of record on each calendar day of such period. The distribution declared for May 2024 was paid on June 20, 2024.
On July 19, 2024, we declared cash distributions totaling $345,775 and DRIP distributions totaling $70,312, cash distributions totaling $25,504 for Common Limited Units of the Operating Partnership and cash distributions totaling $130,186 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001366120 per share of Common
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Stock in our company, equivalent to an annualized rate of five percent (5.00%) per share based on our initial offering price of $10.00, for daily record dates June 1 through June 30, 2024 to holders of record on each calendar day of such period. The distribution declared for June 2024 was paid on July 23, 2024.
On August 20, 2024, we declared cash distributions totaling $356,690 and DRIP distributions totaling $59,688, cash distributions totaling $25,504 for Common Limited Units of the Operating Partnership and cash distributions totaling $130,186 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.001366120 per share of Common Stock in our company, equivalent to an annualized rate of five percent (5.00%) per share based on our initial offering price of $10.00, for daily record dates July 1 through July 31, 2024 to holders of record on each calendar day of such period. The distribution declared for July 2024 remained unpaid at the time of this filing.
Properties Under Contract
On April 23, 2023, the Operating Partnership terminated the Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement entered into on August 16, 2022 in connection with the contribution of the 276-room Sheraton Hotel Albuquerque Airport in Albuquerque, New Mexico. Subsequent to December 31, 2022 and prior to termination, the Operating Partnership deposited an additional $150,000 into escrow as earnest money pending the closing or termination of the Sheraton Albuquerque Airport Contribution Agreement. Upon termination, $300,000 of the total earnest money deposit was returned to the Operating Partnership.
As mentioned in Note 10 “Commitments and Contingencies”, we terminated the College Station Voco Contribution Agreement on June 13, 2023. The earnest money deposit was fully refunded to the Operating Partnership.
On April 15, 2024, the Operating Partnership and Stow Hotel Associates, LLC (the “Stow Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Hampton Stow Contribution Agreement”) pursuant to which the Stow Contributor agreed to contribute the 84-room Hampton Stow hotel in Stow, Ohio to the Operating Partnership. The aggregate consideration for the Hampton Stow under the Hampton Stow Contribution Agreement is $10.2 million, with a majority of the consideration consisting of the assumption by the Operating Partnership of existing debt secured by the Hampton Stow and the remaining consideration consisting of the issuance by the Operating Partnership of Series T LP Units of the Operating Partnership. As required by the Hampton Stow Contribution Agreement, the Operating Partnership deposited $50,000 into an escrow as earnest money pending the closing or termination of the Hampton Stow Contribution Agreement. Except in certain circumstances described in the Hampton Stow Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Hampton Stow Contribution Agreement, it will forfeit the earnest money.
On April 15, 2024, the Operating Partnership and the Stow Contributor entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Staybridge Stow Contribution Agreement”) pursuant to which the Stow Contributor agreed to contribute the 92-room Staybridge Suites Akron-Stow-Cuyahoga Falls hotel in Stow, Ohio to the Operating Partnership. The aggregate consideration for the Staybridge Stow under the Staybridge Stow Contribution Agreement is $10.9 million, with a majority of the consideration consisting of the assumption by the Operating Partnership of existing debt secured by the Staybridge Stow and the remaining consideration consisting of the issuance by the Operating Partnership of Series T LP Units of the Operating Partnership and cash at closing. As required by the Staybridge Stow Contribution Agreement, the Operating Partnership deposited $50,000 into an escrow as earnest money pending the closing or termination of the Staybridge Stow Contribution Agreement. Except in certain circumstances described in the Staybridge Stow Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Staybridge Stow Contribution Agreement, it will forfeit the earnest money.
The Company is still conducting its diligence review with respect to each of these properties. These pending acquisitions are subject to its completion of satisfactory due diligence and other closing conditions. There can be no assurance the Company will complete any or all of these pending property contributions on the contemplated terms, or at all.
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Pineville Property Sold and Loan Repaid
On July 23, 2024, the Company sold the Pineville Property to an unaffiliated purchaser for $8,850,000 in cash, subject to customary prorations and adjustments. The mortgage loan secured by the Pineville Property was repaid in full at closing from sale proceeds. All guaranties in connection with such loan and collateral with respect to such loan have been terminated or released, and all commitments with respect to such loan have been terminated or released.
