2015 Annual Report
Socials and Charities
The Georgian Terrace by SoTHERLY Launch Party
SoTHERLY Foundation
Giving Back
The SoTHERLY Foundation
is the community
outreach arm of SoTHERLY Hotels. We created the
Foundation in 2015 because we wanted to take a
more hands-on approach to making a difference in
the communities surrounding our hotels, one family
at a time.
Each year, the SoTHERLY Foundation will provide
significant aid to one or more American veterans
living in the communities around its hotels. Instead
of taking a one-size-fits-all approach, we work
directly with the veteran and his or her family to
find out what they need most and to determine a
strategy for meeting that need in the most lasting
and meaningful way possible.
S T O C K H O L D E R L E T T E R
To Our Stockholders:
We began 2015 with high expectations of continued growth for the company. We met or exceeded
all of the transactional goals we set for the year. Financially, we experienced some growing pains as
a mid-year hotel acquisition in Florida negatively affected third quarter earnings due to seasonality
issues. Additionally, the lodging sector experienced a significant drop in demand during the sixty days
bracketing Labor Day as a result of a correction in the equity markets, and our Houston asset shared
in the declining fortunes of the oil industry. All and all, 2015 was a year of continued growth for the
company that positions us nicely going into 2016.
The domestic U.S. lodging industry experienced a year of strong growth, ending 2015 with an
increase in Revenue Per Available Room (“RevPAR”) of 6.4%. Our markets were solid with regard to
performance, with the exception of the Houston market. For the most part, our portfolio performed well, finishing the year
with a 7.0% RevPAR increase. To keep our 2015 RevPAR performance in context, the results we achieved included extensive
renovation activity at five of our hotels, which represented more than one third of the company’s room inventory. Atlanta,
Houston, Jacksonville, Laurel, and Wilmington all had room inventory out of service in 2015. So the fact that we exceeded
national RevPAR growth is a noteworthy achievement. We also executed major brand changes in Jacksonville and Laurel
during the year and positioned Houston for an upbranding in early 2016.
We entered the year with a targeted dividend payout of $.305 per share after paying out dividends totaling $.225 per share in
2014. The actual aggregate 2015 dividend was $.305 per share for 2015; an increase of 35.6% over the prior year.
Entering the year we had no immediate pending debt maturities to address. However, given favorable market conditions we
elected to refinance and/or modify several loans.
• Atlanta: In May we refinanced the first mortgage on this property to lock in favorable interest rates for the next decade.
We procured additional funding for the company in the approximate amount of $5.3M, essentially returning all the
company’s equity capital in the 18-month period since the asset was acquired.
• Jacksonville: In July we refinanced the first mortgage to procure renovation funding in the approximate amount of $3.5M.
We extended the loan term by five years while purchasing an open market interest rate cap to protect the company from
higher interest rates.
• Hollywood: In August we refinanced the first mortgage to accommodate the purchase of the remaining interest in the
hotel and lock in favorable interest rates for the next decade.
• Laurel: In December we modified the loan to increase the principal balance to partially fund the hotel’s renovation and
delay the five year term extension notice instituting additional flexibility.
As of December 31, 2015, approximately 84% of the company’s debt carried a fixed interest rate.
Entering the year our belief was we should issue common stock at a price of not less than $7.00 per share to raise equity capital
required to fund an acquisition. In June we capitalized on an opportunity to buy the remaining interests in the Hollywood
hotel shortly after our stock hit a five-year high. Management successfully executed a sale of approximately 3.5M common
shares at $7.11 per share to raise the necessary equity ($23.5M) to fund the Hollywood acquisition.
We entered 2015 with four significant capital improvement projects in process – Jacksonville, Laurel, Atlanta, and Houston.
During the year we added Wilmington to the list.
• Jacksonville: In early September we completed the hotel’s renovations essentially on time and slightly over budget to affect
the timely brand change from Crowne Plaza to DoubleTree by Hilton.
• Laurel: In mid-October we completed the hotel’s renovations essentially on time and slightly over budget to affect the
timely brand change from Holiday Inn to DoubleTree by Hilton.
• Atlanta: During the course of the year we continued the measured room renovation pace to cause minimal disruption to
hotel operations. At year end we were 80% complete.
S T O C K H O L D E R L E T T E R ( C O N T I N U E D )
• Houston: During the year we commenced Phase II renovations in anticipation of an April 2016 brand change from Crowne
Plaza to SoTHERLY. As of the end of the year all guest rooms were complete and the public space is nearing completion.
• Wilmington: During the year, we commenced the total replacement of guest room baths at a measured pace to create minimal
disruption to operations.
A stated goal in 2015 was to add at least one hotel to the portfolio. We believe we were very fortunate to acquire the remaining
interest of the Hollywood asset from the Carlyle Group. Funding the acquisition involved the placement of a new loan and a
secondary common stock offering, all as detailed above. The negotiated price represents a 7.5% T-12 cap rate at closing and 8.1%
cap rate as of the end of the year. We believe the purchase price reflects a cap rate that is above market rates and an excellent value
for the company.
In September we successfully closed on the sale of the Atlanta outparcel for a price of ±$2.2M. In November we successfully closed
on the sale of the Atlanta development rights for a price of $.4M. It is important to note we paid $1.0M in April 2014 for the
Atlanta outparcel and development rights, making these transactions highly profitable for the company.
For 2015, Adjusted Funds From Operations (“AFFO”)1 increased by approximately 5.4% over 2014. As noted above, mid-year we
issued approximately 3.5M new common shares to buy the Hollywood asset. The seasonality of the Hollywood combined with the
increased share count drove down per share AFFO performance.
The company experienced declining results with regard to stock price as the entire lodging sector came under severe selling pressure
in the second half of the year. SOHO fared better than most. SOHO was the number five performer as compared to the eighteen
companies that comprise the lodging REIT universe. Total return to our shareholders in 2015 was negative 14.3%, placing us third
out of the fifteen legacy companies.
In summary, 2015 was a solid year for the company. We met or exceeded all our transaction goals and given market conditions achieved
respectable financial results for our shareholders. We accelerated growth and effectively managed several difficult transactions.
As we enter 2016 we are optimistic that the best times are ahead for SOHO, however, we are mindful of a potential downturn in the
US economy and will plan accordingly. We will recycle some capital out of assets that are not core assets, while seeking to buttress
the company’s liquidity and balance sheet.
Yours in Sothern Hospitality,
Andrew M. Sims
Chairman and Chief Executive Officer
1 AFFO is a non-GAAP financial measure. See further discussion of non-GAAP measures, including definitions related thereto, and reconciliations to net income (loss) in
Items 6 and 7 of our Annual Report on Form 10-K.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
(cid:3)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
For the transition period from to
SOTHERLY HOTELS INC.
(Exact name of registrant as specified in its charter)
001-32379
(Commission File Number)
SOTHERLY HOTELS LP
(Exact name of registrant as specified in its charter)
001-36091
(Commission File Number)
410 West Francis Street
Williamsburg, Virginia 23185
(Address of Principal Executive Officers) (Zip Code)
757-229-5648
(Registrant’s telephone number, including area code)
20-1531029
(I.R.S. Employer
Identification No.)
20-1965427
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Sotherly Hotels Inc.
Sotherly Hotels LP
Sotherly Hotels LP
Title of Each Class
Common Stock, $0.01 par value
8.0% Senior Unsecured Notes due 2018
7.0% Senior Unsecured Notes due 2019
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Sotherly Hotels Inc. Yes (cid:4) No (cid:2) Sotherly Hotels LP Yes (cid:4) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Sotherly Hotels Inc. Yes (cid:4) No (cid:2) Sotherly Hotels LP Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Sotherly Hotels Inc. Yes (cid:2) No (cid:3) Sotherly Hotels LP Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such file.
Sotherly Hotels Inc. Yes (cid:2) No (cid:3) Sotherly Hotels LP Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934).
Sotherly Hotels Inc.
Large Accelerated Filer (cid:3)
Sotherly Hotels LP
Large Accelerated Filer (cid:3)
Accelerated Filer (cid:3)
Non-accelerated Filer (cid:3)
Smaller Reporting Company (cid:2)
Accelerated Filer (cid:3)
Non-accelerated Filer (cid:2)
Smaller Reporting Company (cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Sotherly Hotels Inc. Yes (cid:3) No (cid:2) Sotherly Hotels LP Yes (cid:3) No (cid:2)
The aggregate market value of common stock held by non-affiliates of Sotherly Hotels Inc. as of June 30, 2015, the last business day of Sotherly Hotels Inc.’s
most recently completed second fiscal quarter, was approximately $65,035,163 based on the closing price quoted on the NASDAQ ® Stock Market.
As of March 16, 2016, there were 14,949,651 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain portions of Sotherly Hotels Inc.’s proxy statement for its 2016 annual meeting of stockholders to be
filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
INDEX
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART I
Business ......................................................................................................................................................................
5
Risk Factors................................................................................................................................................................. 13
Unresolved Staff Comments ....................................................................................................................................... 30
Properties .................................................................................................................................................................... 31
Legal Proceedings ....................................................................................................................................................... 31
Mine Safety Disclosure ............................................................................................................................................... 31
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..... 32
Selected Financial Data............................................................................................................................................... 34
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................................... 38
Quantitative and Qualitative Disclosures About Market Risk.................................................................................... 54
Financial Statements and Supplementary Data........................................................................................................... 55
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 55
Controls and Procedures ............................................................................................................................................. 55
Other Information ....................................................................................................................................................... 57
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.......................................................................................... 58
Executive Compensation............................................................................................................................................. 58
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................... 58
Certain Relationships and Related Transactions, and Director Independence ........................................................... 59
Principal Accountant Fees and Services ..................................................................................................................... 59
Item 15.
Exhibits and Financial Statement Schedules .............................................................................................................. 60
PART IV
2
EXPLANATORY NOTE
We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common
stock as “Common Stock,” the Company’s preferred stock as “Preferred Stock,” and the Operating Partnership’s preferred interest as
the “Preferred Interest.” References to “we” and “our” mean the Company, its Operating Partnership and its subsidiaries and
predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The
partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment
of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership
agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.
This report combines the Annual Reports on Form 10-K for the period ended December 31, 2015 of the Company and the
Operating Partnership. We believe combining the annual reports into this single report results in the following benefits:
•
•
•
•
combined reports better reflect how management and investors view the business as a single operating unit;
combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to
view the business as a whole and in the same manner as management;
combined reports are more efficient for the Company and the Operating Partnership and result in savings of time, effort
and expense; and
combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for
their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report
presents the following separate sections for each of the Company and the Operating Partnership:
•
•
•
•
•
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities – selected portions;
Item 9A – Controls and Procedures;
Consolidated Financial Statements;
the following Notes to Consolidated Financial Statements:
•
•
Note 8 – Equity; and
Note 14 – Earnings (Loss) Per Share and Unit; and
Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Information included and incorporated by reference in this Form 10-K may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may
involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations and future
plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,”
“anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or
affirmative, but the absence of these words does not necessarily mean that a statement is not forward looking. All statements regarding
our expected financial position, business and financing plans are forward-looking statements. Factors which could have a material
adverse effect on our operations and future prospects include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the
demand for hotel products and services;
risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs;
the magnitude and sustainability of the economic recovery in the hospitality industry and in the markets in which we
operate;
the availability and terms of financing and capital and the general volatility of the securities markets;
risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements and, if
necessary, to refinance or seek an extension of the maturity of such indebtedness or modify such debt agreements;
management and performance of our hotels;
risks associated with remediating and maintaining our system of internal controls;
risks associated with the conflicts of interest of the Company’s officers and directors;
risks associated with redevelopment and repositioning projects, including delays and cost overruns;
supply and demand for hotel rooms in our current and proposed market areas;
risks associated with our ability to maintain our franchise agreements with our third party franchisors;
our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with
expectations;
our ability to successfully expand into new markets;
legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);
the Company’s ability to maintain its qualification as a REIT; and
our ability to maintain adequate insurance coverage.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the Section
titled “Risk Factors” in Item 1A of this report.
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or
incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any
document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no
obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our
future results.
4
Item 1. Business
Organization
PART I
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust, or REIT, that
was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties
located in primary markets in the mid-Atlantic and southern United States. On December 21, 2004, the Company successfully
completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. The Company
conducts its business through Sotherly Hotels LP, its operating partnership (the “Operating Partnership”), of which the Company is the
general partner. The Company owns approximately 86.8% of the partnership units in the Operating Partnership. Limited partners
(including certain of the Company’s officers and directors) own the remaining Operating Partnership units.
As of March 1, 2016, our portfolio consists of twelve full-service, primarily upscale and upper-upscale hotels located in eight
states with an aggregate of 3,011 rooms and approximately 160,928 square feet of meeting space. All of these hotels are wholly-
owned by subsidiaries of the Operating Partnership, eleven operate under the HiltonTM, Crowne PlazaTM, DoubleTreeTM and
SheratonTM brands, one is an independent hotel, and all are managed on a day to day basis by MHI Hotels Services, LLC, which does
business as Chesapeake Hospitality (“Chesapeake Hospitality”).
In order for the Company to qualify as a REIT, it cannot directly manage or operate our wholly-owned hotels. Therefore, we
lease our wholly-owned hotel properties to entities that we refer to as our TRS Lessees, which in turn have engaged Chesapeake
Hospitality, an eligible independent management company, to manage our hotels. Our TRS Lessees are wholly-owned subsidiaries of
MHI Hospitality TRS Holding, Inc. (“MHI Holding”, and collectively, “MHI TRS”). MHI TRS is a taxable REIT subsidiary for
federal income tax purposes.
Our corporate office is located at 410 West Francis Street, Williamsburg, Virginia 23185. Our telephone number is (757) 229-
5648.
Our Properties
In connection with the Company’s initial public offering, the Company acquired six hotel properties for aggregate consideration
of approximately $15.0 million in cash, 3,817,036 units of interest in our Operating Partnership and the assumption of approximately
$50.8 million in debt. The six initial hotel properties, the Hilton Philadelphia Airport, the Holiday Inn Brownstone, the Holiday Inn
Downtown Williamsburg, the Hilton Wilmington Riverside, the Hilton Savannah DeSoto and the Holiday Inn Laurel West (formerly
the Best Western Maryland Inn), are located in Pennsylvania, North Carolina, Virginia, North Carolina, Georgia, and Maryland,
respectively.
On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront) located
in Jacksonville, Florida, for $22.0 million.
During 2006, we sold the Holiday Inn Downtown Williamsburg for $4.75 million. We also purchased the Louisville Ramada
Riverfront Inn located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs and, after extensive
renovations, re-opened the property in May 2008 as the Sheraton Louisville Riverside.
During 2007, through our joint venture with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P., and
Carlyle, we acquired a 25.0% indirect, noncontrolling interest in the Crowne Plaza Hollywood Beach Resort, a 311-room hotel in
Hollywood, Florida for approximately $75.8 million including transfer costs. We also purchased a hotel formerly known as the Tampa
Clarion Hotel in Tampa, Florida for approximately $13.8 million including transfer costs, which, after extensive renovations, re-
opened in March 2009 as the Crowne Plaza Tampa Westshore.
During 2008, we acquired the Hampton Marina Hotel located in Hampton, Virginia for approximately $7.8 million, including
transfer costs. In October 2008, the hotel was re-branded and renamed the Crowne Plaza Hampton Marina.
During 2011, after extensive renovations, we re-branded and renamed the Holiday Inn Brownstone to the DoubleTree by Hilton
Raleigh Brownstone-University.
During 2013 we acquired the Crowne Plaza Houston Downtown located in Houston, Texas at an aggregate value of
approximately $30.9 million, including certain closing costs.
5
During 2014, we acquired the Georgian Terrace located in Atlanta, Georgia at an aggregate value of approximately $61.1
million, including certain closing costs. We also, after extensive renovations, re-branded and renamed the Hilton Philadelphia Airport
to the DoubleTree by Hilton Philadelphia Airport.
During 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort,
and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a 100%
indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. We also, after extensive renovations,
re-branded and renamed the Crowne Plaza Jacksonville Riverfront to the DoubleTree by Hilton Jacksonville Riverfront, and re-
branded and renamed the Holiday Inn Laurel West to the DoubleTree by Hilton Laurel.
See Item 2 of this Form 10-K for additional detail on our properties.
Our Strategy and Investment Criteria
Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary
markets of the southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe
that we will be able to source significant external growth opportunities through our management team’s extensive network of industry,
corporate and institutional relationships.
Our investment criteria are further detailed below:
•
•
•
•
Geographic Growth Markets: We are focusing our growth strategy on the major markets in the Southern region of the
United States. Our management team remains confident in the long-term growth potential associated with this part of the
United States. We believe these markets have, during the Company’s and our predecessors’ existence, been characterized
by population growth, economic expansion, growth in new businesses and growth in the resort, recreation and leisure
segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for
acquisitions only if we believe these new markets will provide similar long-term growth prospects.
Full-Service Hotels: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall
primarily under the upscale to upper-upscale categories and include such brands as Hilton, Doubletree by Hilton, Sheraton
and Crowne Plaza, as well as independent hotels affiliated with Preferred Hotels & Resorts. We do not own economy
hotels. We believe that full-service hotels, in the upscale to upper-upscale categories, will outperform the broader U.S.
hotel industry, and thus offer the highest returns on invested capital.
Significant Barriers to Entry: We intend to execute a strategy that entails the acquisition of hotels in prime locations with
significant barriers to entry.
Proximity to Demand Generators: We seek to acquire hotel properties located in central business districts for both leisure
and business travelers within the respective markets, including large state universities, airports, convention centers,
corporate headquarters, sports venues and office buildings. We seek to be in walking locations that are proximate to the
markets’ major demand generators.
We typically define underperforming hotels as those that are poorly managed, suffer from significant deferred maintenance and
capital investment and that are not properly positioned in their respective markets. In pursuing these opportunities, we hope to
improve revenue and cash flow and increase the long-term value of the underperforming hotels we acquire. Our ultimate goal is to
achieve a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing
hotel. In analyzing a potential investment in an underperforming hotel property, we typically characterize the investment opportunity
as one of the following:
•
•
•
Up-branding Opportunity: The acquisition of properties that can be upgraded physically and enhanced operationally to
either qualify for repositioning through a change in brand affiliation or provide improved competitive advantage while
maintaining their independent status.
Shallow-Turn Opportunity: The acquisition of an underperforming but structurally sound hotel that requires moderate
renovation to re-establish the hotel in its market.
Deep-Turn Opportunity : The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of
both the business components of the operations as well as the physical plant of the hotel, including extensive renovation
of the building, furniture, fixtures and equipment.
Typically, in our experience, a deep turn opportunity takes a total of approximately four years from the initial acquisition of a
property to achieving full post-renovation stabilization. Therefore, when evaluating future opportunities in underperforming hotels, we
6
intend to focus on up-branding and shallow-turn opportunities, and to pursue deep-turn opportunities on a more limited basis and in
joint venture partnerships if possible.
Investment Vehicles. In pursuit of our investment strategy, we may employ various traditional and non-traditional investment
vehicles:
•
•
Direct Purchase Opportunity: Our traditional investment strategy is to acquire direct ownership interests via our
Operating Partnership in properties that meet our investment criteria, including opportunities that involve full-service,
upscale and upper-upscale properties in identified geographic growth markets that have significant barriers to entry for
new product delivery. Such properties, or portfolio of properties, may or may not be acquired subject to a mortgage by the
seller or third-party.
Joint Venture/Mezzanine Lending Opportunities: We may, from time to time, undertake a significant renovation and
rehabilitation project that we characterize as a deep-turn opportunity. In such cases, we may acquire a functionally
obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to
structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution
and loss of current income commonly referred to as the “negative carry” associated with such extensive renovation
programs. We will not pursue joint venture or mezzanine programs in which we would become a “de facto” lender to the
real estate community.
Portfolio and Asset Management Strategy
We intend to ensure that the management of our hotel properties maximizes market share, as evidenced by revenue per available
room (“RevPAR”) penetration indices, and that our market share yields the optimum level of revenues for our hotels in their
respective markets. Our strategy is designed to actively manage our hotels’ operating expenses in an effort to maximize hotel earnings
before interest, taxes, depreciation and amortization (“Hotel EBITDA”).
Over our long history in the lodging industry we have refined many portfolio and asset management techniques that we believe
provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market
trends, one-time or exceptional revenue opportunities, and/or changes in the regulatory climate that may impact costs. We review
daily revenue results and revenue management strategies at the hotels, and we focus on our manager’s ability to produce high quality
revenues that translate to higher marginal profitability. We look for ancillary forms of revenues, such as leasing roof-top space for
cellular towers and other communication devices and also look to lease space to third parties in our hotels, which may include, but are
not limited to, gift shops or restaurants. We have and will continue to engage parking management companies to maximize parking
revenue. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal
property taxes. We generally appeal tax increases in an effort to secure lower tax payments and routinely pursue strategies that allow
for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.
We also require detailed and refined reporting data from Chesapeake Hospitality, which includes detailed accounts of revenues,
revenue segments, expenses and forecasts based on current and historic booking patterns. We also believe we optimize and
successfully manage capital costs at our hotels while ensuring that adequate product standards are maintained to provide a positive
guest experience.
None of our hotels are managed by a major national or global hotel franchise company. Through our long history in the lodging
industry, we have found that management of our hotels by management companies other than franchisors is preferable to and more
profitable than management derived from the major franchise companies, specifically with respect to optimization of operating
expenses and the delivery of guest service.
Our portfolio management strategy includes our effort to optimize labor costs. The labor force in our hotels is predominately
non-unionized, with only one property, the DoubleTree by Hilton Jacksonville Riverfront, having a total of approximately six
employees electing to participate under a collective bargaining arrangement. Further, the labor force at our hotels is eligible to receive
health and other insurance coverage through Chesapeake Hospitality, which self-insures. Self-insuring has, in our opinion and
experience, provided significant savings over traditional insurance company sponsored plans.
Asset Disposition Strategy. When a property no longer fits with our investment objectives, we will pursue a direct sale of the
property for cash so that our investment capital can be redeployed according to the investment strategies outlined above. Where
possible, we will seek to subsequently purchase a hotel in connection with the requirements of a tax-free exchange. Such a strategy
may be deployed in order to mitigate the tax consequence that a direct sale may cause.
7
Our Principal Agreements
Management Agreements
Chesapeake Hospitality is currently the management company for each of our hotels. Certain of our executive officers and
certain of our directors are also directors of Chesapeake Hospitality
On December 15, 2014, we entered into a master agreement (the “Master Agreement”) and a series of individual hotel
management agreements (each a “Hotel Management Agreement” and, together, the “Hotel Management Agreements”) between the
Company, the operating partnership, and MHI Hospitality TRS, LLC on the one hand and Chesapeake Hospitality on the other hand,
to address the scheduled expiration of the then existing master management agreement (the “MMA”) and the strategic alliance
agreement (the “SA Agreement”) and to provide for ongoing management of the Company’s hotels. The Master Agreement and Hotel
Management Agreements terminated and replaced the then existing MMA and individual management agreements.
The Master Agreement:
•
•
•
•
•
•
•
expires on December 31, 2019, or earlier if all of the Hotel Management Agreements expire or are terminated prior to that
date. The Master Agreement will be extended beyond 2019 for such additional periods as a Hotel Management
Agreement remains in effect;
terminated the then existing SA Agreement as of December 15, 2014;
extended the term of the then existing MMA until December 31, 2014 and terminated the MMA and other individual
management agreements for Tampa, Houston, and Atlanta as of such date;
caused the Hotel Management Agreements to come into effect coincident with the termination of the MMA and other
individual management agreements on December 31, 2014;
requires Chesapeake Hospitality to provide dedicated executive level support for our managed hotels pursuant to certain
criteria;
provides a mechanism and established conditions on which the Company will offer Chesapeake Hospitality the
opportunity to manage hotels acquired by the Company in the future, pursuant to a negotiated form of single facility
management agreement, with the caveat that the Company is not required to offer the management of future hotels to
Chesapeake Hospitality; and
sets an incentive management fee for each of the hotels to be managed by Chesapeake Hospitality equal to 10% of the
amount by which gross operating profit, as defined in the Hotel Management Agreement, for a given year exceeds the
budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of
any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.
Each of the Hotel Management Agreements has a term of five years commencing January 1, 2015, with the exception of the
Hotel Management Agreement for the management of the Crowne Plaza Hollywood Beach Resort, which has a term of five years
commencing July 31, 2015. Each of the Hotel Management Agreements may be extended for up to two additional periods of five
years subject to the approval of both parties with respect to any such extension. The agreements provide that Chesapeake Hospitality
will be the sole and exclusive manager of the hotels as the agent of the lessee and at the sole cost and expense of the lessee and subject
to certain operating standards. Each agreement may be terminated in connection with a sale of the related hotel. In connection with a
termination upon the sale of the hotel, Chesapeake Hospitality will be entitled to receive a termination fee equal to the lesser of the
management fee paid with respect to the prior twelve months or the management fees paid for that number of months prior to the
closing date of the hotel sale equal to the number of months remaining on the current term of the Hotel Management Agreement. No
sale termination fee will be payable in the event the Company elects to provide Chesapeake Hospitality with the opportunity to
manage another comparable hotel and Chesapeake Hospitality is not precluded from accepting such opportunity. Chesapeake
Hospitality is required to qualify as an eligible independent contractor in order to permit the Company to continue to operate as a real
estate investment trust.
Amounts Payable under the Management Agreements. Chesapeake Hospitality receives a base management fee, and, if the
hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.
8
The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be a percentage of
the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for
each of our wholly-owned hotels is as follows (1):
2018 &
2019
2017
2016
2015
2014
2013
Crowne Plaza Hampton Marina..................................................
Crowne Plaza Hollywood Beach Resort.....................................
Crowne Plaza Houston Downtown (3).................................................
Crowne Plaza Tampa Westshore (4) ....................................................
DoubleTree by Hilton Jacksonville Riverfront...........................
DoubleTree by Hilton Laurel......................................................
DoubleTree by Hilton Philadelphia Airport ...............................
DoubleTree by Hilton Raleigh Brownstone – University ..........
Georgian Terrace (5).................................................................................
Hilton Savannah DeSoto.............................................................
Hilton Wilmington Riverside .....................................................
Sheraton Louisville Riverside (6)..........................................................
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.65%
(2)
2.50%
2.65%
2.65%
2.65%
2.65%
2.65%
2.50%
2.65%
2.65%
2.65%
2.65%
(2)
2.25%
2.65%
2.65%
2.65%
2.65%
2.65%
2.25%
2.65%
2.65%
2.65%
2.65%
2.00%
2.00%
2.65%
2.65%
2.65%
2.65%
2.65%
2.00%
2.65%
2.65%
2.65%
3.00%
N/A
2.00%
3.00%
3.00%
3.00%
3.00%
3.00%
2.00%
3.00%
3.00%
3.00%
3.00%
N/A
2.00%
3.00%
3.00%
3.00%
3.00%
3.00%
N/A
3.00%
3.00%
3.00%
(1)
The fees for 2011-2014 were set by the MMA, and the individual management agreements for Tampa, Houston, and Atlanta.
The fees for 2015-2019 are set by the Master Agreement and Hotel Management Agreements.
(2) Upon acquiring the Crowne Plaza Hollywood Beach Resort in July 2015, we entered into a single facility management
(3)
(4)
(5)
(6)
agreement with Chesapeake Hospitality for the management of the hotel. The terms of the agreement provide for a base
management fee of 2.00% through July 2016, 2.25% through July 2017, and 2.50% thereafter.
In November 2013, we assumed the existing management agreement with Chesapeake Hospitality for the management of the
Crowne Plaza Houston Downtown. The terms of the agreement provided for a base management fee of 2.0% and no incentive
management fee.
In January 2009, we entered a separate management agreement with Chesapeake Hospitality for the management of the Crowne
Plaza Tampa Westshore. The provisions of the new agreement related to base management fee were the same as those contained
in the MMA. The provisions of the agreement related to the incentive management fee were the same as those contained in the
MMA except that it was calculated separately and not aggregated with the other properties covered by the MMA.
In March 2014, we entered into the Atlanta Agreement with Chesapeake Hospitality for the management of the Georgian
Terrace. The terms of the agreement provided for a base management fee of 2.0% and no incentive management fee. The
Atlanta Agreement was terminated in connection with the entry into the Master Agreement and Hotel Management Agreements.
Pursuant to the MMA, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was
10 years. The management company agreed to substitute the Sheraton Louisville Riverside for the Holiday Inn Downtown
Williamsburg for remainder of the term of the agreement.
The base management fee for a hotel acquired in the future which is first leased by our TRS Lessees, other than on the first day
of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full year such hotel is managed. There is no
fee cap on the base management fee.
Subsequently Acquired Hotel Properties
First year .............................................................................................
Second year .........................................................................................
Third year and thereafter.....................................................................
2.00%
2.25%
2.50%
Terminated Strategic Alliance Agreement and Management Agreements
On December 21, 2004, we entered into the now terminated ten-year SA Agreement with Chesapeake Hospitality pursuant to
which (i) Chesapeake Hospitality agreed to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States
presented to Chesapeake Hospitality, and (ii) unless a majority of the Company’s independent directors in good faith concluded for
valid business reasons that another management company should manage a hotel owned by us, we agreed to offer Chesapeake
Hospitality or its subsidiaries the right to manage hotel properties that we acquired in the United States. The SA Agreement was
terminated effective as of December 15, 2014, pursuant to the terms of the Master Agreement.
9
Pursuant to the terms of the now terminated MMA and other individual management agreements for Tampa, Houston and
Atlanta, we engaged Chesapeake Hospitality as the property manager for each of our wholly-owned hotels through December 2015.
The MMA had a term of ten (10) years for each initial hotels and a term of ten (10) years for each subsequently acquired hotel that
became subject to the MMA. Chesapeake Hospitality benefited from the payment of management fees by us pursuant to the MMA.
Chesapeake Hospitality received a base management fee equal to a percentage of each hotel’s revenues (2.0% for the first year, 2.5%
for the second year and 3.0% thereafter). Additionally, pursuant to the MMA, Chesapeake Hospitality was entitled to receive certain
incentive fees and project management fees. For Tampa, the base management and incentive management fees were the same as those
contained in the MMA. For Houston and Atlanta, the base management fee was equal to 2% of the respective hotels’ revenues, and
there was no incentive management fee. The MMA and the individual management agreements for Tampa, Houston, and Atlanta were
terminated on December 31, 2014, pursuant to the terms of the Master Agreement.
Franchise Agreements
As of December 31, 2015, all but one of our hotels operate under franchise licenses from national hotel companies. On
March 27, 2014 we purchased an independent full-service hotel in Atlanta, Georgia, which does not operate under a franchise license.
Our TRS Lessees hold the franchise licenses for our wholly-owned hotels. Chesapeake Hospitality must operate each of our
hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.
The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing
standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must comply with the
franchisors’ standards and requirements with respect to:
•
•
•
•
•
•
•
training of operational personnel;
safety;
maintaining specified insurance;
the types of services and products ancillary to guest room services that may be provided;
display of signage;
marketing techniques including print media, billboards, and promotions standards; and
the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.
Additionally, as the franchisee, our TRS Lessees are required to pay the franchise fees described below.
The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:
Franchise Fee (1)
Marketing/
Reservation
Fee (1)
Expiration
Date
Crowne Plaza Hampton Marina ................................
Crowne Plaza Hollywood Beach Resort ...................
Crowne Plaza Houston Downtown ...........................
Crowne Plaza Tampa Westshore...............................
DoubleTree by Hilton Jacksonville Riverfront .........
DoubleTree by Hilton Laurel ....................................
DoubleTree by Hilton Philadelphia – Airport ...........
DoubleTree by Hilton Raleigh Brownstone –
University ...............................................................
Hilton Savannah DeSoto ...........................................
Hilton Wilmington Riverside ....................................
Sheraton Louisville Riverside ...................................
5.0%
5.0%
5.0%
5.0%
5.0% (2)
5.0%
5.0% (3)
(2)
5.0%
5.0%
5.0%
5.0%
3.5%
3.5%
3.5%
3.5%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
3.5%
10/6/2018
9/18/2017
4/12/2016
3/6/2019
9/30/2025
10/31/2030
10/31/2024
11/30/2021
7/31/2017
3/31/2018
4/25/2023
(1)
(2)
(3)
Percentage of room revenues payable to the franchisor.
The Franchise Fee is 3.0% for operating year 1, 4.0% for operating year 2, and 5.0% thereafter.
The Franchise Fee is 4.0% for operating years 1 and 2, and 5.0% thereafter.
10
Lease Agreements
In order for the Company to maintain qualification as a REIT, neither the Company nor the Operating Partnership or its
subsidiaries can operate our hotels directly. Our wholly-owned hotels are leased to our TRS Lessees, which have engaged Chesapeake
Hospitality to manage the hotels. Each lease for the wholly-owned hotels has a non-cancelable term of three to ten years, subject to
earlier termination upon the occurrence of certain contingencies described in the lease.
During the term of each lease, our TRS Lessees are obligated to pay a fixed annual base rent plus a percentage rent and certain
other additional charges. Base rent accrues and is paid monthly. Percentage rent is calculated by multiplying fixed percentages by
gross room revenues, in excess of certain threshold amounts and is paid monthly or quarterly, according to the terms of the agreement.
Tax Status
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the “Code”), commencing with its taxable year ended December 31, 2004. In order to maintain its qualification as a REIT, the
Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute, as
“qualifying distributions,” at least 90.0% of its taxable income (determined without regard to the deduction for dividends paid and by
excluding its net capital gains and reduced by certain non-cash items) to its stockholders. The Company has adhered to these
requirements each taxable year since its formation in 2004 and intends to continue to adhere to these requirements and maintain its
qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that
portion of its taxable income (including its net capital gain) that is distributed to its stockholders. If the Company fails to qualify for
taxation as a REIT in any taxable year, and no relief provision applies, it will be subject to federal income taxes at regular corporate
rates (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the
fifth taxable year after the year in which it failed to qualify as a REIT. Even if the Company qualifies for taxation as a REIT, it may be
subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable
income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state
and local income taxes.
While the Operating Partnership is generally not subject to federal and state income taxes, the unit holders of the Operating
Partnership, including the Company, are subject to tax on their respective allocable shares of the Operating Partnership’s taxable
income.
The Company has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership.
MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss, through
December 31, 2015, of $11.8 million and in addition had deferred timing differences of approximately $0.2 million attributable to
start-up expenses related to the opening of several of its hotels, which was not deductible when incurred and is being amortized over
15 years and deferred timing differences of approximately $0.5 million attributable to accrued, but not deductible, vacation and sick
pay amounts. The Company has not incurred federal income taxes since its formation. The cumulative taxable loss and combined
timing differences result in a net deferred tax asset of approximately $5.4 million for these cumulative deferred tax loss carryforwards.
