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EX-31.2 - EX-31.2 - Sotherly Hotels Inc.soho-ex312_10.htm
EX-31.3 - EX-31.3 - Sotherly Hotels Inc.soho-ex313_11.htm
EX-32.3 - EX-32.3 - Sotherly Hotels Inc.soho-ex323_15.htm
EX-32.2 - EX-32.2 - Sotherly Hotels Inc.soho-ex322_14.htm
EX-31.1 - EX-31.1 - Sotherly Hotels Inc.soho-ex311_9.htm
EX-32.4 - EX-32.4 - Sotherly Hotels Inc.soho-ex324_16.htm
EX-32.1 - EX-32.1 - Sotherly Hotels Inc.soho-ex321_13.htm
EX-31.4 - EX-31.4 - Sotherly Hotels Inc.soho-ex314_12.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

 

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

 

 

MARYLAND

001-32379

20-1531029

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

 

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

001-36091

20-1965427

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

 

410 West Francis Street

Williamsburg, Virginia 23185

(757) 229-5648

(Address and Telephone Number of Principal Executive Offices)

 

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  x    No  ¨     Sotherly Hotels LP    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Sotherly Hotels Inc.    Yes  x    No  ¨     Sotherly Hotels LP    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):

Sotherly Hotels Inc.

 

Large Accelerated Filer

¨

 

 

Accelerated Filer

¨

 

 

 

 

 

 

Non-accelerated Filer

¨

 

 

Smaller Reporting Company

x

 

Sotherly Hotels LP

 

Large Accelerated Filer

¨

 

 

Accelerated Filer

¨

 

 

 

 

 

 

Non-accelerated Filer

x

 

 

Smaller Reporting Company

¨

 

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  x Sotherly Hotels LP    Yes  ¨    No  x

As of November 10, 2015, there were 14,490,714 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.  

 

 


EXPLANATORY NOTE

We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common stock as “Common Stock,” the Company’s preferred stock as “Preferred Stock,” and the Operating Partnership’s preferred interest as the “Preferred Interest.”  References to “we” and “our” mean the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2015 of the Company and the Operating Partnership. We believe combining the quarterly 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 in 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:

 

·

Consolidated Financial Statements;

 

·

the following Notes to Consolidated Financial Statements:

 

·

Note 8 – Equity; and

 

·

Note 14 – Income (Loss) Per Share and Per Unit;

 

·

Item 4 - Controls and Procedures; and

 

·

Item 6 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.

 

 

2


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I

Item 1.

 

Financial Statements

 

4

 

 

Sotherly Hotels Inc.

 

4

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

 

4

 

 

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

 

5

 

 

Consolidated Statement of Changes in Equity (unaudited) for the Nine Months Ended September 30, 2015

 

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2015 and 2014

 

7

 

 

Sotherly Hotels LP

 

8

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

 

8

 

 

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

 

9

 

 

Consolidated Statement of Changes in Partners’ Capital (unaudited) for the Nine Months Ended September 30, 2015

 

10

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2015 and 2014

 

11

 

 

Notes to Consolidated Financial Statements

 

12

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

Item 4

 

Controls and Procedures

 

44

 

 

 

 

 

PART II

Item 1.

 

Legal Proceedings

 

46

Item 1A.

 

Risk Factors

 

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

Item 3.

 

Defaults Upon Senior Securities

 

46

Item 4.

 

Mine Safety Disclosures

 

46

Item 5.

 

Other Information

 

46

Item 6.

 

Exhibits

 

47

 

3


PART I

 

 

Item 1.

Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

354,933,161

 

 

$

260,192,153

 

Investment in joint venture

 

 

 

 

 

1,982,107

 

Cash and cash equivalents

 

 

15,470,385

 

 

 

16,634,499

 

Restricted cash

 

 

6,340,463

 

 

 

6,621,864

 

Accounts receivable, net

 

 

4,749,336

 

 

 

1,908,762

 

Accounts receivable-affiliate

 

 

287,328

 

 

 

197,674

 

Prepaid expenses, inventory and other assets

 

 

4,893,091

 

 

 

3,334,401

 

Deferred income taxes

 

 

4,027,172

 

 

 

3,543,295

 

Deferred financing costs, net

 

 

4,343,069

 

 

 

5,405,288

 

TOTAL ASSETS

 

$

395,044,005

 

 

$

299,820,043

 

LIABILITIES

 

 

 

 

 

 

 

 

Mortgage loans

 

$

269,094,175

 

 

$

205,291,657

 

Unsecured notes

 

 

52,900,000

 

 

 

52,900,000

 

Accounts payable and accrued expenses

 

 

14,591,112

 

 

 

12,044,886

 

Advance deposits

 

 

2,222,728

 

 

 

1,220,729

 

Dividends and distributions payable

 

 

1,335,323

 

 

 

852,914

 

TOTAL LIABILITIES

 

$

340,143,338

 

 

$

272,310,186

 

Commitments and contingencies

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Sotherly Hotels Inc. stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares

   issued and outstanding

 

 

 

 

 

 

Common stock, par value $0.01, 49,000,000 shares authorized,

   14,490,714 shares and 10,570,932 shares issued and outstanding

   at September 30, 2015 and December 31, 2014, respectively

 

 

144,907

 

 

 

105,709

 

Additional paid in capital

 

 

82,766,931

 

 

 

58,659,799

 

Distributions in excess of retained earnings

 

 

(32,209,407

)

 

 

(35,388,313

)

Total Sotherly Hotels Inc. stockholders’ equity

 

 

50,702,431

 

 

 

23,377,195

 

Noncontrolling interest

 

 

4,198,236

 

 

 

4,132,662

 

TOTAL EQUITY

 

 

54,900,667

 

 

 

27,509,857

 

TOTAL LIABILITIES AND OWNERS' EQUITY

 

$

395,044,005

 

 

$

299,820,043

 

 

The accompanying notes are an integral part of these financial statements.

 

 

4


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

$

24,132,181

 

 

$

22,240,896

 

 

$

71,819,966

 

 

$

65,110,333

 

Food and beverage department

 

 

7,556,969

 

 

 

7,643,454

 

 

 

23,889,092

 

 

 

22,915,192

 

Other operating departments

 

 

2,252,725

 

 

 

1,880,103

 

 

 

6,073,555

 

 

 

5,089,017

 

Total revenue

 

 

33,941,875

 

 

 

31,764,453

 

 

 

101,782,613

 

 

 

93,114,542

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

 

6,657,947

 

 

 

6,175,342

 

 

 

18,998,964

 

 

 

17,205,451

 

Food and beverage department

 

 

5,562,404

 

 

 

5,417,434

 

 

 

16,668,025

 

 

 

15,424,254

 

Other operating departments

 

 

491,751

 

 

 

327,942

 

 

 

1,192,917

 

 

 

864,949

 

Indirect

 

 

13,245,062

 

 

 

12,190,045

 

 

 

37,046,275

 

 

 

33,863,830

 

Total hotel operating expenses

 

 

25,957,164

 

 

 

24,110,763

 

 

 

73,906,181

 

 

 

67,358,484

 

Depreciation and amortization

 

 

3,374,209

 

 

 

3,472,760

 

 

 

9,583,506

 

 

 

8,896,057

 

Loss on disposal of assets

 

 

207,235

 

 

 

 

 

 

201,835

 

 

 

 

Corporate general and administrative

 

 

2,437,428

 

 

 

1,039,318

 

 

 

5,379,032

 

 

 

3,738,314

 

Total operating expenses

 

 

31,976,036

 

 

 

28,622,841

 

 

 

89,070,554

 

 

 

79,992,855

 

NET OPERATING INCOME

 

 

1,965,839

 

 

 

3,141,612

 

 

 

12,712,059

 

 

 

13,121,687

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,245,679

)

 

 

(3,994,261

)

 

 

(11,860,649

)

 

 

(10,803,127

)

Interest income

 

 

15,480

 

 

 

6,630

 

 

 

40,888

 

 

 

13,785

 

Equity income (loss) in joint venture

 

 

8,173

 

 

 

(156,165

)

 

 

506,890

 

 

 

248,803

 

Loss on early debt extinguishment

 

 

(74,824

)

 

 

 

 

 

(772,907

)

 

 

 

Unrealized loss on hedging activities

 

 

(106,808

)

 

 

 

 

 

(106,808

)

 

 

 

Gain on change in control

 

 

6,560,958

 

 

 

 

 

 

6,560,958

 

 

 

 

Gain on involuntary conversion of asset

 

 

 

 

 

 

 

 

32,433

 

 

 

 

Net income (loss) before income taxes

 

 

4,123,139

 

 

 

(1,002,184

)

 

 

7,112,864

 

 

 

2,581,148

 

Income tax (provision) benefit

 

 

513,505

 

 

 

722,170

 

 

 

(3,255

)

 

 

893,706

 

Net income (loss)

 

 

4,636,644

 

 

 

(280,014

)

 

 

7,109,609

 

 

 

3,474,854

 

Less: Net (income) loss attributable to the

   noncontrolling interest

 

 

(764,250

)

 

 

65,112

 

 

 

(1,230,773

)

 

 

(740,065

)

Net income (loss) attributable to the Company

 

$

3,872,394

 

 

$

(214,902

)

 

$

5,878,836

 

 

$

2,734,789

 

Net income (loss) per share attributable to

   the Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.27

 

 

$

(0.02

)

 

$

0.49

 

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

14,247,671

 

 

 

10,353,988

 

 

 

11,884,110

 

 

 

10,311,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

5


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-

 

 

in Excess of

 

 

Noncontrolling

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

In Capital

 

 

Retained Earnings

 

 

Interest

 

 

Total

 

Balances at December 31, 2014

 

 

10,570,932

 

 

$

105,709

 

 

$

58,659,799

 

 

$

(35,388,313

)

 

$

4,132,662

 

 

$

27,509,857

 

Issuance of unrestricted common stock awards

 

 

26,350

 

 

 

264

 

 

 

193,936

 

 

 

 

 

 

 

 

 

194,200

 

Issuance of restricted common stock awards

 

 

9,750

 

 

 

97

 

 

 

71,760

 

 

 

 

 

 

 

 

 

71,857

 

Issuance of common stock from ATM sales

 

 

98,682

 

 

 

987

 

 

 

681,222

 

 

 

 

 

 

 

 

 

682,209

 

Issuance of common stock from equity offering

 

 

3,435,000

 

 

 

34,350

 

 

 

22,534,259

 

 

 

 

 

 

 

 

 

22,568,609

 

Conversion of Operating Partnership units into shares of common stock

 

 

350,000

 

 

 

3,500

 

 

 

611,015

 

 

 

 

 

 

(614,515

)

 

 

 

Amortization of restricted stock award

 

 

 

 

 

 

 

 

14,940

 

 

 

 

 

 

 

 

 

14,940

 

Dividends and distributions declared

 

 

 

 

 

 

 

 

 

 

 

(2,699,930

)

 

 

(550,684

)

 

 

(3,250,614

)

Net income

 

 

 

 

 

 

 

 

 

 

 

5,878,836

 

 

 

1,230,773

 

 

 

7,109,609

 

Balances at September 30, 2015

 

 

14,490,714

 

 

$

144,907

 

 

$

82,766,931

 

 

$

(32,209,407

)

 

$

4,198,236

 

 

$

54,900,667

 

 

The accompanying notes are an integral part of these financial statements.

 

 

6


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,109,609

 

 

$

3,474,854

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,583,506

 

 

 

8,896,057

 

Gain on change in control

 

 

(6,560,958

)

 

 

 

Equity income in joint venture

 

 

(506,890

)

 

 

(248,803

)

Amortization of deferred financing costs

 

 

991,858

 

 

 

1,117,373

 

Amortization of mortgage premium

 

 

(12,341

)

 

 

 

Gain on involuntary conversion

 

 

(32,433

)

 

 

 

Unrealized loss on derivative instrument

 

 

106,808

 

 

 

 

Loss on disposal of assets

 

 

201,835

 

 

 

 

Loss on early debt extinguishment

 

 

772,907

 

 

 

 

Charges related to equity-based compensation

 

 

280,996

 

 

 

240,585

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(816,271

)

 

 

(896,342

)

Accounts receivable

 

 

(2,699,986

)

 

 

(529,763

)

Prepaid expenses, inventory and other assets

 

 

(955,695

)

 

 

(912,124

)

Deferred income taxes

 

 

(483,877

)

 

 

(1,037,181

)

Accounts payable and other accrued liabilities

 

 

1,443,460

 

 

 

6,260,015

 

Advance deposits

 

 

1,001,999

 

 

 

387,497

 

Accounts receivable - affiliate

 

 

(89,654

)

 

 

36,185

 

Net cash provided by operating activities

 

 

9,334,873

 

 

 

16,788,353

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of hotel properties

 

 

(25,525,754

)

 

 

(61,106,085

)

Improvements and additions to hotel properties

 

 

(15,694,033

)

 

 

(5,265,006

)

Distributions from joint venture

 

 

600,000

 

 

 

750,000

 

Funding of restricted cash reserves

 

 

(3,539,948

)

 

 

(2,656,793

)

Proceeds of restricted cash reserves

 

 

5,797,378

 

 

 

1,788,612

 

Proceeds from sale of assets

 

 

2,027,113

 

 

 

 

Proceeds from insurance conversion

 

 

124,609

 

 

 

 

Net cash used in investing activities

 

 

(36,210,635

)

 

 

(66,489,272

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds of mortgage debt

 

 

125,000,000

 

 

 

45,600,000

 

Proceeds of loans

 

 

-

 

 

 

19,000,000

 

Proceeds from the sale of common stock

 

 

23,250,818

 

 

 

127,964

 

Dividends and distributions paid

 

 

(2,768,207

)

 

 

(1,833,493

)

Payment of deferred financing costs

 

 

(1,326,663

)

 

 

(1,755,002

)

Payments on mortgage debt and loans

 

 

(118,444,300

)

 

 

(3,898,698

)

Net cash provided by financing activities

 

 

25,711,648

 

 

 

57,240,771

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,164,114

)

 

 

7,539,852

 

Cash and cash equivalents at the beginning of the period

 

 

16,634,499

 

 

 

9,376,628

 

Cash and cash equivalents at the end of the period

 

$

15,470,385

 

 

$

16,916,480

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

10,702,488

 

 

$

8,976,785

 

Cash paid during the period for income taxes

 

