10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

MARYLAND	001-32379	20-1531029
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

DELAWARE	001-36091	20-1965427
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

410 West Francis Street

Williamsburg, Virginia 23185

(757) 229-5648

(Address and Telephone Number of Principal Executive Offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

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

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

Sotherly Hotels Inc.

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-accelerated Filer	¨	Smaller Reporting Company	x

Sotherly Hotels LP

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-accelerated Filer	x	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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

As of November 6, 2013, there were 10,206,927 shares of the registrant’s common stock issued and outstanding.

EXPLANATORY NOTE

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

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

This report combines the Quarterly Reports on Form 10-Q for the period ended June 30, 2013 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

• combined reports better reflect how management and investors view the business as a single operating unit;

• combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

• combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

• combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

• Consolidated Financial Statements;

• the following Notes to Consolidated Financial Statements:

• Note 8 – Equity; and

• Note 14 – Earnings (Loss) Per Share and Unit;

• Item 4 – Controls and Procedures; and

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

2

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

		Page
	PART I
Item 1.	Financial Statements		4
	Sotherly Hotels Inc.		4
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		4
	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012		5
	Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2013		6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		7
	Sotherly Hotels LP		8
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		8
	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2013 and 2012		9
	Consolidated Statement of Changes in Partners’ Capital for the Nine Months Ended September 30, 2013		10
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		11
	Notes to Consolidated Financial Statements		12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41
Item 4	Controls and Procedures		42
	PART II
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults Upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other Information		44
Item 6.	Exhibits		44

3

PART I

Item 1. Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Investment in hotel properties, net	$	174,024,365		$	176,427,904
Investment in joint venture		8,323,446			8,638,967
Cash and cash equivalents		23,785,009			7,175,716
Restricted cash		5,267,202			3,079,894
Accounts receivable		1,958,357			1,478,923
Accounts receivable-affiliate		10,127			8,657
Prepaid expenses, inventory and other assets		1,985,343			1,684,951
Shell Island sublease, net		300,245			480,392
Deferred income taxes		1,237,759			2,649,282
Deferred financing costs, net		3,536,730			2,406,183
TOTAL ASSETS	$	220,428,583		$	204,030,869
LIABILITIES
Mortgage loans	$	139,784,729			135,674,432
Loans payable		3,650,220			4,025,220
Unsecured notes		27,600,000			—
Series A Cumulative Redeemable Preferred Stock, par value $0.01, 27,650 shares authorized, 0 and 14,228 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		—			14,227,650
Accounts payable and other accrued liabilities		7,728,337			6,786,684
Advance deposits		889,440			625,822
Dividends and distributions payable		521,525			389,179
Warrant derivative liability		7,990,712			4,969,752
TOTAL LIABILITIES		188,164,963			166,698,739
Commitments and contingencies (see Note 7)
EQUITY
Sotherly Hotels Inc. stockholders’ equity
Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		—			—
Common stock, par value $0.01, 49,000,000 shares authorized, 10,206,927 shares and 9,999,786 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		102,069			99,998
Additional paid in capital		57,500,847			57,020,979
Distributions in excess of retained deficit		(31,231,594	)		(27,179,392	)
Total Sotherly Hotels Inc. stockholders’ equity		26,371,322			29,941,585
Noncontrolling interest		5,892,298			7,390,545
TOTAL EQUITY		32,263,620			37,332,130
TOTAL LIABILITIES AND EQUITY	$	220,428,583		$	204,030,869

