The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States. Currently, the Company is focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. Sotherly may also opportunistically acquire hotels throughout the United States. The Company’s portfolio consists of investments in twelve hotel properties comprising 3,156 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under the Hilton Worldwide, Marriott International, Inc., and Hyatt Hotels Corporation brands, as well as independent hotels.
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 (the “Operating Partnership”).
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 expenditures 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, 2021 was approximately 93.5% owned by the Company, through its subsidiaries leases the hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership. As of September 30, 2021, the MHI TRS Entities engaged Our Town Hospitality, LLC (“Our Town”), an eligible independent management company, to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.
All references in these “Notes to Consolidated Financial Statements” to “we”, “us”, “our” and “Sotherly” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
COVID-19, Management’s Plans and Liquidity
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels have remained open on a limited basis in order to serve the needs of the community, with the exception of the rental programs at our condominium hotels, which were temporarily closed during April and May of 2020. We believe that maintaining limited operations has allowed us to increase capacity at individual hotels as demand has begun to return and the Centers for Disease Control (“CDC”) and state guidelines have started to permit an easing of travel and other business restrictions. Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and we intend to continue those re-introductions, provided that we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.
COVID-19 has had a significant negative impact on our operations and financial results, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods. Conditions in the second and third quarters, however, improved significantly over the same periods in the prior year, as the Company witnessed increased demand fueled predominantly by leisure travel. Revenues, profitability, and cash flows from operations during the second and third quarters of 2021 exceeded our expectations but were still far below the same periods in 2019, before the pandemic. While the extent and duration of the negative effects resulting from COVID-19 on the Company’s business are uncertain and cannot be reasonably estimated at this time, the quarter’s operations and financial results were a marked improvement over the same period in 2020. Notwithstanding the encouraging results recorded during the second and third quarters of 2021, we expect significant negative impacts on our operations
15
and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and business travel approaches pre-pandemic levels. At a minimum, we expect the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow into 2022.
In response to those negative impacts, we took a number of actions to reduce costs and preserve liquidity. The Company’s board of directors suspended quarterly cash dividends on shares of the Company’s common stock and deferred payment of dividends on the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”). We also suspended most planned capital expenditure projects, reduced the cash compensation of our executive officers, board of directors and employees and engaged in the financing transactions described below.
Working closely with our hotel managers, we significantly curtailed our hotels’ operating expenses. We also sought and obtained forbearance and loan modification agreements with the lenders under the mortgages for all our hotel properties. See the discussion of forbearance, modifications, and waivers in Note 4.
As of September 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall. We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage through June 30, 2022. While the Company believes it will be successful in obtaining waivers, loan modifications or securing refinance arrangements, it cannot provide assurance that it will be able to do so on acceptable terms or at all. For example, based on our current projections, following the expiration of the waiver on the financial covenants from the lender on The Whitehall Mortgage, we do not anticipate that the financial performance of the property will have sufficiently recovered in order to meet the existing covenants. If we fail to obtain additional waivers from the lender, the lender could declare the Company in default under the mortgage loan on that property and require repayment of the outstanding balance. In addition, the mortgage on the DoubleTree by Hilton Raleigh Brownstone – University matures in July 2022 and, as a result of that property’s recent and anticipated financial performance, the Company anticipates that it may be required to make a significant principal reduction in order to exercise the extension option in the loan agreement.
As of September 30, 2021, the Company had approximately $19.5 million in unrestricted cash and approximately $13.2 million in restricted cash.
U.S. generally accepted accounting principles (“U.S. GAAP”) requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The duration and extent of the reduction in hotel demand caused by the pandemic and the return to normalized operations prevents the Company from forecasting with precision and certainty (i) its cash flows and available liquidity to meet its obligations for operating expenses, (ii) capital expenditures and scheduled payments of principal and interest, or (iii) continued compliance with financial covenants. Due to the uncertainties described above related to upcoming maturity of mortgage debt and future cash flows and resulting compliance with the financial covenants under our mortgage loans, the Company determined that there is substantial doubt about its ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Overview of Significant Transactions
Significant transactions occurring during the current and prior fiscal year include the following:
The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part. On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500. On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association. On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
16
On December 31, 2020, we closed a transaction with KWHP SOHO, LLC, a Delaware limited liability company (“KW”), as collateral agent and a note investor, and MIG SOHO, LLC, a Delaware limited liability company (“MIG”, and together with KW, the “Investors”), as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 with the closing of such option required to take place on or before December 31, 2021. As of the date of this report, we have not exercised such option and there is an aggregate of $20.0 million Secured Notes outstanding. The obligations of the Operating Partnership were guaranteed by the Company. We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements. The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option. The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term. Pursuant to the Pledge Agreement, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel (collectively, the “Pledged Collateral”). Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes. Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.
On June 21, 2021, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Palogic Value Fund, L.P., a Delaware limited partnership (“Palogic”). Pursuant to the Share Exchange Agreement, Palogic agreed to exchange 100,000 shares of the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, 85,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, and 35,000 shares of the Company’s 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Palogic Shares”), together with all of Palogic’s rights to receive accrued and unpaid dividends on those Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share (the “Company Shares”). We closed the transaction and issued the Company Shares on June 22, 2021. The Company did not receive any cash proceeds as a result of the exchange of the Palogic Shares for the Company’s common stock, and the Palogic Shares exchanged have been retired and cancelled. The issuance of the shares of the Company’s common stock was made by the Company pursuant to the exemption from the registration requirements of the Securities Act contained in Section 3(a)(9) of such act on the basis that these offers constituted an exchange with existing holders of the Company’s securities, and no commission or other remuneration was paid to any party for soliciting such exchange.
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.
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.
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on acquisition date and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.
17
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
The Company assesses the carrying values of its investments in hotel properties whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on the lodging and hospitality industries, which the Company considered to be a triggering event for each of its hotels during its impairment testing for the three months ended September 30, 2021. The Company assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash flows from the eventual disposition of the hotel. The Company also projects cash flows from the eventual disposition of the hotel based upon property-specific capitalization rates. The Company determined that there were no impairments as of September 30, 2021.
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.
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.
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or net realizable value, with cost determined on a method that approximates first-in, first-out basis.
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of September 30, 2021 and December 31, 2020 were $309,260 and $353,872, respectively. Amortization expense for the three-month periods ended September 30, 2021 and 2020, totaled $14,871 and $14,850, respectively, and for the nine-month periods ended September 30, 2021 and 2020, totaled $ 44,612 and $44,612, respectively.
Lease Accounting, Right-of-Use Assets and Lease Obligations – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption.