$

570,762

 

 

$

238,639

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Proceeds of mortgage debt contributed to restricted cash reserves

 

$

 

 

$

1,500,000

 

Change from assumed loan on Crowne Plaza Hollywood Beach Resort acquisition

 

$

57,000,000

 

 

$

 

Change in loan premium on the Crowne Plaza Hollywood Beach Resort assumed loan

 

$

246,815

 

 

$

 

Change in amount of hotel property improvements in accounts payable and

   accrued liabilities

 

$

657,990

 

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

 

7


SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

354,933,161

 

 

$

260,192,153

 

Investment in joint venture

 

 

 

 

 

1,982,107

 

Cash and cash equivalents

 

 

15,470,385

 

 

 

16,634,499

 

Restricted cash

 

 

6,340,463

 

 

 

6,621,864

 

Accounts receivable, net

 

 

4,749,336

 

 

 

1,908,762

 

Accounts receivable-affiliate

 

 

287,328

 

 

 

197,674

 

Prepaid expenses, inventory and other assets

 

 

4,893,091

 

 

 

3,334,401

 

Deferred income taxes

 

 

4,027,172

 

 

 

3,543,295

 

Deferred financing costs, net

 

 

4,343,069

 

 

 

5,405,288

 

TOTAL ASSETS

 

$

395,044,005

 

 

$

299,820,043

 

LIABILITIES

 

 

 

 

 

 

 

 

Mortgage loans

 

$

269,094,175

 

 

$

205,291,657

 

Unsecured notes

 

 

52,900,000

 

 

 

52,900,000

 

Accounts payable and other accrued liabilities

 

 

14,591,112

 

 

 

12,044,886

 

Advance deposits

 

 

2,222,728

 

 

 

1,220,729

 

Dividends and distributions payable

 

 

1,335,323

 

 

 

852,914

 

TOTAL LIABILITIES

 

$

340,143,338

 

 

$

272,310,186

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

General Partner: 166,916 and 131,218 units issued and outstanding as of

   September 30, 2015 and December 31, 2014, respectively

 

 

794,767

 

 

 

520,791

 

Limited Partners: 16,524,625 and 12,990,541 units issued and outstanding

   as of September 30, 2015 and December 31, 2014, respectively

 

 

54,105,900

 

 

 

26,989,066

 

TOTAL PARTNERS’ CAPITAL

 

 

54,900,667

 

 

 

27,509,857

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

 

$

395,044,005

 

 

$

299,820,043

 

 

The accompanying notes are an integral part of these financial statements.

 

 

8


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

$

24,132,181

 

 

$

22,240,896

 

 

$

71,819,966

 

 

$

65,110,333

 

Food and beverage department

 

 

7,556,969

 

 

 

7,643,454

 

 

 

23,889,092

 

 

 

22,915,192

 

Other operating departments

 

 

2,252,725

 

 

 

1,880,103

 

 

 

6,073,555

 

 

 

5,089,017

 

Total revenue

 

 

33,941,875

 

 

 

31,764,453

 

 

 

101,782,613

 

 

 

93,114,542

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

 

6,657,947

 

 

 

6,175,342

 

 

 

18,998,964

 

 

 

17,205,451

 

Food and beverage department

 

 

5,562,404

 

 

 

5,417,434

 

 

 

16,668,025

 

 

 

15,424,254

 

Other operating departments

 

 

491,751

 

 

 

327,942

 

 

 

1,192,917

 

 

 

864,949

 

Indirect

 

 

13,245,062

 

 

 

12,190,045

 

 

 

37,046,275

 

 

 

33,863,830

 

Total hotel operating expenses

 

 

25,957,164

 

 

 

24,110,763

 

 

 

73,906,181

 

 

 

67,358,484

 

Depreciation and amortization

 

 

3,374,209

 

 

 

3,472,760

 

 

 

9,583,506

 

 

 

8,896,057

 

Loss on disposal of assets

 

 

207,235

 

 

 

 

 

 

201,835

 

 

 

 

Corporate general and administrative

 

 

2,437,428

 

 

 

1,039,318

 

 

 

5,379,032

 

 

 

3,738,314

 

Total operating expenses

 

 

31,976,036

 

 

 

28,622,841

 

 

 

89,070,554

 

 

 

79,992,855

 

NET OPERATING INCOME

 

 

1,965,839

 

 

 

3,141,612

 

 

 

12,712,059

 

 

 

13,121,687

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,245,679

)

 

 

(3,994,261

)

 

 

(11,860,649

)

 

 

(10,803,127

)

Interest income

 

 

15,480

 

 

 

6,630

 

 

 

40,888

 

 

 

13,785

 

Equity income(loss) in joint venture

 

 

8,173

 

 

 

(156,165

)

 

 

506,890

 

 

 

248,803

 

Loss on early debt extinguishment

 

 

(74,824

)

 

 

 

 

 

(772,907

)

 

 

 

Unrealized loss on hedging activities

 

 

(106,808

)

 

 

 

 

 

(106,808

)

 

 

 

Gain on change in control

 

 

6,560,958

 

 

 

 

 

 

6,560,958

 

 

 

 

Gain on involuntary conversion of asset

 

 

 

 

 

 

 

 

32,433

 

 

 

 

Net income (loss) before income taxes

 

 

4,123,139

 

 

 

(1,002,184

)

 

 

7,112,864

 

 

 

2,581,148

 

Income tax benefit  (provision)

 

 

513,505

 

 

 

722,170

 

 

 

(3,255

)

 

 

893,706

 

Net income (loss)

 

$

4,636,644

 

 

$

(280,014

)

 

$

7,109,609

 

 

$

3,474,854

 

Net income (loss) per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.28

 

 

$

(0.02

)

 

$

0.50

 

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

16,615,889

 

 

 

13,108,115

 

 

 

14,328,893

 

 

 

13,101,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

9


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

(unaudited)

 

 

 

General Partner

 

 

Limited Partner

 

 

 

 

 

 

 

Units

 

 

Amount

 

 

Units

 

 

Amounts

 

 

Total

 

Balances at December 31, 2014

 

 

131,218

 

 

$

520,791

 

 

 

12,990,541

 

 

$

26,989,066

 

 

$

27,509,857

 

Issuance of partnership units

 

 

35,697

 

 

 

235,237

 

 

 

3,534,085

 

 

 

23,281,638

 

 

 

23,516,875

 

Amortization of restricted units award

 

 

 

 

 

149

 

 

 

 

 

 

14,791

 

 

 

14,940

 

Distributions declared

 

 

 

 

 

(32,506

)

 

 

 

 

 

(3,218,108

)

 

 

(3,250,614

)

Net income

 

 

 

 

 

71,096

 

 

 

 

 

 

7,038,513

 

 

 

7,109,609

 

Balances at September 30, 2015

 

 

166,915

 

 

$

794,767

 

 

 

16,524,626

 

 

$

54,105,900

 

 

$

54,900,667

 

 

The accompanying notes are an integral part of these financial statements.

 

 

10


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,109,609

 

 

$

3,474,854

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,583,506

 

 

 

8,896,057

 

Gain on change in control

 

 

(6,560,958

)

 

 

 

 

Equity income in joint venture

 

 

(506,890

)

 

 

(248,803

)

Amortization of deferred financing costs

 

 

991,858

 

 

 

1,117,373

 

Amortization of mortgage premium

 

 

(12,341

)

 

 

 

Gain on involuntary conversion

 

 

(32,433

)

 

 

 

Unrealized loss on derivative instrument

 

 

106,808

 

 

 

 

Loss on disposal of assets

 

 

201,835

 

 

 

 

Loss on early debt extinguishment

 

 

772,907

 

 

 

 

Charges related to equity-based compensation

 

 

280,996

 

 

 

240,585

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(816,271

)

 

 

(896,342

)

Accounts receivable

 

 

(2,699,986

)

 

 

(529,763

)

Prepaid expenses, inventory and other assets

 

 

(955,695

)

 

 

(912,124

)

Deferred income taxes

 

 

(483,877

)

 

 

(1,037,181

)

Accounts payable and other accrued liabilities

 

 

1,443,460

 

 

 

6,260,015

 

Advance deposits

 

 

1,001,999

 

 

 

387,497

 

Accounts receivable - affiliate

 

 

(89,654

)

 

 

36,185

 

Net cash provided by operating activities

 

 

9,334,873

 

 

 

16,788,353

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of hotel properties

 

 

(25,525,754

)

 

 

(61,106,085

)

Improvements and additions to hotel properties

 

 

(15,694,033

)

 

 

(5,265,006

)

Distributions from joint venture

 

 

600,000

 

 

 

750,000

 

Funding of restricted cash reserves

 

 

(3,539,948

)

 

 

(2,656,793

)

Proceeds of restricted cash reserves

 

 

5,797,378

 

 

 

1,788,612

 

Proceeds from the sale of asset

 

 

2,027,113

 

 

 

 

 

Proceeds from insurance conversion

 

 

124,609

 

 

 

 

 

Net cash used in investing activities

 

 

(36,210,635

)

 

 

(66,489,272

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds of mortgage debt

 

 

125,000,000

 

 

 

45,600,000

 

Proceeds of loans

 

 

 

 

 

19,000,000

 

Proceeds from the issuance of units

 

 

23,250,818

 

 

 

127,964

 

Distributions paid

 

 

(2,768,207

)

 

 

(1,833,493

)

Payment of deferred financing costs

 

 

(1,326,663

)

 

 

(1,755,002

)

Payments on mortgage debt and loans

 

 

(118,444,300

)

 

 

(3,898,698

)

Net cash provided by financing activities

 

 

25,711,648

 

 

 

57,240,771

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,164,114

)

 

 

7,539,852

 

Cash and cash equivalents at the beginning of the period

 

 

16,634,499

 

 

 

9,376,628

 

Cash and cash equivalents at the end of the period

 

$

15,470,385

 

 

$

16,916,480

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

10,702,488

 

 

$

8,976,785

 

Cash paid during the period for income taxes

 

$

570,762

 

 

$

238,639

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Proceeds of mortgage debt contributed to restricted cash reserves

 

$

 

 

$

1,500,000

 

Change from assumed loan on Crowne Plaza Hollywood Beach Resort acquisition

 

$

57,000,000

 

 

$

 

Change in loan premium on the Crowne Plaza Hollywood Beach Resort assumed loan

 

$

246,815

 

 

$

 

Change in amount of hotel property improvements in accounts payable and

   accrued liabilities

 

$

657,990

 

 

$

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

11


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

1. Organization and Description of Business

Sotherly Hotels Inc., formerly MHI Hospitality Corporation (the “Company”), is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the Mid-Atlantic and Southern United States.  Many of the hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza and Sheraton.

The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six hotel properties (the “initial properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. (the “Operating Partnership”).  The Company and the Operating Partnership through July 30, 2015, also owned a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”).  As of July 31, 2015, we own 100% of the entities that own the Crowne Plaza Hollywood Beach Resort.

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, 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 September 30, 2015, was approximately 86.8% owned by the Company, and its subsidiaries, lease the hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in this report to “we”, “us” and “our” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

Significant transactions occurring during the current and prior fiscal year include the following:

On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0 million secured loan (the “Bridge Loan”) with Richmond Hill Capital Partners, LP (“Richmond Hill”) and Essex Equity Joint Investment Vehicle, LLC (collectively with Richmond Hill, the “Bridge Lenders”).   The Bridge Loan bore interest at the rate of 10.0% per annum and was scheduled to mature on March 26, 2015.  The loan also required mandatory prepayment upon certain events, was subject to a prepayment premium if the loan was prepaid in full or in part prior to maturity and contained limited financial covenants.  The loan was secured by a lien on our interest in our subsidiary that owns the DoubleTree by Hilton Philadelphia Airport.  The Bridge Loan was repaid in full in November 2014.

On March 27, 2014, we acquired the Georgian Terrace, a 326-room hotel in Atlanta, Georgia for the aggregate purchase price of approximately $61.1 million. Also included in the acquisition was a 698-space parking structure; all personal property and equipment located in or at the hotel; and a separate 0.6 acre development parcel with related development rights and improvements located thereon.  In conjunction with the acquisition, we obtained a $41.5 million first mortgage from Bank of the Ozarks, of which $1.5 million of the proceeds was placed in a restricted cash reserve.  The mortgage had a floating rate of interest equal to LIBOR plus 3.75%, with a 4.00% floor and required monthly payments of principal and interest on a 25-year amortization schedule following a 12-month interest-only period.  The mortgage would have matured on March 27, 2017, but could have been extended for two additional 1-year period subject to certain terms and conditions.  We refinanced the mortgage on the Georgian Terrace on May 5, 2015, see below.

On March 31, 2014, we entered into a First Amendment and other amended loan documents to extend the maturity date and secure additional proceeds of approximately $5.6 million on the original $30.0 million mortgage on the DoubleTree by Hilton Philadelphia Airport hotel with its existing lender, TD Bank, N.A. Pursuant to the First Amendment and other amended loan documents, the mortgage continues to bear interest at a rate of LIBOR plus 3.0% with a 3.50% floor, requires monthly payments of

12


principal and interest on an amortization schedule over the remainder of the 25-year period that began with the commencement of the loan in March 2012, and extends the maturity date to April 1, 2019.

As a condition to obtaining the First Amendment to the mortgage on the Hilton Philadelphia Airport hotel, we were required to enter into a license agreement with a national hotel franchise through at least the term of the amended mortgage loan. As such, we entered into a 10-year franchise agreement with Hilton Worldwide to rebrand the Hilton Philadelphia Airport hotel as a DoubleTree by Hilton in November 2014, subject to the completion of certain product improvement requirements that were met as of October 27, 2014.

On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2016.  Under the terms of the extension, we made a principal payment of $0.8 million and are required to make monthly principal payments of $83,000 and interest payments at a rate of 5.0% per annum.

On November 21, 2014, we closed on a 7.0% unsecured note offering in the aggregate amount of $25.3 million, of which a portion of the proceeds was used to repay the $19.0 million Bridge Loan, with the remainder to be used for general corporate purposes.

On November 24, 2014, we repaid the $19.0 million Bridge Loan.

On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the Crowne Plaza Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the existing loan agreement.

 

On May 5, 2015, we entered into a mortgage loan agreement to secure a $47.0 million mortgage loan on the Georgian Terrace with Bank of America, N.A.  We used the proceeds to repay the existing first mortgage on the Georgian Terrace, to pay closing costs and the remainder of the proceeds to partially fund ongoing renovations at the Georgian Terrace and for general corporate purposes.

