Grand yet welcoming, The Georgian Terrace is the epitome of true Southern hospitality.
Built in 1911, this historic icon soon became known as “The Grande Dame of Atlanta.”
Modernized in 1991 with the addition of a new tower, the hotel remains a celebrated architectural
masterpiece situated at the heart of Atlanta’s Midtown Mile, directly across from the world-famous
Fox Theatre and adjacent business and commercial districts.
2022
2022
ANNUAL REPORT
ANNUAL REPORT
OUTSIDE FRONT GATE (2)
Grand yet welcoming, The Georgian Terrace is the epitome of true Southern hospitality.
Built in 1911, this historic icon soon became known as “The Grande Dame of Atlanta.”
Modernized in 1991 with the addition of a new tower, the hotel remains a celebrated architectural
masterpiece situated at the heart of Atlanta’s Midtown Mile, directly across from the world-famous
Fox Theatre and adjacent business and commercial districts.
UR STOCKHOLDERS
TTO OO OUR STOCKHOLDERS
A letter from Sotherly Hotels President & CEO David R. Folsom
A letter from Sotherly Hotels President & CEO David R. Folsom
To Our Stockholders:
Fiscal year 2022 was an excellent year for Sotherly Hotels. As the effects of the
COVID-19 pandemic waned, the lodging industry across the United States began
to experience a recovery that continues to this day. Markets have rebounded with
the end of COVID-19 restrictions on travel, recreation, and business activity. This
has been a welcome and long-awaited development for the industry’s outlook and
profitability. In 2022, our portfolio of well-located hotels experienced a gain of
35.4% in Revenue Per Available Room (“RevPAR”) over the prior year. This increase in
revenue ultimately enhanced the Company’s profitability, as 2022’s Hotel EBITDA of
$46.5 million eclipsed 2021’s Hotel EBITDA by $15.6 million.1
Sotherly’s performance relative to 2019, the last full year prior to the pandemic, provides further evidence of the
Company’s positive trajectory during the recovery. The Average Daily Rate (“ADR”) has been particularly strong
during the industry’s recovery. In 2019, our portfolio’s ADR was $155.92. In 2022, the portfolio realized ADR of
$171.34, an improvement of 9.9%. These strong room rates signal the traveling public’s willingness to spend on
hotel accommodations, food and beverage, and other hotel amenities. Along with growth in ADR, we have seen
profit margins expand. In 2019, our portfolio’s Hotel EBITDA margin was 25.3%, but by the end of 2022, that
number expanded to 28.0%.
One of the major developments for the lodging industry in 2022 centered on the return of group business and the
business traveler. Throughout the pandemic, most hotel owners and operators opined that group and business
travel would be the last revenue segments to return to hotels. By the end of 2022, we witnessed a return of
bookings for the group segment (including corporate and leisure bookings) and business travel. These positive
trends have accelerated into 2023. Our pace for the business travel segment is 145% ahead of the booking pace
for the same time in 2022. Our group booking pace is also attractive: our current pace is 47% ahead of the same
time last year.2
In 2022, Sotherly made significant strides in deleveraging its balance sheet and improving its capital structure.
In the year, the Company was able to reduce its outstanding debt by $56.9 million, or 15.0%. In the year, the
Company also sold two hotels: one in the metropolitan Louisville market, and the other in downtown Raleigh,
North Carolina. The sales price for each of these hotels proved attractive, with the Raleigh asset alone being
sold at a 1.3% capitalization rate. Further, by selling these two hotels, the Company avoided near-term life cycle
improvements that would have required approximately $25.0 million in capital expenditures over the next
three years.
As we ended 2022 and moved into the current year, Sotherly announced it would resume payment of dividends on
its three series of preferred stock. This announcement, made at the beginning of 2023, marked another significant
milestone for the Company and underscores the Company’s efforts to rebound from the effects of the pandemic.
A letter from Sotherly Hotels President & CEO David R. Folsom
A letter from Sotherly Hotels President & CEO David R. Folsom
BOARD OF DIRECTORS & EXECUTIVES
We closely monitor major macroeconomic trends and developments. As 2023 unfolds, economic analysis has
focused on the likelihood of a future recession or some form of market downturn. As of this writing, we do not see
“cracks” in the lodging recovery. Our business has been and remains strong. That said, we believe our bias towards
conservative balance sheet structuring and tireless asset management will be important factors, if and when we
see a pullback of the industry’s current positive trajectory.
We want to thank our shareholders who continue to invest in and support Sotherly Hotels.
Andrew M. Sims
Chairman
Sincerely,
David R. Folsom
President and Chief Executive Officer
1. Hotel EBITDA is a non-GAAP financial measure. See further discussion of non-GAAP measures, including definitions related thereto, and reconciliations to
net income (loss) in Item 7 of our Annual Report on Form 10-K.
2. Booking pace is presented as of March 9, 2023. Booking pace is an industry term that we define as the estimated value of committed future bookings at a
given point in time. Booking pace can be further separated into various segments, including group booking pace or business travel booking pace.
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)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
SOTHERLY HOTELS INC.
(Exact name of registrant as specified in its charter)
MARYLAND
(State or Other Jurisdiction of
Incorporation or Organization)
001-32379
(Commission File Number)
SOTHERLY HOTELS LP
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
001-36091
(Commission File Number)
20-1531029
(I.R.S. Employer
Identification No.)
20-1965427
(I.R.S. Employer
Identification No.)
306 South Henry Street, Suite 100
Williamsburg, Virginia 23185
(Address of Principal Executive Officers) (Zip Code)
757-229-5648
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Sotherly Hotels Inc.
Sotherly Hotels Inc.
Sotherly Hotels Inc.
Sotherly Hotels Inc.
Title of Each Class
Common Stock, $0.01 par value
8.0% Series B Cumulative Redeemable Perpetual
Preferred Stock, $0.01 par value
7.875% Series C Cumulative Redeemable Perpetual
Preferred Stock, $0.01 par value
8.25% Series D Cumulative Redeemable Perpetual
Preferred Stock, $0.01 par value
Trading Symbols
SOHO
SOHOB
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
SOHOO
SOHON
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: 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 ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒
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 ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒
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 ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Sotherly Hotels Inc. Yes ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging
growth company. (See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the
Securities Exchange Act of 1934).
Sotherly Hotels Inc.
Large Accelerated Filer ☐
Smaller Reporting Company ☒ Emerging growth company ☐
Non-accelerated Filer ☒
Accelerated Filer ☐
1
Sotherly Hotels LP
Large Accelerated Filer ☐
Accelerated Filer ☐
Non-accelerated Filer ☒
Smaller Reporting Company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Sotherly Hotels Inc. Yes ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of Sotherly Hotels Inc. as of June 30, 2022, the last business day of Sotherly Hotels Inc.’s
most recently completed second fiscal quarter, was approximately $26,443,236 based on the closing price quoted on the NASDAQ ® Stock Market.
As of March 5, 2023, there were 19,235,803 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.
Part III of this Form 10-K incorporates by reference certain portions of Sotherly Hotels Inc.’s proxy statement for its 2023 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.
DOCUMENTS INCORPORATED BY REFERENCE
Auditor Firm Id: 686
Auditor Name: FORVIS, LLP
Auditor Location: Richmond, Virginia
2
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
INDEX
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Information about our Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Page
6
13
35
36
36
36
37
38
39
51
52
52
52
53
53
54
54
54
55
55
56
3
EXPLANATORY NOTE
We refer to Sotherly Hotels Inc. as the “Company” or "Sotherly", Sotherly Hotels LP as the “Operating Partnership,” the
Company’s common stock as “common stock,” the Company’s preferred stock as “preferred stock,” the Operating Partnership’s
partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “preferred units.” 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, 2022 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 7 – Preferred Stock and Units;
Note 8 – Common Stock and Units;
Note 13 – Earnings (Loss) per Share and per Unit; and
•
Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.
4
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, 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 the Company’s future operations, performance and 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 and new supply of hotel rooms, increases in wages, energy
costs and other operating costs;
risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, and, as
necessary, to refinance or seek an extension of the maturity of such indebtedness or further modification of such debt
agreements;
risks associated with adverse weather conditions, including hurricanes;
impacts on the travel industry from pandemic diseases, including COVID-19;
the availability and terms of financing and capital and the general volatility of the securities markets;
management and performance of our hotels;
risks associated with 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 the limitations imposed on the Company's business due
to such maintenance; 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 annual 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.
5
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. As of the filing date, the Company owns approximately 95.8% of the general and limited partnership units in the
Operating Partnership. Limited partners own the remaining Operating Partnership units.
As of December 31, 2022, our portfolio consisted of ten full-service, primarily upscale and upper-upscale hotels located in
seven states with an aggregate of 2,786 hotel rooms, and interests in two condominium hotels and their associated rental programs.
All of our hotels are wholly-owned by subsidiaries of the Operating Partnership and are managed on a day-to-day basis by Our Town
Hospitality, LLC (“Our Town”). Our portfolio is concentrated in markets that we believe possess multiple demand generators and
have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we
expect will be capable of providing strong risk-adjusted returns.
In order for the Company to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, we lease our wholly-
owned hotel properties to entities that we refer to as our “TRS Lessees”, which are wholly-owned subsidiaries of MHI Hospitality
TRS Holding, Inc. (“MHI Holding”, and collectively with the TRS Lessees, the “MHI TRS Entities”). The MHI TRS Entities, in turn,
have engaged Our Town, which is an eligible independent management company, to manage the day-to-day operations at our hotels.
MHI Holding is a taxable REIT subsidiary (“TRS”) for federal income tax purposes.
Our corporate office is located at 306 South Henry Street, Suite 100, Williamsburg, Virginia 23185. Our telephone number is
(757) 229-5648.
Our Properties
As of December 31, 2022, our hotels were located in Florida, Georgia, Maryland, Virginia, North Carolina, Pennsylvania and
Texas. Seven of these hotels operate under franchise agreements with major hotel brands, and three are independent hotels. We also
own the hotel commercial condominium units of the Hyde Resort & Residences and Hyde Beach House Resort & Residences
condominium hotels. We closed the sale of the Sheraton Louisville Riverside on February 10, 2022 and the sale of the DoubleTree by
Hilton Raleigh Brownstone-University on June 10, 2022. See Item 2 in Part I and Item 7 in Part II 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. Sotherly may also opportunistically acquire hotels throughout other regions of the 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. Current market conditions and the terms of our loan agreements limit our ability to pursue our growth strategy, but as
economic conditions improve and demand and consumer confidence increase, we intend to position the Company to execute on our
growth strategy. We are not subject to limitations on the amount or percentage of our total assets that may be invested in any one
property. Additionally, no limits have been set on the concentration of investments in any one location or facility type. Our policy is to
acquire assets primarily for income and long-term appreciation.
6
Our investment criteria are further detailed below:
•
•
•
•
Geographic Growth Markets: Our growth strategy focuses 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. Sotherly may also
opportunistically acquire hotels throughout the United States.
Full-Service Hotels: Our acquisition strategy focuses 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, and
Hyatt, as well as independent hotels. We may also acquire commercial unit(s) within upscale to upper-upscale
condominium hotel projects, allowing us to establish and operate unit rental programs. We do not own limited service or
extended-stay 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. Sotherly may also opportunistically
acquire hotels outside of the full-service, upscale or upper-upscale category.
Significant Barriers to Entry: We intend to execute a strategy that focuses on 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 generally have a bias toward acquiring underperforming hotels, which we typically define 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:
•
•
•
Branding Opportunity: The acquisition of properties that includes a repositioning of the property through a change in
brand affiliation, which may include positioning the property as an independent hotel. Branding opportunities typically
include physical upgrades and enhanced efficiencies brought about by changes in operations.
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
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, or
other financing or lending instruments, 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
7
programs. We will not pursue joint venture or mezzanine programs in which we would become a “de facto” lender to the
real estate community.
•
Investments in Mortgages, Structured Financings and Other Lending Policies: In sourcing acquisitions for our core
turnaround growth strategy, we may pursue investments in debt instruments that are collateralized by underperforming
hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire
the underlying real estate asset and (ii) provide a non-dilutive current return to the Company’s stockholders in the form of
interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is
ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire
deeds to properties that fit our investment criteria in lieu of foreclosures. We do not have a policy limiting our ability to
invest in loans secured by properties or to make loans to other persons. We may consider offering purchase money
financing in connection with the sale of properties where the provision of that financing will increase the value to be
received by us for the property sold. We may make loans to joint ventures in which we may participate in the future.
However, neither Sotherly nor the Operating Partnership intend to engage in significant lending activities.
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 monitor 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 managers’ ability to produce high quality
revenues that translate to higher profit margins. 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.
We also require detailed and refined reporting data from our hotel manager, 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 services provided by the major franchise companies, specifically with respect to optimization of operating
expenses and the delivery of guest service.
Our portfolio management strategy includes efforts to optimize labor costs. Our third-party hotel manager is responsible for
hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our hotels,
we monitor our hotel manager and make recommendations regarding the operation of our hotels. The labor force in our hotels is
predominately non-unionized, with only one property, the DoubleTree by Hilton Jacksonville Riverfront, having approximately 86
employees electing to participate under a collective bargaining arrangement. Further, the employees at our hotels that are managed by
Our Town are eligible to receive health and other insurance coverage through Our Town, 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.
8
Our Principal Agreements
Management Agreements
Our hotels are managed on a day-to-day basis by Our Town, an eligible independent management company. The base
management fee for each of our hotels is a percentage of the gross revenues of the hotel and is due monthly. The applicable
percentages of gross revenue for the base management fee for each of our wholly-owned hotels and our condominium hotel rental
programs are shown below:
Hotel Name
Hotel Ballast Wilmington, Tapestry Collection by
Hilton
The DeSoto
DoubleTree by Hilton Philadelphia Airport
Hotel Alba Tampa, Tapestry Collection by Hilton
DoubleTree by Hilton Jacksonville Riverfront
DoubleTree by Hilton Laurel
Georgian Terrace
The Whitehall
Commencement
Date
Expiration
Date
Percentage
Fee
January 1, 2020
March 31, 2035
January 1, 2020
January 1, 2020
January 1, 2020
January 1, 2020
January 1, 2020
January 1, 2020
January 1, 2020
March 31, 2035
March 31, 2035
March 31, 2035
March 31, 2035
March 31, 2035
March 31, 2035
March 31, 2035
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
Hotel Name
DoubleTree Resort by Hilton
Hollywood Beach
Hyde Resort & Residences
Hyde Beach House Resort &
Residences
Hyatt Centric Arlington
Commencement
Date
April 1, 2020
Expiration
Date
March 31, 2035
April 1, 2020
April 1, 2020
March 31, 2035
March 31, 2035
November 15, 2020
March 31, 2035
Year 1
Year 2
Year 3
Years 4-5 &
Renewals
2.00%
2.00%
2.00%
2.00%
2.25%
2.25%
2.25%
2.25%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
2.50%
Agreements with Our Town. Our Town is the management company for each of our twelve wholly-owned hotels, as well as the
manager for our two condominium rental programs. As of March 15, 2022, an affiliate of Andrew M. Sims, our Chairman, an affiliate
of David R. Folsom, our President and Chief Executive Officer, and Andrew M. Sims Jr., our Vice President - Operations & Investor
Relations, beneficially owned approximately 63.0%, 7.0%, and 15.0%, respectively, of the total outstanding ownership interests in
Our Town. Mr. Sims, Mr. Folsom, and Mr. Sims Jr. serve as directors of Our Town.
On September 6, 2019, we entered into a master agreement with Our Town and the former majority owner of Our Town related
to the management of certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On
December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the management of
our hotels. Those hotel management agreements for our ten wholly-owned hotels and the two rental programs are each referred to as
an “OTH Hotel Management Agreement” and, together, the “OTH Hotel Management Agreements”.
The OTH Master Agreement:
•
•
•
•
•
expires on March 31, 2035, or earlier if all of the OTH Hotel Management Agreements expire or are terminated prior to
that date. The OTH Master Agreement shall be extended beyond 2035 for such additional periods as an OTH Hotel
Management Agreement remains in effect;
requires Our Town to provide dedicated executive level support for our managed hotels pursuant to certain criteria;
sets an incentive management fee for each of the hotels managed by Our Town equal to 10% of the amount by which
gross operating profit, as defined in the OTH Hotel Management Agreements, 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;
provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net
operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021;
provides a mechanism and establishes conditions on which the Company will offer Our Town 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 Our Town; and
9
•
sets a base management fee for future hotels of 2.00% for the first year of the term, 2.25% for the second year of the term,
and 2.50% for the third and any additional years of the term.
Each of the OTH Hotel Management Agreements has an initial term ending March 31, 2035. Each of the OTH 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 Our Town will be the sole and exclusive manager of the hotels as the
agent of the respective TRS Lessee, at the sole cost and expense of the TRS Lessee, and subject to certain operating standards. Each
OTH Hotel Management Agreement may be terminated in connection with a sale of the related hotel. In connection with a
termination upon the sale of the hotel, Our Town 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 OTH Hotel Management Agreement. Upon the sale of
a hotel, no termination fee will be due in the event the Company elects to provide Our Town with the opportunity to manage another
comparable hotel and Our Town is not precluded from accepting such opportunity. Our Town 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.
Pursuant to the management agreements for the Hyde Resort & Residences and the Hyde Beach House Resort & Residences,
Our Town manages the rental of individually owned condominium units pursuant to rental agreements entered into with individual
condominium unit owners. We have also entered into an Association Sub Management and Assignment Agreement with Our Town
for the management and operation of the condominium association responsible for the operation of the Hyde Beach House Resort &
Residences, and a Rental Sales Management Agreement pursuant to which Our Town agreed to manage the marketing and negotiation
of rental agreements with individual condominium unit owners.
Franchise Agreements
As of December 31, 2022, all but three of our wholly-owned hotels operate under franchise licenses from national hotel
companies. As our franchise agreements expire, we will continue to evaluate each hotel on a case-by-case basis and decide whether to
re-license with the existing franchisor, re-brand and license with a new franchisor, or re-brand as an independent hotel. We also
periodically review our independent hotels to determine whether they would be better served by operating under a franchise license.
Our TRS Lessees hold the franchise licenses for our wholly-owned hotels. Our hotel manager must operate each of our hotels
they manage 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 standards 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.
As the franchisee, our TRS Lessees are required to pay franchise/royalty fees, as well as certain other fees for marketing and
reservations services in amounts that range from approximately 3.0% to 4.0% of gross revenues. The following table sets forth certain
information for the franchise licenses of our wholly-owned hotel properties as of December 31, 2022:
10
Franchise/Royalty
Hotel Alba Tampa, Tapestry Collection by Hilton (2)
DoubleTree by Hilton Jacksonville Riverfront
DoubleTree by Hilton Laurel
DoubleTree by Hilton Philadelphia – Airport
DoubleTree Resort by Hilton Hollywood Beach
Hotel Ballast Wilmington, Tapestry Collection by Hilton (2)
Hyatt Centric Arlington
Fee (1)
Expiration
Date
June 2029
5.0%
5.0% September 2025
October 2030
5.0%
October 2024
5.0%
October 2027
5.0%
April 2028
5.0%
March 2038
5.0 %
(1) Percentage of room revenues payable to the franchisor.
(2) The Franchise/Royalty Fee is 3.0% for operating year 1, 4.0% for operating year 2, and 5.0% thereafter.
Lease Agreements
TRS Leases
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 a third-party
management company to manage the hotels. Each lease has a non-cancelable term ranging from four to thirty 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.
Other Leases
We lease the land underlying the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to
make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain
thresholds, as defined in the ground lease agreement. The ground lease contains a rent reset provision that will reset the rent in June
2025 to a fixed amount per annum equal to 8.0% of the land value, subject to an appraisal process. The initial term of the ground
lease expires in 2035 and may be extended by us for four additional renewal periods of 10 years each. In order to sell the Hyatt
Centric Arlington hotel and assign our leasehold interest in the ground lease, we are required to obtain the consent of the third-party
lessor.
In connection with the acquisition of the Hyde Beach House Resort & Residences hotel commercial condominium unit, we
entered into a 20-year parking and cabana management agreement for the parking garage and poolside cabanas associated with the
resort. In exchange for rights to the parking and cabana revenue, we pay the condominium association an annual payment of $271,000
for the initial five years of the term, with 5.0% increases on every fifth year of the term.
We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia for our corporate offices, under
an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement is $218,875, with the rent
for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent was offset by a tenant
improvement allowance of $200,000, applied against one-half of each monthly rent payment until the tenant improvement allowance
was exhausted in 2021.
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 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
11
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, or TRSs, 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 TRS, 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, 2022,
of approximately $41.7 million and deferred timing differences of approximately $1.7 million attributable to accrued, but not
deductible, vacation and sick pay amounts, business interest, depreciation and other timing differences. The Company has not incurred
federal income taxes since its formation. During the first quarter of 2020, we reduced our deferred tax assets through the establishment
of a 100% valuation allowance of approximately $5.4 million. During the year ended December 31, 2020, we increased the valuation
allowance to approximately $14.7 million and increased it again during the year ended December 31, 2021 to approximately $14.9
million and in 2022 we reduced the valuation allowance by approximately $3.7 million to approximately $11.2 million.
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.
Employees and Human Capital
As of December 31, 2022, we employed nine full-time persons, all of whom work at our corporate office in Williamsburg,
Virginia. We believe relations with our employees are positive. Our human capital resources objectives include attracting and
retaining talented and well-qualified employees. Our compensation program, including competitive salaries and other benefits, are
designed to attract, hire, retain and motivate highly qualified employees and executives. We are committed to enhancing our culture
through efforts to promote and preserve inclusion and by providing and maintaining a safe work environment. All persons employed
in the day-to-day operations of each of our hotels are employees of our third-party hotel manager 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 Nominating, Corporate
Governance and Compensation Committee (“NCGC Committee”) and Audit Committee 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 Business and Properties
SUMMARY
•
•
•
•
•
•
•
•
•
•
•
•
•
Risks related to the limited number of hotels that we own.
Risks related to increased hotel operating expenses and decreased hotel revenues.
Risks related to our investment strategy, and the acquisition, renovation, or repositioning of hotels.
Risks related to our management company.
Risks related to our ability to make distributions.
Risks related to the geographic concentration of our hotels.
Risks related to the concentration of our hotel franchise agreements.
Risks related to our ground lease for the Hyatt Centric Arlington.
Risks related to hedging against interest rate exposure.
Risks related to investment opportunities and growth prospects.
Risks related to internal controls.
Risks related to information technology.
Risks related to natural disasters and the physical effects of climate change.
Risks Related to the Lodging Industry
•
•
•
•
•
•
•
•
•
•
Risks related to the overall economy and our financial performance.
Risks related to operating risks, seasonality of the hotel business, investment concentration in particular segments of a single
industry, and capital expenditures.
Risks related to operating hotels with franchise agreements.
Risks related to restrictive covenants in certain of our franchise agreements.
Risks related to hotel re-development.
Risks related to obtaining financing.
Risks related to uninsured and underinsured losses.
Risks related to governmental regulations, including regulations covering environmental matters or the Americans with
Disabilities Act.
Risks related to unknown or contingent liabilities.
Risks related to future terrorist activities.
General Risks Related to the Real Estate Industry
•
•
•
•
Risks related to illiquidity of real estate investments.
Risks related to future acquisitions.
Risks related to property damage including harmful mold.
Risks related to increases in property taxes.
13
Risks Related to Our Debt and Financing
•
•
•
•
•
•
Risks related to our financial leverage.
Risks related to our forbearance agreements.
Risks related to our financial covenants.
Risks related to our debt maturities.
Risks related to our borrowing costs.
Risks related to interest rates.
Risks Related to Our Organization and Structure
•
•
•
•
•
•
•
•
Risks related to change of control.
Risks related to our executive employment agreements.
Risks related to ownership limitations on our common stock and preferred stock.