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

4

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
REVENUE
Rooms department	$	15,290,818		$	15,580,600		$	47,692,797		$	47,281,173
Food and beverage department		5,121,631			5,071,821			15,947,997			16,247,828
Other operating departments		1,046,188			1,118,792			3,258,298			3,379,880
Total revenue		21,458,637			21,771,213			66,899,092			66,908,881
EXPENSES
Hotel operating expenses
Rooms department		4,300,441			4,383,150			12,877,637			12,803,795
Food and beverage department		3,358,603			3,456,698			10,273,994			10,812,234
Other operating departments		121,715			125,023			347,739			365,961
Indirect		8,438,237			8,484,381			25,009,858			25,127,080
Total hotel operating expenses		16,218,996			16,449,252			48,509,228			49,109,070
Depreciation and amortization		2,038,000			2,150,007			6,121,871			6,525,561
Corporate general and administrative		866,551			978,473			3,084,023			3,073,008
Total operating expenses		19,123,547			19,577,732			57,715,122			58,707,639
NET OPERATING INCOME		2,335,090			2,193,481			9,183,970			8,201,242
Other income (expense)
Interest expense		(3,899,128	)		(2,442,620	)		(8,912,319	)		(10,014,982	)
Interest income		3,579			4,133			11,139			11,985
Equity income (loss) in joint venture		(122,637	)		(162,463	)		434,479			15,251
Unrealized loss on warrant derivative		(340,750	)		(1,659,750	)		(3,020,960	)		(4,344,650	)
Net loss before income taxes		(2,023,846	)		(2,067,219	)		(2,303,691	)		(6,131,154	)
Provision for income tax		(93,962	)		(27,979	)		(1,468,835	)		(1,090,700	)
Net loss		(2,117,808	)		(2,095,198	)		(3,772,526	)		(7,221,854	)
Add: Net loss attributable to the noncontrolling interest		468,086			480,178			838,478			1,658,825
NET LOSS ATTRIBUTABLE TO THE COMPANY	$	(1,649,722	)	$	(1,615,020	)	$	(2,934,048	)	$	(5,563,029	)
Net loss per share attributable to the Company
Basic	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)
Weighted average number of shares outstanding
Basic		10,181,927			9,999,786			10,137,021			9,994,246
Diluted		11,203,156			10,801,390			11,088,876			10,603,240

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

5

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

	Common Stock				Additional Paid- In Capital		Distributions in Excess of Retained Earnings			Noncontrolling Interest			Total
	Shares		Par Value
Balances at December 31, 2012		9,999,786	$	99,998	$	57,020,979	$	(27,179,392	)	$	7,390,545		$	37,332,130
Issuance of restricted common stock awards		75,500		755		170,705		—			—			171,460
Dividends and distributions declared		—		—		—		(1,118,154	)		(316,390	)		(1,434,544	)
Redemption of units in operating partnership		—		—		—		—			(32,900	)		(32,900	)
Conversion of units in operating partnership to shares of common stock		131,641		1,316		309,163		—			(310,479	)		—
Net loss		—		—		—		(2,934,048	)		(838,478	)		(3,772,526	)
Balances at September 30, 2013		10,206,927	$	102,069	$	57,500,847	$	(31,231,594	)	$	5,892,298		$	32,263,620

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

6

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30, 2013			Nine months ended September 30, 2012
Cash flows from operating activities:
Net loss	$	(3,772,526	)	$	(7,221,854	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,121,871			6,525,561
Equity income in joint venture		(434,479	)		(15,251	)
Unrealized (gain) loss on warrant derivative		3,020,960			4,344,650
Amortization of deferred financing costs		1,316,697			1,804,221
Paid-in-kind interest		186,293			316,386
Charges related to equity-based compensation		171,460			110,400
Changes in assets and liabilities:
Restricted cash		(395,207	)		276,227
Accounts receivable		(479,434	)		(752,263	)
Prepaid expenses, inventory and other assets		(350,217	)		(318,123	)
Deferred income taxes		1,411,523			1,194,851
Accounts payable and other accrued liabilities		938,320			1,401,593
Advance deposits		263,618			602,154
Due from affiliates		(1,470	)		17,534
Net cash provided by operating activities		7,997,409			8,286,086
Cash flows from investing activities:
Improvements and additions to hotel properties		(4,254,358	)		(2,517,705	)
Distributions from joint venture		750,000			250,000
Funding of restricted cash reserves		(1,554,466	)		(1,552,843	)
Proceeds of restricted cash reserves		1,104,440			1,215,972
Net cash used in investing activities		(3,954,384	)		(2,604,576	)
Cash flows from financing activities:
Proceeds of mortgage debt		7,187,287			44,000,000
Proceeds of unsecured notes		27,600,000			—
Redemption of redeemable preferred stock		(14,413,943	)		(11,513,602	)
Payments on credit facility		—			(25,537,290	)
Pledge of cash collateral		(662,075	)		—
Dividends and distributions paid		(1,302,198	)		(778,038	)
Redemption of units in operating partnership		(32,900	)		(36,180	)
Payment of deferred financing costs		(1,677,913	)		(1,102,397	)
Payments on mortgage debt and loans		(4,131,990	)		(6,648,775	)
Net cash provided by (used in) financing activities		12,566,268			(1,616,282	)
Net increase (decrease) in cash and cash equivalents		16,609,293			4,065,228
Cash and cash equivalents at the beginning of the period		7,175,716			4,409,959
Cash and cash equivalents at the end of the period	$	23,785,009		$	8,475,187
Supplemental disclosures:
Cash paid during the period for interest	$	7,761,110		$	8,292,859
Cash paid during the period for income taxes	$	143,138		$	115,284