On July 1, 2015, the Company closed an equity sale and issuance of 3,000,000 shares of common stock (the “Offering”), for net proceeds of approximately $19.8 million, after deducting offering-related expenses.  On July 17, 2015, the Company closed an additional equity sale and issuance of 435,000 shares of common stock in the amount of approximately $2.9 million, net, from the exercise by the underwriter of an overallotment option to purchase additional shares from the Offering.  The Company contributed the approximately $22.7 million net proceeds of this Offering, including the proceeds from the exercise of the underwriters’ overallotment option, to the Operating Partnership in exchange for common units of partnership interest in the Operating Partnership. The Operating Partnership used the net proceeds from the Offering to partially fund the cash portion of the purchase price for the acquisition of Carlyle’s 75.0% indirect interest in the Crowne Plaza Hollywood Beach Resort and related transaction expenses.

 

On July 7, 2015, the Company obtained an $18.5 million mortgage loan with Bank of the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The mortgage loan carries a four-year term, bears interest at a floating rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0% and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The maturity date is July 7, 2019, with a possible one year extension. The Company used the proceeds of the mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville Riverfront and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the DoubleTree by Hilton Jacksonville Riverfront and for general corporate purposes.

On July 31, 2015, we acquired the remaining 75% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort.  As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. The purchase price for the remaining 75.0% interest in the Crowne Plaza Hollywood Beach Resort was a cash payment in the aggregate amount of approximately $26.3 million, subject to customary pro-rations. The existing mortgage loan secured by the Crowne Plaza Hollywood Beach Resort in the amount of $57.0 million issued by Bank of America, N.A remained in place and was assumed by the Company.

On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood Beach Resort with Bank of America, N.A   The Company used the proceeds to repay the existing first mortgage on the Crowne Plaza Hollywood Beach Resort and to pay closing costs, and will use the balance of the proceeds for general corporate purposes.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. 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.

13


The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse 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 exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment of approximately $3.2 million, as of December 31, 2014.

Assets Held For Sale – The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.

Investment in Joint Venture – Investment in joint venture represented our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. Carlyle owned a 75.0% controlling indirect interest in these entities, through July 30, 2015. As of July 31, 2015, we own 100% of the entities that own the Crowne Plaza Hollywood Beach Resort, and the operating activity of that hotel is consolidated in these financial statements for the two months ended September 30, 2015.  We accounted for our investment in the joint venture under the equity method of accounting and were entitled to receive our pro rata share of annual cash flow. We also had the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.

Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management 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 and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.  See Note 5 for further discussion on allowance for potential credit losses.

Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.

14


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 September 30, 2015 and December 31, 2014 were approximately $351,999 and $394,139, respectively. Amortization expense for the three month periods ended September 30, 2015 and 2014 totaled $40,572 and $10,875, respectively, and for the nine month periods ended September 30, 2015 and 2014 totaled $68,972 and $32,625, respectively.

Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations. Amortization of deferred offering costs occurs when the equity offering is complete, whereby the costs are offset against the equity funds raised in the future and included in additional paid in capital on the consolidated balance sheets, or if the offering expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and administrative expenses in the consolidated statements of operations.

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we primarily used an interest-rate swap, which was required under our then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for our making fixed-rate payments without exchange of the underlying principal amount. We valued our interest-rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We also have used derivative instruments in the Company’s stock to obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

Fair Value Measurements –

We classify the inputs used to measure fair value into the following hierarchy:

 

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2

Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset or liability.

 

Level 3

Unobservable inputs for the asset or liability.

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our investment in hotel property, net, interest rate cap, mortgage loans and unsecured notes measured at fair value and the basis for that measurement:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel property, net(1)

 

$

 

 

$

 

 

$

6,396,787

 

Mortgage loans(2)

 

$

 

 

$

(209,994,659

)

 

$

 

Unsecured notes(3)

 

$

(53,816,320

)

 

$

 

 

$

 

September 30, 2015 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Cap(5)

 

$

 

 

$

72,992

 

 

$

 

Mortgage loans(2)

 

$

 

 

$

(270,473,291

)

 

$

 

Unsecured notes(3)

 

$

(54,385,800

)

 

$

 

 

$

 

 

(1)

A non-recurring fair value measurement was conducted in 2014 for our investment in hotel property, which resulted in impairment charges for the year ended December 31, 2014, which represent the amount by which the carrying value of the asset group exceeded its fair value.

15


(2)

Mortgage loans are reflected at outstanding principal balance on our Consolidated Balance Sheet as of September 30, 2015 and December 31, 2014.

(3)

Unsecured notes are recorded at outstanding principal balance on our Consolidated Balance Sheet as of September 30, 2015 and December 31, 2014.

(4)

Interest rate cap for our loan on DoubleTree by Hilton Jacksonville Riverfront, which caps the rate at 2.5%.

Noncontrolling Interest in Operating Partnership – Certain hotel properties have been acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit, including a receivable for approximately $1.6 million from Starwood Resorts and Hotels. See Note 5, for further discussion.

Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes.  We account for the lease income as revenue from other operating departments within the statement of consolidated operations pursuant to the terms of each lease.  Lease revenue was approximately $0.5 million and $0.4 million, for the three months ended September 30, 2015 and 2014, respectively, and approximately $1.4 million and $1.2 million, for the nine months ended September 30, 2015 and 2014, respectively.

A schedule of minimum future lease payments receivable for the following twelve-month periods is as follows:

 

Remaining three months ending December 31, 2015

 

$

367,936

 

December 31, 2016

 

 

1,321,344

 

December 31, 2017

 

 

867,447

 

December 31, 2018

 

 

356,179

 

December 31, 2019

 

 

236,372

 

December 31, 2020 and thereafter

 

 

1,086,188

 

Total

 

$

4,235,466

 

 

Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2015 and December 31, 2014, 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 September 30, 2015, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2010 through 2014. In addition, as of September 30, 2015, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally include 2004 through 2014.

The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.

Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options, restricted stock and performance share compensation awards to its employees for up to 350,000 and 750,000 shares of common stock, respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.

16


Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 18,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest pro rata on each of the next three anniversaries of the effective date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested. The 2004 plan was terminated in 2013.

Under the 2013 Plan, the Company has made stock awards totaling 72,850 shares, including 50,350 non-restricted shares to certain executives and employees and 22,500 restricted shares issued to its independent directors.  All awards have vested except for 9,000 shares issued to the Company’s independent directors in January 2015, which will vest on December 31, 2015.

Previously, under the 2004 Plan, and currently, under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of September 30, 2015, no performance-based stock awards have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan and 2013 Plan for the three months ended September 30, 2015 and 2014 was $276,016 and $235,605, respectively.  The 2004 Plan was terminated in April 2013.

Advertising – Advertising costs were $69,006 and $46,943 for the three months ended September 30, 2015 and 2014, respectively, and were $178,661 and $160,096 for the nine months ended September 30, 2015 and 2014, respectively. Advertising costs are expensed as incurred.

Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.

Segment Information – We have 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.

Reclassifications – Certain reclassifications in the amount of $69,130, from accounts receivable to accounts receivable – affiliate on the consolidated statements of cash flows, have been made to the prior period balances to conform to the current period presentation.

New Accounting Pronouncements – In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03 related to ASU Subtopic 835-30, Interest- Imputation of Interest.  To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.  This guidance will be effective for annual reporting periods beginning after December 15, 2015.  Other than the change in presentation of deferred financing costs from an asset to a liability, we do not expect this ASU to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02 related to ASC Topic 810, Consolidation. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  This guidance will be effective for annual reporting periods beginning after December 15, 2017.  We do not expect this ASU to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 related to ASC Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost

17


guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.  As issued, this ASU is not effective until annual reporting periods beginning after December 15, 2016, however the FASB has deferred the effective date of ASU 2014-09 such that it would be effective for annual reporting periods beginning after December 15, 2017.  We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

 

3. Acquisition of Hotel Properties

Georgian Terrace Acquisition. On March 27, 2014, we acquired the 326-room Georgian Terrace in Atlanta, Georgia, for approximately $61.1 million.

Crowne Plaza Hollywood Beach Resort Acquisition. On July 31, 2015, we acquired the controlling interest in the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood Beach, Florida, previously held by the Carlyle Group for approximately $25.5 million.  The purchase price allocation for final valuation of assets acquired is preliminary as of September 30, 2015.

The allocation of the purchase price based on fair values for both properties is as follows:

 

 

 

Georgian Terrace

 

 

Crowne Plaza Hollywood Beach Resort

 

Land and land improvements

 

$

10,127,687

 

 

$

24,008,289

 

Buildings and improvements

 

 

45,385,939

 

 

 

64,854,787

 

Furniture, fixtures and equipment

 

 

5,163,135

 

 

 

2,802,135

 

Investment in hotel properties

 

 

60,676,761

 

 

 

91,665,211

 

Restricted cash

 

 

124,658

 

 

 

1,159,759

 

Accounts receivable

 

 

465,287

 

 

 

140,588

 

Prepaid expenses, inventory and other assets

 

 

430,997

 

 

 

797,505

 

Assumed mortgage

 

 

 

 

 

(57,259,159

)

Accounts payable and accrued liabilities

 

 

(591,618

)

 

 

(2,527,633

)

Equity investment

 

 

 

 

 

(1,889,560

)

Gain on change in control

 

 

 

 

 

(6,560,958

)

Net cash

 

$

61,106,085

 

 

$

25,525,754

 

 

The results of operations of the Georgian Terrace are included in our consolidated financial statements from the date of acquisition. The total revenue and net loss related to the acquisition of the Georgian Terrace, for the period March 27, 2014 to September 30, 2014 are approximately $11.3 million and $2.0 million, respectively and the total revenue and net loss related to the acquisition of the Crowne Plaza Hollywood Beach Resort, for the period from August 1, 2015 to September 30, 2015 are approximately $2.4 million and $0.5 million, respectively. The following pro forma financial information presents the results of operations of the Company and the Operating Partnership for the three and nine months ended September 30, 2015 and 2014, as if the acquisitions of the Georgian Terrace and the Crowne Plaza Hollywood Beach Resort had taken place on January 1, 2014. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2014, or of future results of operations:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Pro forma revenues

 

$

35,402,727

 

 

$

35,581,783

 

 

$

115,181,068

 

 

$

112,740,493

 

Pro forma operating expenses

 

 

33,597,191

 

 

 

32,850,638

 

 

 

99,056,441

 

 

 

96,048,017

 

Pro forma operating income

 

$

1,805,536

 

 

$

2,731,145

 

 

$

16,124,627

 

 

$

16,692,476

 

Pro forma net income (loss)

 

$

(1,936,057

)

 

$

(1,378,074

)

 

$

1,487,491

 

 

$

1,735,808

 

Pro forma earnings (loss) per basic and diluted share

 

$

(0.12

)

 

$

(0.08

)

 

$

0.09

 

 

$

0.10

 

Pro forma earnings (loss) per basic and diluted units

 

$

(0.12

)

 

$

(0.08

)

 

$

0.09

 

 

$

0.10

 

Pro forma basic and diluted common shares

 

 

14,247,671

 

 

 

13,788,988

 

 

 

15,319,110

 

 

 

13,746,595

 

Pro forma basic and diluted units

 

 

16,487,524

 

 

 

16,542,413

 

 

 

16,534,316

 

 

 

16,542,413

 

18


 

 

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

Land and land improvements

 

$

59,846,416

 

 

$

37,483,400

 

Buildings and improvements

 

 

330,213,388

 

 

 

257,343,516

 

Furniture, fixtures and equipment

 

 

41,561,930

 

 

 

38,762,997

 

 

 

 

431,621,734

 

 

 

333,589,913

 

Less: accumulated depreciation and impairment

 

 

(76,688,573

)

 

 

(73,397,760

)

 

 

$

354,933,161

 

 

$

260,192,153

 

 

 

 

5. Accounts Receivable, Net

Accounts receivable as of September 30, 2015 and December 31, 2014 were $4,749,336 and $1,908,762, respectively.  Current and prior year revenues earned under various preferred guests programs through our license contracts with national hotel companies are subject to audit.  Starwood Hotels & Resorts Worldwide Inc. is disputing a portion of the approximately $1.6 million of revenues earned and recognized during the second quarter of 2015.  This receivable has been reviewed for potential impairment loss and the review resulted in no allowance as of September 30, 2015.  The Company has filed a claim against Starwood Hotels & Resorts Worldwide Inc. for this amount and for other damages in favor of the Sheraton Louisville Riverside.  There is potential for loss up to $1.5 million, related to this receivable, however the Company has concluded that collection of an amount less than the amount due is currently not probable.

 

 

6. Debt

Mortgage Debt. As of September 30, 2015 and December 31, 2014, we had approximately $268.8 million and approximately $205.3 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

 

 

Balance Outstanding as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

December 31,

 

 

Prepayment

 

Maturity

 

Amortization

 

 

Interest

 

Property

(unaudited)

 

 

2014

 

 

Penalties

 

Date

 

Provisions

 

 

Rate

 

Crowne Plaza Hampton Marina

$

3,761,585

 

 

$

4,509,500

 

 

None

 

6/30/2016

 

$

83,000

 

(1)

5.00%(2)

 

Crowne Plaza Hollywood Beach Resort

 

60,000,000

 

 

 

 

 

None

 

10/1/2025

 

30 years

 

 

 

4.91%

 

Crowne Plaza Houston Downtown

 

20,585,912

 

 

 

20,954,867

 

 

Yes(3)

 

4/12/2016

(4)

25 years

 

 

 

4.50%

 

Crowne Plaza Tampa Westshore

 

13,093,566

 

 

 

13,317,684

 

 

None

 

6/18/2017

 

25 years

 

 

 

5.60%

 

DoubleTree by Hilton Jacksonville

   Riverfront

 

17,920,603

 

 

 

16,358,706

 

 

Yes(12)

 

7/7/2019

 

(5)

25 years

 

 

LIBOR plus 3.50 %

 

DoubleTree by Hilton Laurel

 

6,840,862

 

 

 

6,974,458

 

 

Yes(10)

 

8/5/2021

 

25 years

 

 

5.25 %(11)

 

DoubleTree by Hilton Philadelphia Airport

 

32,631,238

 

 

 

33,378,102

 

 

None

 

4/1/2019

 

25 years

 

 

LIBOR plus 3.00 %(7)

 

DoubleTree by Hilton Raleigh Brownstone –University

 

15,111,479

 

 

 

15,274,284

 

 

(6)

 

8/1/2018

 

30 years

 

 

 

4.78%

 

Georgian Terrace

 

46,822,566

 

 

 

41,500,000

 

 

None

 

6/1/2025

(8)

30 years

 

 

 

4.42%

 

Hilton Savannah DeSoto

 

20,702,141

 

 

 

21,050,093

 

 

Yes(9)

 

9/1/2017

 

25 years

 

 

 

6.06%

 

Hilton Wilmington Riverside

 

19,969,949

 

 

 

20,389,325

 

 

Yes(9)

 

4/1/2017

 

25 years

 

 

 

6.21%

 

Sheraton Louisville Riverside

 

11,407,459

 

 

 

11,584,638

 

 

(6)

 

1/6/2017

 

25 years

 

 

 

6.24%

 

Total Mortgage Principal Balance

$

268,847,360

 

 

$

205,291,657

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized premium on loan

 

246,815

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Mortgage Loans

$

269,094,175

 

 

$

205,291,657

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The Operating Partnership is required to make monthly principal payments of $83,000.