Risks related to our preferred stock.
Risks related to future indebtedness.
Risks related to our REIT status.
Risks related to our major corporate policies.
Risks related to key personnel.
Risks Related to Conflicts of Interest of Our Officers and Directors
•
Risks related to conflicts of interest of our officers and directors.
Federal Income Tax Risks Related to the Company’s Status as a REIT.
•
•
•
•
•
•
•
•
•
•
•
Risks related to potential failure to qualify as a REIT.
Risks related to potential failure to make distributions.
Risks related to MHI Holding, including its TRS qualification and potential tax liability.
Risks related to potential tax liabilities.
Risks related to highly technical and complex REIT compliance requirements.
Risks related to Operating Partnership’s qualification as a partnership for federal income tax purposes.
Risks related to the qualification of our hotel manager as an “eligible independent contractor”.
Risks related to our TRS leases.
Risks related to taxation of dividend income and U.S. withholding tax.
Risks related to foreign investors.
Risks related to U.S. tax reform and related regulatory action.
14
Risks Related to Our Business and Properties
DETAIL
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, 2022, our portfolio consisted of ten wholly-owned hotels with a total of 2,786 rooms and the hotel
commercial condominium units of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences condominium
hotels. 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;
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 loan covenants 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 loan
covenants 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 our hotel management
company.
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 our TRS Lessees, and our TRS Lessees retain managers to operate our hotels
pursuant to management agreements. All of our hotels are managed by Our Town.
Under the terms of our management agreements with our hotel manager and the REIT qualification rules, our ability to
participate in operating decisions regarding the hotels is limited. We will depend on our hotel manager 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
force a hotel management company to change its method of operating our hotels. Additionally, in the event that we need to replace a
hotel management company 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.
15
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 noncash
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 and limit the
volume of food and beverage revenue and other operating revenue such as parking revenue.
The declaration of distributions to holders of our securities is subject to 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 generate sufficient cash to fund distributions. We did not pay any dividend
distributions following the payment of dividends in March 2020 through the end of 2022.
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 brands owned by Hilton Worldwide Holdings, Inc.("Hilton"); therefore, we are
subject to risks associated with concentrating our portfolio in one brand. We also own a hotel operated under the brand owned by
Hyatt Hotels Corporation ("Hyatt").
In our portfolio, the majority of the hotels that we owned as of December 31, 2022, utilize brands owned by Hilton. As a result,
our success is dependent in part on the continued success of Hilton and their respective brands. If market recognition or the positive
perception of Hilton is reduced or compromised, the goodwill associated with the Hilton branded hotels in our portfolio may be
adversely affected, which may have a material adverse effect on our business, financial condition, results of operations and our ability
to make distributions to our stockholders. As of March 1, 2023, we owned one property that utilizes a brand owned by Hyatt. Our
success is also dependent in part on the continued success, market recognition, and positive perception of these brands.
Our ground lease for the Hyatt Centric Arlington may constrain us from acting in the best interest of stockholders or require us to
make certain payments.
The Hyatt Centric Arlington is subject to a ground lease with a third-party lessor which requires us to obtain the consent of the
relevant third-party lessor in order to sell the Hyatt Centric Arlington hotel or to assign our leasehold interest in the ground lease.
Accordingly, we may be prevented from completing such a transaction if we are unable to obtain the required consent from the lessor,
even if we determine that the sale of this hotel or the assignment of our leasehold interest in the ground lease is in the best interest of
the Company or our stockholders. In addition, at any given time, potential purchasers may be less interested in buying a hotel subject
to a ground lease and may demand a lower price for the hotel than for a comparable property without such a restriction, or they may
not purchase the hotel at any price. For these reasons, we may have a difficult time selling the hotel or may receive lower proceeds
from any such sale. The ground lease is subject to four additional renewal periods of 10 years each, following the first renewal period
which expires in 2035. At the beginning of each renewal period, certain provisions of the lease may be adjusted by the lessor, which
could impact payments we are required to make to the lessor. The ground lease contains a rent reset provision that will reset the rent
in June 2025 to a fixed amount per annum equal to 8.0% of the land value, subject to an appraisal process. If we are not able to come
to reasonable terms with the lessor at the end of the term or if we are found to have breached certain obligations under the ground
lease, the hotel may suffer a substantial decline in value and we may be forced to dispose of the hotel at a substantial loss.
16
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;
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 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
Sarbanes-Oxley Act of 2002. While we have undertaken substantial work to maintain effective internal controls, we cannot be certain
that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future.
In the future, we may 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 shares and make it more difficult for the Company to raise capital. 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.
We and our hotel manager rely on information technology in our operations, and any material failure, inadequacy, interruption or
security failure of that technology could harm our business.
We and our hotel manager rely on information technology networks and systems, including the Internet, to process, transmit and
store electronic information, and to manage or support a variety of business processes, including financial transactions and records,
personal identifying information, reservations, billing and operating data. We and our hotel manager purchase some of our information
technology from vendors, on whom our systems depend. We and our hotel manager rely on commercially available systems, software,
tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer
information, such as individually identifiable information, including information relating to financial accounts. Although we and our
hotel manager have taken steps, we believe are necessary to protect the security of our information systems and the data maintained in
those systems, it is possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning
or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security
breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system
disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper functionality, security
and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or
regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. Our hotel
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manager carries cyber insurance policies to protect and offset a portion of potential costs incurred from a security breach.
Additionally, we currently have cyber insurance policies to provide supplemental coverage above the coverage carried by our third-
party manager. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, any cyber-attack
occurrence could still result in losses at our properties, which could affect our results of operations. We are not aware of any cyber
incidents that we believe to be material or that could have a material adverse effect on our business, financial condition and results of
operations. We also rely on the reservation systems of our brand partners and those systems may be hacked or subject to denial of
service attacks.
We face possible risks associated with natural disasters and the physical effects of climate change.
We are subject to the risks associated with natural disasters and the physical effects of climate change, which can include more
frequent or severe storms, droughts, hurricanes and flooding, any of which could have a material adverse effect on our hotels,
operations and business. Over time, our coastal markets are expected to experience increases in storm intensity and rising sea-levels
causing damage to our properties. As a result, we could become subject to significant losses and/or repair costs that may or may not be
fully covered by insurance. Other markets may experience prolonged variations in temperature or precipitation that may limit access
to the water needed to operate our hotels or significantly increase energy costs, which may subject those hotels to additional regulatory
burdens, such as limitations on water usage or stricter energy efficiency standards. Climate change also may affect our business by
increasing the cost of (or making unavailable) property insurance on terms we find acceptable in areas most vulnerable to such events,
increasing operating costs at our hotels, such as the cost of water or energy, and requiring us to expend funds as we seek to repair and
protect our hotels against such risks. There can be no assurance that climate change will not have a material adverse effect on our
hotels, operations or business.
Risks Related to the Lodging Industry
If the economy falls 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, such as the decrease experienced due to COVID-19, will
negatively affect our operating revenues, which will lower our cash flow and may affect our ability to make distributions to
stockholders and to maintain compliance with our loan obligations. An economic downturn, such as the once caused by COVID-19,
may result in losses or reduce our income in the future. 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.
Our ability to comply with the terms of our loan covenants, 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:
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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;
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;
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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.
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, 2022 and 2021, we spent
approximately $8.0 million and approximately $3.2 million, respectively, on capital improvements to our hotels. Capital
improvements and renovation projects may give rise to the following risks:
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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.
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. Many operating standards and other terms can be modified or expanded at the sole discretion of the franchisor. Our
franchisors periodically inspect our hotels to ensure that we, our TRS Lessees, and the management companies follow their standards.
Failure by us, our TRS Lessees or a 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 loan covenants and reduce our cash available for distribution to stockholders.
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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:
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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
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. 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 hurricanes, earthquakes and floods, such as
Hurricane Ian in September 2022, Hurricanes Harvey and Irma in August and September 2017, respectively, Hurricane Matthew in
October 2016 and Hurricane Sandy in October 2012, losses from foreign terrorist activities, such as those on September 11, 2001,
losses from power outages 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.
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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:
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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 ("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 our loan covenants and to make
distributions to the Company’s stockholders could be adversely affected.
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:
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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 acquisition
transactions that had not been asserted or were unknown prior to the Company’s 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
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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 in the past. 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, including COVID-19 and its variants, 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, the outbreaks of H1N1 flu in 2009
threatened to have a similar impact, the perceived threat of a Zika virus outbreak in 2016 had an impact on the south Florida market,
and the COVID-19 pandemic had a severe impact on the travel industry. A prolonged recurrence of COVID-19, 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:
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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;
the ongoing need for capital improvements, particularly in older structures;
changes in operating expenses; and
civil unrest, acts of war or terrorism and the consequences of terrorist acts, acts of God, including earthquakes, hurricanes,
floods and other natural disasters, which may result in uninsured losses.
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 indenture and to pay distributions to
stockholders.
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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 shares could decline.
Risks Related to Our Debt
We have substantial financial leverage.
As of December 31, 2022, the principal balance of our mortgages, unsecured and secured debt was approximately $324.4
million, not accounting for reductions of unamortized premiums or deferred financing costs as shown on our balance sheet.
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:
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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 our loan covenants;
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 or to modify the terms of existing obligations;
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 stockholders;
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.
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We must comply with financial covenants in our mortgage loan agreements.
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 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 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.
We have three mortgage debt obligations maturing in 2023 and 2024 and if we are not successful in extending the terms 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. The ability to refinance or replace mortgage debt is subject to market conditions and could become limited in the future.
There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. In May 2023, the mortgage on
our DoubleTree by Hilton Laurel matures. In October 2023, the mortgage on the DoubleTree by Hilton Philadelphia Airport matures.
In July 2024 the mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures. We also have additional significant
obligations maturing in subsequent years. The total aggregate amount of our debt obligation scheduled to mature in 2023, inclusive of
monthly principal and interest amortization of all our indebtedness, not including lease obligations, is approximately $70.1 million,
which represents approximately 18.9% of our total debt obligation outstanding as of December 31, 2022. The total aggregate amount
of our debt obligation scheduled to mature in 2024, inclusive of monthly principal amortization of all our mortgage indebtedness, is
approximately $51.5 million, which represents approximately 13.9% of our total debt obligation outstanding as of December 31, 2022.
The total aggregate amount of our debt obligation scheduled to mature in 2025, inclusive of monthly principal amortization of all our
mortgage indebtedness, is approximately $125.0 million, which represents approximately 33.8% of our total debt obligation
outstanding as of December 31, 2022.
We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to the respective maturity date. If we are
unable to extend our maturing 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 this obligation 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 Sotherly’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we have given 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.
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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, the Hotel Alba Tampa, Tapestry Collection by Hilton and
The Whitehall, in Houston, Texas. The mortgages on the DoubleTree by Hilton Philadelphia Airport and the Hotel Alba Tampa,
Tapestry Collection by Hilton bear interest at rates tied to SOFR. The mortgage on The Whitehall, in Houston, Texas bears interest at
a rate tied to the New York Prime Rate. Each mortgage provides for a substitute rate and minimum rates of interest. To the extent that
increases in SOFR or New York Prime Rate, or a substitute 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 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.
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 best 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 69,000,000 shares of common
stock and up to 11,000,000 shares of preferred stock, 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 best 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 ("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.
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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 into the business combination
provisions of the MGCL and the Company may, by amendment to its bylaws, opt into 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 employment agreements may make a change of control of the Company more costly or
difficult.
The Company’s employment agreements with Andrew M. Sims, our Chairman, David R. Folsom, our President and Chief
Executive Officer, Anthony E. Domalski, our Secretary and Chief Financial Officer, Scott M. Kucinski, our Executive Vice President
and Chief Operating Officer, Robert E. Kirkland IV, our General Counsel, and Andrew M. Sims Jr., our Vice President - Operations &
Investor Relations, 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 executives’ employment without cause or the executive resigns with good
reason (which for Sims, Folsom, and Domalski, 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 each executive’s respective combined salary and actual bonus compensation
for the preceding fiscal year.
In the event that the Company elects not to renew Mr. Folsom’s employment agreement, then Mr. Folsom is entitled to receive
the following: (i) any accrued but unpaid salary and bonuses; (ii) a severance payment equal to Mr. Folsom’s combined salary and
actual bonus compensation for the preceding fiscal year, to be paid within five (5) days of Mr. Folsom’s last day of employment; and
(iii) payment of the full premium (including administrative fee) for continuing health insurance coverage under COBRA or any similar
state law for a period of two (2) years following the expiration of Mr. Folsom’s employment agreement.
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 or
preferred 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
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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 Company’s articles supplementary establishing and fixing the rights and preferences of each of our 8.0% Series B
Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable
Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock
(the “Series D Preferred Stock”, and together with the Series B Preferred Stock and the Series C Preferred Stock, the "Preferred
Stock"), provide that no person may directly or indirectly own more than 9.9% of the aggregate number of outstanding shares of
Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock, respectively, excluding any outstanding shares of
Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock not treated as outstanding for federal income tax
purposes. 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.
Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders
of our common shares.
Our board of directors has the authority to designate and issue preferred shares with liquidation, dividend and other rights that
are senior to those of our common shares. As of December 31, 2022, 1,464,100 shares of our Series B Preferred Stock were issued
and outstanding, 1,346,110 shares of our Series C Preferred Stock were issued and outstanding, and 1,163,100 shares of our Series D
Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding shares of Series B
Preferred Stock is approximately $44.7 million, and annual dividends on our outstanding shares of Series B Preferred Stock are
approximately $2.9 million. The aggregate liquidation preference with respect to the outstanding shares of Series C Preferred Stock is
approximately $40.9 million, and annual dividends on our outstanding shares of Series C Preferred Stock are approximately $2.7
million. The aggregate liquidation preference with respect to the outstanding shares of Series D Preferred Stock is approximately
$35.7 million, and annual dividends on our outstanding shares of Series D Preferred Stock are approximately $2.4 million. Holders of
our Preferred Stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares.
Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common
shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and
unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common
shares. In addition, holders of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock voting together as
a separate class have the right to elect two additional directors to our board of directors whenever dividends on the preferred shares are
in arrears in an aggregate amount equivalent to six or more quarterly dividends (whether or not consecutive). As of December 31,
2022, distributions on our Preferred Stock are in arrears for the last twelve quarterly payments. Therefore, the holders of our Preferred
Stock are entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next
annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all
past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. No dividends may be paid
on our common stock until such time as the Preferred Stock distributions are made current.
Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot
predict or estimate the amount, timing or nature of any future preferred offerings. Thus, our stockholders bear the risk of our future
securities issuances reducing the market price of our common shares and diluting their interest.
The change of control conversion and redemption features of the Company’s preferred stock may make it more difficult for a party
to take over our Company or discourage a party from taking over our Company.
Upon a change of control (as defined in our charter), holders of our Preferred Stock will have the right (unless, as provided in
our charter, we have provided or provide notice of our election to exercise our special optional redemption right before the relevant
date) to convert some or all of their shares of preferred stock into shares of our common stock (or equivalent value of alternative
consideration). Upon such a conversion, holders will be limited to a maximum number of shares equal to the share cap, subject to
adjustments. If the common stock price is less than $3.015, subject to adjustment, holders will receive a maximum of 8.29187 shares
of our common stock per share of Series B Preferred Stock, which may result in a holder receiving value that is less than the
liquidation preference of the Series B Preferred Stock. If the common stock price is less than $2.94, subject to adjustment, holders
will receive a maximum of 8.50340 shares of our common stock per share of Series C Preferred Stock, which may result in a holder
receiving value that is less than the liquidation preference of the Series C Preferred Stock. If the common stock price is less than
$3.38, subject to adjustment, holders will receive a maximum of 7.39645 shares of our common stock per share of Series D Preferred
Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series D Preferred Stock. In
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addition, those features of our Preferred Stock may have the effect of inhibiting or discouraging a third party from making an
acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances
that otherwise could provide the holders of shares of our common stock and shares of our Preferred Stock with the opportunity to
realize a premium over the then current market price or that stockholders may otherwise believe is in their best interests.
Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly
leveraged in the future, which could materially and adversely affect us.
Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. In addition, our
organizational documents contain no limitations on the amount of debt that we may incur, and the Company’s board of directors may
change our financing policy at any time. As a result, we may be able to incur substantial additional debt, including secured debt, in the
future. Incurring debt could subject us to many risks, including the risks that:
•
•
•
•
our cash flows from operations may be insufficient to make required payments of principal and interest;
our debt may increase our vulnerability to adverse economic and industry conditions;
we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby
reducing cash available for funds available for operations and capital expenditures, future business opportunities or other
purposes; and
the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt
being refinanced.
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, Andrew M. Sims; our President and Chief Executive Officer, David R.
Folsom; our Executive Vice President and Chief Operating Officer, Scott M. Kucinski; and our Secretary and 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.
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 Our Town, the entity that manages our ten wholly-owned hotels and our two condominium hotel
rental programs, and the terms of our management agreements with Our Town may lead to management decisions that are not
in the stockholders’ best interest.
Conflicts of interest relating to Our Town may lead to management decisions that are not in the stockholders’ best interest. an
affiliate of Andrew M. Sims, our Chairman, an affiliate of David R. Folsom, our President and Chief Executive Officer, and Andrew
M. Sims Jr., our Vice President - Operations & Investor Relations, together own an interest of approximately 85.0%, as of March 15,
2023, in Our Town. Mr. Sims, Mr. Folsom, and Mr. Sims Jr. serve as directors of Our Town.
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Our management agreements with Our Town establish the terms of Our Town’s management of our hotels covered by those
agreements. The OTH Master Agreement provides that in the event the agreement is terminated in connection with the sale of a hotel,
and Our Town accepts an offer to manage another hotel which is reasonably comparable to the hotel that was sold, we will not be
liable for any termination fee. If we do not offer Our Town such opportunity or Our Town 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 will be due. If we terminate a
hotel management agreement at the end of any renewable five-year term, Our Town is due a termination fee equivalent to one month’s
management fees, as determined under the agreement.
As owners of Our Town, which would receive any management and management termination fees payable by us under the
management agreements, Mr. Sims or Mr. Folsom 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, Mr. Sims and Mr. Folsom will have conflicts of interest
with respect to decisions to enforce provisions of the management agreements, including any termination thereof.
Mr. Sims and Mr. Folsom approve the budgets upon which the incentive management fee payable to Our Town is based. As
owners of Our Town, which would receive any incentive management fees payable by us under the management agreements, Mr.
Sims or Mr. Folsom may influence the budget process, including the revenue targets set for each hotel. The incentive management
fees are based on each hotel exceeding budgeted revenue targets.
We purchase employee medical benefits through Our Town (or its affiliate) for those employees employed by Our Town who
work exclusively for our properties. Mr. Sims and Mr. Folsom participate in the budget approval process confirming employee
insurance rates paid to Our Town. Our Town's policy is to rebate 70% of any annual surplus in its self-insured health plan back to the
Company and retain the remaining 30%. As owners of Our Town, which would receive 30% of any such surplus, Mr. Sims or Mr.
Folsom may influence the budget process.
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 Our
Town, 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 control trusts that 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 trusts controlled in whole or part by members of our management team,
may suffer adverse tax consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including a trust
controlled in part by Andrew M. Sims, and a charitable trust controlled by Edward S. Stein, may have different objectives than holders
of the Company’s stock regarding the appropriate pricing and timing of a property’s sale, or the timing and amount of a property’s
refinancing. As of December 31, 2022, these trusts owned approximately 2.3% of the outstanding units in our Operating Partnership.
The individuals controlling these trusts 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 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.
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 ("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.
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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 noncash 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)
85.0% of our ordinary income for such calendar year, plus (B) 95.0% 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 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 stock, and the value of its 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.
If MHI Holding exceeds certain value thresholds, this could cause the Company to fail to qualify as a REIT.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT. Overall, no more than 20.0% of the value of a REIT’s assets may
consist of stock or securities of one or more TRSs. MHI Holding is a TRS and the Company may form other TRSs in the future. The
Company plans to monitor the value of its shares of MHI Holding and of any other TRS the Company may form. However, there can
be no assurance that the IRS will not attempt to attribute additional value to the shares of MHI Holding or to the shares of any other
TRS that the Company may form. If the Company is treated as owning securities of one or more TRSs with an aggregate value that is
in excess of the thresholds outlined above, the Company could lose its status as a REIT or become subject to penalties.
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);
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
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•
•
“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 TRSs) 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 TRSs) can consist of the securities of any one issuer, and no more than 20.0% of the value of the Company’s
total assets can be represented by securities of one or more TRSs.
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.
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.
31
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 also reduced by certain noncash 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 it holds its assets through the Operating Partnership.
If MHI Holding does not qualify as a TRS, 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 stockholders.
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, as noted above. 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 TRS, and expects to continue to
do so. So long as MHI Holding qualifies as a TRS, 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 TRS 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 stockholders, 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.
In addition, for the Company’s hotel management company to qualify as an “eligible independent contractor,” such company or
a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one
or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a
TRS. The Company believes the hotel manager operates qualified lodging facilities for certain persons who are not related to the REIT
or its TRSs. However, no assurances can be provided that this will continue to be the case or that any other hotel management
companies that the Company may engage in the future will in fact comply with this requirement in the future. Failure to comply with
this requirement would require the Company to find other managers for future contracts, and, if the Company hired a management
company without knowledge of the failure, it could jeopardize the Company’s status as a REIT.
As noted above, each hotel with respect to which a TRS Lessee pays rent must be a “qualified lodging facility”. A “qualified
lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient
basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such
facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at
or in connection with such facility. The Company believes that all of the hotels leased to the TRS Lessees are qualified lodging
facilities. Although the Company intends to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code
provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no
assurance that these requirements will be satisfied in all cases.
32
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 15.0% on the amount realized on the disposition if the foreign transferor is subject to U.S. federal income
tax under FIRPTA. This 15.0% 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 50.0% 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). On December 29, 2022, the IRS released proposed regulations under FIRPTA that,
if finalized as proposed, include a new “look-through rule” in determining whether a REIT is considered to be “domestically
controlled.” In determining ownership, the look-through rule would require a REIT to “look-through” any nonpublic domestic
corporation if 25% or more of the corporation’s stock (by value) is owned by foreign persons. 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 10.0% of the value of the Company’s outstanding stock.
If the leases between the Operating Partnership and the TRS Lessees are recharacterized, the Company may fail to qualify as a
REIT.
To qualify as a REIT for federal income tax purposes, the Company must satisfy two gross income tests, under which specified
percentages of the Company’s gross income must be derived from certain sources, including “rents from real property”. Rents paid by
the TRS Lessees to the Operating Partnership and its subsidiaries pursuant to the leases of the Company’s hotel properties will
constitute substantially all of the Company’s gross income. In order for such rent to qualify as “rents from real property” for purposes
of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service
contracts, joint ventures, or some other type of arrangement. If the leases between the TRS Lessees to the Operating Partnership and
its subsidiaries are not respected as true leases for federal income tax purposes, the Company could fail to qualify as a REIT for
federal income tax purposes.
MHI Holding increases our overall tax liability.
Our TRS Lessees are single-member limited liability companies that are wholly-owned, directly or indirectly, by MHI Holding,
a TRS 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
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 via the Operating Partnership.
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. While the Company believes its leases have customary terms and reflect normal business practices and that the rents
paid thereto reflect market terms, there can be no assurance that the IRS will agree.
Taxation of dividend income could make the Company’s stock less attractive to certain investors and reduce the market price of its
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. Currently, “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%, plus a 3.8% "Medicare tax" discussed below.