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

7

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Investment in hotel properties, net	$	174,024,365	$	176,427,904
Investment in joint venture		8,323,446		8,638,967
Cash and cash equivalents		23,785,009		7,175,716
Restricted cash		5,267,202		3,079,894
Accounts receivable		1,958,357		1,478,923
Accounts receivable-affiliate		10,127		8,657
Prepaid expenses, inventory and other assets		1,985,343		1,684,951
Shell Island sublease, net		300,245		480,392
Deferred income taxes		1,237,759		2,649,282
Deferred financing costs, net		3,536,730		2,406,183
TOTAL ASSETS	$	220,428,583	$	204,030,869
LIABILITIES
Mortgage loans	$	139,784,729		135,674,432
Loans payable		3,650,220		4,025,220
Unsecured notes		27,600,000		—
Series A Preferred Interest		—		14,227,650
Accounts payable and other accrued liabilities		7,728,337		6,786,684
Advance deposits		889,440		625,822
Dividends and distributions payable		521,525		389,179
Warrant derivative liability		7,990,712		4,969,752
TOTAL LIABILITIES		188,164,963		166,698,739
Commitments and contingencies (see Note 7)
PARTNERS’ CAPITAL
General Partner: 130,382 and 129,727 units issued and outstanding as of September 30, 2013 and December 31, 2012, respectively		557,601		617,909
Limited Partners: 12,907,743 and 12,842,898 units issued and outstanding as of September 30, 2013 and December 31, 2012, respectively		31,706,019		36,714,221
TOTAL PARTNERS’ CAPITAL		32,263,620		37,332,130
TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	220,428,583	$	204,030,869

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

8

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
REVENUE
Rooms department	$	15,290,818		$	15,580,600		$	47,692,797		$	47,281,173
Food and beverage department		5,121,631			5,071,821			15,947,997			16,247,828
Other operating departments		1,046,188			1,118,792			3,258,298			3,379,880
Total revenue		21,458,637			21,771,213			66,899,092			66,908,881
EXPENSES
Hotel operating expenses
Rooms department		4,300,441			4,383,150			12,877,637			12,803,795
Food and beverage department		3,358,603			3,456,698			10,273,994			10,812,234
Other operating departments		121,715			125,023			347,739			365,961
Indirect		8,438,237			8,484,381			25,009,858			25,127,080
Total hotel operating expenses		16,218,996			16,449,252			48,509,228			49,109,070
Depreciation and amortization		2,038,000			2,150,007			6,121,871			6,525,561
Corporate general and administrative		866,551			978,473			3,084,023			3,073,008
Total operating expenses		19,123,547			19,577,732			57,715,122			58,707,639
NET OPERATING INCOME		2,335,090			2,193,481			9,183,970			8,201,242
Other income (expense)
Interest expense		(3,899,128	)		(2,442,620	)		(8,912,319	)		(10,014,982	)
Interest income		3,579			4,133			11,139			11,985
Equity income (loss) in joint venture		(122,637	)		(162,463	)		434,479			15,251
Unrealized loss on warrant derivative		(340,750	)		(1,659,750	)		(3,020,960	)		(4,344,650	)
Net loss before income taxes		(2,023,846	)		(2,067,219	)		(2,303,691	)		(6,131,154	)
Provision for income tax		(93,962	)		(27,979	)		(1,468,835	)		(1,090,700	)
Net loss	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Net loss per unit
Basic	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)
Weighted average number of units outstanding
Basic		13,038,125			12,974,647			13,037,422			12,974,399
Diluted		14,059,354			13,776,251			13,989,277			13,583,393

