UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(
(Address and Telephone Number of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act.
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Sotherly Hotels Inc.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
Sotherly Hotels Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.
Sotherly Hotels Inc.
Large Accelerated Filer |
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Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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Sotherly Hotels LP
Large Accelerated Filer |
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Accelerated Filer |
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Smaller Reporting Company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Sotherly Hotels Inc. Yes ☐ No
As of November 8, 2024, there were
EXPLANATORY NOTE
We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s common stock as “common stock,” the Company’s preferred stock as “preferred stock,” the Operating Partnership’s common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “preferred units.” References to “we” and “our” mean the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The Operating Partnership's partnership agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership. The Company does not conduct business itself, other than (a) acting as the sole general partner of the Operating Partnership, (b) issuing public equity from time to time, and (c) guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries and affiliates. The Operating Partnership holds substantially all of the assets of the business, directly or indirectly. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances made by the Company, which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the business through the Operating Partnership's operations, incurrence of indebtedness, and issuance of partnership units to third parties.
This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2024, of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
3
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
INDEX
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Page |
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Item 1. |
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5 |
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Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023 |
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5 |
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6 |
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7 |
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Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2024 and 2023 |
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9 |
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Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023 |
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10 |
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11 |
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12 |
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Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2024 and 2023 |
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14 |
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15 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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34 |
Item 3. |
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46 |
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Item 4 |
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47 |
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Item 1. |
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48 |
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Item 1A. |
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48 |
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Item 2. |
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48 |
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Item 3. |
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48 |
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Item 4. |
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48 |
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Item 5. |
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48 |
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Item 6. |
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49 |
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4
PART I
Item 1. Consolidated Financial Statements
SOTHERLY HOTELS INC.
CONSOLIDATED BALANCE SHEETS
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June 30, 2024 |
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December 31, 2023 |
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(unaudited) |
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ASSETS |
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Investment in hotel properties, net |
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$ |
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$ |
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Cash and cash equivalents |
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Restricted cash |
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Accounts receivable, net |
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Prepaid expenses, inventory and other assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES |
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Mortgage loans, net |
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$ |
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$ |
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Unsecured notes |
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Accounts payable and accrued liabilities |
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Advance deposits |
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Dividends and distributions payable |
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TOTAL LIABILITIES |
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$ |
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$ |
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— |
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— |
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EQUITY |
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Sotherly Hotels Inc. stockholders’ equity |
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Preferred stock, $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Unearned ESOP shares |
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( |
) |
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( |
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Distributions in excess of retained earnings |
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( |
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( |
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Total Sotherly Hotels Inc. stockholders’ equity |
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Noncontrolling interest |
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( |
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( |
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TOTAL EQUITY |
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TOTAL LIABILITIES AND EQUITY |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
5
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended |
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Three Months Ended |
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Six Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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June 30, 2024 |
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June 30, 2023 |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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REVENUE |
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Rooms department |
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$ |
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$ |
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$ |
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$ |
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Food and beverage department |
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Other operating departments |
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Total revenue |
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EXPENSES |
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Hotel operating expenses |
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Rooms department |
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Food and beverage department |
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Other operating departments |
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Indirect |
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Total hotel operating expenses |
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Depreciation and amortization |
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Corporate general and administrative |
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Total operating expenses |
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NET OPERATING INCOME |
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Other income (expense) |
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Interest expense |
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( |
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( |
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( |
) |
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Interest income |
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Other income |
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— |
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— |
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Loss on early extinguishment of debt |
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— |
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— |
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( |
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— |
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Realized gain on hedging activities |
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— |
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— |
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— |
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Unrealized gain (loss) on hedging activities |
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( |
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( |
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( |
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PPP loan forgiveness |
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— |
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— |
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— |
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Gain on sale of assets |
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— |
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— |
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Gain on involuntary conversion of assets |
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Net income before income taxes |
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Income tax provision |
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( |
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( |
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( |
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( |
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Net income |
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Less: Net income attributable to noncontrolling interest |
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( |
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( |
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( |
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( |
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Net income attributable to the Company |
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Undeclared distributions to preferred stockholders |
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( |
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( |
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( |
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( |
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Net income attributable to common stockholders |
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$ |
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$ |
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$ |
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$ |
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Net income per share attributable to common stockholders: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
6
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
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Additional |
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Unearned |
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Distributions |
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Preferred Stock |
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Common Stock |
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Paid- |
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ESOP |
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in Excess of |
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Noncontrolling |
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Shares |
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Par Value |
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Shares |
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Par Value |
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In Capital |
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Shares |
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Retained Earnings |
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Interest |
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Total |
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Balances at December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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Preferred stock dividends declared: |
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Series B Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Series C Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Series D Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Amortization of ESOP shares |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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Amortization of restricted |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balances at March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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$ |
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Preferred stock dividends declared: |
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Series B Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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$ |
( |
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— |
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( |
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Series C Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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$ |
( |
) |
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— |
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( |
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Series D Preferred Stock, |
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— |
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— |
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— |
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— |
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— |
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— |
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$ |
( |
) |
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— |
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( |
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Amortization of ESOP shares |
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— |
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— |
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— |
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— |
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( |
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$ |
- |
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— |
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Amortization of restricted |
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— |
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— |
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— |
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— |
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— |
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$ |
- |
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— |
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Balances at June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
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Additional |
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Unearned |
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Distributions |
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Preferred Stock |
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Common Stock |
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Paid- |
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ESOP |
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in Excess of |
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Noncontrolling |
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Shares |
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Par Value |
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Shares |
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Par Value |
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In Capital |
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Shares |
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Retained Earnings |
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Interest |
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Total |
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Balances at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||
Issuance of common stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Issuance of restricted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Amortization of ESOP shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at March 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Conversion of units in Operating |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|||
Preferred stock dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Series B Preferred Stock, |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Series C Preferred Stock, |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Series D Preferred Stock, |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Amortization of ESOP shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
SOTHERLY HOTELS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
|
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||
|
|
|
(unaudited) |
|
|
(unaudited) |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
||
Net income |
|
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash |
|
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
|
||
Amortization of deferred financing costs |
|
|
|
|
|
|
|
||
Amortization of mortgage premium |
|
|
|
( |
) |
|
|
( |
) |
Gain on involuntary conversion of assets |
|
|
|
( |
) |
|
|
( |
) |
Unrealized loss on hedging activities |
|
|
|
|
|
|
|
||
Loss on early extinguishment of debt |
|
|
|
|
|
|
— |
|
|
PPP loan forgiveness |
|
|
|
— |
|
|
|
( |
) |
Gain on disposal of assets |
|
|
|
( |
) |
|
|
— |
|
ESOP and stock - based compensation |
|
|
|
|
|
|
|
||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
|
||
Prepaid expenses, inventory and other assets |
|
|
|
( |
) |
|
|
( |
) |
Accounts payable and other accrued liabilities |
|
|
|
|
|
|
( |
) |
|
Advance deposits |
|
|
|
( |
) |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
|
||
Improvements and additions to hotel properties |
|
|
|
( |
) |
|
|
( |
) |
Proceeds from involuntary conversion |
|
|
|
|
|
|
|
||
Proceeds from sale of assets |
|
|
|
|
|
|
|
||
Net cash used in investing activities |
|
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
||
Proceeds from mortgage loans |
|
|
|
|
|
|
|
||
Redemption of interest rate swap |
|
|
|
|
|
|
— |
|
|
Payments on mortgage loans |
|
|
|
( |
) |
|
|
( |
) |
Payments on unsecured notes |
|
|
|
( |
) |
|
|
( |
) |
Payments of deferred financing costs |
|
|
|
( |
) |
|
|
( |
) |
Purchase of interest rate cap |
|
|
|
( |
) |
|
|
— |
|
Preferred dividends paid |
|
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
( |
) |
|
|
( |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at the beginning of the period |
|
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at the end of the period |
|
|
$ |
|
|
$ |
|
||
Supplemental disclosures: |
|
|
|
|
|
|
|
||
Cash paid during the period for interest |
|
|
$ |
|
|
$ |
|
||
Cash paid during the period for income taxes |
|
|
$ |
|
|
$ |
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
||
Change in amount of improvements to hotel property |
|
|
$ |
( |
) |
|
$ |
|
|
Right of use assets acquired under lease liability |
|
|
$ |
|
|
$ |
- |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
SOTHERLY HOTELS LP
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
|
|
(unaudited) |
|
|
|
|
||
ASSETS |
|
|
|
|
|
|
||
Investment in hotel properties, net |
|
$ |
|
|
$ |
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Restricted cash |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Loan receivable - affiliate |
|
|
|
|
|
|
||
Prepaid expenses, inventory and other assets |
|
|
|
|
|
|
||
TOTAL ASSETS |
|
$ |
|
|
$ |
|
||
LIABILITIES |
|
|
|
|
|
|
||
Mortgage loans, net |
|
$ |
|
|
$ |
|
||
Unsecured notes, net |
|
|
|
|
|
|
||
Accounts payable and other accrued liabilities |
|
|
|
|
|
|
||
Advance deposits |
|
|
|
|
|
|
||
Dividends and distributions payable |
|
|
|
|
|
|
||
TOTAL LIABILITIES |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
PARTNERS’ CAPITAL |
|
|
|
|
|
|
||
Preferred units, |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
General Partner: |
|
|
( |
) |
|
|
( |
) |
Limited Partners: |
|
|
( |
) |
|
|
( |
) |
TOTAL PARTNERS’ CAPITAL |
|
|
|
|
|
|
||
TOTAL LIABILITIES AND PARTNERS’ CAPITAL |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
10
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||||
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||||
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rooms department |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Food and beverage department |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other operating departments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Hotel operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rooms department |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Food and beverage department |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other operating departments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total hotel operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
NET OPERATING INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other income |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Loss on early extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Realized gain on hedging activities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Unrealized gain (loss) on hedging activities |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
PPP loan forgiveness |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Gain on sale of assets |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Gain on involuntary conversion of assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax provision |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Undeclared distributions to preferred unit holders |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income attributable to general and limited partnership unit holders |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net income attributable per general and limited partner unit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Weighted average number of general and limited partner units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The accompanying notes are an integral part of these consolidated financial statements.