Environmental Matters
In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances
and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often
impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic
substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such
contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a
person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports
such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the
environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the
presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as
collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances
and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a
material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance,
liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel
properties.
11
Employees
As of March 15, 2016, we employed twelve full-time persons, all of whom work at our corporate office in Williamsburg,
Virginia. All persons employed in the day-to-day operations of the hotels are employees of Chesapeake Hospitality, the management
company engaged by our TRS Lessees to operate such hotels.
Available Information
We maintain an Internet site, http://www.sotherlyhotels.com, which contains additional information concerning Sotherly Hotels
Inc. We make available free of charge through our Internet site all our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, definitive proxy statements and other reports filed with the Securities and Exchange Commission as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We
have also posted on this website the Company’s Code of Business Conduct and the charters of the Company’s Audit and NCGC
Committees of the Company’s board of directors. We intend to disclose on our website any changes to, or waivers from, the
Company’s Code of Business Conduct. Information on the Company’s Internet site is neither part of nor incorporated into this Form
10-K.
12
Item 1A. Risk Factors
The following are the material risks that may affect us. Any of the risks discussed herein can materially adversely affect our
business, liquidity, operations, industry or financial position or our future financial performance.
Risks Related to Our Debt
We have substantial financial leverage.
As of December 31, 2015, we had consolidated debt of approximately $324.9 million, which is comprised of approximately
$272.0 million secured debt, approximately $27.6 million unsecured debt related to 8.0% senior unsecured notes due September 30,
2018, (the “8% Notes”) and $25.3 million unsecured debt related to the 7.0% senior unsecured notes due November 20, 2019 (the “7%
Notes”), and together with the 8% Notes, the “Notes”). Historically, we have incurred debt for acquisitions and to fund our renovation,
redevelopment and rebranding programs. Limitations upon our access to additional debt could adversely affect our ability to fund
these programs or acquire hotels in the future.
Our financial leverage could negatively affect our business and financial results, including the following:
•
•
•
•
•
•
•
•
•
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing
funds available for operations, working capital, capital expenditures, future business opportunities, paying dividends or
other purposes;
limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements and other purposes;
adversely affect our ability to satisfy our financial obligations, including those related to the Notes;
limit our ability to refinance existing debt;
require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain
financing;
force us to dispose of one or more of our properties, possibly on unfavorable terms;
increase our vulnerability to adverse economic and industry conditions, and to interest rate fluctuations;
force us to issue additional equity, possibly on terms unfavorable to existing shareholders;
limit our flexibility to make, or react to, changes in our business and our industry; and
place us at a competitive disadvantage, compared to our competitors that have less debt.
We must comply with financial covenants in our mortgage loan agreements and in the indenture.
Our mortgage loan agreements and indentures contain various financial covenants. Failure to comply with these financial
covenants could result from, among other things, changes in the local competitive environment, general economic conditions and
disruption caused by renovation activity or major weather disturbances.
If we violate the financial covenants contained in our mortgage loan agreements, we may attempt to negotiate waivers of the
violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we
would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments
would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise
comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by
providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the
cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash
collateral may have a material impact on our liquidity.
If we violate the financial covenants in the indentures, we may attempt to cure that violation by engaging in one or more
transactions pursuant to the cure provision in the indentures.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate
cure requirements and a default were to occur, we would possibly have to refinance the debt through debt financing, private or public
offerings of debt securities, additional equity financing, or by disposing of an asset. We are uncertain whether we will be able to
refinance these obligations or if refinancing terms will be favorable.
13
We have a significant amount of mortgage debt obligations maturing in 2016 and 2017, and if we are not successful in extending
the term of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our overall financial condition
could be materially and adversely affected.
We will be required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is
maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no
assurance that we will be able to obtain future financings on acceptable terms, if at all.
The mortgage on our Crowne Plaza Hampton Marina matures on June 30, 2016, at which time we anticipate the balance to be
approximately $3.0 million. The mortgage on our Crowne Plaza Houston Downtown which was scheduled to mature in April 2016
has been extended until November 2017. In January 2017, the mortgage on our Sheraton Louisville Riverside matures. In April 2017,
the mortgage on our Hilton Wilmington Riverside mortgage matures. In June 2017, the mortgage on our Crowne Plaza Tampa
Westshore matures. Lastly, in September 2017, the mortgage on the Hilton Savannah Desoto matures.
The total aggregate amount of our debt obligations scheduled to mature in 2016, inclusive of monthly amortization of all our
indebtedness, is approximately $9.4 million, which represents approximately 2.9% of our total debt obligation outstanding as of
December 31, 2015. The total aggregate amount of our debt obligations scheduled to mature in 2017, inclusive of monthly
amortization of all our indebtedness is approximately $86.7 million, which represents 26.7% of our indebtedness.
We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. If we
are unable to extend these loans, we may be required to repay the outstanding principal amount at maturity or a portion of such
indebtedness upon refinance. If we do not have sufficient funds to repay any portion of the indebtedness, it may be necessary to raise
capital through debt financing, private or public offerings of debt securities or equity financings. We are uncertain whether we will be
able to refinance these obligations or if refinancing terms will be favorable. If, at the time of any refinancing, prevailing interest rates
or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and,
consequently, cash available to meet our financial obligations. If we are unable to obtain alternative or additional financing
arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies
or we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses and potentially reducing
cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be
reinvested in equally profitable real property investments. Moreover, the terms of any additional financing may restrict our financial
flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the
extent we cannot repay our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required
to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.
For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the
outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our
tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could
hinder the Company’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial
guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity
that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity.
Our borrowing costs are sensitive to fluctuations in interest rates.
Higher interest rates could increase our debt service requirements and interest expense. Currently, our floating rate debt is
limited to the mortgages on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the DoubleTree by Hilton
Jacksonville Riverfront. Each of these mortgages bears interest at rates tied to the 30-day London Interbank Offered Rate (“LIBOR”)
and provide for minimum rates of interest. To the extent that increases in the LIBOR rate of interest cause the interest on the
mortgages to exceed the minimum rates of interest, we are exposed to rising interest rates.
Should we obtain new debt financing or refinance existing indebtedness, we may increase the amount of floating rate debt that
currently exists. In addition, adverse economic conditions could also cause the terms on which we borrow to be unfavorable.
Risks Related to Our Business and Properties
If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance and financial
results may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.
The performance of the lodging industry and the general economy historically have been closely linked. In an economic
downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels,
which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have
lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating revenues, which will
14
lower our cash flow and may affect our ability to make distributions to stockholders and to maintain compliance with our loan
obligations. We had net income attributable to the Company of approximately $5.4 million for the 2015 fiscal year. A renewed
economic downturn may reduce our income or produce losses. A weakening of the economy may adversely and materially affect our
industry, business and results of operations and we cannot predict the likelihood, severity or duration of any such downturn.
Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term
business strategy.
We own a limited number of hotels and significant adverse changes at one hotel could have a material adverse effect on our
financial performance and may limit our ability to make distributions to stockholders.
As of December 31, 2015, our portfolio consisted of twelve wholly-owned properties with a total of 3,011 rooms. Significant
adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly,
on our ability to make distributions to stockholders.
We are subject to risks of increased hotel operating expenses and decreased hotel revenues.
Our leases with our TRS Lessees provide for the payment of rent based in part on gross revenues from our hotels. Our TRS
Lessees are subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but
not limited to the following:
•
•
•
•
•
•
wage and benefit costs;
repair and maintenance expenses;
energy costs;
property taxes;
insurance costs; and
other operating expenses.
Any increases in these operating expenses can have a significant adverse impact on our TRS Lessees’ ability to pay rent and
other operating expenses and, consequently, our earnings and cash flow.
In keeping with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as
part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely
affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the
Company’s stockholders.
We have in the past, and may in the future, develop or acquire hotels in geographic areas in which our management may have
little or no operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning
strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we may
have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than
those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may choose to increase
spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient
demand at new hotel properties, therefore, could adversely affect our financial performance and our ability to comply with covenants
in the indenture and to make distributions to the Company’s stockholders.
We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the
daily operations of any hotel and as a result, our returns are dependent on the management of our hotels by Chesapeake
Hospitality.
Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or
manage our hotels. Instead, we lease all of our hotels to subsidiaries of our TRS Lessees, and our TRS Lessees retain third-party
managers to operate our hotels pursuant to management agreements.
Under the terms of our management agreements with Chesapeake Hospitality and the REIT qualification rules, our ability to
participate in operating decisions regarding the hotels is limited. We will depend on Chesapeake Hospitality to operate our hotels as
provided in the management agreements. We do not have the authority to require any hotel to be operated in a particular manner or to
govern any particular aspect of the daily operations of any hotel. Thus, even if we believe our hotels are being operated inefficiently or
in a manner that does not result in satisfactory occupancy rates, RevPAR, and average daily rates (“ADR”), we may not be able to
15
force Chesapeake Hospitality to change its method of operating our hotels. Additionally, in the event that we need to replace
Chesapeake Hospitality or any other management companies in the future, we may be required by the terms of the applicable
management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
Our ability to make distributions to the Company’s stockholders is subject to fluctuations in our financial performance, operating
results and capital improvement requirements.
As a REIT, the Company is required to distribute, as “qualifying distributions,” at least 90.0% of its REIT taxable income
(determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash
items), each year to the Company’s stockholders. However, several factors may make us unable to declare or pay distributions to the
Company’s stockholders, including poor operating results and financial performance or unanticipated capital improvements to our
hotels, including capital improvements that may be required by our franchisors.
We lease all of our hotels to our TRS Lessees. Our TRS Lessees are subject to hotel operating risks, including risks of sustaining
operating losses after payment of hotel operating expenses, including management fees. Among the factors which could cause our
TRS Lessees to fail to make required rent payments are reduced net operating profits or operating losses, increased debt service
requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among
the factors that could reduce the net operating profits of our TRS Lessees are decreases in hotel revenues and increases in hotel
operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel
rooms and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates at our hotels.
The amount of any dividend distributions to holders of the Company’s common stock is in the sole discretion of the Company’s
board of directors, which will consider, among other factors, our financial performance, debt service obligations, debt covenants and
capital expenditure requirements. We cannot assure you that we will continue to generate sufficient cash to fund distributions.
Geographic concentration of our hotels makes our business vulnerable to economic downturns in the mid-Atlantic and southern
United States.
Our hotels are located in the mid-Atlantic and southern United States. As a result, economic conditions in the mid-Atlantic and
southern United States significantly affect our revenues and the value of our hotels to a greater extent than if we had a more
geographically diversified portfolio. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar
factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any
resulting oversupply or reduced demand for hotels in the mid-Atlantic and southern United States and in our markets in particular
would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.
A substantial number of our hotels operate under a brand owned by IHG, Starwood or Hilton; therefore, we are subject to risks
associated with concentrating our portfolio in three brands.
In our portfolio, the majority of the hotels that we owned as of December 31, 2015 utilize brands owned by IHG, Starwood or
Hilton. As a result, our success is dependent in part on the continued success of IHG, Starwood or Hilton and their respective brands.
If market recognition or the positive perception of IHG, Starwood and/or Hilton is reduced or compromised, the goodwill associated
with the IHG, Starwood and Hilton branded hotels in our portfolio may be adversely affected, which may have a material adverse
effect our business, financial condition, results of operations and our ability to make distributions to our stockholders.
Hedging against interest rate exposure may adversely affect us and our hedges may fail to protect us from the losses that the
hedges were designed to offset.
Subject to maintaining the Company’s qualification as a REIT, we may elect to manage our exposure to interest rate volatility
by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that
these arrangements may fail to protect or adversely affect us because, among other things:
•
•
•
•
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
the financial instruments we select may not have the effect of reducing our interest rate risk;
the duration of the hedge may not match the duration of the related liability;
16
•
•
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it
impairs our ability to sell or assign our side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, may fail to protect us from the
losses that the hedges were designed to offset and could have a material adverse effect on us.
Our investment opportunities and growth prospects may be affected by competition for acquisitions.
We compete for investment opportunities with other entities, some of which have substantially greater financial resources than
we do. This competition may generally limit the number of suitable investment opportunities offered to us, which may limit our ability
to grow. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for
us to acquire new properties on attractive terms, or at all.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or
prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which could harm our
business and the value of the Company’s common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of
the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. Our internal
controls and financial reporting are not subject to attestation by our independent registered public accounting firm pursuant to the
exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010. While we have undertaken substantial work to comply with Section 404, we cannot be certain
that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future.
We may in the future discover areas of our internal controls that need improvement. Furthermore, as we grow our business, our
internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain
effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could
reduce the market value of the Company’s common shares. Additionally, the existence of any material weakness or significant
deficiency would require management to devote significant time and incur significant expense to remediate any such material
weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant
deficiencies in a timely manner. In 2014, we identified a material weakness in our internal control over financial reporting which has
been remediated.
We are subject to cyber-security risks related to breaches of security pertaining to sensitive company, customer, employee and
vendor information as well as breaches in the technology that manages operations and other business processes.
Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting.
Despite careful security and controls design, implementation, updating and independent third party verification, our information
technology systems, and those of our third party providers, could become subject to cyber-attacks. Network, system, application and
data breaches could result in operational disruptions or information misappropriation including, but not limited to interruption to
systems availability, denial of access to and misuse of applications required by our customers. Access to internal applications required
to plan our operations could be denied or misused. Inappropriate disclosure of confidential company, employee, customer or vendor
information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result
in lost sales, business delays, and negative publicity and could have a material effect on our business.
Risks Related to Conflicts of Interest of Our Officers and Directors
Conflicts of interest could result in our executive officers and certain of our directors acting in a manner other than in the
Company’s stockholders’ best interest.
Conflicts of interest relating to Chesapeake Hospitality, the entity that manages the properties, and the terms of its management
agreements may lead to management decisions that are not in the stockholders’ best interest.
Conflicts of interest relating to Chesapeake Hospitality may lead to management decisions that are not in the stockholders’ best
interest. Certain of our officers and directors including Andrew M. Sims, our chairman and chief executive officer and Kim E. Sims,
who currently serves on our board of directors, together own a substantial interest in Chesapeake Hospitality which manages our hotel
properties.
Our management agreements establish the terms of Chesapeake Hospitality’s management of our hotels. The new Master
Agreement provides that in the event the agreement is terminated in connection with the sale of a hotel, and Chesapeake Hospitality
17
accepts an offer to manage another hotel which is reasonable comparable to the hotel that was sold, we will not be liable for any
termination fee. If we do not offer Chesapeake Hospitality such opportunity or Chesapeake Hospitality declines such opportunity, then
a termination fee equivalent to the lesser of the management fees paid for the prior twelve-month period or the management fees for
the period prior to the sale that is equal to the number of months remaining under the term of the agreement. If we terminate the
agreement at the end of any renewable five-year term, Chesapeake Hospitality is due a termination fee equivalent to one month’s
management fees, as determined under the agreement.
As significant owners of Chesapeake Hospitality, which would receive any management and management termination fees
payable by us under the management agreement, Andrew M. Sims and Kim E. Sims may influence our decisions to sell a hotel or
acquire or develop a hotel when it is not in the best interests of the Company’s stockholders to do so. In addition, Andrew M. Sims
will have conflicts of interest with respect to decisions to enforce provisions of the management agreement, including any termination
thereof.
There can be no assurance that provisions in our bylaws will always be successful in mitigating conflicts of interest.
Under our bylaws, a committee consisting of only independent directors must approve any transaction between us and
Chesapeake Hospitality or its affiliates or any interested director. However, there can be no assurance that these policies always will
be successful in mitigating such conflicts, and decisions could be made that might not fully reflect the interests of all of the
Company’s stockholders.
Certain of our officers and directors hold units in our Operating Partnership and may seek to avoid adverse tax consequences,
which could result from transactions that would otherwise benefit the Company’s stockholders.
Holders of units in our Operating Partnership, including members of our management team, may suffer adverse tax
consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including Kim E. Sims, a trust controlled
by Edward S. Stein, and a trust controlled by Andrew M. Sims, Kim E. Sims and a former member of our board of directors, may have
different objectives than holders of the Company’s common stock regarding the appropriate pricing and timing of a property’s sale, or
the timing and amount of a property’s refinancing. These individuals, together with their affiliates, owned as of December 31, 2015, in
the aggregate, approximately 4.9% of the outstanding units in our Operating Partnership. These individuals may influence us not to
sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to the Company’s stockholders,
or they may influence us to enter into tax-deferred exchanges with the proceeds of such sales when such a reinvestment might not
otherwise be in our best interest.
Our agreements with Chesapeake Hospitality and its affiliates, including the contribution agreements and the partnership
agreement of our Operating Partnership, were not negotiated on an arms’ length basis and may be less favorable to us than we
could have obtained from third parties.
In connection with the Company’s initial public offering, we entered into various agreements with Chesapeake Hospitality and
its affiliates, including contribution agreements, a master management agreement, a strategic alliance agreement, subleases, the
partnership agreement of our Operating Partnership and employment agreements – of which only the contribution agreements and the
partnership agreement of our Operating Partnership have not expired. In addition, we entered into various separate management
agreements with Chesapeake Hospitality which have all been superseded by the new master management agreement and new
individual hotel agreements executed in December 2014. The terms of all of these agreements were determined by our management
team, who had conflicts of interest as described above and ownership interests in Chesapeake Hospitality and its affiliates. The terms
of all of these agreements may be less favorable to us than we could have obtained from third parties.
Risks Related to the Lodging Industry
Our ability to comply with the terms of the indentures, our ability to make distributions to the Company’s stockholders and the
value of our hotels in general, may be adversely affected by factors in the lodging industry.
Operating Risks
Our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our
control, including the following:
•
•
•
competition from other hotel properties in our markets;
over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels;
dependence on business and commercial travelers and tourism;
18
•
•
•
•
•
•
•
increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of
business and commercial travelers and tourists;
increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by
increased room rates;
changes in interest rates and in the availability, cost and terms of debt financing;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance
with laws and regulations, fiscal policies and ordinances;
adverse effects of international, national, regional and local economic and market conditions;
adverse effects of a downturn in the lodging industry; and
risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.
These factors could reduce the net income of our TRS Lessees, which in turn could adversely affect the value of our hotels and
our ability to comply with the terms of the indenture and to make distributions to the Company’s stockholders.
Competition for Acquisitions
We may compete for investment opportunities with entities that may have substantially greater financial resources than we do.
These entities generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit
the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property
owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Seasonality of the Hotel Business
The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly
earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a
result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make
distributions to the Company’s stockholders.
Investment Concentration in Particular Segments of a Single Industry
Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the full-service, upscale
and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our
financial condition and the extent to which cash may be available for distribution to the Company’s stockholders.
Capital Expenditures
Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time
to time, of furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a
condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts for capital
improvements to the secured properties on a monthly basis. For the years ended December 31, 2015 and 2014, we spent
approximately $20.1 million and approximately $9.8 million, respectively, on capital improvements to our hotels. Capital
improvements and renovation projects may give rise to the following risks:
•
•
•
•
possible environmental problems;
construction cost overruns and delays;
a possible shortage of available cash to fund capital improvements and the related possibility that financing for these
capital improvements may not be available to us on affordable terms; and
uncertainties as to market demand or a loss of market demand after capital improvements have begun.
The costs of all these capital improvements as well as future capital improvements could adversely affect our financial condition
and amounts available for distribution to the Company’s stockholders.
19
Operating our hotels under franchise agreements could increase our operating costs and lower our net income.
Most of our hotels operate under franchise agreements which subject us to risks in the event of negative publicity related to one
of our franchisors.
The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and
conditions. Our franchisors periodically inspect our hotels to ensure that we, our TRS Lessees, and the management company follow
their standards. Failure by us, our TRS Lessees or the management company to maintain these standards or other terms and conditions
could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements
or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor
and by hotel. As a condition of continuing a franchise license, a franchisor may require us to make capital expenditures, even if we do
not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless,
we may risk losing a franchise license if we do not make franchisor-required capital expenditures.
If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license or to operate
the hotel without a franchise license. The loss of a franchise license could significantly decrease the revenues at the hotel and reduce
the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. A loss of a franchise license for one or more hotels could materially and adversely affect our
revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations, our ability to
comply with the terms of the indentures and reduce our cash available for distribution to stockholders.
Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or
refinance our hotels, which could have a material adverse effect on us.
Franchise agreements typically contain covenants that may affect our ability to sell or refinance a hotel, including requirements
to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisor’s consent is
not forthcoming, the terms of a sale or refinancing may be less favorable to us than would otherwise be the case. Some of our
franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide
that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we
may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the
transferee agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels,
we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less favorable to
us, which could have a material adverse effect on our financial condition and the execution of our strategies.
Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to
make distributions to stockholders.
We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general
economic conditions, and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks,
including risks associated with:
•
•
•
•
•
•
construction delays or cost overruns that may increase project costs;
receipt of zoning, occupancy and other required governmental permits and authorizations;
development costs incurred for projects that are not pursued to completion;
acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
financing; and
governmental restrictions on the nature or size of a project.
We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a
project on time or within budget would increase our operating costs and reduce our net income.
The hotel business is capital intensive and our inability to obtain financing could limit our growth.
Our hotel properties will require periodic capital expenditures and renovation to remain competitive. Acquisitions or
development of additional hotel properties will require significant capital expenditures. In addition, several of our mortgage lenders
require that we set aside annual amounts for capital improvements to the secured property. We may not be able to fund capital
improvements or acquisitions solely from cash provided from our operating activities because we must distribute at least 90.0% of our
REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status. As a result, our ability to fund significant
20
capital expenditures, acquisitions or hotel development through retained earnings is very limited. Consequently, we rely upon the
availability of debt or equity capital to fund any significant investments or capital improvements, but due to the recent recession and
disruption of capital markets, these sources of funds may not yet be available to us on reasonable terms and conditions. Our ability to
grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing which will
depend on market conditions. Neither our charter nor our bylaws limit the amount of debt that we can incur. However, we cannot
assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on
favorable terms.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to the
Company’s stockholders.
We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the
type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will
continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, such as Hurricane Sandy
in October 2012 and Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist activities, such as those on
September 11, 2001, or losses from domestic terrorist activities, such as the Oklahoma City bombing on April 19, 1995, may not be
insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage in conjunction with the Terrorism
Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured
losses resulting from acts of terrorism.
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or
replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a
portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might
nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in
building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to
replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive
might be inadequate to restore our economic position on the damaged or destroyed property.
Noncompliance with governmental regulations could adversely affect our operating results.
Environmental Matters
Our hotels may be subject to environmental liabilities. An owner of real property can face liability for environmental
contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:
•
•
•
•
our knowledge of the contamination;
the timing of the contamination;
the cause of the contamination; or
the party responsible for the contamination of the property.
There may be unknown environmental problems associated with our properties. If environmental contamination exists on our
properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.
The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur
substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect
on our results of operations and financial condition and our ability to comply with our covenants and to pay distributions to
stockholders.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal
requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access
barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are
required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and
regulations, our financial condition, results of operations and ability to comply with the terms of the indentures and to make
distributions to the Company’s stockholders could be adversely affected.
21
Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
The hotel properties that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or
only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might
include:
•
•
•
•
•
•
liabilities for environmental conditions;
losses in excess of our insured coverage;
accrued but unpaid liabilities incurred in the ordinary course of business;
tax, legal and regulatory liabilities;
claims of customers, vendors or other persons dealing with the Company’s predecessors prior to our formation or
acquisition transactions that had not been asserted or were unknown prior to the Company’s formation or acquisition
transactions; and
claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of
our properties.
In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel
properties may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect
to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality
thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts
with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and
expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may
experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations and our
ability to make distributions to the Company’s stockholders.
Future terrorist activities may adversely affect, and create uncertainty in, our business.
Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will
depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the
United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years.
Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business, our
ability to insure our properties and/or our results of operations and financial condition, as a whole.
We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for
our hotels.
Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example,
the outbreaks of SARS and avian flu in 2003 had a severe impact on the travel industry, and the outbreaks of H1N1 flu in 2009
threatened to have a similar impact. A prolonged recurrence of SARS, avian flu, H1N1 flu, Ebola virus, Zika virus or another
pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could
result in a significant drop in demand for our hotels and adversely affect our financial conditions and results of operations.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our
properties and harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in
response to changing economic, financial and investment conditions is limited.
The real estate market is affected by many factors that are beyond our control, including:
•
•
•
•
adverse changes in international, national, regional and local economic and market conditions;
changes in interest rates and in the cost and terms of debt financing;
absence of liquidity in credit markets which limits the availability and amount of debt financing;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance
with laws and regulations, fiscal policies and ordinances;
22
•
•
•
the ongoing need for capital improvements, particularly in older structures;
changes in operating expenses; and
civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Sandy in October
2012 and Hurricane Katrina in New Orleans in August 2005, which may result in uninsured losses, and acts of war or
terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001.
We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property for the price
or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also
cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot
assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we
may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions,
such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would
impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our
operating results and financial condition, as well as our ability to comply with the terms of the indentures and to pay distributions to
stockholders.
Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management
resources and may result in stockholder dilution.
Our business strategy may not ultimately be successful and may not provide positive returns on our investments. Acquisitions
may cause disruptions in our operations and divert management’s attention away from day-to-day operations. The issuance of equity
securities in connection with any acquisition could be substantially dilutive to the Company’s stockholders.
Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating
the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants.
Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and
symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us
to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash
available for distribution. In addition, the presence of significant mold could expose us to liability from our guests, employees or the
management company and others if property damage or health concerns arise and could harm our reputation.
Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to make
distributions to the Company’s stockholders.
Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as
the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations
and our ability to make distributions to the Company’s stockholders could be materially and adversely affected and the market price of
the Company’s common shares could decline.
Risks Related to Our Organization and Structure
Our ability to effect a merger or other business combination transaction may be restricted by our Operating Partnership
agreement.
In the event of a change of control of the Company, the limited partners of our Operating Partnership will have the right, for a
period of 30 days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the
limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the
partnership agreement. This cash redemption right may make it more unlikely or difficult for a third party to propose or consummate a
change of control transaction, even if such transaction were in the best interests of the Company’s stockholders.
23
Provisions of the Company’s charter may limit the ability of a third party to acquire control of the Company.
Aggregate Share and Common Share Ownership Limits
The Company’s charter provides that no person may directly or indirectly own more than 9.9% of the value of the Company’s
outstanding shares of capital stock or more than 9.9% of the number of the Company’s outstanding shares of common stock. These
ownership limitations may prevent an acquisition of control of the Company by a third party without the Company’s board of
directors’ approval, even if the Company’s stockholders believe the change of control is in their interest. The Company’s board of
directors has discretion to waive that ownership limit if, including other considerations, the board receives evidence that ownership in
excess of the limit will not jeopardize the Company’s REIT status.
Authority to Issue Stock
The Company’s amended and restated charter authorizes our board of directors to issue up to 49,000,000 shares of common
stock and up to 1,000,000 shares of preferred stock (27,650 of which have since been retired), to classify or reclassify any unissued
shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares.
Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of the Company, including
transactions at a premium over the market price of the Company’s stock, even if stockholders believe that a change of control is in
their interest. The Company will be able to issue additional shares of common or preferred stock without stockholder approval, unless
stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which the
Company’s securities may be listed or traded.
Provisions of Maryland law may limit the ability of a third party to acquire control of the Company.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of
shares of the Company’s common stock with the opportunity to realize a premium over the then-prevailing market price of such
shares, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an
“interested stockholder” (defined generally as any person who beneficially owns 10.0% or more of the voting power of
our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested
stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these
combinations; and
“control share” provisions that provide that “control shares” of the Company (defined as shares which, when aggregated
with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting
power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of
ownership or control of “control shares”) have no voting rights except to the extent approved by the Company’s
stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all
interested shares.
The Company has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL
by resolution of the Company’s board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision
in the Company’s bylaws. However, the Company’s board of directors may by resolution elect to opt in to the business combination
provisions of the MGCL and the Company may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in
the future. The Company’s board of directors has the exclusive power to amend the Company’s bylaws.
Additionally, Title 8, Subtitle 3 of the MGCL permits the Company’s board of directors, without stockholder approval and
regardless of what is currently provided in the Company’s charter or bylaws, to implement takeover defenses, some of which (for
example, a classified board) the Company does not currently have. These provisions may have the effect of inhibiting a third party
from making an acquisition proposal for the Company or of delaying, deferring or preventing a change in control of the Company
under the circumstances that otherwise could provide the holders of the Company’s common stock with the opportunity to realize a
premium over the then current market price.
Provisions in the Company’s executive officers’ employment agreements may make a change of control of the Company more
costly or difficult.
The Company’s employment agreements with Andrew M. Sims, its chief executive officer, David R. Folsom, its president and
chief operating officer, and Anthony E. Domalski, its chief financial officer, contain provisions providing for substantial payments to
these officers in the event of a change of control of the Company. Specifically, if the Company terminates these executive’s
24
employment without cause or the executive resigns with good reason, which includes a failure to nominate Andrew M. Sims to the
Company’s board of directors or his involuntary removal from the Company’s board of directors, unless for cause or by vote of the
stockholders, or if there is a change of control, each of these executives is entitled to the following:
•
•
•
•
•
any accrued but unpaid salary and bonuses;
vesting of any previously issued stock options and restricted stock;
payment of the executive’s life, health and disability insurance coverage for a period of five years following termination;
any unreimbursed expenses; and
a severance payment equal to three times for Andrew M. Sims’, David R. Folsom’s and Anthony E. Domalski’s respective
combined salary and actual bonus compensation for the preceding fiscal year.
In addition, these executives will receive additional payments to compensate them for the additional taxes, if any, imposed on
them under Section 4999 of the Code by reason of receipt of excess parachute payments. We will not be able to deduct any of the
above amounts paid to the executives for tax purposes.
These provisions may make a change of control of the Company, even if it is in the best interests of the Company’s
stockholders, more costly and difficult and may reduce the amounts the Company’s stockholders would receive in a change of control
transaction.
Our ownership limitations may restrict or prevent you from engaging in certain transfers of the Company’s common stock.
In order to maintain the Company’s REIT qualification, it cannot be closely held (i.e., more than 50.0% in value of our
outstanding stock cannot be owned, directly or indirectly, by five or fewer individuals during the last half of any taxable year). To
preserve the Company’s REIT qualification, the Company’s charter contains a 9.9% aggregate share ownership limit and a 9.9%
common share ownership limit. Generally, any shares of the Company’s stock owned by affiliated persons will be added together for
purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together
for purposes of the common share ownership limit.
If anyone transfers shares in a way that would violate the aggregate share ownership limit or the common share ownership limit,
or prevent the Company from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be
transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership
of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails
to prevent such a violation or fails to preserve the Company’s continued qualification as a REIT, then the Company will consider the
initial intended transfer to be null and void from the outset. The intended transferee of those shares will be deemed never to have
owned the shares. Anyone who acquires shares in violation of the aggregate share ownership limit, the common share ownership limit
or the other restrictions on transfer in the Company’s charter bears the risk of suffering a financial loss when the shares are redeemed
or sold if the market price of the Company’s stock falls between the date of purchase and the date of redemption or sale.
The board of directors’ revocation of the Company’s REIT status without stockholder approval may decrease the Company’s
stockholders’ total return.
The Company’s charter provides that the Company’s board of directors may revoke or otherwise terminate the Company’s
REIT election, without the approval of the Company’s stockholders, if the Company’s board of directors determines that it is no
longer in the Company’s best interest to continue to qualify as a REIT. If the Company ceases to be a REIT, it would become subject
to federal income tax on its taxable income and would no longer be required to distribute most of its taxable income to the Company’s
stockholders, which may have adverse consequences on our total return to the Company’s stockholders.
The ability of the Company’s board of directors to change the Company’s major corporate policies may not be in your best interest.
The Company’s board of directors determines the Company’s major corporate policies, including its acquisition, financing,
growth, operations and distribution policies. The Company’s board of directors may amend or revise these and other policies from
time to time without the vote or consent of the Company’s stockholders.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our chairman and chief executive officer, Andrew M. Sims; our president and chief
operating officer, David R. Folsom; and our chief financial officer, Anthony E. Domalski, to manage our day-to-day operations and
strategic business direction. The loss of any of their services could have an adverse effect on our operations.
25
Federal Income Tax Risks Related to the Company’s Status as a REIT
The federal income tax laws governing REITs are complex.
The Company intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws.
The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing
qualification as a REIT are limited. The Company has not requested or obtained a ruling from the Internal Revenue Service, or the
IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that the Company will be successful in operating in a manner that
will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the
federal income tax consequences of the Company’s qualification as a REIT. We cannot predict when or if any new federal income tax
law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect
retroactively. The Company and its stockholders could be adversely affected by any such change in, or any new, federal income tax
law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect
the Company’s ability to qualify as a REIT.
Failure to make distributions could subject the Company to tax.
In order to maintain its qualification as a REIT, each year the Company must pay out to its stockholders in distributions, as
“qualifying distributions,” at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid
and excluding net capital gains and reduced by certain non-cash items. To the extent that the Company satisfies this distribution
requirement, but distributes less than 100.0% of its taxable income (including its net capital gain), it will be subject to federal
corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a 4.0% nondeductible excise tax
if the actual amount that it pays out to its stockholders as a “qualifying distribution” for a calendar year is less than the sum of:
(A) 85% of our ordinary income for such calendar year, plus (B) 95% of our capital gain net income for such calendar year. The
Company’s only recurring source of funds to make these distributions comes from rent received from its TRS Lessees whose only
recurring source of funds with which to make these payments and distributions is the net cash flow (after payment of operating and
other costs and expenses and management fees) from hotel operations, and any dividend and other distributions that we may receive
from MHI Holding. Accordingly, the Company may be required to borrow money or sell assets to make distributions sufficient to
enable it to pay out enough of its taxable income to satisfy the distribution requirement and to avoid corporate income tax and the
4.0% nondeductible excise tax in a particular year.
Failure to qualify as a REIT would subject the Company to federal income tax.
If the Company fails to qualify as a REIT in any taxable year, it will be required to pay federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause the
Company to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results in
order to pay any such tax. Unless it is entitled to relief under certain statutory provisions, the Company would be disqualified from
treatment as a REIT for the four taxable years following the year in which it lost its qualification. If the Company lost its REIT status,
its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved.
In addition, the Company would no longer be required to make distributions to its stockholders, and it would not be able to deduct any
stockholder distributions in computing its taxable income. This would substantially reduce the Company’s earnings, cash available to
pay distributions, and the value of common stock.