Status of the Offering
Our board of directors extended the term of the Offering to May 31, 2025. As of the date of this filing, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold 10,284,915 shares of common stock, including 1,203,059 shares issued pursuant to the DRIP, resulting in the receipt of gross offering proceeds of $100.6 million.
Series T LP Units
The Operating Partnership did not issue any Series T LP Units subsequent to the three months ended March 31, 2023 through the date of this filing.
Common LP Units
The Operating Partnership did not issue any Common LP Units subsequent to the three months ended March 31, 2023 through the date of this filing.
GO II Unit Offering
On April 7, 2023, the Operating Partnership commenced an offering of Series GO II LP Units. On April 17, 2024, our board of directors extended the term of the GO II Unit Offering to March 31, 2025. The Operating Partnership has issued and sold 363,426 Series Go II LP Units, resulting in the receipt of gross offering proceeds of $2.7 million as of the date of this filing.
Exit Strategy
On May 7, 2024, our board of directors authorized management to pursue an exit strategy and position the Company for a sale or merger of the Company in 2025, provided that the economic environment is conducive to such a transaction, and to prepare the Company’s portfolio of hotel properties for a transaction through strategic acquisitions and dispositions with the objective of maximizing profitability at the hotel property level. There can be no assurances that we will achieve an exit strategy within the time period and in the manner anticipated. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risks have been omitted as permitted under rules applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)) required by Securities Exchange Act of 1934 Rules 13a-15(b) or 15d-15(b), our Chief Executive
Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective.
Material Weakness in Internal Control over Financial Reporting
In connection with the review of the Company’s consolidated financial statements for the quarter ended September 30, 2022, we identified a material weakness in our control environment related to the accounting treatment of an acquisition in August of 2022 of a controlling interest in an entity which holds the leasehold interest in a hotel property. We believe that this material weakness was a result of the misapplication of the GAAP accounting guidance. The material weakness did not result in any misstatements, material or otherwise, to the financial statements issued for the quarters ended March 31, 2022 or June 30, 2022. Solely due to this weakness, our management concluded that at March 31, 2023, the Company’s internal control over financial reporting was not effective.
Subsequent to March 31, 2023, management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include consultation with external GAAP accounting experts on non-recurring, significant, or unusual transactions. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the application controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2024.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2023, except for the material weakness noted above, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The remediation plan described above was implemented subsequent to March 31, 2023.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. See Note 10 “Commitments and Contingencies” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a discussion of ongoing legal proceedings and governmental authority inquiries. Other than such proceedings, management is not aware of any current or pending legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such legal proceedings contemplated by governmental authorities.
Item 1A. Risk Factors
Except as otherwise described herein, there are no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 27, 2024.
Although we have authorized management to pursue an exit strategy and position the Company for a sale or merger, we can give no assurances regarding the consummation of any particular transaction or that we will be successful in executing such strategy or in creating additional stockholder value.
Although our board of directors has authorized management to pursue an exit strategy and position us for a sale or merger as early as 2025, there is no assurance that this process will result in the approval or completion of any specific transaction or outcome. Further, although we have begun the process of exploring strategic alternatives and marketing for sale our assets, there is no assurance that we will achieve an exit strategy within the proposed time period or in the manner anticipated. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. Specifically, current general economic conditions, including high interest rates in a high inflation environment, may adversely impact the valuation of our assets and make it more difficult for potential purchasers to obtain acquisition financing on acceptable terms or at all. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Initial Offering
On June 1, 2018, we commenced an offering (the “Offering”) of up to $100,000,000 in shares of our common stock, which amount was increased to $150,000,000 in shares of our common stock in December 2021. We are offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. In addition to sales of common stock for cash, we have adopted a dividend reinvestment plan, which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are offering the shares in the private offering at an initial price of $10.57 per share, with shares purchased in our dividend reinvestment plan at an initial price of $10.04 per share. See Note 9 “Stockholders’ Equity” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of the update to offering price and share NAV. During
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the three months ended March 31, 2023 we sold 101,608 shares of common stock in the private offering, resulting in gross offering proceeds of approximately $1.0 million, including 39,418 shares issued pursuant to our dividend reinvestment plan. During the three months ended March 31, 2023, aggregate selling commissions of $31,688 and marketing and diligence allowances and other wholesale selling costs and expenses of $0.3 million were paid in connection with the private offering.