Because REITs generally do not pay corporate-level taxes as a result of the dividends-paid deduction to which they are entitled,
33
dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Under the Tax
Cuts and Jobs Act (“TCJA”), for taxable years prior to January 1, 2026, a non-corporate taxpayer may deduct 20% of ordinary REIT
dividends that are not “capital gain dividends” or “qualified dividend income” resulting in an effective maximum U.S. federal income
tax rate of 29.6% (based on the current maximum U.S. federal income tax rate for individuals of 37%). Individuals, trusts and estates
whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on dividends received from the Company. The more
favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive
investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the Company’s stock. Moreover, there is no assurance that we will always distribute
ordinary income dividends, or that Congress will not repeal such legislation.
Investors may be subject to a 3.8% Medicare tax in connection with an investment in the Company’s stock.
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 as well
as gains from the disposition of the Company’s stock 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 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 (the “HIRE Act”) was enacted in the United States. The
HIRE Act includes provisions known as the Foreign Account Tax Compliance Act ("FATCA"), that generally impose a 30.0% 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 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 stock or gross proceeds from a disposition of shares of the
Company’s 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 subject to U.S. withholding tax at a statutory rate of 30.0%. This 30.0% withholding tax may be reduced by
an applicable income tax treaty. The FATCA and nonresident withholding regulations are complex. Even if the 30.0% withholding is
reduced or eliminated by treaty for payments made to a foreign investor, FATCA withholding of 30.0% 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 30.0% “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.
34
U.S. tax reform and related regulatory action could adversely affect you and the Company.
Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could
adversely affect investors in Company stock. The TCJA and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
made significant changes to the U.S. federal tax system. Specifically, and as relevant to the Company and its subsidiaries, the TCJA
reduced the maximum corporate tax rate from 35% to 21%, allows for full expensing of certain property, revised the net operating loss
(“NOL”) provisions, set limitations on certain types of interest deductions, and expanded limitations on deductions for executive
compensation. The TCJA also temporarily reduced individual federal income tax rates on ordinary income (the highest individual
federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January
1, 2026).
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended.
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. Several recent proposals have been made that would make
substantial changes to the U.S. federal income tax laws generally. We cannot predict whether any of these proposed changes will
become law, or the long-term effect of any future law changes on the Company and its stockholders. We and our stockholders could
be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
Item 1B. Unresolved Staff Comments
Not applicable.
35
Item 2. Properties
As of December 31, 2022, 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
in Part II of this Annual Report on Form 10-K):
Wholly-Owned Properties
The DeSoto, Savannah, Georgia
DoubleTree by Hilton Jacksonville
Riverfront, Jacksonville, Florida
DoubleTree by Hilton Laurel, Laurel,
Maryland
DoubleTree by Hilton Philadelphia
Airport, Philadelphia, Pennsylvania
DoubleTree Resort by Hilton
Hollywood Beach, Hollywood,
Florida
Georgian Terrace, Atlanta, Georgia
Hotel Alba Tampa, Tapestry
Collection by Hilton, Tampa, Florida
Hotel Ballast Wilmington, Tapestry
Collection by Hilton, Wilmington,
North Carolina
Hyatt Centric Arlington, Arlington,
Virginia
The Whitehall, Houston, Texas
Wholly-Owned Properties Total
Condominium Hotels
Hyde Resort & Residences
Hyde Beach House Resort &
Residences
Total Hotel & Participating
Condominium Hotel Rooms
Number of
Rooms
Occupancy
2022
ADR
2022
RevPAR
2022
Occupancy
2021
ADR
2021
RevPAR
2021
Occupancy
2020
ADR
2020
RevPAR
2020
246
293
208
331
311
326
222
272
318
259
2,786
80 (1)
(1)
86
2,952
65.7%$
211.49 $
139.00
59.3%$
185.06 $
109.76
29.3%$ 150.24 $
44.03
68.8%$
146.53 $
100.79
65.7%$
135.34 $
88.96
38.3%$ 135.19 $
51.77
59.7%$
117.20 $
69.98
48.0%$
100.75 $
48.41
31.9%$ 89.92 $
28.69
64.6%$
140.94 $
91.01
58.9%$
123.41 $
72.71
36.4%$ 110.37 $
40.22
60.6%$
51.8%$
206.18 $
198.90 $
124.93
103.09
52.2%$
48.7%$
186.73 $
183.53 $
97.45
89.35
35.3%$ 162.97 $
25.1%$ 186.04 $
57.45
46.73
76.3%$
165.11 $
125.92
72.8%$
143.09 $
104.15
34.8%$ 137.75 $
47.98
62.2%$
183.90 $
114.45
54.3%$
171.60 $
93.18
33.1%$ 148.48 $
49.19
64.3%$
40.0%$
187.12 $
150.17 $
120.33
60.11
43.7%$
29.5%$
125.47 $
128.31 $
54.83
37.91
26.1%$ 133.75 $
21.8%$ 132.01 $
34.91
28.81
52.8%$
420.53 $
222.08
54.2%$
415.38 $
225.21
24.1%$ 332.86 $
80.10
42.4%$
381.07 $
161.42
40.1%$
408.40 $
163.93
11.7%$ 330.14 $
38.67
(1) We own the hotel commercial unit and operate a rental program. Reflects only those condominium units that were
participating in the rental program as of December 31, 2022. At any given time, some portion of the units participating in
our rental program may be occupied by the unit owners and unavailable for rent to hotel guests. We sometimes refer to
each participating condominium unit as a “room.”
Item 3. Legal Proceedings
We are not involved in any material legal proceedings, nor to our knowledge, are any material legal proceedings threatened
against us. We are involved in routine litigation arising out of the ordinary course of business, most 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.
36
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 closing price of the
Company’s common stock on the NASDAQ ® Global Market on March 1, 2023 was $2.21 per share.
Stockholder Information
As of March 1, 2023, there were approximately 79 holders of record 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 May 19, 2022, a holder of units in the Operating Partnership redeemed 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(a)(2) of the Securities Act of 1933, as amended.
On July 1, 2022, a holder of units in the Operating Partnership redeemed 40,687 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(a)(2) of the Securities Act of 1933, as amended.
On November 1, 2022, a holder of units in the Operating Partnership redeemed 217,845 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(a)(2) of the Securities Act of 1933, as amended.
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, 2023, there were 7 holders of the Operating Partnership’s partnership units, including Sotherly Hotels Inc.
Recent Sales of Unregistered Securities
From time to time, the Operating Partnership may issue and/or repurchase limited partnership units (common and/or preferred)
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 2022.
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
37
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 are equity ownership interests in hotels, which will result in depreciation and noncash 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.
As a result of the impact of COVID-19 on our business, our board of directors has suspended our common stock dividend. We
anticipate that our board of directors will re-evaluate our current dividend policy on an ongoing basis. Distributions on our preferred
stock are in arrears for the last twelve quarterly payments. On January 24, 2023, the Company announced it will resume quarterly
distributions to holders of its preferred stock and set a record date of February 28, 2023 and a payment date of March 15, 2023, for the
preferred distributions declared in January 2020. No dividends may be paid on our common stock until such time as the preferred
stock distributions are made current. We did not pay any common dividends in 2021 or 2022.
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).
During the years ended December 31, 2022 and 2021, we did not pay any common or preferred stock or unit distributions.
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. [Reserved]
38
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. Since January 1, 2020, we have completed the following acquisitions and
dispositions:
•
•
On February 10, 2022, we sold the Sheraton Louisville Riverside hotel located in Jeffersonville, Indiana.
On June 10, 2022, we sold the DoubleTree by Hilton Raleigh-Brownstone University hotel located in Raleigh, North
Carolina
As of December 31, 2022, our hotel portfolio consisted of ten full-service, primarily upscale and upper-upscale hotels with an
aggregate total of 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. Seven of our
hotels operate under well-known brands such as DoubleTree and Hyatt, and three are independent hotels. As of December 31, 2022,
our portfolio consisted of the following hotel properties:
Property
Wholly-owned Hotels
The DeSoto
DoubleTree by Hilton Jacksonville Riverfront
DoubleTree by Hilton Laurel
DoubleTree by Hilton Philadelphia Airport
DoubleTree Resort by Hilton Hollywood Beach
Georgian Terrace
Hotel Alba Tampa, Tapestry Collection by Hilton
Hotel Ballast Wilmington, Tapestry Collection by
Hilton
Hyatt Centric Arlington
The Whitehall
Hotel Rooms Subtotal
Condominium Hotels
Hyde Resort & Residences
Hyde Beach House Resort & Residences
Number
of Rooms
Location
Date of Acquisition
Chain/Class Designation
246
293
208
331
311
326
222
December 21, 2004
Savannah, GA
Jacksonville, FL July 22, 2005
Laurel, MD
December 21, 2004
Philadelphia, PA December 21, 2004
Hollywood, FL August 9, 2007
March 27, 2014
Atlanta, GA
October 29, 2007
Tampa, FL
272 Wilmington, NC December 21, 2004
318
259
2,786
Arlington, VA March 1, 2018
Houston, TX
November 13, 2013
Upper Upscale(1)
Upscale
Upscale
Upscale
Upscale
Upper Upscale(1)
Upscale
Upscale
Upper Upscale
Upper Upscale(1)
80 (2) Hollywood, FL
86 (2) Hollywood, FL
January 30, 2017
September 27, 2019
Luxury(1)
Luxury(1)
Total Hotel & Participating Condominium Hotel Rooms
(1) Operated as an independent hotel.
(2) We own the hotel commercial unit and operate a rental program. Reflects only those condominium units that were participating
in the rental program as of December 31, 2022. At any given time, some portion of the units participating in our rental program
may be occupied by the unit owner(s) and unavailable for rental to hotel guests. We sometimes refer to each participating
condominium unit as a “room.”
2,952
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 currently owns an approximate 95.8% 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
hotel management companies to operate the hotels under a management agreement. Our TRS Lessees have engaged Our Town to
manage our hotels. Our TRS Lessees, and their parent, MHI Holding (MHI Hospitality TRS Holding, Inc.), are consolidated into each
of our financial statements for accounting purposes. The earnings of MHI Holding are taxable as regular C corporations and are
subject to federal, state, local, and, if applicable, foreign taxation on its taxable income.
39
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 Funds from Operations ("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, 2022 to Year Ended December 31, 2021
The following table illustrates the key operating metrics for the years ended December 31, 2022 and 2021 for our wholly-owned
hotels and the condominium hotel units, during each respective reporting period (“composite portfolio” properties), as well as the key
operating metrics for the twelve wholly-owned hotel properties that were under our control during all of 2020 (“actual” properties).
Occupancy %
ADR
RevPAR
Year Ended December 31, 2022
Actual
Composite
Year Ended December 31, 2021
Actual
Composite
$
$
60.0%
181.34
108.87
$
$
60.8%
171.34
104.17
$
$
52.5%
160.51
84.29
$
$
52.9%
145.50
76.94
Revenue. Total revenue for the year ended December 31, 2022 was approximately $166.1 million, an increase of approximately
$38.5 million, or 30.2%, from total revenue for the year ended December 31, 2021 of approximately $127.6 million. There was an
aggregate increase in total revenue of approximately $45.0 million from 10 of our properties, offset by a decrease of approximately
$1.0 million, at the Hyde Beach House Resort & Residences, Hollywood and a decrease of approximately $5.5 million as a result of
the sales of the Sheraton Louisville Riverside in Jeffersonville, Indiana, in February 2022 and the DoubleTree by Hilton Raleigh
Brownstone University in Raleigh, North Carolina, in June 2022. There were significant increases in demand primarily driven by the
lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel
compared to the same period in the prior year.
Room revenues at our properties for the year ended December 31, 2022 increased approximately $21.0 million, or 23.6%, to
approximately $109.6 million compared to room revenues for the year ended December 31, 2021 of approximately $88.6 million with
eleven of our properties experiencing increased occupancies.
Food and beverage revenues at our properties for the year ended December 31, 2022 increased approximately $13.7 million, or
86.7%, to approximately $29.5 million compared to food and beverage revenues of approximately $15.8 million for the year ended
December 31, 2021, with most of our properties experiencing increased demand for food and beverage services as a result of increased
occupancy. The increase in food and beverage revenues for the year ended December 31, 2022, resulted from an aggregate increase of
approximately $14.2 million from ten of our properties, offset by the loss of food and beverage revenue of approximately $0.5 million
following the sale of the Sheraton Louisville Riverside, in February 2022 and the DoubleTree by Hilton Raleigh Brownstone
University in June 2022.
Other operating revenues for the year ended December 31, 2022 increased approximately $3.8 million, or 16.5%, to
approximately $26.9 million compared to other operating revenues for the year ended December 31, 2021 of approximately $23.1
million. Increases in parking revenue at many of our properties, as well as approximately $1.0 million of other reimbursed revenue at
the Georgian Terrace in Atlanta, Georgia, $1.0 million received under the North Carolina Business Recovery Grant, offset decreases
40
in fees of approximately $1.0 million earned at the Hyde Resort & Residences in Hollywood Beach, Florida; a non-recurring $0.2
million in business interruption proceeds earned in the prior year at the Hotel Ballast Wilmington, Tapestry Collection by Hilton in
Wilmington, North Carolina; and a non-recurring COVID relief grant of approximately $0.3 million received in the prior period by the
DoubleTree by Hilton Laurel in Laurel, Maryland.
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 $22.9 million, or 23.7%, for the year ended December 31,
2022 to approximately $119.6 million compared to hotel operating expenses for the year ended December 31, 2021 of approximately
$96.7 million. The aggregate increase of approximately $28.9 million in hotel operating expenses for the twelve months ended
December 31, 2022, is directly related to the significant increase in hotel occupancy and gross revenue at all of our properties, which
was mainly offset with the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh
Brownstone University in June 2022, reducing hotel operating expenses by approximately $5.7 million.
Rooms expense at our properties for the year ended December 31, 2022 increased approximately $3.1 million, or 13.6%, to
approximately $25.8 million compared to rooms expense of approximately $22.7 million for the year ended December 31, 2021. The
increase in rooms expense for the year ended December 31, 2022, resulted from an aggregate increase of approximately $5.0 million
from all of our properties, offset by a decrease of approximately $1.9 million as a result of the sale of our properties in Jeffersonville,
Indiana and Raleigh, North Carolina.
Food and beverage expenses at our properties for the year ended December 31, 2022 increased approximately $9.4 million, or
91.5%, to approximately $19.7 million compared to food and beverage expense of approximately $10.3 million for the year ended
December 31, 2021. The net increase in food and beverage expenses for the twelve months ended December 31, 2022, resulted from
an aggregate increase of approximately $9.7 million, offset by a decrease of approximately $0.3 million as a result of the sale of our
properties in Jeffersonville, Indiana and Raleigh, North Carolina.
Expenses from other operating departments increased approximately $0.7 million, or 8.0%, to approximately $9.3 million for
the year ended December 31, 2022, compared to expenses from other operating departments of approximately $8.6 million for the
year ended December 31, 2021. The increase in expenses from other operating departments for the twelve months ended December
31, 2021, resulted from aggregate increases in other operating expenses of approximately $1.3 million from ten of our properties.
These increases were seen mainly from bringing back parking servicing contractors. Four of our properties, including the properties
in Jeffersonville, Indiana and Raleigh, North Carolina, had decreases in other operating expenses aggregating to approximately $0.6
million.
Indirect expenses at our properties for the year ended December 31, 2022 increased approximately $9.7 million, or 17.6%, to
approximately $64.8 million compared to indirect expenses of approximately $55.1 million for the year ended December 31, 2021.
The increase in indirect expenses for the twelve months ended December 31, 2022, resulted from an aggregate increase in total
indirect expenses of approximately $13.1 million, offset by a decrease of approximately $3.4 million as a result of the sale of our
properties in Jeffersonville, Indiana and Raleigh, North Carolina. Additionally, we realized refunds of prior year real estate property
taxes at our properties in Savannah, Georgia, and the DoubleTree by Hilton Hollywood Beach in Hollywood, Florida, totaling
approximately $0.8 million.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2022 decreased by
approximately $1.3 million or 6.3%, to approximately $18.6 million, compared to depreciation and amortization expense of
approximately $19.9 million for the year ended December 31, 2021. The decrease is mainly due to the sale of our properties in
Jeffersonville, Indiana and Raleigh, North Carolina.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended
December 31, 2022 and 2021 was $0 and approximately $12.2 million, respectively. Our review of possible impairment at two of our
hotel properties in 2021 revealed an excess of current carrying costs over the estimated undiscounted cash flows, which was triggered
by a reduction in the holding period due to the recent sale of the Sheraton Louisville Riverside and a lack of certainty regarding our
ability to extend or refinance the mortgage on The Whitehall in Houston, Texas, which was to mature in 2023. The resulting
adjustment to fair market value resulted in a charge of approximately $12.2 million during the period ended December 31, 2021.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2022
decreased approximately $0.4 million, or 5.4%, to approximately $6.6 million compared to corporate general and administrative
expenses of approximately $7.0 million for the year ended December 31, 2021. The decrease in corporate general and administrative
expenses was mainly due to an employee retention credit of approximately $0.2 million and a reduction of loan fees and other
expenses in the aggregate compared to the prior year of approximately $0.2 million.
41
Interest Expense. Interest expense for the year ended December 31, 2022 decreased approximately $2.9 million, or 12.8%, to
approximately $19.8 million, compared to approximately $22.7 million of interest expense for the year ended December 31, 2021. The
decrease in interest expense for the twelve months ended December 31, 2022, was substantially related to decreases in the amount of
debt attributable to the mortgages on the hotel properties in Jeffersonville, Indiana and Raleigh, North Carolina, sold earlier this year,
as well as the extinguishment of the secured notes with KWHP SOHO, LLC ("KW") and MIG SOHO, LLC (the "Secured Notes") in
June 2022.
Loss on Early Extinguishment of Debt. The loss relates to the repayment and cancellation of the Secured Notes in June 2022
resulting in a loss on early extinguishment consisting of the unamortized exit fee as well as the unamortized origination costs, which
totaled approximately $5.9 million for the twelve months ended December 31, 2022.
Unrealized Gain (Loss) on Hedging Activities. Unrealized gain (loss) on hedging activities primarily relates to the change in
variance between the unamortized cost of the interest-rate swaps related to our mortgages on the DoubleTree by Hilton Philadelphia
Airport and the Hotel Alba Tampa, Tapestry Collection by Hilton and the fair value of interest-rate swaps which are affected by both
the decreasing number of payment periods in the swap periods and the changes in anticipated LIBOR/SOFR rates over the remaining
period. Those factors contributed to an unrealized gain of approximately $2.9 million for the year ended December 31, 2022,
compared to an unrealized gain of approximately $1.5 million for the year ended December 31, 2021.
PPP loan forgiveness. During the fourth quarter of 2022, we received notification from our banks and the Small Business
Administration that we received partial forgiveness on our unsecured notes, relating to the original PPP Loans we received in 2020.
We received approximately $4.7 million PPP loan forgiveness, which includes principal forgiveness and the accrued interest on that
portion of the loans.
Gain on Sale of Assets. During the twelve months ended December 31, 2022, we sold the property in Raleigh, North Carolina
for a gain of approximately $30.1 million.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets increased approximately $1.2 million, from
approximately $0.6 million for the year ended December 31, 2021 to approximately $1.8 million, for the year ended December 31,
2022. The gains were related to casualties at our properties in Savannah, Georgia, Houston, Texas and Atlanta, Georgia.
Income Tax Provision. We had an income tax provision of approximately $0.5 million for the year ended December 31, 2022,
compared to an income tax provision of approximately $0, for the year ended December 31, 2021. MHI TRS realized an operating
gain for the year ended December 31, 2022 and an operating loss for December 31, 2021.
Net (Loss) Income. Net income for the year ended December 31, 2022 increased approximately $62.5 million, or 219.0%, to
approximately $34.0 million, compared to a net loss of approximately $28.5 million for the year ended December 31, 2021, as a result
of the operating results discussed above.
Distributions to Preferred Stockholders. During the year ended December 31, 2022, we accounted for undeclared distributions
to preferred stockholders of approximately $7.6 million, compared to declared and undeclared distributions to preferred stockholders
of approximately $7.5 million for the year ended December 31, 2021.
Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020
The following table illustrates the key operating metrics for the years ended December 31, 2021 and 2020, for our wholly-
owned hotels and the condominium hotel units, during each respective reporting period (“composite portfolio” properties), as well as
the key operating metrics for the twelve wholly-owned hotel properties that were under our control during all of 2021 and 2020
(“actual” properties).
Occupancy %
ADR
RevPAR
Year Ended December 31, 2021
Actual
Composite
Year Ended December 31, 2020
Actual
Composite
$
$
52.5%
160.51
84.29
$
$
52.9%
145.50
76.94
$
$
30.6%
144.88
44.28
$
$
31.7%
134.48
42.59
Revenue. Total revenue for the year ended December 31, 2021 was approximately $127.6 million, an increase of approximately
$56.1 million, or 78.4%, from total revenue for the year ended December 31, 2020 of approximately $71.5 million. The increase in
revenue for the twelve months ended December 31, 2021, was due mainly to the significant increases in demand driven by the lifting
of restrictions on travel, social gatherings and businesses; significant increases in demand from transient consumers; increases in travel
by some group business and increases in the number of foreign travelers.
42
Room revenues at our properties for the year ended December 31, 2021 increased approximately $39.4 million, or 80.2%, to
approximately $88.6 million, compared to room revenues for the year ended December 31, 2020 of approximately $49.2 million with
each of our properties experiencing increased occupancy.
Food and beverage revenues at our properties for the year ended December 31, 2021 increased approximately $5.1 million, or
48.3%, to approximately $15.8 million, compared to food and beverage revenues of approximately $10.7 million for the year ended
December 31, 2020, with most of our properties experiencing increased demand for food and beverage services as a result of increased
occupancy. Our properties in Laurel, Maryland, Houston, Texas and Hollywood Beach, Florida experienced decreases in food and
beverage revenues collectively totaling approximately $0.5 million.
Other operating revenues for the year ended December 31, 2021 increased approximately $11.5 million, or 98.8%, to
approximately $23.1 million, compared to other operating revenues for the year ended December 31, 2020 of approximately $11.6
million. Each of our properties experienced increased other operating revenues for the period with the exception of our property in
Raleigh, North Carolina, which was relatively flat.
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 $22.0 million, or 29.4%, for the year ended December 31,
2021 to approximately $96.7 million, compared to hotel operating expenses for the year ended December 31, 2020 of approximately
$74.7 million. The increase in hotel operating expenses for the twelve months ended December 31, 2021, is directly related to the
significant increase in hotel occupancy and gross revenue at all of our properties.
Rooms expense at our properties for the year ended December 31, 2021 increased approximately $7.1 million, or 45.8%, to
approximately $22.7 million, compared to rooms expense of approximately $15.6 million for the year ended December 31, 2020.
Food and beverage expenses at our properties for the year ended December 31, 2021 increased approximately $1.8 million, or
20.7%, to approximately $10.3 million, compared to food and beverage expense of approximately $8.5 million for the year ended
December 31, 2020.
Expenses from other operating departments increased approximately $3.5 million, or 67.4%, to approximately $8.6 million for
the year ended December 31, 2021, compared to expenses from other operating departments of approximately $5.1 million for the
year ended December 31, 2020.
Indirect expenses at our properties for the year ended December 31, 2021 increased approximately $9.6 million, or 21.1%, to
approximately $55.1 million, compared to indirect expenses of approximately $45.5 million for the year ended December 31, 2020.
The increase in indirect expenses for the twelve months ended December 31, 2021, related to an expansion of operations to
accommodate increased occupancy.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2021 slightly increased by
0.1%, to approximately $19.9 million, compared to depreciation and amortization expense of approximately $19.9 million for the year
ended December 31, 2020.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended
December 31, 2021 and 2020 was approximately $12.2 million and $0, respectively. Our review of possible impairment at two of our
hotel properties revealed an excess of current carrying costs over the estimated undiscounted cash flows, which was triggered by a
reduction in the holding period due to the recent sale of the Sheraton Louisville Riverside as well as lack of certainty regarding our
ability to extend or refinance the mortgage on The Whitehall in Houston, Texas which matures in early 2023. The resulting adjustment
to fair market value resulted in a charge of approximately $12.2 million during the period ended December 31, 2021.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2021
increased approximately $0.5 million, or 7.8%, to approximately $7.0 million compared to corporate general and administrative
expenses of approximately $6.5 million for the year ended December 31, 2020. The increase in corporate general and administrative
expenses was mainly due to fees related to an abandoned debt offering as well as fees to the special servicer of our mortgage on the
DoubleTree Resort by Hilton Hollywood Beach.