(2)

The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014.

(3)

The note is subject to a prepayment penalty if the loan is prepaid in full or in part prior to November 13, 2015.

(4)

The note provides that the mortgage can be extended until November 2018 if certain conditions have been satisfied.

19


(5)

The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.

(6)

With limited exception, the note may not be prepaid until two months before maturity.

(7)

The note bears a minimum interest rate of 3.50%.

(8)

The note may not be prepaid on or prior to February 2025. Prepayment can be made without penalty thereafter with not less than 30 days and not more than 90 days, prior written notice.

(9)

The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(10)

Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or without penalty from such date until 180 days before the maturity.

(11)

The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.

(12)

The note is subject to a prepayment premium if the loan is prepaid in full or in part prior to 24 months from July 7, 2015.

 

We were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, as of September 30, 2015.

Total future mortgage debt maturities, without respect to any extension of loan maturity, as of September 30, 2015 were as follows:

 

The remaining three month period ending December 31, 2015

$

1,798,746

 

December 31, 2016

 

29,229,131

 

December 31, 2017

 

66,768,132

 

December 31, 2018

 

18,152,719

 

December 31, 2019

 

31,786,801

 

December 31, 2020 and thereafter

 

121,111,831

 

Total future maturities

$

268,847,360

 

 

7.0% Unsecured Notes. On November 21, 2014, the Operating Partnership issued 7.0% senior unsecured notes in the aggregate amount of $25.3 million (the “7% Notes”). The indenture requires quarterly payments of interest and matures on November 15, 2019. The 7% Notes are callable after November 15, 2017 at 101% of face value.

8.0% Unsecured Notes. On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes in the aggregate amount of $27.6 million (the “8% Notes”). The indenture requires quarterly payments of interest and matures on September 30, 2018. The 8% Notes are callable after September 30, 2016 at 101% of face value.

 

 

7. Commitments and Contingencies

Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to the Hilton Savannah DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the three and nine months ended September 30, 2015 and 2014 each totaled $15,867 and $47,601, respectively.

We lease, as landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

We lease a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three and nine months ended September 30, 2015 and 2014, each totaled $23,871 and $71,612, respectively.

20


We lease land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida Department of Transportation that commenced in July 2009.  In May 2014, we extended the agreement for an additional five years.  The agreement expires in July 2019. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for the three and nine months ended September 30, 2015 and 2014, each totaled $651 and $1,952, respectively.

We lease certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year operating lease requiring annual payments of $4,961, which expired September 18, 2012. A new operating lease was executed requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the three and nine months ended September 30, 2015 and 2014, each totaled $1,505 and $4,515, respectively.

We lease 5,216 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced September 1, 2009 and expires August 31, 2018.  Rent expense for the three and nine months ended September 30, 2015 totaled $21,851 and $62,585, respectively, for the three months and nine months ended September 30, 2014 totaled $19,269 and $51,769, respectively.

We lease 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $12,584 and $37,754 for the three and nine months ended September 30, 2015, respectively, and totaled $12,585 and $37,692 for the three and nine months ended September 30, 2014, respectively.

We also lease certain furniture and equipment under financing arrangements expiring between August 2015 and February 2018.

A schedule of minimum future lease payments for the following twelve-month periods is as follows:

 

The remaining three month period ending December 31, 2015

 

$

98,026

 

December 31, 2016

 

 

356,720

 

December 31, 2017

 

 

240,263

 

December 31, 2018

 

 

176,740

 

December 31, 2019

 

 

100,480

 

December 31, 2020 and thereafter

 

 

636,547

 

Total

 

$

1,608,776

 

 

Employment Agreements - The Company has entered into various employment contracts with employees that could result in obligations to the Company in the event of a change in control or termination without cause.

Management Agreements – At September 30, 2015, each of our wholly-owned operating hotels was operated under a management agreement with Chesapeake Hospitality.  Effective January 1, 2015, each of our wholly-owned hotels operated under a new master agreement as well as an individual hotel management agreement (see Note 9).  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 September 30, 2015, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between September 2015 and October 2024.  On August 7, 2014, we voluntarily terminated the franchise agreement with Holiday Hospitality Franchising, LLC (IHG) for the Crowne Plaza Jacksonville Riverfront effective September 1, 2015 and recognized a termination fee of $351,800.  The property is being rebranded as the DoubleTree by Hilton Jacksonville Riverfront.  Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the DoubleTree by Hilton Brownstone-University, the Sheraton Louisville Riverside and the Georgian Terrace an amount equal to 1/12 of the annual real estate taxes due for the properties. We are also required by several of 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 Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh Brownstone–University, Crowne Plaza Houston Downtown, Crowne Plaza Hampton Marina and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport.

21


LitigationWe are involved in litigation against Starwood Resorts and Hotels seeking payment of accounts receivable owing to us in the amount of approximately $1.6 million and for additional unspecified damages in favor of the Sheraton Louisville Riverside.  To our knowledge, we are not involved in any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.

 

 

8. Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares were issued as Series A Cumulative Redeemable Preferred Stock, and subsequently redeemed in 2013.  None of the remaining authorized shares have been issued.

Common Stock – The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders.  Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.

The following is a schedule of issuances, since January 1, 2014, of the Company’s common stock:

On September 16, 2015, one holder of units in the Operating Partnership redeemed a total of 200,000 units for an equivalent number of shares of the Company’s common stock.

On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.9 million, which it contributed to the Operating Partnership for an equivalent number of units.

On July 1, 2015, the Company sold 3,000,000 shares of common stock, for net proceeds of approximately $19.8 million, which it contributed to the Operating Partnership for an equivalent number of units.  

During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it contributed to the Operating Partnership for an equivalent number of units.

On May 1, 2015, one holder of units in the Operating Partnership redeemed a total of 50,000 units for an equivalent number of shares of the Company’s common stock.

On April 1, 2015, one holder of units in the Operating Partnership redeemed 100,000 units for an equivalent number of shares of the Company’s common stock.

On January 23, 2015, the Company was issued 36,100 units in the Operating Partnership and awarded an aggregate of 26,350 shares of unrestricted stock to certain executives and employees as well as 9,750 shares of restricted stock to certain of its independent directors.

On October 1, 2014, one holder of units in the Operating Partnership redeemed 200,000 units for an equivalent number of shares of the Company’s common stock.

During September 2014, the Company sold 16,979 shares of common stock for net proceeds of $122,793, which it contributed to the Operating Partnership for an equivalent number of units.

During August 2014, the Company sold 276 shares of common stock for net proceeds of $2,118, which it contributed to the Operating Partnership for an equivalent number of units.

On April 1, 2014, two holders of units in the Operating Partnership redeemed 110,000 units for an equivalent number of shares of the Company’s common stock.

On February 14, 2014, the Company was issued 36,750 units in the Operating Partnership and awarded an aggregate of 24,000 shares of unrestricted stock to certain executives as well as 12,000 shares of restricted stock and 750 share of unrestricted stock to certain of its independent directors.

As of September 30, 2015 and December 31, 2014, the Company had 14,490,714 and 10,570,932 shares of common stock outstanding, respectively.

22


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.

The following is a schedule of issuances and redemptions, since January 1, 2014, of units in the Operating Partnership in addition to the issuances of units in the Operating Partnership to the Company described above:

On November 1, 2014, the Operating Partnership redeemed 3,300 units held by a trust controlled by two members of the Board of Directors for a total of $25,621, pursuant to the terms of the partnership agreement.

As of September 30, 2015 and December 31, 2014, the total number of Operating Partnership units outstanding was 16,691,541 and 13,121,759, respectively.

As of September 30, 2015 and December 31, 2014, the total number of outstanding Operating Partnership units not owned by the Company was 2,200,827 and 2,550,827, respectively, with a fair market value of approximately $15.0 million and $19.1 million, based on the price per share of the common stock on such respective dates.

 

 

9. Related Party Transactions

Chesapeake Hospitality. As of September 30, 2015, the members of Chesapeake Hospitality (a company that is majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer, a member of its Board of Directors and a former member of its Board of Directors) owned 1,364,404 shares, approximately 9.4%, of the Company’s outstanding common stock as well as 1,292,958 Operating Partnership units. The indirect equity owners of Chesapeake Hospitality include the Company’s chief executive officer, Andrew M. Sims, and a member of the Company’s board of directors, Kim E. Sims.  The following is a summary of the transactions between Chesapeake Hospitality and us:

Accounts Receivable – At September 30, 2015 and December 31, 2014, we were due $0 and $50,838, respectively, from Chesapeake Hospitality.

Shell Island Sublease – We had a sublease arrangement with Chesapeake Hospitality on our expired leasehold interests in the property at Shell Island. Leasehold revenue was $0 and $87,500 for the three month periods ended September 30, 2015 and 2014, respectively and was $0 and $175,000 for the nine month periods ended September 30, 2015 and 2014.  The underlying leases at Shell Island expired on December 31, 2011.

Strategic Alliance Agreement – On December 21, 2004, we entered into a ten-year strategic alliance agreement with Chesapeake Hospitality that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by Chesapeake Hospitality. The agreement expired on December 15, 2014, in conjunction with the execution of the new management agreements.

Management Agreements – Each of the hotels that we wholly-owned at September 30, 2015 were operated by Chesapeake Hospitality under various management agreements that were to expire between December 2014 and March 2019.  Under those now terminated agreements, Chesapeake Hospitality received a base management fee of 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. The agreements also provided for an incentive management fee due annually in arrears within 90 days of the end of the fiscal year equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis for eight hotels and on an individual basis for two other hotels, for a given year exceeds the gross operating profit for the same hotel(s), for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotel(s) included in the incentive fee calculation.  The management agreement for the Crowne Plaza Houston Downtown did not provide for any incentive management fee.  Additionally, the management agreement for the Georgian Terrace provided for an administrative fee of $30,000 per year for as long as the adjacent parking garage is managed by a third party.

On December 15, 2014, we entered into a new master agreement and a series of individual hotel management agreements that became effective on January 1, 2015.  The master agreement has a five-year term, but may be extended for such additional periods as long as an individual management agreement remains in effect.  The base management fee for the Crowne Plaza Houston Downtown and the Georgian Terrace will remain at 2.00% through 2015, increases to 2.25% in 2016 and increases to 2.50% thereafter.  The base management fees for the remaining properties in the current portfolio will be 2.65% through 2017 and decreases to 2.50% thereafter.  For new individual hotel management agreements, Chesapeake Hospitality will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary

23


date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.  On July 31, 2015, we entered into a new management agreement for the management of the Crowne Plaza Hollywood Beach Resort, with a base management fee of 2.00% for the first full year from the commencement date through the anniversary date, 2.25% for the second full year, and 2.50% for every year thereafter.

Base management and administrative fees earned by Chesapeake Hospitality for our wholly owned properties totaled $823,610 and $2,490,047 for the three months and nine months ended September 30, 2015, respectively, and $915,286 and $2,696,499 for the three months and nine months ended September 30, 2014, respectively.  In addition, estimated incentive management fees of $9,905 and $104,713 were accrued for the three months and nine months ended September 30, 2015, respectively, and estimated incentive management fees of $58,002 and $157,895 were accrued for the three months and nine months ended September 30, 2014, respectively.  

Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitality for our employees as well as those employees that are employed by Chesapeake Hospitality that work exclusively for our hotel properties. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $1,190,699 and $3,432,373 for the three and nine months ended September 30, 2015, respectively and $979,507 and $2,791,054 for the three and nine months ended September 30, 2014, respectively.

Crowne Plaza Hollywood Beach Resort JV.  As of September 30, 2015, we own 100% of the Crowne Plaza Hollywood Beach Resort, which is no longer considered a related party and has a new management agreement as of July 31, 2015.  However, through July 30, 2015 we owned a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. The following is a summary of the transactions between Crowne Plaza Hollywood Beach Resort and us:

Accounts Receivable – At September 30, 2015 and December 31, 2014, we were due $0 and $146,836, respectively, from Crowne Plaza Hollywood Beach Resort.

Management Agreement – Crowne Plaza Hollywood Beach Resort was operated by Chesapeake Hospitality under a management agreement that was set to expire August 2017.  Under this agreement Chesapeake Hospitality received a base management fee of 3.0% of gross revenues. Base management fees earned by Chesapeake Hospitality totaled $43,826 and $401,954 for the three and nine months ended September 30, 2015, respectively, and totaled $114,520 and $445,564 for the three and nine months ended September 30, 2014, respectively.         

Asset Management Fee – Also, under an asset management agreement that terminated on July 31, 2015, MHI Hospitality TRS II, LLC, an indirect subsidiary of the Company, received a fee of 1.50% of total revenue which was due on a quarterly basis for services rendered. Asset management fees totaled $21,913 and $200,976 for the three and nine months ended September 30, 2015, respectively, and totaled $57,260 and $222,829 for three and nine months ended September 30, 2014, respectively.  Unpaid asset management fees included in accounts payable and accrued liabilities at September 30, 2015 and December 31, 2014 totaled $0 and $73,278, respectively.