11
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
|
|
Preferred Units |
|
|
General Partner |
|
|
Limited Partner |
|
|
|
|
||||||||||||||||||||||||
|
|
Units |
|
|
Series B |
|
|
Series C |
|
|
Series D |
|
|
Units |
|
|
Amounts |
|
|
Units |
|
|
Amounts |
|
|
Total |
|
|||||||||
Balances at December 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Preferred distributions paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Unit based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Balances at March 31, 2024 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Preferred distributions paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Unit based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Balances at June 30, 2024 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
12
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
|
|
Preferred Units |
|
|
General Partner |
|
|
Limited Partner |
|
|
|
|
||||||||||||||||||||||||
|
|
Units |
|
|
Series B |
|
|
Series C |
|
|
Series D |
|
|
Units |
|
|
Amounts |
|
|
Units |
|
|
Amounts |
|
|
Total |
|
|||||||||
Balances at December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Unit based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Balances at March 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
Amortization of restricted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Preferred distributions paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Unit based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Balances at June 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
|
|
|
$ |
( |
) |
|
$ |
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
13
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
|
|
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||
|
|
|
|
(unaudited) |
|
|
(unaudited) |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
||
Net income |
|
|
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash |
|
|
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
|
|
||
Amortization of deferred financing costs |
|
|
|
|
|
|
|
|
||
Amortization of mortgage premium |
|
|
|
|
( |
) |
|
|
( |
) |
Gain on involuntary conversion of assets |
|
|
|
|
( |
) |
|
|
( |
) |
Unrealized loss on hedging activities |
|
|
|
|
|
|
|
|
||
Loss on early extinguishment of debt |
|
|
|
|
|
|
|
— |
|
|
PPP loan forgiveness |
|
|
|
|
— |
|
|
|
( |
) |
Gain on disposal of assets |
|
|
|
|
( |
) |
|
|
— |
|
ESOP and unit - based compensation |
|
|
|
|
|
|
|
|
||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
|
|
||
Prepaid expenses, inventory and other assets |
|
|
|
|
( |
) |
|
|
( |
) |
Accounts payable and other accrued liabilities |
|
|
|
|
|
|
|
( |
) |
|
Advance deposits |
|
|
|
|
( |
) |
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
||
Improvements and additions to hotel properties |
|
|
|
|
( |
) |
|
|
( |
) |
ESOP loan payments received |
|
|
|
|
|
|
|
|
||
Proceeds from involuntary conversion |
|
|
|
|
|
|
|
|
||
Proceeds from sale of assets |
|
|
|
|
|
|
|
|
||
Net cash used in investing activities |
|
|
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
||
Proceeds from mortgage loans |
|
|
|
|
|
|
|
|
||
Redemption of interest rate swap |
|
|
|
|
|
|
|
— |
|
|
Payments on mortgage loans |
|
|
|
|
( |
) |
|
|
( |
) |
Payments on unsecured notes |
|
|
|
|
( |
) |
|
|
( |
) |
Payments of deferred financing costs |
|
|
|
|
( |
) |
|
|
( |
) |
Purchase of interest rate cap |
|
|
|
|
( |
) |
|
|
— |
|
Preferred dividends paid |
|
|
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
( |
) |
|
|
( |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at the beginning of the period |
|
|
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at the end of the period |
|
|
|
$ |
|
|
$ |
|
||
Supplemental disclosures: |
|
|
|
|
|
|
|
|
||
Cash paid during the period for interest |
|
|
|
$ |
|
|
$ |
|
||
Cash paid during the period for income taxes |
|
|
|
$ |
|
|
$ |
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
||
Change in amount of improvements to hotel property in |
|
|
|
$ |
( |
) |
|
$ |
|
|
Right of use assets acquired under lease liability |
|
|
|
$ |
|
|
$ |
- |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
14
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
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
The Company commenced operations on
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which at June 30, 2024 was approximately
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.
Overview of Significant Transactions
Significant transactions occurring during the current six-month period and prior fiscal year include the following:
On February 26, 2023, the Company entered into amended loan documents to modify the mortgage loan on The Whitehall hotel located in Houston, TX with the lender, International Bank of Commerce. The amendment (i) extends the maturity date to
On March 14, 2023, the Company entered into amended loan documents to modify the mortgage loan on the DoubleTree by Hilton Philadelphia Airport with the lender, TD Bank, N.A. The amendment provided a waiver for non-compliance with financial covenants for the periods ended September 30 and December 31, 2022, modified the reference rate replacing 1-month LIBOR with SOFR and required us to establish a debt service coverage reserve of $
On May 4, 2023, affiliates of the Company entered into loan documents to secure a $
15
On February 7, 2024, affiliates of the Company entered into loan documents to secure a $
On April 29, 2024, the Company entered into a loan amendment to amend the existing mortgage on the DoubleTree by Hilton Philadelphia Airport hotel with the existing lender, TD Bank, N.A. Pursuant to the amended loan documents, the mortgage loan: (i) has a principal balance of approximately $
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.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) assuming the Company will continue as a going concern. The Company has mortgages maturing during 2025 with balances at maturity totaling approximately $
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on the acquisition date and allocated to land, property and equipment and identifiable intangible assets. If substantially all the fair value of the gross assets acquired are concentrated in a single identifiable asset, the asset is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired asset. We capitalize the costs of significant additions and improvements that materially upgrade, increase the value of or extend the useful life of the property. These costs may include refurbishment, renovation, and remodeling expenditures, as well as certain direct internal costs related to construction projects. 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.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally
16
The Company assesses the carrying value 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 Company recognized
Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, mortgage servicing and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
|
|
|
As of |
|
|
As of |
|
||
|
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||
Cash and cash equivalents |
|
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at the end of the period |
|
|
$ |
|
|
$ |
|
||
Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $
Accounts Receivable – Accounts receivable consists primarily of amounts due from hotel guests including payments rendered by credit card for which we are awaiting payment from the merchant processor. Most of our revenue is collected through payment by cash or credit card on or in advance of the date of service, with limited extension of credit to a small number of customers. 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 June 30, 2024 and December 31, 2023 were $
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 swaps which act as cash flow hedges and are not designated as hedges. We
17
value our interest rate swaps at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
Level 1 |
Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 |
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
Level 3 |
Unobservable inputs for the asset or liability. |
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
June 30, 2024 |
|
December 31, 2023 |
|
||||||||
|
Carrying Amount |
|
Fair Value |
|
Carrying Amount |
|
Fair Value |
|
||||
Financial Assets |
|
|
|
|
|
|
|
|
||||
Interest-rate swap(1) |
$ |
— |
|
$ |
— |
|
$ |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
||||
Interest-rate cap(2) |
$ |
|
$ |
|
$ |
— |
|
$ |
— |
|
||
|
|
|
|
|
|
|
|
|
||||
Financial Liabilities |
|
|
|
|
|
|
|
|
||||
Mortgage loans |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
The fair value of the Company’s interest rate swap and cap agreements were determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward yield curves) derived from observable market interest rates.