18
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, which relates to the accounting for lease arrangements. The Company’s operating lease agreements are primarily the ground lease on the Hyatt Centric Arlington, the parking garage lease in Hollywood, Florida at the Hyde Beach House, and the corporate office lease. The assets are classified as “right of use assets”, which represent our right to use an underlying asset and the operating lease liability, which represent our obligation to make lease payments arising from the lease, is classified within “accounts payable and other accrued liabilities”. Right of use assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments are excluded from the right of use assets and operating lease liabilities are recognized in the period in which the obligation for those payments is incurred. As our leases do not provide an implicit rate, we use our incremental borrowing cost based on information available at the commencement date using our actual borrowing rates commensurate with the lease terms and fully levered borrowing. Extension options on our leases are included in our minimum lease terms when they are reasonably certain to be exercised.
As of September 30, 2021, we had right of use assets of approximately $8.0 million, net and lease obligations of approximately $6.5 million. The right-of-use assets are included in investments in hotel properties, net and in prepaid expenses, inventory and other assets and the lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets.
Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in advance of issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheets and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we currently use interest rate caps and an interest rate swap which act as cash flow hedges and are not designated as hedges. We value our interest-rate caps and interest rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
|
Level 3
|
Unobservable inputs for the asset or liability.
|
19
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate swap are the only assets or liabilities measured at fair value on a recurring basis, there were no non-recurring assets or liabilities for fair value measurements as of September 30, 2021 and December 31, 2020, respectively):
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps (1)
|
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
Interest Rate Swap (2)
|
|
$
|
—
|
|
|
$
|
(3,038,967
|
)
|
|
$
|
—
|
|
|
Mortgage loans (3)
|
|
$
|
—
|
|
|
$
|
(364,112,622
|
)
|
|
$
|
—
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap (1)
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
Interest Rate Swap (2)
|
|
$
|
—
|
|
|
$
|
(2,077,490
|
)
|
|
$
|
—
|
|
|
Mortgage loans (3)
|
|
$
|
—
|
|
|
$
|
(358,880,026
|
)
|
|
$
|
—
|
|
|
(1)
|
Interest rate cap, which cap the 1-month LIBOR rate at 3.25%.
|
|
(2)
|
Interest rate swap, which takes the Loan Rate and swaps it for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan.
|
|
(3)
|
Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020.
|
Noncontrolling Interest in Operating Partnership – Certain hotel properties were acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition – Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the gross commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) shown on our consolidated balance sheets and recognized once the performance obligations are satisfied.
Certain of the Company’s hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company’s consolidated statements of operations.
The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease income as revenue from other operating departments within the consolidated statements of operations pursuant to the terms of each lease. Lease revenue was approximately $0.4 million and $0.3 million, for the three months ended September 30, 2021 and 2020, respectively, and approximately $1.2 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively.
20
A schedule of minimum future lease payments receivable for the remaining three and twelve-month periods is as follows:
|
For the three months ending December 31, 2021
|
|
$
|
269,560
|
|
|
December 31, 2022
|
|
|
1,002,297
|
|
|
December 31, 2023
|
|
|
1,004,831
|
|
|
December 31, 2024
|
|
|
1,011,847
|
|
|
December 31, 2025
|
|
|
1,019,411
|
|
|
December 31, 2026 and thereafter
|
|
|
6,856,396
|
|
|
Total
|
|
$
|
11,164,342
|
|
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. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. As of September 30, 2021, we have determined that it is more-likely-than-not that we will not be able to fully utilize our deferred tax assets for future tax consequences, therefore a 100% valuation allowance is required. As of September 30, 2021 and December 31, 2020, deferred tax assets each totaled $0, respectively.
As of September 30, 2021 and December 31, 2020, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2014 through 2019. In addition, as of September 30, 2021, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject, because of open NOL carryforwards, generally include 2014 through 2019.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation – The Company’s 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 750,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.
As of September 30, 2021, under the 2013 Plan, the Company has made cumulative stock awards totaling 517,464 shares, including 337,881 unrestricted shares and 179,583 restricted shares issued to certain executives and employees and to its independent directors. All awards have vested except for: 122,615 shares issued to certain employees, which will vest over the next nine years and 56,968 shares issued to the Company’s independent directors, which will vest by December 31, 2021.
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, 2021, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended September 30, 2021 and 2020 was $18,195 and $18,195, respectively, and for the nine months ended September 30, 2021 and 2020 was $499,351 and $163,260, respectively.
Additionally, the Company sponsors and maintains an Employee Stock Ownership Plan (“ESOP”) and related trust for the benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods in which they are committed to be released. For the three months ended September 30, 2021 and 2020, the ESOP compensation cost was $21,538 and $19,197, respectively, and for the nine months ended September 30, 2021 and 2020, the ESOP compensation cost was $65,709 and $81,740, respectively. To the extent that the fair value
21
of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
Advertising – Advertising costs, including internet advertising, were $473,024 and $50,566 for the three months ended September 30, 2021 and 2020, respectively, and were $1,248,607 and $209,821 for the nine months ended September 30, 2021 and 2020, respectively. Advertising costs are expensed as incurred.
Involuntary Conversion of Assets – We record gains or losses on involuntary conversions of assets due to recovered insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds received. During each of the three-month periods ending September 30, 2021 and 2020, we recognized $10,782 and $13,518, respectively, and during the nine-month periods ending September 30, 2021 and 2020, we recognized $507,739 and $40,125, respectively, in gain on involuntary conversion of assets, which is reflected in the consolidated statements of operations.
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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with lenders and the hedging contracts associated with each respective modified borrowing contract. In general, the provision of the update would benefit us by allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and not be considered debt extinguishment. As of September 30, 2021, we have not entered into any contract modification as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future. While the Company anticipates the impact of this update may be to its benefit, the Company is still evaluating the overall impact.