Failure to qualify as a REIT may cause the Company to reduce or eliminate distributions to its stockholders, and the Company
may face increased difficulty in raising capital or obtaining financing.
If the Company fails to remain qualified as a REIT, it may have to reduce or eliminate any distributions to its stockholders in
order to satisfy its income tax liabilities. Any distributions that the Company does make to its stockholders would be treated as taxable
dividends to the extent of its current and accumulated earnings and profits. This may result in negative investor and market perception
regarding the market value of the Company’s common stock, and the value of its common stock may be reduced. In addition, the
Company and the Operating Partnership may face increased difficulty in raising capital or obtaining financing if the Company fails to
qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of its market valuation.
MHI Holding increases our overall tax liability.
Our TRS Lessees are single-member limited liability companies that are wholly-owned by MHI Holding, a taxable REIT
subsidiary that is wholly-owned by the Operating Partnership. Each of our TRS Lessees is disregarded as an entity separate from MHI
Holding for U.S. federal income tax purposes, such that the assets, liabilities, income, gains, losses, credits and deductions of our TRS
Lessees are treated as the assets, liabilities, income, gains, losses, credits and deductions of MHI Holding for U.S. federal income tax
purposes. MHI Holding is subject to federal and state income tax on its taxable income, which will consist of the revenues from the
26
hotels leased by the Company’s TRS Lessees, net of the operating expenses for such hotels and rent payments. Accordingly, although
the Company’s ownership of MHI Holding and the TRS Lessees will allow it to participate in the operating income from its hotels in
addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any,
will be available for distribution to the Company.
The Company will incur a 100.0% excise tax on its transactions with MHI Holding and the TRS Lessees that are not conducted
on an arm’s-length basis. For example, to the extent that the rent paid by the TRS Lessees exceeds an arm’s-length rental amount,
such amount potentially will be subject to this excise tax. The Company intends that all transactions among itself, MHI Holding and
the TRS Lessees will be conducted on an arm’s-length basis and, therefore, that the rent paid by the TRS Lessees will not be subject to
this excise tax.
Even if the Company remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.
Even if the Company remains qualified for taxation as a REIT, it may be subject to certain federal, state and local taxes on its
income and assets. For example:
•
•
•
•
•
•
it will be required to pay tax on undistributed REIT taxable income (including net capital gain);
it may be required to pay “alternative minimum tax” on its items of tax preference;
if it has net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course
of business or other non-qualifying income from foreclosure property, it must pay tax on that income at the highest
corporate rate;
if it (or the Operating Partnership or any subsidiary of the Operating Partnership other than MHI Holding) sells a property
in a “prohibited transaction,” its gain, or its share of such gain, from the sale would be subject to a 100.0% penalty tax. A
“prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to
customers in the ordinary course of business;
MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its taxable income; and
it may experience increases in its state and/or local income tax burdens as states and localities continue to look to modify
their tax laws in order to raise revenues, including by (among other things) changing from a net taxable income-based
regime to a gross receipts-based regime, suspending and/or limiting the use of net operating losses, increasing tax rates
and fees, imposing surcharges and subjecting partnerships to an entity-level tax, and limiting or disallowing certain U.S.
federal deductions such as the dividends-paid deduction.
Complying with REIT requirements may cause the Company to forgo attractive opportunities that could otherwise generate strong
risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other
things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the
ownership of its stock.
In general, when applying these tests, the Company is treated as owning its proportionate share of the Operating Partnership’s
assets (which share is determined in accordance with the Company’s capital interest in the Operating Partnership) and as being
entitled to the Operating Partnership’s income attributable to such share. Thus, compliance with the REIT requirements may hinder
our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our stockholders.
Complying with REIT requirements may force the Company to liquidate otherwise attractive investments, which could result in an
overall loss on its investments.
To maintain qualification as a REIT, the Company must ensure that at the end of each calendar quarter at least 75.0% of the
value of its assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of the
Company’s assets (other than securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the
outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5.0% of the value of the Company’s assets (other than government securities, qualified real estate
assets and securities of one or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0%
(20.0% for taxable years beginning after December 31, 2017) of the value of the Company’s total assets can be represented by
securities of one or more taxable REIT subsidiaries.
27
When applying these asset tests, the Company is treated as owning its proportionate share of the Operating Partnership’s assets
(which is determined in accordance with the Company’s capital interest in the Operating Partnership). If the Company fails to comply
with these requirements at the end of any calendar quarter, it must correct such failure within 30 days after the end of the calendar
quarter to avoid losing its REIT status and suffering adverse tax consequences. If the Company fails to comply with these
requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, the Company may be able to preserve
its REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, we will be required to dispose of the
assets causing the failure within six months after the last day of the quarter in which the failure occurred, and we will be required to
pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated
on those assets.
As a result, we may be required to liquidate otherwise attractive investments.
Taxation of dividend income could make the Company’s common stock less attractive to investors and reduce the market price of
its common stock.
The federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended at any time.
Any new laws or interpretations may take effect retroactively and could adversely affect the Company or could adversely affect its
stockholders. Under recently-enacted legislation, “qualified dividends,” which include dividends from domestic C corporations that
are paid to non-corporate stockholders, are subject to a reduced maximum U.S. federal income tax rate of 20.0%. Because REITs
generally do not pay corporate-level taxes as a result of the dividends-paid deduction to which they are entitled, dividends from REITs
generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an
investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from
non-REIT corporations would be subject to lower tax rates.
If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, the Company could cease to qualify
as a REIT and suffer other adverse consequences.
We believe that the Operating Partnership will continue to qualify to be treated as a partnership for U.S. federal income tax
purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners,
including the Company, will be required to pay tax on its allocable share of the Operating Partnership’s income. We cannot assure
you, however, that the IRS will not challenge the Operating Partnership’s status as a partnership for U.S. federal income tax purposes,
or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for
federal income tax purposes, the Company could fail to meet the gross income tests and certain of the asset tests applicable to REITs
and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause the
Operating Partnership to become subject to federal and state corporate income tax, which would reduce significantly the amount of
cash available for debt service and for distribution to its partners, including the Company.
The Company’s failure to qualify as a REIT would have serious adverse consequences to its stockholders.
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year
ended December 31, 2004. The Company believes it has operated so as to qualify as a REIT under the Code and believes that its
current organization and method of operation comply with the rules and regulations promulgated under the Code to enable the
Company to continue to qualify as a REIT. However, it is possible that the Company has been organized or has operated in a manner
that would not allow it to qualify as a REIT, or that its future operations could cause it to fail to qualify. Qualification as a REIT
requires the Company to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly
technical and complex sections of the Code for which there are only limited judicial and administrative interpretations, and involves
the determination of various factual matters and circumstances not entirely within its control. For example, in order to qualify as a
REIT, the Company must satisfy a 75.0% gross income test pursuant to Code Section 856(c)(3) and a 95.0% gross income test
pursuant to Code Section 856(c)(2) each taxable year. In addition, the Company must pay dividends, as “qualifying distributions,” to
its stockholders aggregating annually at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid
deduction and by excluding capital gains, and reduced by certain non-cash items) and must satisfy specified asset tests on a quarterly
basis. While historically the Company has satisfied the distribution requirement discussed above by making cash distributions to its
stockholders, the Company may choose to satisfy this requirement by making distributions of cash or other property, including, in
limited circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are
more complicated in the Company’s case because its holds its assets through the Operating Partnership.
28
If MHI Holding does not qualify as a taxable REIT subsidiary, or if the Company’s hotel manager does not qualify as an “eligible
independent contractor,” the Company would fail to qualify as a REIT and would be subject to higher taxes and have less cash
available for distribution to its shareholders.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income
tests applicable to REITs. The Company currently leases substantially all of its hotels to the TRS Lessees, which are disregarded
entities for U.S. federal income tax purposes and are wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects to
continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a “related party tenant” with
respect to the Company’s properties that are managed by an independent hotel management company that qualifies as an “eligible
independent contractor.” The Company believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary
for federal income tax purposes, but there can be no assurance that the IRS will not challenge this status or that a court would not
sustain such a challenge. If the IRS were successful in such challenge, it is possible that the Company would fail to meet the asset tests
applicable to REITs and substantially all of its income would fail to be qualifying income for purposes of the two gross income tests.
If the Company failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax
purposes.
Additionally, if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail
to qualify as a REIT. Each hotel manager that enters into a management contract with the TRS Lessees must qualify as an “eligible
independent contractor” under the REIT rules in order for the rent paid by the TRS Lessees to be qualifying income for purposes of
the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, a hotel manager
must not own, directly or through its shareholders, more than 35.0% of the Company’s outstanding shares, taking into account certain
ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although
the Company intends to monitor ownership of its shares by its hotel manager and its owners, there can be no assurance that these
ownership levels will not be exceeded.
Foreign investors may be subject to U.S. tax on the disposition of the Company’s stock if the Company does not qualify as a
“domestically controlled” REIT.
A foreign person disposing of a “U.S. real property interest,” which includes stock of a U.S. corporation whose assets consist
principally of U.S. real property interests, is generally subject to U.S. federal income tax under the Foreign Investment in Real
Property Tax Act of 1980 (“FIRPTA”) on the gain recognized on the disposition, unless such foreign person is a “qualified foreign
pension fund” or one of the certain publicly traded non-U.S. “qualified collective investment vehicles”. Additionally, the transferee
will be required to withhold 15% on the amount realized on the disposition if the foreign transferor is subject to U.S. federal income
tax under FIRPTA. This 15% is creditable against the U.S. federal income tax liability of the foreign transferor in connection with
such transferor’s disposition of the Company’s stock. FIRPTA does not apply, however, to the disposition of stock in a REIT if the
REIT is “domestically controlled” (i.e., less than 50% of the REIT’s capital stock, by value, has been owned directly or indirectly by
persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter,
during the entire period of the REIT’s existence). We cannot be sure that the Company will qualify as a “domestically controlled”
REIT. If the Company does not so qualify, gain realized by foreign investors on a sale of the Company’s stock would be subject to
U.S. income and withholding tax under FIRPTA, unless the Company’s stock were traded on an established securities market and a
foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of the
Company’s outstanding stock.
Investors may be subject to a 3.8% Medicare tax in connection with an investment in the Company’s common stock or the Notes.
The U.S. tax laws impose a 3.8% “Medicare tax” on the “net investment income” (i.e., interest, dividends, capital gains,
annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000
($250,000 if married filing jointly or $125,000 if married filing separately), and of estates and trusts. Dividends on the Company’s
stock and interest on the Notes as well as gains from the disposition of the Company’s stock or the Notes may be subject to the
Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the Medicare tax to an
investment in the Company’s stock or the Notes in light of such investors’ particular circumstances.
Investors may be subject to U.S. withholding tax under the “Foreign Account Tax Compliance Act.”
On March 18, 2010, the Hiring Incentives to Restore Employment Act, or the HIRE Act, was enacted in the United States. The
HIRE Act includes provisions known as the Foreign Account Tax Compliance Act, or FATCA, that generally impose a 30% U.S.
withholding tax on “withholdable payments,” which consist of (i) U.S.-source dividends, interest, rents and other “fixed or
determinable annual or periodical income” paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after
December 31, 2018 to (a) “foreign financial institutions” unless (x) they enter into an agreement with the IRS to collect and disclose to
the IRS information regarding their direct and indirect U.S. owners or (y) they comply with the terms of any FATCA
29
intergovernmental agreement executed between the authorities in their jurisdiction and the U.S., and (b) “non-financial foreign
entities” (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct
and indirect U.S. owners. Final regulations under FATCA were issued by the IRS on January 17, 2013, and have been subsequently
supplemented by additional regulations and guidance. FATCA does not replace the existing U.S. withholding tax regime. However,
the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.
A foreign investor that receives dividends on the Company’s common stock or gross proceeds from a disposition of shares of
the Company’s common stock may be subject to FATCA withholding tax with respect to such dividends or gross proceeds.
Foreign investors will be subject to U.S. withholding tax on the receipt of ordinary dividends on the Company’s stock.
The portion of dividends received by a foreign investor payable out of the Company’s current and accumulated earnings and
profits which are not attributable to capital gains and which are not effectively connected with a U.S. trade or business of the foreign
investor will generally be treated as ordinary income and will be subject to U.S. withholding tax at the rate of 30%. This 30%
withholding tax may be reduced by an applicable income tax treaty. The FATCA and nonresident withholding regulations are
complex. Even if the 30% withholding is reduced or eliminated by treaty for payments made to a foreign investor, FATCA
withholding of 30% could apply depending upon the foreign investor’s FATCA status. Foreign investors should consult with their
independent advisors as to the U.S. withholding tax consequences to such investors with respect to their investment in the Company’s
stock in light of their particular circumstances, as well as determining the appropriate documentation required to reduce or eliminate
U.S. withholding tax.
Foreign investors will be subject to U.S. income tax on the receipt of capital gain dividends on the Company’s stock.
Under FIRPTA, distributions that we make to a foreign investor that are attributable to gains from our dispositions of U.S. real
property interests (“capital gain dividends”) will be treated as income that is effectively connected with a U.S. trade or business, and
therefore subject to U.S. federal income tax, in the hands of the foreign investor, unless such foreign person is a “qualified foreign
pension fund” or one of certain publicly traded non-U.S. “qualified collective investment vehicles”. A foreign investor who is subject
to tax under FIRPTA will be subject to U.S. federal income tax (at the rates applicable to U.S. investors) on any capital gain
dividends, and will also be required to file U.S. federal income tax returns to report such capital gain dividends. Furthermore, capital
gain dividends are subject to an additional 30% “branch profits tax” (which may be reduced by an applicable income tax treaty) in the
hands of a foreign investor who is subject to tax under FIRPTA if such foreign investor is treated as a corporation for U.S. federal
income tax purposes.
Legislative or regulatory action could adversely affect you.
Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could
adversely affect our investors. You are strongly encouraged to consult with your own tax advisor with respect to the status of any
legislative, regulatory or administrative developments, announcements and proposals and their potential impact on your investment in
the Company’s stock.
Item 1B. Unresolved Staff Comments
Not applicable.
30
Item 2. Properties
As of March 1, 2016, our portfolio consisted of the following properties (see Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Key Operating Metrics, for definitions of Occupancy, ADR, and RevPAR):
Wholly-Owned Properties
Crowne Plaza Hampton Marina, Hampton,
Number of Occupancy
Rooms
2015
ADR RevPAR Occupancy
2015 2015
2014
ADR RevPAR Occupancy
2014 2014
2013
ADR RevPAR
2013 2013
Virginia ......................................................
173
55.2% $ 93.59 $ 51.64
50.8% $ 93.17 $
48.27
50.1% $ 95.27 $
47.72
Crowne Plaza Hollywood Beach Resort,
Hollywood, Florida (3) ............................
311
83.1% $174.35 $ 144.86
83.1% $163.13 $ 135.55
82.2% $157.87 $ 129.79
Crowne Plaza Houston Downtown,
Houston, Texas (1)......................................
259
70.9% $142.05 $ 100.66
76.1% $138.93 $ 105.66
74.6% $133.51 $
99.64
Crowne Plaza Tampa Westshore, Tampa,
Florida........................................................
222
72.5% $111.08 $ 80.53
72.5% $104.90 $
76.09
67.1% $ 99.12 $
66.46
DoubleTree by Hilton Jacksonville
Riverfront, Jacksonville, Florida ...............
293
67.4% $109.20 $ 73.60
65.8% $ 99.20 $
65.24
58.5% $ 97.51 $
57.05
DoubleTree by Hilton Laurel, Laurel,
Maryland....................................................
DoubleTree by Hilton Philadelphia Airport,
Philadelphia, Pennsylvania ........................
DoubleTree by Hilton Raleigh Brownstone
– University, Raleigh, North Carolina .......
Georgian Terrace, Atlanta, Georgia (2) .........
Hilton Savannah DeSoto, Savannah,
Georgia.......................................................
Hilton Wilmington Riverside, Wilmington,
208
48.2% $ 95.19 $ 45.86
60.8% $ 89.08 $
54.19
61.5% $ 87.68 $
53.90
331
79.3% $136.32 $ 108.13
75.9% $133.78 $ 101.58
78.2% $134.40 $ 105.13
190
326
71.5% $131.61 $ 94.16
69.9% $155.56 $ 108.70
73.4% $122.60 $
90.04
76.2% $137.65 $ 104.88
69.9% $111.56 $
71.2% $135.33 $
78.03
96.39
246
76.9% $154.52 $ 118.89
75.7% $146.75 $ 111.14
73.7% $137.77 $ 101.61
North Carolina ...........................................
272
71.6% $138.36 $ 99.07
69.7% $139.09 $
96.90
73.3% $140.44 $ 102.91
Sheraton Louisville Riverside,
Jeffersonville, Indiana................................
Total...............................................................
180
3,011
69.5% $131.74 $ 111.87
66.8% $150.20 $ 100.31
67.9% $133.19 $
90.42
(1)
(2)
(3)
The operating statistics for the Crowne Plaza Houston Downtown rely on information from both the period prior to, and the period subsequent to, the
Company’s acquisition of the hotel.
The operating statistics for the Georgian Terrace rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of
the hotel.
The operating statistics for the Crowne Plaza Hollywood Beach Resort rely on information from both the period prior to, and the period subsequent to, the
Company’s acquisition of the hotel.
Item 3. Legal Proceedings
We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We have
settled, during the period covered by this report, all significant claims made during the same period. We are involved in routine
litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is
expected to have a material impact on our financial condition or results of operations.
Item 4. Mine Safety Disclosure
Not applicable.
31
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Sotherly Hotels Inc.
Market Information
The Company’s common stock trades on the NASDAQ ® Global Market under the symbol “SOHO”. The following table sets
forth, for the indicated period, the high and low sales prices for the common stock, as reported on NASDAQ ®:
Year Ended December 31, 2015
First Quarter ........................................... $
Second Quarter ....................................... $
Third Quarter .......................................... $
Fourth Quarter ........................................ $
Year Ended December 31, 2014
First Quarter ........................................... $
Second Quarter ....................................... $
Third Quarter .......................................... $
Fourth Quarter ........................................ $
Price Range
High
Low
7.82 $
8.47 $
7.38 $
6.74 $
6.39 $
8.03 $
8.20 $
7.87 $
7.14
6.95
6.38
5.77
5.55
6.47
7.46
7.07
The closing price of the Company’s common stock on the NASDAQ ® Global Market on March 1, 2016 was $5.42 per share.
Stockholder Information
As of March 1, 2016, there were 81 holders of record of the Company’s common stock and as of March 1, 2016, there were
approximately 3,513 beneficial owners of the Company’s common stock.
In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s charter, subject
to certain exceptions, limits the number of common shares that may be owned by any single person or affiliated group to 9.9% of the
outstanding common shares.
Recent Sales of Unregistered Securities
On April 1, 2015, Kim E. Sims, a director of the Company, through the KES Family Limited Partnership, LLP, a holder of units
in the Operating Partnership, redeemed 100,000 units in the Operating Partnership for an equivalent number of shares of the
Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended.
On May 1, 2015, one holder of units in the Operating Partnership redeemed a total of 50,000 units for an equivalent number of
shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
On September 16, 2015, one holder of units in the Operating Partnership redeemed a total of 200,000 units for an equivalent
number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
On February 1, 2016, two holders of units in the Operating Partnership redeemed a total of 422,687 units for an equivalent
number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
Use of Proceeds from Registered Securities
During June 2015, the Company sold 98,682 shares of common stock in an “At-the-Market” offering pursuant to a registration
statement on Form S-3 (File No. 333-196754) for net proceeds of approximately $0.7 million, which it contributed to the Operating
Partnership for an equivalent number of units. The Operating Partnership used the net proceeds from the sale of shares to partially
32
fund the cash portion of the purchase price for the acquisition of Carlyle’s 75.0% indirect interest in the Crowne Plaza Hollywood
Resort Hotel and related transaction expenses and for general corporate purposes.
On July 1, 2015, the Company sold 3,000,000 shares of common stock pursuant to a registration statement on Form S-3 (File
No. 333-199256), for net proceeds of approximately $19.8 million, which it contributed to the Operating Partnership for an equivalent
number of units. The Operating Partnership used the net proceeds from the sale of shares to partially fund the cash portion of the
purchase price for the acquisition of Carlyle’s 75.0% indirect interest in the Crowne Plaza Hollywood Resort Hotel and related
transaction expenses and for general corporate purposes.
On July 17, 2015, the Company sold 435,000 shares of common stock pursuant to a registration statement on Form S-3 (File
No. 333-199256) for net proceeds of approximately $2.8 million, which it contributed to the Operating Partnership for an equivalent
number of units. The Operating Partnership used the net proceeds from the sale of shares to partially fund the cash portion of the
purchase price for the acquisition of Carlyle’s 75.0% indirect interest in the Crowne Plaza Hollywood Resort Hotel and related
transaction expenses and for general corporate purposes.
Sotherly Hotels LP
Market Information
There is no established trading market for partnership units of the Operating Partnership. The Operating Partnership does not
currently propose to offer partnership units to the public, and does not currently expect that a public market for those units will
develop.
Partnership Unitholder Information
As of March 1, 2016, there were 12 holders of the Operating Partnership’s partnership units, including Sotherly Hotels Inc.
Recent Sales of Unregistered Securities
From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, to mirror the capital structure of the Company to reflect
additional issuances by the Company and to preserve equitable ownership ratios.
There were no sales of unregistered securities in the Operating Partnership during 2015.
Use of Proceeds from Registered Securities
There were no sales of registered securities in the Operating Partnership during 2015.
Sotherly Hotels Inc. and Sotherly Hotels LP
Dividend and Distribution Information
The Company elected to be taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain
qualification as a REIT, we are required to make annual distributions to the Company’s stockholders of at least 90.0% of our REIT
taxable income, excluding net capital gain, which does not necessarily equal net income as calculated in accordance with generally
accepted accounting principles. Our ability to pay distributions to the Company’s stockholders will depend, in part, upon our receipt of
distributions from our Operating Partnership which may depend upon receipt of lease payments with respect to our properties from
our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s
stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our
investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a
portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status,
our TRS Lessees may retain any after-tax earnings.
33
In order to maintain our qualification as a REIT, we must make distributions to our stockholders each year in an amount equal to
at least:
•
•
•
90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital
gains; plus
90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; minus
Any excess noncash income (as defined in the Code).
The following table sets forth information regarding the declaration, payment and income tax characterization of
distributions by the Company on its common shares to Company’s stockholders for fiscal year 2014 to 2015. The same table sets
forth the Operating Partnership’s distributions per common partnership unit for fiscal year 2014 to 2015:
Dividend (Distribution) Payments
Date Declared
January 2014
April 2014
July 2014
October 2014
January 2015
April 2015
July 2015
October 2015
Date Paid
April 11, 2014
July 11, 2014
For the Quarter Ended
March 31, 2014
June 30, 2014
Amount per Share and Unit
0.045
$
0.050
$
0.065
September 30, 2014 October 15, 2014 $
0.065
$
December 31, 2014
0.070
$
March 31, 2015
0.075
$
0.080
$
0.080
January 11, 2016 $
September 30, 2015 October 9, 2015
December 31, 2015
January 9, 2015
April 10, 2015
July 10, 2015
June 30,2015
Return of
Capital
Ordinary
Income
0%
0%
0%
0%
100%
100%
100%
100%
82.6% 17.4%
82.6% 17.4%
82.6% 17.4%
82.6% 17.4%
The amount of future common stock distributions will be based upon quarterly operating results, general economic conditions,
requirements for capital improvements, the availability of debt and equity capital, the Code’s annual distribution requirements, and
other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be
authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors,
and no assurance can be given that our distribution policy will not change in the future.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for Sotherly Hotels Inc. and Sotherly Hotels LP for the years
ended December 31, 2015, 2014, 2013, 2012, and 2011. The financial results for the Crowne Plaza Hollywood Beach Resort, in which
we had a 25.0% indirect interest, are not consolidated through July 31, 2015, as we accounted for our investment under the equity
method of accounting. However from August 1, 2015 through December 31, 2015 we did consolidate the financial results for the
Crowne Plaza Hollywood Beach Resort, as a result of our acquisition of the remaining 75.0% interest in the hotel. The following
selected historical financial data was derived from audited consolidated financial statements contained elsewhere in this Annual
Report on Form 10-K and in prior filings. The Company’s financial statements for the years ended December 31, 2015 and 2014, have
been audited by Grant Thornton LLP and for the year ended December 31, 2013, have been audited by PBMares, LLP (formerly Witt
Mares, PLC, which also audited the Company’s financial statements for the years ended December 31, 2012 and 2011, our
independent registered public accounting firms, for such periods). The audited historical financial statements include reclassifications
and all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial
condition and the results of operations as of those dates and for those periods under accounting principles generally accepted in the
United States of America.
34
The information presented below is only a summary and does not provide all of the information contained in our consolidated
financial statements, including notes thereto, and should be read together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual
Report on Form 10-K.
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
SELECTED HISTORICAL FINANCIAL DATA
Statement of Operations
Total Revenues ........................................................ $
Total Operating Expenses excluding Depreciation,
Amortization, Disposal Gain and Impairment of
Investments in Hotel Properties, net.....................
Depreciation, Amortization, Disposal Gain and
Impairment of Investments in Hotel Properties,
net .........................................................................
Net Operating Income..............................................
Interest Income ........................................................
Interest Expense.......................................................
Other Income (Expense) – Net ................................
Income Tax Benefit (Provision) ..............................
Net Income (Loss) ...................................................
Net (Income) Loss Attributable to Noncontrolling
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Year Ended
December 31,
2012
Year Ended
December 31,
2011
138,533,476
$ 122,939,919
$ 89,374,527
$
87,343,220
$
81,172,504
(109,153,366)
(95,290,304)
(69,888,820)
(68,519,401)
(65,807,786)
(14,050,060)
15,330,050
50,461
(16,515,827)
6,196,936
1,336,033
6,397,653
(15,144,284)
12,505,331
19,865
(14,636,870)
(354,558)
1,727,723
(738,509)
(9,078,228)
10,407,479
17,914
(9,606,479)
(3,796,410)
(1,496,096)
(4,473,592)
(8,661,769)
10,162,050
16,158
(10,399,962)
(3,941,594)
(1,246,397)
(5,409,745)
(8,702,880)
6,661,838
14,808
(10,821,815)
(1,424,620)
(905,455)
(6,475,243)
Interest ..................................................................
Net Income (Loss) Attributable to the Company .... $
(1,040,987)
$
5,356,666
153,838
(584,671) $
989,623
(3,483,969) $
1,241,868
(4,167,877) $
1,630,797
(4,844,446)
Statement of Cash Flows
Cash provided by Operations – net.......................... $
Cash used in Investing – net ....................................
Cash provided by (used in) Financing – net ............
Net Increase (Decrease) in Cash and Cash
11,377,374
$
(41,132,602)
24,614,643
14,851,255
$
(71,096,578)
63,503,194
9,594,751
$
(29,527,589)
22,133,750
9,011,957
$
(3,156,121)
(3,090,079)
7,550,142
(6,130,273)
(2,798)
Equivalents ........................................................... $
(5,140,585) $
7,257,871
$
2,200,912
$
2,765,757
$
1,417,071
Balance Sheet
Investments in Hotel Properties – net...................... $
Total Assets (1) .........................................................
Line of Credit...........................................................
Mortgage Loans .......................................................
Unsecured Notes......................................................
Redeemable Preferred Stock....................................
Total Liabilities........................................................
Noncontrolling Interest (1)........................................
Total Sotherly Hotels Inc. Stockholders’ Equity (1)......
Operating Data
Average Number of Available Rooms ....................
Total Number of Available Room Nights ...............
Occupancy Percentage (2).........................................
Average Daily Rate (ADR) (2) ................................. $
RevPAR (2) ............................................................... $
Additional Financial Data
FFO (3)...................................................................... $
Adjusted FFO (3) ......................................................
Hotel EBITDA (4).....................................................
Income (Loss) Per Basic Share................................ $
(1)
As of the period end.
$
354,963,242
393,058,353
—
271,977,944
52,900,000
—
340,199,985
3,855,237
49,003,131
$ 260,192,153
299,820,043
—
205,291,657
52,900,000
—
272,310,186
4,132,662
23,377,195
$ 202,645,633
228,169,081
—
160,363,549
27,600,000
—
197,314,286
5,669,386
25,185,409
176,427,904
204,223,074
—
135,674,432
—
14,227,650
167,179,121
7,322,314
29,721,639
$ 181,469,432
209,299,446
25,537,290
94,157,825
—
25,353,698
165,416,203
8,947,405
34,935,838
2,828
1,032,353
69.9%
$
$
134.21
93.80
2,622
957,060
70.3%
$
$
125.77
88.42
2,148
783,936
67.4%
$
$
118.91
80.16
2,113
773,358
68.9%
$
$
114.22
78.65
2,111
770,334
66.2%
110.24
72.94
14,103,844
14,904,608
36,447,390
0.43
$
$
$
14,765,677
14,142,080
32,084,957
5,150,303
10,766,147
23,220,515
$
$
3,842,699
9,218,032
22,296,938
(0.06) $
(0.34) $
(0.42) $
2,923,539
5,577,805
18,708,019
(0.50)
35
(2)
(3)
(4)
Occupancy Percent is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available. ADR, is
calculated by dividing the total daily room revenue by the total daily number of rooms sold. RevPAR is calculated by dividing the total daily
room revenue by the total daily number of rooms available.
Industry analysts and investors use Funds from Operations (“FFO”) as a supplemental operating performance measure of an equity REIT. FFO
is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment
Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with generally accepted accounting
principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated
operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any
noncontrolling interest from unconsolidated partnerships and joint ventures.
Adjusted FFO accounts for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes,
any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt,
aborted offering costs, franchise termination costs, loan modification fees, costs associated with the departure of executive officers, litigation
settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition transaction costs.
Hotel EBITDA represents the portion of net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or
benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other
comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived
assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) corporate general and
administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary conversions of assets and (14) other operating
revenue not related to our wholly-owned portfolio.
The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2015, 2014, 2013, 2012, and 2011.
Net Income (Loss) .................................................... $ 6,397,653 $
Depreciation and Amortization ........................... 13,591,495 11,969,284
Equity in Depreciation and Amortization of
Year Ended
December 31,
2015
Year Ended
December 31,
2013
Year Ended
December 31,
2014
(738,509) $ (4,473,592) $ (5,409,745) $ (6,475,243)
8,702,880
Year Ended
December 31,
2012
Year Ended
December 31,
2011
8,661,769
8,467,228
Joint Venture ....................................................
259,279
529,053
545,667
590,675
567,803
Impairment of Investment in Hotel Properties,
—
500,000
(6,603,148)
3,175,000
Net ....................................................................
Gain on Change in Control..................................
Gain on Involuntary Conversion of Asset ...........
(Gain)/ Loss on Asset Disposal ...........................
—
—
—
128,099
Funds From Operations.......................................... $ 14,103,844 $ 14,765,677 $ 5,150,303 $ 3,842,699 $ 2,923,539
685,189
—
—
—
—
—
(Increase)/Decrease in Deferred Income Taxes ..
Acquisition Costs ................................................
Loss on Starwood Settlement ..............................
Over-assessed Real Estate Taxes Under Appeal ...
Loan Modification Fees.......................................
Franchise Termination Fee ..................................
Realized and Unrealized (Gain)/Loss on
1,370,189
89,743
—
—
—
—
(1,780,571)
634,376
324,271
497,733
243,229
—
—
—
351,800
611,000
—
—
—
—
(169,151)
—
(1,961,663)
155,187
—
—
—
—
—
—
—
—
—
1,241,848
(41,435)
—
Hedging Activities (A).......................................
108,819
—
(89,998)
13,752
77,152
Realized and Unrealized Loss on Warrant
Derivative .........................................................
Impairment of Note Receivable ..........................
Aborted Offering Costs .......................................
Loss on Early Debt Extinguishment(A) ................
1,309,075
—
582,850
—
Adjusted FFO........................................................... $ 14,904,608 $ 14,142,080 $ 10,766,147 $ 9,218,031 $ 5,577,805
2,205,248
—
—
2,026,677
110,871
—
—
—
—
—
—
2,040,662
1,982,184
831,079
772,907
—
(A)
Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture.
36
The following is a reconciliation of net income/(loss) to Hotel EBITDA for the years ended December 31, 2015, 2014, 2013, 2012, and 2011.
Net Income (Loss) .................................................. $
Interest Expense................................................. 16,515,827 14,636,870
(19,865)
Interest Income ..................................................
Income Tax Provision (Benefit) ........................
(1,727,723)
Depreciation and Amortization ......................... 13,591,495 11,969,284
Equity in (Earnings)/Loss of Joint Venture .......
(307,370)
(Gain) Loss on Asset Disposal ..........................
Gain on involuntary conversion of asset ...........
Realized and Unrealized Loss (Gain) on
(50,461)
(1,336,033)
(475,514)
(41,435)
—
(169,151)
—
Year Ended
December 31,
2015
6,397,653 $
Year Ended
December 31,
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
2011
2012
2013
2014
(738,509) $ (4,473,592) $ (5,409,745) $ (6,475,243)
9,606,479 10,399,962 10,821,815
(14,808)
(16,158)
1,246,397
905,455
8,661,769 8,702,880
60,094
(178,138)
128,099
—
—
—
(17,914)
1,496,096
8,467,228
(449,500)
—
—
Hedging Activities..........................................
108,819
—
—
—
(72,649)
Realized and Unrealized Loss on Warrant
Derivative .......................................................
Loss on Debt Extinguishment............................
Impairment of Investment in Hotel Properties,
—
772,907
—
831,079
2,205,248
2,040,662
2,026,677 1,309,075
—
1,982,184
Net ..................................................................
500,000
3,175,000
611,000
Impairment of Note Receivable.........................
Corporate General and Administrative
—
—
—
—
110,871
—
—
Expenses.........................................................
Gain on Change in Control................................
Net Lease Rental Income...................................
Other Fee Income ..............................................
4,078,826 4,025,794
—
(447,000)
(235,493)
Hotel EBITDA........................................................ $ 36,447,390 $ 32,084,957 $ 23,220,515 $ 22,296,938 $ 18,708,019
7,268,256
(6,603,148)
(350,000)
(255,707)
—
(200,976)
(350,000)
(300,607)
(350,000)
(275,774)
4,360,582
5,085,949
—
—
—
37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue
opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary
markets in the mid-Atlantic and southern United States. We commenced operations in December 2004 when the Company completed
its initial public offering and thereafter consummated the acquisition of six initial hotel properties. Since the Company’s initial public
offering, we have engaged in the following acquisitions and dispositions:
•
•
•
•
•
•
•
•
•
On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront).
During September 2015, after extensive renovations, we re-branded and renamed the hotel the DoubleTree by Hilton
Jacksonville Riverfront.