The Company estimates the fair value of its mortgage loans by discounting the future cash flows of each loan at estimated market rates consistent with the maturity of a mortgage loan with similar credit terms and credit characteristics, which are Level 2 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity.
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 rental of rooms, sales of food and beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and
18
beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) shown on our consolidated balance sheets and recognized once the performance obligations are satisfied.
Certain ancillary services are provided by third parties and the Company 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. With respect to the hotel condominium rental programs that the Company operates at the Lyfe Resort & Residences (f/k/a Hyde Resort & Residences) and Hyde Beach House Resort & Residences, the Company has determined that it is an agent and recognizes revenue based on its share of revenue earned under the rental agency agreement.
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 the restaurant space within the hotel and space on the roofs of our hotels for antennas and satellite dishes. Leases for the restaurant space within the hotel are leased under
A schedule of minimum future lease payments receivable for the remaining six and twelve-month periods is as follows:
For the six months ending December 31, 2024 |
|
$ |
|
|
December 31, 2025 |
|
|
|
|
December 31, 2026 |
|
|
|
|
December 31, 2027 |
|
|
|
|
December 31, 2028 |
|
|
|
|
December 31, 2029 |
|
|
|
|
December 31, 2030 and thereafter |
|
|
|
|
Total |
|
$ |
|
Lessee Accounting – The Company’s operating lease agreements primarily include the ground lease on the Hyatt Centric Arlington, the parking garage lease in Hollywood, Florida at the Hyde Beach House Resort & Residences, and the corporate office lease. The assets are classified as “right of use assets”, which represent our right to use an underlying asset. The corresponding operating lease liability, which represent our obligation to make lease payments under the lease agreement, 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 financing rate, we use our incremental borrowing cost based on information available at the commencement date using our actual borrowing rates commensurate with the lease terms and fully levered borrowing to determine present value. Extension options on our leases are included in our minimum lease terms when they are reasonably certain to be exercised.
Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. 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
19
sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than
As of June 30, 2024 and December 31, 2023, we had
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 2022 Long-Term Incentive Plan (the “2022 Plan”), which the Company’s stockholders approved in April 2022, permits the grant of stock options, restricted stock, unrestricted stock and service/performance share compensation awards to its employees and directors for up to
Under the 2022 Plan, the Company may issue a variety of service or 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 June 30, 2024, the Company has made cumulative awards totaling
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 service or performance share compensation awards to its employees and directors for up to
As of June 30, 2024, under the 2013 Plan, the Company has made cumulative service-based stock awards totaling
Under the 2013 Plan, the Company was able to issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of June 30, 2024,
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 a 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 June 30, 2024 and 2023, the ESOP compensation cost was $
Advertising – Advertising costs, including internet advertising, were $
20
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. The gain on involuntary conversion of assets 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
New Accounting Pronouncements –
In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative ("ASU 2023-06"). ASU 2023-06 incorporates 14 of the 27 disclosure requirements published in SEC Release No. 33-10532 - Disclosure Update and Simplification into various topics within the Accounting Standards Codification ("ASC"). ASU 2023-06's amendments represent clarifications to, or technical corrections of, current requirements. For SEC registrants, the effective date for each amendment will vary based on the date on which the SEC removes that related disclosure from its rules. If the SEC does not act to remove its related requirement by June 30, 2027, any related FASB amendments will be removed from the ASC and will not be effective. Early adoption is prohibited. The Company is currently assessing the potential impacts of ASU 2023-06 and does not expect it to have a material effect on its consolidated financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently assessing the impacts of adopting ASU 2023-07 on its consolidated financial statements and disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied on a prospective basis, with the option to apply retrospectively. The Company is currently assessing the impacts of adopting ASU 2023-09 on its consolidated financial statements and disclosures.
In March 2024, the FASB issued ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards (“ASU 2024-01”), to clarify the scope application of profits interest and similar awards by adding illustrative guidance in ASC 718, Compensation—Stock Compensation ("ASC 718"). ASU 2024-01 clarifies how to determine whether profits interest and similar awards should be accounted for as a share-based payment arrangement (ASC 718) or as a cash bonus or profit-sharing arrangement (ASC 710, Compensation—General, or other guidance) and applies to all reporting entities that account for profits interest awards as compensation to employees or non-employees. In addition to adding the illustrative guidance, ASU 2024-01 modified the language in paragraph 718-10-15-3 to improve its clarity and operability without changing the guidance. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024, including interim periods within those annual periods. Early adoption is permitted. The amendments should be applied either retrospectively to all prior periods presented in the financial statements, or prospectively to profits interests and similar awards granted or modified on or after the adoption date. The Company is currently assessing the impacts of adopting ASU 2024-01 on its consolidated financial statements and disclosures.
In November 2024, the FASB issued 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40). The amendments improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales and research and development). The amendments are effective for annual reporting periods beginning after December 15, 2026, and interim
21
reporting periods beginning after December 15, 2027. We are currently evaluating the impact these changes may have on our consolidated financial statements.
3. Investment in Hotel Properties, Net
Investment in hotel properties, net as of June 30, 2024 and December 31, 2023 consisted of the following:
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June 30, 2024 |
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December 31, 2023 |
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Land and land improvements |
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$ |
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$ |
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Buildings and improvements |
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Right of use assets |
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Furniture, fixtures and equipment |
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Less: accumulated depreciation |
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( |
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( |
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Investment in Hotel Properties, Net |
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$ |
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$ |
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4. Debt
Mortgage Loans, Net. As of June 30, 2024 and December 31, 2023, we had approximately $
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Balance Outstanding as of |
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June 30, |
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December 31, |
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Prepayment |
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Maturity |
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Amortization |
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Interest |
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Property |
2024 |
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2023 |
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Penalties |
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Date |
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Provisions |
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Rate |
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The DeSoto (1) |
$ |
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$ |
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DoubleTree by Hilton Jacksonville |
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DoubleTree by Hilton Laurel (3) |
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(3) |
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(3) |
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DoubleTree by Hilton Philadelphia Airport (4) |
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(4) |
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SOFR plus |
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DoubleTree Resort by Hilton Hollywood |
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(5) |
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Georgian Terrace (6) |
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(6) |
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Hotel Alba Tampa, Tapestry Collection by Hilton (7) |
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(7) |
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(7) |
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Hotel Ballast Wilmington, Tapestry Collection by |
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Hyatt Centric Arlington (9) |
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The Whitehall (10) |
$ |
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PRIME plus |
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Total Mortgage Principal Balance |
$ |
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$ |
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Deferred financing costs, net |
$ |
( |
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( |
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Unamortized premium on loan |
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Total Mortgage Loans, Net |
$ |
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$ |
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(1) |
The note amortizes on a |
(2) |
Prepayment can be made without penalty. See Note 13. Subsequent Events for additional information on this loan. |
(3) |
The note requires payments of interest only and cannot be prepaid until the last 4 months of the loan term. |
(4) |
The note requires payments of interest only. On May 3, 2024, we entered into an interest rate cap with a notional amount of $ |
(5) |
With limited exception, the note may not be prepaid prior to |
(6) |
With limited exception, the note may not be prepaid prior to |
(7) |
The note requires payments of interest only and cannot be prepaid until the last four months of the term. |
(8) |
The note amortizes on a |
(9) |
Following a |
(10) |
The note bears a floating interest rate of New York Prime Rate plus |
As of June 30, 2024, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. Additionally, the mortgage on the Georgian Terrace and the DoubleTree Resort by Hilton Hollywood Beach mature in and , respectively. We intend to refinance these mortgages, but may be required to reduce the level of indebtedness by an amount of up to $
22
Total future mortgage debt maturities for the remaining six and twelve-month periods, without respect to any extension of loan maturity or loan modification after June 30, 2024, were as follows:
For the remaining six months ended December 31, 2024 |
$ |
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December 31, 2025 |
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December 31, 2026 |
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December 31, 2027 |
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December 31, 2028 |
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December 31, 2029 |
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Total future maturities |
$ |
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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 had an initial term of
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 $
On April 28, 2020, we entered into a promissory note and received proceeds of approximately $
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $
At June 30, 2024 and December 31, 2023, the PPP loans had a cumulative balance of approximately $
5. Commitments and Contingencies
Ground, Building, Parking and Land Leases – We lease
We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a
We lease land adjacent to the Hotel Alba Tampa for use as parking under a
23
additional
We lease approximately
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 $
We lease the parking garage and poolside cabanas associated with the Hyde Beach House. The parking and cabana lease requires us to make rental payments of $
We also lease equipment under operating and financing leases under agreements expiring between July 2024 and December 2029. The equipment is primarily included in investment in hotel properties, net with the related lease obligations included in accounts payable and accrued liabilities.