Interest Expense. Interest expense for the year ended December 31, 2021 increased approximately $4.6 million, or 25.6%, to
approximately $22.7 million compared to approximately $18.1 million of interest expense for the year ended December 31, 2020.
Approximately $4.0 million of the increase is related to the Secured Notes issued in December 2020.
Unrealized Gain (Loss) on Hedging Activities. Unrealized gain (loss) on hedging activities primarily relates to the change in
variance between the unamortized cost of the interest-rate swap related to our mortgage on the DoubleTree by Hilton Philadelphia
43
Airport and the fair value of that interest-rate swap which is affected by both the decreasing number of payment periods in the swap
period and the changes in anticipated LIBOR rates over the remaining period. Those factors contributed to an unrealized gain of
approximately $1.5 million for the year ended December 31, 2021, compared to an unrealized loss of approximately $1.0 million for
the year ended December 31, 2020.
Income Tax (Provision) Benefit. A decrease in our income tax provision of approximately $5.3 million primarily relates to the
reduction in the deferred tax asset through a 100% valuation allowance of approximately $5.4 million taken in the year ended
December 31, 2020.
Net (Loss) Income. Net loss for the year ended December 31, 2021 decreased approximately $25.1 million, or 46.8%, to
approximately $28.5 million compared to a net loss of approximately $53.7 million for the year ended December 31, 2020, as a result
of the operating results discussed above.
Distributions to Preferred Stockholders. During the year ended December 31, 2021, we accounted for undeclared distributions
to preferred stockholders of approximately $7.5 million, compared to declared and undeclared distributions to preferred stockholders
of approximately $8.8 million for the year ended December 31, 2020.
Sources and Uses of Cash
Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds
from the sale of secured and unsecured notes, proceeds of mortgage or other debt and hotel property sales. Our principal uses of cash
are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and
dividends. As of December 31, 2022, we had unrestricted cash of approximately $21.9 million and restricted cash of approximately
$5.4 million.
Operating Activities. Our net cash provided by operating activities for the year ended December 31, 2022 was approximately
$6.7 million, generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the
year was due to the increase in occupancy at our hotels as a result of increases in transient consumers, group business, and other
business travel due to the lifting of restrictions on travel, social gatherings and business operations. Our cash provided by operating
activities for the year ended December 31, 2021 was approximately $2.3 million. Cash used in or provided by operating activities
generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and
positive or negative changes in working capital.
Investing Activities. Our cash provided by investing activities for the year ended December 31, 2022 was approximately $46.7
million. Of this amount approximately $10.9 million came from the sale of Sheraton Louisville Riverside property and approximately
$41.5 million came from the sale of the DoubleTree by Hilton Raleigh Brownstone University property. We spent approximately $8.0
million on capital expenditures on improvements to our hotel properties, including the replacement and refurbishment of furniture,
fixtures and equipment. We also received insurance proceeds related to involuntary conversions of approximately $2.2 million. Cash
used for investing activities for the year ended December 31, 2021 was approximately $2.4 million which mostly consisted of capital
expenditures of approximately $3.2 million offset by insurance proceeds related to involuntary conversion of approximately $0.6
million.
Financing Activities. Our cash used in financing activities for the year ended December 31, 2022, was approximately $51.6
million. During the year ended December 31, 2022, the Company and Operating Partnership received proceeds of $7.8 million from
the refinance of the Hotel Alba mortgage loan, made principal payments on its mortgages of approximately $38.5 million, including
the extinguishment of debt related to the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone
University. In addition, the Company extinguished debt on its Secured Notes of $20.0 million, paid approximately $0.4 million in
deferred financing costs. We also paid approximately $0.5 million to reduce the principal balance outstanding of unsecured notes.
Cash used in financial activities for the year ended December 31, 2021, was approximately $9.7 million, which included
approximately $6.5 million in scheduled payments of principal on our mortgage loans and approximately $3.1 million in payments on
our unsecured notes.
44
Capital Expenditures
We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity
with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined
through the annual budget process over which we maintain approval rights, and which are implemented or administered by our
management company.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the
hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we
may be required by one or more of our franchisors to complete a property improvement program (“PIP”) in order to bring the hotel up
to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including restricted
cash, proceeds of mortgage debt or equity offerings.
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 early 2020, we postponed all major non-essential capital
expenditures in response to the COVID-19 pandemic. As travel demand returned and occupancy, and RevPAR gradually increased,
we increased the level of capital expenditures. We expect total capital expenditures for 2023 to be approximately $7.3 million.
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. Except as temporarily reduced during the pandemic through loan modifications and
forbearance agreements, we deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, the
DoubleTree Resort by Hilton Hollywood Beach, The DoubleTree by Hilton Jacksonville Riverfront, The Whitehall and the Georgian
Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington on a
monthly basis.
Liquidity and Capital Resources
The COVID-19 pandemic had a significant negative impact on our operations and financial results during 2020, 2021 and 2022.
During 2020 and into 2021, we entered into forbearance agreements with all our mortgage lenders and negotiated extended
payment terms with a few key vendors in order to preserve liquidity. Repayment of deferred amounts of interest, mortgage principal
and amounts due certain vendors, which began in 2021, was completed at the end of 2022, with the exception of certain amounts that
were deferred until the maturity of the applicable loan.
As of December 31, 2022, we had cash, cash equivalents and restricted cash of approximately $27.3 million, of which
approximately $5.4 million was in restricted reserve accounts for cash collateral, 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
scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt or secured
notes).
On June 10, 2022, we sold the DoubleTree by Hilton Raleigh Brownstone – University which generated net proceeds of
approximately $19.8 million, which we used to repay a portion of the Secured Notes and the associated repayment factor. Also in
June 2022, we refinanced the Hotel Alba mortgage and generated proceeds of approximately $7.5 million, which we used to pay the
remainder of the Secured Notes and accrued interest in combination with approximately $2.3 million of unrestricted and restricted
cash.
On February 26, 2023, we amended the mortgage loan agreement on The Whitehall hotel located in Houston, TX with the
existing lender, International Bank of Commerce. The amendment (i) extends the loan's maturity date to February 26, 2028; (ii)
maintains a floating rate of interest of New York Prime Rate plus 1.25%; and (iii) subjects the interest rate to a floor rate of 7.50%.
The mortgage loan continues to be guaranteed by the Operating Partnership. The amendment also requires us to establish a real estate
tax reserve as well as a debt service reserve that approximates the aggregate amount of one year's debt service, which was initially
established at approximately $1.5 million.
As of the date of this report, we were current on all loan payments on all other mortgages per the terms of our mortgage
agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement (“DSCR”)
covenant under the mortgage secured by The Whitehall and the DoubleTree by Hilton Philadelphia Airport. We have received a
45
waiver of the financial covenants from the lender of the mortgage on The Whitehall, as well as the lender of the mortgage on the
DoubleTree by Hilton Philadelphia Airport through December 31, 2022.
In 2023, the mortgages on the DoubleTree by Hilton Laurel and the DoubleTree by Hilton Philadelphia Airport mature. We
intend to refinance the mortgages maturing in 2023 at the level of their existing indebtedness or request extensions at existing terms.
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 or have access to capital during this period. Additionally, we may
choose to dispose of certain hotels as a means to provide liquidity.
Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment,
investments in new joint ventures and debt maturities, 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, the selective disposition of non-core assets, and cash on hand. We
remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
Mortgage Debt
As of December 31, 2022, we had a principal mortgage debt balance of approximately $321.9 million. The following table sets
forth our mortgage debt obligations on our hotels.
Property
The DeSoto (1)
DoubleTree by Hilton Jacksonville
Riverfront (2)
DoubleTree by Hilton Laurel (3)
DoubleTree by Hilton Philadelphia Airport (4)
DoubleTree Resort by Hilton Hollywood
Beach (5)
Georgian Terrace (6)
Hotel Alba Tampa, Tapestry Collection by
Hilton (7)
Hotel Ballast Wilmington, Tapestry Collection
by Hilton (8)
Hyatt Centric Arlington (9)
The Whitehall (10)
Total Mortgage Principal Balance
Deferred financing costs, net
Unamortized premium on loan
Total Mortgage Loans, Net
December 31,
2022
$ 31,219,022
Prepayment
Penalties
Yes
Maturity
Date
7/1/2026
Amortization
Provisions
25 years
Interest Rate
4.25%
32,416,570
7,412,107
39,413,672
52,724,475
40,492,622
Yes
None
None
(5)
(6)
7/11/2024
5/5/2023
10/31/2023
10/1/2025
6/1/2025
24,756,400
None
6/30/2025
30 years
25 years
30 years LIBOR plus 2.27%
4.88%
5.25%
30 years
30 years
(7)
25 years
30 years
4.91%
4.42%
SOFR plus 2.75%
4.25%
5.25%
PRIME
plus 1.25%
1/1/2027
10/1/2028
2/26/2028
25 years
Yes
Yes
None
31,699,775
47,534,606
14,226,067
321,895,316
(1,480,779)
67,566
$ 320,482,103
(1)
(2)
(3)
(4)
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments
made within 120 days of the maturity date.
The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
The note is subject to an exit fee of 0.75% if prepaid on or after February 5, 2023. On July 15, 2021, we entered into a note modification agreement whereby the
maturity date was extended from August 5, 2021 to May 5, 2022. On April 28, 2022, we entered into an additional note modification agreement whereby the
maturity date was extended from May 5, 2022 to May 5, 2023.
The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237% through July 31, 2023.
Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated
with early termination of the swap agreement.
(5) With limited exception, the note may not be prepaid prior to June 2025.
(6) With limited exception, the note may not be prepaid prior to February 2025.
(7)
The note bears a floating interest rate of SOFR plus 2.75% subject to a floor rate of 2.75%; with monthly principal payments of $40,600; the note provides that
the mortgage can be extended for two additional periods of one year each, subject to certain conditions. On July 11, 2022, we entered into a swap agreement to
fix the rate at 5.576%. The swap agreement reflects notional amounts approximate to the declining balance of the loan and we are responsible for any potential
termination fees associated with early termination of the swap agreement.
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments
made within 120 days of the maturity date.
Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
(9)
(10) The note bears a floating interest rate of New York Prime Rate plus 1.25%, with a floor of 7.50%.
(8)
46
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the
collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local
competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well
as the changes in business travel patterns and demand following the global pandemic.
As described in “Liquidity and Capital Resources”, we failed to meet certain financial covenants under the mortgages secured
by The Whitehall and the DoubleTree by Hilton Philadelphia Airport. We have received a waiver of the financial covenants from the
lender of the mortgage on The Whitehall, as well as the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport,
through December 31, 2022.
Certain of our loan agreements also include financial covenants that trigger a “cash trap”, requiring substantially all the revenue
generated by the hotel to be deposited directly into a lockbox account and swept into a cash management account for the benefit of the
lender until the property meets the criteria in the loan agreement for exiting the “cash trap”.
Contractual Obligations
The following table outlines our contractual obligations as of December 31, 2022, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods (in thousands).
Contractual Obligations
Mortgage loans, including interest
Unsecured Notes
Ground, building, parking garage, office and
equipment leases
Totals
$
$
Total
367,724
2,648
16,567
386,939
$
$
Payments due by period (in thousands)
Less than
1 year
1-3 years
3-5 years
68,750
1,324
676
70,750
$
$
175,221
1,324
1,362
177,907
$
$
67,951
-
1,016
68,967
$
$
More than
5 years
55,802
-
13,513
69,315
Dividend Policy
Distributions to 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 are equity ownership interests in hotels, which will result in
depreciation and noncash 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.
Distributions to Preferred Stockholders and Holder of Preferred Partnership Units in the Operating Partnership. The Company
is obligated to pay distributions to its holders of Preferred Stock and the Operating Partnership is obligated to pay its preferred unit
holder, the Company. Holders of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred 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.
In March 2020, we announced that the record date for the dividends on the Company’s Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock, originally set for March 31, 2020, with a payment date of April 15, 2020, had been
deferred. No dividends have been declared since that date. The Company may not make distributions with respect to any shares of its
common stock, unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or
declared and a sum sufficient for the payment thereof in cash is set aside. As of December 31, 2022, the amount of cumulative unpaid
dividends on our outstanding preferred shares was approximately $23.9 million and the aggregate liquidation preference with respect
to our outstanding preferred shares was approximately $121.3 million. The preferred stock is not redeemable by the holders, has no
maturity date and is not convertible into any other security of the Company or its affiliates, except in the event of a change of control.
47
On January 24, 2023, the Company announced it will resume quarterly distributions to holders of its preferred stock and set a
record date of February 28, 2023 and a payment date of March 15, 2023 for the preferred distributions declared in January 2020.
The Company expects that any reduction in the level of cumulative unpaid distributions will be made in the form of a series of
special distributions. 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 its
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 may vary at rates that differ
from the general rate of inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, 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.
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
Our consolidated financial statements, prepared in conformity with U.S. GAAP, require management to make estimates and
assumptions that affect the reported amount of assets and liability at the date of our financial statements, the reported amounts of
revenue and expenses during the reporting periods and the related disclosures in the consolidated financial statements and
accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2, Summary of
Significant Accounting Policies, in the audited consolidated financial statements included elsewhere in this Annual Report on Form
10-K, the following accounting policies are critical because they require difficult, subjective and complex judgments and include
estimates about matters that are inherently uncertain, involve various assumptions, require management judgment, and because they
are important for understanding and evaluating our financial position, results of operations and related disclosures. We evaluate our
estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our historical experiences and
various matters that we believe are reasonable and appropriate for consideration under the circumstances. Actual results may differ
significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or
otherwise, which could have a material impact on our financial position or results of operations.
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
48
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.
The COVID-19 pandemic has had, an adverse impact on the lodging and hospitality industries, which the Company considered
to be a triggering event for each of its hotels during its impairment testing for the year ended December 31, 2021. The Company
assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon
significant assumptions regarding its ability to maintain ownership of the property, growth rates, occupancy, room rates, economic
trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash
flows from the eventual disposition of the hotel. The Company also projected cash flows assuming an eventual disposition of the
hotel based upon property-specific capitalization rates. As of December 31, 2021, the Company determined the Sheraton Louisville
Riverside, to be impaired based on the proceeds received in a subsequent sale, as well as The Whitehall in Houston, Texas due to the
lack of certainty regarding our ability to extend or refinance the mortgage which was set to mature in early 2023. The Company
recognized an impairment loss of approximately $12.2 million during the period ended December 31, 2021. The impairment loss was
determined using level 2 inputs under authoritative guidance for fair value measurements. No impairment loss was recognized for the
year ended December 31, 2022.
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. The MHI TRS Entities which
leases our hotels from subsidiaries of the Operating Partnership, are 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. A valuation allowance is required for deferred tax assets if, based on all available evidence, it
is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate
sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of
realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable
income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are
expected to be realized using these criteria. As of December 31, 2022, we have determined that it is more-likely-than-not that we will
not be able to fully utilize our deferred tax assets for future tax consequences, therefore a 100% valuation allowance is required. As of
December 31, 2022 and 2021, deferred tax assets each totaled $0, respectively.
As of December 31, 2022, 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, 2022, the tax years that remain subject to examination by the major
tax jurisdictions to which the Company is subject generally include 2016 through 2020. In addition, as of December 31, 2022, the tax
years that remain subject to examination by the major tax jurisdictions to which the MHI TRS Entities are subject, because of open
NOL carryforwards, generally include 2014 through 2021.
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.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting
Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Non-GAAP Financial Measures
We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per
common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key
49
supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a
measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by
generally accepted accounting principles (“GAAP”) or amounts available for the Company’s 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 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, gains or losses from involuntary conversion of assets, plus certain non-cash items such as real estate asset
depreciation and amortization or impairment, stock compensation costs 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 Available to Common Stockholders and Unitholders for certain additional items that are not in
NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or
warrant derivative, loan impairment losses, losses on early extinguishment of debt, gains on extinguishment of preferred stock,
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, management contract termination costs, operating asset depreciation
and amortization, change in control gains or losses, ESOP and stock compensation expenses 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.
The following is a reconciliation of net income (loss) to FFO and Adjusted FFO for the years ended December 31, 2022, 2021,
and 2020.
Net income (loss)
$
Depreciation and amortization - real estate
Impairment of investment in hotel properties, net
Loss (gain) on disposal of assets
Gain on sale of hotel properties
Distributions to preferred stockholders
Gain on involuntary conversion of asset
FFO available to common stockholders and unitholders
$
Decrease (increase) in deferred income taxes
Amortization
ESOP and stock - based compensation
Aborted offering costs
Termination (refund) fee
Unrealized (gain) loss on hedging activities
Loss on early debt extinguishment
Year Ended
December 31,
2022
33,959,848
18,593,359
—
636,198
(30,053,977)
(7,634,219)
(1,763,320)
13,737,889
—
56,977
998,424
—
—
(2,918,207)
5,944,881
$
$
Year Ended
December 31,
2021
(28,539,640)
19,838,017
12,201,461
(158,286)
—
(7,541,891)
(588,586)
(4,788,925)
—
71,209
689,547
631,952
—
(1,493,841)
—
$
$
Year Ended
December 31,
2020
(53,682,905)
19,825,382
—
136,063
—
(8,755,642)
(179,856)
(42,656,958)
5,412,084
71,390
754,111
—
(19,709)
986,200
—
Adjusted FFO available to common stockholders and
unitholders
$
17,819,964
$
(4,890,058)
$
(35,452,882)
50
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) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on
disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) unrealized gains and losses on derivative
instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) Paycheck Protection Program
(PPP) debt forgiveness, (11) gain on exercise of development right, (12) corporate general and administrative expense, and (13) other
operating revenue not related to our 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.
The following is a reconciliation of net loss to Hotel EBITDA for the years ended December 31, 2022, 2021, and 2020.
Year Ended
December 31,
2022
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Net (loss) income
Interest expense
Interest income
Income tax provision
Depreciation and amortization
Impairment of investment in hotel properties, net
Unrealized (gain) loss on hedging activities
Loss on early debt extinguishment
Gain on sale of hotel properties
Loss (gain) on disposal of assets
PPP loan forgiveness
Gain on involuntary conversion of asset
Corporate general and administrative expenses
Hotel EBITDA
$
$
33,959,848
19,772,802
(189,291)
522,355
18,650,336
—
(2,918,207)
5,944,881
(30,053,977)
636,198
(4,720,278)
(1,763,320)
6,621,221
46,462,568
$ (28,539,640) $ (53,682,905)
18,056,874
(210,426)
5,280,443
19,896,772
—
986,200
—
—
136,063
—
(179,856)
6,492,526
(3,224,309)
22,686,694
(147,025)
27,392
19,909,226
12,201,461
(1,493,841)
—
—
(158,286)
—
(588,586)
6,997,166
30,894,561
$
$
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, 2022, we had approximately $310.2 million of fixed-rate debt, including the mortgage on our DoubleTree
by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, the mortgage on our Hotel Alba Tampa,
Tapestry Collection by Hilton, which is fixed by an interest rate swap to 5.576% and the PPP Loans of $2.5 million, with a fixed rate
of 1.0% and approximately $14.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.83%.
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
LIBOR, SOFR, and in Prime Rate. Assuming that the aggregate amount outstanding on the mortgage on The Whitehall remains at
approximately $14.2 million, the balance at December 31, 2022, the impact on our annual interest incurred and cash flows of a one
percent increase in 1-month LIBOR, SOFR, and in Prime Rate, would be approximately $0.1 million.
As of December 31, 2021, we had approximately $330.0 million of fixed-rate debt, including the mortgage on our DoubleTree
by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, Secured Notes of $20.0 million with a fixed
rate of 6.0%, the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $50.2 million of variable-rate debt. The
51
weighted-average interest rate on the fixed-rate debt was 4.77%. 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 LIBOR and in Prime Rate. Assuming that the aggregate amount
outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University
remains at approximately $50.2 million, the balance at December 31, 2021, the impact on our annual interest incurred and cash flows
of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.2 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, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2022, 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 within 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, 2022. In making this assessment, the Company’s management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013 Internal Control-
Integrated Framework. The Company’s management has concluded that, as of December 31, 2022, the Company’s 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.
52
Changes in Internal Control over Financial Reporting
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, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2022, 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 within 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, 2022. In making this assessment, management used the criteria set forth by COSO
in 2013 Internal Control-Integrated Framework. Management has concluded that, as of December 31, 2022, 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.
Changes in Internal Control over Financial Reporting
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.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
53
PART III
The information required by Items 10-14 is incorporated by reference to the Company’s proxy statement for the 2023 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 annual report).
Item 10. Information about our 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, executive officers and corporate governance is incorporated by reference to the
sections captioned “Proposal I – Election of Directors” and “Delinquent Section 16(a) Reports” contained in the Company’s 2023
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 2023 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 2023 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 2023 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, 2022 with respect to compensation plans under which equity securities of the
Company are authorized for issuance.
54
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)
2022 Plan (2)
Equity compensation plans not approved by
security holders:
N/A
None
Total
1,832,610
(1) On February 4, 2021, we granted (i) 136,281 shares of common stock to our officers and employees, and (ii) 15,000 shares of
—
1,832,610
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
restricted common stock to our independent directors, all of which vested on December 31, 2021.
On January 21, 2022, we granted (i) 168,037 shares of common stock to our independent directors, officers, and employees, and
(ii) 15,000 shares of restricted common stock to our independent directors, all of which vested on December 31, 2022.
On February 15, 2022, we granted 7,231 shares of common stock to one of our employees.
On May 23, 2022, we granted 37,428 shares of common stock to our employees.
The remaining 4,840 shares were deregistered as of June 20, 2022.
(2)
The Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which the Company’s stockholders approved in April 2022,
permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its
employees and directors for up to 2,000,000 shares of common stock.
On July 21, 2022 we granted 167,390 shares of common stock to our employees.
On January 12, 2023, we granted (i) 64,278 shares of common stock to one of our employees and our independent directors, and
(ii) 15,000 shares of restricted common stock to our independent directors, which will vest on December 31, 2023. These shares
are included in the number of securities remaining available for future issuance as of December 31, 2022.
On January 23, 2023, we granted 205,000 shares of restricted common stock to certain of our employees. These shares are
included in the number of securities remaining available for future issuance as of December 31, 2022.
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 2023 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 2023 Proxy Statement.
55
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
Index to Financial Statements and Financial Statement Schedules
Sotherly Hotels Inc.
Report of Independent Registered Public Accounting Firm, FORVIS, LLP
Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2022 and 2021
Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021 and
2020
Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021
and 2020
Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021 and
2020
Sotherly Hotels LP
Report of Independent Registered Public Accounting Firm, FORVIS, LLP
Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2022 and 2021
Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2022, 2021 and
2020
Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31,
2022, 2021 and 2020
Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2022, 2021 and
2020
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2022
F-1
F-2
F-4
F-5
F-6
F-7
F-9
F-11
F-12
F-13
F-14
F-16
F-39
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.
56
The following exhibits are filed as part of this Form 10-K:
Exhibits
3.1
3.1A
3.1B
3.1C
3.2
3.2A
3.2B
3.2C
3.2D
3.2E
3.2F
3.3
3.4
3.5
3.6
Articles of Amendment and Restatement of the Company (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)).
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).
Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of August 12, 2016
(incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 15, 2016).
Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 12, 2019
(incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on April 16, 2019).