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

9

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

(unaudited)

	General Partner						Limited Partners						Total
	Units			Amount			Units			Amount
Balances at December 31, 2012		129,727		$	617,909			12,842,898		$	36,714,221		$	37,332,130
Issuance of partnership units		755			3,059			74,745			168,401			171,460
Redemption of limited partnership units		(100	)		(476	)		(9,900	)		(32,424	)		(32,900	)
Distributions declared		—			(14,345	)		—			(1,420,199	)		(1,434,544	)
Net loss		—			(48,546	)		—			(3,723,980	)		(3,772,526	)
Balances at September 30, 2013		130,382		$	557,601			12,907,743		$	31,706,019		$	32,263,620

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

10

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30, 2013			Nine months ended September 30, 2012
Cash flows from operating activities:
Net loss	$	(3,772,526	)	$	(7,221,854	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,121,871			6,525,561
Equity income in joint venture		(434,479	)		(15,251	)
Unrealized (gain) loss on warrant derivative		3,020,960			4,344,650
Amortization of deferred financing costs		1,316,697			1,804,221
Paid-in-kind interest		186,293			316,386
Charges related to equity-based compensation		171,460			110,400
Changes in assets and liabilities:
Restricted cash		(395,207	)		276,227
Accounts receivable		(479,434	)		(752,263	)
Prepaid expenses, inventory and other assets		(350,217	)		(318,123	)
Deferred income taxes		1,411,523			1,194,851
Accounts payable and other accrued liabilities		938,320			1,401,593
Advance deposits		263,618			602,154
Due from affiliates		(1,470	)		17,534
Net cash provided by operating activities		7,997,409			8,286,086
Cash flows from investing activities:
Improvements and additions to hotel properties		(4,254,358	)		(2,517,705	)
Distributions from joint venture		750,000			250,000
Funding of restricted cash reserves		(1,554,466	)		(1,552,843	)
Proceeds of restricted cash reserves		1,104,440			1,215,972
Net cash used in investing activities		(3,954,384	)		(2,604,576	)
Cash flows from financing activities:
Proceeds of mortgage debt		7,187,287			44,000,000
Proceeds of unsecured notes		27,600,000			—
Redemption of Series A Preferred Interest		(14,413,943	)		(11,513,602	)
Payments on credit facility		—			(25,537,290	)
Pledge of cash collateral		(662,075	)		—
Distributions paid		(1,302,198	)		(778,038	)
Redemption of units in operating partnership		(32,900	)		(36,180	)
Payment of deferred financing costs		(1,677,913	)		(1,102,397	)
Payments on mortgage debt and loans		(4,131,990	)		(6,648,775	)
Net cash provided by (used in) financing activities		12,566,268			(1,616,282	)
Net increase (decrease) in cash and cash equivalents		16,609,293			4,065,228
Cash and cash equivalents at the beginning of the period		7,175,716			4,409,959
Cash and cash equivalents at the end of the period	$	23,785,009		$	8,475,187
Supplemental disclosures:
Cash paid during the period for interest	$	7,761,110		$	8,292,859
Cash paid during the period for income taxes	$	143,138		$	115,284

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

11

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

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

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

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2013, was approximately 78.3% owned by the Company, and its subsidiaries, lease the hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC (“MHI Hotels Services”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

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

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

On March 5, 2012, we obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport. The mortgage bears interest at a rate of 30-day LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is August 30, 2014, with an extension option until March 1, 2017, contingent upon the extension or acceptable replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish our indebtedness under the then-existing credit facility, for working capital, and to prepay a portion of our indebtedness under our then-existing agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which we, at such time, had the right to borrow up to $10.0 million on or before December 31, 2011 (the “Bridge Financing”). With this transaction, our syndicated credit facility was extinguished and the Crowne Plaza Tampa Westshore hotel property was released from such mortgage encumbrance.