The following is a summary of the Company’s leases as of June 30, 2024:
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June 30, 2024 |
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Weighted-average remaining lease term years |
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Weighted-average discount rate |
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% |
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Right of use assets (1) |
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$ |
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(2) |
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$ |
( |
) |
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Operating lease rent expense |
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$ |
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Variable lease costs |
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Total rent and variable lease costs |
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$ |
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24
(1)
A schedule of minimum future lease payments for the following six and twelve-month periods is as follows:
For the six months ending December 31, 2024 |
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$ |
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December 31, 2025 |
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December 31, 2026 |
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December 31, 2027 |
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December 31, 2028 |
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December 31, 2029 |
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December 31, 2030 and thereafter |
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Total undiscounted lease payments |
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Less imputed interest |
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( |
) |
Total lease liability |
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$ |
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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 June 30, 2024, our
Franchise Agreements – As of June 30, 2024,
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Laurel, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, the Hotel Alba, the Whitehall, the Hyatt Centric Arlington and the Georgian Terrace an
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 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 $
25
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.
6. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to
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Per |
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Number of Shares |
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Quarterly |
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Annum |
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Liquidation |
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Issued and Outstanding as of |
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Distributions |
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Preferred Stock - Series |
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Rate |
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Preference |
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June 30, 2024 |
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December 31, 2023 |
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Per Share |
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Series B Preferred Stock |
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% |
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$ |
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$ |
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Series C Preferred Stock |
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% |
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$ |
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$ |
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Series D Preferred Stock |
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% |
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$ |
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$ |
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The Company is obligated to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the $
On January 24, 2023, the Company announced its intention to resume quarterly payments of dividends on its preferred stock, following the suspension of the preferred dividends during the pandemic.
The total undeclared and unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock as of June 30, 2024, are $
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.
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Per |
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Number of Units |
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Quarterly |
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Annum |
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Liquidation |
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Issued and Outstanding as of |
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Distributions |
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Preferred Units - Series |
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Rate |
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Preference |
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June 30, 2024 |
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December 31, 2023 |
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Per Unit |
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Series B Preferred Units |
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% |
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$ |
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$ |
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Series C Preferred Units |
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% |
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$ |
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$ |
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Series D Preferred Units |
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% |
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$ |
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$ |
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The Operating Partnership pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $
The total undeclared and unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units as of June 30, 2024, is $
26
7. Common Stock and Units
Common Stock – As of June 30, 2024, the Company was authorized to issue up to
The following is a schedule of issuances, since January 1, 2023, of the Company’s common stock and related partnership units of the Operating Partnership:
On January 12, 2023, the Company was issued
On January 23, 2023, the Company was issued
On April 28, 2023, one holder of partnership units in the Operating Partnership converted
On August 18, 2023, one holder of partnership units in the Operating Partnership converted
On August 30, 2023, one holder of partnership units in the Operating Partnership converted
On January 18, 2024, the Company was issued
As of June 30, 2024 and December 31, 2023, the Company had
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
Since January 1, 2022, there have been
As of June 30, 2024 and December 31, 2023, the total number of Operating Partnership units outstanding was
As of June 30, 2024 and December 31, 2023, the total number of outstanding Operating Partnership units not owned by the Company was
As of June 30, 2024, there are unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of $
27
8. Related Party Transactions
Our Town Hospitality. Our Town is currently the management company for each of our ten wholly-owned hotels, as well as the manager of our rental programs at the Lyfe Resort & Residences and the Hyde Beach House Resort & Residences. As of June 30, 2024, an affiliate of Andrew M. Sims, our Chairman, an affiliate of David R. Folsom, our President and Chief Executive Officer, and Andrew M. Sims Jr., our Vice President - Operations & Investor Relations, beneficially owned approximately
Accounts Receivable – At June 30, 2024 and December 31, 2023, we were due approximately $
Accounts Payable – At June 30, 2024 and December 31, 2023, we owed Our Town approximately $
Management Agreements – On September 6, 2019, the Company entered into a master agreement with Our Town related to the management of certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the management of our hotels. The hotel management agreements for each of our ten wholly-owned hotels and the
As of June 30, 2024, the OTH Master Agreement provided 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 $
Base management fees earned by Our Town for our properties totaled approximately $
Each OTH Hotel Management Agreement sets an incentive management fee equal to
Each OTH Hotel Management Agreement provides for the payment of a termination fee upon the sale of the hotel equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees paid for the number of months prior to the closing date of the hotel sale equal to the number of months remaining on the current term of the management agreement.
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases
Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town and who 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 $
Others. We employ Robert E. Kirkland IV, the son-in-law of our Chairman, 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 these two
28
individuals, including salary and benefits, for the three months ended June 30, 2024 and 2023, were $
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 consisting of
Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016, which 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 $
Between January 3, and February 28, 2017, the Company’s ESOP had purchased
A total of
The share allocations are accounted for at fair value on the date of allocation as follows:
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June 30, 2024 |
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December 31, 2023 |
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Number of Shares |
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Fair Value |
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Number of Shares |
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Fair Value |
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Allocated shares |
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$ |
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$ |
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Committed to be released shares |
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— |
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— |
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Total Allocated and Committed-to-be-Released |
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$ |
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$ |
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Unallocated shares |
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Total ESOP Shares |
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$ |
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$ |
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10. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
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Three Months Ended |
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Three Months Ended |
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Six Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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June 30, 2024 |
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June 30, 2023 |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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Sales and marketing |
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$ |
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$ |
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$ |
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$ |
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General and administrative |
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Repairs and maintenance |
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Utilities |
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Property taxes |
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Management fees, including incentive |
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Franchise fees |
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Insurance |
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Information and telecommunications |
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Other |
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Total indirect hotel operating expenses |
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$ |
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$ |
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$ |
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$ |
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11. Income Taxes
The components of the income tax provision for the three and six months ended June 30, 2024 and 2023 are as follows:
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Three Months Ended |
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Three Months Ended |
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Six Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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June 30, 2024 |
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June 30, 2023 |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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(unaudited) |
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Current: |
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Federal |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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State |
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Deferred: |
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Federal |
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State |
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Subtotals |
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Change in deferred tax valuation allowance |
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( |
) |
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( |
) |
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( |
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( |
) |
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— |
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— |
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— |
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— |
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Income tax provision |
|
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$ |
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$ |
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$ |
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$ |
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Three Months Ended |
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Three Months Ended |
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Six Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||||
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
||||
Statutory federal income tax provision |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Federal tax impact of REIT election |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Federal impact of PPP loan forgiveness |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
State income tax benefit, net of federal provision (benefit) |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Change in valuation allowance |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax (benefit) provision |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
12. Income Per Share and Per Unit
Income Per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income or loss would also be added back to net income or loss. The shares of the Series B Preferred Stock, Series C
30
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 unallocated ESOP shares have been excluded in the weighted average for the basic and diluted earnings per share computation.
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
||||
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
||||
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Less: Net income allocated to participating share awards |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income attributable to non-controlling interest |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Undeclared distributions to preferred stockholders |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net Income attributable to common stockholders for EPS computation |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number common shares outstanding for basic EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive participating securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested restricted shares |
|
— |
|
(1) |
|
|
|
|
— |
|
(1) |
|
— |
|
(1) |
|
Weighted average number common and common equivalent shares outstanding for diluted EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Undistributed income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Undistributed income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
(1) Anti-dilutive, therefore not included.
The accounting for unvested share-based payment awards included in the calculation of earnings per share changed. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are now participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees
31
and directors are considered participating securities, and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in the basic and diluted weighted average shares outstanding calculation.
Income Per Unit – The computation of basic net income per unit is presented below:
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
||||
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
||||
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Less: Net income allocated to participating unit awards |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Undeclared distributions to preferred unitholders |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income attributable to unitholders for EPU computation |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of units outstanding for basic EPU computation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive participating securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested restricted units |
|
— |
|
(1) |
|
|
|
|
— |
|
(1) |
|
— |
|
(1) |
|
Weighted average number of equivalent units outstanding for diluted EPU computation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Undistributed income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Undistributed income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Total diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
(1) Anti-dilutive, therefore not included.