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)).
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).
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)).
Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 23, 2016).
Amendment No. 4 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 11, 2017).
Amendment No. 5 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.2E to our current report on Form 8-K filed with the Securities
and Exchange Commission on August 31, 2018).
Amendment No. 6 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated
by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 18, 2019).
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).
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).
Articles Supplementary designating the Series B Preferred Stock of the Company, effective as of August 19, 2016
(incorporated by reference to the document previously filed as Exhibit 3.5 to the Company’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on August 22, 2016).
Articles Supplementary designating the Series C Preferred Stock of the Company, effective as of October 5, 2017
(incorporated by reference to the document previously filed as Exhibit 3.5 to the Company’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on October 10, 2017).
57
Exhibits
3.7
3.8
4.0
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Articles Supplementary dated August 30, 2018 (incorporated by reference to the document previously filed as Exhibit
3.7 to our current report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2018).
Articles Supplementary designating the Series D Preferred Stock of the Company, effective as of April 15, 2019
(incorporated by reference to the document previously filed as Exhibit 3.6 to the Company’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on April 16, 2019).
Form of Common Stock Certificate (incorporated by reference to the document previously filed as Exhibit 4.0 to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange
Commission on March 22, 2017).
Form of Specimen Certificate of Series B Preferred Stock of the Company (incorporated by reference to the document
previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 22, 2016).
Form of Specimen Certificate of Series C Preferred Stock of the Company (incorporated by reference to the document
previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on October 10, 2017).
Form of Specimen Certificate of Series D Preferred Stock of the Company (incorporated by reference to the document
previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on April 16, 2019).
Description of Registered Securities.
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 Anthony E. Domalski, dated as of January 1, 2018
(incorporated by reference to the document previously filed as Exhibit 10.3 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on January 5, 2018). *
Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport
Hospitality Group, Inc. and Our Town Hospitality LLC (incorporated by reference to the document previously filed as
Exhibit 10.17 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9,
2019).
Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC,
Newport Hospitality Group, Inc. and Our Town Hospitality LLC (incorporated by reference to the document previously
filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 16, 2019).
Sublease Agreement between Our Town Hospitality LLC and Sotherly Hotels Inc. dated December 13, 2019
(incorporated by reference to the document previously filed as Exhibit 10.23 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 16, 2019).
Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated as of January 1, 2020
(incorporated by reference to the document previously filed as Exhibit 10.24 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 6, 2020). *
Executive Employment Agreement between Sotherly Hotels Inc. and David R. Folsom, dated as of January 1, 2020
(incorporated by reference to the document previously filed as Exhibit 10.25 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 6, 2020). *
Executive Employment Agreement between Sotherly Hotels Inc. and Scott M. Kucinski, dated as of January 1, 2020
(incorporated by reference to the document previously filed as Exhibit 10.26 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 6, 2020). *
Executive Employment Agreement between Sotherly Hotels Inc. and Robert E. Kirkland IV, dated as of January 1, 2020
(incorporated by reference to the document previously filed as Exhibit 10.27 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 6, 2020). *
10.10
Promissory Note between Sotherly Hotels LP and Village Bank dated as of April 16, 2020 (incorporated by reference to
the document previously filed as Exhibit 10.16 to our quarterly report on Form 10-Q filed with the Securities and
Exchange Commission on June 24, 2020).
58
Exhibits
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
16.1
21.1
21.2
23.1
23.2
31.1
31.2
31.3
Promissory Note between MHI Hospitality TRS, LLC and Fifth Third Bank, National Association, dated as of April 28,
2020 (incorporated by reference to the document previously filed as Exhibit 10.17 to our quarterly report on Form 10-Q
filed with the Securities and Exchange Commission on June 24, 2020).
Promissory Note between SOHO Arlington TRS LLC and Fifth Third Bank, National Association, dated as of May 6,
2020 (incorporated by reference to the document previously filed as Exhibit 10.18 to our quarterly report on Form 10-Q
filed with the Securities and Exchange Commission on June 24, 2020).
Second Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality
TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality (incorporated by reference to the document
previously filed as Exhibit 10.20 to our Current Report on Form 8-K filed with the Securities and Exchange Commission
on June 9, 2021).
First Amendment to Employment Agreement between Sotherly Hotels Inc. and Robert E. Kirkland IV, dated February 8,
2022 (incorporated by reference to the document previously filed as Exhibit 10.25 to our Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 11, 2022). *
Third Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS,
LLC, and Our Town Hospitality LLC (incorporated by reference to the document previously filed as Exhibit 10.27 to
our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2022).
Sotherly Hotels Inc. 2022 Long-Term Incentive Plan (incorporated by reference to the document previously filed as
Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission
on July 20, 2022). *
Amendment to Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated January 23, 2023
(incorporated by reference to the document previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 24, 2023). *
Amendment to Employment Agreement between Sotherly Hotels Inc. and David R. Folsom, dated January 23, 2023
(incorporated by reference to the document previously filed as Exhibit 10.2 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 24, 2023). *
Amendment to Employment Agreement between Sotherly Hotels Inc. and Scott M. Kucinski, dated January 23, 2023
(incorporated by reference to the document previously filed as Exhibit 10.3 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 24, 2023). *
Amendment to Employment Agreement between Sotherly Hotels Inc. and Anthony E. Domalski, dated January 23, 2023
(incorporated by reference to the document previously filed as Exhibit 10.4 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 24, 2023). *
Second Amendment to Employment Agreement between Sotherly Hotels Inc. and Robert E. Kirkland IV, dated January
23, 2023 (incorporated by reference to the document previously filed as Exhibit 10.5 to our Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 24, 2023). *
Letter from FORVIS, LLP, dated June 6, 2022 (incorporated by reference to the document previously filed as Exhibit
16.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2022.)
List of Subsidiaries of Sotherly Hotels Inc.
List of Subsidiaries of Sotherly Hotels LP.
Consent of FORVIS, LLP.
Consent of FORVIS, 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.
59
Exhibits
31.4
32.1
32.2
32.3
32.4
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
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.0
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Denotes management contract and/or compensatory plan/arrangement.
60
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 21, 2023
SOTHERLY HOTELS INC.
By:
/s/ DAVID R. FOLSOM
David R. Folsom
President and 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
Chairman of the Board of Directors
March 21, 2023
President, Chief Executive Officer and Director
March 21, 2023
Chief Financial Officer
March 21, 2023
/s/ SCOTT M. KUCINSKI
Scott M. Kucinski
Executive Vice President and Chief Operating
Officer
/s/ HERSCHEL J. WALKER
Herschel J. Walker
/s/ MARIA L. CALDWELL
Maria L. Caldwell
/s/ EDWARD S. STEIN
Edward S. Stein
/s/ ANTHONY C. ZINNI
Anthony C. Zinni
/s/ G. SCOTT GIBSON IV
G. Scott Gibson IV
Director
Director
Director
Director
Director
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
61
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 21, 2023
SOTHERLY HOTELS LP,
by its General Partner,
SOTHERLY HOTELS INC.
By:
/s/ DAVID R. FOLSOM
David R. Folsom
President and 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
Chairman of the Board of Directors of the General
Partner
March 21, 2023
President, Chief Executive Officer and Director of
the General Partner
March 21, 2023
Chief Financial Officer of the General Partner
March 21, 2023
/s/ SCOTT M. KUCINSKI
Scott M. Kucinski
Executive Vice President and Chief Operating
Officer of the General Partner
March 21, 2023
/s/ HERSCHEL J. WALKER
Herschel J. Walker
/s/ MARIA L. CALDWELL
Maria L. Caldwell
/s/ EDWARD S. STEIN
Edward S. Stein
/s/ ANTHONY C. ZINNI
Anthony C. Zinni
/s/ G. SCOTT GIBSON IV
G. Scott Gibson IV
Director of the General Partner
March 21, 2023
Director of the General Partner
March 21, 2023
Director of the General Partner
March 21, 2023
Director of the General Partner
March 21, 2023
Director of the General Partner
March 21, 2023
62
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Sotherly Hotels Inc.
Report of Independent Registered Public Accounting Firm, FORVIS, LLP
Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2022 and 2021
Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021
and 2020
Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2022, 2021 and
2020
Sotherly Hotels LP
Report of Independent Registered Public Accounting Firm, FORVIS, LLP
Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2022 and 2021
Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31,
2022, 2021 and 2020
Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2022
F-2
F-4
F-5
F-6
F-7
F-9
F-11
F-12
F-13
F-14
F-16
F-39
F - 1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Sotherly Hotels Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sotherly Hotels Inc. and subsidiaries (the “Company”) as of
December 31, 2022 and 2021, the related consolidated statements of operations, changes in equity, and cash flows for each of the
years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2022 and 2021, and the results of its their operations and their cash flows for each of the years in the
three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Evaluation of investments in hotel properties for impairment
As of December 31, 2022, Investment in Hotel Properties was $365.1 Million. As discussed in Note 2 and 4 to the consolidated
financial statements, the Company assesses the carrying values of its investments in hotel properties whenever events or changes in
circumstances indicate that the carrying value of the hotel properties may not be recoverable. 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 and the carrying amount exceeds its fair market value, an adjustment to reduce the carrying
amount to the related hotel property’s fair market value would be recorded and an impairment loss recognized.
We identified the Company’s evaluation of hotel properties for impairment as a critical audit matter. The principal considerations for
our determination included the significant auditor judgments required to evaluate certain key inputs and assumptions used by the
Company in developing their impairment assessment, specifically, the judgments related to the Company’s determination of growth
rates, occupancy, room rates, economic trends, property-specific operating costs and an allowance for the replacement of furniture,
fixtures and equipment used in projecting cash flows from operations and capitalization rates utilized in determining eventual
disposition.
F - 2
The primary procedures we performed to address this critical audit matter included:
•
•
•
•
•
•
We obtained an understanding of and tested the design and effectiveness of internal controls over the Company’s
impairment analysis.
We acquired an understanding of the Company’s impairment methodology to assess the life of the cash flows and
recoverability of the investments in hotel properties.
We assessed the appropriateness of the significant assumptions and inputs, such as growth rates, occupancy, room rates,
economic trends, property-specific operating costs and an allowance for the replacement of furniture, fixtures and
equipment based on Company-specific data and published industry data.
We tested the mathematical accuracy of management’s impairment analysis.
We performed a sensitivity analysis over the estimated capitalization rates obtained from published industry reports.
We reviewed the methodologies and assumptions utilized by the Company’s third-party specialist for reasonableness.
/s/ FORVIS, LLP
(Formerly, Dixon Hughes Goodman LLP)
We have served as the Company's auditor since 2016.
Richmond, Virginia
March 21, 2023
F - 3
SOTHERLY HOTELS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 AND 2021
ASSETS
Investment in hotel properties, net
Investment in hotel properties held for sale, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid expenses, inventory and other assets
TOTAL ASSETS
LIABILITIES
Mortgage loans, net
Secured notes, net
Unsecured notes
Accounts payable and accrued liabilities
Advance deposits
Dividends and distributions payable
TOTAL LIABILITIES
Commitments and contingencies
EQUITY
Sotherly Hotels Inc. stockholders’ equity
Preferred stock, $0.01 par value, 11,000,000 shares authorized:
8.0% Series B cumulative redeemable perpetual preferred stock,
1,464,100 and 1,510,000 shares issued and outstanding; aggregate liquidation
preference $44,655,050 and $43,035,000, at December 31, 2022 and
2021, respectively.
7.875% Series C cumulative redeemable perpetual preferred stock,
1,346,110 and 1,384,610 shares issued and outstanding; aggregate liquidation
preference $40,940,681 and $39,385,669, at December 31, 2022 and
2021, respectively.
8.25% Series D cumulative redeemable perpetual preferred stock,
1,163,100 and 1,165,000 shares issued and outstanding; aggregate liquidation
preference $35,674,458 and $33,329,922, at December 31, 2022 and
2021, respectively.
Common stock, par value $0.01, 69,000,000 shares authorized, 18,951,525
shares issued and outstanding at December 31, 2022 and 17,441,058
shares issued and outstanding at December 31, 2021.
Additional paid-in capital
Unearned ESOP shares
Distributions in excess of retained earnings
Total Sotherly Hotels Inc. stockholders’ equity
Noncontrolling interest
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
December 31, 2022
December 31, 2021
$
$
$
$
$
365,070,725
—
21,918,680
5,422,950
5,844,904
8,311,862
406,569,121
320,482,103
—
2,545,975
25,704,835
2,233,013
4,082,472
355,048,398
—
$
$
$
$
375,885,224
22,870,487
13,166,883
12,411,654
4,822,187
6,894,228
436,050,663
351,170,883
19,128,330
7,609,934
35,960,293
1,552,942
4,125,351
419,547,733
—
14,641
15,100
13,461
13,846
11,631
11,650
189,515
175,611,370
(2,601,134)
(120,985,183)
52,254,301
(733,578)
51,520,723
406,569,121
$
174,410
177,651,954
(3,083,398)
(153,521,704)
21,261,858
(4,758,928)
16,502,930
436,050,663
The accompanying notes are an integral part of these financial statements.
F - 4
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
REVENUE
Rooms department
Food and beverage department
Other operating departments
Total revenue
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
Loss (gain) on disposal of assets
Corporate general and administrative
Total operating expenses
NET OPERATING INCOME (LOSS)
Other income (expense)
Interest expense
Interest income
Loss on early extinguishment of debt
Unrealized gain (loss) on hedging activities
PPP loan forgiveness
Gain on sale of hotel properties
Gain on involuntary conversion of assets
Net income (loss) before income taxes
Income tax provision
Net income (loss)
Less: Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to the Company
Undeclared distributions to preferred stockholders
Gain on extinguishment of preferred stock
Net income (loss) attributable to common stockholders
Net income (loss) per share attributable to common stockholders:
Basic
Diluted
Weighted average number of common shares outstanding
Basic
Diluted
2022
2021
2020
$
$
109,553,906
29,556,213
26,967,185
166,077,304
$
88,625,659
15,829,487
23,132,778
127,587,924
49,192,589
10,676,646
11,633,341
71,502,576
25,782,888
19,724,225
9,296,056
64,811,567
119,614,736
18,650,336
—
636,198
6,621,221
145,522,491
20,554,813
(19,772,802)
189,291
(5,944,881)
2,918,207
4,720,278
30,053,977
1,763,320
34,482,203
(522,355)
33,959,848
(1,423,327)
32,536,521
(7,634,219)
64,518
24,966,820
1.40
1.40
$
$
$
22,688,063
10,297,461
8,607,594
55,100,245
96,693,363
19,909,226
12,201,461
(158,286)
6,997,166
135,642,930
(8,055,006)
(22,686,694)
147,025
—
1,493,841
—
—
588,586
(28,512,248)
(27,392)
(28,539,640)
2,318,166
(26,221,474)
(7,541,891)
361,476
(33,401,889)
(2.15)
(2.15)
$
$
$
15,565,313
8,531,411
5,142,853
45,487,308
74,726,885
19,896,772
—
136,063
6,492,526
101,252,246
(29,749,670)
(18,056,874)
210,426
—
(986,200)
—
—
179,856
(48,402,462)
(5,280,443)
(53,682,905)
4,489,341
(49,193,564)
(8,755,642)
—
(57,949,206)
(4.05)
(4.05)
17,802,772
17,802,772
15,531,684
15,531,684
14,312,049
14,312,049
$
$
$
The accompanying notes are an integral part of these financial statements.
F - 5
Balances at December 31, 2019
Net loss
Issuance of restricted
common stock awards
Issuance of unrestricted common stock
awards
Conversion of units in
Operating Partnership to
shares of common stock
Amortization of ESOP
shares
Amortization of restricted
stock award
Preferred stock dividends
declared
Common stockholders'
dividends and
distributions declared
Balances at December 31, 2020
Net loss
Issuance of common stock awards
Conversion of units in
Operating Partnership to
shares of common stock
Amortization of ESOP
shares
Amortization of restricted
stock award
Extinguishment of preferred stock
Balances at December 31, 2021
Net income
Issuance of common stock awards
Conversion of units in
Operating Partnership to
shares of common stock
Amortization of ESOP
shares
Amortization of restricted
stock award
Extinguishment of preferred stock
Balances at December 31, 2022
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
—
—
—
—
150,238
—
1,513
328
—
Preferred Stock
Shares
4,364,610
Par Value
43,646
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
Par Value
Additional
Paid-
In Capital
Shares
14,272,378
—
187,583
2,250
$
142,723
$
180,515,861
$
—
1,876
23
—
460,063
14,152
—
—
—
561,639
5,616
(505,699)
(322)
—
—
—
(264,717)
469,933
72,780
—
—
—
Unearned
ESOP
Shares
(4,105,637)
Distributions
in Excess of
Retained Earnings
(73,990,690)
$
Noncontrolling
Interest
$
(1,198,732)
$
(49,193,564)
(4,489,341)
—
—
—
—
—
(2,188,910)
—
—
500,405
—
—
—
Total
101,407,171
(53,682,905)
461,939
14,175
—
205,216
72,780
(2,188,910)
—
4,364,610
—
43,646
$
—
15,023,850
$
—
—
—
—
—
—
—
—
—
151,281
32,781
—
—
443,253
(2,908,329)
—
—
—
(380,628)
552,628
—
180,292,440
$
—
(3,636,026)
$
$
(1,927,066)
(127,300,230)
$
(26,221,474)
—
(161,095)
(5,348,763)
(2,318,166)
—
$
(2,088,161)
44,201,305
(28,539,640)
444,766
—
—
2,908,001
—
—
172,000
—
(305,000)
4,059,610
—
—
$
—
(3,050)
40,596
—
—
—
2,233,146
17,441,058
—
395,086
$
—
22,331
174,410
—
3,951
$
72,780
132,438
177,651,954
—
794,735
$
—
—
(3,083,398)
—
—
$
—
—
(153,521,704)
32,536,521
—
—
—
—
—
308,532
3,085
(2,605,108)
—
—
—
(355,306)
482,264
—
—
—
(86,300)
3,973,310
—
8,069
189,515
The accompanying notes are an integral part of these financial statements.
72,780
52,315
175,611,370
—
—
(2,601,134)
—
806,849
18,951,525
—
—
(120,985,183)
—
(863)
39,733
$
$
$
$
$
—
—
(4,758,928)
1,423,327
—
$
72,780
151,719
16,502,930
33,959,848
798,686
2,602,023
—
—
126,958
—
—
(733,578)
$
72,780
59,521
51,520,723
$
$
F - 6
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
Cash flows from operating activities:
Net Income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization
Impairment of investment in hotel properties, net
Amortization of deferred financing costs
Amortization of mortgage premium
Gain on involuntary conversion of assets
Unrealized (gain) loss on hedging activities
Loss on early extinguishment of debt
PPP loan forgiveness
Gain on sale of assets
Loss (gain) on disposal of assets
ESOP and stock - based compensation
Changes in assets and liabilities:
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 (used in) operating activities
Cash flows from investing activities:
Proceeds from sale of hotel properties
Improvements and additions to hotel properties
Proceeds from involuntary conversion
Proceeds from sale of assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from mortgage loans
Proceeds from secured notes
Proceeds from unsecured notes
Payments on mortgage loans
Payments on secured notes
Payments on unsecured notes
Payments of deferred financing costs
Dividends on common stock and distributions paid
Preferred dividends paid
Net cash (used in) provided by financing activities
Net increase/(decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the period
Cash, cash equivalents and restricted cash at the end of the period
Supplemental disclosures:
Cash paid during the period for interest
Cash paid (received) during the period for income taxes
Non-cash investing and financing activities:
Change in amount of improvements to hotel property
in accounts payable and accrued liabilities
$
$
$
$
F - 7
2022
2021
2020
$
33,959,848
$
(28,539,640) $
(53,682,905)
18,650,336
—
1,293,092
(24,681)
(1,763,320)
(2,918,207)
5,944,881
(4,720,278)
(30,053,977)
633,803
998,424
(1,439,886)
(1,597,055)
—
(12,984,231)
680,071
—
6,658,820
52,403,981
(7,964,630)
2,180,489
35,327
46,655,167
7,777,475
—
—
(38,507,799)
(20,000,000)
(461,181)
(359,389)
—
—
(51,550,894)
1,763,093
25,578,537
27,341,630
23,277,738
26,000
$
$
$
19,909,226
12,201,461
1,029,306
(24,681)
(588,586)
(1,493,841)
—
—
—
(158,286)
689,547
(2,640,487)
719,031
—
1,630,584
(411,131)
—
2,322,503
—
(3,176,841)
588,586
200,500
(2,387,755)
—
—
—
(6,528,078)
—
(3,109,166)
(19,513)
—
—
(9,656,757)
(9,722,009)
35,300,546
25,578,537
19,897,847
20,200
$
$
$
19,896,772
—
572,696
(24,681)
(179,856)
986,200
—
—
—
136,063
754,111
3,032,703
(2,197,874)
5,412,084
15,152,165
(821,265)
(300,153)
(11,263,940)
—
(4,015,514)
179,856
56,677
(3,778,981)
—
20,000,000
10,719,100
(2,609,861)
—
—
(1,560,680)
(2,000,418)
(2,188,910)
22,359,231
7,316,310
27,984,236
35,300,546
9,543,748
(21,078)
56,914
$
353,028
$
542,102
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash at the end of the period
2022
21,918,680
5,422,950
27,341,630
$
$
2021
13,166,883
12,411,654
25,578,537
$
$
2020
25,297,771
10,002,775
35,300,546
$
$
The accompanying notes are an integral part of these financial statements.
F - 8
Report of Independent Registered Public Accounting Firm
To the Board of Directors of the General Partner of Sotherly Hotels LP
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sotherly Hotels LP and subsidiaries (the “Partnership”) as of
December 31, 2022 and 2021, the related consolidated statements of operations, changes in partners’ capital, and cash flows for each
of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Partnership as of December 31, 2022 and 2021, and the results of its their operations and their cash flows for
each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an
opinion on the Partnership’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Evaluation of investments in hotel properties for impairment
As of December 31, 2022, Investment in Hotel Properties was $365.1 Million. As discussed in Note 2 and 4 to the consolidated
financial statements, the Company assesses the carrying values of its investments in hotel properties whenever events or changes in
circumstances indicate that the carrying value of the hotel properties may not be recoverable. 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 and the carrying amount exceeds its fair market value, an adjustment to reduce the carrying
amount to the related hotel property’s fair market value would be recorded and an impairment loss recognized.
We identified the Company’s evaluation of hotel properties for impairment as a critical audit matter. The principal considerations for
our determination included the significant auditor judgments required to evaluate certain key inputs and assumptions used by the
Company in developing their impairment assessment, specifically, the judgments related to the Company’s determination of growth
rates, occupancy, room rates, economic trends, property-specific operating costs and an allowance for the replacement of furniture,
fixtures and equipment used in projecting cash flows from operations and capitalization rates utilized in determining eventual
disposition.
The primary procedures we performed to address this critical audit matter included:
F - 9
•
•
•
•
•
•
We obtained an understanding of and tested the design and effectiveness of internal controls over the Company’s
impairment analysis.
We acquired an understanding of the Company’s impairment methodology to assess the life of the cash flows and
recoverability of the investments in hotel properties.
We assessed the appropriateness of the significant assumptions and inputs, such as growth rates, occupancy, room rates,
economic trends, property-specific operating costs and an allowance for the replacement of furniture, fixtures and
equipment based on Company-specific data and published industry data.
We tested the mathematical accuracy of management’s impairment analysis.
We performed a sensitivity analysis over the estimated capitalization rates obtained from published industry reports.
We reviewed the methodologies and assumptions utilized by the Company’s third-party specialist for reasonableness.
/s/ FORVIS, LLP
(Formerly, Dixon Hughes Goodman LLP)
We have served as the Partnership’s auditor since 2016.