3. Investment in Hotel Properties, Net
Investment in hotel properties, net as of September 30, 2021 and December 31, 2020 consisted of the following:
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
66,148,696
|
|
|
$
|
66,088,705
|
|
|
Buildings and improvements
|
|
|
443,212,615
|
|
|
|
442,063,950
|
|
|
Right of use assets
|
|
|
5,827,487
|
|
|
|
5,995,438
|
|
|
Furniture, fixtures and equipment
|
|
|
56,124,047
|
|
|
|
55,796,798
|
|
|
|
|
|
571,312,845
|
|
|
|
569,944,891
|
|
|
Less: accumulated depreciation and impairment
|
|
|
(156,236,449
|
)
|
|
|
(142,120,306
|
)
|
|
Investment in Hotel Properties, Net
|
|
$
|
415,076,396
|
|
|
$
|
427,824,585
|
|
22
4. Debt
Mortgage Loans, Net. As of September 30, 2021 and December 31, 2020, we had approximately $353.4 million and approximately $357.5 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
|
|
Balance Outstanding as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Prepayment
|
|
Maturity
|
|
Amortization
|
|
Interest
|
|
|
|
Property
|
2021
|
|
|
2020
|
|
|
Penalties
|
|
Date
|
|
Provisions
|
|
Rate
|
|
|
|
The DeSoto (1)
|
$
|
32,375,170
|
|
|
$
|
32,820,733
|
|
|
Yes
|
|
7/1/2026
|
|
25 years
|
|
4.25%
|
|
|
|
DoubleTree by Hilton Jacksonville
Riverfront (2)
|
|
33,206,264
|
|
|
|
33,655,483
|
|
|
Yes
|
|
7/11/2024
|
|
30 years
|
|
4.88%
|
|
|
|
DoubleTree by Hilton Laurel (3)
|
|
8,259,409
|
|
|
|
8,654,754
|
|
|
Yes
|
|
5/5/2022
|
|
25 years
|
|
5.25%
|
|
|
|
DoubleTree by Hilton Philadelphia Airport (4)
|
|
40,905,879
|
|
|
|
41,804,700
|
|
|
None
|
|
10/31/2023
|
|
30 years
|
|
LIBOR plus 2.27%
|
|
|
|
DoubleTree by Hilton Raleigh-
Brownstone University (5)
|
|
18,300,000
|
|
|
|
18,300,000
|
|
|
Yes
|
|
8/1/2022
|
|
(5)
|
|
LIBOR plus 4.00%
|
|
|
|
DoubleTree Resort by Hilton Hollywood
Beach (6)
|
|
54,759,439
|
|
|
|
55,878,089
|
|
|
(6)
|
|
10/1/2025
|
|
30 years
|
|
4.913%
|
|
|
|
Georgian Terrace (7)
|
|
41,803,935
|
|
|
|
42,507,512
|
|
|
(7)
|
|
6/1/2025
|
|
30 years
|
|
4.42%
|
|
|
|
Hotel Alba Tampa, Tapestry Collection by Hilton (8)
|
|
17,866,013
|
|
|
|
17,946,480
|
|
|
None
|
|
6/30/2022
|
|
(8)
|
|
LIBOR plus 3.75%
|
|
|
|
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9)
|
|
32,825,304
|
|
|
|
33,259,067
|
|
|
Yes
|
|
1/1/2027
|
|
25 years
|
|
4.25%
|
|
|
|
Hyatt Centric Arlington (10)
|
|
48,990,136
|
|
|
|
48,990,136
|
|
|
Yes
|
|
10/1/2028
|
|
30 years
|
|
5.25%
|
|
|
|
Sheraton Louisville Riverside (11)
|
|
11,025,376
|
|
|
|
11,037,086
|
|
|
Yes
|
|
12/1/2026
|
|
25 years
|
|
4.27%
|
|
|
|
The Whitehall (12)
|
|
14,641,157
|
|
|
|
14,697,830
|
|
|
Yes
|
|
2/26/2023
|
|
25 years
|
|
PRIME plus 1.25%
|
|
|
|
Total Mortgage Principal Balance
|
$
|
354,958,082
|
|
|
$
|
359,551,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net
|
|
(1,694,291
|
)
|
|
|
(2,122,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premium on loan
|
|
98,418
|
|
|
|
116,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans, Net
|
$
|
353,362,209
|
|
|
$
|
357,545,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The note amortizes on a 25-year schedule after an initial 1 year interest only period (which expired in August 2017) and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
|
|
(2)
|
The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
|
|
(3)
|
Prepayment can be made on this note without penalty. On July 15, 2021, we entered into a note modification agreement whereby the maturity date was extended from August 5, 2021 to May 5, 2022.
|
|
(4)
|
The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237%. Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
|
|
(5)
|
The note provides initial proceeds of $18.3 million, with an additional $5.2 million available upon the satisfaction of certain conditions; has an initial term of 4 years with a 1-year extension; bears a floating interest rate of 1-month LIBOR plus 4.00%; requires interest only monthly payments; and following a 12-month lockout, can be prepaid with penalty in year 2 and without penalty thereafter. We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000.
|
|
(6)
|
With limited exception, the note may not be prepaid prior to June 2025.
|
|
(7)
|
With limited exception, the note may not be prepaid prior to February 2025.
|
|
(8)
|
The note bears a floating interest rate of 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%; with monthly principal payments of $26,812; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions.
|
|
(9)
|
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
|
|
(10)
|
Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
|
|
(11)
|
The note bears a fixed interest rate of 4.27% for the first 5 years of the loan, with an option for the lender to reset the interest rate after 5 years.
|
|
(12)
|
The note bears a floating interest rate of New York Prime Rate plus 1.25% and is subject to prepayment penalty of 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022. Pre-payment can be made without penalty thereafter.
|
23
Mortgage Forbearance Agreements. Since the onset of the COVID-19 pandemic, we have completed mortgage forbearance agreements and/or loan modification agreements for the twelve mortgage loans secured by our hotels. The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to fifteen months, temporary elimination of requirements to make contributions to the furniture, fixtures and equipment replacement reserve, the ability to temporarily utilize furniture, fixtures and equipment replacement reserve funds for operating expenses or to fund principal and interest and required deposits to real estate tax escrows, subject to certain restrictions and conditions, including requirements to replenish such funds used; waivers for existing quarterly financial covenants for one to six quarters; and adjustments to some covenant calculations following the waiver period. Below is a summary of those agreements for each hotel.
The DeSoto
Starting on April 1, 2020, we entered into a series of note modification agreements with the mortgage lender for The DeSoto pursuant to which we agreed with the lender on the following: (a) deferral of scheduled principal and interest payments due from April 1, 2020 to September 1, 2020, provided that interest continued to accrue during that period; (b) additional deferral of scheduled principal and interest payments due February 1, 2021, provided that interest also continued to accrue during that period; (c) a payment of interest only on March 1, 2021 in the amount of $116,240; (d) waiver of certain FF&E requirements until February 28, 2021; (e) to pay all deferred principal and interest amounts at maturity; and (f) a guarantee by the Operating Partnership of payment of up to 5.0% of all present and future indebtedness under the loan. The maturity date under the loan modification remains unchanged. As a condition to the loan modification, the borrowing entity, agreed to not declare, set aside or pay any distribution or dividend until the later of March 1, 2021 or the resumption of regular principal and interest payments.
DoubleTree by Hilton Jacksonville Riverfront
On April 21, 2020, we entered into a letter agreement pursuant to which the lender agreed to the following: (a) the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; (b) FF&E deposits were deferred for the April, May, and June 2020 payment dates; and (c) released FF&E and the deferred FF&E was repaid in 6 monthly installments ending with the December 2020 payment. The maturity date under the loan modification remains unchanged.