Redemption of Units in Operating Partnership – During 2014, we redeemed a total of 3,300 units in our Operating Partnership held by a trust controlled by two current members and one former member of the Company’s Board of Directors for a total of $25,621 pursuant to the terms of the partnership agreement.

Bridge Lenders. A former member of the Company’s board of directors holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Equity Joint Investment Vehicle, LLC as well as Richmond Hill Capital Partners, LP. On March 26, 2014, we entered into a Note Agreement, Guaranty, and Pledge Agreement to secure a $19.0 million secured Bridge Loan with the Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC.  The Bridge Loan had a maturity date of March 26, 2015; carried a fixed interest rate of 10.0% per annum; was subject to a prepayment premium if the loan was prepaid in full or in part prior to March 26, 2015; required mandatory prepayment upon certain events; contained limited financial covenants; and was secured by a lien on 100% of the limited partnership interests in the subsidiary that owns the DoubleTree by Hilton Philadelphia Airport hotel. The Bridge Loan was repaid in full in November 2014.

Others. On June 24, 2013 we hired Ashley S. Kirkland, the daughter of our Chief Executive Officer as a legal analyst and Robert E. Kirkland IV, her husband, as our compliance officer. On October 2, 2014, we hired Andrew M. Sims Jr., the son of our Chief Executive Officer, as a brand manager. Compensation for the three and nine months ended September 30, 2015 totaled approximately $68,044 and $201,884, respectively, for the three individuals.  Compensation for the three and nine months ended September 30, 2014 totaled $41,613 and $113,642, respectively, for the three individuals.

During the three and nine month period ending September 30, 2015, the Company reimbursed $44,691 and $84,701, respectively, to a partnership controlled by the Chief Executive Officer for business-related air travel pursuant to the Company’s travel reimbursement policy.

 

24


10. Retirement Plan

We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions and which requires that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All employer matching funds vest immediately in accordance with the “safe harbor” provision.  Contributions to the plan totaled $14,567 and $42,177 for the three and nine months ended September 30, 2015, respectively, and $6,138 and $36,778 for the three and nine months ended September 30, 2014, respectively.

 

11. Unconsolidated Joint Venture

As of September 30, 2015, we own 100% of the Crowne Plaza Hollywood Beach Resort.  However through July 31, 2015 we owned only a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged Chesapeake Hospitality to operate the hotel under a management contract. Carlyle owned a 75.0% indirect controlling interest in these entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment through July 31, 2015, which is accounted for under the equity method, is as follows:

 

 

 

 

 

 

 

 

December 31, 2014

 

ASSETS

 

 

 

 

Investment in hotel property, net

 

$

62,823,142

 

Cash and cash equivalents

 

 

2,153,906

 

Restricted cash

 

 

874,111

 

Accounts receivable

 

 

328,755

 

Prepaid expenses, inventory and other assets

 

 

1,489,479

 

TOTAL ASSETS

 

$

67,669,393

 

LIABILITIES

 

 

 

 

Mortgage loan, net

 

$

57,000,000

 

Accounts payable and other accrued liabilities

 

 

2,195,613

 

Accounts payable and other accrued liabilities, member

 

 

146,836

 

Advance deposits

 

 

398,695

 

TOTAL LIABILITIES

 

 

59,741,144

 

TOTAL MEMBERS’ EQUITY

 

 

7,928,249

 

TOTAL LIABILITIES AND MEMBERS’  EQUITY

 

$

67,669,393

 

   

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015 (1)

 

 

September 30, 2014

 

 

September 30, 2015 (2)

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

$

1,084,157

 

 

$

2,860,460

 

 

$

10,605,942

 

 

$

11,592,712

 

Food and beverage department

 

 

239,212

 

 

 

590,816

 

 

 

1,911,950

 

 

 

2,194,154

 

Other operating departments

 

 

137,483

 

 

 

366,054

 

 

 

880,564

 

 

 

1,068,421

 

Total revenue

 

 

1,460,852

 

 

 

3,817,330

 

 

 

13,398,456

 

 

 

14,855,287

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms department

 

 

262,070

 

 

 

788,569

 

 

 

2,071,436

 

 

 

2,471,048

 

Food and beverage department

 

 

185,976

 

 

 

516,777

 

 

 

1,442,145

 

 

 

1,696,364

 

Other operating departments

 

 

67,190

 

 

 

176,520

 

 

 

388,087

 

 

 

502,967

 

Indirect

 

 

648,430

 

 

 

1,663,202

 

 

 

3,991,773

 

 

 

5,270,113

 

Total hotel operating expenses

 

 

1,163,666

 

 

 

3,145,068

 

 

 

7,893,441

 

 

 

9,940,492

 

Depreciation and amortization

 

 

148,134

 

 

 

619,164

 

 

 

1,037,113

 

 

 

1,867,706

 

General and administrative

 

 

36,944

 

 

 

63,254

 

 

 

1,060,687

 

 

 

296,850

 

Total operating expenses

 

 

1,348,744

 

 

 

3,827,486

 

 

 

9,991,241

 

 

 

12,105,048

 

Operating income

 

 

112,108

 

 

 

(10,156

)

 

 

3,407,215

 

 

 

2,750,239

 

Interest expense

 

 

(223,218

)

 

 

(597,711

)

 

 

(1,523,455

)

 

 

(1,755,027

)

Net (loss) income

 

$

(111,110

)

 

$

(607,867

)

 

$

1,883,760

 

 

$

995,212

 

 

 

(1)

Represents one month of activity for the unconsolidated joint venture from July 1, 2015 to July 31, 2015.

25


 

(2)

Represents seven months of activity for the unconsolidated joint venture from January 1, 2015 to July 31, 2015.

 

12. Indirect Hotel Operating Expenses

Indirect hotel operating expenses consists of the following expenses incurred by the hotels:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

General and administrative

 

$

2,908,836

 

 

$

2,542,701

 

 

$

8,245,283

 

 

$

7,335,774

 

Sales and marketing

 

 

837,820

 

 

 

2,588,456

 

 

 

6,360,115

 

 

 

7,328,646

 

Repairs and maintenance

 

 

2,788,820

 

 

 

1,700,344

 

 

 

6,046,368

 

 

 

4,676,000

 

Utilities

 

 

994,203

 

 

 

1,662,806

 

 

 

3,836,014

 

 

 

4,357,314

 

Franchise fees

 

 

1,865,001

 

 

 

1,289,381

 

 

 

3,872,493

 

 

 

3,279,077

 

Management fees, including incentive

 

 

1,770,100

 

 

 

977,178

 

 

 

3,531,346

 

 

 

2,696,499

 

Insurance

 

 

591,058

 

 

 

513,071

 

 

 

1,614,391

 

 

 

1,473,246

 

Property taxes

 

 

1,406,013

 

 

 

901,066

 

 

 

3,336,271

 

 

 

2,535,613

 

Other

 

 

83,211

 

 

 

15,042

 

 

 

203,994

 

 

 

181,661

 

Total indirect hotel operating expenses

 

$

13,245,062

 

 

$

12,190,045

 

 

$

37,046,275

 

 

$

33,863,830

 

 

 

13. Income Taxes

The components of the income tax benefit for the three and nine months ended September 30, 2015 and 2014 are as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

67,708

 

 

$

9,285

 

 

$

67,708

 

 

$

32,285

 

State

 

 

311,468

 

 

 

93,890

 

 

 

419,424

 

 

 

209,379

 

 

 

 

379,176

 

 

 

103,175

 

 

 

487,132

 

 

 

241,664

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(774,207

)

 

 

(659,931

)

 

 

(424,111

)

 

 

(917,792

)

State

 

 

(118,474

)

 

 

(165,414

)

 

 

(59,766

)

 

 

(217,578

)

 

 

 

(892,681

)

 

 

(825,345

)

 

 

(483,877

)

 

 

(1,135,370

)

 

 

$

(513,505

)

 

$

(722,170

)

 

$

3,255

 

 

$

(893,706

)

 

A reconciliation of the statutory federal income tax benefit to the Company’s income tax benefit is as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Statutory federal income tax expense

 

$

1,536,869

 

 

$

(340,744

)

 

$

2,553,376

 

 

$

877,590

 

Effect of non-taxable REIT income

 

 

(2,243,368

)

 

 

(309,902

)

 

 

(2,909,779

)

 

 

(1,763,096

)

State income tax benefit

 

 

192,994

 

 

 

(71,524

)

 

 

359,658

 

 

 

(8,200

)

 

 

$

(513,505

)

 

$

(722,170

)

 

$

3,255

 

 

$

(893,706

)

 

As of September 30, 2015 and December 31, 2014, we had a net deferred tax asset of approximately $4.0 million and $3.5 million, respectively, of which, approximately $3.1 million and $2.7 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2028 if not utilized by such time.  As of both September 30, 2015 and December 31, 2014, approximately $0.2 million of the net deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years.  The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance

26


awards, vacation and sick pay, bad debt allowance and depreciation.  We believe that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

 

 

14. Income Per Share and Per Unit

Income 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 partners and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income. The computation of basic and diluted earnings per share is presented below.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to the Company for

   basic computation

 

$

3,872,394

 

 

$

(214,902

)

 

$

5,878,836

 

 

$

2,734,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding for basic computation

 

 

14,247,671

 

 

 

10,353,988

 

 

 

11,884,110

 

 

 

10,311,595

 

Basic and diluted net income (loss) per share

 

$

0.27

 

 

$

(0.02

)

 

$

0.49

 

 

$

0.27

 

 

Income Per Unit – The computation of basic and diluted earnings per unit is presented below.

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,636,644

 

 

$

(280,014

)

 

$

7,109,609

 

 

$

3,474,854

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of units outstanding

 

 

16,615,889

 

 

 

13,108,115

 

 

 

14,328,893

 

 

 

13,101,986

 

Basic and diluted net income (loss)  per unit

 

$

0.28

 

 

$

(0.02

)

 

$

0.50

 

 

$

0.27

 

 

 

15. Subsequent Events

On October 20, 2015, we secured $2.0 million additional proceeds on our mortgage loan on the DoubleTree by Hilton Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the existing loan agreement.

On October 27, 2015, we announced a quarterly dividend (distribution) on our common stock (and units) of $0.08 per share (and unit), payable on January 11, 2016 to stockholders (and unitholders) of record as of December 15, 2015.

 

 

27


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Sotherly Hotels Inc. 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.  Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the initial properties.

Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels, comprising 3,011 rooms. All of our properties, except for the Georgian Terrace, operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree and Sheraton.  As of July 31, 2015, all twelve of these hotels are 100% owned by subsidiaries of the Operating Partnership.  During the reporting period, we owned a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle prior to our acquisition of the remaining 75.0% interest in July 2015.  As of September 30, 2015, we owned the following hotel properties:

 

 

 

Number

 

 

 

 

 

 

 

Property

 

of Rooms

 

 

Location

 

Date of Acquisition

 

Chain Designation

Wholly-owned

 

 

 

 

 

 

 

 

 

 

Crowne Plaza Hampton Marina

 

 

173

 

 

Hampton, VA

 

April 24, 2008

 

Upscale

Crowne Plaza Hollywood Beach Resort(1)

 

 

311

 

 

Hollywood Beach, FL

 

August 9, 2007

 

Upscale

Crowne Plaza Houston Downtown

 

 

259

 

 

Houston, TX

 

November 13, 2013

 

Upscale

Crowne Plaza Tampa Westshore

 

 

222

 

 

Tampa, FL

 

October 29, 2007

 

Upscale

DoubleTree by Hilton Brownstone-University

 

 

190

 

 

Raleigh, NC

 

December 21, 2004

 

Upscale

DoubleTree by Hilton Jacksonville Riverfront

 

 

293

 

 

Jacksonville, FL

 

July 22, 2005

 

Upscale

DoubleTree by Hilton Laurel

 

 

208

 

 

Laurel, MD

 

December 21, 2004

 

Upscale

DoubleTree by Hilton Philadelphia Airport

 

 

331

 

 

Philadelphia, PA

 

December 21, 2004

 

Upscale

Georgian Terrace

 

 

326

 

 

Atlanta, GA

 

March 27, 2014

 

Independent(2)

Hilton Savannah DeSoto

 

 

246

 

 

Savannah, GA

 

December 21, 2004

 

Upper Upscale

Hilton Wilmington Riverside

 

 

272

 

 

Wilmington, NC

 

December 21, 2004

 

Upper Upscale

Sheraton Louisville Riverside

 

 

180

 

 

Jeffersonville, IN

 

September 20, 2006

 

Upper Upscale

Total

 

 

3,011

 

 

 

 

 

 

 

 

(1)

We owned this hotel through a joint venture in which we had a 25.0% interest, through July 31, 2015.   We acquired the remaining 75.0% interest on July 31, 2015 and owned the hotel 100%, as of September 30, 2015.

(2)

We believe that the Georgian Terrace would carry a chain scale designation of upper upscale if it were a branded hotel.

We conduct substantially all our business through our Operating Partnership.  We are the sole general partner of our Operating Partnership, and we own an approximate 88.1% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our initial properties and related assets.

To qualify as a REIT, we cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessees, which are wholly owned subsidiaries of the Operating Partnership.  Our TRS Lessees then engage an eligible independent hotel management company to operate the hotels under a management agreement.  Our TRS Lessee has engaged Chesapeake Hospitality to manage our wholly-owned hotels.  Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes.  The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Key Operating Metrics

In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

 

·

Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

 

·

Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and

 

·

Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.

28


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 reserve expenses), 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 of the additional variable operating costs associated with higher occupancy.

We also use FFO, Adjusted FFO and Hotel EBITDA as a measure of our operating performance.  See “Non-GAAP Financial Measures.”