On August 10, 2006, we sold the Holiday Inn Downtown Williamsburg.
On September 20, 2006, we acquired the Louisville Ramada Riverfront Inn, which went through an extensive renovation
and re-opened in May 2008 as the Sheraton Riverside Louisville.
On August 8, 2007, through our joint venture with Carlyle, we acquired a 25.0% indirect noncontrolling interest in the
Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida.
On October 29, 2007, we acquired a hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, which went
through an extensive renovation and re-opened in March 2009 as the Crowne Plaza Tampa Westshore.
On April 24, 2008, we acquired the Hampton Marina Hotel in Hampton, Virginia, which has been renovated and was
converted to the Crowne Plaza Hampton Marina in October 2008.
On November 13, 2013, we acquired the Crowne Plaza Houston Downtown in Houston, Texas.
On March 27, 2014, we acquired the Georgian Terrace in Atlanta, Georgia.
On July 31, 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza Hollywood
Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating
Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach
Resort.
Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels with 3,011 rooms,
eleven of which operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree and Sheraton, and one independent
hotel. As of December 31, 2015, we owned the following hotel properties:
Property
Wholly-owned
Crowne Plaza Hampton Marina................................
Crowne Plaza Hollywood Beach Resort(1)................
Crowne Plaza Houston Downtown...........................
Crowne Plaza Tampa Westshore ..............................
DoubleTree by Hilton Jacksonville Riverfront.........
DoubleTree by Hilton Laurel....................................
DoubleTree by Hilton Philadelphia Airport .............
DoubleTree by Hilton Raleigh Brownstone-
University...............................................................
Georgian Terrace ......................................................
Hilton Savannah DeSoto...........................................
Hilton Wilmington Riverside....................................
Sheraton Louisville Riverside...................................
Total ...............................................................................
Number
of Rooms
Location
Date of Acquisition
Chain Designation
173
311
259
222
293
208
331
April 24, 2008
August 9, 2007
November 13, 2013
October 29, 2007
Hampton, VA
Hollywood, FL
Houston, TX
Tampa, FL
Jacksonville, FL July 22, 2005
Laurel, MD
December 21, 2004
Philadelphia, PA December 21, 2004
Upscale
Upscale
Upscale
Upscale
Upscale
Upscale
Upscale
Upscale
December 21, 2004
Raleigh, NC
Independent(2)
March 27, 2014
Atlanta, GA
Upper Upscale
December 21, 2004
Savannah, GA
Wilmington, NC December 21, 2004
Upper Upscale
Jeffersonville, IN September 20, 2006 Upper Upscale
190
326
246
272
180
3,011
(1) We owned this hotel through a joint venture in which we had a 25.0% interest, through July 31, 2015. We acquired the
remaining 75.0% interest on July 31, 2015, and owned the hotel 100% as of December 31, 2015.
(2) We believe that the Georgian Terrace would carry a chain scale designation of upper upscale if it were a branded hotel.
38
We conduct substantially all our business through the Operating Partnership, Sotherly Hotels LP. The Company is the sole
general partner of the Operating Partnership and owns an approximate 86.8% interest in the Operating Partnership, with the remaining
interest being held by limited partners who were contributors of our initial hotel properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned
hotel properties are leased to our TRS Lessees that are wholly-owned subsidiaries of the Operating Partnership, which then engage a
hotel management company to operate the hotels under a management agreement. Our TRS Lessees have engaged Chesapeake
Hospitality to manage our hotels. Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each
of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar
to other C corporations.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories
such as food, beverage, catering, parking and telephone. There are three key performance indicators used in the hotel industry to
measure room revenues:
•
•
•
Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;
Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and
Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and
profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to
additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees,
credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant,
banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on
operating margins and profitability as they do not generate all the additional variable operating costs associated with higher
occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial
Measures”.
Results of Operations
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
The following table illustrates the key operating metrics for the years ended December 31, 2015 and 2014 for our wholly-owned
properties during each respective reporting period (“actual” properties) as well as the key operating metrics for the ten wholly-owned
properties that were under our control during all of 2014 (“same-store” properties). Accordingly, the same-store data does not reflect
the performance of the Georgian Terrace, which was acquired in March 2014. Each table excludes performance data for the Crowne
Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we had a 25.0% indirect interest through
July 31, 2015 and a 100% interest thereafter through December 31, 2015.
Occupancy % ..............................................................
ADR............................................................................ $
RevPAR ...................................................................... $
69.9%
$
$
134.21
93.80
65.7%
$
$
130.09
85.47
70.3%
$
$
125.77
88.42
69.7%
124.27
86.57
Year Ended December 31, 2015
Same-Store
Actual
Year Ended December 31, 2014
Same-Store
Actual
Revenue. Total revenue for the year ended December 31, 2015 was approximately $138.5 million, an increase of approximately
$15.6 million, or 12.7%, from total revenue for the year ended December 31, 2014 of approximately $122.9 million. Approximately
$6.2 million of the increase relates to the acquisition of our property in Atlanta, Georgia in March 2014. Approximately $7.5 million
of the increase relates to the acquisition of the remaining 75.0% interest in our property in Hollywood Beach, Florida in July 2015.
Increases in revenues at our properties in Wilmington, North Carolina; Savannah, Georgia; Raleigh, North Carolina; Philadelphia,
Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Hampton, Virginia and Atlanta, Georgia were offset by
decreases in revenue at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas, as well as by the
loss of rental income associated with Shell Island which expired in December 2014.
39
Room revenues at our properties for the year ended December 31, 2015 increased approximately $12.2 million, or 14.4%, to
approximately $96.8 million compared to room revenues for the year ended December 31, 2014 of approximately $84.6 million. The
increase in room revenue for the year ended December 31, 2015 resulted mainly from the acquired property in Atlanta, Georgia,
accounting for an increase of approximately $3.3 million for the period and from the recently acquired property in Hollywood Beach,
Florida, accounting for an increase of approximately $2.4 million for the period. Our properties in Wilmington, North Carolina;
Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Tampa, Florida; and Hampton,
Virginia and Atlanta, Georgia, experienced a significant increase in room revenue, offset by decreases at our properties impacted by
renovation activities in Laurel, Maryland and Houston, Texas. We continue to expect occupancy and ADR to increase in 2016 as a
result of continuing strong demand and the completion in 2015 and in 2016 of renovations at our properties in Laurel, Maryland,
Jacksonville, Florida; Houston, Texas and Atlanta, Georgia.
Food and beverage revenues at our properties for the year ended December 31, 2015 increased approximately $1.8 million, or
5.8%, to approximately $33.3 million compared to food and beverage revenue of approximately $31.4 million for the year ended
December 31, 2014. The increase in food and beverage revenues for the year ended December 31, 2015 resulted principally from our
acquired property in Atlanta, Georgia, accounting for an increase of approximately $2.1 million for the period, and
from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.2 million for the
period. Additional increases in food and beverage revenue at our properties in Wilmington, North Carolina; Raleigh, North
Carolina and Jeffersonville, Indiana of approximately $0.3 million, were offset by decreases of approximately $1.6 million in
banqueting revenue at our other properties.
Other operating revenues for the year ended December 31, 2015 increased approximately $1.5 million, or 22.5%, to
approximately $8.4 million compared to other operating revenues for the year ended December 31, 2014 of approximately $6.9
million. The increase in other operating departments revenues for the year ended December 31, 2015 resulted principally from our
acquired property in Atlanta, Georgia, accounting for an increase of approximately $0.8 million for the period and
from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.5 million for the
period.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct
expenses, indirect expenses, and management fees, increased approximately $11.7 million, or 12.9%, for the year ended December 31,
2015 to approximately $101.9 million compared to hotel operating expenses for the year ended December 31, 2014 of approximately
$90.2 million. The increase in hotel operating expenses for the year ended December 31, 2015 was substantially related to our
acquired property in Atlanta, Georgia, accounting for approximately $6.7 million of the increase in expenses for the year
ended December 31, 2015 and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of
approximately $9.2 million for the period, coupled by a decrease in hotel operating expenses at our same-store properties of
approximately $1.0 million, mainly from reduced occupancy by 5.7% and RevPAR by 1.3% combined with decreases in expenses at
our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas.
Rooms expense at our properties for the year ended December 31, 2015 increased approximately $2.9 million, or 12.5%, to
approximately $25.8 million compared to rooms expense of approximately $22.9 million for the year ended December 31, 2014. The
increase in rooms expense for the year ended December 31, 2015 was substantially related to our acquired property in Atlanta,
Georgia, accounting for approximately $1.0 million of the increase and from the recently acquired property in Hollywood Beach,
Florida, accounting for an increase of approximately $1.3 million for the period.
Food and beverage expenses at our properties for the year ended December 31, 2015 increased approximately $2.0 million, or
9.4%, to approximately $23.0 million compared to food and beverage expense of approximately $21.0 million for the year ended
December 31, 2014. The increase in food and beverage expenses for the year ended December 31, 2015 was substantially related
to our acquired property in Atlanta, Georgia, accounting for approximately $1.5 million of the increase and from the recently acquired
property in Hollywood Beach, Florida, accounting for an increase of approximately $0.9 million for the period, offset by decreases in
food and beverage expenses mainly from reduced occupancy and decreases in expenses at our property impacted by renovation
activities in Houston, Texas.
Indirect expenses at our properties for the year ended December 31, 2015 increased approximately $6.2 million, or 13.8%, to
approximately $51.3 million compared to indirect expenses of approximately $45.1 million for the year ended December 31, 2014.
Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property
taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect
expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and
franchise fees. Specifically, increases in indirect expenses were substantially related to our recently acquired property in Atlanta,
Georgia, accounting for approximately $2.1 million of the increase and from the recently acquired property in Hollywood Beach,
Florida, accounting for an increase of approximately $2.8 million for the period, compared to the year ended December 31, 2014.
40
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2015 increased approximately
$1.6 million, or 13.6%, to approximately $13.6 million compared to depreciation and amortization expense of approximately $12.0
million for the year ended December 31, 2014. The increase was mostly attributable to depreciation and amortization related to our
recently acquired property in Atlanta, Georgia and depreciation and amortization related to our capital assets acquired in the fourth
quarter of 2014 and the year of 2015, offset by reductions of intangible asset amortization during the year ended December 31, 2015
compared to the year ended December 31, 2014.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended
December 31, 2015 and 2014 was approximately $0.5 million and $3.2 million, respectively. Our review of possible impairment at
one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was
triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues
based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an
impairment to fair market value of $0.5 million, as of December 31, 2015.
Gain on Disposal of Assets. During the year ended December 31, 2015, we recorded a gain on disposal of assets of
$41,435, compared to no gain or loss on disposal of assets for the year ended December 31, 2014.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2015
increased approximately $2.2 million, or 42.9%, to approximately $7.3 million compared to corporate general and administrative
expenses of approximately $5.1 million for the year ended December 31, 2014. The increase in corporate general and administrative
expenses was mainly due to an increase in acquisition costs of approximately $0.5 million, a one-time tax penalty of $0.4 million,
additional staffing and related salary increase of approximately $0.3 million, increased professional fees of approximately
$0.5 million, loan costs of $0.2 million on the loan modifications of the Crowne Plaza Hollywood Beach Resort mortgage and the
DoubleTree by Hilton Laurel mortgage, and increased audit fees of approximately $0.1 million partially offset by a reduction in legal
fees of approximately $0.1 million.
Interest Expense. Interest expense for the year ended December 31, 2015 increased approximately $1.9 million, or 12.8%, to
approximately $16.5 million compared to approximately $14.6 million of interest expense for the year ended December 31, 2014. The
increase in interest expense for the year ended December 31, 2015, was substantially related to the additional mortgage on
our acquired property in Atlanta, Georgia of $0.7 million, the assumed mortgage loan for the recently acquired property in Hollywood
Beach, Florida, accounting for an increase in interest expense of approximately $1.4 million, the issuance of the 7% Notes due in
2019, accounting for an increase of approximately $1.6 million. These increases were offset by a decrease in interest from the
reduction of the Bridge Loan during the year ending December 31, 2015 of $1.3 million.
Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture increased approximately $0.2 million, or
54.7%, to approximately $0.5 million for the year ended December 31, 2015 compared to equity in the income of the joint venture of
approximately $0.3 million for the year ended December 31, 2014 and represents our 25.0% share of the net income of the Crowne
Plaza Hollywood Beach Resort through July 31, 2015. For the year ended December 31, 2015, the Crowne Plaza Hollywood Beach
Resort reported occupancy of 83.1%, ADR of $174.35 and RevPAR of $144.86. This compares with results reported by the hotel for
the year ended December 31, 2014 of occupancy of 83.1%, ADR of $163.13 and RevPAR of $135.55.
Loss on Early Debt Extinguishment. The loss on early debt extinguishment for the year ended December 31, 2015 decreased
approximately $0.1 million, or 7.0%, to approximately $0.7 million compared to a loss on debt extinguishment of approximately $0.8
million for the year ended December 31, 2014. During the year ended December 31, 2015, we refinanced a variable rate mortgage
loan we had with the Bank of the Ozarks on the Georgian Terrace, with a new fixed rate loan from Bank of America. The amount of
accumulated un-amortized loan costs of $697,582 was written off during 2015. In addition, we refinanced a variable rate mortgage
loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of
the Ozarks. The amount of accumulated un-amortized loan costs of $75,324 was written off during 2015.
Gain on Involuntary Conversion of Asset. Gain on involuntary conversion of asset for the year ended December 31, 2015,
decreased approximately $0.2 million, or 100.0%, to $0 compared to approximately $0.2 million of gain on involuntary conversion of
asset for the year ended December 31, 2014. During 2014, we had a one-time involuntary conversion of equipment at our Hilton
Wilmington Riverside property for replacement of a water chiller in the amount of approximately $0.2 million.
Unrealized Loss on Hedging Activities. During the year ended December 31, 2015 we refinanced a variable rate mortgage loan
we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the
Ozarks. During August 2015 we purchased an interest rate cap for $179,800. As of December 31, 2015 the fair market value of the
interest rate cap is $70,981. The unrealized loss on hedging activities during the year ended December 31, 2015 and 2014, was $0.1
million and $0, respectively.
41
Gain on Change in Control. On July 31, 2015, we acquired from Carlyle the remaining 75.0% interest in the entities that own
and lease the Crowne Plaza Hollywood Beach Resort. Due to the increased fair market value of the property for our original 25.0%
interest we recognized a discounted gain on change in control. The gain on change in control during the year ended December 31,
2015, was approximately $6.6 million while no such gain was recorded in 2014.
Income Tax Benefit. The income tax benefit for the year ended December 31, 2015 decreased approximately $0.4 million, or
22.7%, to approximately $1.3 million compared to an income tax provision of approximately $1.7 million for the year ended
December 31, 2014. The income tax benefit was primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized
lower operating loss for the year ended December 31, 2015 compared to the year ended December 31, 2014.
Net Income (Loss). Net income for the year ended December 31, 2015 increased approximately $7.1 million, or 966.3%, to
approximately $6.4 million compared to net loss of approximately $0.7 million for the year ended December 31, 2014 as a result of
the operating results discussed above.
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table illustrates the key operating metrics for the years ended December 31, 2014 and 2013 for our wholly-owned
properties during each respective reporting period (“actual” properties) as well as the key operating metrics for the nine wholly-owned
properties that were under our control during all of 2013 (“same-store” properties). Accordingly, the same-store data does not reflect
the performance of the Crowne Plaza Houston Downtown, which was acquired in November 2013, or the Georgian Terrace, which
was acquired in March 2014. Each table excludes performance data for the Crowne Plaza Hollywood Beach Resort, which was
acquired through a joint venture and in which we had a 25.0% indirect interest.
Occupancy %..........................................
ADR ........................................................
RevPAR...................................................
$
$
Year Ended December 31, 2014
Year Ended December 31, 2013
Actual
70.3%
125.77
88.42
Same-Store
68.9%
122.29
84.23
$
$
Actual
67.4%
118.91
80.16
$
$
Same-Store
67.6%
118.82
80.32
$
$
Revenue. Total revenue for the year ended December 31, 2014 was approximately $122.9 million, an increase of approximately
$33.6 million, or 37.6%, from total revenue for the year ended December 31, 2013 of approximately $89.4 million. Approximately
$31.0 million of the increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace.
Within the remainder of the portfolio, revenue increases were strongest at our Hilton Savannah DeSoto, the DoubleTree by Hilton
Raleigh Brownstone – University, the DoubleTree by Hilton Jacksonville Riverfront, the Crowne Plaza Tampa Westshore and the
Sheraton Louisville Riverside properties. These increases offset revenue decreases at our properties in Wilmington, North Carolina
and Philadelphia, Pennsylvania.
Room revenues at our properties for the year ended December 31, 2014 increased approximately $21.8 million, or 34.7%, to
approximately $84.6 million compared to room revenues for the year ended December 31, 2013 of approximately $62.8 million.
Approximately $19.7 million of the increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the
Georgian Terrace. Within the remainder of the portfolio, room revenue increases were strongest at our Hilton Savannah DeSoto, the
DoubleTree by Hilton Raleigh Brownstone – University, the Crowne Plaza Jacksonville Riverfront, the Crowne Plaza Tampa
Westshore and the Sheraton Louisville Riverside properties. These increases offset revenue decreases at our properties in Wilmington,
North Carolina and Philadelphia, Pennsylvania.
Food and beverage revenues at our properties for the year ended December 31, 2014 increased approximately $9.3 million, or
42.6%, to approximately $31.4 million compared to food and beverage revenue of approximately $22.1 million for the year ended
December 31, 2013. A significant increase in food and beverage revenue at the Hilton Savannah DeSoto, the Crowne Plaza
Jacksonville Riverfront, the Crowne Plaza Tampa Westshore, the Holiday Inn Laurel West and the Crowne Plaza Hampton Marina, as
well as food and beverage revenue increase of approximately $8.6 million associated with our acquisition of the Crowne Plaza
Houston Downtown and the Georgian Terrace, offset decreases at several other properties in our portfolio.
Other operating revenues for the year ended December 31, 2014 increased approximately $2.4 million, or 53.4%, to
approximately $6.9 million compared to other operating revenues for the year ended December 31, 2013 of approximately $4.5
million. Most of the revenue increase of approximately $2.2 million was associated with our acquisition of the Crowne Plaza Houston
Downtown and the Georgian Terrace.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct
expenses, indirect expenses, and management fees, increased approximately $24.7 million, or 37.7%, for the year ended December 31,
42
2014 to approximately $90.2 million compared to hotel operating expenses for the year ended December 31, 2013 of approximately
$65.5 million. The entire increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the Georgian
Terrace.
Rooms expense at our properties for the year ended December 31, 2014 increased approximately $5.7 million, or 33.1%, to
approximately $22.9 million compared to rooms expense of approximately $17.2 million for the year ended December 31, 2013. The
increase in rooms expense was directly related to the $3.5 million increase in rooms expense of our acquisitions of the Crowne Plaza
Houston Downtown and the Georgian Terrace and increases in our other hotel properties similar to the increases in room revenue.
Food and beverage expenses at our properties for the year ended December 31, 2014 increased approximately $7.0 million, or
49.7%, to approximately $21.0 million compared to food and beverage expense of approximately $14.0 million for the year ended
December 31, 2013. The increase in food and beverage expense was directly related to the $6.3 million increase in food and beverage
expense of our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace and increases in our other hotel
properties similar to the increases in food and beverage revenue.
Indirect expenses at our properties for the year ended December 31, 2014 increased approximately $11.3 million, or 33.5%, to
approximately $45.1 million compared to indirect expenses of approximately $33.8 million for the year ended December 31, 2013.
Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property
taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect
expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and
franchise fees. Approximately $9.5 million of the increase was attributable to the acquisitions of the Crowne Plaza Houston
Downtown and the Georgian Terrace. Increases in administrative and general costs, management fees, sales and marketing, franchise
fees (including the franchise termination fee for Crowne Plaza Jacksonville Riverfront), repairs and maintenance, energy costs and
personal property taxes are the other main increases in other indirect costs for the remaining properties.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2014 increased approximately
$3.5 million, or 41.4%, to approximately $12.0 million compared to depreciation and amortization expense of approximately $8.5
million for the year ended December 31, 2013. Approximately $1.0 million of the increase was attributable to the acquisitions and
capital expenditures during the year of the Crowne Plaza Houston Downtown and the Georgian Terrace. The remaining increase
relates to the capital expenditures during the year at the Crowne Plaza Jacksonville Riverfront and the DoubleTree by Hilton
Philadelphia Airport.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended
December 31, 2014 and 2013 was approximately $3.2 million and $0.6 million, respectively. Our review of possible impairment at
one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was
triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues
based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an
impairment to fair market value by an amount of approximately $3.2 million, as of December 31, 2014.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2014
increased approximately $0.7 million, or 16.6%, to approximately $5.1 million compared to corporate general and administrative
expenses of approximately $4.4 million for the year ended December 31, 2013. The increase in corporate and administrative costs is
attributable to acquisition charges related to the Georgian Terrace of approximately $0.2 million, in addition to increases in employee
compensation, accounting, legal and professional fees of approximately $0.5 million.
Interest Expense. Interest expense for the year ended December 31, 2014 increased approximately $5.0 million, or 52.4%, to
approximately $14.6 million compared to approximately $9.6 million of interest expense for the year ended December 31, 2013.
Increases in interest expense are mainly attributable to the periodic interest, interest on the Georgian Terrace acquisition mortgage, a
full year of interest on the mortgage on the Crowne Plaza Houston Downtown and interest on the 7.0% unsecured notes issued in
November 2014.
Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture decreased approximately $0.1 million, or
31.6%, to approximately $0.3 million for the year ended December 31, 2014 compared to equity in the income of the joint venture of
approximately $0.4 million for the year ended December 31, 2013 and represents our then current 25.0% share of the net income of
the Crowne Plaza Hollywood Beach Resort. For the year ended December 31, 2014, the Crowne Plaza Hollywood Beach Resort
reported occupancy of 83.6%, ADR of $162.15 and RevPAR of $135.55. This compares with results reported by the hotel for the year
ended December 31, 2013 of occupancy of 82.2%, ADR of $157.87 and RevPAR of $129.79.
Realized and Unrealized Loss on Warrant Derivative. There was no realized or unrealized loss on the warrant derivative for the
year ended December 31, 2014, an increase of approximately $2.2 million, or 100.0%, to approximately $0.0 million compared to the
43
unrealized loss of approximately $2.2 million for the year ended December 31, 2013. With the redemption of the warrants in the
fourth quarter 2013, there were not any further charges.
Loss on Debt Extinguishment. The loss on debt extinguishment for the year ended December 31, 2014 decreased approximately
$1.2 million, or 59.3%, to approximately $0.8 million compared to a loss on debt extinguishment of approximately $2.0 million for the
year ended December 31, 2013. Pre-payment of the Bridge Loan during the year had us realize a pre-payment penalty associated with
the Bridge Loan and the remaining unamortized loan costs associated with the Bridge Loan in the amount of approximately $0.8
million.
Gain on Involuntary Conversion of Asset. During the year we had a one-time involuntary conversion of equipment at our Hilton
Wilmington Riverside property for replacement of a water chiller in the amount of approximately $0.2 million.
Income Tax Benefit. The income tax benefit for the year ended December 31, 2014 increased approximately $3.2 million, or
215.5%, to approximately $1.7 million compared to an income tax provision of approximately $1.5 million for the year ended
December 31, 2013. The income tax benefit was primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized
greater operating loss for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Net Loss. Net loss for the year ended December 31, 2014 decreased approximately $3.8 million, or 83.5%, to approximately
$0.7 million compared to net loss of approximately $4.5 million for the year ended December 31, 2013 as a result of the operating
results discussed above.
Sources and Uses of Cash
The following narrative discusses our sources and uses of cash for the year ended December 31, 2015.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders of
the Operating Partnership and stockholders of the Company as well as debt service (excluding debt maturities), is the operations of our
hotels. Cash flow provided by operating activities for the year ended December 31, 2015 was approximately $11.4 million. We expect
that cash on hand and the net cash provided by operations will be adequate to fund our operating requirements, monthly and quarterly
scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of
dividends (distributions) to the stockholders of the Company (the unitholders of the Operating Partnership) in accordance with federal
income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least
90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains,
and reduced by certain non-cash items).
Investing Activities. During the year ended December 31, 2015, we used approximately $25.5 million to acquire the remaining
75.0% ownership interest in the Crowne Plaza Hollywood Beach Resort. We also spent approximately $20.1 million on capital
expenditures, of which, approximately $5.1 million related to the routine replacement of furniture, fixtures and equipment;
approximately $4.6 million related to the renovation of our property in Laurel, Maryland in anticipation of a new franchise agreement
which commenced in October 2015; approximately $3.4 million related to the renovation of our property in Jacksonville, Florida in
anticipation of a new franchise license which commenced in September 2015; approximately $3.1 million related to guestroom
renovations at the Georgian Terrace; approximately $3.0 million in renovations at our property in Houston, Texas; and approximately
$0.9 related to the renovation of our property in Philadelphia, Pennsylvania.
We also contributed approximately $5.0 million during 2015 into reserves required by the lenders for ten of our hotels according
to the provisions of their respective loan agreements. During 2015, we received reimbursements from those reserves of approximately
$6.4 million for capital expenditures related to those properties for periods ending on or before December 31, 2015 and we received
net proceeds of approximately $2.4 million from the sale of a 0.3 acre parcel of excess land located adjacent to our property in Atlanta,
Georgia and related development rights.
Financing Activities. Cash flow provided by financing activities for the year ended December 31, 2015 was approximately $24.6
million. This inflow was principally from proceeds from the sale of common stock of approximately $23.3 million and net mortgage
proceeds of approximately $6.8 million, offset by dividend and distribution payments of approximately $4.1 million and payments of
deferred financing costs of approximately $1.4 million.
On October 20, 2015, we secured $2.0 million of additional proceeds on the mortgage loan on the DoubleTree by Hilton
Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.
44
On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood
Beach Resort with Bank of America, N.A. The mortgage term is ten years maturing October 1, 2025. The mortgage bears a fixed
interest rate of 4.913%. The mortgage amortizes on a 30-year schedule. The Company used the proceeds from the mortgage to repay
the existing first mortgage on the Crowne Plaza Hollywood Beach Resort, to pay closing costs, and for general corporate purposes.
On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.8 million, which it
contributed to the Operating Partnership for an equivalent number of units.
On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of
the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The $18.5 million mortgage was
received in two parts. We received $18.0 million on July 7, 2015 and the remainder of $0.5 million on October 20, 2015. The $0.5
million was included with the additional earn-out provision of $1.5 million, for a total of $2.0 million additional proceeds, as
described above. The mortgage term is four years maturing July 7, 2019 and may be extended for one additional period of one year,
subject to certain criteria. The mortgage bears a floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of
4.0%. The mortgage amortizes on a 25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The
Company used the proceeds from the mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville
Riverfront, to pay closing costs, to partially fund renovations at the DoubleTree by Hilton Jacksonville Riverfront, and for general
corporate purposes.
On July 1, 2015, the Company sold 3,000,000 shares of common stock, for net proceeds of approximately $19.8 million, which
it contributed to the Operating Partnership for an equivalent number of units.
During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it
contributed to the Operating Partnership for an equivalent number of units.
On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America, N.A. on the Georgian Terrace in
Atlanta, Georgia. The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a
monthly basis under a 30-year amortization schedule. The maturity date is June 1, 2025. The Company used the proceeds of the
mortgage to repay the existing first mortgage, to pay closing costs, and to partially fund ongoing renovations at the Georgian Terrace
and for general corporate purposes.
The following narrative discusses our sources and uses of cash for the year ended December 31, 2014.
Operating Activities. Cash flow provided by operating activities for the year ended December 31, 2014 was approximately $14.9
million.
Investing Activities. In March 2014, we spent approximately $61.1 million to acquire the Georgian Terrace. We also spent
approximately $9.8 million during 2014 on capital expenditures, of which, approximately $1.0 million related to the routine
replacement of furniture, fixtures and equipment; approximately $2.0 million related to the renovation of our property in Philadelphia,
Pennsylvania in anticipation of its franchise license renewal in October 2014 (on October 27, 2014, our hotel in Philadelphia,
Pennsylvania was rebranded as the DoubleTree by Hilton Philadelphia Airport, pursuant to a new 10-year franchise agreement with
Hilton Worldwide); approximately $2.2 million related to renovation activities at our property in Jacksonville, Florida in anticipation
of a new franchise license commencing in September 2015; approximately $3.3 million related to guest room renovations at the
Georgian Terrace and approximately $1.3 million related to renovations at our property in Houston, Texas.
We also contributed approximately $3.7 million during 2014 into reserves required by the lenders for seven of our hotels
according to the provisions of their respective loan agreements. During 2014, we received reimbursements from those reserves of
approximately $2.6 million for capital expenditures related to those properties for periods ending on or before December 31, 2014.
Financing Activities. On March 26, 2014, we borrowed $19.0 million from Richmond Hill Capital Partners, LP and Essex
Equity Joint Investment Vehicle, LLC, (the “Bridge Loan”), and used the net proceeds to fund a portion of the acquisition of the
Georgian Terrace.
On March 27, 2014, we borrowed $41.5 million in conjunction with the purchase of the Georgian Terrace, of which $1.5 million
was contributed to a restricted reserve.
On March 31, 2014, we entered into a First Amendment and other amended loan documents to secure additional proceeds in
conjunction with a $5.6 million expansion of the existing mortgage on the DoubleTree by Hilton Philadelphia Airport.
45
On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza
Hampton Marina in Hampton, Virginia, until June 30, 2016. Pursuant to those terms, we reduced the mortgage balance by $0.8 million.
On November 21, 2014, we closed on a 7% unsecured note offering for approximately $25.3 million. The net proceeds of
approximately $23.7 million were used to repay the $19.0 million Bridge Loan and for general corporate purposes.
On November 24, 2014, we repaid the $19.0 million Bridge Loan.
On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the DoubleTree by Hilton
Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the then existing loan agreement.
Capital Expenditures
We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and
equipment over the next 12 to 24 months will be at historical norms for our properties and the industry. Historically, we have aimed to
maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license
renewal, at 4.0% of gross revenue. In addition, during 2016 we expect capital expenditures of $3.8 million related to our property in
Savannah, Georgia. We also anticipate capital expenditures during 2016 of approximately $0.9 million, at our property in Houston,
Texas other than for the recurring replacement of furniture, fixtures and equipment. We anticipate capital expenditures during 2016 of
approximately $1.2 million for the Georgian Terrace other than for the recurring replacement of furniture, fixtures and equipment
related to a guestroom renovation.
Given our desire to proceed with the renovation activities at our properties in Savannah, Georgia, Houston, Texas and Atlanta,
Georgia, we aim to restrict all other capital expenditures to the replacement of broken or damaged furniture and equipment and the
acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations. We anticipate that capital
expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation
activities to total 4.00% of gross revenues in 2016.
We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our
properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required
by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or
expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah
DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina, the Crowne Plaza Hollywood Beach Resort, The
DoubleTree by Hilton Jacksonville Riverside, the DoubleTree by Hilton Raleigh Brownstone-University, the Sheraton Louisville
Riverside, the Crowne Plaza Houston Downtown and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by
Hilton Philadelphia Airport on a monthly basis.
Liquidity and Capital Resources
As of December 31, 2015, we had cash and cash equivalents of approximately $17.3 million, of which approximately $5.8
million was in restricted reserve accounts for capital improvements, real estate tax and insurance escrows. We expect that our cash on
hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures
for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of
principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).
We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy
depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we will continue to
make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means
to provide liquidity.
We expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint
ventures and debt maturities, which include the repayment of the Notes (which are callable after September 30, 2016, with respect to
the 8% Notes, and November 15, 2017, with respect to the 7% Notes) and the retirement of maturing mortgage debt, through net
proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited
partnership interest in our Operating Partnership, secured and unsecured borrowings, as well as the selective disposition of non-core
assets. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
On March 21, 2016, we entered into an agreement to extend the maturity of the mortgage on the Crowne Plaza Houston
Downtown until November 2017.
46
On December 31, 2015, we entered into an amendment to the existing mortgage loan on the DoubleTree by Hilton Laurel which
generated additional net proceeds of approximately $2.6 million, which loan proceeds we received January 4, 2016.
On October 20, 2015, we secured $2.0 million additional proceeds on the mortgage loan on the DoubleTree by Hilton
Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.
On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood
Beach Resort with Bank of America, N.A. The mortgage term is ten years maturing October 1, 2025, subject to certain criteria. The
mortgage bears a fixed interest rate of 4.913%. The mortgage amortizes on a 30-year schedule. The Company used the proceeds from
the mortgage to repay the existing first mortgage on the Crowne Plaza Hollywood Beach Resort and to pay closing costs, and will use
the balance of the proceeds for general corporate purposes.
On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.0 million mortgage with Bank of
the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. We received $18.0 million on July
7, 2015 and the remainder of $0.5 million on October 20, 2015 with the additional earn-out provision of $1.5 million. The mortgage
term is four years maturing July 7, 2019 and may be extended for one additional period of one year, subject to certain criteria. The
mortgage bears a floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0%. The mortgage amortizes on a
25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The Company used the proceeds from the
mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville Riverfront and to pay closing costs, and will
use the balance of the proceeds to partially fund ongoing renovations at the DoubleTree by Hilton Jacksonville Riverfront and for
general corporate purposes.
On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America on the Georgian Terrace in Atlanta,
Georgia. The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a monthly
basis under a 30-year amortization schedule. The maturity date is June 1, 2025. The Company used the proceeds of the mortgage to
repay the existing first mortgage and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing
renovations at the Georgian Terrace and for general corporate purposes.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could
result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by
renovation activity or major weather disturbances.
If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or
amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be
successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be
on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with
the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing
cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash
collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral
may have a material impact on our liquidity.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate
cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private
or public offerings of debt securities, or additional equity financing.
Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the
loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash
flow would not be available to us.
At December 31, 2015, we were in compliance with all debt covenants, current on all loan payments and not otherwise in
default under any of our mortgage loans.
Unsecured Notes
The indentures for the Notes contains certain covenants and restrictions that require us to meet certain financial ratios. We are
not permitted to incur any Debt (other than intercompany Debt), as defined in the indentures, if, immediately after giving effect to the
47
incurrence of such Debt and to the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding
Debt to Adjusted Total Asset Value, as defined in the indentures, would be greater than 0.65 to 1.0. In addition, we are not permitted
to incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest
Expense, both as defined in the indentures, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after
giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.
These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of
evaluating our compliance with the key financial covenants as they were or would have been applicable at December 31, 2015 and
December 31, 2014, respectively.