Richmond, Virginia
March 21, 2023
F - 10
SOTHERLY HOTELS LP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 AND 2021
ASSETS
Investment in hotel properties, net
Investment in hotel properties held for sale, net
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Loan receivable - affiliate
Prepaid expenses, inventory and other assets
TOTAL ASSETS
LIABILITIES
Mortgage loans, net
Secured loan, net
Unsecured notes, net
Accounts payable and other accrued liabilities
Advance deposits
Dividends and distributions payable
TOTAL LIABILITIES
December 31, 2022
December 31, 2021
$
$
$
$
365,070,725
—
21,918,680
5,422,950
5,844,904
2,650,526
8,311,862
409,219,647
320,482,103
—
2,545,975
25,704,835
2,233,013
4,082,472
355,048,398
$
$
$
$
375,885,224
22,870,487
13,166,883
12,411,654
4,822,187
3,157,172
6,894,228
439,207,835
351,170,883
19,128,330
7,609,934
35,960,293
1,552,942
4,125,351
419,547,733
Commitments and contingencies (see Note 6)
—
—
PARTNERS’ CAPITAL
Preferred units, 11,000,000 units authorized;
8.0% Series B cumulative redeemable perpetual preferred unit;
1,464,100 and 1,510,000 units issued and outstanding; aggregate liquidation
preference $44,655,050 and $43,035,000, at December 31, 2022 and
2021, respectively.
7.875% Series C cumulative redeemable perpetual preferred units,
1,346,110 and 1,384,610 units issued and outstanding; aggregate liquidation
preference $40,940,681 and $39,385,669, each at December 31, 2022 and
2021, respectively.
8.25% Series D cumulative redeemable perpetual preferred units,
1,163,100 and 1,165,000 units issued and outstanding; aggregate liquidation
preference $35,674,458 and $33,329,922, each at December 31, 2022 and
2021, respectively.
General Partner: 197,767 units and 185,748 units issued and outstanding as of
December 31, 2022 and 2021, respectively.
Limited Partners: 19,578,946 units and 18,389,030 units issued and outstanding as
of December 31, 2022 and 2021, respectively.
TOTAL PARTNERS’ CAPITAL
TOTAL LIABILITIES AND PARTNERS’ CAPITAL
$
34,344,086
$
35,420,784
31,571,778
32,474,760
27,504,901
27,549,832
(106,022)
(469,805)
(39,143,494)
54,171,249
409,219,647
$
(75,315,469)
19,660,102
439,207,835
$
The accompanying notes are an integral part of these financial statements.
F - 11
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
REVENUE
Rooms department
Food and beverage department
Other operating departments
Total revenue
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
Loss (gain) on disposal of assets
Corporate general and administrative
Total operating expenses
NET OPERATING INCOME (LOSS)
Other income (expense)
Interest expense
Interest income
Loss on early extinguishment of debt
Unrealized gain (loss) on hedging activities
PPP loan forgiveness
Gain on sale of hotel properties
Gain on involuntary conversion of assets
Net income (loss) before income taxes
Income tax provision
Net income (loss)
Undeclared distributions to preferred unit holders
Gain on extinguishment of preferred units
Net income (loss) attributable to general and limited partnership unit
holders
Net income (loss) attributable per general and limited partner unit:
Basic
Diluted
Weighted average number of general and limited partner units
outstanding
Basic
Diluted
$
$
$
2022
2021
2020
$
$
109,553,906
29,556,213
26,967,185
166,077,304
$
88,625,659
15,829,487
23,132,778
127,587,924
49,192,589
10,676,646
11,633,341
71,502,576
25,782,888
19,724,225
9,296,056
64,811,567
119,614,736
18,650,336
—
636,198
6,621,221
145,522,491
20,554,813
(19,772,802)
189,291
(5,944,881)
2,918,207
4,720,278
30,053,977
1,763,320
34,482,203
(522,355)
33,959,848
(7,634,219)
64,518
26,390,147
1.36
1.36
$
$
$
22,688,063
10,297,461
8,607,594
55,100,245
96,693,363
19,909,226
12,201,461
(158,286)
6,997,166
135,642,930
(8,055,006)
(22,686,694)
147,025
—
1,493,841
—
—
588,586
(28,512,248)
(27,392)
(28,539,640)
(7,541,891)
361,476
(35,720,055)
(2.08)
(2.08)
$
$
$
15,565,313
8,531,411
5,142,853
45,487,308
74,726,885
19,896,772
—
136,063
6,492,526
101,252,246
(29,749,670)
(18,056,874)
210,426
—
(986,200)
—
—
179,856
(48,402,462)
(5,280,443)
(53,682,905)
(8,755,642)
—
(62,438,547)
(3.89)
(3.89)
19,266,320
19,266,320
17,186,789
17,186,789
16,065,499
16,065,499
The accompanying notes are an integral part of these financial statements.
F - 12
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
Balances at December 31, 2019
Issuance of partnership units
Amortization of restricted
units award
Unit based compensation
Preferred units distributions
declared
Partnership units
distributions declared
Net loss
Balances at December 31, 2020
Issuance of partnership units
Amortization of restricted
units award
Unit based compensation
Extinguishment of preferred units
Net loss
Balances at December 31, 2021
Issuance of partnership units
Amortization of restricted
units award
Unit based compensation
Extinguishment of preferred units
Net income
Balances at December 31, 2022
Preferred Units
Series B
Amounts
Series C
Amounts
$
37,766,531
—
$
36,461,955
—
Series D
Amounts
28,377,509
—
$
—
—
—
—
—
—
(805,000)
(765,160)
(618,750)
—
805,000
37,766,531
—
—
—
(2,345,747)
—
35,420,784
—
—
—
(1,076,698)
—
34,344,086
$
$
$
—
765,160
36,461,955
—
—
—
(3,987,195)
—
32,474,760
—
—
—
(902,982)
—
31,571,778
—
618,750
28,377,509
—
—
—
(827,677)
—
27,549,832
—
—
—
(44,931)
—
27,504,901
$
$
$
$
$
$
Units
4,364,610
—
—
—
—
—
—
4,364,610
—
—
—
(305,000)
—
4,059,610
—
—
—
(86,300)
—
3,973,310
General Partner
Limited Partner
Units
160,006
1,898
—
—
—
—
—
161,904
1,513
—
—
22,331
—
185,748
3,951
—
—
8,068
—
197,767
$
$
$
$
Amounts
315,959
4,761
728
(1,997)
—
(19,271)
(558,718)
(258,538)
4,448
728
(4,171)
73,124
(285,396)
(469,805)
7,987
728
(5,025)
20,495
339,598
(106,022)
Units
15,840,512
187,935
—
—
—
—
—
16,028,447
149,768
—
—
2,210,815
—
18,389,030
391,135
—
—
798,781
—
19,578,946
Amounts
2,636,363
471,352
$
Total
105,558,317
476,113
72,052
(197,678)
72,780
(199,675)
—
(2,188,910)
(2,068,890)
(55,313,097)
(54,399,898)
440,318
72,052
(412,911)
7,239,214
(28,254,244)
(75,315,469)
790,699
72,052
(374,663)
2,063,637
33,620,250
(39,143,494)
$
$
$
(2,088,161)
(53,682,905)
47,947,559
444,766
72,780
(417,082)
151,719
(28,539,640)
19,660,102
798,686
72,780
(379,688)
59,521
33,959,848
54,171,249
$
$
$
$
The accompanying notes are an integral part of these financial statements.
F - 13
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization
Impairment of investment in hotel properties, net
Amortization of deferred financing costs
Amortization of mortgage premium
Gain on involuntary conversion of assets
Unrealized (gain) loss on hedging activities
Loss on early extinguishment of debt
PPP loan forgiveness
Gain on sale of assets
Loss (gain) on disposal of assets
ESOP and unit - based compensation
Changes in assets and liabilities:
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 (used in) operating activities
Cash flows from investing activities:
Proceeds from sale of hotel properties
Improvements and additions to hotel properties
ESOP loan payments received
Proceeds from involuntary conversion
Proceeds from sale of assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from mortgage loans
Proceeds from secured notes
Proceeds from unsecured notes
Payments on mortgage loans
Payments on secured notes
Payments on unsecured notes
Payments of deferred financing costs
Dividends on common stock and distributions paid
Preferred dividends paid
Net cash (used in) provided by financing activities
Net increase/(decrease) in cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash at the beginning of the
period
Cash, cash equivalents and restricted cash at the end of the period
Supplemental disclosures:
Cash paid during the period for interest
Cash paid (received) during the period for income taxes
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in
accounts payable and accrued liabilities
F - 14
2022
2021
2020
$
33,959,848
$
(28,539,640)
$
(53,682,905)
18,650,336
1,293,092
(24,681)
(1,763,320)
(2,918,207)
5,944,881
(4,720,278)
(30,053,977)
633,803
491,778
(1,439,886)
(1,597,055)
—
(12,984,231)
680,071
—
6,152,174
52,403,981
(7,964,630)
506,646
2,180,489
35,327
47,161,813
7,777,475
—
—
(38,507,799)
(20,000,000)
(461,181)
(359,389)
—
—
(51,550,894)
19,909,226
12,201,461
1,029,306
(24,681)
(588,586)
(1,493,841)
—
—
—
(158,286)
100,465
(2,640,487)
719,031
—
1,630,584
(411,131)
—
1,733,421
—
(3,176,841)
589,082
588,586
200,500
(1,798,673)
—
—
—
(6,528,078)
—
(3,109,166)
(19,513)
—
—
(9,656,757)
19,896,772
-
572,696
(24,681)
(179,856)
986,200
—
—
—
136,063
349,217
3,032,703
(2,197,874)
5,412,084
15,152,165
(821,265)
(300,153)
(11,668,834)
—
(4,015,514)
463,376
179,856
56,677
(3,315,605)
—
20,000,000
10,719,100
(2,609,861)
—
—
(1,560,680)
(2,058,900)
(2,188,910)
22,300,749
1,763,093
(9,722,009)
7,316,310
25,578,537
27,341,630
23,157,605
26,000
56,914
$
$
$
$
35,300,546
25,578,537
19,630,506
20,200
353,028
$
$
$
$
27,984,236
35,300,546
9,541,533
(21,078)
542,102
$
$
$
$
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash at the end of the period
$
$
2022
21,918,680
5,422,950
27,341,630
$
$
2021
13,166,883
12,411,654
25,578,537
$
$
2020
25,297,771
10,002,775
35,300,546
The accompanying notes are an integral part of these financial statements.
F - 15
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust (“REIT”) that
was incorporated in Maryland on August 20, 2004. The Company historically has 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, as of
December 31, 2022, consisted of investments in ten hotel properties, comprising 2,786 rooms and two hotel commercial condominium
units and their associated rental programs. Seven of our hotels operated under the Hilton, DoubleTree and Hyatt brands, and three are
independent hotels.
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. Substantially all of the Company’s assets are held by, and all of its operations are
conducted through, Sotherly Hotels LP, (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 substantially 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,
2022, was approximately 95.8% owned by the Company, and its subsidiaries, lease its hotels to direct and indirect subsidiaries of MHI
Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries, (collectively, “MHI TRS Entities”), each of
which is a wholly-owned subsidiary of the Operating Partnership. For the years ended December 31, 2022, 2021, and 2020, the MHI
TRS Entities engaged eligible independent hotel management companies, MHI Hotels Services, LLC, which did business as
Chesapeake Hospitality (“Chesapeake Hospitality”); Highgate Hotels, L.P.; and Our Town Hospitality, LLC (“Our Town”) to operate
the hotels under management contracts. MHI Hospitality TRS Holding, Inc. is treated as a taxable REIT subsidiary (“TRS”) for
federal income tax purposes. As of December 31, 2022, Our Town was the manager of each of our ten wholly-owned hotels and our
two condominium hotel rental programs.
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
Significant transactions occurring during the current and two prior fiscal years include the following:
Between April 16 and May 6, 2020, the Company received proceeds of three separate PPP Loans administered by the U.S.
Small Business Administration pursuant to the CARES Act totaling approximately $10.7 million. Each PPP Loan had an initial term
of two years with the ability to extend the loan to five years, if not completely forgiven and carries an interest rate of 1.00%. Equal
payments of principal and interest were to begin no later than 10 months following origination of the loan and are amortized over the
remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs,
mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to,
among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.
On December 9, 2022, the Company was notified it had received forgiveness for one of its PPP Loans in the principal amount of
approximately $4.6 million. On February 3, 2023, the Company was notified it has received forgiveness for another PPP Loan in the
principal amount of approximately $0.3 million.
On December 31, 2020, we entered into the following agreements with KWHP SOHO, LLC ("KW") and MIG SOHO, LLC
(together, the "Investors"): (i) a Note Purchase Agreement with the Investors; (ii) the Secured Notes; (iii) a Pledge and Security
Agreement with KW; (iv) a Board Observer Agreement with KW; and (v) other ancillary agreements. These agreements constituted a
transaction whereby the Investors purchased $20.0 million in Secured Notes (the "Secured Notes") from the Operating Partnership.
On June 29, 2022, the Company satisfied and paid in full the Secured Notes.
F - 16
On November 30, 2021, Raleigh Hotel Associates, LLC, a Delaware limited liability company and an affiliate of the Company,
entered into a real estate sale agreement to sell the DoubleTree by Hilton Raleigh-Brownstone University hotel located in Raleigh,
North Carolina to CS Acquisition Vehicle, LLC, a Delaware limited liability company, for a purchase price of $42.0 million.
On December 13, 2021, Louisville Hotel Associates, LLC, a Delaware limited liability company and an affiliate of the
Company, entered into a purchase and sale agreement to sell the Sheraton Louisville Riverside hotel located in Jeffersonville, Indiana
to Riverside Hotel, LLC, an Indiana limited liability company, for a purchase price of $11.5 million, including the assumption by the
buyer of the mortgage loan on the hotel. On February 10, 2022, the Company closed the sale of the Sheraton Louisville Riverside
hotel. There were no net proceeds from the sale.
On June 10, 2022, we closed the sale of the DoubleTree by Hilton Raleigh-Brownstone University hotel. The Company used
approximately $18.6 million of the net cash proceeds from the sale of the hotel to repay the existing mortgage on the property and
approximately $19.8 million of the net cash proceeds to repay a portion of the Secured Notes with the Investors as required by the
terms of the Secured Notes. The Company used the remaining net cash proceeds general corporate purposes. The Investors received
approximately $19.8 million of the proceeds from the sale of the hotel, of which approximately $13.3 million was applied toward
principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million
was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest
reserves in the amount of approximately $1.6 million, of which approximately $1.1 million was applied toward principal and
approximately $0.5 million was applied toward the exit fee.
On June 28, 2022, affiliates of the Company entered into amended loan documents to modify the existing mortgage loan on the
Hotel Alba Tampa with the existing lender, Fifth Third Bank. Pursuant to the amended loan documents, the amended mortgage loan:
(i) has an increased principal balance of $25.0 million; (ii) includes an extended maturity date of June 30, 2025, which may be further
extended for two additional periods of one year each, subject to certain conditions; (iii) bears a floating interest rate of SOFR plus
2.75%, subject to a floor rate of 2.75%; (iv) amortizes on a 25-year schedule and requires payments of monthly interest plus $40,600
monthly amortization payments; and (v) is guaranteed by the Operating Partnership up to $12.5 million, with the guaranty reducing to
$6.25 million upon the successful achievement of certain performance milestones.
On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2
million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy
and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which
approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the
Secured Notes, and approximately $0.02 million was applied toward accrued interest. Concurrent with the cancellation of the Secured
Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and
Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.
From June 21, 2021 through August 24, 2022, the Company entered into various privately-negotiated share exchange
agreements with holders of its Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, in reliance on Section
3(a)(9) of the Securities Act. Pursuant to those share exchange agreements, the Company has exchanged an aggregate of 3,0393,995
shares of its common stock for 145,900 shares of the Series B Preferred Stock, 208,500 shares of the Series C Preferred Stock, and
36,900 shares of the Series D Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those
shares of Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock. The common stock was issued in reliance
on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer
with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly
for soliciting such an exchange.
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all the accounts of
Sotherly Hotels Inc., the Operating Partnership and the MHI TRS Entities. All significant inter-company balances and transactions
have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.
The consolidated financial statements of the Operating Partnership presented herein include all the accounts of Sotherly Hotels
LP and the MHI TRS Entities. 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.
F - 17
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its
investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those
assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating
Partnership and its subsidiaries.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded
at fair value on the acquisition date 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.
The Company assesses the carrying values of its investments in hotel properties 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.
The COVID-19 pandemic has had, an adverse impact on the lodging and hospitality industries, which the Company considered
to be a triggering event for each of its hotels during its impairment testing for the year ended December 31, 2021. The Company
assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon
significant assumptions regarding its ability to maintain ownership of the property, growth rates, occupancy, room rates, economic
trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash
flows from the eventual disposition of the hotel. The Company also projected cash flows assuming an eventual disposition of the
hotel based upon property-specific capitalization rates. As of December 31, 2021, the Company determined the Sheraton Louisville
Riverside, to be impaired based on the proceeds received in a subsequent sale, as well as The Whitehall in Houston, Texas due to the
lack of certainty regarding our ability to extend or refinance the mortgage which was set to mature in early 2023. The Company
recognized an impairment loss of approximately $12.2 million during the period ended December 31, 2021. The impairment loss was
determined using level 2 inputs under authoritative guidance for fair value measurements. No impairment loss was recognized for the
year ended December 31, 2022.
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. When
the carrying value of the asset is greater than the fair value, the Company reduces the carrying value to fair value less selling costs and
recognizes an impairment loss.
Cash and Cash Equivalents – The Company consider all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Concentration of Credit Risk – The Company holds 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
monitors, on a regular basis, the financial condition of the financial institutions along with the balances there 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, banqueting and credit card 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.
F - 18
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or net realizable value, 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, 2022 and 2021 were approximately $241,038 and $294,390, respectively.
Amortization expense for the years ended December 31, 2022, 2021, and 2020 was $48,852, $59,482 and $59,482, respectively.
Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in
issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering
costs are recorded at cost and consist of offering fees and other costs incurred in advance of 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.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated 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 currently use interest rate caps and an interest rate swap which act as cash flow hedges and are not
designated as hedges. We value our interest-rate caps and 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 measurement date
(exit price). 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
assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate swap are the
only assets or liabilities measured at fair value on a recurring basis, there were two non-recurring or infrequent asset valuations and no
non-recurring liabilities for fair value measurements as of December 31, 2022 and 2021, respectively):
Level 1
Level 2
Level 3
December 31, 2021
Interest rate cap (1)
Interest rate swap (2)
Mortgage loans (3)
Investment in hotel properties, net(4)
Investment in hotel properties held for sale, net(5)
December 31, 2022
Interest rate swaps (2)
Mortgage loans (3)
(1)
Interest rate cap, which caps the 1-month LIBOR rate at 3.25%.
F - 19
$
$
$
$
$
$
$
47
$
— $
— $
(1,537,319) $
— $ (355,496,444) $
$
— $
$
— $
23,000,000
11,063,952
— $
$
— $ (306,300,855) $
1,308,503
—
—
—
—
—
—
—
(2)
Interest rate swaps, one of which swaps the Loan Rate for a fixed interest rate of 5.237% for the DoubleTree by Hilton
Philadelphia Airport mortgage and is valued at December 31, 2022 and December 31, 2021, and the other which swaps the Loan
Rate for a fixed rate of 5.576% for the Hotel Alba Tampa mortgage and is valued only at December 31, 2022. Notional amounts
of the swaps approximate the declining balance of the loan.
(3) Mortgage loans had a carrying value on our Consolidated Balance Sheets of $320,482,103 and $351,170,883, as of December
(4)
(5)
31, 2022 and December 31, 2021, respectively.
Investment in hotel properties, net, a non-recurring asset, is reflected at appraised value as of December 31, 2021.
Investment in hotel properties held for sale, net, a non-recurring asset, is reflected at net realizable value as of December 31,
2021.
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 – Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and
beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and beverage and
other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue
is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the
customer. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits
(or contract liabilities) shown on our consolidated balance sheets and recognized once the performance obligations are satisfied.
Certain ancillary services are provided by third parties and the Company assessed whether it is the principal or agent in these
arrangements. If the Company is the agent, revenue is recognized based upon the gross commission earned from the third party. If
the Company is the principal, the Company recognizes based upon the gross sales price. With respect to the hotel condominium rental
programs the Company operates at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, the Company has
determined that it is an agent and recognizes revenue based on its share of revenue earned under the rental agency agreement.
Certain of the Company’s hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease
revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company’s
consolidated statements of operations.
The Company collects revenue, sales taxes, use taxes, occupancy taxes and similar taxes at its hotels which are reflected in
revenue on a net basis on the consolidated statements of operations.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant
space within the hotel, portions of our parking facilities, 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 consolidated statement of operations
pursuant to the terms of each lease. Lease revenue was approximately $1.3 million, $1.7 million and $1.4 million, for the years ended
December 31, 2022, 2021, and 2020, respectively.
A schedule of minimum future lease payments receivable for the following twelve-month periods is as follows:
December 31, 2023
December 31, 2024
December 31, 2025
December 31, 2026
December 31, 2027
December 31, 2028 and thereafter
Total
1,370,292
1,367,550
1,339,747
1,330,479
1,327,226
19,575,361
26,310,655
Lessee Accounting – The Company’s operating lease agreements primarily include the ground lease on the Hyatt Centric
Arlington, the parking garage lease in Hollywood, Florida at the Hyde Beach House Resort & Residences, and the corporate office
lease. The assets are classified as “right of use assets”, which represent our right to use an underlying asset and the operating lease
liability, which represent our obligation to make lease payments arising from the lease, is classified within “accounts payable and
F - 20
other accrued liabilities”. Right of use assets and operating lease liabilities are recognized at the commencement date based on the
present value of lease payments over the lease term. Variable lease payments are excluded from the right of use assets and operating
lease liabilities are recognized in the period in which the obligation for those payments is incurred. As our leases do not provide an
implicit financing rate, we use our incremental borrowing cost based on information available at the commencement date using our
actual borrowing rates commensurate with the lease terms and fully levered borrowing to determine present value. Extension options
on our leases are included in our minimum lease terms when they are reasonably certain to be exercised.
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. The MHI TRS Entities which
leases our hotels from subsidiaries of the Operating Partnership, are 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. A valuation allowance is required for deferred tax assets if, based on all available evidence, it
is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate
sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of
realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable
income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are
expected to be realized using these criteria. As of December 31, 2022, we determined that it is more-likely-than-not that we will not
be able to fully utilize our deferred tax assets for future tax consequences; therefore, a 100% valuation allowance is required.
As of December 31, 2022, 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, 2022, the tax years that remain subject to examination by the major
tax jurisdictions to which the Company is subject generally include 2011 through 2021. In addition, as of December 31, 2022, the tax
years that remain subject to examination by the major tax jurisdictions to which the MHI TRS Entities are subject, because of open
NOL carryforwards, generally include 2014 through 2021.
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 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s
stockholders approved in April 2013, permitted the grant of stock options, restricted stock and performance share compensation
awards to its employees and directors for up to 750,000 shares of common stock. The Company believes that stock awards align the
interests of its employees with those of its stockholders.
Under the 2013 Plan, the Company made cumulative stock awards totaling 745,160 shares, of which 316,333 were originally
restricted. As of December 31, 2022, there were 45,000 restricted shares to certain executives, directors, and employees, and 700,160
non-restricted shares issued to certain executives, directors and employees. All awards have vested except for 45,000 shares issued to
certain executives, which will vest over the next 7 years. The remaining 4,840 shares have been deregistered.
Under the 2013 Plan, the Company was authorized to 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,
2022, 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.
The Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which the Company’s stockholders approved in April 2022,
permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees
and directors for up to 2,000,000 shares of common stock.
Under the 2022 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, 2022,
167,390 service-based stock awards have been granted.