DoubleTree by Hilton Laurel
Starting on March 24, 2020, we entered into a series of deferral and note modification agreements with the mortgage lender for the DoubleTree by Hilton Laurel pursuant to which we agreed with the lender to the following: (a) an initial deferral of scheduled payments of principal and interest due from April 5, 2020 to September 5, 2020; (b) an additional deferral of scheduled payments of principal only from November 5, 2020 to March 5, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any and all deferred principal is due and payable at maturity. On July 15, 2021, we entered into a note modification agreement pursuant to which we agreed with the lender to the following: (i) the maturity date was extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, the borrowing entity will pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%. Concurrently with the execution of the Note Modification Agreement, the borrowing entity paid lender the deferred interest accumulated on the loan from April 2020 through September 2020 in the amount of $226,859. All other terms of the mortgage remain unchanged. A nominal amount in cash consideration was provided in exchange for the note modifications and the lender also waived the application of the December 31, 2020, calculation of the debt service coverage ratio covenant.
DoubleTree by Hilton Philadelphia Airport
We have agreed with the lender to the following: (a) deferral of scheduled principal through June 1, 2021; (b) payment of regular principal and interest to resume on July 1, 2021; (c) remaining deferred interest is to be paid in 12 equal installments beginning April 1, 2021; (d) deferred principal is due and payable at maturity; (e) a guaranty by the Operating Partnership of payment under the loan; and (f) addition of a revenue per available room financial covenant for the period between March 1, 2021 and May 31, 2021. In connection with the guarantee, the Operating Partnership entered into an acknowledgment of confession of judgment of guarantor pursuant to which the lender is authorized to enter a judgment against the Operating Partnership upon the occurrence of an event of default. The maturity date was extended by 3 months, or until October 31, 2023. As of September 30, 2021, we failed to meet the financial covenants under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport. We received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021.
24
DoubleTree by Hilton Raleigh-Brownstone University
Starting on May 4, 2020, we entered into a series of forbearance and loan modification agreements with the mortgage lender for the DoubleTree by Hilton Raleigh-Brownstone University pursuant to which the lender agreed to the following: (a) deferral of scheduled interest payments due from April 1, 2020 to July 31, 2021; (b) a one-time fee of $236,375 made in January 2021 and applied to deferred interest; (c) deferral of the FF&E reserve deposit from April 2020 until July 2021; and (d) remainder of deferred interest, along with additional accrued interest on interest, is due and payable by maturity. In the event that accrued interest is not paid in full by August 1, 2022, the borrowing entity will be required to pay an exit fee equal to one percent of the total outstanding principal amount under the loan in addition to all outstanding payments of principal and interest on the loan.
DoubleTree Resort by Hilton Hollywood Beach
On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms. Under the amended loan agreement and promissory note we paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4.0 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses. In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the borrowing entity relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrowing entity under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.
Georgian Terrace
On October 8, 2020, the lender agreed to the release of approximately $1.1 million from the FF&E reserve to fund up to 50% of (a) shortfall between gross revenues and operating expenses for the period April through July 31, 2020, and (b) scheduled payments of debt service, deposits to the real estate tax escrow and insurance expenses for the period April through August 2020. The FF&E reserve must be replenished no later than December 31, 2021. So long as there is no event of default under the terms of the loan agreement, lender agreed to defer deposits into the FF&E reserve account between November 2020 and April 2021. As consideration to entering into the loan modification agreement, the Operating Partnership agreed to guarantee full and prompt payment of the released reserves amounts.
Hotel Alba Tampa
Starting on May 14, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to: (a) the deferral of scheduled payments of principal due from April 1, 2020 to June 30, 2021; (b) waive certain financial covenants applicable to the borrowing entity and the Operating Partnership through the quarter ended December 31, 2020 and (c) repayment of deferred payments upon the earlier of (i) the maturity date or (ii) acceleration of the loan. The borrowing entity may not, without prior written consent of the lender, make any distributions of cash or property until all the following conditions have been satisfied: (x) the deferral period has expired and deferred payments have been made; (y) certain conditions precedent for making distributions under the loan agreement have been satisfied; and (z) the PPP loans, have been repaid or forgiven. The borrowing entity is also restricted from making any payments on any subordinated indebtedness, mezzanine financing or certain other funded indebtedness, with certain limited exceptions, without prior written consent of the lender. As of September 30, 2021, we were in compliance with the modified financial covenant under the mortgage secured by the Hotel Alba, provided that we maintain the cash collateral on deposit with the lender. Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million as of September 30, 2021, subject to certain withdrawal privileges.
25
Hotel Ballast Wilmington
The lender has agreed to the following: (a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to September 1, 2020; (c) waiver of FF&E requirement until March 1, 2021; (d) deferred principal and interest will be due and payable at maturity; and (e) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership. The maturity date under the loan modification remains unchanged. As a condition to the modification the borrowing entity cannot declare, set aside or pay any distributions or dividends until the later of (i) March 1, 2021 or (ii) the resumption of regular principal and interest payments.
Hyatt Centric Arlington
Starting on July 15, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal and interest due from April 1, 2020 to March 31, 2021; (b) deferral of scheduled payments of principal due from April 1, 2021 to December 31, 2021; (c) loan balance to be re-amortized as of January 1, 2022; (d) deferred principal and interest, along with additional accrued interest on interest, is due and payable by July 1, 2022; (e) $147,765 drawn from the reserve account to be replenished in full by December, 2021; and (f) wavier of the requirement to make deposits into FF&E reserve from April 2020 to April 1, 2021. As a condition to the effectiveness of the first modification, the borrowing entity under the loan paid (i) $50,000 to be deposited into the ground lease reserve account and (ii) $426,620 to be deposited into an escrow for impositions. As a condition to the effectiveness of the second modification, the borrowing entity paid (i) an additional $47,500 to be deposited into the ground lease reserve account and (ii) a one-time fee of $100,000 to be deposited into an escrow for impositions. Until the borrowing entity under the loan has fully repaid the deferred monthly payment and replenished the FF&E reserves account and the PPP loan is no longer outstanding, the borrowing entity is not permitted make any distributions without prior written consent of the lender.
Sheraton Louisville Riverside
The lender has agreed to the following: (a) deferral of scheduled payments of interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent payments were required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity. The maturity date under the loan modification remains unchanged.