GO Unit Offering
On June 15, 2020, we commenced a private placement offering of limited partnership units in our Operating Partnership, designated as Series GO LP Units, with a maximum offering of $20,000,000, which could be increased to $30,000,000 in the sole discretion of the Company, as the General Partner of the Operating Partnership, (the “GO Unit Offering”). The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. Our board of directors terminated the GO Unit Offering as of February 14, 2022. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. The Operating Partnership was offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities were being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Series GO LP Units (a “Series GO Limited Partner”) will have the right to exchange its Series GO LP Units for, at the option of the Operating Partnership, an equivalent number of shares of common stock of the Company (“Common Shares”), or cash equal to the fair market value of the Common Shares (the “Cash Amount”) which would have otherwise been received pursuant to such exchange. The exchange right is not available until all of the following have occurred (the “Exchange Date”): (i) the Common Shares are listed on a national securities exchange, the sale of all or substantially all of the GP Units and Interval Units held by the Company or any sale, exchange or merger of the Company or the Operating Partnership or, as determined in the sole discretion of the Company, the occurrence of a similar event; (ii) the Series GO Limited Partner has held its Series GO LP Units for at least one year; (iii) the Common Shares to be issued pursuant to the redemption have been registered with the SEC and the registration statement has been declared effective, or an exemption from registration is available; and (iv) the exchange does not result in a violation of the shareholder ownership limitations set forth in the Company’s articles of incorporation. Notwithstanding the above, the Company may waive any of the requirements above in its sole discretion other than (ii) or (iv). During the three months ended March 31, 2023, we sold and issued no Series GO LP Units in the GO Unit Offering, resulting in no gross proceeds. During the three months ended March 31, 2023, there was no aggregate selling commissions and marketing and diligence allowances and other wholesale selling costs and expenses paid in connection with the offering.
Series T LP Units
On June 15, 2020, the Operating Partnership established the Series T LP Units as a new series of limited partnership units in the Operating Partnership. The Operating Partnership may issue the Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. During the three months ended March 31, 2023, the Operating Partnership issued no Series T LP Units in connection with contributions of hotel properties. During the year ended December 31, 2022, the Operating Partnership issued an aggregate of 2,559,737 Series T LP Units in connection with contributions of hotel properties. These securities were issued in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities were offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act. Subject to the terms of the partnership agreement of the Operating Partnership, each holder of Series T LP Units (a “Series T Limited Partner”) will have its Series T LP Units be eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after the issuance of the Series T LP Units, at which point the value will be calculated pursuant to the terms of the partnership agreement of the Operating Partnership and the formula set forth in the contribution agreement between the Operating Partnership and the Series T Limited Partner. The number of Common LP Units to be issued to the contributor based on
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such conversion may be higher or lower than the initial valuation of the Series T LP Units. The Series T LP Units will also automatically convert into Common LP Units upon other events as described in the partnership agreement of the Operating Partnership at a rate based on a mathematical formula. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Common LP Units will have the right to exchange its Common LP Units for, at the option of the Operating Partnership, an equivalent number of Common Shares or the Cash Amount which would have otherwise been received pursuant to such exchange. The exchange right is not available until the Exchange Date (as defined in the previous paragraph). Notwithstanding the above, the Company may waive any of the requirements of the Exchange Date described in the paragraph above in its sole discretion other than (ii) or (iv).
Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. The Operating Partnership is offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Common LP Units will have the right to exchange its Common LP Units for, at the option of the Operating Partnership, an equivalent number of Common Shares or the Cash Amount which would have otherwise been received pursuant to such exchange. The exchange right is not available until the Exchange Date (as defined above). Notwithstanding the above, the Company may waive any of the requirements described above in its sole discretion other than (ii) or (iv). During the three months ended March 31, 2023, the Operating Partnership issued no Common LP Units. During the year ended December 31, 2022, the Operating Partnership issued 460,000 Common LP Units.
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The following discussion summarizes the principal terms of our share repurchase plan.
Repurchase Price
Under certain circumstances and subject to the death repurchase described below, the prices at which we will repurchase shares under our repurchase plan are as follows:
● | For those shares held by the stockholder for at least one year, 92% of the current share NAV; |
● | For those shares held by the stockholder for at least two years, 96% of the current share NAV; and |
● | For those shares held by the stockholder for at least three years, 100% of the current share NAV. |
For purposes of determining the time period a stockholder has held each share, the time period begins as of the date the stockholder acquired the share, provided that shares purchased by the stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial shares to which the dividend reinvestment plan shares relate. The board of directors may, in its sole discretion, reject any request for repurchase and may, upon notice to the stockholders, amend, suspend or terminate the repurchase program at any time.