13. Subsequent Events
On July 8, 2024, we secured a $
On July 29, 2024, we authorized payment of a quarterly distribution of $
On July 29, 2024, we authorized payment of a quarterly distribution of $
On July 29, 2024, we authorized payment of a quarterly distribution of $
On August 14, 2024, we secured a $
32
On October 28, 2024, we authorized payment of a quarterly distribution of $
On October 28, 2024, we authorized payment of a quarterly distribution of $
On October 28, 2024, we authorized payment of a quarterly distribution of $
33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations, and future plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Factors which could have a material adverse effect on the Company’s future operations, results, performance and prospects include, but are not limited to:
Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.
Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
34
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
Overview
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 and focused on the acquisition, renovation, up-branding 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. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.
Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of June 30, 2024, our portfolio consisted of the following hotel properties:
|
|
Number |
|
|
|
|
|
|
|
|
Property |
|
of Rooms |
|
|
Location |
|
Date of Acquisition |
|
Chain/Class Designation |
|
Wholly-owned Hotels |
|
|
|
|
|
|
|
|
|
|
The DeSoto |
|
|
246 |
|
|
Savannah, GA |
|
December 21, 2004 |
|
Upper Upscale(1) |
DoubleTree by Hilton Jacksonville Riverfront |
|
|
293 |
|
|
Jacksonville, FL |
|
July 22, 2005 |
|
Upscale |
DoubleTree by Hilton Laurel |
|
|
208 |
|
|
Laurel, MD |
|
December 21, 2004 |
|
Upscale |
DoubleTree by Hilton Philadelphia Airport |
|
|
331 |
|
|
Philadelphia, PA |
|
December 21, 2004 |
|
Upscale |
DoubleTree Resort by Hilton Hollywood Beach |
|
|
311 |
|
|
Hollywood, FL |
|
August 9, 2007 |
|
Upscale |
Georgian Terrace |
|
|
326 |
|
|
Atlanta, GA |
|
March 27, 2014 |
|
Upper Upscale(1) |
Hotel Alba Tampa, Tapestry Collection by Hilton |
|
|
222 |
|
|
Tampa, FL |
|
October 29, 2007 |
|
Upscale |
Hotel Ballast Wilmington, Tapestry Collection by Hilton |
|
|
272 |
|
|
Wilmington, NC |
|
December 21, 2004 |
|
Upscale |
Hyatt Centric Arlington |
|
|
318 |
|
|
Arlington, VA |
|
March 1, 2018 |
|
Upper Upscale |
The Whitehall |
|
|
259 |
|
|
Houston, TX |
|
November 13, 2013 |
|
Upper Upscale(1) |
Hotel Rooms Subtotal |
|
|
2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominium Hotels |
|
|
|
|
|
|
|
|
|
|
Lyfe Resort & Residences |
|
|
66 |
|
(2) |
Hollywood, FL |
|
January 30, 2017 |
|
Luxury(1) |
Hyde Beach House Resort & Residences |
|
|
76 |
|
(2) |
Hollywood, FL |
|
September 27, 2019 |
|
Luxury(1) |
Total Hotel & Participating Condominium Hotel Rooms |
|
|
2,928 |
|
|
|
|
|
|
|
We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 98.2% interest in our Operating Partnership, as of the date of this report, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Entities, which are indirect wholly-owned subsidiaries of the Operating Partnership. Our MHI TRS Entities then engage an eligible independent hotel management company to operate the hotels under a management
35
agreement. Our MHI TRS Entities have engaged Our Town to manage our hotels. Our MHI TRS Entities, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.
When calculating composite portfolio metrics, we include available rooms at the Lyfe Resort & Residences and the Hyde Beach House Resort & Residences that participate in our rental programs and are not reserved for owner-occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures.”
Results of Operations
The following tables illustrate the key operating metrics for the three and six months ended June 30, 2024 and 2023, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms of the Lyfe Resort & Residences and the Hyde Beach House Resort & Residences. The composite portfolio metrics represent the Company’s wholly-owned properties and the participating condominium hotel rooms at the Lyfe Resort & Residences and the Hyde Beach House Resort & Residences, during the three and six months ended June 30, 2024 and the corresponding period in 2023.
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||||
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||||
Actual Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Occupancy % |
|
|
74.0 |
% |
|
|
70.6 |
% |
|
|
69.1 |
% |
|
|
65.6 |
% |
ADR |
|
$ |
184.24 |
|
|
$ |
185.82 |
|
|
$ |
183.54 |
|
|
$ |
186.45 |
|
RevPAR |
|
$ |
136.38 |
|
|
$ |
131.16 |
|
|
$ |
126.84 |
|
|
$ |
122.27 |
|
Composite Portfolio Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Occupancy % |
|
|
73.4 |
% |
|
|
69.4 |
% |
|
|
69.2 |
% |
|
|
64.9 |
% |
ADR |
|
$ |
187.51 |
|
|
$ |
190.15 |
|
|
$ |
188.91 |
|
|
$ |
193.35 |
|
RevPAR |
|
$ |
137.67 |
|
|
$ |
131.94 |
|
|
$ |
130.64 |
|
|
$ |
125.53 |
|
Comparison of the Three Months Ended June 30, 2024, to the Three Months Ended June 30, 2023
Revenue. Total revenue for the three months ended June 30, 2024, increased by approximately $1.7 million, or 3.4%, to approximately $50.7 million compared to total revenue of approximately $49.0 million for the three months ended June 30, 2023. Increases of approximately $1.7 million in total revenue at eleven of our properties accounted for the change. The aggregate increase in total revenue reflects an overall increase in room occupancy by 5.8%, we also received higher food and beverage revenues and comparable other operating revenues, coming from better group business for the quarter ended June 30, 2024, versus the comparable period in 2023.
36
Room revenue increased approximately $1.3 million, or 4.0%, to approximately $34.6 million for the three months ended June 30, 2024, compared to room revenue of approximately $33.3 million for the three months ended June 30, 2023. RevPAR for the three month period increased 4.3% from $131.94 in 2023, to $137.67 in 2024, driven by a 4.0% increase in occupancy. Increases in room revenue at eight of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset room revenue decreases at the remaining two wholly-owned properties.
Food and beverage revenues increased approximately $0.4 million, or 4.2%, to approximately $9.9 million for the three months ended June 30, 2024, compared to food and beverage revenues of approximately $9.5 million for the three months ended June 30, 2023. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at five of our wholly-owned properties offset decreases at the remaining five wholly-owned properties.
Revenue from other operating departments decreased slightly by approximately $0.1 million, or 0.7%, to approximately $6.2 million for the three months ended June 30, 2024, compared to revenue from other operating departments of approximately $6.3 million for the three months ended June 30, 2023.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $0.8 million, or 2.4%, to approximately $35.0 million for the three months ended June 30, 2024, compared to total hotel operating expenses of approximately $34.2 million for the three months ended June 30, 2023. The increase in hotel operating expenses for the three months ended June 30, 2024, resulted from an aggregate increase at eight of our hotel properties by approximately $1.1 million, offset by decreases totaling approximately $0.3 million from four of our properties. This increase in hotel operating expenses was directly related to the increases in room revenues and food and beverage revenues and other operating expenses at a number of our hotels and higher indirect expenses as described below.
Room expense for the three months ended June 30, 2024, increased by approximately $0.4 million, or 6.2%, to approximately $7.4 million, compared to rooms expense for the three months ended June 30, 2023, of approximately $7.0 million. The increase was directly related to the increase in room revenue.
Food and beverage expenses for the three months ended June 30, 2024, increased approximately $0.1 million, or 2.4%, to approximately $6.5 million, compared to food and beverage expenses of approximately $6.4 million, for the three months ended June 30, 2023. The net increase in food and beverage expenses for the three months ended June 30, 2024, resulted from an aggregate increase of approximately $0.3 million from four of our properties, with offsetting decreases at our remaining properties. The increase was directly related to the increase in food and beverage revenue.
Expenses from other operating departments for the three months ended June 30, 2024, increased approximately $0.2 million or 8.7%, to approximately $2.5 million, compared to other operating departments expense for the three months ended June 30, 2023, of approximately $2.3 million. The increase was directly related to the increase in other departments revenue.
Indirect expenses at our wholly-owned properties for the three months ended June 30, 2024, slightly increased by 0.2%, to approximately $18.5 million, compared to indirect expenses of approximately $18.5 million for the three months ended June 30, 2023.
Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2024, decreased approximately $0.2 million, or 11.7%, to approximately $1.6 million compared to corporate general and administrative expenses of approximately $1.8 million, for the three months ended June 30, 2023. A decrease in legal and professional fees for the current quarter accounted for the majority of this decrease.
Interest Expense. Interest expense for the three months ended June 30, 2024, increased approximately $0.7 million, or 16.6%, to approximately $5.0 million, as compared to interest expense of approximately $4.3 million, for the three months ended June 30, 2023. The increase in interest expense for the three months ended June 30, 2024, was substantially related to increases from interest rate swaps ending for both our mortgage loans on our properties DoubleTree by Hilton Philadelphia Airport and Hotel Alba Tampa, Tapestry Collection by Hilton. This affected the interest expense by increasing interest rates on these variable rate mortgages. We also refinanced the Hotel Alba Tampa, Tapestry Collection by Hilton mortgage during the previous quarter ended March 31, 2024, which increased the loan amount and increased the interest rate to a fixed rate of 8.49%.
Unrealized Loss on Hedging Activities. As of June 30, 2024, there was an interest rate cap related to the mortgage loan on the DoubleTree by Hilton Philadelphia Airport with a fair value of approximately $0.8 million, which capped the interest rate down by 3.0%. There was an unrealized loss on the fair value of this cap of approximately $0.1 million, compared to an unrealized gain of approximately $0.3 million during the three months ended June 30, 2023.
37
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets decreased approximately $0.7 million, from approximately $0.8 million for the three months ended June 30, 2023, to approximately $0.1 million, for the three months ending June 30, 2024. The gain was related to casualties at two of our properties in Hollywood, Florida and Arlington, Virginia.
Income Taxes. We had an income tax provision of $17,184 for the three months ended June 30, 2024, compared to an income tax provision of $16,537, for the three months ended June 30, 2023.
Net Income. We realized a net income for the three months ended June 30, 2024, of approximately $4.7 million, compared to a net income of approximately $5.3 million, for the three months ended June 30, 2023, because of the operating results discussed above.
Comparison of the Six Months Ended June 30, 2024, to the Six Months Ended June 30, 2023
Revenue. Total revenue for the six months ended June 30, 2024, increased by approximately $4.7 million, or 5.1%, to approximately $97.2 million compared to total revenue of approximately $92.5 million for the six months ended June 30, 2023. Increases of approximately $5.2 million in total revenue at 10 of our properties accounted for the change. The aggregate increase in total revenue reflects an overall increase in room occupancy by 6.5%, we also received higher food and beverage revenues and comparable other operating revenues, coming from better group business for the six months ended June 30, 2024, versus the comparable period in 2023.
Room revenue increased approximately $2.6 million, or 4.3%, to approximately $64.3 million for the six months ended June 30, 2024, compared to room revenue of approximately $61.7 million for the six months ended June 30, 2023. RevPAR for the six month period increased 4.1% from $125.53 in 2023, to $130.64 in 2024, driven by a 6.5% increase in occupancy. Increases in room revenue at seven of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset room revenue decreases at the remaining three wholly-owned properties.
Food and beverage revenues increased approximately $1.4 million, or 7.7%, to approximately $19.6 million for the six months ended June 30, 2024 compared to food and beverage revenues of approximately $18.2 million for the six months ended June 30, 2023. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at seven of our wholly-owned properties offset decreases at the remaining three wholly-owned properties.
Revenue from other operating departments increased by approximately $0.7 million, or 5.3%, to approximately $13.3 million for the six months ended June 30, 2024 compared to revenue from other operating departments of approximately $12.6 million for the six months ended June 30, 2023.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $3.6 million, or 5.5%, to approximately $69.2 million for the six months ended June 30, 2024, compared to total hotel operating expenses of approximately $65.6 million for the six months ended June 30, 2023. The increase in hotel operating expenses for the six months ended June 30, 2024, resulted from an aggregate increase at nine of our hotel properties by approximately $4.0 million, offset by decreases totaling approximately $0.4 million from three of our properties. This increase in hotel operating expenses was directly related to the increases in room revenues and food and beverage revenues and other operating expenses at a number of our hotels and higher indirect expenses as described below.
Room expense for the six months ended June 30, 2024, increased by approximately $0.6 million, or 4.3%, to approximately $14.0 million, compared to rooms expense for the six months ended June 30, 2023, of approximately $13.4 million. The increase was directly related to the increase in room revenue.
Food and beverage expenses for the six months ended June 30, 2024, increased approximately $0.7 million, or 5.5%, to approximately $13.0 million, compared to food and beverage expenses of approximately $12.3 million, for the six months ended June 30, 2023. The net increase in food and beverage expenses for the six months ended June 30, 2024, resulted from an aggregate increase of approximately $0.9 million from seven of our properties, with offsetting decreases at our remaining properties. The increase was directly related to the increase in food and beverage revenue.
Expenses from other operating departments for the six months ended June 30, 2024, increased approximately $0.6 million or 12.3%, to approximately $5.2 million, compared to other operating departments expense for the six months ended June 30, 2023, of approximately $4.6 million. The increase was directly related to the increase in other departments revenue.
Indirect expenses at our wholly-owned properties for the six months ended June 30, 2024, increased approximately $1.8 million, or 5.0%, to approximately $37.0 million, compared to indirect expenses of approximately $35.2 million for the six months ended June
38
30, 2023. The increase was related to increases in administration and general, repairs and maintenance, energy and utilities, insurance and real estate and personal property taxes.
Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2024, decreased approximately $0.3 million, or 7.2%, to approximately $3.5 million compared to corporate general and administrative expenses of approximately $3.8 million, for the six months ended June 30, 2023. A decrease in legal and professional fees for the current period accounted for the majority of this decrease.
Interest Expense. Interest expense for the six months ended June 30, 2024, increased approximately $1.5 million, or 17.7%, to approximately $9.9 million, as compared to interest expense of approximately $8.4 million, for the six months ended June 30, 2023. The increase in interest expense for the six months ended June 30, 2024, was substantially related to increases from interest rate swaps ending for both our mortgage loans on our properties DoubleTree by Hilton Philadelphia Airport and Hotel Alba Tampa, Tapestry Collection by Hilton. This affected the interest expense by increasing interest rates on these variable rate mortgages. We also refinanced the Hotel Alba Tampa, Tapestry Collection by Hilton mortgage during the previous quarter ended March 31, 2024, which increased the loan amount and increased the interest rate to a fixed rate of 8.49%.
Realized Gain on Hedging Activities. The realized gain on hedging activities during the six months ended June 30, 2024, was approximately $1.0 million, due to termination of the Hotel Alba Tampa, Tapestry Collection by Hilton interest rate swap.
Unrealized Loss on Hedging Activities. As of June 30, 2024, there was a new interest rate cap related to the mortgage loan on the DoubleTree by Hilton Philadelphia Airport with a fair value of approximately $0.8 million, which capped the interest rate down by 3.0%, with an unrealized loss on hedging activities of approximately $0.1 million. There was also an unrealized loss on the fair value of the Hotel Alba Tampa, Tapestry Collection by Hilton interest rate swap of approximately $0.7 million. These two aggregated losses of approximately $0.8 million for the six months ended June 30, 2024, compared to a loss of approximately $0.2 million during the six months ended June 30, 2023.
Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets decreased approximately $0.5 million, from approximately $0.8 million for the six months ended June 30, 2023 to approximately $0.2 million, for the six months ending June 30, 2024. The gain was related to casualties at two of our properties in Hollywood, Florida and Arlington, Virginia.
Income Taxes. We had an income tax provision of $35,277 for the six months ended June 30, 2024, compared to an income tax provision of $31,719, for the six months ended June 30, 2023.
Net Income. We realized a net income for the six months ended June 30, 2024, of approximately $6.0 million, compared to a net income of approximately $6.6 million, for the six months ended June 30, 2023, because of the operating results discussed above.
Non-GAAP Financial Measures
We consider the non-GAAP financial measures of FFO attributable to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO attributable to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, gains or losses from involuntary conversions of assets, plus certain non-cash items such as real estate asset depreciation and amortization or impairment, stock compensation costs and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate
39
values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
We further adjust FFO Attributable to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments, losses on early extinguishment of debt, gains on extinguishment of preferred stock, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, management contract termination costs, operating asset depreciation and amortization, gain or loss on a change in control, ESOP and stock compensation expenses and negative lease amortization on our finance ground lease obligation. We exclude these items as we believe it allows for meaningful
40
comparisons between periods and among other REITs and is more indicative than FFO of the on-going performance of our business and assets. Our calculation of adjusted FFO may be different from similar measures calculated by other REITs.