The Whitehall
We entered into two forbearance agreement pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal due from April 1, 2020 to July 13, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to October 12, 2020; (c) deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the amortization period; (d) on July 14, 2021 principal and interest payments will resume based upon the original amortization; (e) the interest rate was changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; (f) loan modification fees of $54,500; (g) the prepayment penalty was changed to: (i) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (ii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iii) no prepayment fee if prepaid after November 26, 2022; and (h) a waiver of the financial covenants through June 30, 2022. The maturity date under the loan modification remains unchanged. As conditions to the forbearance agreement, the parties agreed to the following during the forbearance period lasting until the earlier of (a) July 13, 2021 or (b) the occurrence of a forbearance event of default: (i) the borrowing entity, the Operating Partnership and the Company cannot declare, authorize or pay dividends or may any distribution to any person, without prior written consent of the lender; (ii) the borrowing entity may not sell, convey, transfer or assign assets, other than in the ordinary course of business, without the lender’s consent and in the case of such sale, the lender may cause the buyer to pay all proceeds directly to the lender and (iii) the borrowing entity shall not default on any of its obligations to third parties. If we fail to meet the obligations under the forbearance agreements, lender has the right to exercise all remedies available under the loan agreement including the right to accelerate the maturity of the loan.
As of September 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”. Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap” as well. Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University
26
and the Hyatt Centric Arlington, we agreed to “cash traps” which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.
Total future mortgage debt maturities for the remaining three and twelve-month periods, without respect to any extension of loan maturity or loan modification after September 30, 2021, were as follows:
|
For the three months ending December 31, 2021
|
|
1,642,644
|
|
|
December 31, 2022
|
|
50,389,496
|
|
|
December 31, 2023
|
|
60,667,244
|
|
|
December 31, 2024
|
|
37,269,666
|
|
|
December 31, 2025
|
|
92,494,465
|
|
|
December 31, 2026 and thereafter
|
|
112,494,567
|
|
|
Total future maturities
|
$
|
354,958,082
|
|
PPP Loans. The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part. As of September 30, 2021, no application for loan forgiveness has been filed and approximately $0.7 million in payments have been required.
On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.
On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
Secured Notes Financing. On December 31, 2020, we entered into the following agreements with KW, as collateral agent and an investor, and MIG, as an investor: (i) a Note Purchase Agreement with KW and MIG; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement with KW; (iv) a Board Observer Agreement with KW; and (v) other ancillary agreements. These agreements constitute a transaction whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 and which option is required to be completed on or before December 31, 2021, on the terms and subject to the conditions described below.
Note Purchase Agreement
On December 31, 2020, the Operating Partnership and the Company entered into the Note Purchase Agreement with KW and MIG, pursuant to which: (i) we agreed to issue and sell, and the Investors agreed to purchase, the Secured Notes with an aggregate face amount of US $20 million and on the terms described below; (ii) KW and MIG granted us an option, subject to certain conditions and exercisable by us on or before the first anniversary of the first closing date, pursuant to which we may issue and sell a second note to each of the Investors with an aggregate face amount of $10.0 million on substantially the same terms as the initial Secured Notes; (iii) the Company agreed to fully and unconditionally guaranty the obligations of the Operating Partnership; (iv) we entered into the Pledge Agreement and Board Observer Agreement; (v) we agreed to provide certain representations and warranties to the Investors; and (vi) we agreed to use the net proceeds to support the continued operation of the business conducted by the Operating Partnership. We were required to pay a 1% origination fee on the amount of the initial Secured Notes in connection with the first closing and a 1% commitment fee on the committed amount of the Second Secured Notes.
Secured Notes
On December 31, 2020, the Operating Partnership issued and sold initial Secured Notes to the Investors in the amount of $20.0 million. The Secured Notes: (i) have a maturity date of December 30, 2023, with a one-year extension option, subject
27
to a fee in the amount of 1% of the outstanding principal amount under the Secured Notes as of such maturity date; (ii) accrue interest at a rate of 6.00% during the initial term and then at a rate of 10% following any extension; (iii) require quarterly interest payments, which shall initially be in the amount of $0.30 million; (iv) require principal repayment equal to 1.47 times the face amount of the Secured Notes if repaid on or prior to December 30, 2023 and 1.65 times the face amount of the Secured Notes if repaid after December 30, 2023; (v) may be prepaid without penalty, but subject to make-whole amounts for interest and the repayment multiplier; and (vi) rank pari passu with other notes issued under the Note Purchase Agreement and senior to all other indebtedness of the Operating Partnership.
The Secured Notes require us to maintain certain cash management standards and include a broad range of covenants restricting our ability to incur additional debt, make dividend payments, transfer or acquire assets, or exceed our 2019 employee compensation levels. They also require us to maintain certain financial thresholds, including limitations on our accounts payable and capital expenditures.
Upon an event of default or liquidity event described in the Secured Notes, the holders of the Secured Notes have the right to require and approve our selection of one or more of our hotel properties for disposition or refinancing in order to cure an event of default or liquidity event based on a process set forth in the Secured Notes. In addition, the Secured Notes are redeemable by the holder in full upon an event of default or a change of control transaction.
Pledge Agreement
On December 31, 2020, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel. Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.
5. Commitments and Contingencies
Ground, Building, Parking and Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the fourth of five optional five-year renewal periods expiring October 31, 2026. Rent expense for this operating lease for the three and nine months ended September 30, 2021, totaled $20,983 and $62,949, respectively, and rent expense for this operating lease for the three and nine months ended September 30, 2020, totaled $18,246 and $54,738.
We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.
We lease land adjacent to the Hotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009. In May 2014, we extended the agreement for an additional five years. We signed a new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years. The new agreement expires in July 2024, 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, 2021, totaled $641 and $1,924, respectively and rent expense for each of the three and nine months ended September 30, 2020, totaled $661 and $1,963, respectively.
We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement was $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as the tenant improvement allowance is exhausted. Rent expense for the three and nine month periods ended September 30, 2021, totaled $55,902 and $167,706, respectively and rent expense for the three and nine month periods ended September 30, 2020 totaled, $56,042 and $167,706, respectively.
We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement. The initial term of the ground lease expires in 2025 and may be extended for
28
five additional renewal periods of 10 years each. Rent expense for the three and nine months ended September 30, 2021, was $68,284 and $157,757, respectively and rent expense for the three and nine months ended September 30, 2020, was $28,116 and $134,685, respectively.
We lease parking garage and poolside cabanas associated with the Hyde Beach House. The parking and cabana lease requires us to make rental payments of $270,100 per year in base and has an initial term that expires in 2034 and which may be extended for four additional renewal periods of 5 years each. Rent expense for the three months ended September 30, 2021 and 2020, was $67,750 and $67,749, respectively, and for the nine months ended September 30, 2021 and 2020, was $203,250 and $203,247, respectively.