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Limitations on Repurchase
There are several limitations on our ability to repurchase shares under our share repurchase plan:
● | Unless the shares are being repurchased in connection with a stockholder’s death, we may not repurchase shares unless the stockholder has held the shares for at least one year. |
● | During any calendar year, we will repurchase only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan upon 10 business days’ notice to our stockholders. |
● | During any calendar year, we will limit the total shares repurchased to no more than 5.0% of the weighted-average number of shares outstanding as of December 31 of the prior calendar year. |
● | We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
● | We will not repurchase shares if the board of directors determines, in its sole discretion, that the repurchase price determined in accordance with the terms of our share repurchase plan exceeds the then current fair market value of the shares to be repurchased. |
Procedures for Repurchase
We will repurchase shares within 21 days following the end of a calendar quarter. We must receive a written request for repurchase at least two business days before the end of the calendar quarter in order for us to repurchase a stockholder’s shares on the repurchase date. If we cannot repurchase all shares presented for repurchase in any quarter, we will attempt to honor repurchase requests on a pro rata basis. The board of directors may, in its sole discretion, reject any request for repurchase.
If we did not completely satisfy a stockholder’s repurchase request on a repurchase date because we did not receive the request in time, because of the limitations on repurchases set forth in our share repurchase plan or because of a suspension of our share repurchase plan, we would treat the unsatisfied portion of the repurchase request as a request for repurchase at the next repurchase date at which funds are available for repurchase unless the stockholder withdraws its request. Any stockholder may withdraw a repurchase request upon written notice to the program administrator if such notice is received at least two business days before the repurchase date.
All shares to be repurchased must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares, we will not repurchase any such shares.
Neither we nor the board of directors will have any liability to any stockholder for any damages resulting from or related to the stockholder’s presentment of its shares. Further, stockholders will have complete responsibility for payment of all taxes, assessments and other applicable obligations and third-party costs resulting from or relating to our repurchase of shares. All repurchased shares shall be repurchased as treasury shares and may be made available for purchase to new or existing stockholders.
Special Repurchases—Death Repurchase
In the event of the death of a stockholder, the Company will, upon request and within six months from the date of the request, repurchase such stockholder’s shares regardless of the period the deceased stockholder has owned such shares at the following prices:
● | 92% of the current share NAV if death occurs less than six months of the purchase; |
● | 96% of the current share NAV if death occurs from six months to one year of purchase; and |
● | 100% of the current share NAV if death occurs after one year of purchase. |
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We will not be obligated to repurchase a deceased stockholder’s shares if more than two years have elapsed from the date of death.
Amendment, Suspension or Termination of Program and Notice
The board of directors may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate our share repurchase plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan.
Shares Repurchased
Pursuant to the terms of our Share Repurchase Plan and the discretion provided therein, we will repurchase shares within 21 days following the end of a calendar quarter. During the three months ended March 31, 2023, we repurchased no shares of our common stock.
| | | | | | | | | |
Month | | Total Number of Shares Repurchased | | Average Price Paid Per Share | | Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program | |||
January 2023 | | | — | | $ | - | | | (1) |
February 2023 | | | — | | $ | — | | | (1) |
March 2023 | | | — | | $ | — | | | (1) |
Total | | | — | | | | | | |
Three Months Ended March 31, 2023 | | | — | | | | | | |
(1) | We limit the dollar value of shares that may be repurchased under the plan as described above. One of these limitations is that during each calendar year, our share repurchase plan limits the number of shares we may repurchase to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares upon ten business days’ notice to our stockholders. |
The above table is on a cash basis, but we record our shares repurchased on an accrual basis.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. | | Description | |
3.1 | | Articles of Amendment and Restatement, dated as of June 1, 2018 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2020) | |
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3.2 | | Articles Supplementary for Interval Common Stock (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2020) | |
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* Filed herewith.
** Furnished herewith.
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101.INS |
| Inline XBRL Instance Document |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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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.
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| LODGING FUND REIT III, INC. | |
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Date: | August 23, 2024 | By: | /s/ Norman H. Leslie |
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| | Norman H. Leslie |
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| President, Chief Executive Officer, Secretary, Chief Investment Officer, Treasurer and Director |
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| (principal executive officer) |
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Date: | August 23, 2024 | By: | /s/ Samuel C. Montgomery |
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| Samuel C. Montgomery |
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| | Chief Financial Officer |
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| (principal financial officer) |
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