The following is a reconciliation of net income to FFO and Adjusted FFO, for the three and six months ended June 30, 2024 and 2023:
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||||
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||||
Net income |
|
$ |
4,664,232 |
|
|
$ |
5,257,670 |
|
|
$ |
5,987,053 |
|
|
$ |
6,645,185 |
|
Depreciation and amortization - real estate |
|
|
4,802,717 |
|
|
|
4,750,322 |
|
|
|
9,557,629 |
|
|
|
9,314,947 |
|
Gain on sale of assets |
|
|
(4,400 |
) |
|
|
— |
|
|
|
(4,400 |
) |
|
|
— |
|
Gain on involuntary conversion of assets |
|
|
(112,645 |
) |
|
|
(763,169 |
) |
|
|
(235,037 |
) |
|
|
(779,645 |
) |
FFO |
|
|
9,349,904 |
|
|
|
9,244,823 |
|
|
|
15,305,245 |
|
|
|
15,180,487 |
|
Distributions to preferred stockholders |
|
|
(1,994,313 |
) |
|
|
(1,994,313 |
) |
|
|
(3,988,625 |
) |
|
|
(3,988,625 |
) |
FFO attributable to common stockholders and unitholders |
|
|
7,355,591 |
|
|
|
7,250,510 |
|
|
|
11,316,620 |
|
|
|
11,191,862 |
|
Amortization |
|
|
14,806 |
|
|
|
12,871 |
|
|
|
29,611 |
|
|
|
26,557 |
|
ESOP and stock - based compensation |
|
|
47,827 |
|
|
|
54,488 |
|
|
|
303,783 |
|
|
|
314,951 |
|
Loss on early debt extinguishment |
|
|
— |
|
|
|
— |
|
|
|
241,878 |
|
|
|
— |
|
Unrealized loss (gain) on hedging activities |
|
|
84,872 |
|
|
|
(286,831 |
) |
|
|
791,421 |
|
|
|
155,632 |
|
Adjusted FFO attributable to common stockholders and unitholders |
|
$ |
7,503,096 |
|
|
$ |
7,031,038 |
|
|
$ |
12,683,313 |
|
|
$ |
11,689,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares outstanding, basic |
|
|
19,431,455 |
|
|
|
18,712,452 |
|
|
|
19,395,528 |
|
|
|
18,658,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of non-controlling units |
|
|
364,186 |
|
|
|
772,441 |
|
|
|
364,186 |
|
|
|
798,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares and units outstanding, basic |
|
|
19,795,641 |
|
|
|
19,484,893 |
|
|
|
19,759,714 |
|
|
|
19,457,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
FFO per common share and unit |
|
$ |
0.37 |
|
|
$ |
0.37 |
|
|
$ |
0.57 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjusted FFO per common share and unit |
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.64 |
|
|
$ |
0.60 |
|
EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.
Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) realized and unrealized gains and losses on derivative instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) Paycheck Protection Program (PPP) debt forgiveness, (11) gain on exercise of development right, (12) corporate general and administrative expense, and (13) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides
41
investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
The following is a reconciliation of net income to Hotel EBITDA for the three and six months ended June 30, 2024 and 2023:
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||||
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
|
June 30, 2024 |
|
|
June 30, 2023 |
|
||||
Net income |
|
$ |
4,664,232 |
|
|
$ |
5,257,670 |
|
|
$ |
5,987,053 |
|
|
$ |
6,645,185 |
|
Interest expense |
|
|
5,000,995 |
|
|
|
4,288,367 |
|
|
|
9,889,801 |
|
|
|
8,401,964 |
|
Interest income |
|
|
(208,102 |
) |
|
|
(222,772 |
) |
|
|
(422,873 |
) |
|
|
(369,437 |
) |
Income tax provision |
|
|
17,184 |
|
|
|
16,537 |
|
|
|
35,277 |
|
|
|
31,719 |
|
Depreciation and amortization |
|
|
4,817,523 |
|
|
|
4,763,193 |
|
|
|
9,587,240 |
|
|
|
9,341,504 |
|
EBITDA |
|
|
14,291,832 |
|
|
|
14,102,995 |
|
|
|
25,076,498 |
|
|
|
24,050,935 |
|
PPP loan forgiveness |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(275,494 |
) |
Other income |
|
|
(142,353 |
) |
|
|
— |
|
|
|
(267,230 |
) |
|
|
— |
|
Loss on early debt extinguishment |
|
|
— |
|
|
|
— |
|
|
|
241,878 |
|
|
|
— |
|
Gain on sale of assets |
|
|
(4,400 |
) |
|
|
— |
|
|
|
(4,400 |
) |
|
|
— |
|
Gain on involuntary conversion of assets |
|
|
(112,645 |
) |
|
|
(763,169 |
) |
|
|
(235,037 |
) |
|
|
(779,645 |
) |
Subtotal |
|
|
14,032,434 |
|
|
|
13,339,826 |
|
|
|
24,811,709 |
|
|
|
22,995,796 |
|
Corporate general and administrative |
|
|
1,580,373 |
|
|
|
1,789,041 |
|
|
|
3,496,898 |
|
|
|
3,769,805 |
|
Realized and unrealized (gain) loss on hedging activities |
|
|
84,872 |
|
|
|
(286,831 |
) |
|
|
(250,573 |
) |
|
|
155,632 |
|
Hotel EBITDA |
|
$ |
15,697,679 |
|
|
$ |
14,842,036 |
|
|
$ |
28,058,034 |
|
|
$ |
26,921,233 |
|
Sources and Uses of Cash
Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage and other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and dividends. As of June 30, 2024, we had approximately $18.9 million of unrestricted cash and $18.4 million of restricted cash.
Operating Activities. Our net cash flow provided by operating activities for the six months ended June 30, 2024, was approximately $16.7 million, generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the quarter and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in leisure transient, small group and corporate business travel. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and positive or negative changes in working capital.
Investing Activities. Our cash used in investing activities for the six months ended June 30, 2024, was approximately $5.0 million. Of this amount approximately $5.2 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $0.2 million.
Financing Activities. During the six months ended June 30, 2024, the Company and Operating Partnership received proceeds from a mortgage loan of $35.0 million, received proceeds from the redemption of the Tampa interest rate swap of approximately $1.0 million, made principal payments on our mortgages of approximately $30.2 million, payments on our unsecured notes of approximately $0.4 million and payments on deferred financing costs of approximately $1.0 million, and paid preferred dividends of approximately $4.0 million.
42
Capital Expenditures
We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined through the annual budget process over which we maintain approval rights, and which are implemented or administered by our management company.
Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. For 2024, we expect total capital expenditures for the routine replacement and refurbishment of furniture, fixtures and equipment for 2024 to be approximately $7.0 million.
We expect a substantial portion of our capital expenditures for the routine replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, Tapestry Collection by Hilton, the Hotel Alba Tampa, Tapestry Collection by Hilton, the DoubleTree Resort by Hilton Hollywood Beach, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree by Hilton Laurel, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington on a monthly basis.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we may be required by one or more of our franchisors to complete a PIP in order to bring the hotel up to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including replacement reserve accounts, proceeds of mortgage debt or equity offerings.
During fiscal years 2024, 2025, and 2026, we expect total capital expenditures related to the renovation of our property in Philadelphia, Pennsylvania of approximately $11.5 million as a condition to the renewal of our franchise license. On April 29, 2024, coincident with the extension of the mortgage loan, we placed $5.0 million into a reserve account to partially fund the renovation. In addition, provided we meet certain financial covenants, we expect the release of $1.2 million of other reserves in additional funding on or after June 30, 2025. The remainder of the capital expenditures will be funded out of working capital. As of June 30, 2024, we had incurred costs totaling approximately $0.3 million.
During fiscal years 2024, 2025, and 2026, we expect total capital expenditures related to the renovation of our property in Jacksonville, Florida of approximately $14.6 million, as a condition to the renewal of our franchise license. On July 8, 2024, in conjunction with the refinance of the mortgage with Fifth Third Bank, N.A., we secured additional funding of $9.49 million to partially fund the product improvement plan. The remainder of the capital expenditures will be funded out of working capital.
Liquidity and Capital Resources
As of June 30, 2024, we had total cash and cash equivalents of approximately $18.9 million and restricted cash of approximately $18.4 million. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, routine capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt).