We also lease certain storage facilities, furniture and equipment under agreements expiring between October 2021 and June 2026.
A schedule of minimum future lease payments for the following three and twelve-month periods is as follows:
|
For the three months ending December 31, 2021
|
|
$
|
184,447
|
|
|
December 31, 2022
|
|
|
683,693
|
|
|
December 31, 2023
|
|
|
671,883
|
|
|
December 31, 2024
|
|
|
663,585
|
|
|
December 31, 2025
|
|
|
668,651
|
|
|
December 31, 2026 and thereafter
|
|
|
14,758,986
|
|
|
Total
|
|
$
|
17,631,245
|
|
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 – As of September 30, 2021, our twelve wholly-owned hotels, and our two condo-hotel rental programs, operated under management agreements with Our Town (see Note 8). The management agreements expire on March 31, 2025 and may be extended for up to two additional periods of five years each, subject to the approval of both parties. Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees.
Franchise Agreements – As of September 30, 2021, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently in force expire between November 2021 and March 2038. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone–University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.
ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
Litigation –We are 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.
29
6. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:
|
|
|
Per
|
|
|
|
|
|
|
Number of Shares
|
|
|
Quarterly
|
|
|
|
|
Annum
|
|
|
Liquidation
|
|
|
Issued and Outstanding as of
|
|
|
Distributions
|
|
|
Preferred Stock - Series
|
|
Rate
|
|
|
Preference
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Per Share
|
|
|
Series B Preferred Stock
|
|
|
8.000
|
%
|
|
$
|
25.00
|
|
|
|
1,510,000
|
|
|
|
1,610,000
|
|
|
$
|
0.500000
|
|
|
Series C Preferred Stock
|
|
|
7.875
|
%
|
|
$
|
25.00
|
|
|
|
1,469,610
|
|
|
|
1,554,610
|
|
|
$
|
0.492188
|
|
|
Series D Preferred Stock
|
|
|
8.250
|
%
|
|
$
|
25.00
|
|
|
|
1,165,000
|
|
|
|
1,200,000
|
|
|
$
|
0.515625
|
|
The Company is obligated to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the $25.00 liquidation preference per share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates. As previously announced, the record dates for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020, have each been declared and the record date and the payment of dividends on all classes of the Company’s preferred stock has been deferred.
On March 17, 2020, the Company announced that it was deferring payment of Sotherly’s previously announced declared distributions for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020. No distributions have been declared for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending September 30, 2021.
The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through September 30, 2021, are $5,285,000, $5,063,271 and $4,204,922, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2021, the undeclared cumulative preferred dividends were approximately $12.5 million and the declared unpaid preferred dividends are approximately $2.1 million.
Preferred Units - The Company is the holder of the Operating Partnership’s preferred partnership units and is entitled to receive distributions when authorized by the general partner of the Operating Partnership out of assets legally available for the payment of distributions. The following table sets forth our Cumulative Redeemable Perpetual Preferred Units by series:
|
|
|
Per
|
|
|
|
|
|
|
Number of Units
|
|
|
Quarterly
|
|
|
|
|
Annum
|
|
|
Liquidation
|
|
|
Issued and Outstanding as of
|
|
|
Distributions
|
|
|
Preferred Units - Series
|
|
Rate
|
|
|
Preference
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Per Unit
|
|
|
Series B Preferred Units
|
|
|
8.000
|
%
|
|
$
|
25.00
|
|
|
|
1,510,000
|
|
|
|
1,610,000
|
|
|
$
|
0.500000
|
|
|
Series C Preferred Units
|
|
|
7.875
|
%
|
|
$
|
25.00
|
|
|
|
1,469,610
|
|
|
|
1,554,610
|
|
|
$
|
0.492188
|
|
|
Series D Preferred Units
|
|
|
8.250
|
%
|
|
$
|
25.00
|
|
|
|
1,165,000
|
|
|
|
1,200,000
|
|
|
$
|
0.515625
|
|
The Company pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00 liquidation preference per unit. The Company, which is the holder of the Operating Partnership’s preferred units is entitled to receive distributions when authorized by the Operating Partnership’s general partner out of assets legally available for the payment of distributions. The preferred units are not redeemable by the holder, have no maturity date and are not convertible into any other security of the Operating Partnership or its affiliates. As previously announced, the record dates for the dividends on the Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15, 2020, to unitholders of record as of March 31, 2020, have each been declared and the record date and the payment of dividends on all classes of the Operating Partnership’s preferred units has been deferred.
The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through September 30, 2021, is $5,285,000, $5,063,271 and $4,204,922, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2021, the undeclared cumulative preferred dividends were approximately $12.5 million and the declared unpaid preferred dividends were approximately $2.1 million.
30
7. Common Stock and Units
Common Stock – As of September 30, 2021, the Company was authorized to issue up to 69,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.
The following is a schedule of issuances, since January 1, 2020, of the Company’s common stock and related units of the Operating Partnership:
On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of shares in the Company’s common stock.
On January 1, 2020, the Company was issued 45,000 units in the Operating Partnership and awarded shares of restricted stock to two employees.
On February 3, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
On May 1, 2020, one holder of units in the Operating Partnership redeemed 57,687 units for an equivalent number of shares in the Company’s common stock.
On December 1, 2020, one holder of units in the Operating Partnership redeemed 15,000 units for an equivalent number of shares in the Company’s common stock.
On December 17, 2020, the Company was issued 127,583 units in the Operating Partnership and awarded shares of restricted stock to its independent directors and employees.
On February 4, 2021, one holder of units in the Operating Partnership redeemed 100 units for an equivalent number of shares in the Company’s common stock.
On February 4, 2021, the Company was issued 136,281 units in the Operating Partnership and awarded shares of unrestricted stock to its employees.
On February 4, 2021, the Company was issued 15,000 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
On June 21, 2021, we entered into a Share Exchange Agreement with Palogic. Pursuant to the Share Exchange Agreement, Palogic agreed to exchange 100,000 shares of the Company’s Series B Preferred Stock, 85,000 shares of the Company’s Series C Preferred Stock, and 35,000 shares of the Company’s Series D Preferred Stock, together with all of Palogic’s rights to receive accrued and unpaid dividends on the remaining Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share. We closed the transaction and issued the Company Shares on June 22, 2021.
As of September 30, 2021 and December 31, 2020, the Company had 16,717,958 and 15,023,850 shares of common stock outstanding, respectively.
Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.
Since January 1, 2020, there have been no issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.
As of September 30, 2021 and December 31, 2020, the total number of Operating Partnership units outstanding was 17,884,359 and 16,190,351, respectively.