December 31,
December 31,
2015
2014
Ratio of Stabilized Consolidated Income Available for Debt Service
to Stabilized Consolidated Interest Expense
Net income (loss)(1) ...................................................................................... $
Interest expense(1).........................................................................................
Loss on early debt extinguishment ..............................................................
Unrealized loss on hedging activities ..........................................................
Gain on change in control ............................................................................
Gain on involuntary conversion of asset......................................................
Gain on disposal of assets ............................................................................
Provision for taxes(1) ....................................................................................
Equity in income of joint venture(1) .............................................................
Impairment of investment in hotel properties, net(1) ....................................
Depreciation and amortization(1)..................................................................
Corporate general and administrative expenses(1)........................................
Consolidated income available for debt service(1) .......................................
Less: income of non-stabilized assets (1) ......................................................
Stabilized Consolidated Income Available for Debt Service (1) .................. $
Interest expense(1)......................................................................................... $
Loss on early debt extinguishment ..............................................................
Amortization of issuance costs(1) .................................................................
Consolidated interest expense(1)...................................................................
Less: interest expense of non-stabilized assets(1) .........................................
Stabilized Consolidated Interest Expense(1)................................................. $
Ratio of Stabilized Consolidated Income Available for Debt Service to
Stabilized Consolidated Interest Expense .................................................
Threshold Ratio Minimum...........................................................................
Ratio of Debt to Adjusted Total Asset Value:
Mortgage loans............................................................................................. $
Unsecured notes ...........................................................................................
Total debt ..................................................................................................... $
Stabilized Consolidated Income Available for Debt Service(1) ................... $
Capitalization rate ........................................................................................
Non-stabilized assets....................................................................................
Total cash .....................................................................................................
Adjusted Total Asset Value ......................................................................... $
Ratio of Debt to Adjusted Total Asset Value ..............................................
Threshold Ratio Maximum ..........................................................................
$
6,397,653
16,515,827
772,907
108,819
(6,603,148)
—
(41,435)
(1,336,033)
(475,514)
500,000
13,591,495
7,268,256
36,698,827
(16,284,975)
$
20,413,852
16,515,827
$
772,907
(1,300,032)
15,988,702
(5,295,224)
$
10,693,478
1.91
1.50
$
271,977,944
52,900,000
324,877,944
20,413,852
$
$
7.5%
272,184,693
305,255,698
17,287,754
594,728,145
0.55
0.65
$
(738,509)
14,636,870
831,079
—
—
(169,151)
—
(1,727,723)
(307,370)
3,175,000
11,969,284
5,085,949
32,755,429
(8,961,209)
23,794,220
14,636,870
831,079
(1,428,674)
14,039,275
(2,444,937)
11,594,338
2.05
1.50
205,291,657
52,900,000
258,191,657
23,794,220
7.5%
317,256,267
146,440,000
23,256,363
486,952,630
0.53
0.65
(1) As permitted by the indentures, the DoubleTree by Hilton Laurel, DoubleTree by Hilton Jacksonville Riverfront and Crowne
Plaza Hollywood Beach Resort, for the period ended December 31, 2015, and the DoubleTree by Hilton Philadelphia Airport
and the Georgian Terrace, for the period ended December 31, 2014, are considered non-stabilized assets for purposes of the
financial covenants.
48
Mortgage Debt
As of December 31, 2015, we had approximately $272.0 million of outstanding mortgage debt, respectively. The following table
sets forth our mortgage debt obligations on our hotels.
Property
Crowne Plaza Hampton Marina ........................ $
Crowne Plaza Hollywood Beach Resort ...........
Crowne Plaza Houston Downtown ...................
Crowne Plaza Tampa Westshore.......................
DoubleTree by Hilton Jacksonville Riverfront ...
DoubleTree by Hilton Laurel ............................
DoubleTree by Hilton Philadelphia Airport ......
DoubleTree by Hilton Raleigh Brownstone –
December 31,
Prepayment
2015
Penalties
3,512,586 None
59,795,743
N/A
20,459,256 None
13,016,045 None
Yes
19,774,577
9,500,000
Yes
32,376,795 None
Maturity
Date
6/30/2016 $
(3) 10/1/2025
11/13/2017 (4)
6/18/2017
(5) 7/7/2019 (6)
(7) 8/5/2021
4/1/2019
University .......................................................
Georgian Terrace ...............................................
Hilton Savannah DeSoto ...................................
Hilton Wilmington Riverside ............................
Sheraton Louisville Riverside ...........................
15,029,121
46,579,011
20,522,836
19,825,772
11,345,866
Total Mortgage Principal Balance ............... 271,737,608
240,336
Total Mortgage Loans.................................. $ 271,977,944
Unamortized premium on loan..........................
N/A
N/A
Yes
Yes
N/A
(10) 8/1/2018
(11) 6/1/2025
(12) 9/1/2017
(12) 4/1/2017
(10) 1/6/2017
Amortization
Provisions
83,000 (1)
30 years
25 years
25 years
25 years
25 years
25 years
30 years
30 years
25 years
25 years
25 years
(2)
Interest Rate
5.00%
4.913%
4.50%
5.60%
LIBOR plus 3.50 %
(8)
5.25%
LIBOR plus 3.00 % (9)
4.78%
4.42%
6.06%
6.21%
6.24%
The Operating Partnership is required to make monthly principal payments of $83,000.
The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014.
(1)
(2)
(3) With limited exception, the note may not be prepaid until June 2025.
(4)
(5)
(6)
(7)
(8)
The note was extended in March 2016 and provides that the mortgage can be extended until November 2018 if certain
conditions have been satisfied.
The note is subject to a pre-payment penalty until July 2017. Pre-payment can be made without penalty thereafter.
The note provides that the mortgage can be extended until July 2020 if certain conditions have been satisfied.
The note is subject to a pre-payment penalty except for any pre-payments made either between April 2017 and August 2017, or
from April 2021 through maturity of the note.
The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-
year U.S. Treasury rate of interest, with a floor of 5.25%.
The note bears a minimum interest rate of 3.50%.
(9)
(10) With limited exception, the note may not be prepaid until two months before maturity.
(11) With limited exception, the note may not be prepaid until February 2025.
(12) The note may not be prepaid during the first six years of the term. Prepayment can be made with penalty thereafter until 90 days
before maturity.
Contractual Obligations
The following table outlines our contractual obligations as of December 31, 2015, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods (in thousands).
Contractual Obligations
Total
Payments due by period (in thousands)
Less than
1 year
1-3 years
3-5 years
More than
5 years
Mortgage loans, including interest...... $
Unsecured notes, including interest ....
Ground, building, office and
334,635 $
65,859
22,393 $
3,979
122,769 $
35,006
63,185 $
26,874
126,288
—
equipment leases ..............................
1,539
337
444
217
541
Totals .................................................. $
402,033 $
26,709 $
158,219 $
90,276 $
126,829
In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that required us to
indemnify the contributors of our initial properties against tax liabilities in the event we sold any of those properties in a taxable
49
transaction during a 10-year period. The tax indemnity agreements expired on or about December 22, 2014. Our obligations under the
contribution agreements may effectively preclude us from reducing our consolidated indebtedness below approximately $11.0 million.
Off Balance Sheet Arrangements. Through a joint venture with a Carlyle subsidiary, we owned a 25.0% indirect, noncontrolling
interest in an entity (the “JV Owner”) that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida. We
had the right to receive a pro rata share of operating surpluses and we had an obligation to fund our pro rata share of operating
shortfalls. We also had the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based
upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. The Crowne Plaza
Hollywood Beach Resort was leased to another entity (the “Joint Venture Lessee”) in which we also owned a 25.0% indirect,
noncontrolling interest.
Carlyle owned a 75.0% controlling interest in the entities that own and lease the Crowne Plaza Hollywood Beach
Resort. Carlyle had the right to dispose of the Crowne Plaza Hollywood Beach Resort without our consent. We accounted for our
noncontrolling 25.0% interest in all of these entities under the equity method of accounting.
On July 31, 2015, indirect subsidiaries of the Operating Partnership acquired from Carlyle the remaining 75.0% interest in the
entities that own and lease the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a 100%
indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. The property was refinanced on
September 28, 2015 and is encumbered by a $60.0 million mortgage which matures in September 2025 and requires monthly
payments of interest at a rate of 4.913%. The Crowne Plaza Hollywood Beach Resort secures the mortgage.
Distributions to Common Stockholders and Holders of Units in the Operating Partnership. The Company has elected to be
taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain qualification as a REIT, the Company is
required to make annual distributions to its stockholders of at least 90.0% of our REIT taxable income, (excluding net capital gain,
which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). The
Company’s ability to pay distributions to its stockholders will depend, in part, upon its receipt of distributions from the Operating
Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon
the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the
Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in
hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a non-
taxable return of capital. To the extent not inconsistent with maintaining the Company’s REIT status, our TRS Lessees may retain any
after-tax earnings.
The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by the
Company based upon a variety of factors deemed relevant by its directors, and no assurance can be given that the distribution policy
will not change in the future.
Inflation
We generate revenues primarily from lease payments from our TRS Lessees and net income from the operations of our TRS
Lessees. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to
increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep
pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to
raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance
are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance,
property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher
than inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we
are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of
businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in
which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or
decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
50
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as
is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in
certain markets, namely Florida and Texas, which experience significant room demand during this period.
Competition
The hotel industry is highly competitive with various participants competing on the basis of price, level of service and
geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive
hotel properties in a particular area could have a material adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel
properties acquired in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided,
and price, are the principal competitive factors affecting our hotels.
Critical Accounting Policies
The critical accounting policies are described below. We consider these policies critical because they involve difficult
management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to
fully understand and evaluate our reported financial results.
Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the
straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and
equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting
predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in
hotels, which were acquired from third parties contributed to us in connection with the Company’s initial public offering, are recorded
at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels,
other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value
at the time of acquisition.
We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the
hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited
to, adverse permanent changes in the demand for lodging at our properties due to declining national or local economic conditions
and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a
recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated
proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows
are found to be less than the carrying amount of the hotel property, an adjustment to reduce the carrying value to the related hotel
property’s estimated fair market value would be recorded and an impairment loss recognized.
Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated
undiscounted future cash flows, which resulted in an impairment to fair market value by an approximate amount of $0.5 million, $3.2
million and $0.6 million, as of December 31, 2015, 2014 and 2013, respectively.
In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding
growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to
maintain the hotel in its current operating condition. We also project cash flows from the eventual disposition of the hotel based upon
various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per
room.
Revenue Recognition. Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related
services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful
accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy
or other economic downturn, such amounts will be charged against operations when that determination is made.
Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than
not to be realized. Because of expected future taxable income of our TRS Lessees, we have not recorded a valuation allowance to
reduce our net deferred tax asset as of December 31, 2015. Should our estimate of future taxable income be less than expected, we
would record an adjustment to the net deferred tax asset in the period such determination was made.
51
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting
Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Non-GAAP Financial Measures
We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental
measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our
performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting
principles (“GAAP”) or amounts available for our discretionary use and should not be considered alternative measures of net income,
cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating
performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss
determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of
previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization,
and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting
for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.
Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered
the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial
performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of
performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding
real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate
between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies
may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to
FFO as reported by other REITs.
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred
income taxes, any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early
extinguishment of debt, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure
of executive officers, litigation settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition
transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other
REITs and is more indicative than FFO of the on-going performance of our business and assets. Our calculation of Adjusted FFO may
be different from similar measures calculated by other REITs.
52
The following is a reconciliation of net income (loss) to FFO and Adjusted FFO for the years ended December 31, 2015, 2014,
and 2013.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Net Income (Loss).................................................................... $ 6,397,653 $
(738,509) $ (4,473,592)
Depreciation and Amortization ........................................... 13,591,495 11,969,284 8,467,228
500,000 3,175,000
611,000
Impairment of Investment in Hotel Properties, net .............
545,667
259,279
529,053
Equity in Depreciation on Joint Venture .............................
—
Gain on Disposal of Assets..................................................
(41,435)
—
Gain on Change in Control .................................................. (6,603,148)
—
Gain on Involuntary Conversion of Asset ...........................
Funds From Operations ......................................................... $ 14,103,844 $ 14,765,677 $ 5,150,303
(Increase)/Decrease in Deferred Income Taxes................... (1,780,571) (1,961,663) 1,370,189
Acquisition Costs.................................................................
89,743
Loss on Starwood Settlement ..............................................
—
Over-assessed Real Estate Taxes Under Appeal .................
—
Loan Modification Fees.......................................................
—
Franchise Termination Fee ..................................................
—
Realized and Unrealized (Gain)/Loss on Hedging
634,376
324,271
497,733
243,229
—
—
—
351,800
—
—
(169,151)
155,187
—
—
Activities (A) ...................................................................................
Realized and Unrealized Loss on Warrant Derivative ........
Loss on Early Debt Extinguishment (A) ....................................
—
(89,998)
— 2,205,248
831,079 2,040,662
Adjusted FFO .......................................................................... $ 14,904,608 $ 14,142,080 $ 10,766,147
108,819
—
772,907
(A)
Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture.
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income
tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments
not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments,
(8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control,
(11) corporate general and administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary
conversions of assets and (14) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more
complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe
Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the
effectiveness of third-party management companies operating our business on a property-level basis.
Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.
53
The following is a reconciliation of net loss to Hotel EBITDA for the years ended December 31, 2015, 2014, and 2013.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Net Income (Loss).................................................................... $ 6,397,653 $
(738,509) $ (4,473,592)
Interest Expense ................................................................... 16,515,827 14,636,870 9,606,479
(17,914)
Interest Income.....................................................................
Income Tax Provision (Benefit)........................................... (1,336,033) (1,727,723) 1,496,096
Depreciation and Amortization............................................ 13,591,495 11,969,284 8,467,228
(449,500)
Equity in (Earnings)/Loss of Joint Venture .........................
—
Unrealized loss on hedging activities ..................................
Realized and Unrealized (Gain)/Loss on Warrant
(475,514)
108,819
(307,370)
(19,865)
(50,461)
—
Derivative..........................................................................
— 2,205,248
—
—
—
Gain on Change in Control .................................................. (6,603,148)
831,079 2,040,662
Loss on Debt Extinguishment..............................................
—
Gain on Disposal of Assets ..................................................
—
Gain on involuntary conversion of asset..............................
Impairment of Investment in Hotel Properties, Net.............
611,000
Corporate General and Administrative Expenses ................ 7,268,256 5,085,949 4,360,583
(350,000)
Net Lease Rental Income .....................................................
(275,775)
Other Fee Income.................................................................
(350,000)
(300,607)
—
(200,976)
500,000 3,175,000
772,907
(41,435)
—
(169,151)
—
Hotel EBITDA ......................................................................... $ 36,447,390 $ 32,084,957 $ 23,220,515
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking
statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical
future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of
reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents
the sensitivity of the market value of our financial instruments to selected changes in market interest rates.
To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our
interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock
agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue
derivative contracts for trading or speculative purposes.
As of December 31, 2015, we had approximately $272.6 million of fixed-rate debt and approximately $52.3 million of variable-
rate debt. The weighted-average interest rate on the fixed-rate debt was 5.58%. A change in market interest rates on the fixed portion
of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is
exposed to changes in interest rates, specifically the changes in 1-month and 3-month LIBOR. However, to the extent that 30-day
LIBOR does not exceed the 30-day LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a
portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding
on the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the DoubleTree by Hilton Jacksonville
Riverfront remains at approximately $52.2 million, the balance at December 31, 2015, the impact on our annual interest incurred and
cash flows of a one percent increase in 1-month LIBOR and 3-month LIBOR would be approximately $0.5 million.
As of December 31, 2014, we had approximately $167.0 million of fixed-rate debt and approximately $91.2 million of variable-
rate debt. The weighted-average interest rate on the fixed-rate debt was 6.14%. A change in market interest rates on the fixed portion
of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is
exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not
exceed the 30-day LIBOR floors on the mortgages on the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, of
0.50% and 0.25%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that
the aggregate amount outstanding on our mortgage on the Georgian Terrace, the mortgage on the DoubleTree by Hilton Philadelphia
Airport and the mortgage on the DoubleTree by Hilton Jacksonville Riverfront remain at approximately $91.2 million, the balance at
54
December 31, 2014, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be
approximately $0.8 million.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Sotherly Hotels Inc.
Disclosure Controls and Procedures
The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 under
the Exchange Act), as of December 31, 2015. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2015, its disclosure controls and procedures were effective and designed to ensure
that (i) information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and
reported with the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to
the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the
Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide
absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act). The Company’s management assessed the effectiveness over
internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 1992 Internal Control-
Integrated Framework. The Company’s management has concluded that, as of December 31, 2015, its internal control over financial
reporting is effective based on these criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Management’s Remediation Initiatives and Changes in Internal Control Over Financial Reporting
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with
the SEC on April 14, 2015, we concluded that, as of December 31, 2014, a material weakness in our internal control over financial
reporting existed relating to insufficient financial accounting policies and procedures and resources, particularly as it relates to the
evaluation and contemporaneous documentation of income tax and property impairment accounting conclusions and certain SEC
disclosure requirements related to significant subsidiaries.
In the fourth quarter of 2015, we completed our remediation activities. As a result, as of December 31, 2015, we concluded that
we have remediated the previously reported material weakness in our internal control over financial reporting.
55
During 2015 we implemented the following changes in our internal control over financial reporting to address the previously
reported material weakness and to enhance our overall financial control environment:
•
•
•
Engaged outside independent consultant to assist in the evaluation and contemporaneous documentation of accounting for
income taxes.
Engaged outside independent consultant to assist in the evaluation of our conclusions and accounting for property
impairment.
Implemented enhanced documentation requirements, additional policies and procedures as well as additional levels of
review to be followed within the accounting department and by outside independent consultants.
Except as noted above, there was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels
Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over
financial reporting.
Sotherly Hotels LP
Disclosure Controls and Procedures
The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief
Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under
the Exchange Act), as of December 31, 2015. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2015, the disclosure controls and procedures were effective and designed to ensure
that (i) information required to be disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and
reported with the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels
Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and
all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels
LP have been detected.
Management’s Report on Internal Control over Financial Reporting
The Operating Partnership’s management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act). Management assessed the effectiveness over internal
control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 1992 Internal Control-Integrated Framework.
Management has concluded that, as of December 31, 2015, the Operating Partnership’s internal control over financial reporting is
effective based on these criteria.
This annual report does not include an attestation report of the Operating Partnership’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the Operating Partnership’s
independent registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or
“accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Management’s Remediation Initiatives and Changes in Internal Control Over Financial Reporting
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with
the SEC on April 14, 2015, we concluded that, as of December 31, 2014, a material weakness in our internal control over financial
reporting existed relating to insufficient financial accounting policies and procedures and resources, particularly as it relates to the
evaluation and contemporaneous documentation of income tax and property impairment accounting conclusions and certain SEC
disclosure requirements related to significant subsidiaries.
56
In the fourth quarter of 2015, we completed our remediation activities. As a result, as of December 31, 2015, we concluded that
we have remediated the previously reported material weakness in our internal control over financial reporting.
During 2015 we implemented the following changes in our internal control over financial reporting to address the previously
reported material weakness and to enhance our overall financial control environment:
•
•
•
Engaged outside independent consultant to assist in the evaluation and contemporaneous documentation of accounting for
income taxes.
Engaged outside independent consultant to assist in the evaluation of our conclusions and accounting for property
impairment.
Implemented enhanced documentation requirements, additional policies and procedures as well as additional levels of
review to be followed within the accounting department and by outside independent consultants.
Except as noted above, there was no change in Sotherly Hotels LP’s internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels
LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over
financial reporting.
Item 9B. Other Information
None.
57
The information required by Items 10-14 is incorporated by reference to the Company’s proxy statement for the 2016 annual
meeting of stockholders (to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal
year covered by this report).
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The Company has adopted a code of business conduct and ethics, including a conflicts of interest policy that applies to its
principal executive officer, principal financial officer, principal accounting officer or controller performing similar functions. We
intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our
business. A copy of the Company’s Code of Business Conduct is posted on the Company’s external website at
www.sotherlyhotels.com. The Company and the Operating Partnership intend to post to its website any amendments to or waivers of
its code. The Operating Partnership is managed by the Company, its sole general partner and parent company. Consequently, the
Operating Partnership does not have its own separate directors or executive officers.
Information on the Company’s directors is incorporated by reference to the sections captioned “Proposal I – Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Company’s 2016 Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the section captioned “Director and Executive
Compensation” contained in the Company’s 2016 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the
Company’s 2016 Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the
Company’s 2016 Proxy Statement.
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change in control of the Company.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth below is information as of December 31, 2015 with respect to compensation plans under which equity securities of the
Company are authorized for issuance.
58
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS
WEIGHTED-AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS
AND RIGHTS
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
Equity compensation plans approved by
security holders:
2013 Plan (1) ................................................
Equity compensation plans not approved by
security holders:
None .............................................................
Total .............................................................
N/A
N/A
N/A
N/A
N/A
N/A
677,150
N/A
677,150
(1) On February 14, 2014, we granted 10,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski
and 8,000 shares of stock to David R. Folsom.
On February 14, 2014, we granted 12,000 shares (3,000 each) of restricted stock to certain of our independent directors that
vested on December 31, 2014. Also on February 14, 2014, we granted 750 shares of restricted stock to former director J. Paul Carey
that vested on April 21, 2014.
On January 29, 2015, we granted 10,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski and
8,000 shares of stock to David R. Folsom, and 2,350 shares of stock to other employees of the Company.
On January 29, 2015, we granted 9,000 shares (3,000 each) of restricted stock to certain of our independent directors that vested
on December 31, 2015. Also on January 29, 2015, we granted 750 shares of restricted stock to director James P. O’Hanlon that vested
on April 27, 2015.
On February 2, 2016, we granted 8,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski,
7,000 shares of stock to David R. Folsom, and 1,000 shares of stock to other employees of the Company. These shares are included in
the number of securities remaining available for future issuance at December 31, 2015.
On February 2, 2016, we granted 12,000 shares (3,000 each) of restricted stock to certain of our independent directors that will
vest on December 31, 2016. Also on February 2, 2016, we granted an additional 2,250 shares of unrestricted stock to director Herschel
J. Walker in consideration for his service during 2015. These shares are included in the number of securities remaining available for
future issuance at December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the sections captioned “Certain Relationships and Related
Transactions” and “Proposal I – Election of Directors” in the Company’s 2016 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the section captioned “Proposal II –Ratification of
Appointment of Accountants” in the Company’s 2016 Proxy Statement.
59
Item 15. Exhibits and Financial Statement Schedules
PART IV
1. Financial Statements
Index to Financial Statements and Financial Statement Schedules.........................................................................................
Sotherly Hotels Inc.
Report of Independent Registered Public Accounting Firm, Grant Thornton LLP.............................................................
Report of Independent Registered Public Accounting Firm, PBMares, LLP......................................................................
Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2015 and 2014 ...............................................
Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014 and
F-1
F-2
F-3
F-4
2013...................................................................................................................................................................................
F-5
Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014
and 2013............................................................................................................................................................................
F-6
Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014 and
2013...................................................................................................................................................................................
F-7
Sotherly Hotels LP
F-8
Report of Independent Registered Public Accounting Firm, Grant Thornton LLP.............................................................
Report of Independent Registered Public Accounting Firm, PBMares, LLP......................................................................
F-9
Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2015 and 2014................................................. F-10
Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2015, 2014 and
2013................................................................................................................................................................................... F-11
Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31,
2015, 2014 and 2013......................................................................................................................................................... F-12
Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2015, 2014 and
2013................................................................................................................................................................................... F-13
Notes to Consolidated Financial Statements ................................................................................................................................. F-14
2. Financial Statement Schedules
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2015 ........................................................ F-36
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related
instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and,
therefore, have been omitted.
The following exhibits are filed as part of this Form 10-K:
Exhibits
3.1
3.3
3.4
3.5
3.6
3.7
Articles of Amendment and Restatement of Sotherly Hotels Inc. (incorporated by reference to the document previously
filed as Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed
with the Securities and Exchange Commission on October 20, 2004 (File No. 333-118873)).
Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the
document previously filed as Exhibit 3.3 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement
on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)).
Articles Supplementary of Sotherly Hotels Inc. (incorporated by reference to the document previously filed as Exhibit
3.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18,
2011).
Amended and Restated Bylaws of Sotherly Hotels Inc. (incorporated by reference to the document previously filed as
Exhibit 3.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
April 18, 2011).
Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.6 to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on April 18, 2011).
Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013
(incorporated by reference to the document previously filed as Exhibit 3.7 to the Company’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on April 16, 2013).
60
Exhibits
3.8
3.9
4.0
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.1A
10.2A
10.2B
Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013 (incorporated by reference to the
document previously filed as Exhibit 3.8 to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 16, 2013).
Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment
No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013
(File No. 333-189821)).
Form of Common Stock Certificate (incorporated by reference to the document previously filed as Exhibit 4.0 to the
Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and
Exchange Commission on December 13, 2004 (File No. 333-118873)).
Warrant, dated as of April 18, 2011, by and between the Company, Essex Illiquid, LLC and Richmond Hill Capital
Partners, LP (incorporated by reference to the document previously filed as Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).
Amendment, dated December 21, 2011, to Warrant, dated as of April 18, 2011, by and among the Company, Essex
Illiquid, LLC and Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as
Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 22, 2011).
Amendment No. 2, dated July 10, 2012, to Warrant, dated as of April 18, 2011, by and among the Company, Essex Illiquid,
LLC and Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 4.4 to
the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2012).
Amendment No. 3 to Warrant, dated October 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC and
Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 4.5 to our
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2013).
Senior Unsecured Note issued by Sotherly Hotels LP (incorporated by reference to the document previously filed as
Exhibit 4.6 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the
Securities and Exchange Commission on November 7, 2013).
Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee (incorporated by
reference to the document previously filed as Exhibit 4.7 to our Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013).
Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as
trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit 4.8 to our
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014).
First Supplemental Indenture, by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National
Association, as trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit
4.9 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014).
7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP (incorporated by reference to the document
previously filed as Exhibit 4.10 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed
with the Securities and Exchange Commission on April 14, 2015).
Sotherly Hotels Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the document previously filed as
Exhibit 10.1 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the
Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). *
Form of Restricted Stock Award Agreement between Sotherly Hotels Inc. and Participant (incorporated by reference to
the document previously filed as Exhibit 10.1A to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, filed with the Securities and Exchange Commission on March 25, 2009). *
Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims (incorporated by reference to the
document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 5, 2010). *
First Amendment, dated as of January 1, 2011, to Executive Employment Agreement between Sotherly Hotels Inc. and
Andrew M. Sims (incorporated by reference to the document previously filed as Exhibit 10.3A to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 19, 2011). *
61
Exhibits
10.2C
10.2D
10.3
10.3A
10.4
10.5
10.5A
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated January 12, 2015
(incorporated by reference to the document previously filed as Exhibit 10.2A to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 13, 2015). *
Executive Employment Agreement between Sotherly Hotels Inc. and Anthony E. Domalski (incorporated by reference to
the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 3, 2013). *
Executive Employment Agreement between Sotherly Hotels Inc. and William J. Zaiser (incorporated by reference to the
document previously filed as Exhibit 10.3A to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 5, 2010). *
Consulting Agreement between Sotherly Hotels Inc. and WJZ Consulting LLC (incorporated by reference to the
document previously filed as Exhibit 10.3A to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 3, 2013). *
Strategic Alliance Agreement between Sotherly Hotels Inc., Sotherly Hotels LP and MHI Hotels Services, LLC
(incorporated by reference to the document previously filed as Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on
November 9, 2011).
Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC (incorporated by
reference to the document previously filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011).
Amendment Number 2, dated January 14, 2008 to the Master Management Agreement, dated December 21, 2004, as
amended, by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC (incorporated by reference to the
document previously filed as Exhibit 10.5A to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 18, 2008).
Contribution Agreement dated August 23, 2004 by and between the owners of Capitol Hotel Associates L.P., L.L.P. and
Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.6 to the Company’s Pre-
Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on December 15, 2004 (File No. 333-118873)).
Contribution Agreement dated August 23, 2004 by and between the owners of Savannah Hotel Associates LLC and
Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.7 to the Company’s Pre-
Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on December 15, 2004 (File No. 333-118873)).
Contribution Agreement dated August 23, 2004 by and between KDCA Partnership, MAVAS LLC, and Sotherly Hotels
LP (incorporated by reference to the document previously filed as Exhibit 10.8 to the Company’s Pre-Effective
Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on
December 13, 2004 (File No. 333-118873)).
Contribution Agreement dated September 8, 2004 by and between Elpizo Limited Partnership, Phileo Land Corporation
and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.9 to the Company’s
Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on December 13, 2004 (File No. 333-118873)).
Asset Purchase Agreement dated August 19, 2004 by and between Accord LLC, West Laurel Corporation and MHI
Hotels Services, LLC (incorporated by reference to the document previously filed as Exhibit 10.10 to the Company’s
Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on December 13, 2004 (File No. 333-118873)).
Agreement to Assign and Sublease Common Space Lease and Form of Sublease by and between MHI Hospitality L.P.
and MHI Hotels, LLC (incorporated by reference to the document previously filed as Exhibit 10.11 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and
Exchange Commission on November 9, 2011).
Agreement to Assign and Sublease Commercial Space Lease and Form of Sublease by and between MHI Hospitality
L.P. and MHI Hotels Two, Inc. (incorporated by reference to the document previously filed as Exhibit 10.12 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities
and Exchange Commission on November 9, 2011).
62
Exhibits
10.13
10.14
10.15
10.18
10.19
10.19A
10.19B
10.19C
10.20
10.20A
10.22A
10.22B
10.23
10.24
Lease Agreement by and between Philadelphia Hotel Associates, LP and MHI Hospitality TRS, LLC (with a schedule of
eight additional agreements that are substantially identical in all material respects to the Lease agreement, except as
identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K
(incorporated by reference to the document previously filed as Exhibit 10.13 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on
November 9, 2011).
Management Restructuring Agreement by and between MHI Hospitality TRS, LLC, MHI Hotels Services, LLC and
Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.14 to the Company’s Pre-
Effective Amendment No. 3 to its Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on November 15, 2004 (File No. 333-118873)).
Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc.
(incorporated by reference to the document previously filed as Exhibit 10.15 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on
November 9, 2011).
Purchase, Sale and Contribution Agreement by and between BIT Holdings Seventeen, Inc, Sotherly Hotels LP, and MHI
Hotels, LLC (incorporated by reference to the document previously filed as Exhibit 10.18 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2005, filed with the Securities and Exchange Commission
on August 11, 2005).
Purchase Agreement by and between MCZ/Centrum Florida VI and MHI Hollywood LLC (incorporated by reference to
the document previously filed as Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005).
Third Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC
(incorporated by reference to the document previously filed as Exhibit 10.19A to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 28, 2006).
Fourth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood,
LLC, dated September 1, 2006 (incorporated by reference to the document previously filed as Exhibit 10.19B to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006).
Fifth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC
(incorporated by reference to the document previously filed as Exhibit 10.19C to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on June 1, 2007).
Employment Agreement, dated as of January 1, 2011, between Sotherly Hotels Inc. and David R. Folsom (incorporated
by reference to the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 19, 2011). *
Executive Employment Agreement, dated as of January 1, 2016, between Sotherly Hotels Inc. and David R. Folsom
(incorporated by reference to the document previously filed as Exhibit 10.20A to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 4, 2016). *
First Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel,
and Capitol Hotel Associates, LP, dated as of July 25, 2006 (incorporated by reference to the document previously filed
as Exhibit 10.22A to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, filed
with the Securities and Exchange Commission on August 8, 2006).
Second Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel,
and Capitol Hotel Associates, LP, dated as of August 4, 2006 (incorporated by reference to the document previously
filed as Exhibit 10.22B to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006,
filed with the Securities and Exchange Commission on August 8, 2006).
Purchase Agreement dated July 6, 2006, between Riverfront Inn, LLC and Sotherly Hotels Inc. (incorporated by
reference to the document previously filed as Exhibit 10.23 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 26, 2006).
Strategic Alliance Agreement dated September 8, 2006 by and among Sotherly Hotels LP, Sotherly Hotels Inc. and
Coakley & Williams Hotel Management Company (incorporated by reference to the document previously filed as
Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with
the Securities and Exchange Commission on March 22, 2007).
63
Exhibits
10.25
10.26A
10.26B
10.26C
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Promissory Note dated March 29, 2007, made by Capitol Hotel Associates, L.P., L.L.P. and MONY Life Insurance
Company (incorporated by reference to the document previously filed as Exhibit 10.25 to the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007).
Limited Liability Company Agreement of MHI/Carlyle Hotel Investment Program I, L.L.C. dated April 26, 2007
(incorporated by reference to the document previously filed as Exhibit 10.26A to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 2, 2007).
Limited Liability Company Agreement of MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007
(incorporated by reference to the document previously filed as Exhibit 10.26B to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 2, 2007).
Program Agreement for MHI/Carlyle Hotel Investment Program I, L.L.C. and MHI/Carlyle Hotel Lessee Program I,
L.L.C. dated April 26, 2007 (incorporated by reference to the document previously filed as Exhibit 10.26C to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007).
Agreement to Purchase Hotel dated May 25, 2007 between MCZ/Centrum Florida VI Owner, L.L.C. and MHI
Hollywood LLC (incorporated by reference to the document previously filed as Exhibit 10.27 to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2007).
Purchase Agreement between Sotherly Hotels Inc. and VanTampa Plaza Hotel, Inc. dated July 16, 2007 (incorporated by
reference to the document previously filed as Exhibit 10.28 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 18, 2007).
Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life
Insurance Company (incorporated by reference to the document previously filed as Exhibit 10.29 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2007).
Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and
Hampton Redevelopment and Housing Authority dated April 24, 2008 (incorporated by reference to the document
previously filed as Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2008, filed with the Securities and Exchange Commission on May 7, 2008).
Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated
December 1, 1998 (incorporated by reference to the document previously filed as Exhibit 10.31 to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities and Exchange
Commission on May 7, 2008).
$7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton
Hotel Associates Project) Series 1998A (incorporated by reference to the document previously filed as Exhibit 10.32 to
the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities
and Exchange Commission on May 7, 2008).
Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998
(incorporated by reference to the document previously filed as Exhibit 10.33 to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities and Exchange Commission on
May 7, 2008).
Promissory Note by MHI Hotel Investments Holdings, LLC, dated February 9, 2009 (incorporated by reference to the
document previously filed as Exhibit 10.34 to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 13, 2009).
Guaranty by Sotherly Hotels Inc., dated February 9, 2009 (incorporated by reference to the document previously filed as
Exhibit 10.35 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
February 13, 2009).