Total stock-based compensation cost recognized under the 2013 Plan and 2022 Plan for the years ended December 31, 2022,
2021, and 2020 was $871,466, $517,546 and $548,894, respectively.
Additionally, the Company sponsors and maintains an Employee Stock Ownership Plan (“ESOP”) and related trust for the
benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned
F - 21
ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair
value of the Company’s ESOP shares during the periods in which they are committed to be released. For the years ended December
31, 2022, 2021, and 2020 the ESOP compensation cost was $140,703, $172,000 and $175,367, respectively. To the extent that the fair
value of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital.
Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from
the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s consolidated financial
statements.
Advertising – Advertising costs, including digital advertising, were approximately $2.2 million, $2.0 million and $1.4 million,
for the years ended December 31, 2022, 2021, and 2020, respectively and are expensed as incurred.
Business Interruption Proceeds – Insurance recoveries for business interruption were recognized during the years ended
December 31, 2022, 2021, and 2020, for $62,010, $200,000, and $85,517, respectively. The insurance proceeds were reflected in the
statement of operations in other operating departments revenues.
Involuntary Conversion of Assets – The Company record gains or losses on involuntary conversions of assets due to recovered
insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds
received. During the years ending December 31, 2022, 2021, and 2020, we recognized approximately $1.8 million, $0.6 million and
$0.2 million, respectively, for gain on involuntary conversion of assets, which is reflected in the consolidated statements of operations.
Comprehensive Income (Loss) – Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a
period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).
Segment Information – The Company has determined that our business is conducted in one reportable segment: hotel ownership.
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 June 2016, the FASB issued ASU 2016-13, Financial Instruments -Credit Losses(Topic
326), which replaced the existing "incurred loss" approach with an "expected loss" model for financial instruments measured at
amortized cost. For trade and other receivables, the forward looking "expected loss" model will generally result in the earlier
recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326,
Financial Instruments -Credit Losses, which clarified that operating lease receivables accounted for under ASC 842 are not in the
scope of ASU 2016-13. We do not expect adoption of this standard to have a material impact on the Company's consolidated financial
statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate
Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract
modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London
Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight
Financing Rate (“SOFR”). The update provides guidance in accounting for changes in contracts, hedging relationships, and other
transactions as a result of this reference rate reform. The option expedients and exceptions contained within this update, in general,
only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update will most
likely affect our financial reporting process relating to modifications of contracts with lenders and the hedging contracts associated
with each respective modified borrowing contract. In general, the provision of the update would benefit us by allowing modifications
of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and
not be considered debt extinguishment. As of December 31, 2022, we have not entered into any contract modification as it directly
relates to reference rate reform, with the exception of a modification to the mortgages on The Whitehall in Houston, Texas, which
changed the reference rate from LIBOR to the New York Prime Rate, and on Hotel Alba Tampa, Tapestry Collection in Tampa,
Florida, which changed the reference rate from LIBOR to SOFR. On March 14, 2023, the Company modified the floating-rate
mortgage on the DoubleTree by Hilton Philadelphia Airport to change the reference rate from 1-month LIBOR to SOFR. The
Company anticipates no additional loan modifications will be required.
3. Disposal of Assets
Sheraton Louisville Riverside and DoubleTree by Hilton Raleigh-Brownstone University. On February 10, 2022 and June 10,
2022, we closed on the sale of our hotel properties the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh-
Brownstone University, respectively. The results of operations for these two properties are included in our consolidated financial
F - 22
statements through the date of disposal. The following proforma financial information presents the results of operations of the
Company and the Operating Partnership for the years ending December 31, 2022 and 2021, respectively, as if the disposition of
properties, the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh-Brownstone University, had taken place on
January 1, 2021. The following proforma results have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations, had the transactions taken place on January 1, 2021:
Pro forma revenues
Pro forma operating expenses
Pro forma operating expense (income)
Pro forma net income (loss)
Pro forma income (loss) per basic share
Pro forma income (loss) per diluted share
Pro forma income (loss) per basic unit
Pro forma income (loss) per diluted unit
Basic common shares
Diluted common shares
Basic units
Diluted units
Twelve Months Ended
December 31, 2022
(unaudited)
Twelve Months Ended
December 31, 2021
(unaudited)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
162,852,282
143,126,315
19,725,967
7,090,465
0.40
0.40
0.37
0.37
17,802,772
17,802,772
19,266,320
19,266,320
118,839,373
121,773,659
(2,934,286)
(21,984,647)
(1.42)
(1.42)
(1.28)
(1.28)
15,531,684
15,531,684
17,186,789
17,186,789
4. Investment in Hotel Properties, Net and Investment in Hotel Properties Held for Sale, Net
Investment in hotel properties, net as of December 31, 2022 and 2021 consisted of the following:
Land and land improvements
Buildings and improvements
Right of use assets
Furniture, fixtures and equipment
Less: accumulated depreciation and impairment
Investment in Hotel Properties, Net
December 31, 2022
December 31, 2021
$
$
60,934,859
412,717,919
5,199,845
51,292,107
530,144,730
(165,074,005)
365,070,725
$
$
60,395,168
407,310,530
5,711,607
50,505,902
523,923,207
(148,037,983)
375,885,224
Our review of possible impairment during the years ended December 31, 2022 and 2021, resulted in an impairment charge of
approximately $12.2 million, related to the Sheraton Louisville Riverside and The Whitehall in Houston, Texas during the year ended
December 31, 2021.
Investment in hotel properties held for sale, net as of December 31, 2022 and 2021 consisted of the following:
Land and land improvements
Buildings and improvements
Furniture, fixtures and equipment
Less: accumulated depreciation and impairment
Investment in Hotel Properties Held for Sale, Net
December 31, 2022
December 31, 2021
$
$
— $
—
—
—
—
— $
5,799,197
36,115,121
5,743,949
47,658,267
(24,787,780)
22,870,487
F - 23
5. Debt
Mortgage Loans, Net. As of December 31, 2022 and 2021, the Company had approximately $320.5 million and approximately
$351.2 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
Property
The DeSoto (1)
DoubleTree by Hilton Jacksonville
Riverfront (2)
DoubleTree by Hilton Laurel (3)
DoubleTree by Hilton Philadelphia Airport (4)
DoubleTree by Hilton Raleigh-
Brownstone University (5)
DoubleTree Resort by Hilton Hollywood
Beach (6)
Georgian Terrace (7)
Hotel Alba Tampa, Tapestry Collection by Hilton (8)
Hotel Ballast Wilmington, Tapestry Collection by
Hilton (9)
Hyatt Centric Arlington (10)
Sheraton Louisville Riverside (11)
The Whitehall (12)
Total Mortgage Principal Balance
Deferred financing costs, net
Unamortized premium on loan
Total Mortgage Loans, Net
Balance Outstanding as of
December 31,
2022
31,219,022
$
December 31,
2021
32,148,819
$
Prepayment Maturity
Penalties
Yes
Date
7/1/2026
Amortization
Provisions
25 years
Interest
Rate
4.25%
32,416,570
7,412,107
39,413,672
33,051,316
8,175,215
40,734,077
—
18,300,000
52,724,475
40,492,622
24,756,400
31,699,775
47,534,606
—
14,226,067
321,895,316
(1,480,779)
67,566
320,482,103
$
$
54,253,963
41,484,732
17,383,397
32,604,948
48,990,136
10,947,366
14,551,671
352,625,640
(1,547,004)
92,247
351,170,883
$
$
Yes
None
None
Yes
(6)
(7)
None
Yes
Yes
Yes
None
7/11/2024
5/5/2023
10/31/2023
8/1/2022
10/1/2025
6/1/2025
6/30/2025
1/1/2027
10/1/2028
12/1/2026
2/26/2028
30 years
25 years
30 years LIBOR plus 2.27%
4.88%
5.25%
(5)
LIBOR plus 4.00%
30 years
30 years
(8)
4.913%
4.42%
SOFR plus 2.75%
25 years
30 years
25 years
25 years PRIME plus 1.25%
4.25%
5.25%
4.27%
(1)
(2)
(3)
(4)
(9)
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments
made within 120 days of the maturity date.
The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
The note is subject to an exit fee of 0.75% if prepaid on or after February 5, 2023. On July 15, 2021, we entered into a note modification agreement whereby the
maturity date was extended from August 5, 2021 to May 5, 2022. On April 28, 2022, we entered into an additional note modification agreement whereby the
maturity date was extended from May 5, 2022 to May 5, 2023.
The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237% through July 31, 2023.
Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated
with early termination of the swap agreement.
The DoubleTree by Hilton Raleigh-Brownstone University was sold on June 10, 2022.
(5)
(6) With limited exception, the note may not be prepaid prior to June 2025.
(7) With limited exception, the note may not be prepaid prior to February 2025.
(8)
The note bears a floating interest rate of SOFR plus 2.75% subject to a floor rate of 2.75%; with monthly principal payments of $40,600; the note provides that
the mortgage can be extended for two additional periods of one year each, subject to certain conditions. On July 11, 2022, we entered into a swap agreement to
fix the rate at 5.576%. The swap agreement reflects notional amounts approximate to the declining balance of the loan and we are responsible for any potential
termination fees associated with early termination of the swap agreement.
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments
made within 120 days of the maturity date.
(10) Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
(11) The Sheraton Louisville Riverside was sold on February 10, 2022.
(12) The note bears a floating interest rate of New York Prime Rate plus 1.25%, with a floor of 7.50%.
As of December 31, 2022, the Company failed to meet certain financial covenants under the mortgages secured by The
Whitehall and the DoubleTree by Hilton Philadelphia Airport. The Company has received waivers of the financial covenants from
each lender, through December 31, 2022. In 2023, the mortgages on the Whitehall, the DoubleTree by Hilton Laurel, and the
DoubleTree by Hilton Philadelphia Airport mature. We intend to either refinance the mortgages maturing in 2023 at the level of their
existing indebtedness or request extensions at existing terms.
Total future mortgage debt maturities, including with respect to any extensions of loan maturity, as of December 31, 2022 were
as follows:
December 31, 2023
December 31, 2024
December 31, 2025
December 31, 2026
December 31, 2027
December 31, 2028 and thereafter
Total future maturities
53,555,486
38,069,572
116,084,892
58,588,970
1,757,220
53,839,176
321,895,316
$
F - 24
PPP Loans. Between April 16 and May 6, 2020, the Operating Partnership and certain of its subsidiaries received proceeds of
three separate PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act totaling approximately
$10.7 million. Each PPP Loan had an initial term of two years with the ability to extend the loan to five years, if not forgiven and
carries an interest rate of 1.00%. Equal payments of principal and interest were to begin no later than 10 months following origination
of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP
Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains
customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of
provisions of the relevant promissory note.
Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan,
which is determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. On
December 9, 2022, the Company was notified it had received principal debt forgiveness in the amount of approximately $4.6 million.
As of December 31, 2022, the Company had two outstanding applications for forgiveness totaling approximately $0.6 million. No
assurance is provided that the Company will obtain forgiveness under any relevant PPP Loan in whole or in part. As of December 31,
2022 and 2021, the Company had principal balances outstanding which totaled approximately $2.5 million and $7.6 million,
respectively.
Secured Notes Financing. On December 31, 2020, we entered into a transaction whereby certain investors purchased $20.0
million in Secured Notes from the Operating Partnership.
On June 10, 2022, the Company used the proceeds from the sale of the Doubletree by Hilton Raleigh Brownstone-University
hotel to partially repay the Secured Notes. The Investors received approximately $19.8 million of the proceeds from the sale of the
hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee
owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the
Secured Notes allowed for the release of a portion of the interest reserves in the amount of approximately $1.6 million, of which
approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.
On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2
million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy
and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which
approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the
Secured Notes, and approximately $0.1 million was applied toward accrued interest. Concurrent with the cancellation of the Secured
Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and
Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.
6. Commitments and Contingencies
Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to The 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 fourth of five optional five-year
renewal periods expiring October 31, 2026. Rent expense for this operating lease for the years ended December 31, 2022, 2021, and
2020 was $83,932, $83,932 and $74,809, 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 land adjacent to the Hotel Alba Tampa, Tapestry Collection by Hilton for use as parking under a five-year renewable
agreement with the Florida Department of Transportation that commenced in July 2019 and expires in July 2024. The agreement
requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for each of the years
ended December 31, 2022, 2021, and 2020 was $2,608, $2,575 and $2,604, respectively.
We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-
year term beginning January 1, 2020. The initial annual rent under the agreement is $218,875, with the rent for each successive
annual period increasing by 3.0% over the prior annual period’s rent. The annual rent was offset by a tenant improvement allowance
of $200,000, that was applied against one-half of each monthly rent payment until the tenant improvement allowance was exhausted in
2021. Rent expense for the years ended December 31, 2022, 2021, and 2020 was each $223,607.
F - 25
We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to
make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain
thresholds, as defined in the ground lease agreement. The initial term of the ground lease expires in 2025. We have exercised our
option on the first of five renewal periods of 10 years each. Rent expense for the years ended December 31, 2022, 2021, and 2020,
was $501,042, $232,588 and $153,019, respectively.
We entered into a 20-year parking and cabana management agreement for the parking garage and poolside cabanas associated
with the Hyde Beach House Resort & Residences. The parking and cabana management agreement, which is treated for accounting
purposes as an embedded lease, requires us to make rental payments of $270,100 per year in base rent. The initial term of the parking
garage and cabana lease expires in 2039 and may be extended for four additional renewal periods of 5 years each. Rent expense for
the years ended December 31, 2022, 2021, and 2020, was $271,000, $271,000 and $85,166, respectively.
We also lease certain furniture and equipment under financing arrangements expiring by December 2027.
A schedule of minimum future lease payments for the following twelve-month periods is as follows:
December 31, 2023
December 31, 2024
December 31, 2025
December 31, 2026
December 31, 2027
December 31, 2028 and thereafter
Total
$
$
675,927
678,300
683,348
673,413
342,503
13,512,577
16,566,068
Employment Agreements— The Company has entered into various employment contracts with employees that could result in
obligations to us in the event of a change in control or termination without cause.
Management Agreements – As of December 31, 2022, all ten of our wholly-owned hotels, and our two condominium hotel
rental programs, operated under management agreements with Our Town (see Note 9). The management agreements expire on March
31, 2035 and may be extended for up to two additional periods of five years each, subject to the approval of both parties. 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, 2022, 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 3.0% and 5.0% of room
revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to
between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently expire between October 2024 and
March 2038. 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 Hotel Ballast, The DeSoto, the
DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach, the Hyatt Centric Arlington and
the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required
by several of our 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 Hotel Ballast, The DeSoto, the DoubleTree by Hilton
Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0%
of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.
ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted
by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan
covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from
the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may
borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the
aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that
limit in the future, until December 29, 2036. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased
682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
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 these financial statements, all significant claims made during the same period. We
F - 26
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 adverse impact on our financial condition or results of
operations or cash flows.
7. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. The following table sets forth
our Cumulative Redeemable Perpetual Preferred Stock by series:
Preferred Stock - Series
Series B Preferred Stock
Series C Preferred Stock
Series D Preferred Stock
Per
Annum
Rate
Liquidation
Preference
Number of Shares
Issued and Outstanding as of
December 31, 2022
December 31, 2021
Quarterly
Distributions
Per Share
8.000% $
7.875% $
8.250% $
25.00
25.00
25.00
1,464,100
1,346,110
1,163,100
1,510,000
1,384,610
1,165,000
$
$
$
0.500000
0.492188
0.515625
The Company is required to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the
$25.00 liquidation preference per share. Holders of the Company’s preferred 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 preferred stock is
not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates. In
March 2020 the Company deferred the record date for the dividends on the Company’s Series B Preferred Stock, Series C Preferred
Stock, and Series D Preferred Stock that were to be paid April 15, 2020. As of December 31, 2022, there are cumulative undeclared
preferred dividends, of approximately $21.9 million.
Preferred Units – The Company is the holder of the Operating Partnership’s preferred partnership units and is entitled to receive
distributions when authorized by the general partner of the Operating Partnership out of assets legally available for the payment of
distributions. The following table sets forth our Cumulative Redeemable Perpetual Preferred Units by series:
Preferred Units - Series
Series B Preferred Units
Series C Preferred Units
Series D Preferred Units
Per
Annum
Rate
Liquidation
Preference
Number of Units
Issued and Outstanding as of
December 31, 2022
December 31, 2021
Quarterly
Distributions
Per Unit
8.000% $
7.875% $
8.250% $
25.00
25.00
25.00
1,464,100
1,346,110
1,163,100
1,510,000
1,384,610
1,165,000
$
$
$
0.500000
0.492188
0.515625
The Company pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00
liquidation preference per unit. The Company, which is the holder of the Operating Partnership’s preferred units is entitled to receive
distributions when authorized by the Operating Partnership’s general partner out of assets legally available for the payment of
distributions. The preferred units are not redeemable by the holder, have no maturity date and are not convertible into any other
security of the Operating Partnership or its affiliates. In March 2020 the Company deferred the record dates for the dividends on the
Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15,
2020. As of December 31, 2022, there are cumulative undeclared preferred distributions to the Company from the Operating
Partnership of approximately $21.9 million.
The following table presents the quarterly distributions by the Operating Partnership declared and payable per
Series B Preferred Unit and dividends by the Company declared and payable per share of Series B Preferred Stock, for the years ended
December 31, 2022, 2021, and 2020:
Quarter Ended
March 31,
June 30,
September 30,
December 31,
2020
2021
2022
$
$
0.500000
-
-
-
$
-
-
-
-
-
-
-
-
F - 27
The following table presents the quarterly distributions by the Operating Partnership declared and payable per Series C
Preferred Unit and dividends by the Company declared and payable per share of Series C Preferred Stock, for the years ended
December 31, 2022, 2021, and 2020:
Quarter Ended
March 31,
June 30,
September 30,
December 31,
2020
2021
2022
$
$
0.492188
-
-
-
$
-
-
-
-
-
-
-
-
The following table presents the quarterly distributions by the Operating Partnership declared and payable per Series D
Preferred Unit and dividends by the Company declared and payable per share of Series D Preferred Stock, for the years ended
December 31, 2022, 2021, and 2020:
Quarter Ended
March 31,
June 30,
September 30,
December 31,
2020
2021
2022
$
$
0.515625
-
-
-
$
-
-
-
-
-
-
-
-
8. Common Stock and Units
Common Stock – The Company is authorized to issue up to 69,000,000 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, 2022, 2021, and 2020 of the Company’s common
stock:
On November 1, 2022, one holder of units in the Operating Partnership converted 217,845 units for an equivalent number of
shares in the Company’s common stock.
On August 23, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 13,000 shares of the Company's Series B Preferred Stock and 3,200 shares of the
Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those
preferred shares, for 140,130 shares of the Company's common stock. We closed the transaction and issued the common stock on
August 24, 2022.
On August 18, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 11,000 shares of the Company's Series B Preferred Stock, 7,100 shares of the Company's
Series C Preferred Stock, and 1,900 shares of the Company's Series D Preferred Stock, together with all of the holder’s rights to
receive accrued and unpaid dividends on those preferred shares, for 178,800 shares of the Company's common stock. We closed the
transaction and issued the common stock on August 18, 2022.
On July 21, 2022, the Company was issued 167,390 units in the Operating Partnership and awarded an equivalent number of
shares of unrestricted stock to its employees.
On July 1, 2022, one holder of units in the Operating Partnership converted 40,687 units for an equivalent number of shares in
the Company’s common stock.
On May 23, 2022, the Company was issued 37,428 units in the Operating Partnership and awarded an equivalent number of
shares of unrestricted stock to its employees.
F - 28
On May 19, 2022, one holder of units in the Operating Partnership converted 50,000 units for an equivalent number of shares in
the Company’s common stock.
On April 19, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 5,000 shares of the Company's Series B Preferred Stock and 10,600 shares of the
Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those
preferred shares, for 153,504 shares of the Company's common stock. We closed the transaction and issued the common stock on
April 19, 2022.
On April 11, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 4,000 shares of the Company's Series B Preferred Stock and 8,000 shares of the
Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those
preferred shares, for 116,640 shares of the Company's common stock. We closed the transaction and issued the common stock on
April 12, 2022.
On March 31, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 5,900 shares of the Company’s Series B Preferred Stock and 6,600 shares of the
Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares,
for 120,875 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 31, 2022.
On March 24, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 7,000 shares of the Company’s Series B Preferred Stock and 3,000 shares of the
Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares,
for 96,900 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 25, 2022.
On January 21, 2022, the Company was issued 15,000 units in the Operating Partnership and awarded an equivalent number of
shares of restricted stock to its independent directors.
On January 21, 2022 and February 15, 2022, the Company was issued a total of 175,268 units in the Operating Partnership and
awarded an equivalent number of shares of unrestricted stock to its employees.
On December 16, 2021, one holder of units in the Operating Partnership redeemed 32,681 units for an equivalent number of
shares in the Company’s common stock.
On December 9, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 75,000 shares of the Company’s Series C Preferred Stock, together with all of the rights
to receive accrued and unpaid dividends on those preferred shares, for 620,919 shares of the Company’s common stock. We closed the
transaction and issued the common stock on December 9, 2021.
On December 3, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 10,000 shares of the Company’s Series C Preferred Stock, together with all of the rights
to receive accrued and unpaid dividends on those preferred shares, for 69,500 shares of the Company’s common stock. We closed the
transaction and issued the common stock on December 9, 2021.
On June 21, 2021, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange
agreement, the Company agreed to exchange 100,000 shares of the Company’s Series B Preferred Stock, 85,000 shares of the
Company’s Series C Preferred Stock, and 35,000 shares of the Company’s Series D Preferred Stock, together with all of the rights to
receive accrued and unpaid dividends on those preferred shares, for 1,542,727 shares of the Company’s common stock. We closed the
transaction and issued the common stock on June 22, 2021.
On February 4, 2021, one holder of units in the Operating Partnership redeemed 100 units for an equivalent number of shares in
the Company’s common stock.
On February 4, 2021, the Company was issued 136,281 units in the Operating Partnership and awarded shares of unrestricted
stock to its employees.
On February 4, 2021, the Company was issued 15,000 units in the Operating Partnership and awarded shares of restricted stock
to its independent directors.
F - 29
On December 17, 2020, The Company issued 127,583 units in the Operating Partnership and awarded shares of restricted stock
to its independent directors and employees.
On December 1, 2020, one holder of units in the Operating Partnership redeemed 15,000 units for an equivalent number of
shares in the Company’s common stock.
On May 1, 2020, one holder of units in the Operating Partnership redeemed 57,687 units for an equivalent number of shares in
the Company’s common stock.
On February 23, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded 15,000 shares of
restricted stock and 2,250 shares of unrestricted stock to its independent directors.
On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of
shares in the Company’s common stock.
On January 1, 2020, the Company was issued 45,000 units in the Operating Partnership and awarded 45,000 shares of restricted
stock to two of its employees.
As of December 31, 2022 and 2021, the Company had 18,951,525 and 17,441,058 shares of common stock outstanding,
respectively.
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.
Since January 1, 2020, there have been no issuances or redemptions, of units in the Operating Partnership other than the
issuances of units in the Operating Partnership to the Company described above.
As of December 31, 2022 and 2021, the total number of Operating Partnership units outstanding was 19,776,713 and
18,574,778, respectively.
As of December 31, 2022 and 2021, the total number of outstanding units in the Operating Partnership not owned by the
Company was 825,188 and 1,133,720, respectively, with a fair market value of approximately $1.5 million and approximately $2.4
million, respectively, based on the price per share of the common stock on such respective dates.