 

 

Results of Operations

The following tables illustrate the key operating metrics for the three and nine months ended September 30, 2015 and 2014, respectively, for the Company’s wholly-owned properties, including the Crowne Plaza Hollywood Beach Resort for the period from August 1, 2015 to September 30, 2015, during each respective reporting period (“actual” portfolio metrics), as well as the ten wholly-owned properties in the portfolio that were under the Company’s control during the three and nine months ended September 30, 2015 and the corresponding period in 2014 (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Georgian Terrace, which was acquired in March 2014, or for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture in August 2007 and in which the Company had a 25.0% indirect interest prior to its acquisition of the remaining 75.0% interest in July 2015.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

Actual Portfolio Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy %

 

 

70.5

%

 

 

73.1

%

 

 

71.4

%

 

 

72.7

%

ADR

 

$

128.16

 

 

$

122.61

 

 

$

133.20

 

 

$

126.32

 

RevPAR

 

$

90.32

 

 

$

89.60

 

 

$

95.06

 

 

$

91.85

 

Same-Store Portfolio Metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy %

 

 

69.7

%

 

 

72.1

%

 

 

71.2

%

 

 

71.9

%

ADR

 

$

124.77

 

 

$

119.48

 

 

$

130.49

 

 

$

124.27

 

RevPAR

 

$

86.93

 

 

$

86.14

 

 

$

92.87

 

 

$

86.57

 

 

Comparison of the Three Months Ended September 30, 2015 to the Three Months Ended September 30, 2014

Revenue.  Total revenue for the three months ended September 30, 2015 increased approximately $2.2 million, or 6.9%, to approximately $33.9 million compared to total revenue of approximately $31.8 million for the three months ended September 30, 2014. Approximately $2.4 million of the increase relates to the acquisition of our property in Hollywood Beach, Florida in July 2015.  Increases in revenues at our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Hampton, Virginia and Atlanta, Georgia were offset by decreases in revenue at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas; other revenue decreases at properties in Jeffersonville, Indiana and Tampa, Florida, as well as by the loss of rental income associated with the Shell Island which expired in December 2014.

Room revenue increased approximately $1.9 million, or 8.5%, to approximately $24.1 million for the three months ended September 30, 2015 compared to room revenue of approximately $22.2 million for the three months ended September 30, 2014.  The increase in room revenue for the three months ended September 30, 2015 resulted mainly from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.8 million for the period.  In addition, the increase in room revenue for the three months ended September 30, 2015 resulted from favorable results of a 4.5% increase in ADR and a 0.8% increase in RevPAR, offset by a 3.6% decrease in occupancy, as compared to the same period in 2014. Reduced occupancy was due to ongoing renovations at our Laurel, Maryland; Jacksonville, Florida; Houston, Texas and Atlanta, Georgia. Our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; and Hampton, Virginia, experienced a significant increase in room revenue, offset by decreases at our properties in Wilmington, North Carolina and Tampa, Florida.

Food and beverage revenues decreased approximately $0.1 million, or 1.1%, to approximately $7.5 million for the three months ended September 30, 2015 compared to food and beverage revenues of approximately $7.6 million for the three months ended September 30, 2014.   The decrease in food and beverage revenues for the three months ended September 30, 2014 resulted principally from reduced occupancy due to ongoing renovations at our Laurel, Maryland; Jacksonville, Florida; Houston, Texas and Atlanta, Georgia and reductions at our properties in Wilmington, North Carolina; Savannah, Georgia; Philadelphia, Pennsylvania and

29


Hampton, Virginia, which were offset by increases in food and beverage revenue mainly from the acquired property in Hollywood Beach, Florida and at our other properties.

Revenue from other operating departments increased approximately $0.4 million, or 19.8%, to approximately $2.3 million for the three months ended September 30, 2015 compared to revenue from other operating departments of approximately $1.9 million for the three months ended September 30, 2014.  The increase in revenue from other operating departments for the three months ended September 30, 2015 resulted mainly from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.2 million for the period.

Hotel Operating Expenses.  Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $26.0 million for the three months ended September 30, 2015, an increase of approximately $1.8 million, or 7.7%, compared to total hotel operating expenses of approximately $24.1 million for the three months ended September 30, 2014.  The increase in hotel operating expenses for the three months ended September 30, 2015 was substantially related to increases from the acquired property in Hollywood Beach, Florida, accounting for increases in hotel operating expenses of approximately $1.9 million for the period.

Rooms expense for the three months ended September 30, 2015 increased approximately $0.5 million, or 7.8%, to approximately $6.7 million compared to rooms expense for the three months ended September 30, 2014 of approximately $6.2 million. The increase in rooms expense for the three months ended September 30, 2015 was substantially related to the acquired property in Hollywood Beach, Florida, accounting for increases in rooms expense of approximately $0.5 million for the period.

Food and beverage expenses for the three months ended September 30, 2015 increased approximately $0.2 million, or 2.7%, to approximately $5.6 million compared to food and beverage expenses of approximately $5.4 million for the three months ended September 30, 2014.  The increase in food and beverage expenses for the three months ended September 30, 2015 was substantially related to the acquired property in Hollywood Beach, Florida, accounting for increases in food and beverage expenses of approximately $0.3 million for the period.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2015 increased approximately $1.1 million, or 8.7%, to approximately $13.2 million compared to indirect expenses of approximately $12.2 million for the three months ended September 30, 2014.  The increase in indirect expenses for the three months ended September 30, 2015 was substantially related to the acquired property in Hollywood Beach, Florida, accounting for increases in indirect expenses of approximately $1.0 million for the period and property tax costs compared with the three months ended September 30, 2014.

Depreciation and Amortization.  Depreciation and amortization expense for the three months ended September 30, 2015 decreased approximately $0.1 million, or 2.8%, to $3.4 million compared to depreciation and amortization of approximately $3.5 million for the three months ended September 30, 2014.  The decrease was mostly attributable to reductions of intangible asset amortization during the three months ended September 30, 2015 compared to the three months ended September 30, 2014, offset by increases in the depreciation related to our capital assets acquired in the fourth quarter of 2014 and the first two quarters of 2015.

Loss on Disposal of Assets.  During the three months ended September 30, 2015, we recorded a loss on disposal of assets of $207,235, compared to no disposal of assets for the three months ended September 30, 2014.

Corporate General and Administrative.  Corporate general and administrative expenses for the three months ended September 30, 2015 increased approximately $1.4 million, or 134.5% to approximately $2.4 million compared to corporate general and administrative expenses of approximately $1.0 million for the three months ended September 30, 2014.  The increase in corporate general and administrative expenses was mainly due to an increase in acquisition costs of approximately $0.6 million, a one-time tax penalty of $0.4 million, loan costs of $0.2 million on the modification of the Crowne Plaza Hollywood Beach Resort mortgage, additional staffing and related salary increase of approximately $0.1 million, and increased professional fees of approximately $0.1 million.

Interest Expense.  Interest expense for the three months ended September 30, 2015 increased approximately $0.2 million, or 6.3%, to approximately $4.2 million compared to interest expense of approximately $4.0 million for the three months ended September 30, 2014.  The increase in interest expense for the three months ended September 30, 2015 was substantially related to the assumed mortgage loan for the acquired property in Hollywood Beach, Florida, accounting for an increase in interest expense of approximately $0.3 million for the period, and by the issuance of the 7% Notes due in 2019, accounting for approximately $0.4 million.  These increases were offset by the Bridge Loan interest during the three months ending September 30, 2014 compared to no Bridge Loan interest during the three months ending September 30, 2015 accounting for approximately $0.5 million.

Equity Income (Loss) in Joint Venture.  Equity income (loss) in joint venture for the three months ended September 30, 2015 represented our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort through July 31, 2015, the date of our

30


acquisition of the property.  For the three months ended September 30, 2015 and 2014, we realized approximately $0 and $(0.2) net income (loss), respectively.  

Loss on Early Debt Extinguishment.  During the three months ended September 30, 2015 we refinanced a variable rate mortgage loan, we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks.  The amount of accumulated un-amortized loan costs of $74,824 was written off during the period ending September 30, 2015.  There was no loss on early debt extinguishment during the three months ending September 30, 2014.

Unrealized Loss on Hedging Activities.  During the three months ended September 30, 2015 we refinanced a variable rate mortgage loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks.  During August 2015 we purchased an interest rate cap for $179,800.  As of September 30, 2015 the fair market value of the interest rate cap is $72,992.  The unrealized loss on hedging activities during the three months ended September 30, 2015 and 2014, was $106,808 and $0, respectively.

Gain on Change in Control.  On July 31, 2015, we acquired from Carlyle the remaining 75% of the entities that own and lease the Crowne Plaza Hollywood Beach Resort.  Due to the increased fair market value of the property for our original 25% we recognized a discounted gain on change in control.  The gain on change in control during the three months ended September 30, 2015 and 2014, was approximately $6.6 million and $0, respectively.  The gain on change in control is based on a preliminary purchase price allocation.

Income Taxes.  We had an income tax benefit of approximately $0.5 million for the three months ended September 30, 2015 compared to an income tax benefit of approximately $0.7 million for the three months ended September 30, 2014.  The income tax provision is primarily derived from the operations of our TRS Lessees.  Our TRS Lessees realized a lesser operating loss for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Net Income (Loss).  We realized net income for the three months ended September 30, 2015 of approximately $4.6 million compared to total net loss of approximately $(0.3) million for the three months ended September 30, 2014 as a result of the operating results discussed above.

Comparison of the Nine Months Ended September 30, 2015 to the Nine Months Ended September 30, 2014

Revenue. Total revenue for the nine months ended September 30, 2015 increased approximately $8.7 million, or 9.3%, to approximately $101.8 million compared to total revenue of approximately $93.1 million for the nine months ended September 30, 2014. Approximately $5.6 million of the increase relates to the acquisition of our property in Atlanta, Georgia in March 2014.  Approximately $2.4 million of the increase relates to the acquisition of our property in Hollywood Beach, Florida in July 2015.  Increases in revenues at our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Hampton, Virginia and Atlanta, Georgia were offset by decreases in revenue at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas; other revenue decreases at our property in Wilmington, North Carolina,  as well as by the loss of rental income associated with the Shell Island which expired in December 2014.

Room revenue increased approximately $6.7 million, or 10.3%, to approximately $71.8 million for the nine months ended September 30, 2015 compared to room revenue of approximately $65.1 million for the nine months ended September 30, 2014. The increase in room revenue for the nine months ended September 30, 2015 resulted mainly from the acquired property in Atlanta, Georgia, accounting for an increase of approximately $3.0 million for the period and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.8 million for the period. Our properties in Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; and Hampton, Virginia, experienced a significant increase in room revenue, offset by decreases at our properties in Wilmington, North Carolina; Laurel, Maryland; Tampa, Florida; Houston, Texas and Atlanta, Georgia.

Food and beverage revenues increased approximately $1.0 million, or 4.3%, to approximately $23.9 million for the nine months ended September 30, 2015 compared to food and beverage revenues of approximately $22.9 million for the nine months ended September 30, 2014. The increase in food and beverage revenues for the nine months ended September 30, 2015 resulted principally from our acquired property in Atlanta, Georgia, accounting for an increase of approximately $2.0 million for the period and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.4 million for the period. Additional increases in food and beverage revenue at our properties in Savannah, Georgia and Raleigh, North Carolina were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments increased approximately $1.0 million, or 19.3%, to approximately $6.1 million for the nine months ended September 30, 2015 compared to revenue from other operating departments of approximately $5.1 million for the nine months ended September 30, 2014. The increase in other operating departments revenues for the nine months ended September 30, 2015 resulted principally from our acquired property in Atlanta, Georgia, accounting for an increase of approximately

31


$0.6 million for the period and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.3 million for the period.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $73.9 million for the nine months ended September 30, 2015, an increase of approximately $6.5 million, or 9.7%, compared to total hotel operating expenses of approximately $67.4 million for the nine months ended September 30, 2014. The increase in hotel operating expenses for the nine months ended September 30, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $5.0 million of the increase in expenses for the nine months ended September 30, 2015 and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $2.9 million for the period, coupled by a decrease in hotel operating expenses at our same-store properties of approximately $1.4 million compared to the nine months ended September 30, 2014, mainly from reduced occupancy by 0.4% and decreases in expenses at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas.

Rooms expense for the nine months ended September 30, 2015 increased approximately $1.8 million, or 10.4%, to approximately $19.0 million compared to rooms expense of approximately $17.2 million for the nine months ended September 30, 2014. The increase in rooms expense for the nine months ended September 30, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $0.9 million of the increase and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.5 million for the period.

Food and beverage expenses for the nine months ended September 30, 2015 increased approximately $1.2 million, or 8.1%, to approximately $16.7 million compared to food and beverage expenses of approximately $15.4 million for the nine months ended September 30, 2014. The increase in food and beverage expenses for the nine months ended September 30, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $1.3 million of the increase and from the recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.3 million for the period, these were offset by decreases in food and beverage expenses mainly from reduced occupancy and decreases in expenses at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas.

Indirect expenses at our wholly-owned properties were approximately $37.0 million for the nine months ended September 30, 2015, an increase of approximately $3.1 million, or 9.4%, compared to indirect expenses of approximately $33.9 million for the nine months ended September 30, 2014. The increase in indirect expenses for the nine months ended September 30, 2015 were substantially related to our recently acquired property in Atlanta, Georgia, accounting for approximately $1.7 million of the increase compared to the nine months ended September 30, 2014.

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2015 increased approximately $0.7 million, or 7.7%, to $9.6 million compared to depreciation and amortization of approximately $8.9 million for the nine months ended September 30, 2014. The increase was mostly attributable to depreciation and amortization related to our recently acquired property in Atlanta, Georgia and depreciation and amortization related to our capital assets acquired in the fourth quarter of 2014 and the first quarter of 2015, offset by reductions of intangible asset amortization during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Loss on Disposal of Assets.  During the nine months ended September 30, 2015, we recorded a loss on disposal of assets of $0.2 million, compared to no disposal of assets for the nine months ended September 30, 2014.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2015 increased approximately $1.7 million, or 43.9%, to approximately $5.4 million compared to corporate general and administrative expenses of approximately $3.7 million the nine months ended September 30, 2014.  The increase in corporate general and administrative expenses was mainly due to an increase in acquisition costs of approximately $0.5 million, a one-time tax penalty of $0.4 million, additional staffing and related salary increase of approximately $0.4 million, increased professional fees of approximately $0.3 million, loan costs of $0.2 million on the modification of the Crowne Plaza Hollywood Beach Resort mortgage, and increased audit fees of approximately $0.2 million offset somewhat by a reduction in legal fees of approximately $$0.2 million

Interest Expense. Interest expense for the nine months ended September 30, 2015 increased approximately $1.1 million, or 9.8%, to approximately $11.9 million compared to interest expense of approximately $10.8 million for the nine months ended September 30, 2014. The increase in interest expense for the nine months ended September 30, 2015, was substantially related to the additional mortgage on our acquired property in Atlanta, Georgia during the first quarter of 2015 of $0.4 million, the assumed mortgage loan for the recently acquired property in Hollywood Beach, Florida, accounting for an increase in interest expense of approximately $0.3 million for the period, the issuance of the 7% Notes due in 2019, accounting for an increase of approximately $1.3 million for the nine month period ending September 30, 2015.  These increases were offset by a decrease in interest from the reduction of the Bridge Loan during the nine months ending September 30, 2015 of $0.9 million.