Securities Purchase Agreement, dated as of April 18, 2011, by and between the Company, Essex Illiquid, LLC and
Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 10.36 to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).
Registration Rights Agreement, dated April 18, 2011, by and between the Company, Essex Illiquid, LLC and Richmond
Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 10.37 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).
64
Exhibits
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
Note Agreement, dated as of April 18, 2011, by and between the Company and Essex High Income Joint Investment
Vehicle, LLC (incorporated by reference to the document previously filed as Exhibit 10.38 to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011).
Amendment No. 1, dated December 21, 2011, to Note Agreement, dated April 18, 2011, by and among the Company and
Essex Equity High Income Joint Investment Vehicle, LLC (incorporated by reference to the document previously filed as
Exhibit 10.39 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 22, 2011).
Amendment No. 2, dated June 15, 2012, to Note Agreement, dated April 18, 2011, by and between the Company and
Essex Equity High Income Joint Investment Vehicle, LLC (incorporated by reference to the document previously filed as
Exhibit 10.40 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 20, 2012).
Agreement, Waiver and Consent by Preferred Stockholders, dated June 15, 2012, by and among the Company, Essex
Illiquid, LLC, and Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as
Exhibit 10.41 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 20, 2012).
Sotherly Hotels Inc. 2013 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s
Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 20, 2013). *
Warrant Redemption Agreement, dated October 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC, and
Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 10.43 to our
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2013).
General Partnership Interest Sale and Purchase Agreement between Boston Resources Limited and Sotherly-Houston GP
LLC, dated as of November 13, 2013 (incorporated by reference to the document previously filed as Exhibit 10.44 to our
Current Report on Form 8-K filed with the Securities and Exchange Commission on November 14, 2013).
Exchange Agreement between MHI Hotels, L.L.C. and Sotherly Hotels LP, dated as of November 13, 2013
(incorporated by reference to the document previously filed as Exhibit 10.45 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 14, 2013).
Warrant Redemption Agreement, dated December 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC,
and Richmond Hill Capital Partners, LP (incorporated by reference to the document previously filed as Exhibit 10.46 to
our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 27, 2013).
Purchase Agreement between Sotherly Hotels Inc. and CSC Georgian Terrace Limited Partnership dated January 13,
2014 (incorporated by reference to the document previously filed as Exhibit 10.47 to our Current Report on Form 8-K
filed with the Securities and Exchange Commission on April 1, 2014).
Note Agreement by and between Sotherly Hotels LP, Richmond Hill Capital Partners, LP and Essex Equity Joint
Investment Vehicle, LLC dated March 26, 2014 (incorporated by reference to the document previously filed as Exhibit
10.48 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the Securities and
Exchange Commission on May 14, 2014).
Guaranty by Sotherly Hotels Inc. dated March 26, 2014 (incorporated by reference to the document previously filed as
Exhibit 10.49 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the
Securities and Exchange Commission on May 14, 2014).
Pledge Agreement by Sotherly Hotels LP and MHI GP LLC, acknowledged by Philadelphia Hotel Associates LP, dated
March 26, 2014 (incorporated by reference to the document previously filed as Exhibit 10.50 to our Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2014, filed with the Securities and Exchange Commission on
May 14, 2014).
Sales Agency Agreement, dated July 9, 2014, among Sotherly Hotels Inc., Sotherly Hotels LP and Sandler O’Neill &
Partners, L.P. (incorporated by reference to the document previously filed as Exhibit 10.51 to our Current Report on
Form 8-K filed with the Securities and Exchange Commission on July 9, 2014).
Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC and MHI Hotels
Services LLC (incorporated by reference to the document previously filed as Exhibit 10.52 to our Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 19, 2014).
65
Exhibits
10.53
16.2
21.1
21.2
23.1
23.2
23.3
23.4
31.1
31.2
31.3
31.4
32.1
32.2
32.3
32.4
Purchase and Sale Agreement by and between MHI Hospitality TRS II, LLC, MHI Hotel Investments Holdings LLC and
CRP/MHI Holdings, L.L.C. dated as of June 19, 2015 (incorporated by reference to the document previously filed as
Exhibit 10.53 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2015).
Letter from PBMares, LLP, dated April 14, 2014 (incorporated by reference to the document previously filed as Exhibit
16.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 14, 2014).
List of Subsidiaries of Sotherly Hotels Inc.
List of Subsidiaries of Sotherly Hotels LP.
Consent of PBMares, LLP.
Consent of Grant Thornton LLP.
Consent of PBMares, LLP.
Consent of Grant Thornton LLP.
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Denotes management contract and/or compensatory plan/arrangement.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 24, 2016
SOTHERLY HOTELS INC.
By:
/s/ ANDREW M. SIMS
Andrew M. Sims
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ANDREW M. SIMS
Andrew M. Sims
/s/ DAVID R. FOLSOM
David R. Folsom
/s/ ANTHONY E. DOMALSKI
Anthony E. Domalski
/s/ HERSCHEL J. WALKER
Herschel J. Walker
/s/ DAVID J. BEATTY
David J. Beatty
/s/ KIM E. SIMS
Kim E. Sims
/s/ EDWARD S. STEIN
Edward S. Stein
/s/ ANTHONY C. ZINNI
Anthony C. Zinni
Chief Executive Officer and Chairman of the Board
of Directors
March 24, 2016
President, Chief Operating Officer and Director
March 24, 2016
Chief Financial Officer
March 24, 2016
March 24, 2016
March 24, 2016
March 24, 2016
March 24, 2016
March 24, 2016
Director
Director
Director
Director
Director
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 24, 2016
SOTHERLY HOTELS LP,
by its General Partner,
SOTHERLY HOTELS INC.
By:
/s/ ANDREW M. SIMS
Andrew M. Sims
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ANDREW M. SIMS
Andrew M. Sims
/s/ DAVID R. FOLSOM
David R. Folsom
/s/ ANTHONY E. DOMALSKI
Anthony E. Domalski
/s/ HERSCHEL J. WALKER
Herschel J. Walker
/s/ DAVID J. BEATTY
David J. Beatty
/s/ KIM E. SIMS
Kim E. Sims
/s/ EDWARD S. STEIN
Edward S. Stein
/s/ ANTHONY C. ZINNI
Anthony C. Zinni
Chief Executive Officer and Chairman of the Board
of Directors of the General Partner
March 24, 2016
President, Chief Operating Officer and Director of
the General Partner
March 24, 2016
Chief Financial Officer of the General Partner
March 24, 2016
Director of the General Partner
March 24, 2016
Director of the General Partner
March 24, 2016
Director of the General Partner
March 24, 2016
Director of the General Partner
March 24, 2016
Director of the General Partner
March 24, 2016
68
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Sotherly Hotels Inc.
Report of Independent Registered Public Accounting Firm, Grant Thornton LLP ..............................................................
Report of Independent Registered Public Accounting Firm, PBMares, LLP .......................................................................
Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2015 and 2014 .................................................
Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014 and
F-2
F-3
F-4
2013 ....................................................................................................................................................................................
F-5
Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014
and 2013 .............................................................................................................................................................................
F-6
Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2015, 2014 and
2013 ....................................................................................................................................................................................
F-7
Sotherly Hotels LP
F-8
Report of Independent Registered Public Accounting Firm, Grant Thornton LLP ..............................................................
Report of Independent Registered Public Accounting Firm, PBMares, LLP .......................................................................
F-9
Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2015 and 2014 .................................................. F-10
Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2015, 2014 and 2013 ..... F-11
Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31,
2015, 2014 and 2013 .......................................................................................................................................................... F-12
Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2015, 2014 and
2013 .................................................................................................................................................................................... F-13
Notes to Consolidated Financial Statements ................................................................................................................................. F-14
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2015 ................................................................. F-36
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sotherly Hotels Inc.:
We have audited the accompanying consolidated balance sheets of Sotherly Hotels Inc. and subsidiaries (the “Company”) as of
December 31, 2015 and 2014, and the related consolidated statements of operations, changes in equity, and cash flows for each of the
two years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the financial
statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Sotherly Hotels Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Grant Thornton LLP
McLean, Virginia
March 24, 2016
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sotherly Hotels Inc. (formerly MHI Hospitality Corporation)
Williamsburg, Virginia 23185
We have audited the accompanying consolidated statements of operations, changes in equity and cash flows for the year ended
December 31, 2013 of Sotherly Hotels Inc. (formerly MHI Hospitality Corporation) and subsidiaries (the “Company”). Sotherly
Hotels Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Sotherly
Hotels Inc. (formerly MHI Hospitality Corporation) and subsidiaries’ operations and their cash flows for the year ended December 31,
2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ PBMares, LLP
Norfolk, Virginia
March 25, 2014, except for Note 2, as to which the date is April 14, 2015
F-3
SOTHERLY HOTELS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
December 31, 2015
December 31, 2014
ASSETS
Investment in hotel properties, net .............................................................................
Investment in joint venture.........................................................................................
Cash and cash equivalents..........................................................................................
Restricted cash............................................................................................................
Accounts receivable, net ............................................................................................
Accounts receivable-affiliate......................................................................................
Loan proceeds receivable ...........................................................................................
Prepaid expenses, inventory and other assets.............................................................
Deferred income taxes................................................................................................
Deferred financing costs, net......................................................................................
TOTAL ASSETS ......................................................................................................
LIABILITIES
Mortgage loans ...........................................................................................................
Unsecured notes .........................................................................................................
Accounts payable and accrued expenses....................................................................
Advance deposits........................................................................................................
Dividends and distributions payable ..........................................................................
TOTAL LIABILITIES ............................................................................................
Commitments and contingencies ...............................................................................
EQUITY
Sotherly Hotels Inc. stockholders’ equity
Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares issued
and outstanding.............................................................................................
Common stock, par value $0.01, 49,000,000 shares authorized, 14,490,714
shares and 10,570,932 shares issued and outstanding at December 31,
2015 and December 31, 2014, respectively..................................................
Additional paid in capital......................................................................................
Distributions in excess of retained earnings .........................................................
Total Sotherly Hotels Inc. stockholders’ equity ..............................................
Noncontrolling interest...............................................................................................
TOTAL EQUITY .....................................................................................................
TOTAL LIABILITIES AND OWNERS' EQUITY ..............................................
$
$
$
$
$
354,963,242
—
11,493,914
5,793,840
4,071,175
226,552
2,600,711
4,432,431
5,390,374
4,086,114
393,058,353
271,977,944
52,900,000
12,334,878
1,651,840
1,335,323
340,199,985
—
$
$
$
$
260,192,153
1,982,107
16,634,499
6,621,864
1,908,762
197,674
—
3,334,401
3,543,295
5,405,288
299,820,043
205,291,657
52,900,000
12,044,886
1,220,729
852,914
272,310,186
—
—
—
144,907
82,749,058
(33,890,834)
49,003,131
3,855,237
52,858,368
393,058,353
$
105,709
58,659,799
(35,388,313)
23,377,195
4,132,662
27,509,857
299,820,043
The accompanying notes are an integral part of these financial statements.
F-4
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
REVENUE
Rooms department ........................................................................................
Food and beverage department .....................................................................
Other operating departments.........................................................................
Total revenue .........................................................................................
$
96,837,386
33,273,599
8,422,491
138,533,476
$
84,618,889
31,444,984
6,876,046
122,939,919
$
62,837,422
22,054,209
4,482,896
89,374,527
2015
2014
2013
EXPENSES
Hotel operating expenses
Rooms department ........................................................................................
Food and beverage department .....................................................................
Other operating departments.........................................................................
Indirect ..........................................................................................................
Total hotel operating expenses .............................................................
Depreciation and amortization ...........................................................................
Impairment of investment in hotel properties, net .............................................
Gain on disposal of assets ..................................................................................
Corporate general and administrative ................................................................
Total operating expenses.......................................................................
NET OPERATING INCOME.........................................................................
Other income (expense)
Interest expense.............................................................................................
Interest income..............................................................................................
Equity income in joint venture......................................................................
Loss on early debt extinguishment ...............................................................
Unrealized loss on hedging activities ...........................................................
Realized and unrealized loss on warrant derivative......................................
Gain on change in control .............................................................................
Gain (loss) on involuntary conversion of asset.............................................
Net income (loss) before income taxes ............................................................
Income tax (provision) benefit ...........................................................................
Net income (loss)...............................................................................................
Less: Net (income) loss attributable to the noncontrolling interest ...................
Net income (loss) attributable to the Company .............................................
Net income (loss) per share attributable to the Company
$
25,782,992
23,005,629
1,786,197
51,310,292
101,885,110
13,591,495
500,000
(41,435)
7,268,256
123,203,426
15,330,050
(16,515,827)
50,461
475,514
(772,907)
(108,819)
—
6,603,148
—
5,061,620
1,336,033
6,397,653
(1,040,987)
5,356,666
22,913,479
21,026,202
1,192,183
45,072,491
90,204,355
11,969,284
3,175,000
—
5,085,949
110,434,588
12,505,331
(14,636,870)
19,865
307,370
(831,079)
—
—
—
169,151
(2,466,232)
1,727,723
(738,509)
153,838
(584,671)
$
$
17,212,549
14,048,924
508,868
33,757,896
65,528,237
8,467,228
611,000
—
4,360,583
78,967,048
10,407,479
(9,606,479)
17,914
449,500
(2,040,662)
—
(2,205,248)
—
—
(2,977,496)
(1,496,096)
(4,473,592)
989,623
(3,483,969)
Basic and diluted...........................................................................................
$
0.43
$
(0.06)
$
(0.34)
Weighted average number of shares outstanding
Basic and diluted...........................................................................................
12,541,117
10,377,125
10,156,955
The accompanying notes are an integral part of these financial statements.
F-5
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Balances at December 31, 2012 .......................... 9,999,786 $ 99,998 $57,020,979 $
—
—
—
Net loss ............................................................
Conversion of units in Operating Partnership
Additional
Common Stock
Shares
Par Value
Paid-
In Capital
Distributions
in Excess of
Retained Earnings
Noncontrolling
Interest
(27,389,338) $ 7,322,314 $37,053,953
(989,623) (4,473,592)
(3,483,969)
Total
to shares of common stock ...........................
Redemption of units in Operating Partnership ....
Issuance of units for Houston purchase ...........
Issuance of restricted and unrestricted
131,641
—
—
1,316
—
—
337,449
—
—
—
—
—
(338,765)
(32,900)
153,636
—
(32,900)
153,636
common stock awards...................................
Dividends and distributions declared ..............
175,685
—
Balances at December 31, 2013 .......................... 10,206,927 $ 102,069 $57,534,113 $
—
75,500
—
755
—
—
—
Net loss ............................................................
Conversion of units in Operating Partnership
to shares of common stock ...........................
Redemption of units in Operating Partnership ....
Issuance of unrestricted common stock
awards ...........................................................
Issuance of restricted common stock awards ..
Issuance of common stock through ATM
offering, net...................................................
Amortization of restricted stock award ...........
Dividends and distributions declared ..............
310,000
—
3,100
—
755,750
—
24,750
12,000
17,255
—
—
248
120
147,112
78,165
172
—
—
124,739
19,920
Balances at December 31, 2014 .......................... 10,570,932 $ 105,709 $58,659,799 $
—
—
—
Net income.......................................................
Issuance of unrestricted common stock
awards ...........................................................
Issuance of restricted common stock awards ......
Issuance of common stock through ATM
26,350
9,750
264
98
193,936
71,760
offering, net...................................................
98,682
986
681,222
Issuance of common stock from equity
offering ......................................................... 3,435,000
34,350 22,534,259
Conversion of Operating Partnership units
into shares of common stock ........................
Amortization of restricted stock award ...........
Dividends and distributions declared ..............
588,162
19,920
—
Balances at December 31, 2015 .......................... 14,490,714 $ 144,907 $82,749,058 $
350,000
—
—
3,500
—
—
—
—
(1,577,466)
176,440
(445,276) (2,022,742)
(32,450,773) $ 5,669,386 $30,854,795
(738,509)
(153,838)
(584,671)
—
—
—
—
(758,850)
(25,621)
—
(25,621)
—
—
147,360
78,285
—
—
124,911
—
19,920
—
(2,352,869)
(598,415) (2,951,284)
(35,388,313) $ 4,132,662 $27,509,857
5,356,666 1,040,987 6,397,653
—
—
—
—
—
—
194,200
71,858
—
682,208
— 22,568,609
(591,662)
—
—
—
(3,859,187)
—
19,920
(726,750) (4,585,937)
(33,890,834) $ 3,855,237 $52,858,368
The accompanying notes are an integral part of these financial statements.
F-6
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Cash flows from operating activities:
Net income (loss)........................................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
6,397,653
$
(738,509)
$
(4,473,592)
2015
2014
2013
Depreciation and amortization.............................................................................................
Gain on change in control....................................................................................................
Equity income in joint venture ............................................................................................
Impairment of investment in hotel properties, net...............................................................
Realized and unrealized loss on warrant derivative ............................................................
Amortization of deferred financing costs ............................................................................
Amortization of mortgage premium ....................................................................................
Unrealized loss on derivative instrument ............................................................................
Gain on disposal of assets....................................................................................................
Loss on early debt extinguishment ......................................................................................
Paid-in-kind interest.............................................................................................................
Charges related to equity-based compensation....................................................................
Changes in assets and liabilities:
Restricted cash ..............................................................................................................
Accounts receivable ......................................................................................................
Prepaid expenses, inventory and other assets ...............................................................
Deferred income taxes ..................................................................................................
Accounts payable and other accrued liabilities.............................................................
Advance deposits ..........................................................................................................
Accounts receivable - affiliate ......................................................................................
Net cash provided by operating activities............................................................................
Cash flows from investing activities:
Acquisition of hotel properties ...................................................................................................
Improvements and additions to hotel properties ........................................................................
Distributions from joint venture .................................................................................................
Funding of restricted cash reserves ............................................................................................
Proceeds from restricted cash reserves.......................................................................................
Proceeds from the sale of assets .................................................................................................
Proceeds from involuntary conversion of assets ........................................................................
Net cash used in investing activities ....................................................................................
Cash flows from financing activities:
Proceeds of unsecured notes.......................................................................................................
Proceeds of mortgage debt .........................................................................................................
Proceeds of loans ........................................................................................................................
Proceeds from the sale of common stock, net ............................................................................
Payments on mortgage debt and loans .......................................................................................
Payment of deferred financing costs ..........................................................................................
Dividends and distributions paid ................................................................................................
Redemption of redeemable preferred stock................................................................................
Redemption of units in Operating Partnership ...........................................................................
Redemption of warrants .............................................................................................................
Net cash provided by financing activities............................................................................
Net (decrease) increase in cash and cash equivalents...................................................
Cash and cash equivalents at the beginning of the period ............................................
Cash and cash equivalents at the end of the period .....................................................................
Supplemental disclosures:
Cash paid during the period for interest .....................................................................................
Cash paid during the period for income taxes ............................................................................
Non-cash investing and financing activities:
Issuance of units in Operating Partnership for acquisition of hotel property.............................
Mortgage debt proceeds receivable and related loan costs.........................................................
Assumption of mortgage loan on Crowne Plaza Hollywood Beach Resort acquisition ............
Assumption of loan premium on the Crowne Plaza Hollywood Beach Resort assumed loan .......
Change in amount of deferred financing and deferred offering cost in accounts payable and
accrued liabilities ....................................................................................................................
Change in amount of hotel property improvements in accounts payable and accrued
$
$
$
$
$
$
$
$
13,591,495
(6,603,148)
(475,514)
500,000
—
1,300,032
(18,820)
108,819
(41,435)
772,907
—
285,978
584,926
(2,021,825)
(623,980)
(1,780,571)
(1,001,376)
431,111
(28,878)
11,377,374
(25,525,754)
(20,136,427)
600,000
(4,973,602)
6,376,459
2,402,113
124,609
(41,132,602)
—
127,000,000
—
23,250,818
(120,154,764)
(1,377,882)
(4,103,529)
—
—
—
24,614,643
(5,140,585)
16,634,499
11,493,914
15,415,695
570,762
—
2,704,415
57,000,000
246,815
624,117
liabilities..................................................................................................................................
$
601,895
$
$
$
$
$
$
$
$
$
11,969,284
—
(307,370)
3,175,000
—
1,428,674
—
—
—
—
—
245,565
(92,439)
369,685
(1,677,032)
(1,961,663)
2,338,688
89,099
12,273
14,851,255
(61,106,085)
(9,801,018)
750,000
(3,692,045)
2,583,419
—
169,151
(71,096,578)
25,300,000
48,600,000
19,000,000
124,911
(24,171,892)
(2,637,637)
(2,686,567)
—
(25,621)
—
63,503,194
7,257,871
9,376,628
16,634,499
13,766,824
263,621
—
—
—
—
375,487
1,108,182
$
$
$
$
$
$
$
$
$
8,467,228
—
(449,500)
611,000
2,205,248
1,518,556
—
—
—
—
186,293
323,800
(173,990)
58,368
116,976
1,370,189
(3,396)
(33,233)
(129,196)
9,594,751
(30,725,959)
(4,906,000)
6,646,627
(2,195,658)
1,653,401
—
—
(29,527,589)
27,600,000
29,367,287
—
—
(8,703,390)
(2,684,581)
(1,823,723)
(14,413,943)
(32,900)
(7,175,000)
22,133,750
2,200,912
7,175,716
9,376,628
10,423,150
143,848
153,636
—
—
—
248,630
195,725
The accompanying notes are an integral part of these financial statements.
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of the General Partner of
Sotherly Hotels LP:
We have audited the accompanying consolidated balance sheets of Sotherly Hotels LP and subsidiaries (the “Partnership”) as of
December 31, 2015 and 2014, and the related consolidated statements of operations, changes in partners’ capital, and cash flows for
each of the two years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the
financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Sotherly Hotels LP and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Grant Thornton LLP
McLean, Virginia
March 24, 2016
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of the General Partner of
Sotherly Hotels LP (formerly MHI Hospitality, L.P.)
Williamsburg, Virginia 23185
We have audited the accompanying consolidated statements of operations, changes in partners’ capital and cash flows for the year
ended December 31, 2013 of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries (the “Partnership”). Sotherly
Hotels LP’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Sotherly
Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries’ operations and their cash flows for the year ended December 31, 2013 in
conformity with accounting principles generally accepted in the United States of America.
/s/ PBMares, LLP
Norfolk, Virginia
March 25, 2014, except for Note 2, as to which the date is April 14, 2015
F-9
SOTHERLY HOTELS LP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
December 31, 2015
December 31, 2014
ASSETS
Investment in hotel properties, net........................................................................
Investment in joint venture ...................................................................................
Cash and cash equivalents ....................................................................................
Restricted cash ......................................................................................................
Accounts receivable, net .......................................................................................
Accounts receivable-affiliate ................................................................................
Loan proceeds receivable......................................................................................
Prepaid expenses, inventory and other assets .......................................................
Deferred income taxes ..........................................................................................
Deferred financing costs, net ................................................................................
TOTAL ASSETS ......................................................................................................
LIABILITIES
Mortgage loans .....................................................................................................
Unsecured notes....................................................................................................
Accounts payable and other accrued liabilities.....................................................
Advance deposits ..................................................................................................
Dividends and distributions payable.....................................................................
TOTAL LIABILITIES ............................................................................................
$
$
$
$
354,963,242
—
11,493,914
5,793,840
4,071,175
226,552
2,600,711
4,432,431
5,390,374
4,086,114
393,058,353
271,977,944
52,900,000
12,334,878
1,651,840
1,335,323
340,199,985
$
$
$
$
260,192,153
1,982,107
16,634,499
6,621,864
1,908,762
197,674
—
3,334,401
3,543,295
5,405,288
299,820,043
205,291,657
52,900,000
12,044,886
1,220,729
852,914
272,310,186
Commitments and contingencies (see Note 6)........................................................
—
—
PARTNERS’ CAPITAL
General Partner: 166,915 and 131,218 units issued and outstanding as of
December 31, 2015 and December 31, 2014, respectively................................
774,295
520,791
Limited Partners: 16,524,626 and 12,990,541 units issued and outstanding as
of December 31, 2015 and December 31, 2014, respectively ...........................
TOTAL PARTNERS’ CAPITAL ...........................................................................
TOTAL LIABILITIES AND PARTNERS’ CAPITAL........................................
$
52,084,073
52,858,368
393,058,353
$
26,989,066
27,509,857
299,820,043
The accompanying notes are an integral part of these financial statements.
F-10
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
REVENUE
Rooms department ........................................................................................
Food and beverage department .....................................................................
Other operating departments.........................................................................
Total revenue .........................................................................................
$
96,837,386
33,273,599
8,422,491
138,533,476
$
84,618,889
31,444,984
6,876,046
122,939,919
$
62,837,422
22,054,209
4,482,896
89,374,527
2015
2014
2013
EXPENSES
Hotel operating expenses
Rooms department ........................................................................................
Food and beverage department .....................................................................
Other operating departments.........................................................................
Indirect ..........................................................................................................
Total hotel operating expenses .............................................................
Depreciation and amortization ...........................................................................
Impairment of investment in hotel properties, net .............................................
Gain on disposal of assets ..................................................................................
Corporate general and administrative ................................................................
Total operating expenses.......................................................................
NET OPERATING INCOME.........................................................................
Other income (expense)
Interest expense.............................................................................................
Interest income..............................................................................................
Equity income in joint venture......................................................................
Loss on early debt extinguishment ...............................................................
Unrealized loss on hedging activities ...........................................................
Realized and unrealized loss on warrant derivative......................................
Gain on change in control .............................................................................
Gain on involuntary conversion of asset.......................................................
Net income (loss) before income taxes ............................................................
Income tax benefit (provision) ..........................................................................
Net income (loss)...............................................................................................
Net income (loss) per unit
$
25,782,992
23,005,629
1,786,197
51,310,292
101,885,110
13,591,495
500,000
(41,435)
7,268,256
123,203,426
15,330,050
(16,515,827)
50,461
475,514
(772,907)
(108,819)
—
6,603,148
—
5,061,620
1,336,033
6,397,653
22,913,479
21,026,202
1,192,183
45,072,491
90,204,355
11,969,284
3,175,000
—
5,085,949
110,434,588
12,505,331
(14,636,870)
19,865
307,370
(831,079)
—
—
—
169,151
(2,466,232)
1,727,723
(738,509)
$
$
17,212,549
14,048,924
508,868
33,757,896
65,528,237
8,467,228
611,000
—
4,360,583
78,967,048
10,407,479
(9,606,479)
17,914
449,500
(2,040,662)
—
(2,205,248)
—
—
(2,977,496)
(1,496,096)
(4,473,592)
Basic and diluted...........................................................................................
$
0.43
$
(0.06)
$
(0.34)
Weighted average number of units outstanding
Basic and diluted...........................................................................................
14,924,410
13,107,413
13,042,020
The accompanying notes are an integral part of these financial statements.
F-11
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
General Partner
Limited Partner
Balances at December 31, 2012............................................
Issuance of partnership units .............................................
Distributions declared .......................................................
Redemption of limited partnership units...........................
Net loss..............................................................................
Balances at December 31, 2013............................................
Issuance of partnership units .............................................
Amortization of restricted units award..............................
Distributions declared .......................................................
Redemption of limited partnership units...........................
Net loss..............................................................................
Balances at December 31, 2014............................................
Issuance of partnership units .............................................
Amortization of restricted units award..............................
Distributions declared .......................................................
Net income ........................................................................
Balances at December 31, 2015............................................
Units
Total
540
(100)
Amount
Amounts
1,084
(9,900)
(32,424)
325,451
4,625
(20,227)
(476)
(44,736)
Units
129,727 $ 615,130 12,842,898 $36,438,823 $37,053,953
330,076
107,345
(2,002,515) (2,022,742)
(32,900)
(4,428,856) (4,473,592)
130,711 $ 554,316 12,940,343 $30,300,479 $30,854,795
350,556
53,465
19,920
(2,921,640) (2,951,284)
(25,621)
(738,509)
131,218 $ 520,791 12,990,541 $26,989,066 $27,509,857
235,237 3,534,085 23,281,638 23,516,875
35,697
—
—
19,920
19,771
— (4,540,078) (4,585,937)
—
— 6,333,676 6,397,653
—
166,915 $ 774,295 16,524,626 $52,084,073 $52,858,368
3,534
199
(29,644)
(228)
(7,386)
149
(45,859)
63,977
(25,393)
(731,123)
347,022
19,721
(3,267)
(33)
The accompanying notes are an integral part of these financial statements.
F-12
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013
Cash flows from operating activities:
Net income (loss)........................................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
6,397,653
$
(738,509)
$
(4,473,592)
2015
2014
2013
Depreciation and amortization.............................................................................................
Gain on change in control....................................................................................................
Equity income in joint venture ............................................................................................
Impairment of investment in hotel properties, net...............................................................
Realized and unrealized loss on warrant derivative ............................................................
Amortization of deferred financing costs ............................................................................
Amortization of mortgage premium ....................................................................................
Unrealized loss on derivative instrument ............................................................................
Gain on disposal of assets....................................................................................................
Loss on early debt extinguishment ......................................................................................
Paid-in-kind interest.............................................................................................................
Charges related to equity-based compensation....................................................................
Changes in assets and liabilities:
Restricted cash ..............................................................................................................
Accounts receivable ......................................................................................................
Prepaid expenses, inventory and other assets ...............................................................
Deferred income taxes ..................................................................................................
Accounts payable and other accrued liabilities.............................................................
Advance deposits ..........................................................................................................
Accounts receivable - affiliate ......................................................................................
Net cash provided by operating activities............................................................................
Cash flows from investing activities:
Acquisition of hotel properties ...................................................................................................
Improvements and additions to hotel properties ........................................................................
Distributions from joint venture .................................................................................................
Funding of restricted cash reserves ............................................................................................
Proceeds from restricted cash reserves.......................................................................................
Proceeds from the sale of assets .................................................................................................
Proceeds from involuntary conversion of assets ........................................................................
Net cash used in investing activities ....................................................................................
Cash flows from financing activities:
Proceeds of unsecured notes.......................................................................................................
Proceeds of mortgage debt .........................................................................................................
Proceeds of loans ........................................................................................................................
Proceeds from the issuance of units ...........................................................................................
Payments on mortgage debt and loans .......................................................................................
Payment of deferred financing costs ..........................................................................................
Distributions paid .......................................................................................................................
Redemption of Series A Preferred Interest.................................................................................
Redemption of units in Operating Partnership ...........................................................................
Redemption of warrants .............................................................................................................
Net cash provided by financing activities............................................................................
Net (decrease) increase in cash and cash equivalents...................................................
Cash and cash equivalents at the beginning of the period ............................................
Cash and cash equivalents at the end of the period .....................................................................
Supplemental disclosures:
Cash paid during the period for interest .....................................................................................
Cash paid during the period for income taxes ............................................................................
Non-cash investing and financing activities:
Issuance of units in Operating Partnership for acquisition of hotel property.............................
Mortgage debt proceeds receivable and related loan costs.........................................................
Assumption of mortgage loan on Crowne Plaza Hollywood Beach Resort acquisition ............
Assumption of loan premium on the Crowne Plaza Hollywood Beach Resort assumed loan .......
Change in amount of deferred financing and deferred offering cost in accounts payable and
accrued liabilities ....................................................................................................................
Change in amount of hotel property improvements in accounts payable and accrued
$
$
$
$
$
$
$
$
13,591,495
(6,603,148)
(475,514)
500,000
—
1,300,032
(18,820)
108,819
(41,435)
772,907
—
285,978
584,926
(2,021,825)
(623,980)
(1,780,571)
(1,001,376)
431,111
(28,878)
11,377,374
(25,525,754)
(20,136,427)
600,000
(4,973,602)
6,376,459
2,402,113
124,609
(41,132,602)
—
127,000,000
—
23,250,818
(120,154,764)
(1,377,882)
(4,103,529)
—
—
—
24,614,643
(5,140,585)
16,634,499
11,493,914
15,415,695
570,762
—
2,704,415
57,000,000
246,815
624,117
liabilities..................................................................................................................................
$
601,895
$
$
$
$
$
$
$
$
$
11,969,284
—
(307,370)
3,175,000
—
1,428,674
—
—
—
—
—
245,565
(92,439)
369,685
(1,677,032)
(1,961,663)
2,338,688
89,099
12,273
14,851,255
(61,106,085)
(9,801,018)
750,000
(3,692,045)
2,583,419
—
169,151
(71,096,578)
25,300,000
48,600,000
19,000,000
124,911
(24,171,892)
(2,637,637)
(2,686,567)
—
(25,621)
—
63,503,194
7,257,871
9,376,628
16,634,499
13,766,824
263,621
—
—
—
—
375,487
1,108,182
$
$
$
$
$
$
$
$
$
8,467,228
—
(449,500)
611,000
2,205,248
1,518,556
—
—
—
—
186,293
323,800
(173,990)
58,368
116,976
1,370,189
(3,396)
(33,233)
(129,196)
9,594,751
(30,725,959)
(4,906,000)
6,646,627
(2,195,658)
1,653,401
—
—
(29,527,589)
27,600,000
29,367,287
—
—
(8,703,390)
(2,684,581)
(1,823,723)
(14,413,943)
(32,900)
(7,175,000)
22,133,750
2,200,912
7,175,716
9,376,628
10,423,150
143,848
153,636
—
—
—
248,630
195,725
The accompanying notes are an integral part of these financial statements.
F-13
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sotherly Hotels Inc., formerly MHI Hospitality Corporation, (the “Company”) is a self-managed and self-administered lodging
real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and
upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States. Currently, the
Company is focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the
southern United States. The Company’s portfolio consists of investments in twelve hotel properties, comprising 3,011 rooms. All of
the Company’s hotels, except for the Georgian Terrace, operate under the Hilton, Crowne Plaza, DoubleTree, and Sheraton brands.
The Company commenced operations on December 21, 2004 when it completed its initial public offering (“IPO”) and thereafter
consummated the acquisition of six hotel properties (“initial properties”). Substantially all of the Company’s assets are held by, and all
of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. (the “Operating Partnership”).
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), the
Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general
partner, conducts all of its operations through the Operating Partnership and the Company’s administrative expenses are the
obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on
the Operating Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at December 31,
2015, was approximately 86.8% owned by the Company, and its subsidiaries, lease its hotels to a subsidiary of MHI Hospitality TRS
Holding, Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI
TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC, which does business as
Chesapeake Hospitality (“Chesapeake Hospitality”), to operate the hotels under a management contract. MHI TRS is treated as a
taxable REIT subsidiary for federal income tax purposes.
All references in these “Notes to Consolidated Financial Statements” to “we,” “us” and “our” refer to the Company, its
Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise
indicated.