On February 7, 2024, we secured a $35.0 million mortgage on the Hotel Alba located in Tampa, Florida with Cit Real Estate Funding, Inc. The loan has a maturity date of March 6, 2029; carries a fixed rate of interest of 8.49%, requires monthly payments of interest only; and cannot be prepaid until the last four months of the loan term. We used a portion of the proceeds to repay the existing first mortgage on the hotel. The remainder of the proceeds were used for working capital.
On April 29, 2024, we amended the mortgage loan agreement on the DoubleTree by Hilton Philadelphia Airport with the existing lender, TD Bank, N.A. The amendment extends the loan’s maturity to April 29, 2026; requires payments of interest only at existing terms of interest at a floating rate based on SOFR plus 3.50%; and required a principal reduction of $3.0 million. Existing reserves were increased by $2.0 million and a separate reserve of $5.0 million was established for the anticipated renovation of the property in conjunction with the renewal of the franchise license.
On July 8, 2024, we secured a $26.25 million mortgage loan on the DoubleTree by Hilton Jacksonville Riverfront hotel located in Jacksonville, Florida with Fifth Third Bank, N.A. The loan provides for an additional $9.49 million available to fund a product
43
improvement plan at the hotel; matures on July 8, 2029; requires monthly payments of interest at a floating interest rate of SOFR plus 3.00% plus principal of $38,700. Proceeds of the loan were used to repay the existing mortgage.
On August 14, 2024, we secured a $5.0 million second mortgage loan on the DeSoto hotel located in Savannah, GA with MONY Life Insurance Company. The loan has a maturity date of July 1, 2026 and requires level payments of principal and interest at a fixed interest rate of 7.50% and amortizing on a 25-year schedule. Proceeds of the loan were used for working capital.
As of the date of this report, we were current on all mortgage and other loan payments per the terms of our agreements, as amended.
In June 2025, the mortgage on The Georgian Terrace in Atlanta, Georgia matures. We intend to refinance the mortgage but may be required to reduce the level of indebtedness by an amount of up to $5.25 million based upon anticipated financial performance of the property and anticipated market conditions.
In October 2025, the mortgage on the DoubleTree Resort by Hilton Hollywood Beach matures. We intend to refinance the mortgage but may be required to reduce the level of indebtedness by an amount of up to $12.5 million based upon anticipated financial performance of the property and anticipated market conditions.
We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources, which we expect to be limited as a result of the economic changes in the travel industry coming out of the COVID-19 pandemic. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances as well as general economic conditions.
As described in “Liquidity and Capital Resources”, as of June 30, 2024, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, with the exception of a covenant default under the mortgage on the DoubleTree by Hilton Philadelphia Airport. In April 2024, we obtained a waiver of non-compliance with the financial covenants for the quarters ended September 30 and December 31, 2023. In May 2024, we obtained a waiver of non-compliance with the financial covenants for the quarter ended March 31, 2024.
As of September 30, 2024, we failed to maintain compliance with the financial covenants under the mortgage on the DoubleTree by Hilton Jacksonville Riverfront. If we are unable to receive a waiver, we may be required to reduce the outstanding balance with a prepayment of approximately $1.2 million or provide an equivalent amount of cash collateral until we establish compliance.
Certain of our loan agreements contain “cash trap” provisions that may be triggered if the performance of the applicable hotel declines below a certain threshold. As of June 30, 2024, the provisions under the mortgage secured by the DoubleTree Resort by Hilton Hollywood Beach were triggered, which will require substantially all the revenue generated by the hotel to be deposited directly into a lockbox account and swept into a cash management account for the benefit of the lender until the property meets the criteria in the loan agreement for exiting the “cash trap.”
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Dividend Policy
We may not make distributions with respect to any shares of our common stock, unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
On January 24, 2023, we announced that we will resume quarterly distributions to holders of our preferred stock and set a record date of February 28, 2023 with a payment date of March 15, 2023.
On April 24, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of May 31, 2023 and a payment date of June 13, 2023.
On May 30, 2023, we announced the declaration of a "catch up" distribution to holders of our preferred stock with a record date of June 30, 2023 and a payment date of July 14, 2023.
On August 1, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of August 31, 2023 and a payment date of September 15, 2023.
On October 30, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of November 30, 2023 and a payment date of December 15, 2023.
On January 30, 2024, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of February 29, 2024 and a payment date of March 15, 2024.
On April 30, 2024, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of May 31, 2024 and a payment date of June 17, 2024.
On July 30, 2024, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of August 30, 2024 and a payment date of September 16, 2024.
On October 29, 2024, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of November 29, 2024 and a payment date of December 16, 2024.
As of June 30, 2024, the amount of cumulative unpaid dividends on our outstanding preferred shares as approximately $21.9 million. We expect that any reduction in the level of cumulative unpaid distributions will be made in the form of a series of "catch up" distributions, such as the distribution announced on May 30, 2023. The amount, timing and frequency of distributions, including additional “catch-up” distributions, will be authorized by our board of directors and based upon a variety of factors deemed relevant by the directors. No assurance can be given that the distribution policy will not change in the future.
Off-Balance Sheet Arrangements
None.
Inflation
We generate revenues primarily from lease payments from our MHI TRS Entities and net income from the operations of our MHI TRS Entities. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates that differ from the general rate of inflation.
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Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, adverse weather conditions and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgment on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in these critical accounting policies or the methods or assumptions we apply.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.
To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.
As of June 30, 2024, we had approximately $273.4 million of fixed-rate debt, including the PPP Loans of approximately $1.1 million, with a fixed rate of 1.0% and approximately $49.8 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 5.28%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in the Prime Rate. Assuming that the aggregate amount outstanding on the mortgages on our Philadelphia, Pennsylvania and Houston, Texas hotels remains at approximately $49.8 million, the balance at June 30, 2024, the impact on our annual interest incurred and cash flows of a one percent increase in SOFR and the Prime Rate, would be approximately $0.3 million.
As of December 31, 2023, we had approximately $266.0 million of fixed-rate debt, including the mortgage on our Hotel Alba Tampa, Tapestry Collection by Hilton, which is fixed by an interest rate swap to 5.576% and the PPP Loans of $1.5 million, with a fixed rate of 1.0% and approximately $52.9 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.87%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR, SOFR, and in Prime Rate. Assuming that the aggregate amounts outstanding on the mortgage on The Whitehall remains at approximately $14.0 million and the mortgage on the DoubleTree by Hilton Philadelphia Airport remains at approximately $38.9 million, the balance at December 31, 2023, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month SOFR and in Prime Rate, would be approximately $0.4 million.
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Item 4. Controls and Procedures
Sotherly Hotels Inc.
Disclosure Controls and Procedures
The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of June 30, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, its disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.
Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over financial reporting.
Sotherly Hotels LP
Disclosure Controls and Procedures
The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of June 30, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, the disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels LP have been detected.
Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels LP’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
We are not involved in any material legal proceedings, nor to our knowledge, is any material litigation threatened against us. We are involved in routine legal proceedings arising out of the ordinary course of business most of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Partnership Agreement, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.
Item 3. Defaults upon Senior Securities
Preferred Stock
The Company’s distribution on the shares of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for eleven quarterly periods. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s preferred stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
As of November 4, 2024, the Company has deferred payment and is in arrears on dividends for the Company's Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the periods ending March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023, June 30, 2023, September 30, 2023, December 31, 2023, March 31, 2024, June 30, 2024, and September 30, 2024. The relevant distributions were as follows:
The Company has declared dividends in the respective amounts shown above for each of the Series B, Series C, and Series D Preferred Stock, for the distribution period ending March 31, 2022, payable on December 16, 2024. The total arrearage of cumulative unpaid cash dividends on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through October 29, 2024, are $8,052,550, $7,287,931, and $6,596,958, respectively.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act)
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Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q:
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Description of Exhibit |
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31.1 |
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31.2 |
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31.3 |
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31.4 |
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32.1 |
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32.2 |
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32.3 |
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32.4 |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
** Filed herewith
(+) This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SOTHERLY HOTELS INC. |
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Date: November 12, 2024 |
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By: |
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/s/ David R. Folsom |
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David R. Folsom |
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President and Chief Executive Officer |
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By: |
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/s/ Anthony E. Domalski |
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Anthony E. Domalski |
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Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SOTHERLY HOTELS LP |
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By: |
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SOTHERLY HOTELS INC. |
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Its General Partner |
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Date: November 12, 2024 |
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By: |
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/s/ David R. Folsom |
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David R. Folsom |
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President and Chief Executive Officer |
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By: |
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/s/ Anthony E. Domalski |
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Anthony E. Domalski |
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Chief Financial Officer |
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