Common Stock Dividends and Unit Distributions – The following table presents the quarterly stock dividends and unit
distributions by us declared and payable per common stock/unit for the years ended December 31, 2022, 2021, and 2020:
Quarter Ended
March 31,
June 30,
September 30,
December 31,
2020
2021
2022
$
$
0.130
-
-
-
$
-
-
-
-
-
-
-
-
As of December 31, 2022, there were unpaid common dividends and distributions to holders of record as of March 13, 2020
in the amount of $2,088,160.
9. Related Party Transactions
Our Town Hospitality. Our Town is currently the management company for each of our ten wholly-owned hotels, as well as the
manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. As of December
31, 2022, an affiliate of Andrew M. Sims, our Chairman, an affiliate of David R. Folsom, our President and Chief Executive Officer,
and Andrew M. Sims Jr., our Vice President - Operations & Investor Relations, beneficially owned approximately 63.0%, 7.0%, and
F - 30
15.0%, respectively, of the total outstanding ownership interests of Our Town. Mr. Sims, Mr. Folsom, and Mr. Sims Jr. serve as
directors of Our Town. The following is a summary of the transactions between Our Town and us:
Accounts Receivable – At December 31, 2022 and 2021, we were due approximately $0.3 million and $0.2 million,
respectively, from Our Town Hospitality.
Accounts Payable – At December 31, 2022 and 2021, we owed Our Town approximately $1.3 million and $1.0 million,
respectively.
Management Agreements – On September 6, 2019, we entered into a master agreement with Our Town related to the
management of certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On
December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the
management of our hotels. The hotel management agreements for each of our ten wholly-owned hotels and the two rental
programs are each referred to as an “OTH Hotel Management Agreement” and, together, the “OTH Hotel Management
Agreements”.
The Company agreed to provide Our Town with initial working capital of up to $1.0 million as an advance on the
management fees that we will owe to Our Town under the OTH Hotel Management Agreements. The advanced funds were to
be offset against future management fees otherwise payable to Our Town by means of a 25% reduction in such fees each month
during 2020.
In addition, the OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel
Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year
beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2035 but shall be extended beyond
2035 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for
each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Our Town 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.
For the years ended December 31, 2022 and 2021, the base management fees earned by Our Town under the contract were
approximately $4.1 million and $3.4 million, respectively, and the incentive management fees earned by Our Town were
approximately $0.3 million and $0.3 million, respectively. We also paid Our Town approximately $0.3 million in termination
fees in 2022 triggered by the sale of the Sheraton Louisville Riverside and DoubleTree by Hilton Raleigh-Brownstone
University.
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town
subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5-year renewal subject to approval by
Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third-party owner of
the property. For the years ended December 31, 2022 and 2021, the Company received rent income from Our Town of
$159,734 and $144,452, respectively.
Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020,
pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit. The original agreement allowed
Our Town to borrow up to $500,000. Our Town was allowed to draw against the line of credit from time to time prior to
January 1, 2021. The credit agreement was amended by the parties on June 4, 2021 such that (i) the maximum amount of credit
available is capped at $894,900; (ii) the total amount of advances, as of June 4, 2021, was agreed to be $894,900; (iii) no
additional advances are permitted; (iv) principal payments are required to be made by the borrower in the amount of $100,000
on each of December 31, 2021 through 2025; (v) the maturity date was extended to December 31, 2026; and (vi) the aggregate
unpaid principal amount and another other obligations are required to be paid at maturity. In addition, an affiliate of Mr. Sims
entered into a conditional financing commitment with Our Town to provide funding to permit repayment of the loan in the event
the principal balance of the loan made to Our Town under the credit agreement has not been repaid prior to maturity and
Sotherly declines to extend the maturity date. Interest accrued on the outstanding balance at 3.5% per annum and was payable
quarterly in arrears. In the event of a default under the credit agreement, the Company had the right to offset any outstanding
unpaid balance against amounts it owed to Our Town under the OTH Hotel Management Agreements.
On June 4, 2021, the OTH Master Agreement and the related credit agreement were amended to provide for an increase in
the balance outstanding under the credit agreement of $299,900 in satisfaction for an equivalent portion of unrepaid
management fee advances and to provide for a guaranteed minimum incentive management fee of $250,000 for calendar year
2021 in satisfaction of the remainder of unrepaid management fee advances.
F - 31
On December 20, 2021, the Company received full payment on the credit agreement and was no longer available for use
by Our Town.
Employee Medical Benefits – We purchase employee medical benefits through Our Town (or its affiliate) for those
employees that are employed by Our Town that work exclusively for our properties, starting January 1, 2020. For the years
ended December 31, 2022 and 2021, the employer portion of the plan covering those employees that work exclusively at our
properties under our management agreements with Our Town was approximately $3.2 million and $2.7 million, respectively.
Chesapeake Hospitality. Chesapeake Hospitality was a company owned and controlled by individuals including Kim E. Sims
and Christopher L. Sims, each a former director of Sotherly and a sibling of our Chairman, Andrew M. Sims. Prior to November
2019, Andrew M. Sims, owned approximately 19.3% of the total outstanding ownership interests of Chesapeake Hospitality, all of
which have since been sold. The following is a summary of the transactions between Chesapeake Hospitality and us:
Management Agreements – Chesapeake Hospitality was the management company for our DoubleTree Resort by Hilton
Hollywood Beach hotel, the Hyde Resort & Residences, and the Hyde Beach House Resort & Residences until April 1, 2020.
Effective April 1, 2020, Chesapeake no longer serves as manager for any of our properties and management of the remaining
properties that had been managed by Chesapeake was transitioned to Our Town. Upon termination of the last remaining
individual hotel management agreements with Chesapeake, the Chesapeake master agreement automatically terminated in
accordance with its terms.
Prior to January 1, 2020, Chesapeake Hospitality was the manager for each of our hotels that we wholly-owned, with the
exception of the Hyatt Centric Arlington, under various hotel management agreements. On January 1, 2020, the management
agreements for ten of our wholly-owned hotels expired. Those hotels are now managed by Our Town as described above. In
connection with the termination of those ten Chesapeake management agreements, we paid approximately $0.2 million in
termination fees.
Base management fees earned by Chesapeake Hospitality totaled $0, $0 and $241,332 for the years ended December 31,
2022, 2021, and 2020, respectively. In addition, incentive management fees of $0, $0 and $(40,375) were expensed for the years
ended December 31, 2022, 2021, and 2020, respectively.
Other Related Parties – The Company employs Andrew M. Sims, Jr. the son of our Chairman, who currently serves as Vice
President – Operations & Investor Relations, and Robert E. Kirkland IV, the son-in-law of our Chairman, who currently serves as
General Counsel, as employees. Prior to February 1, 2022, the Company employed Ashley S. Kirkland, daughter of our Chairman, as
Corporate Counsel and Compliance Officer. Compensation for these three employees, including benefits, for the years ended
December 31, 2022, 2021, and 2020 totaled $605,163, $462,809 and $464,218, respectively.
On July 1, 2022, a partnership controlled by a sibling of our Chairman converted 40,687 partnership units for an equivalent
number of shares in the Company’s common stock, pursuant to the terms of the partnership agreement.
On May 19, 2022, a trust in which our Chairman has a potential beneficial interest converted 50,000 partnership units for an
equivalent number of shares in the Company’s common stock, pursuant to the terms of the partnership agreement.
On December 16, 2021, a trust controlled in part by our Chairman converted 32,681 partnership units for an equivalent number
of shares of the Company’s common stock, pursuant to the terms of the partnership agreement.
On May 1, 2020, a partnership controlled by a sibling of our Chairman converted 57,867 partnership units, for an equivalent
number of shares of the Company’s common stock, pursuant to the terms of the partnership agreement.
On January 1, 2020, a partnership controlled by a sibling of our Chairman converted 410,000 partnership units for an equivalent
number of shares of the Company’s common stock, pursuant to the terms of the partnership agreement.
10. Retirement Plans
401(k) Plan - The Company maintains a 401(k) plan for qualified employees. Prior to May 16, 2020, the plan was subject to
“safe harbor” provisions requiring that we match 100.0% of the deferral equal to 3.0% of eligible employee compensation and 50.0%
of the deferral equal to the next 2.0% of eligible employee compensation. All employer matching funds vested immediately in
accordance with the “safe harbor” provisions. For the year ended December 31, 2021, the Company elected to make a discretionary
contribution of 3.0% of eligible employee compensation in order to comply with requirements associated with top-heavy plans. The
F - 32
Company's contributions to the plan for the years ended December 31, 2022, 2021, and 2020 were $75,631, $53,474 and $42,841,
respectively.
Employee Stock Ownership Plan - The Company adopted an ESOP effective January 1, 2016, which is a non-contributory
defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, with funds loaned to the ESOP
from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP
may maintain aggregate borrowings of up to $5.0 million to purchase shares of the Company’s common stock on the open market,
which serve as collateral for the loan. Coincident with the loan between the Company and the ESOP, the Operating Partnership
entered into a loan with the Company to facilitate borrowings between the Company and the ESOP.
Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common
stock of an aggregate cost of approximately $4.9 million. Shares purchased by the ESOP are held in a suspense account for allocation
among participants as contributions are made to the ESOP by the Company. The share allocations are accounted for at fair value on
the date of allocation.
A total of 301,646 and 247,606 shares with a fair value of $545,979 and $517,496 remained allocated or committed to be
released from the suspense account as of December 31, 2022 and 2021, respectively. The Company recognized compensation cost of
$140,703, $172,000 and $175,367 during the twelve months ended December 31, 2022, 2021 and 2020, respectively. The remaining
364,177 unallocated shares have an approximate fair value of $0.7 million, as of December 31, 2022. At December 31, 2022, the
ESOP held a total of 301,646 allocated shares, no committed-to-be-released shares and 364,177 unallocated shares. Dividends
received by the ESOP on allocated and unallocated shares are used to pay down the loan from the Company.
The share allocations are accounted for at fair value on the date of allocation as follows:
Allocated shares
Committed to be released shares
Total Allocated and Committed-to-be-Released
Unallocated shares
Total ESOP Shares
December 31, 2022
December 31, 2021
Number of Shares
301,646
—
301,646
$
$
364,177
Fair Value
545,979
—
545,979
659,160
Number of Shares
247,606
—
247,606
$
$
431,697
Fair Value
517,496
—
517,496
902,247
665,823
$
1,205,139
679,303
$
1,419,743
11. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
Sales and marketing
General and administrative
Repairs and maintenance
Utilities
Property taxes
Management fees, including incentive
Franchise fees
Insurance
Information and telecommunications
Other
Total indirect hotel operating expenses
2022
2021
2020
$
$
15,062,397
13,436,054
8,723,144
5,649,716
5,254,075
4,377,814
4,059,709
4,082,551
3,378,716
787,391
64,811,567
$
$
11,684,933
10,533,201
7,362,334
5,309,637
6,131,271
3,620,071
3,321,352
3,596,153
3,048,495
492,798
55,100,245
$
$
8,094,085
10,542,495
5,490,145
4,817,508
7,014,472
1,822,359
2,042,902
3,097,245
2,271,266
294,831
45,487,308
F - 33
12. Income Taxes
The components of the provision for income taxes for the years ended December 31, 2022, 2021, and 2020 are as follows:
Current:
Federal
State
Deferred:
Federal
State
Subtotals
Change in deferred tax valuation allowance
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Year Ended
December 31, 2020
$
$
— $
— $
522,355
522,355
3,025,518
695,708
3,721,226
(3,721,226)
—
522,355
$
27,392
27,392
(149,704)
(38,580)
(188,284)
188,284
—
27,392
$
(125,587)
(6,054)
(131,641)
(7,576,931)
(1,705,939)
(9,282,870)
14,694,954
5,412,084
5,280,443
A reconciliation of the statutory federal income tax provision (benefit) to the Company’s provision for income tax is as follows:
Statutory federal income tax provision (benefit)
Federal tax impact of REIT election
Statutory federal income tax provision (benefit) at TRS
Federal impact of PPP loan forgiveness
State income tax provision (benefit), net of federal provision
(benefit)
Change in valuation allowance
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Year Ended
December 31, 2020
$
$
7,241,263
(3,255,236)
3,986,027
(966,584)
1,224,138
(3,721,226)
522,355
$
$
(5,987,572)
5,851,466
(136,106)
—
(24,786)
188,284
27,392
$
$
(10,164,517)
2,530,482
(7,634,035)
—
(1,780,476)
14,694,954
5,280,443
Deferred income taxes are recognized for temporary differences between the financial reporting bases of asset and liabilities and
their respective tax bases and for operating losses and tax credit carryforwards based on enacted tax rates expected to be in effect
when such amounts are realized. However, deferred tax assets are recognized only to the extent that it is more likely than not that they
will be realizable based on consideration of available evidence, including future reversal of taxable temporary differences, projected
taxable income and tax planning strategies.
Due to the economic uncertainty the COVID-19 pandemic has produced upon tax-planning strategies and projections for future
taxable income over the periods in which the deferred tax assets are realizable, as of December 31, 2022, the Company believes is not
more likely than not that the Company will realize the benefits of these assets. Therefore, the Company has determined that a full
valuation allowance should be recorded against the deferred tax asset. The amount of the deferred tax assets considered unrealizable,
however, could change in the future based on revised estimates of future taxable income during the carryforward period.
The significant components of our deferred tax asset as of December 31, 2022 and 2021, are as follows:
Deferred tax asset:
Net operating loss carryforwards
Accrued compensation
Accrued expenses and other
Intangible assets
Less: Valuation allowance
Total
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Year Ended
December 31, 2020
$
$
$
10,744,121
425,575
—
10,092
(11,179,788)
— $
14,287,318
338,033
247,037
28,627
(14,901,015)
—
$
$
14,409,321
108,646
128,318
48,670
(14,694,955)
—
F - 34
13. Earnings (Loss) per Share and per Unit
Earnings (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 loss. The shares of the Series B Preferred Stock, Series C Preferred
Stock, and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company,
except upon the occurrence of a change of control and have been excluded from the diluted earnings per share calculation as there
would be no impact on the current controlling stockholders. The 364,177, 431,697 and 509,069 non-committed, unearned ESOP
shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average
number of common shares outstanding, for the years ended December 31, 2022, 2021 and 2020, respectively. The effect of allocated
and committed to be released shares during the years ended December 31, 2021 and 2020, have not been included in the weighted
average diluted earnings per share calculation, since there would be an anti-dilutive effect from the dilution by these shares, although
the amount of compensation for allocated shares is reflected in net loss available to common stockholders for basic computation.
The computation of the Company’s basic net earnings (loss) per share is presented below:
Numerator
Net income (loss)
Less: Net income allocated to participating share awards
Net (income) loss attributable to non-controlling interest
Declared and undeclared distributions to preferred stockholders
Gain on extinguishment of preferred stock
Net income (loss) attributable to common stockholders for EPS
computation
Denominator
Weighted average number common shares outstanding for basic EPS
computation
Effect of dilutive participating securities:
Unvested restricted shares
Weighted average number common and common equivalent shares
outstanding for diluted EPS computation
Basic net income (loss) per common share:
Undistributed income (loss)
Total basic
Diluted net income (loss) per common share:
Undistributed income (loss)
Allocation of participating share awards
Total diluted
(1) Anti-dilutive, therefore not included.
Twelve Months
Ended
December 31,
2022
Twelve Months
Ended
December 31,
2021
Twelve Months
Ended
December 31,
2020
$
33,959,848
(113,405)
(1,423,327)
(7,634,219)
64,518
$
(28,539,640)
$ (53,682,905)
— (1)
— (1)
2,318,166
(7,541,891)
361,476
4,489,341
(8,755,642)
—
$
24,853,415
$
(33,401,889)
$ (57,949,206)
17,802,772
15,531,684
14,312,049
— (1)
— (1)
— (1)
17,802,772
15,531,684
14,312,049
$
$
$
$
1.40
1.40
1.40
— (1)
1.40
$
$
$
$
(2.15)
(2.15)
(2.15)
— (1)
(2.15)
$
$
$
$
(4.05)
(4.05)
(4.05)
— (1)
(4.05)
Earnings (Loss) Per Unit. The Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units are not
convertible into or exchangeable for any other property or securities of the Operating Partnership, except upon the occurrence of a
change of control and have been excluded from the diluted earnings per unit calculation as there would be no impact on the current
F - 35
unitholders. The number of non-committed, unearned shares in the Company’s ESOP have no impact on the calculation of the loss
per unit in the Operating Partnership.
The computation of basic earnings (loss) per general and limited partnership unit in the Operating Partnership is presented
below:
Twelve Months
Ended
December 31,
2022
Twelve Months
Ended
December 31,
2021
Twelve Months
Ended
December 31,
2020
Numerator
Net income (loss)
Less: Net income allocated to participating unit awards
Declared and undeclared distributions to preferred unitholders
Gain on extinguishment of preferred units
Net income (loss) attributable to unitholders for EPU computation $
$
Denominator
Weighted average number of units outstanding for basic EPU computation
Effect of dilutive participating securities:
Unvested restricted units
Weighted average number of equivalent units outstanding for diluted EPU
computation
33,959,848
(113,405)
(7,634,219)
64,518
26,276,742
$
(28,539,640)
$ (53,682,905)
— (1)
— (1)
(7,541,891)
361,476
(35,720,055)
(8,755,642)
—
$ (62,438,547)
$
19,266,320
17,186,789
16,065,499
— (1)
— (1)
— (1)
19,266,320
17,186,789
16,065,499
Basic net income (loss) per unit:
Undistributed income (loss)
Total basic
Diluted net income (loss) per unit:
Undistributed income (loss)
Allocation of participating unit awards
Total diluted
(1) Anti-dilutive, therefore not included.
14. Quarterly Operating Results - Unaudited
$
$
$
$
1.36
1.36
1.36
— (1)
1.36
$
$
$
$
(2.08)
(2.08)
(2.08)
— (1)
(2.08)
$
$
$
$
(3.89)
(3.89)
(3.89)
— (1)
(3.89)
Total revenue
Total operating expenses
Net operating income
Net income (loss)
Net income (loss) attributable to common shareholders
Income (loss) per share attributable to common
shareholders– basic
Income (loss) per share attributable to common
shareholders– diluted
Net income (loss) available to operating partnership unitholders
Income (loss) per unit attributable to operating partnership
unitholders– basic
Income (loss) per unit attributable to operating partnership
unitholders– diluted
Quarters Ended 2022
March 31
$ 38,352,603
June 30
$ 47,170,259
September 30
$ 39,212,695
34,427,399
3,925,204
(810,944)
(2,507,765)
38,970,971
8,199,288
27,605,359
24,269,449
35,923,699
3,288,996
1,972,563
112,680
December 31
$ 41,341,747
36,200,422
5,141,325
5,192,870
3,092,456
$
$
$
$
(0.15) $
1.36
(0.15) $
(2,669,386)
1.36
25,799,389
(0.14) $
(0.14) $
1.33
1.33
$
$
$
$
0.01
0.01
61,586
0.00
0.00
$
$
$
$
0.18
0.18
3,198,559
0.17
0.17
F - 36
Total revenue
Total operating expenses
Net operating income (loss)
Net loss
Net loss attributable to common shareholders
Loss per share attributable to common shareholders– basic and
diluted
Net loss available to operating partnership unitholders
Loss per unit attributable to operating partnership unitholders–
basic and diluted
March 31
June 30
September 30
December 31
Quarters Ended 2021
$ 22,635,532 $ 34,383,309 $ 35,493,126 $ 35,075,957
46,978,440
(11,902,483)
(16,881,825)
(17,209,210)
32,706,524
2,786,602
(2,528,221)
(4,317,081)
31,240,158
3,143,151
(1,553,970)
(2,810,603)
24,717,808
(2,082,276)
(7,575,624)
(9,064,995)
$
$
(0.62) $
(0.19) $
(0.27) $
(9,764,534)
(2,990,241)
(4,607,249)
(1.05)
(18,358,031)
(0.60) $
(0.18) $
(0.26) $
(1.02)
F - 37
15. Subsequent Events
On February 3, 2023, the SBA notified the Company that it had received partial forgiveness for one of its PPP Loans in the
amount of $268,309.
On January 12, 2023, the Company issued 15,000 restricted shares of common stock to its independent directors and 64,278
vested shares of common stock to its independent directors and one officer.
On January 23, 2023, the Company issued 205,000 restricted shares of common stock to certain its officers and employees
pursuant to their employment agreements.
On January 27, 2023, the Company amended one of its two PPP Loan Agreement with Fifth Third Bank providing for monthly
level payments of $13,402 commencing March 6, 2023 and continuing until May 6, 2025 to extinguish the outstanding balance of the
loan.
On February 9, 2023, the Company amended another of its PPP Loan Agreements providing for 29 monthly level payments of
$56,809 commencing March 1, 2023 and continuing until July 1, 2025 to extinguish the outstanding balance of the loan.
On February 26, 2023, the Company entered into amended loan documents to modify the mortgage loan on The Whitehall hotel
located in Houston, TX with the lender, International Bank of Commerce. The amendment (i) extends the maturity date to February
26, 2028; (ii) maintains a floating interest rate of New York Prime Rate plus 1.25%; and (iii) subjects the interest rate to a floor rate of
7.50%. The mortgage loan continues to be guaranteed by the Operating Partnership.
On March 14, 2023, the Company entered into amended loan documents to modify the mortgage loan on the DoubleTree by
Hilton Philadelphia Airport with the lender, TD Bank, N.A. The amendment provides a waiver for non-compliance with financial
covenants for the periods ended September 30 and December 31, 2022, and modifies the reference rate replacing 1-month LIBOR
with SOFR.
On March 15, 2023, the Company paid a quarterly dividend (distribution) of $0.50 per Series B Preferred Stock (and unit) to the
preferred stockholders (and unitholders of the Operating Partnership) of record on February 28, 2023.
On March 15, 2023, the Company paid a quarterly dividend (distribution) of $0.492188 per Series C Preferred Stock (and unit)
to the preferred stockholders (and unitholders of the Operating Partnership) of record on February 28, 2023.
On March 15, 2023, the Company paid a quarterly dividend (distribution) of $0.515625 per Series D Preferred Stock (and unit)
to the preferred stockholders (and unitholders of the Operating Partnership) of record on February 28, 2023.
F - 38
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[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
BOARD OF DIRECTORS & EXECUTIVES
Andrew M. Sims
Chairman
Herschel J. Walker
Director
Gen. Anthony C. Zinni
(USMC Retired)
Director
David R. Folsom
Director
President / CEO
Edward S. Stein
Lead Director
Maria L. Caldwell
Director
G. Scott Gibson IV
Director
Anthony E. Domalski
Chief Financial Officer
Scott Kucinski
Chief Operating
Officer
OUR PROPERTIES
1. The Georgian Terrace, Atlanta, GA
2. The Whitehall, Houston, TX
3. The DeSoto, Savannah, GA
4. Hyde Resort & Residences, Hollywood, FL
5. Hotel Ballast, Wilmington, NC
6. Hotel Alba, Tampa, FL
7. DoubleTree Jacksonville Riverfront, Jacksonville, FL
8. DoubleTree Resort Hollywood Beach, Hollywood, FL
9. Hyatt Centric Arlington, Arlington, VA
10. DoubleTree Laurel, Laurel, MD
11. DoubleTree Philadelphia Airport, Philadelphia, PA
12. Hyde Beach House, Hollywood, FL
2
11
10
9
5
8
4
12
1
3
7
6
Corporate Headquarters
Sotherly Hotels
306 South Henry Street, Suite 100
Williamsburg, Virginia 23185
757.229.5648 (o) 757.564.8801 (f)
Website
Information on Sotherly Hotels’ stock
price, corporate news, SEC filings, earnings
releases, and other financial data can be
found online at SotherlyHotels.com.
Independent Auditors
ONE JAMES CENTER
901 E Cary Street Suite 1000
Richmond, Virginia 23219
804.282.7636 (o) 804.282.1461 (f)
Exchange Listings
Sotherly Hotels’ common shares
are listed on the NASDAQ® stock
market under the ticker symbol
SOHO.