Significant transactions occurring during the current and two prior fiscal years include the following:
On March 22, 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional
proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Raleigh Brownstone-University hotel property with our
existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loan’s principal amount was increased to
$10.0 million, the prepayment penalty was removed and the interest rate was fixed at 5.25%; if the mortgage loan is extended, it will
adjust to a rate of 3.00% plus the current 5-year U.S. Treasury bill rate of interest, with an interest rate floor of 5.25%. The remaining
original terms of the agreement remained the same.
On March 26, 2013, we used the net proceeds of the mortgage on the DoubleTree by Hilton Raleigh Brownstone-University to
make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate
redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends.
On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza
Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of
approximately $1.1 million to reduce the principal balance on the loan to approximately $6.0 million and continue to be required to
make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage remained unchanged at a rate of
LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum. Pursuant to certain terms and
conditions, we extended the maturity date of the loan to June 30, 2015.
On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone –
University in Raleigh, North Carolina. The mortgage bears interest at a rate of 4.78% and provides for level payments of principal and
interest on a monthly basis under a 30-year amortization schedule. The maturity date is August 1, 2018. Approximately $0.7 million of
the loan proceeds were placed into a restricted reserve which can be disbursed to us upon satisfaction of certain financial performance
criteria. The remaining proceeds of the mortgage were used to repay the existing indebtedness, to pay closing costs, to make a special
F-14
distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price
of approximately $2.7 million plus the payment of accrued and unpaid cash and stock dividends and for working capital. The
redemption resulted in a prepayment fee of approximately $0.2 million.
On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes (the “8% Notes”) in the aggregate
amount of $27.6 million. The indenture requires quarterly payments of interest and matures on September 30, 2018. The proceeds
were used to make a special distribution by the Operating Partnership to the Company to redeem the remaining outstanding shares of
Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and
stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million.
On October 23, 2013, the Company redeemed a portion of a warrant to purchase 1,900,000 shares of the Company’s common
stock (the “Essex Warrant”) from Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the “Investors” or “Initial
Holders”) corresponding to an aggregate of 900,000 Issuable Warrant Shares (the “First Tranche of Redeemed Warrant Shares”) for
an aggregate cash redemption price of $3.2 million. The First Tranche of Redeemed Warrant Shares are no longer Issuable Warrant
Shares under the Essex Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares
under the Essex Warrant are terminated and extinguished.
Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed a portion of a
warrant to purchase 1,900,000 units of the Operating Partnership (the “OP Warrant”) corresponding to an aggregate of 900,000
Issuable Warrant Units, as defined in the OP Warrant, for an aggregate cash redemption price of $3.2 million.
On November 13, 2013, we acquired 100% of the partnership interests of Houston Hotel Associates Limited Partnership, L.L.P.,
a Virginia limited liability partnership (“HHA”), for aggregate consideration of approximately $30.9 million in cash, the issuance to
MHI Hotels, L.L.C., a Virginia limited liability company (“MHI Hotels”), of 32,929 units of limited partnership interests in the
Operating Partnership, plus an additional amount for HHA’s working capital as of the closing date. HHA is the sole owner of the
entity that indirectly owns the Crowne Plaza Houston Downtown.
On December 23, 2013, the Company redeemed the remaining portion of the Essex Warrant corresponding to an aggregate of
1,000,000 Issuable Warrant Shares (the “Final Tranche of Redeemed Warrant Shares”) for an aggregate cash redemption price of
approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Essex
Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant
are terminated and extinguished.
Concurrently with the redemption of the 1,000,000 Issuable Warrant Shares, the Operating Partnership redeemed a portion of
the OP Warrant corresponding to an aggregate of 1,000,000 Issuable Warrant Units from the Company for an aggregate cash
redemption price of approximately $4.0 million.
On December 27, 2013, through our joint venture with The Carlyle Group (“Carlyle”), we entered into a credit and security
agreement and other loan documents to secure a $57.0 million non-recourse mortgage on the Crowne Plaza Hollywood Beach Resort
in Hollywood, Florida with Bank of America, N.A. The proceeds from the loan were used to repay the existing first mortgage, to pay
closing costs, and to make a distribution to the joint venture partners. We used approximately $3.5 million of its distribution proceeds
to repay its existing loan with The Carlyle Group, and the remainder for general corporate purposes.
On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0 million secured loan
(the “Bridge Loan”) with Richmond Hill Capital Partners, LP (“Richmond Hill”) and Essex Equity Joint Investment Vehicle, LLC
(collectively with Richmond Hill, the “Bridge Lenders”). The Bridge Loan bore interest at the rate of 10.0% per annum and matured
on March 26, 2015. The loan also required mandatory prepayment upon certain events, was subject to a prepayment premium if the
loan was prepaid in full or in part prior to maturity and contains limited financial covenants. The loan was secured by a lien on our
interest in our subsidiary that owns the DoubleTree by Hilton Philadelphia Airport.
On March 27, 2014, we acquired the Georgian Terrace, a 326-room hotel in Atlanta, Georgia for the aggregate purchase price of
approximately $61.1 million. Also included in the acquisition was a 698-space parking structure; all personal property and equipment
located in or at the hotel; and a separate 0.6 acre development parcel with related development rights and improvements located
thereon. In conjunction with the acquisition, we obtained a $41.5 million first mortgage from Bank of the Ozarks, of which $1.5
million of the proceeds was placed in a restricted cash reserve. The mortgage bore a floating rate of interest equal to LIBOR plus
3.75%, with a 4.00% floor and required monthly payments of principal and interest on a 25-year amortization schedule following a
12-month interest-only period. The mortgage would have matured on March 27, 2017, and could have been extended for two
additional 1-year period subject to certain terms and conditions.
F-15
On March 31, 2014, we entered into a First Amendment and other amended loan documents to extend the maturity date and
secure additional proceeds of approximately $5.6 million on the original $30.0 million mortgage on the DoubleTree by Hilton
Philadelphia Airport hotel with its existing lender, TD Bank, N.A. Pursuant to the First Amendment and other amended loan
documents, the mortgage continues to bear interest at a rate of LIBOR plus 3.0% with a 3.50% floor, requires monthly payments of
principal and interest on an amortization schedule over the remainder of the 25-year period that began with the commencement of the
loan in March 2012, and extends the maturity date to April 1, 2019.
As a condition to obtaining the First Amendment to the mortgage on the Hilton Philadelphia Airport hotel, we were required to
enter into a license agreement with a national hotel franchise through at least the term of the amended mortgage loan. As such, we
entered into a 10-year franchise agreement with Hilton Worldwide to rebrand the Hilton Philadelphia Airport hotel as a DoubleTree
by Hilton in November 2014, subject to the completion of certain product improvement requirements that were met as of October 27,
2014.
On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza
Hampton Marina in Hampton, Virginia, until June 30, 2016. Under the terms of the extension, we made a principal payment of $0.8
million and are required to make monthly principal payments of $83,000 and interest payments at a rate of 5.0% per annum.
On November 21, 2014, we closed on a 7.0% unsecured note offering in the aggregate amount of $25.3 million, of which a
portion of the proceeds was used to repay the $19.0 million Bridge Loan, with the remainder to be used for general corporate
purposes.
On November 24, 2014, we repaid the $19.0 million Bridge Loan.
On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the DoubleTree by Hilton
Jacksonville Riverfront property as part of an earnout pursuant to the terms of the existing loan agreement.
On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America N.A. on the Georgian Terrace in
Atlanta, Georgia. The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a
monthly basis under a 30-year amortization schedule. The maturity date is June 1, 2025. The Company used the proceeds of the
mortgage to repay the existing first mortgage and to pay closing costs, and will use the balance of the proceeds to partially fund
ongoing renovations at the Georgian Terrace and for general corporate purposes.
During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it
contributed to the Operating Partnership for an equivalent number of units.
On July 1, 2015, the Company sold 3,000,000 shares of common stock, for net proceeds of approximately $19.8 million, which
it contributed to the Operating Partnership for an equivalent number of units.
On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of
the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The $18.5 million mortgage was
received in two parts. We received $18.0 million on July 7, 2015 and the remainder of $0.5 million on October 20, 2015. The $0.5
million was included with the additional earn-out provision of $1.5 million, for a total of $2.0 million additional proceeds, as
described below. The mortgage term is four years maturing July 7, 2019 and may be extended for one additional period of one year,
subject to certain criteria. The mortgage bears a floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of
4.0%. The mortgage amortizes on a 25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The
Company used the proceeds from the mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville
Riverfront and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the DoubleTree
by Hilton Jacksonville Riverfront and for general corporate purposes.
On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.8 million, which it
contributed to the Operating Partnership for an equivalent number of units.
On July 31, 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach
Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a
100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort.
On September 2, 2015, we closed on the sale of a 0.3 acre parcel of excess land adjacent to our Atlanta, Georgia property for
$2.2 million. The parcel was included in the acquisition of the Georgian Terrace in March 2014. We used the proceeds of the sale for
general corporate purposes.
F-16
On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood
Beach Resort with Bank of America, N.A. The mortgage term is ten years maturing October 1, 2025, subject to certain criteria. The
mortgage bears a fixed interest rate of 4.913%. The mortgage amortizes on a 30-year schedule. The Company used the proceeds from
the mortgage to repay the existing first mortgage on the Crowne Plaza Hollywood Beach Resort and to pay closing costs, and will use
the balance of the proceeds for general corporate purposes.
On October 20, 2015, we secured $2.0 million additional proceeds on the mortgage loan on the DoubleTree by Hilton
Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.
On December 31, 2015, we entered into an amendment to the existing mortgage loan on the DoubleTree by Hilton Laurel which
generated additional net proceeds of approximately $2.6 million and received the loan proceeds on January 4, 2016.
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of
Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries and have been prepared using accounting standards
generally accepted in the United States of America (“GAAP”). All significant inter-company balances and transactions have been
eliminated.
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly
Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all
administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are
reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the
Partnership Agreement.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded
at fair value and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are
capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related
accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations.
Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are
capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for
buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized
over the shorter of the lease term or the useful lives of the related assets.
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the
carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not
limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic
conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs
an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate
disposition of a hotel property exceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the
carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value
would be recorded and an impairment loss recognized.
Our review of possible impairment at one of our hotel properties and a re-evaluation of future revenues based on anticipated
market conditions, market penetration and costs necessary to achieve such market penetration revealed an excess of current carrying
cost over the estimated undiscounted future cash flows and current fair values during the periods ending December 31, 2015 and 2013,
resulting in impairments of approximately $0.5 and $0.6 million, as of December 31, 2015 and 2013, respectively. Our review of
possible impairment at the same hotel property for 2014, which was triggered by a combination of a change in anticipated use and
future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration,
costs necessary to achieve such market penetration and the then current fair value, resulted in an impairment of approximately $3.2
million, as of December 31, 2014.
Assets Held For Sale – The Company records assets as held for sale when management has committed to a plan to sell the
assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.
Investment in Joint Venture – Investment in joint venture represents our noncontrolling indirect 25.0% equity interest, through
July 30, 2015, in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has
F-17
engaged Chesapeake Hospitality to operate the hotel under a management contract. Carlyle owned a 75.0% controlling indirect
interest in these entities during this period. We accounted for our investment in the joint venture under the equity method of
accounting and were entitled to receive our pro rata share of annual cash flow. We also had the opportunity to earn an incentive
participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata
share of net sale proceeds. On July 31, 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza
Hollywood Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating
Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort and
consolidates the financial results of operations within the financial statements from August 1, 2015 through December 31, 2015. In
addition we recorded a gain on change in control of $6,603,148. The overall enterprise fair value based on underlying acquired assets
was used to determine the fair value of the equity interest on the date of acquisition. The value was reduced by a minority interest
discount to arrive at the fair value used to calculate the gain on the acquisition.
Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be
cash equivalents.
Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance
Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is
represented by the difference between the FDIC protection limit and the total amounts on deposit. Management reviews, on a regular
basis, the balances on deposit to minimize our potential risk.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture,
fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of
collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is
estimated to be uncollectible.
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost
determined on a method that approximates first-in, first-out basis.
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or
renewal. The unamortized franchise fees as of December 31, 2015 and 2014 were approximately $339,542 and $394,139, respectively.
Amortization expense for the years ended December 31, 2015, 2014, and 2013 was $124,632, $50,908 and $49,658, respectively.
Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs
incurred in issuing debt. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in issuing
equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred
financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is
included in interest expense in the consolidated statements of operations. Deferred offering costs are offset against the equity funds
raised in the future and included in additional paid in capital on the consolidated balance sheets when the equity offering is complete.
When there is a shelf registration the offset may occur when the registration expires or when the funds are raised, and if the offering
expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and
administrative expenses in the consolidated statements of operations.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the balance sheet and measured at
fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge
exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a
derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other
comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument
designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the
hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not
designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To
accomplish this objective, we primarily used an interest-rate swap, which was required under our then-existing credit agreement and
acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for our making fixed-rate
payments without exchange of the underlying principal amount. We valued our interest-rate swap at fair value, which we define as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
F-18
measurement date (exit price). We also use derivative instruments in the Company’s stock to obtain more favorable terms on our
financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or
similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset
or liability.
Level 3
Unobservable inputs for the asset or liability.
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our
mortgage loans and unsecured notes measured at fair value and the basis for that measurement:
December 31, 2014
Level 1
Level 2
Level 3
Investment in hotel property, net(1) ..................................... $
Mortgage loans(2)................................................................. $
Unsecured notes(3) ............................................................... $(53,816,320) $
— $
— $(209,994,659) $
— $
— $ 6,396,787
—
—
December 31, 2015
Investment in hotel property, net(1) ..................................... $
Interest Rate Cap(4) .............................................................. $
Mortgage loans(2)................................................................. $
Unsecured notes(3) ............................................................... $(54,238,600) $
— $
— $
70,981 $
— $(272,933,327) $
— $
— $ 5,700,762
—
—
—
(1) A non-recurring fair value measurement was conducted in both 2014 and 2015 for our investment in hotel property, which
resulted in impairment charges for the years ended December 31, 2015 and 2014, which represent the amounts by which the
carrying value of the asset group exceeded its fair value.
(2) Mortgage loans are reflected at carrying value on our Consolidated Balance Sheet as of December 31, 2015 and December 31,
2014.
(3) Unsecured notes are recorded at historical cost on our Consolidated Balance Sheet as of December 31, 2015 and December 31,
2014.
(4) An interest rate cap on the DoubleTree by Hilton Jacksonville Riverfront mortgage with the Bank of the Ozarks.
Noncontrolling Interest in Operating Partnership – Certain hotel properties have been acquired, in part, by the Operating
Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating
Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss,
respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and
(iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately
after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional
paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted
average percentage ownership throughout the period.
Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist
of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals
from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from
customers and remitted to governmental authorities.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant
space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease
income as revenue from other operating departments within the statement of consolidated operations pursuant to the terms of each
lease. Lease revenue was $1,776,518, $1,657,614 and $1,734,944, for the years ended December 31, 2015, 2014, and 2013,
respectively.
F-19
A schedule of minimum future lease payments receivable for the following twelve-month periods is as follows:
December 31, 2016........................................................................ $
December 31, 2017........................................................................ $
December 31, 2018........................................................................ $
December 31, 2019........................................................................ $
December 31, 2020........................................................................ $
December 31, 2021 and thereafter................................................. $
Total............................................................................................... $
1,336,016
863,350
352,384
233,286
188,158
539,063
3,512,257
Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned
taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income
taxes.
We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. As of December 31, 2015, we had no uncertain tax positions. Our policy is to recognize
interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015, the tax years that remain
subject to examination by the major tax jurisdictions to which the Company is subject generally include 2010 through 2015. In
addition, as of December 31, 2015, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS
is subject generally include 2004 through 2014.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are
subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term
Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options,
restricted stock and performance share compensation awards to its employees for up to 350,000 and 750,000 shares of common stock,
respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.
Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including
255,938 shares issued to certain executives and employees and 81,500 restricted shares issued to its independent directors. Of the
255,938 shares issued to certain of our executives and employees, all have vested except 18,000 shares issued to the Chief Financial
Officer upon execution of his employment contract which will vest pro rata on each of the next three anniversaries of the effective
date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested. The
2004 plan was terminated in 2013.
Under the 2013 Plan, the Company has made stock awards totaling 109,100 shares, including 74,600 non-restricted shares to
certain executives, directors and employees, and 34,500 restricted shares issued to its independent directors. All awards have vested
except for 12,000 shares issued to the Company’s independent directors in January 2016.
Previously, under the 2004 Plan, and currently, under the 2013 Plan, the Company may issue a variety of performance-based
stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line
basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of
grant or issuance. As of December 31, 2015, no performance-based stock awards have been granted. Consequently, stock-based
compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation
cost recognized under the 2004 Plan and 2013 Plan for the years ended December 31, 2015, 2014, and 2013 was $285,978, $245,565
and $323,800, respectively. The 2004 Plan was terminated in April 2013.
Advertising – Advertising costs were $280,625, $198,991 and $181,886 for the years ended December 31, 2015, 2014, and
2013, respectively and are expensed as incurred.
Comprehensive Income (Loss) – Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a
period from non-owner sources. We do not have any items of comprehensive income (loss) other than net income (loss).
Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership.
F-20
Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements – In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03 related to
“Simplifying the Presentation of Debt Issuance Costs,” as part of its simplification initiative. The ASU changes the presentation of
debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction
from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The ASU specifies that
“issue costs shall be reported in the balance sheet as a direct deduction from the face amount of the note” and that “amortization of
debt issue costs shall also be reported as interest expense.” According to the ASU’s Basis for Conclusions, debt issuance costs
incurred before the associated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred charges
until that debt liability amount is recorded. For public business entities, the guidance in the ASU is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015 and is applicable for our interim periods within 2016.
Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new
guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). We do expect this ASU to have a
material impact on the Company’s consolidated financial position and cash flows and will be applied during our 2016 reporting.
In February 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-02 related to ASC Topic 810, Consolidation.
The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal
entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify
the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities;
2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the consolidation analysis of
reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4. Provide
a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or
operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered
money market funds. This guidance will be effective for annual reporting periods beginning after December 15, 2015. We do not
expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 related to ASC Topic 606, Revenue from
Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer
goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other
standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition
requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the
Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—
Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the
transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property,
Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be
consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update. As issued, this ASU
is not effective until annual reporting periods beginning after December 15, 2016, however the FASB has deferred the effective date
of ASU 2014-09 such that it would be effective for annual reporting periods beginning after December 15, 2017. We do not expect
this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
F-21
3. Acquisition of Hotel Properties
Hollywood Beach and Atlanta Acquisitions. On July 31, 2015, we acquired the remaining 75.0% interest in the 311-room
Crowne Plaza Hollywood Beach Resort in Hollywood Beach, Florida, for approximately $25.5 million, net cash. On March 27, 2014,
we acquired the 326-room Georgian Terrace in Atlanta, Georgia, for approximately $61.1 million, net cash. The allocation of the
purchase price based on their fair values was as follows:
Land and land improvements .................... $
Buildings and improvements .....................
Furniture, fixtures and equipment .............
Investment in hotel properties ...................
Restricted cash...........................................
Accounts receivable...................................
Prepaid expenses, inventory and other
Georgian Terrace Crowne Plaza Hollywood Beach Resort
24,008,289
64,854,787
2,802,135
91,665,211
1,159,759
140,588
10,127,687 $
45,385,939
5,163,135
60,676,761
124,658
465,287
assets.......................................................
Assumed mortgage ....................................
Accounts payable and accrued liabilities ....
Equity investment ......................................
Gain on change in control..........................
Net cash ..................................................... $
430,997
—
(591,618)
—
—
61,106,085 $
797,505
(57,259,159)
(2,517,380)
(1,857,622)
(6,603,148)
25,525,754
The results of operations of the Georgian Terrace and the Crowne Plaza Hollywood Beach Resort are included in our
consolidated financial statements from the dates of acquisition. The total revenue and net loss related to the acquisition of the
Georgian Terrace, for the period March 27, 2014 to December 31, 2014 are approximately $16.4 million and $2.2 million,
respectively and the total revenue and net loss related to the acquisition of the Crowne Plaza Hollywood Beach Resort, for the period
from August 1, 2015 to December 31, 2015 are approximately $5.2 million and $1.1 million, respectively. The following pro forma
financial information presents the results of operations of the Company and the Operating Partnership for the years ended December
31, 2015 and 2014, as if the acquisitions of the Georgian Terrace and the Crowne Plaza Hollywood Beach Resort had taken place on
January 1, 2014. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the
results of operations which would have actually occurred had the transaction taken place on January 1, 2014, or of future results of
operations:
December 31,
2015
(unaudited)
December 31,
2014
(unaudited)
Pro forma revenues ............................................................
Pro forma operating expenses............................................
Pro forma operating income...............................................
Pro forma net income (loss)...............................................
Pro forma earnings (loss) per basic and diluted share .......
Pro forma earnings (loss) per basic and diluted units ........
Pro forma basic and diluted common shares .....................
Pro forma basic and diluted units.......................................
$ 151,931,931 $ 147,451,042
$ 133,346,497 $ 129,961,867
17,489,175
$
(1,671,774)
$
(0.10)
$
(0.10)
$
13,812,125
16,542,413
18,585,434 $
1,017,180 $
0.07 $
0.07 $
12,541,117
14,924,410
4. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2015 and 2014 consisted of the following:
December 31,
2015
December 31,
2014
Land and land improvements............................................. $
Buildings and improvements .............................................
Furniture, fixtures and equipment......................................
Less: accumulated depreciation and impairment ...............
59,910,212
333,720,421
42,245,334
435,875,967
(80,912,725)
$
37,483,400
257,343,516
38,762,997
333,589,913
(73,397,760)
$ 260,192,153
$ 354,963,242
F-22
Our review of possible impairment at one of our hotel properties and a re-evaluation of future revenues based on anticipated
market conditions, market penetration and costs necessary to achieve such market penetration revealed an excess of current carrying
cost over the estimated undiscounted future cash flows and current fair values during the periods ending December 31, 2015 and 2013,
resulting in impairments of approximately $0.5 and $0.6 million, as of December 31, 2015 and 2013, respectively. Our review of
possible impairment at the same hotel property for 2014, which was triggered by a combination of a change in anticipated use and
future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration,
costs necessary to achieve such market penetration and the then current fair value, resulted in an impairment of approximately $3.2
million, as of December 31, 2014.
5. Debt
Mortgage Debt. As of December 31, 2015 and 2014, we had approximately $272.0 million and approximately $205.3 million of
outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
Balance Outstanding as of
Property
Crowne Plaza Hampton Marina ..........$
Crowne Plaza Hollywood Beach
December 31,
2015
3,512,586 $
December 31,
Prepayment
2014
Penalties
4,509,500 None
Resort ............................................... 59,795,743
— N/A
Crowne Plaza Houston Downtown ..... 20,459,256 20,954,867 None
Crowne Plaza Tampa Westshore ........ 13,016,045 13,317,684 None
DoubleTree by Hilton Jacksonville
Riverfront ......................................... 19,774,577 16,358,706 Yes
6,974,458 Yes
9,500,000
DoubleTree by Hilton Laurel ..............
DoubleTree by Hilton Philadelphia
Maturity
Date
Amortization
Provisions
6/30/2016 $
83,000 (1)
(3) 10/1/2025
11/13/2017 (4)
6/18/2017
30 years
25 years
25 years
Interest
Rate
5.00%
4.913%
4.50%
5.60%
(2)
(5)
(7)
7/7/2019 (6)
8/5/2021
25 years
25 years
LIBOR plus 3.50 %
5.25%
(8)
Airport .............................................. 32,376,795 33,378,102 None
4/1/2019
25 years
LIBOR plus 3.00 % (9)
DoubleTree by Hilton Raleigh
Brownstone –University................... 15,029,121 15,274,284 N/A
Georgian Terrace................................. 46,579,011 41,500,000 N/A
Hilton Savannah DeSoto ..................... 20,522,836 21,050,093 Yes
Hilton Wilmington Riverside.............. 19,825,772 20,389,325 Yes
Sheraton Louisville Riverside ............. 11,345,866 11,584,638 N/A
Total Mortgage Principal Balance ......$ 271,737,608 $205,291,657
—
Unamortized premium on loan ...........
Total Mortgage Loans .........................$ 271,977,944 $205,291,657
240,336
(10)
(11)
(12)
(12)
(10)
8/1/2018
6/1/2025
9/1/2017
4/1/2017
1/6/2017
30 years
30 years
25 years
25 years
25 years
4.78%
4.42%
6.06%
6.21%
6.24%
The Operating Partnership is required to make monthly principal payments of $83,000.
The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014.
(1)
(2)
(3) With limited exception, the note may not be prepaid until June 2025.
(4)
The note was extended in March 2016 and provides that the mortgage can be extended until November 2018 if certain
conditions have been satisfied.
The note is subject to a pre-payment penalty until July 2017. Prepayment can be made without penalty thereafter.
The note provides that the mortgage can be extended until July 2020 if certain conditions have been satisfied.
(5)
(6)
(7) The note is subject to a pre-payment penalty except for any pre-payments made either between April 2017 and August 2017, or
(8)
from April 2021 through maturity of the note.
The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-
year U.S. Treasury rate of interest, with a floor of 5.25%.
The note bears a minimum interest rate of 3.50%.
(9)
(10) With limited exception, the note may not be prepaid until two months before maturity.
(11) With limited exception, the note may not be prepaid until February 2025.
(12) The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90
days before maturity.
We were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our
mortgage loans, as of December 31, 2015.
F-23
Total future mortgage debt maturities, without respect to any extension of loan maturity, as of December 31, 2015 were as follows:
9,364,807
December 31, 2016........................................................................$
86,711,703
December 31, 2017........................................................................
18,184,906
December 31, 2018........................................................................
49,559,118
December 31, 2019........................................................................
2,237,443
December 31, 2020........................................................................
December 31, 2021 and thereafter................................................. 105,679,631
Total future maturities ...................................................................$ 271,737,608
7.0% Unsecured Notes. On November 21, 2014, the Operating Partnership issued 7.0% senior unsecured notes in the aggregate
amount of $25.3 million (the “7% Notes”). The indenture requires quarterly payments of interest and matures on November 15, 2019.
The 7% Notes are callable after November 15, 2017 at 101% of face value.
8.0% Unsecured Notes. On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes in the aggregate
amount of $27.6 million (the “8% Notes”). The indenture requires quarterly payments of interest and matures on September 30, 2018.
The 8% Notes are callable after September 30, 2016 at 101% of face value.
Bridge Loan. On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0
million secured Bridge Loan with the Bridge Lenders. The Bridge Loan had a maturity date of March 26, 2015; carried a fixed interest
rate of 10.0% per annum; was subject to a prepayment premium if the loan is prepaid in full or in part prior to March 26, 2015;
required mandatory prepayment upon certain events; contained limited financial covenants; and was secured by a lien on 100% of the
limited partnership interests in the subsidiary that owns the DoubleTree by Hilton Philadelphia Airport hotel. On November 24, 2014,
the Bridge Loan was repaid with the proceeds of a $25.3 million 7.0% senior unsecured note offering. There was no outstanding
balance on the Bridge Loan at December 31, 2015 and December 31, 2014, respectively.
6. Preferred Stock, Preferred Interest and Warrants
Preferred Stock and Preferred Interest. On April 18, 2011, the Company completed a private placement to the Investors
pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred
Stock and the Essex Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share.
The Company designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per
share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary (the “Articles Supplementary”),
which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible.
The holders of the Preferred Stock had a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of
10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of the
liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock had the
exclusive right, voting separately as a single class, to elect one (1) member of the Company’s board of directors. As of December 31,
2011, there were 25,354 shares of the Preferred Stock issued and outstanding. In addition, under certain circumstances as set forth in
the Articles Supplementary, the holder(s) of the Company’s Preferred Stock would have been entitled to appoint a majority of the
members of the Company’s board of directors. The holder(s) of the Company’s Preferred Stock would have been entitled to require
that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at
such price as is set forth in the Articles Supplementary.
Concurrently with the issuance of the Preferred Stock, the Operating Partnership issued the Preferred Interest to the Company in
an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership
Agreement. The Partnership Agreement also authorizes the general partner to make special distributions to the Company related to its
Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect to the Preferred Stock. In addition, the
Operating Partnership issued the OP Warrant to purchase 1,900,000 partnership units at an amount equal to the consideration received
by the Company upon exercise of the Essex Warrant, as amended.
On June 15, 2012, the Company entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514
shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and
unpaid cash and stock dividends.
On June 18, 2012, we used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special
distribution by the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock. The redemption resulted in
F-24
a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the
redeemed shares were written off.
On March 26, 2013, we used the net proceeds of an expansion of the mortgage on the DoubleTree by Hilton Raleigh
Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of
Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash
and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, approximately $0.1
million in unamortized issuance costs related to the redeemed shares were written off.
On August 1, 2013, we used the net proceeds of a new mortgage on the DoubleTree by Hilton Raleigh Brownstone-University
to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate
redemption price of approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends. The
redemption resulted in a prepayment fee of approximately $0.2 million. In addition, approximately $0.1 million in unamortized
issuance costs related to the redeemed shares were written off.
On September 30, 2013, we used a portion of the proceeds of the 8% Notes offering to make a special distribution by the
Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption
price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption
resulted in a prepayment fee of approximately $0.7 million. In addition, approximately $0.4 million in unamortized issuance costs
related to the redeemed shares were written off.
As of December 31, 2015 and 2014, there were no shares of the Preferred Stock issued and outstanding, respectively.
As of December 31, 2015 and 2014, there was no redemption value of the Preferred Interest, respectively.
Warrants. The Essex Warrant, as modified, entitled the holder(s) to purchase up to 1,900,000 shares of the Company’s common
stock at an exercise price of $2.25 per share. Pursuant to an amendment to the Essex Warrant, the exercise price per share of common
stock covered by the Essex Warrant adjusted from time to time in the event of payment of cash dividends to holders of common stock
by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment did not take into account
dividends declared prior to January 1, 2012.
Concurrently with the issuance of the Essex Warrant, the Operating Partnership issued the OP Warrant to the Company. Under
the terms of the OP Warrant, the Company was obligated to exercise the OP Warrant immediately and concurrently if at any time the
Essex Warrant was exercised by its holders. In that event, the Operating Partnership would have issued an equivalent number of
partnership units and would have been entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.
On October 23, 2013, the Company redeemed the First Tranche of Redeemed Warrant Shares for an aggregate cash redemption
price of $3.2 million. The First Tranche of Redeemed Warrant Shares are no longer Issuable Warrant Shares under the OP Warrant,
and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant are
terminated and extinguished.
Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed 900,000 Issuable
Warrant Units, as defined in the OP Warrant, for an aggregate cash redemption price of $3.2 million.
On December 23, 2013, the Company redeemed the Final Tranche of Redeemed Warrant Shares for an aggregate cash
redemption price of approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer Issuable Warrant
Shares under the OP Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under
the Essex Warrant are terminated and extinguished.
Concurrently with the redemption of the 1,000,000 Issuable Warrant Shares, the Operating Partnership redeemed 1,000,000
Issuable Warrant Units, as defined in the OP Warrant, for an aggregate cash redemption price of approximately $4.0 million. The
redeemed warrant units are no longer Issuable Warrant Units under the OP Warrants, and all rights under the OP Warrants are
terminated and extinguished.
On the date of issuance, we determined the fair market value of the warrants was approximately $1.6 million using the Black-
Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a
dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years. The fair market value is included in deferred
financing costs. The deferred cost was amortized to interest expense in the accompanying consolidated statement of operations over
the period of issuance to the mandatory redemption date of the preferred stock.
F-25
7. Commitments and Contingencies
Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to the Hilton Savannah
DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In
December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial
space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of
three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent
expense for this operating lease for the years ended December 31, 2015, 2014, and 2013 was $65,054, $63,468 and $64,700,
respectively.
We lease, as landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine
year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to
by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent
payment of $990 was received by the previous owner and not prorated over the life of the lease.
We lease a parking lot adjacent to the DoubleTree by Hilton Raleigh Brownstone-University in Raleigh, North Carolina. The
land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is
a 50-year operating lease, which expires August 31, 2016. We exercised a renewal option for the first of three additional ten-year
periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an exclusive and irrevocable option
to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000,
and other conditions. For each of the years ended December 31, 2015, 2014, and 2013, rent expense was $95,482.
We lease land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida
Department of Transportation that commenced in July 2009 and expires in July 2019. The agreement requires annual payments of
$2,432, plus tax, and may be renewed for an additional five years. Rent expense for the years ended December 31, 2015, 2014, and
2013 was $2,602, $2,602 and $3,036, respectively.
We lease certain submerged land in the Saint Johns River in front of the DoubleTree by Hilton Jacksonville Riverfront from the
Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year
operating lease requiring annual payments of $4,961, which expired September 18, 2012. A new operating lease was executed
requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the years ended December 31, 2015, 2014,
and 2013 was $6,020, $6,020 and $6,020, respectively.
We lease 4,836 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that
commenced September 1, 2009 and expires August 31, 2018. Rent expense for each of the years ended December 31, 2015, 2014, and
2013 was $83,651, $71,039 and $63,393, respectively.
We leased 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that was to expire
February 28, 2017. We terminated this lease early by replacing our lease with another tenant lease and prepaying an amount of
$21,000. The agreement required monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly
payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease
term. Rent expense for the years ended December 31, 2015, 2014, and 2013 was $62,949, $50,277 and $47,813, respectively.
We also lease certain furniture and equipment under financing arrangements expiring between June 2016 and March 2019.
A schedule of minimum future lease payments for the following twelve-month periods is as follows:
December 31, 2016........................................................................
December 31, 2017........................................................................
December 31, 2018........................................................................
December 31, 2019........................................................................
December 31, 2020........................................................................
December 31, 2021 and thereafter.................................................
Total...............................................................................................
$
$
337,386
256,211
188,070
121,196
95,482
541,065
1,539,410
Employment Agreements— The Company has entered into various employment contracts with employees that could result in
obligations to the Company in the event of a change in control or termination without cause.
F-26
Management Agreements – At December 31, 2015, each of our wholly-owned operating hotels was operated under a
management agreement with Chesapeake Hospitality. Effective January 1, 2015, each of our wholly-owned hotels operated under a
new master agreement as well as an individual hotel management agreement (see Note 9). On July 31, 2015, upon acquisition of the
Crowne Plaza Hollywood Beach Resort, we entered into a management agreement for the management of said hotel pursuant to the
form of individual hotel management agreement provided for under the master agreement. Each of the individual hotel management
agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement,
in which case we may incur early termination fees.