32


Equity Income (Loss) in Joint Venture. Equity income (loss) in joint venture for the nine months ended September 30, 2015 represented our 25.0% share of the net income (loss) of the Crowne Plaza Hollywood Beach Resort through July 31, 2015, the date of our acquisition of the property.  For the nine months ended September 30, 2015, our 25.0% share of the net income of the hotel increased approximately $0.3 million, or 103.7%, to approximately $0.5 million compared to net income of approximately $0.2 million for the nine months ended September 30, 2014.  The increase primarily relates to better operating metrics.  For the nine months ended September 30, 2015, the hotel reported occupancy of 83.5%, ADR of $172.89 and RevPAR of $146.53. This compares with results reported by the hotel for the nine months ended September 30, 2014 of occupancy of 84.1%, ADR of $161.02 and RevPAR of $136.96.

Loss on Early Debt Extinguishment.  During the nine months ended September 30, 2015 we refinanced a variable rate mortgage loan, we had with the Bank of the Ozarks on the Georgian Terrace, with a new fixed rate loan from Bank of America.  The amount of accumulated un-amortized loan costs of $697,582 was written off during the period ending September 30, 2015.  In addition, we refinanced a variable rate mortgage loan, we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks.  The amount of accumulated un-amortized loan costs of $75,324 was written off during the period ending September 30, 2015.  There was no loss on early debt extinguishment during the nine months ending September 30, 2014.

Unrealized Loss on Hedging Activities.  During the nine months ended September 30, 2015 we refinanced a variable rate mortgage loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks.  During August 2015 we purchased an interest rate cap for $179,800.  As of September 30, 2015 the fair market value of the interest rate cap is $72,992.  The unrealized loss on hedging activities during the nine months ended September 30, 2015 and 2014, was $106,808 and $0, respectively.

Gain on Change in Control.  On July 31, 2015, we acquired from Carlyle the remaining 75% of the entities that own and lease the Crowne Plaza Hollywood Beach Resort.  Due to the increased fair market value of the property for our original 25% we recognized a discounted gain on change in control.  The gain on change in control during the nine months ended September 30, 2015 and 2014, was approximately $6.6 million and $0, respectively.  The gain on change in control is based on a preliminary purchase price allocation.

Income Taxes. We had an income tax provision of approximately $0 for the nine months ended September 30, 2015 compared to an income tax benefit of approximately $0.9 million for the nine months ended September 30, 2014.  The income tax benefit (provision) is primarily derived from the operations of our TRS Lessee.  Our TRS Lessee realized a taxable operating income for the nine months ended September 30, 2015 compared to taxable loss for the nine months ended September 30, 2014.

Net Income (Loss).  We realized net income of approximately $7.1 million for the nine months ended September 30, 2015 compared to a net income of approximately $3.5 million for the nine months ended September 30, 2014, as a result of the operating results discussed above.

 

 

33


Non-GAAP Financial Measures

We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance.  These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.

FFO and Adjusted FFO.  Industry analysts and investors use FFO as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.

We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early debt extinguishment, aborted offering costs, costs associated with the departure of executive officers, change in control gains or losses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative 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.

 

34


The following is a reconciliation of net loss to FFO and Adjusted FFO for the three and nine months ended September 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

Net income (loss)

 

$

4,636,644

 

 

$

(280,014

)

 

$

7,109,609

 

 

$

3,474,854

 

Depreciation and amortization

 

 

3,374,209

 

 

 

3,472,760

 

 

 

9,583,506

 

 

 

8,896,057

 

Equity in depreciation and amortization of

   joint venture

 

 

37,034

 

 

 

139,675

 

 

 

259,279

 

 

 

417,177

 

Loss on disposal of assets

 

 

207,235

 

 

 

 

 

 

201,835

 

 

 

 

Gain on change in control

 

 

(6,560,958

)

 

 

 

 

 

(6,560,958

)

 

 

 

Gain on involuntary conversion of asset

 

 

 

 

 

 

 

 

(32,433

)

 

 

 

FFO

 

$

1,694,164

 

 

$

3,332,421

 

 

$

10,560,838

 

 

$

12,788,088

 

Increase in deferred income taxes

 

 

(824,973

)

 

 

(729,937

)

 

 

(416,169

)

 

 

(1,037,181

)

Acquisition costs

 

 

622,973

 

 

 

 

 

 

622,973

 

 

 

155,187

 

Franchise termination fee

 

 

 

 

 

351,800

 

 

 

 

 

 

351,800

 

Loss on hedging activities

 

 

106,808

 

 

 

 

 

 

106,808

 

 

 

 

Loss on early debt extinguishment

 

 

74,824

 

 

 

 

 

 

772,907

 

 

 

 

Adjusted FFO

 

$

1,673,796

 

 

$

2,954,284

 

 

$

11,647,357

 

 

$

12,257,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

   outstanding, basic and diluted

 

 

14,247,671

 

 

 

10,353,988

 

 

 

11,884,110

 

 

 

10,311,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of non-controlling

   units

 

 

2,368,218

 

 

 

2,754,127

 

 

 

2,444,783

 

 

 

2,790,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares and units

   outstanding, basic and diluted

 

 

16,615,889

 

 

 

13,108,115

 

 

 

14,328,893

 

 

 

13,101,986

 

 

Hotel EBITDA.  We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) equity in the income or loss of equity investees, (4) unrealized gains and losses on derivative instruments not included in other comprehensive income, (5) gains and losses on disposal of assets, (6) realized gains and losses on investments, (7) impairment of long-lived assets or investments, (8) loss on early debt extinguishment, (9) gains or losses on change in control, (10)corporate general and administrative expense; (11) depreciation and amortization; and (12) other operating revenue not related to our wholly-owned portfolio.  We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control.  We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.

Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.

35


The following is a reconciliation of net income to Hotel EBITDA for the three and nine months ended September 30, 2015 and 2014:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

 

Net income (loss)

 

$

4,636,644

 

 

$

(280,014

)

 

$

7,109,609

 

 

$

3,474,854

 

Interest expense

 

 

4,245,679

 

 

 

3,994,261

 

 

 

11,860,649

 

 

 

10,803,127

 

Interest income

 

 

(15,480

)

 

 

(6,630

)

 

 

(40,888

)

 

 

(13,785

)

Income tax provision (benefit)

 

 

(513,505

)

 

 

(722,170

)

 

 

3,255

 

 

 

(893,706

)

Depreciation and amortization

 

 

3,374,209

 

 

 

3,472,760

 

 

 

9,583,506

 

 

 

8,896,057

 

Equity in interest, depreciation and amortization

   of joint venture

 

 

92,844

 

 

 

304,218

 

 

 

640,188

 

 

 

905,683

 

Loss on early debt extinguishment

 

 

74,824

 

 

 

 

 

 

772,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

 

11,895,215

 

 

 

6,762,425

 

 

 

29,929,226

 

 

 

23,172,230

 

Acquisition costs

 

 

622,973

 

 

 

 

 

 

622,973

 

 

 

155,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

12,518,188

 

 

 

6,762,425

 

 

 

30,552,199

 

 

 

23,327,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate general and administrative

 

 

1,814,455

 

 

 

1,039,318

 

 

 

4,756,059

 

 

 

3,583,187

 

Equity in Adjusted EBITDA of joint venture

 

 

(101,017

)

 

 

(148,053

)

 

 

(1,147,078

)

 

 

(1,154,486

)

Loss on hedging activities

 

 

106,808

 

 

 

 

 

 

106,808

 

 

 

 

Loss on disposal of assets

 

 

207,235

 

 

 

 

 

 

201,835

 

 

 

 

Gain on change in control

 

 

(6,560,958

)

 

 

 

 

 

(6,560,958

)

 

 

 

Gain on involuntary conversion of asset

 

 

 

 

 

 

 

 

(32,433

)

 

 

 

Net lease rental income

 

 

 

 

 

(87,500

)

 

 

 

 

 

(262,500

)

Other fee income

 

 

(21,913

)

 

 

(57,260

)

 

 

(200,976

)

 

 

(222,829

)

Hotel EBITDA

 

$

7,962,798

 

 

$

7,508,930

 

 

$

27,675,456

 

 

$

25,270,729

 

 

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels.  Cash flow provided by operating activities for the nine months ended September 30, 2015 was approximately $9.3 million.  We had a decrease in cash provided by operating activities for the nine months ended September 30, 2015 by approximately $7.5 million, compared to the nine months ended September 30, 2014.  The decrease is mainly attributable to a net decrease of changes in assets and liabilities of approximately $5.9 million, an increase in net income of approximately $4.0 million which was offset by an approximate $5.2 million decrease in other adjustments to reconcile net income to net cash provided by operating activities. We expect that cash on hand and the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the Company’s stockholders (and unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).

Investing Activities.  During the nine months ended September 30, 2015, we used $25.5 million to acquire the remaining 75% ownership interest in the Crowne Plaza Hollywood Beach Resort and we spent approximately $15.7 million on capital expenditures, of which, approximately $2.4 million related to the routine replacement of furniture, fixtures and equipment and $13.3 million related to renovation of our properties in Atlanta, Georgia; Houston, Texas; Laurel, Maryland; Philadelphia, Pennsylvania and Jacksonville, Florida.  We also contributed approximately $3.5 million during the nine months ended September 30, 2015 into reserves required by the lenders for seven of our hotels according to the provisions of their respective loan agreements.  During the nine months ended September 30, 2015, we received reimbursements from those reserves of approximately $5.8 million for capital expenditures related to those properties and we received proceeds for the sale of the development parcel for approximately $2.0 million.

Financing Activities. Cash flow provided by financing activities for the nine months ended September 30, 2015 was approximately $25.6 million.  This inflow was mainly from proceeds from the sale of common stock for approximately $23.3 million and net mortgage proceeds of $6.6 million, offset by dividend and distribution payments of $2.8 million and payments of deferred financing costs of $1.5 million.

36


Capital Expenditures

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry.  Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue.  Below is a description of capital expenditures by property:

 

·

At the Company’s hotel in Jacksonville, Florida, we expect additional capital expenditures of $0.3 million for the remainder of 2015, related to the September 2015 conversion to the DoubleTree by Hilton Jacksonville Riverfront.

 

·

At the Company’s hotel in Houston, Texas, renovations of the guestrooms and public spaces totaling an estimated $4.9 million are underway.  As of September 30, 2015, the Company had incurred costs totaling approximately $3.3 million toward this renovation.  Renovations are expected to be completed by March 2016.

 

·

At the Company’s hotel in Atlanta, Georgia, an estimated $6.8 million guestroom renovation is underway.  As of September 30, 2015, the Company had incurred costs totaling approximately $4.8 million toward this renovation.  Renovations are expected to be completed in April 2016.

 

·

At the Company’s hotel in Laurel, Maryland, an estimated $4.7 million renovation and product improvement plan is substantially complete, related to the conversion to the DoubleTree by Hilton Laurel.  As of September 30, 2015, the Company had incurred costs totaling approximately $3.9 million toward this renovation.  Renovations are expected to be completed in December 2015.  

Given our desire to complete the renovation activities at our properties in Laurel, Maryland and Jacksonville, Florida and to continue such activities in Houston, Texas and Atlanta, Georgia, we aim to restrict all other capital expenditures during the renovation period to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations.  We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 2.50% to 3.00% of gross revenues in 2015.

We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina, the DoubleTree by Hilton Raleigh Brownstone-University, the Sheraton Louisville Riverside, the Crowne Plaza Houston Downtown, the DoubleTree by Hilton Jacksonville Riverfront, the Crowne Plaza Hollywood Beach Resort and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.

 

 

Liquidity and Capital Resources

As of September 30, 2015, we had total cash of approximately $21.8 million, of which approximately $15.5 million was in cash and cash equivalents and approximately $6.3 million was restricted for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted.  We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).

On October 20, 2015, we secured $2.0 million additional proceeds on the mortgage loan on the DoubleTree by Hilton Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.

On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood Beach Resort with Bank of America, N.A.   The mortgage term is ten years maturing October 1, 2025, subject to certain criteria. The mortgage bears a fixed interest rate of 4.913%.  The mortgage amortizes on a 30-year schedule. The Company used the proceeds from the mortgage to repay the existing first mortgage on the Crowne Plaza Hollywood Beach Resort and to pay closing costs, and will use the balance of the proceeds for general corporate purposes.

On September 2, 2015, we closed on the sale of a 0.3 acre parcel of excess land adjacent to our Atlanta, Georgia property for $2.2 million.  The parcel was included in the acquisition of the Georgian Terrace in March 2014.  We used the proceeds of the sale for general corporate purposes.

On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The mortgage term is four years maturing July 7, 2019 and may be extended for one additional period of one year, subject to certain criteria. The mortgage bears a

37


floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0%.  The mortgage amortizes on a 25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The Company used the proceeds from the mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville Riverfront and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the DoubleTree by Hilton Jacksonville Riverfront and for general corporate purposes.

On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America on the Georgian Terrace in Atlanta, Georgia.  The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule.  The maturity date is June 1, 2025.  The Company used the proceeds of the mortgage to repay the existing first mortgage and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the Georgian Terrace and for general corporate purposes.

We will need to, and plan to, renew, replace or extend our existing indebtedness prior to their respective maturity dates.  We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.  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 be forced to dispose of hotel properties on disadvantageous terms.  To the extent we cannot repay our outstanding debt, we risk losing some or all of these 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.

We believe there will be more opportunities to acquire properties in the future that meet our strategic goals and provide attractive long term returns.  Given the potential for attractive acquisitions emerging from the recent economic downturn, we intend to pursue the acquisition of wholly-owned properties, permissible joint venture investments as well as equity or debt financing in the future to enable us to take advantage of such opportunities.  However, should permissible joint venture transactions and equity or debt financing not be available on acceptable terms, we may not be able to take advantage of such opportunities.