31
As of September 30, 2021 and December 31, 2020, the total number of outstanding Operating Partnership units not owned by the Company was 1,166,401 and 1,166,501, respectively, with a fair market value of approximately $3.0 million and $2.9 million, respectively, based on the price per share of the common stock on such respective dates.
As of September 30, 2021, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of $2,088,160.
8. Related Party Transactions
Our Town Hospitality. Our Town is currently the management company for each of our twelve wholly owned hotels, as well as the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. Our Town is a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”). As of September 30, 2021, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 48.5% and 1.4%, respectively, of the total outstanding ownership interests in Our Town. Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights. Upon the satisfaction of certain conditions by Our Town, Mr. Sims and Mr. Folsom will be required to make an additional capital contribution to Our Town, which would result in them owning 51.3% and 1.5%, respectively, of the outstanding membership interests in Our Town. The following is a summary of the transactions with Our Town:
Accounts Receivable – At September 30, 2021 and 2020, we were due approximately $0.1 million and $0.7 million, respectively, from Our Town.
Management Agreements – On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of ten of our hotels. On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements for the management of ten of our hotels. On April 1, 2020, we engaged Our Town to manage one additional wholly-owned hotel and two condominium resort rental programs. On November 15, 2020, Our Town became the manager of our Hyatt Centric Arlington hotel. The hotel management agreements for each of our 12 wholly-owned hotels and the two rental programs are referred to as, individually an “OTH Hotel Management Agreement” and, together the “OTH Hotel Management Agreements”.
We agreed to provide Our Town with initial working capital of up to $1.0 million, based on the anticipated management fees earned by Our Town under the individual hotel management agreements. The advanced funds were to be offset against future management fees by means of a 25% reduction in the payment to Our Town, of fees earned each month during 2020. At December 31, 2020, unreimbursed management fee advances totaled $549,900.
On June 4, 2021, the OTH Master Agreement and the related credit agreement were amended to provide for an increase in the balance outstanding under the credit agreement of $299,900 in satisfaction for an equivalent portion of unrepaid management fee advances and to provide for a guaranteed minimum incentive management fee of $250,000 for calendar year 2021 in satisfaction of the remainder of unrepaid management fee advances.
As of September 30, 2021, and December 31, 2020, Sotherly had advanced approximately $0.3 million and $0.6 million, respectively, to Our Town as initial working capital. In addition, the OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2025 but shall be extended beyond 2025 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Our Town will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.
Each OTH Hotel Management Agreement sets an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation. Incentive management fees earned for the nine-month period ending September 30, 2021 and 2020, were $273,942 and $0, respectively.
Base management and administrative fees earned by Our Town for our properties were approximately $0.9 million and $0.4 million, for the three months ended September 30, 2021 and 2020, respectively, and for the nine months ended September 30, 2021 and 2020, were approximately $2.5 million and $1.1 million, respectively.
32
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5 year renewal subject to approval by Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third-party owner of the property. Lease payments due to the Company were $37,852 and $40,301, as of three months ended September 30, 2021 and 2020, respectively and for the nine months ended September 30, 2021 and 2020, were $143,893 and $80,603, respectively.
Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020, pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit. The original agreement allowed Our Town to borrow up to $500,000. Our Town was allowed to draw against the line of credit from time to time prior to January 1, 2021, when the facility became payable in full. The credit agreement was amended by the parties on June 4, 2021 such that: (i) the maximum amount of credit available is capped at $894,900; (ii) the total amount of advances, as of June 4, 2021, was agreed to be $894,900; (iii) no additional advances are permitted; (iv) principal payments are required to be made by the borrower in the amount of $100,000 on each of December 31, 2021, December 31, 2022, December 31, 2023, December 31, 2024, and December 31, 2025; (v) the maturity date was extended to December 31, 2026; and (vi) the aggregate unpaid principal amount and any other obligation are required to be paid at maturity. In addition, an affiliate of Mr. Sims entered into a conditional financing commitment with Our Town to provide funding to permit repayment of the loan in the event the principal balance of the loan made to Our Town under the credit agreement has not been repaid prior to maturity and Sotherly declines to extend the maturity date. Interest on the outstanding balance owed under the credit agreement accrues at 3.5% per annum and is payable quarterly in arrears. In the event of a default under the credit agreement, we have the right to offset any outstanding unpaid balance against amounts we owe to Our Town under the OTH Hotel Management Agreements. As of September 30, 2021 and December 31, 2020, the outstanding credit balance under the credit agreement was approximately $0.9 million and $0.6 million, respectively.
Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town that work exclusively for our properties and elect to participate in Our Town’s self-insured plan. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $0.7 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and for the nine months ended September 30, 2021 and 2020, were approximately $2.0 million and $2.3 million, respectively.
Loan Receivable – Affiliate. As of September 30, 2021 and December 31, 2020, approximately $3.6 million and $3.7 million, respectively, was due to the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016. The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.
Others. We employ Ashley S. Kirkland, the daughter of our Chairman, as Corporate Counsel and Compliance Officer and Robert E. Kirkland IV, her husband, as our General Counsel. We also employ Andrew M. Sims Jr., the son of our Chairman, as Vice President – Operations & Investor Relations. Total compensation for all three individuals, including salary and benefits, for the three months ended September 30, 2021 and 2020, totaled $139,241 and $104,644, respectively, and for the nine months ended September 30, 2021 and 2020, were $352,225 and $331,397, respectively.
9. Retirement Plans
401(k) Plan - We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions include a matching employer contribution to consist of 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. In addition, all employer matching funds vest immediately. We ceased making matching employer contributions effective May 16, 2020. Contributions to the plan each totaled $0, for each of the three months ended September 30, 2021 and 2020, respectively, and for the nine months ended September 30, 2021 and 2020, were $0 and $42,841, respectively.
Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
Shares purchased by the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation. As of September 30, 2021, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market at a cost of approximately $4.9 million, which the ESOP borrowed from the Company pursuant to the loan agreement. A total of 193,915 shares with a fair value of $496,421 remained allocated or committed to be released from the suspense account, as of September 30, 2021. We recognized as compensation cost $65,710 and $81,740, during the nine months ended September 30, 2021 and 2020, respectively. The remaining
33
485,573 unallocated shares have an approximate fair value of $1,243,068, as of September 30, 2021. As of September 30, 2021, the ESOP held a total of 170,419 allocated shares, 23,496 committed-to-be-released shares and 485,573 suspense shares. Dividends on allocated and unallocated shares are used to pay down the ESOP loan from the Operating Partnership. The share allocations are accounted for at fair value on the date of allocation as follows:
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
|
Allocated shares
|
|
|
170,419
|
|
|
$
|
436,273
|
|
|
|
170,419
|
|
|
$
|
426,048
|
|
|
Committed to be released shares
|
|
|
23,496
|
|
|
|
60,149
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Allocated and Committed-to-be-Released
|
|
|
193,915
|
|
|
$
|
496,422
|
|
|
|
170,419
|
|
|
$
|
426,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated shares
|
|
|
485,573
|
|
|
|
1,243,068
|
|
|
|
509,069
|
|
|
|
1,272,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Shares
|
|
|
679,488
|
|
|
$
|
1,739,490
|
|
|
|
679,488
|
|
|
$
|
1,698,720
|
|
10. 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, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Sales and marketing
|
|
|
$
|
3,183,928
|
|
|
$
|
1,469,254
|
|
|
$
|
8,216,303
|
|
|
$
|
6,316,638
|
|
|
General and administrative
|
|
|
|
2,918,733
|
|
|
|
2,462,088
|
|
|
|
7,855,377
|
|
|
|
8,197,401
|
|
|
Repairs and maintenance
|
|
|
|
2,024,620
|
|
|
|
1,196,864
|
|
|
|
5,328,521
|
|
|
|
4,031,876
|
|
|
Utilities
|
|
|
|
1,486,370
|
|
|
|
1,255,305
|
|
|
|
3,938,574
|
|
|
|
3,659,411
|
|
|
Property taxes
|
|
|
|
1,651,190
|
|
|
|
1,899,979
|
|
|
|
4,961,101
|
|
|
|
5,218,265
|
|
|
Management fees, including incentive
|
|
|
|
860,380
|
|
|
|
380,736
|
|
|
|
2,739,246
|
|
|
|
1,385,142
|
|
|
Franchise fees
|
|
|
|
929,405
|
|
|
|
443,868
|
|
|
|
2,395,964
|
|
|
|
1,645,448
|
|
|
Insurance
|
|
|
|
846,241
|
|
|
|
774,153
|
|
|
|
2,551,334
|
|
|
|
2,293,849
|
|
|
Information and telecommunications
|
|
|
|
782,573
|
|
|
|
554,901
|
|
|
|
2,112,944
|
|
|
|
1,607,416
|
|
|
Other
|
|
|
|
137,077
|
|
|
|
61,647
|
|
|
|
360,306
|
|
|
|
254,955
|
|
|
Total indirect hotel operating expenses
|
|
|
$
|
14,820,517
|
|
|
$
|
10,498,795
|
|
|
$
|
40,459,670
|
|
|
$
|
34,610,401
|
|
11. Income Taxes
The components of the income tax (benefit) provision for the three and nine months ended September 30, 2021 and 2020 are as follows:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(125,587
|
)
|
|
$
|
—
|
|
|
$
|
(125,587
|
)
|
|
State
|
|
|
6,544
|
|
|
|
(7,646
|
)
|
|
|
16,126
|
|
|
|
57,667
|
|
|
|
|
|
6,544
|
|
|
|
(133,233
|
)
|
|
|
16,126
|
|
|
|
(67,920
|
)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(611,958
|
)
|
|
|
(2,519,202
|
)
|
|
|
(2,665,498
|
)
|
|
|
(7,440,060
|
)
|
|
State
|
|
|
(203,734
|
)
|
|
|
(650,957
|
)
|
|
|
(633,367
|
)
|
|
|
(1,644,624
|
)
|
|
Subtotals
|
|
|
(815,692
|
)
|
|
|
(3,170,159
|
)
|
|
|
(3,298,865
|
)
|
|
|
(9,084,684
|
)
|
|
Change in deferred tax valuation allowance
|
|
|
815,692
|
|
|
|
3,170,159
|
|
|
|
3,298,865
|
|
|
|
14,496,768
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,412,084
|
|
|
|
|
$
|
6,544
|
|
|
$
|
(133,233
|
)
|
|
$
|
16,126
|
|
|
$
|
5,344,164
|
|
34
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Statutory federal income tax provision
|
|
$
|
(529,425
|
)
|
|
$
|
(5,091,777
|
)
|
|
$
|
(2,444,754
|
)
|
|
$
|
(10,164,517
|
)
|
|
Effect of non-taxable REIT loss
|
|
|
733,159
|
|
|
|
5,617,147
|
|
|
|
3,078,121
|
|
|
|
17,095,638
|
|
|
State income tax provision
|
|
|
(197,190
|
)
|
|
|
(658,603
|
)
|
|
|
(617,241
|
)
|
|
|
(1,586,957
|
)
|
|
|
|
$
|
6,544
|
|
|
$
|
(133,233
|
)
|
|
$
|
16,126
|
|
|
$
|
5,344,164
|
|
12. Loss Per Share and Per Unit
Loss per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of loss would also be added back to net loss. The shares of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control, and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The non-committed, unearned ESOP shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average number of common shares outstanding. The allocated and committed to be released shares have been included in the weighted average diluted earnings per share calculation since there would be an antidilutive effect from the dilution by these shares, although the amount of compensation for allocated shares is reflected in net loss attributable to common stockholder for basic computation. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit. The computation of basic and diluted net loss per share is presented below:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders for basic computation
|
|
$
|
(4,317,081
|
)
|
|
$
|
(12,259,908
|
)
|
|
$
|
(16,192,679
|
)
|
|
$
|
(43,708,223
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
16,717,958
|
|
|
|
14,881,267
|
|
|
|
15,732,781
|
|
|
|
14,852,455
|
|
|
Weighted average number of Unearned ESOP Shares
|
|
|
(493,360
|
)
|
|
|
(549,620
|
)
|
|
|
(496,688
|
)
|
|
|
(558,656
|
)
|
|
Total weighted average number of common shares outstanding for basic computation
|
|
|
16,224,598
|
|
|
|
14,331,647
|
|
|
|
15,236,093
|
|
|
|
14,293,799
|
|
|
Basic net loss per share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(3.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Loss Per Unit – The computation of basic and diluted net loss per unit is presented below:
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to general and limited partnership unitholders for basic computation
|
|
$
|
(4,607,249
|
)
|
|
$
|
(13,228,181
|
)
|
|
$
|
(17,362,023
|
)
|
|
$
|
(47,239,279
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of general and limited partnership units outstanding
|
|
|
17,884,359
|
|
|
|
16,062,768
|
|
|
|
16,899,195
|
|
|
|
16,059,431
|
|
|
Basic net loss per general and limited partnership unit
|
|
$
|
(0.26
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(2.94
|
)
|
13. Subsequent Events
On October 25, 2021, the Board authorized the deferral of payment of the quarterly distribution for the period ending September 30, 2021, for each of the Company’s Series B, Series C, and Series D Preferred Stock (and Preferred Units).
36