Franchise Agreements – As of December 31, 2015, most of our hotels operate under franchise licenses from national hotel
companies. Under the franchise agreements, we are required to pay a franchise fee generally between 2.5% and 5.0% of room
revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to
between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between April 2016 and October
2030. On August 7, 2014, we voluntarily terminated the franchise agreement with Holiday Hospitality Franchising, LLC (IHG) for the
Crowne Plaza Jacksonville Riverfront effective September 1, 2015 and recognized a termination fee of $351,800. The property has
been rebranded as the DoubleTree by Hilton Jacksonville Riverfront. Each of our franchise agreements provides for early termination
fees in the event the agreement is terminated before the stated term.
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hilton Wilmington Riverside, the
Hilton Savannah DeSoto, the DoubleTree by Hilton Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville
Riverside, the Crowne Plaza Hollywood Beach Resort, the Sheraton Louisville Riverside and the Georgian Terrace an amount equal to
1 / 12 of the annual real estate taxes due for the properties. We are also required by several of its lenders to establish individual
property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0%
of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the DoubleTree by Hilton Jacksonville
Riverside, the Crowne Plaza Hollywood Beach Resort, the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh Brownstone–
University, Crowne Plaza Houston Downtown, Crowne Plaza Hampton Marina and the Georgian Terrace and equal 4.0% of room
revenues for the DoubleTree by Hilton Philadelphia Airport.
Litigation – We are not involved in any material litigation, nor, to our knowledge, is any material litigation threatened against
us. We have settled, during the period covered by this report, all significant claims made during the same period. We are involved in
routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is
not reasonably possible such matters will have a material impact on our financial condition or results of operations.
8. Equity
Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares were issued as
Series A Cumulative Redeemable Preferred Stock, as described above, and subsequently redeemed in 2013. None of the remaining
authorized shares have been issued.
Common Stock – The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each
outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the
Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets
legally available for the payment of distributions.
The following is a list of issuances during the years ended December 31, 2015, 2014, and 2013 of the Company’s common
stock:
On September 16, 2015, one holder of units in the Operating Partnership redeemed a total of 200,000 units for an equivalent
number of shares of the Company’s common stock.
On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.8 million, which it
contributed to the Operating Partnership for an equivalent number of units.
On July 1, 2015, the Company sold 3,000,000 shares of common stock, for net proceeds of approximately $19.8 million, which
it contributed to the Operating Partnership for an equivalent number of units.
During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it
contributed to the Operating Partnership for an equivalent number of units.
F-27
On May 1, 2015, one holder of units in the Operating Partnership redeemed a total of 50,000 units for an equivalent number of
shares of the Company’s common stock.
On April 1, 2015, one holder of units in the Operating Partnership redeemed 100,000 units for an equivalent number of shares of
the Company’s common stock.
On January 29, 2015, the Company was issued 36,100 units in the Operating Partnership and awarded an aggregate of 26,350
shares of unrestricted stock to certain executives and employees as well as 9,750 shares of restricted stock to certain of its independent
directors.
On October 1, 2014, one holder of units in the Operating Partnership redeemed 200,000 units for an equivalent number of shares
of the Company’s common stock.
During September 2014, the Company sold 16,979 shares of common stock for net proceeds of $122,793, which it contributed
to the Operating Partnership for an equivalent number of units.
During August 2014, the Company sold 276 shares of common stock for net proceeds of $2,118, which it contributed to the
Operating Partnership for an equivalent number of units.
On April 1, 2014, two holders of units in the Operating Partnership redeemed 110,000 units for an equivalent number of shares
of the Company’s common stock.
On February 14, 2014, the Company was issued 36,750 units in the Operating Partnership and awarded an aggregate of 24,000
shares of unrestricted stock to certain executives as well as 12,000 shares of restricted stock and 750 share of unrestricted stock to
certain of its independent directors.
On August 14, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares
of the Company’s common stock.
On April 1, 2013, one holder of units in the Operating Partnership redeemed 31,641 units for an equivalent number of shares of
the Company’s common stock.
On March 1, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of
the Company’s common stock.
On January 25, 2013, the Company was issued 45,500 units in the Operating Partnership and awarded an aggregate of 30,500
shares of unrestricted stock to certain executives and employees as well as 15,000 shares of restricted stock to certain of its
independent directors.
On January 1, 2013, the Company was issued 30,000 units in the Operating Partnership and granted 30,000 restricted shares to
its Chief Financial Officer in accordance with the terms of his employment contract.
As of December 31, 2015, the Company had 14,490,714 shares of common stock outstanding.
Warrants for Shares of Common Stock – The Company has granted no warrants representing the right to purchase common
stock other than the Essex Warrant described in Note 6.
Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain
redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the
Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market
price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number
of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations
or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners
or the stockholders of the Company.
F-28
The following is a list of issuance and redemption events, since January 2013, of units in the Operating Partnership in addition
to the issuances of units in the Operating Partnership to the Company and redemptions for the Company’s common stock described
above:
On November 1, 2014, the Operating Partnership redeemed 3,300 units held by a trust controlled by two members of the Board
of Directors for a total of $25,621, pursuant to the terms of the partnership agreement.
On November 13, 2013, the Operating Partnership issued 32,929 limited partnership units in conjunction with the purchase of
the partnership interests in HHA, which is the sole owner of the Crowne Plaza Houston Downtown.
On April 1, 2013, the Operating Partnership redeemed 10,000 units held by a trust controlled by two members of the Board of
Directors for a total of $32,900 pursuant to the terms of the partnership agreement.
As of December 31, 2015 and 2014, the total number of Operating Partnership units outstanding was 16,691,541 and
13,121,759, respectively.
As of December 31, 2015 and 2014, the total number of outstanding units in the Operating Partnership not owned by the
Company was 2,200,827 and 2,550,827, respectively, with a fair market value of approximately $15.0 million and approximately
$19.1 million, respectively, based on the price per share of the common stock on such respective dates.
Warrants for Units in the Operating Partnership – The Operating Partnership has granted no warrants representing the right to
purchase limited partnership units other than the Warrant described in Note 6.
Distributions – The following table presents the quarterly distributions by the Operating Partnership declared and payable per
unit for the years ended December 31, 2015, 2014, and 2013:
Quarter Ended
2013
2014
2015
March 31,................................................................................ $
June 30,................................................................................... $
September 30,......................................................................... $
December 31,.......................................................................... $
0.035 $
0.035 $
0.040 $
0.045 $
0.045
0.050
0.065
0.065
0.070
0.075
0.080
0.080
9. Related Party Transactions
Chesapeake Hospitality. As of December 31, 2015, the members of Chesapeake Hospitality (a company that is majority-owned
and controlled by the Company’s chief executive officer, its former chief financial officer, a member of its Board of Directors and a
former member of its Board of Directors) owned 1,329,314 shares, approximately 9.2%, of the Company’s outstanding common stock
as well as 1,292,958 Operating Partnership units. The following is a summary of the transactions between Chesapeake Hospitality and
us:
Accounts Receivable – At December 31, 2015 and 2014, we were due $0 and $50,838, respectively, from Chesapeake
Hospitality.
Shell Island Sublease – We had a sublease arrangement with Chesapeake Hospitality on our expired leasehold interests in
the property at Shell Island. For the years ended December 31, 2015, 2014, and 2013, we earned $0, $350,000 and $350,000,
respectively, in leasehold revenue. The underlying leases at Shell Island expired on December 31, 2011.
Strategic Alliance Agreement – On December 21, 2004, we entered into a ten-year strategic alliance agreement with
Chesapeake Hospitality that provides in part for the referral of acquisition opportunities to the Company and the management of
its hotels by Chesapeake Hospitality. The agreement expired on December 15, 2014, in conjunction with the execution of the
new management agreement,
Management Agreements – Each of the hotels that we wholly-owned at December 31, 2015 and 2014, are operated by
Chesapeake Hospitality under various management agreements that were to expire between December 2014 and March 2019.
Under those now terminated agreements, Chesapeake Hospitality received a base management fee of 2.0% of gross revenues for
the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross
revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. The agreements also provided for an
incentive management fee due annually in arrears within 90 days of the end of the fiscal year equal to 10.0% of the amount by
which the gross operating profit of the hotels, on an aggregate basis for eight hotels and on an individual basis for two other
hotels, for a given year exceeds the gross operating profit for the same hotel(s), for the prior year. The incentive management fee
may not exceed 0.25% of gross revenues of all of the hotel(s) included in the incentive fee calculation. The management
F-29
agreement for the Crowne Plaza Houston Downtown did not provide for any incentive management fee. Additionally, the
management agreement for the Georgian Terrace provided for an administrative fee of $30,000 per year for as long as the
adjacent parking garage is managed by a third party.
On December 15, 2014, we entered into a new master agreement and a series of individual hotel management agreements
that became effective on January 1, 2015. The master agreement has a five-year term, but may be extended for such additional
periods as long as an individual management agreement remains in effect. The base management fee for the Crowne Plaza
Houston Downtown and the Georgian Terrace will remain at 2.00% through 2015, increases to 2.25% in 2016 and increases to
2.50% thereafter. The base management fees for the remaining properties in the current portfolio will be 2.65% through 2017
and decreases to 2.50% thereafter. For new individual hotel management agreements, Chesapeake Hospitality will receive a
base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary
date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.
Base management fees earned by Chesapeake Hospitality totaled $3,371,668, $3,342,782 and $2,652,070 for the years
ended December 31, 2015, 2014, and 2013, respectively. In addition, incentive management fees of $79,555, $97,025 and
$67,502 were accrued for the years ended December 31, 2015, 2014, and 2013, respectively.
Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI
Health), an affiliate of Chesapeake Hospitality for our employees as well as those employees that are employed by Chesapeake
Hospitality that work exclusively for our hotel properties. Gross premiums for employee medical benefits paid by the Company
(before offset of employee co-payments) were $4,541,546, $3,748,587 and $2,592,115 for the years ended December 31, 2015,
2014, and 2013, respectively.
Crowne Plaza Hollywood Beach Resort. As of December 31, 2015, we own 100% of the Crowne Plaza Hollywood Beach
Resort, which is no longer considered a related party and has a new management agreement as of July 31, 2015. However, through
July 30, 2015 we owned a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the
entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. The following
is a summary of the transactions between Crowne Plaza Hollywood Beach Resort and us:
Accounts Receivable – At December 31, 2015 and 2014, we were due $0 and $146,836, respectively, from Crowne Plaza
Hollywood Beach Resort.
Management Agreement – Crowne Plaza Hollywood Beach Resort was operated by Chesapeake Hospitality under a
management agreement that was set to expire August 2017. Under this agreement Chesapeake Hospitality received a base
management fee of 3.0% of gross revenues. Base management fees earned by Chesapeake Hospitality totaled $401,954,
$592,119 and $560,847 for the period ended July 31, 2015 and the years ended December 31, 2014, and 2013, respectively.
Asset Management Fee – Also, under an asset management agreement that terminated on July 31, 2015, MHI Hospitality
TRS II, LLC, an indirect subsidiary of the Company, receives a fee of 1.50% of total revenue which is due on a quarterly basis
for services rendered. Asset management fees for the period ended July 31, 2015 and the years ended December 31, 2014, and
2013 were $200,976, $300,607 and $280,274, respectively. Unpaid asset management fees included in accounts payable and
accrued liabilities at December 31, 2015, 2014, and 2013 totaled $0, $73,278 and $74,464, respectively
Redemption of Units in Operating Partnership – During 2014, we redeemed a total of 3,300 units in its Operating
Partnership held by a trust controlled by one current member of our Board of Directors for a total of $25,621 pursuant to the
terms of the partnership agreement.
Sotherly Foundation – During 2015, the Company loaned $180,000 to the Sotherly Foundation, a non-profit organization to
benefit wounded warriors. As of December 31, 2015, the balance of the loan was $160,000.
Issuance of Units in Operating Partnership – In connection with the acquisition of the Crowne Plaza Houston Downtown Hotel
in November 2013, we purchased from MHI Hotels its 1.0% limited partnership interest in HHA, the entity that owns the property, in
exchange for 32,929 units of limited partnership interests in the Operating Partnership valued at $153,636 pursuant to an exchange
agreement entered into between the Operating Partnership and MHI Hotels. The indirect equity owners of MHI Hotels include the
Company’s chief executive officer, Andrew M. Sims, and a member of the Company’s board of directors, Kim E. Sims.
Modified Excepted Holder. On July 10, 2012, the Company amended the terms of the outstanding Essex Warrant by establishing
a modified excepted holder limit (as defined in the Company’s Articles of Amendment and Restatement) for the Investors.
On December 23, 2013, the Company’s board of directors terminated and extinguished the excepted holder limit and excepted
holder status for the Investors in connection with the redemption of the Essex Warrant.
F-30
Preferred Stock Redemptions. On March 26, 2013, we used the net proceeds of an expansion of the mortgage on the DoubleTree
by Hilton Raleigh Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902
shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and
unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. On August 1, 2013, we
used the net proceeds of a new mortgage on the DoubleTree by Hilton Raleigh Brownstone-University to make a special distribution
by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of
approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a
prepayment fee of approximately $0.2 million.
On September 30, 2013, we used a portion of the proceeds of the 8% Notes offering to make a special distribution by the
Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption
price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption
resulted in a prepayment fee of approximately $0.7 million.
Essex Warrant Redemptions. On October 23, 2013, the Company entered into an agreement to redeem the First Tranche of
Redeemed Warrant Shares for an aggregate cash redemption price of $3.2 million. The First Tranche of Redeemed Warrant Shares are
no longer Issuable Warrant Shares under the Essex Warrant, and all exercise and other rights of the Initial Holders in respect of the
Redeemed Warrant Shares under the Essex Warrant were terminated and extinguished.
On December 23, 2013, the Company entered into an agreement to redeem the Final Tranche of Redeemed Warrant Shares for
an aggregate cash redemption price of approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer
Issuable Warrant Shares under the Essex Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed
Warrant Shares under the Essex Warrant were terminated and extinguished.
Others. On June 24, 2013 we hired Ashley S. Kirkland, the daughter of our Chief Executive Officer as a legal analyst and
Robert E. Kirkland IV, her husband, as our compliance officer. On October 2, 2014, we hired Andrew M. Sims Jr., the son of our
Chief Executive Officer, as a brand manager. Compensation for the years ended December 31, 2015 and 2014 totaled approximately
$270,240 and $204,000, respectively, for the three individuals.
During the year ending December 31, 2015, the Company reimbursed $138,025, to a partnership controlled by the Chief
Executive Officer for business-related air travel pursuant to the Company’s travel reimbursement policy. There were no
reimbursements during the year ended December 31, 2014.
10. Retirement Plans
We began a 401(k) plan for qualified employees on April 1, 2006. The plan is subject to “safe harbor” provisions which require
that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All
employer matching funds vest immediately in accordance with the “safe harbor” provisions. Contributions to the plan for the years
ended December 31, 2015, 2014, and 2013 were $40,768, $40,586 and $47,094, respectively.
F-31
11. Unconsolidated Joint Venture
As of December 31, 2015 we own 100% of the Crowne Plaza Hollywood Beach Resort. However through July 31, 2015 we
owned only a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that
leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. Carlyle owned a 75.0%
indirect controlling interest in these entities through July 31, 2015. The joint venture purchased the property on August 8, 2007 and
began operations on September 18, 2007. Summarized financial information for this investment through July 31, 2015, which is
accounted for under the equity method, is as follows:
December 31, 2014
ASSETS
Investment in hotel property, net ................................................................... $
Cash and cash equivalents .............................................................................
Restricted cash ...............................................................................................
Accounts receivable .......................................................................................
Prepaid expenses, inventory and other assets ................................................
TOTAL ASSETS.......................................................................................... $
LIABILITIES
Mortgage loan, net ......................................................................................... $
Accounts payable and other accrued liabilities..............................................
Accounts payable and other accrued liabilities, member ..............................
Advance deposits ...........................................................................................
TOTAL LIABILITIES................................................................................
TOTAL MEMBERS’ EQUITY..................................................................
TOTAL LIABILITIES AND MEMBERS’ EQUITY ................................ $
62,823,142
2,153,906
874,111
328,755
1,489,479
67,669,393
57,000,000
2,195,613
146,836
398,695
59,741,144
7,928,249
67,669,393
Seven Months Ended
July 31, 2015
Year Ended
December 31, 2014
Revenue
Rooms department ..................................................................................
Food and beverage department ...............................................................
Other operating departments ...................................................................
Total revenue....................................................................................
$
$
10,605,941
1,911,950
880,564
13,398,455
Expenses
Hotel operating expenses
Rooms department ..................................................................................
Food and beverage department ...............................................................
Other operating departments ...................................................................
Indirect ....................................................................................................
Total hotel operating expenses .......................................................
Depreciation and amortization......................................................................
General and administrative ...........................................................................
Total operating expenses .................................................................
Operating income........................................................................................
Interest expense ............................................................................................
Net (loss) income .........................................................................................
$
2,062,515
1,442,139
388,087
4,774,322
8,667,063
1,060,339
252,565
9,979,967
3,418,488
(1,516,433)
1,902,055
$
15,386,595
2,968,395
1,385,469
19,740,459
3,270,930
2,270,918
655,818
7,436,198
13,633,864
2,116,211
148,873
15,898,948
3,841,511
(2,612,032)
1,229,479
F-32
12. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
2015
2014
2013
General and administrative.................................. $
Sales and marketing............................................. $
Repairs and maintenance ..................................... $
Utilities ................................................................ $
Franchise fees ...................................................... $
Management fees, including incentive ................ $
Property taxes ...................................................... $
Insurance.............................................................. $
Other .................................................................... $
Total indirect hotel operating expenses ........... $
11,595,819 $
11,426,637
6,948,699
6,124,458
4,016,083
3,490,586
5,110,659
2,305,967
291,383
51,310,292 $
9,823,853 $
9,788,079
6,278,411
5,763,990
4,122,726
3,439,807
3,664,022
1,927,935
263,668
45,072,491 $
7,258,817
7,497,693
4,705,222
4,301,755
3,098,379
2,719,573
2,480,909
1,447,485
248,063
33,757,896
13. Income Taxes
The components of the provision for (benefit from) income taxes for the years ended December 31, 2015, 2014, and 2013 are as
follows:
Current:
Year Ended
December 31, 2015
Year Ended
December 31, 2014
Year Ended
December 31, 2013
Federal ....................................................................................................
State ........................................................................................................
$
Deferred:
Federal ....................................................................................................
State ........................................................................................................
$
—
444,538
444,538
(1,510,726)
(269,845)
(1,780,571)
(1,336,033)
$
$
—
233,940
233,940
(1,718,351)
(243,312)
(1,961,663)
(1,727,723)
$
$
68,431
57,476
125,907
1,078,543
291,646
1,370,189
1,496,096
A reconciliation of the statutory federal income tax provision (benefit) to the Company’s provision for (benefit from) income tax
is as follows:
Statutory federal income tax expense...........................................................
Effect of non-taxable REIT income .............................................................
State income tax benefit ...............................................................................
Year Ended
December 31, 2015
1,705,610
$
(2,866,950)
(174,693)
(1,336,033)
$
Year Ended
December 31, 2014
(838,519)
$
(898,576)
9,372
(1,727,723)
$
Year Ended
December 31, 2013
(1,012,349)
$
2,159,323
349,122
1,496,096
$
As of December 31, 2015 and 2014, we had a net deferred tax asset of approximately $5.4 million and $3.5 million,
respectively, of which, approximately $4.5 million and $2.7 million, respectively, are due to accumulated net operating losses. These
loss carryforwards will begin to expire in 2028 if not utilized. As of December 31, 2015 and 2014, approximately $0.2 million and
$0.2 million, respectively, of the deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza
Hollywood Beach Resort and start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza
Tampa Westshore, all of which were not deductible when incurred and are now being amortized over 15 years. The remainder of the
deferred tax asset is attributable to year-to-year timing differences for accrued, but not deductible, employee performance awards,
vacation and sick pay, bad debt allowance and depreciation. We believe that it is more likely than not that the deferred tax asset will
be realized and that no valuation allowance is required.
F-33
14. Income (Loss) per Share and per Unit
Income (Loss) Per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may
be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather
than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the
limited partners’ share of income would also be added back to net income (loss). The effect of the allocation of net loss attributable to
the limited partners’ interests by the issuance of dilutive shares has been excluded, since there would be an anti-dilutive effect from
the pro forma dilution of the Essex Warrant discussed in Note 6 issued in April 2011. The computation of basic and diluted income
(loss) per share is presented below.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Numerator
Net income (loss) attributable to the Company for basic
computation ............................................................................ $ 5,356,666
$
(584,671)
$ (3,483,969)
Denominator
Weighted average number of common shares outstanding for
basic computation ................................................................... 12,541,117
0.43
Basic and diluted net income (loss) per share............................ $
10,377,125
$
(0.06) $
10,156,955
(0.34)
Income (Loss) Per Unit. The computation of basic and diluted income (loss) per unit is presented below.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Numerator
Net income (loss)....................................................................... $ 6,397,653
Denominator
Weighted average number of units outstanding ........................ 14,924,410
0.43
Basic and diluted net income (loss) per unit............................. $
$
(738,509) $ (4,473,592)
13,107,413
$
(0.06) $
13,042,020
(0.34)
15. Quarterly Operating Results (Unaudited)
Quarters Ended 2015
December 31
Total revenue ........................................................................... $30,975,630 $36,865,108 $33,941,875 $36,750,863
Total operating expenses ......................................................... 27,410,462 29,689,455 31,976,036 $34,127,473
Net operating income (loss)..................................................... 3,565,168 7,175,653 1,965,839 2,623,390
(711,959)
Net income (loss).....................................................................
(522,174)
Net income (loss) attributable to the Company .......................
(0.04)
Earnings (loss) per share – basic and diluted .......................... $
713,859 1,759,109 4,636,644
575,336 1,431,110 3,872,394
0.27
September 30
March 31
0.13
0.05
June 30
Quarters Ended 2014
December 31
Total revenue ........................................................................... $25,010,389 $36,339,701 $31,764,453 $29,825,377
Total operating expenses ......................................................... 22,249,394 29,120,620 28,622,841 30,441,730
Net operating income (loss)..................................................... 2,760,995 7,219,081 3,141,612
(616,353)
(280,014) (4,213,362)
Net income (loss)..................................................................... 1,002,314 2,752,555
(214,902) (3,319,460)
783,002 2,166,689
Net income (loss) attributable to the Company .......................
(0.31)
0.21
Earnings (loss) per share – basic and diluted ..........................
September 30
March 31
(0.02)
0.08
June 30
F-34
16. Subsequent Events
On January 11, 2016, we paid a quarterly dividend (distribution) of $0.08 per common share (and unit) to those stockholders
(and unitholders of the Operating Partnership) of record on December 31, 2015.
On January 1, 2016, we entered into a new employment agreement, effective as of January 1, 2016, between the Company and
David R. Folsom, to serve as President and Chief Operating Officer of the Company.
On January 25, 2016, we authorized payment of a quarterly dividend (distribution) of $0.085 per common share (and unit) to the
stockholders (and unitholders of the Operating Partnership) of record as of March 15, 2016. The dividend (distribution) is to be paid
on April 11, 2016.
On February 1, 2016, two holders of units in the Operating Partnership redeemed 422,687 units for an equivalent number of
shares of the Company’s common stock.
F-35
n
o
e
f
i
L
h
c
i
h
W
n
o
i
t
a
i
c
e
r
p
e
D
d
e
t
u
p
m
o
C
s
i
.
C
N
I
S
L
E
T
O
H
Y
L
R
E
H
T
O
S
P
L
S
L
E
T
O
H
Y
L
R
E
H
T
O
S
N
O
I
T
A
I
C
E
R
P
E
D
D
E
T
A
L
U
M
U
C
C
A
D
N
A
E
T
A
T
S
E
L
A
E
R
—
I
I
I
E
L
U
D
E
H
C
S
5
1
0
2
,
1
3
R
E
B
M
E
C
E
D
F
O
S
A
)
s
d
n
a
s
u
o
h
t
n
i
(
d
e
z
i
l
a
t
i
p
a
C
s
t
s
o
C
e
t
a
D
f
o
e
t
a
D
d
e
t
a
l
u
m
u
c
c
A
n
o
i
t
a
i
c
e
r
p
e
D
r
a
e
Y
f
o
d
n
E
t
A
t
n
u
o
m
A
s
s
o
r
G
n
o
i
t
i
s
i
u
q
c
A
o
t
t
n
e
u
q
e
s
b
u
S
s
t
s
o
C
l
a
i
t
i
n
I
&
g
n
i
d
l
i
u
B
&
g
n
i
d
l
i
u
B
&
g
n
i
d
l
i
u
B
d
e
r
i
u
q
c
A
n
o
i
t
c
u
r
t
s
n
o
C
t
n
e
m
r
i
a
p
m
I
&
l
a
t
o
T
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
e
c
n
a
r
b
m
u
c
n
E
n
o
i
t
p
i
r
c
s
e
D
s
r
a
e
y
9
3
-
3
8
0
0
2
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
5
1
0
2
3
1
0
2
7
0
0
2
5
0
0
2
4
0
0
2
s
r
a
e
y
9
3
-
3
4
0
0
2
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
s
r
a
e
y
9
3
-
3
4
0
0
2
4
1
0
2
4
0
0
2
4
0
0
2
6
0
0
2
8
8
9
1
2
7
9
1
3
6
9
1
3
7
9
1
0
7
9
1
5
8
9
1
2
7
9
1
1
7
9
1
1
1
9
1
8
6
9
1
0
7
9
1
2
7
9
1
)
1
5
7
,
6
(
$
6
5
5
,
1
1
$
9
5
4
,
0
1
$
7
9
0
,
1
$
6
2
7
,
3
)
5
4
7
(
)
2
2
5
,
1
(
)
5
1
2
,
7
(
)
5
0
0
,
5
(
)
0
3
4
,
3
(
)
0
8
5
,
7
(
)
2
2
4
,
4
(
)
1
4
2
,
2
(
)
0
5
8
,
7
(
)
2
1
7
,
4
(
)
8
6
5
,
0
1
(
)
1
4
0
,
2
6
(
6
0
9
,
8
8
2
5
8
,
2
3
4
9
2
,
6
3
7
5
7
,
8
2
8
3
6
,
5
1
8
9
8
,
4
6
4
3
4
,
5
2
8
5
8
,
1
3
4
9
5
,
1
2
3
6
5
,
4
1
8
0
0
,
4
2
)
2
6
7
,
2
(
8
1
4
,
7
6
3
4
,
4
3
6
1
,
7
5
7
0
,
1
9
4
2
,
3
8
8
1
,
2
2
0
9
9
,
6
0
2
1
,
5
4
6
7
,
9
2
4
7
4
,
7
2
0
9
2
,
2
3
4
4
,
5
0
7
8
,
3
1
0
9
7
,
7
5
8
0
9
,
5
2
0
2
8
,
9
2
5
7
4
,
2
2
2
5
8
,
2
1
8
9
9
,
8
4
4
9
2
,
5
2
3
1
8
,
8
2
3
8
4
,
1
2
8
1
0
,
1
2
9
7
,
8
4
1
6
7
0
0
,
1
2
9
9
$
0
3
6
,
3
9
3
$
0
2
7
,
3
3
3
$
0
1
9
,
9
5
$
6
3
4
,
5
2
1
6
,
3
2
3
7
,
1
1
4
8
9
,
1
1
2
9
5
,
4
1
0
1
3
,
1
9
6
3
—
4
4
3
8
2
3
7
5
7
1
0
9
1
3
0
2
$
4
1
2
2
2
0
1
2
4
1
1
)
6
3
3
,
1
(
$
0
1
4
,
2
4
2
$
6
9
7
,
9
5
$
8
3
7
,
1
7
2
$
$
3
3
7
,
6
$
1
6
0
,
1
$
3
1
5
,
3
.$
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
i
n
i
g
r
i
V
,
n
o
t
p
m
a
H
–
a
n
i
r
a
M
n
o
t
p
m
a
H
a
z
a
l
P
e
n
w
o
r
C
0
6
6
,
7
6
5
8
1
,
2
2
0
7
6
,
9
3
4
4
,
9
4
0
6
,
4
1
1
3
0
,
2
2
6
1
4
,
7
6
8
3
,
5
4
2
6
5
,
3
1
9
2
8
,
6
1
1
9
8
,
6
4
7
3
,
7
3
5
1
,
4
8
0
0
,
4
2
0
0
9
0
9
0
,
7
6
9
7
,
9
5
9
5
4
,
0
2
6
1
0
,
3
1
0
0
5
,
9
5
7
7
,
9
1
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
d
i
r
o
l
F
,
h
c
a
e
B
d
o
o
w
y
l
l
o
H
-
t
r
o
s
e
R
h
c
a
e
B
d
o
o
w
y
l
l
o
H
a
z
a
l
P
e
n
w
o
r
C
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
s
a
x
e
T
,
n
o
t
s
u
o
H
–
n
w
o
t
n
w
o
D
n
o
t
s
u
o
H
a
z
a
l
P
e
n
w
o
r
C
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
d
i
r
o
l
F
,
a
p
m
a
T
–
e
r
o
h
s
t
s
e
W
a
p
m
a
T
a
z
a
l
P
e
n
w
o
r
C
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
d
i
r
o
l
F
,
e
l
l
i
v
n
o
s
k
c
a
J
–
t
n
o
r
f
r
e
v
i
R
e
l
l
i
v
n
o
s
k
c
a
J
n
o
t
l
i
H
y
b
e
e
r
T
e
l
b
u
o
D
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
d
n
a
l
y
r
a
M
,
l
e
r
u
a
L
–
l
e
r
u
a
L
n
o
t
l
i
H
y
b
e
e
r
T
e
l
b
u
o
D
0
0
1
,
2
6
7
3
,
2
3
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
i
n
a
v
l
y
s
n
n
e
P
,
a
i
h
p
l
e
d
a
l
i
h
P
–
t
r
o
p
r
i
A
a
i
h
p
l
e
d
a
l
i
h
P
n
o
t
l
i
H
y
b
e
e
r
T
e
l
b
u
o
D
0
0
6
5
8
7
2
8
7
5
1
8
8
2
1
,
0
1
9
2
0
,
5
1
9
7
5
,
6
4
3
2
5
,
0
2
6
2
8
,
9
1
6
4
3
,
1
1
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
n
i
l
o
r
a
C
h
t
r
o
N
,
h
g
i
e
l
a
R
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
i
g
r
o
e
G
,
a
t
n
a
l
t
A
–
e
c
a
r
r
e
T
n
a
i
g
r
o
e
G
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
i
g
r
o
e
G
,
h
a
n
n
a
v
a
S
–
o
t
o
S
e
D
h
a
n
n
a
v
a
S
n
o
t
l
i
H
–
y
t
i
s
r
e
v
i
n
U
–
e
n
o
t
s
n
w
o
r
B
h
g
i
e
l
a
R
n
o
t
l
i
H
y
b
e
e
r
T
e
l
b
u
o
D
.
.
.
.
.
.
.
.
a
n
i
l
o
r
a
C
h
t
r
o
N
,
n
o
t
g
n
i
m
l
i
W
–
e
d
i
s
r
e
v
i
R
n
o
t
g
n
i
m
l
i
W
n
o
t
l
i
H
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
a
n
a
i
d
n
I
,
e
l
l
i
v
n
o
s
r
e
f
f
e
J
–
e
d
i
s
r
e
v
i
R
e
l
l
i
v
s
i
u
o
L
n
o
t
a
r
e
h
S
F-36
.
n
o
i
l
l
i
m
1
.
1
9
3
$
y
l
e
t
a
m
i
x
o
r
p
p
a
s
a
w
s
e
s
o
p
r
u
p
x
a
t
e
m
o
c
n
i
l
a
r
e
d
e
f
r
o
f
s
t
e
s
s
a
e
t
a
t
s
e
l
a
e
r
r
u
o
f
o
t
s
o
c
e
t
a
g
e
r
g
g
a
e
h
t
,
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
g
n
i
d
n
e
r
a
e
y
e
h
t
r
o
F
)
1
(
RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION
RECONCILIATION OF REAL ESTATE
Balance at December 31, 2013 ................................................. $
Acquisitions..........................................................................
Improvements ......................................................................
Disposal of Assets ................................................................
Balance at December 31, 2014 ................................................. $
Acquisitions..........................................................................
Improvements ......................................................................
Disposal of Assets ................................................................
Balance at December 31, 2015 ................................................. $
233,060
55,514
6,430
(177)
294,827
91,669
11,105
(3,971)
393,630
RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at December 31, 2013 ................................................. $
Current Expense..................................................................
Impairment ..........................................................................
Disposal of Assets ................................................................
Balance at December 31, 2014 ................................................. $
Current Expense..................................................................
Impairment ..........................................................................
Disposal of Assets ................................................................
Balance at December 31, 2015 ................................................. $
42,557
7,602
3,175
(101)
53,233
8,790
500
(482)
62,041
F-37
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
B O A R D O F D I R E C T O R S & E X E C U T I V E S
A d M Si
Andrew M. Sims
Chairman of the Board
Chief Executive Officer
D id R F l
David R. Folsom
Director
President
Chief Operating Officer
l A h
G
General Anthony C. Zinni
(USMC Ret.)
Director
C Z
H h l W lk
Herschel Walker
Director
d S S i
Ed
Edward S. Stein
Director
D id J B
David J. Beatty
Director
Ki E Si
Kim E. Sims
Director
l ki
Anthony E. Domalski
E D
A h
Vice President
Chief Financial Officer
S M K i ki
Scott M. Kucinski
Vice President
Operations and Investor Relations
O U R P R O P E R T I E S
The Georgian Terrace
by Sotherly Hotels
Atlanta, GA
DoubleTree by Hilton
Jacksonville Riverfront
Jacksonville, FL
Crowne Plaza
Houston Downtown
Houston, TX
Crowne Plaza
Tampa Westshore
Tampa, FL
Hilton
Savannah DeSoto
Savannah, GA
Sheraton
Louisville Riverside
Jeffersonville, IN
Hilton
Wilmington Riverside
Wilmington, NC
DoubleTree by Hilton
Laurel
Laurel, MD
DoubleTree by Hilton
Brownstone-University
Raleigh, NC
DoubleTree by Hilton
Philadelphia Airport
Philadelphia, PA
Crowne Plaza
Hollywood Beach Resort
Hollywood, FL
Crowne Plaza
Hampton Marina
Hampton, VA
Corporate Headquarters
410 West Francis Street
Williamsburg, VA 23185
Phone: 757-229-5648
Fax: 757-564-8801
Website
Information on SoTHERLY Hotels
stock price, corporate news, SEC filings,
earnings releases and other financial data about
the Company can be found on the Internet at:
www.sotherlyhotels.com
Independent Auditors
Grant Thornton LLP
2010 Corporate Ridge, Suite 400
McLean, VA 22102
Phone: 703-847-7500
Fax: 703-848-9580
Exchange Listings
SoTHERLY Hotels common shares
are listed on the NASDAQ® Stock Market
under the symbol SOHO.