Beyond the funding of any required principal reduction on our existing indebtedness or acquisitions, our medium and long-term needs will generally include the repayment of the Notes (which are callable after September 30, 2016 with regard to the 8% Notes and November 15, 2017 with regard to the 7% Notes) and the retirement of maturing mortgage debt.  We remain committed to maintaining a flexible capital structure.  Accordingly, we expect to meet our long-term liquidity needs through a combination of some or all of the following:

 

·

The issuance of additional shares of preferred stock;

 

·

The issuance of additional shares of our common stock;

 

·

The issuance of senior, unsecured debt;

 

·

The issuance of additional units in the Operating Partnership;

 

·

The incurrence by the subsidiaries of the Operating Partnership of mortgage indebtedness in connection with the acquisition or refinancing of hotel properties;

 

·

The selective disposition of core or non-core assets;

 

·

The sale or contribution of some of our wholly-owned properties, development projects or development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of generating additional capital through such sale or contribution; or

 

·

The issuance by the Operating Partnership and/or subsidiary entities of secured and unsecured debt securities.

 

 

Financial Covenants

Mortgage Loans

Our mortgage loan agreements contain various financial covenants.  Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.

If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms.  Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash

38


collateral.  Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.

If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing.

Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.

As of September 30, 2015, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.

Unsecured Notes

The indentures for the Notes contains certain covenants and restrictions that require us to meet certain financial ratios.  We are not permitted to incur any Debt (other than intercompany Debt), as defined in the indentures, if, immediately after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value, as defined in the indentures, would be greater than 0.65 to 1.0.  In addition, we are not permitted to incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense, both as defined in the indentures, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.

39


These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were applicable at September 30, 2015 and December 31, 2014, respectively.

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Ratio of Stabilized Consolidated Income Available

   for Debt Service to Stabilized Consolidated

   Interest Expense

 

 

 

 

 

 

 

 

Net income (loss)(1)

 

$

2,896,246

 

 

$

(738,509

)

Interest expense(1)

 

 

15,694,392

 

 

 

14,636,870

 

Loss on debt extinguishment

 

 

1,603,986

 

 

 

831,079

 

Unrealized loss on hedging activities

 

 

106,808

 

 

 

-

 

Gain on change in control

 

 

(6,560,958

)

 

 

-

 

Gain on involuntary conversion of asset

 

 

(201,584

)

 

 

-

 

Loss on disposal of assets

 

 

201,835

 

 

 

-

 

Provision for taxes(1)

 

 

(830,762

)

 

 

(1,727,723

)

Equity in (income) loss of joint venture(1)

 

 

(565,457

)

 

 

(307,370

)

Impairment of investment in hotel properties, net(1)

 

 

3,175,000

 

 

 

3,175,000

 

Depreciation and amortization(1)

 

 

12,656,734

 

 

 

11,969,284

 

Corporate general and administrative expenses(1)

 

 

6,726,666

 

 

 

5,085,949

 

Consolidated Income Available for Debt Service(1)

 

 

34,902,906

 

 

 

32,924,580

 

Less: Income of Non-Stabilized Assets (1)(2)

 

 

(7,653,370

)

 

 

(8,961,209

)

Stabilized Consolidated Income Available for

   Debt Service (1)

 

$

27,249,536

 

 

$

23,963,371

 

Interest expense(1)

 

$

15,694,392

 

 

$

14,636,870

 

Loss on debt extinguishment

 

 

643,889

 

 

 

831,079

 

Amortization of issuance costs(1)(2)

 

 

(1,303,159

)

 

 

(1,428,674

)

Consolidated Interest Expense(1)

 

 

15,035,122

 

 

 

14,039,275

 

Less: Interest expense of Non-Stabilized Assets(1)(2)

 

 

(2,148,725

)

 

 

(2,444,937

)

Stabilized Consolidated Interest Expense(1)

 

$

12,886,397

 

 

$

11,594,338

 

Ratio of Stabilized Consolidated Income Available for

   Debt Service to Stabilized Consolidated

   Interest Expense

 

 

2.11

 

 

 

2.07

 

Threshold Ratio Minimum

 

 

1.50

 

 

 

1.50

 

 

 

 

 

 

 

 

 

 

Ratio of Debt to Adjusted Total Asset Value:

 

 

 

 

 

 

 

 

Mortgage loans

 

$

269,094,175

 

 

$

205,291,657

 

Unsecured notes

 

 

52,900,000

 

 

 

52,900,000

 

Total debt

 

$

321,994,175

 

 

$

258,191,657

 

Stabilized Consolidated Income Available for

   Debt Service(1)(2)

 

$

27,249,536

 

 

$

23,963,361

 

Capitalization Rate

 

 

7.5

%

 

 

7.5

%

 

 

 

363,327,147

 

 

 

319,511,480

 

Non-Stabilized Assets

 

 

196,200,000

 

 

 

146,440,000

 

Total cash

 

 

21,810,848

 

 

 

23,256,363

 

Adjusted Total Asset Value

 

$

581,337,995

 

 

$

489,207,843

 

Ratio of Debt to Adjusted Total Asset Value

 

 

0.55

 

 

 

0.53

 

Threshold Ratio Maximum

 

 

0.65

 

 

 

0.65

 

 

(1)

Represents the four preceding calendar quarters.

(2)

As permitted by the indentures, the DoubleTree by Hilton Philadelphia Airport, DoubleTree by Hilton Jacksonville Riverfront and Crowne Plaza Hollywood Beach Resort, for the period ended September 30, 2015, and the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, for the period ended December 31, 2014, are considered non-stabilized assets for purposes of the financial covenants.

40


Dividend Policy

We intend to continue to declare quarterly distributions to our stockholders.  The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue 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.

In April 2015, we increased the quarterly dividend (distribution) to $0.075 per common share (and unit).

In July 2015, we increased the quarterly dividend (distribution) to $0.08 per common share (and unit).

Off-Balance Sheet Arrangements

Through a joint venture with a Carlyle subsidiary, until July 31, 2015 we owned a 25.0% indirect, noncontrolling interest in an entity that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood Beach, Florida in 2007.  Pursuant to the joint venture, we had the right to receive a pro rata share of operating surpluses and we had an obligation to fund our pro rata share of operating shortfalls.  We also had the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.  The Crowne Plaza Hollywood Beach Resort was leased to another entity in which we also owned a 25.0% indirect, noncontrolling interest.

Carlyle owned a 75.0% controlling interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort.  Carlyle had the right to dispose of the Crowne Plaza Hollywood Beach Resort without our consent.  We accounted for our noncontrolling 25.0% interest in all of these entities under the equity method of accounting.

On July 31, 2015, indirect subsidiaries of the Operating Partnership acquired from Carlyle the remaining 75.0% interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort.  As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort.  The property was refinanced on September 28, 2015 and is encumbered by a $60.0 million mortgage which matures in September 2025 and requires monthly payments of interest at a rate of 4.913%. The Crowne Plaza Hollywood Beach Resort secures the mortgage.

Inflation

We generate revenues primarily from lease payments from our TRS Lessees and net income from the operations of our TRS Lessees. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation.  Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation.  However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, Texas and Virginia.  As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand.  Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

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 markets, namely Florida and Texas, which experience significant room demand during this period.

41


Critical Accounting Policies

The critical accounting policies are described below.  We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.

Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment.  In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties, which were 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 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 a 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 is recognized.

There were no charges for impairment of hotel properties recorded for the nine months ended September 30, 2015.

In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition.  We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.

Revenue Recognition.  Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.  Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit, including a receivable for approximately $1.6 million from Starwood Resorts and Hotels. See Note 5, for further discussion.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized.  Because of expected future taxable income of our TRS Lessees, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2015.  Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Recent Accounting Pronouncements

For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking.  All statements

42


regarding our expected financial position, business and financing plans are forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

·

national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;

 

·

risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs;

 

·

the magnitude and sustainability of the economic recovery in the hospitality industry and in the markets in which we operate;

 

·

the availability and terms of financing and capital and the general volatility of the securities markets;

 

·

risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements and, if necessary, to refinance or seek an extension of the maturity of such indebtedness or modify such debt agreements;

 

·

management and performance of our hotels;

 

·

risks associated with remediating and maintaining our system of internal controls;

 

·

risks associated with the conflicts of interest of the Company’s officers and directors;

 

·

risks associated with redevelopment and repositioning projects, including delays and cost overruns;

 

·

supply and demand for hotel rooms in our current and proposed market areas;

 

·

risks associated with our ability to maintain our franchise agreements with our third party franchisors;

 

·

our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;

 

·

our ability to successfully expand into new markets;

 

·

legislative/regulatory changes, including changes to laws governing taxation of REITs;

 

·

the Company’s ability to maintain its qualification as a REIT; and

 

·

our ability to maintain adequate insurance coverage.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.

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.

 

 

Item 3.

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 September 30, 2015, we had approximately $271.2 million of fixed-rate debt and approximately $50.6 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 5.24%.  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

43


exposed to changes in interest rates, specifically the changes in 1-month and 3-month LIBOR.  However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50% a portion of our variable-rate debt would not be exposed to changes in interest rates.   Assuming that the aggregate amount outstanding on the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the DoubleTree by Hilton Jacksonville Riverfront remains at approximately $50.6 million, the balance at September 30, 2015, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and 3-month LIBOR would be approximately $0.4 million.

As of December 31, 2014, we had approximately $167.0 million of fixed-rate debt and approximately $91.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.14%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, of 0.50% and 0.25%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on our mortgage on the Georgian Terrace, the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the DoubleTree by Hilton Jacksonville Riverfront remain at approximately $91.2 million, the balance at December 31, 2014, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $0.8 million.

 

 

Item 4.

Controls and Procedures

Sotherly Hotels Inc.

Evaluation of 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 September 30, 2015.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting, as described in Management’s Report On Internal Controls Over Financial Reporting in Item 9A of its Annual Report on Form 10-K for the year ended December 31, 2014, which continues to exist at September 30, 2015.

Remediation of Material Weakness in Internal Control over Financial Reporting

The Company is in the process of improving its controls to remediate the material weakness that existed as of December 31, 2014.  The actions being taken are subject to ongoing senior management review, as well as audit committee oversight. These remediation actions include: (i) increasing the staffing of the Company’s internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants. While some of the remediation actions are in process, this will take time to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weakness described above will continue to exist.

Changes in Internal Control over Financial Reporting

There has been 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, except as described above.

Sotherly Hotels LP

Evaluation of 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 September 30, 2015.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, have concluded that the Operating Partnership’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting, as described in Management’s Report On

44


Internal Controls Over Financial Reporting in Item 9A of its Annual Report on Form 10-K for the year ended December 31, 2014, which continues to exist at September 30, 2015.

Remediation of Material Weakness in Internal Control over Financial Reporting

The Operating Partnership is in the process of improving its controls to remediate the material weakness that existed as of December 31, 2014.  The actions being taken are subject to ongoing senior management review, as well as audit committee oversight. These remediation actions include: (i) increasing the staffing of the Operating Partnership’s internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants. While some of the remediation actions are in process, this will take time to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weakness described above will continue to exist.

Changes in Internal Control over Financial Reporting

There has been 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, except as described above.

 

 

45


PART II

 

 

Item 1.

Legal Proceedings

We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of operations, except as disclosed in Note 5.

 

 

Item 1A.

Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2014.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Partnership Agreement, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.

 

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

Item 5.

Other Information

Not applicable.

 

 

46


Item 6.

Exhibits

The following exhibits are filed as part of this Form 10-Q:

 

Exhibit

 

 

Number

 

Description of Exhibit

 

 

 

    3.1

 

Articles of Amendment and Restatement of the Company.(1)

 

 

 

    3.3

 

Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)

 

 

 

    3.4

 

Articles Supplementary of the Company.(3)

 

 

 

    3.6

 

Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)

 

 

 

    3.7

 

Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)

 

 

 

    3.8

 

Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)

 

 

 

    3.9

 

Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)

 

 

 

    4.6

 

Senior Unsecured Note issued by Sotherly Hotels LP. (6)

 

 

 

    4.7

 

Indenture between Sotherly Hotels LP and Wilmington Trust, National Association, as trustee. (6)

 

 

 

    4.8

 

Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)

 

 

 

    4.9

 

First Supplemental Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)

 

 

 

    4.10

 

7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP. (8)

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.3

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  31.4

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.3

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.4

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

47


Exhibit

 

 

Number

 

Description of Exhibit

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’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. (333-118873).

(2)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’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. (333-118873)

(3)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

(4)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013.

(5)

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. (333-189821).

(6)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013.

(7)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014.

(8)

Incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2015.

 

48


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.

 

 

 

SOTHERLY HOTELS INC.

 

 

 

 

 

Date: November 13, 2015

 

By:

 

/s/ Andrew M. Sims

 

 

 

 

Andrew M. Sims

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

By:

 

/s/ Anthony E. Domalski

 

 

 

 

Anthony E. Domalski

 

 

 

 

Chief Financial Officer

49


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.

 

 

 

SOTHERLY HOTELS LP

 

 

 

 

 

 

 

By:

 

SOTHERLY HOTELS INC.

 

 

 

 

Its General Partner

 

 

 

 

 

Date: November 13, 2015

 

By:

 

/s/ Andrew M. Sims

 

 

 

 

Andrew M. Sims

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

By:

 

/s/ Anthony E. Domalski

 

 

 

 

Anthony E. Domalski

 

 

 

 

Chief Financial Officer

50


EXHIBIT INDEX

 

Exhibit

 

 

Number

 

Description of Exhibit

 

 

 

   3.1

 

Articles of Amendment and Restatement of the Company.(1)

 

 

 

   3.3

 

Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)

 

 

 

   3.4

 

Articles Supplementary of the Company.(3)

 

 

 

   3.6

 

Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)

 

 

 

   3.7

 

Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)

 

 

 

   3.8

 

Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)

 

 

 

   3.9

 

Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)

 

 

 

   4.6

 

Senior Unsecured Note issued by Sotherly Hotels LP. (6)

 

 

 

   4.7

 

Indenture between Sotherly Hotels LP and Wilmington Trust, National Association, as trustee. (6)

 

 

 

   4.8

 

Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)

 

 

 

   4.9

 

First Supplemental Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014. (7)

 

 

 

   4.10

 

7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP. (8)

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  31.3

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  31.4

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.

 

 

 

  32.3

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

  32.4

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

51


 

(1)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’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. (333-118873).

(2)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’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. (333-118873)

(3)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

(4)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013.

(5)

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. (333-189821).

(6)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2013.

(7)

Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014.

(8)

Incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 14, 2015.

 

 

52