On June 15, 2012, we entered into an amendment of our Bridge Financing that provided, subject to a $1.5 million prepayment which we made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property.

On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Company’s Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”) to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.

On June 18, 2012, we obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in Tampa, Florida. The mortgage bears interest at a rate of 5.60% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is June 18, 2017. Proceeds of the mortgage were used to pay the outstanding indebtedness under the then-existing Bridge Financing and to make a special distribution from the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock referenced above.

12

On June 22, 2012, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until September 30, 2013. Under the terms of the extension, we were required to make monthly principal payments of $16,000 and additional quarterly principal payments to the lender of $200,000 each on July 1, 2012, October 1, 2012, January 1, 2013 and April 1, 2013. Interest payable monthly pursuant to the mortgage remained at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum.

On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. The mortgage bears interest at a rate of LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The maturity date is July 10, 2015, but may be extended for an additional year pursuant to certain terms and conditions. The mortgage also contains an “earn-out” feature which allows for an additional draw of up to $3.0 million during the term of the loan contingent upon satisfaction of certain debt service coverage and loan-to-value covenants. Proceeds of the mortgage were used to repay the existing mortgage indebtedness and to pay closing costs.

On March 22, 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University hotel property with our existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loan’s principal amount was increased to $10.0 million, the prepayment penalty was removed and the interest rate was fixed at 5.25%; if the mortgage loan is extended, it will adjust to a rate of 3.00% plus the current 5-year U.S. Treasury bill rate of interest, with an interest rate floor of 5.25%. The remaining original terms of the agreement remained the same.

On March 26, 2013, we used the net proceeds of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends.

On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to approximately $6.0 million and are required to continue to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage will remain at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum. Pursuant to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015.

On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone – University in Raleigh, North Carolina. The mortgage bears interest at a rate of 4.78% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule. The maturity date is August 1, 2018. Approximately $0.7 million of the loan proceeds were placed into a restricted reserve which can be disbursed to us upon satisfaction of certain financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing indebtedness, to pay closing costs, to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.

On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes (the “Notes”) in the aggregate amount of $27.6 million. The indenture requires quarterly payments of interest and matures on September 30, 2018. The proceeds were used to make a special distribution to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million.

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., formerly MHI Hospitality Corporation, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2013 and December 31, 2012 and for the three months and nine months ended September 30, 2013 and 2012. The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. 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. All significant inter-company balances and transactions have been eliminated.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and

13

related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

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

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

Investment in Joint Venture – Investment in joint venture represents our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0 million junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these entities. We account for our investment in the joint venture under the equity method of accounting and are entitled to receive our pro rata share of annual cash flow. We also have the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.

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

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Company’s potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment, and cash that is otherwise restricted pursuant to certain requirements in our various mortgage agreements.

Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

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

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2013 and December 31, 2012 were $207,864 and $240,489, respectively. Amortization expense for each of the three month periods ended September 30, 2013 and 2012 totaled $10,875 and for each of the nine month periods ended September 30, 2013 and 2012 totaled $32,625.

Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. 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 balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument

14

designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

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

We account for the warrant to purchase 1,900,000 shares of the Company’s common stock (the “Essex Warrant”) as well as the warrant to purchase 1,900,000 partnership units that was issued to the Company by the Operating Partnership (the “Warrant”) based upon the guidance enumerated in Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging: Contracts in Entity’s Own Stock. Both the Essex Warrant and the Warrant contain a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive and therefore is classified as a derivative liability. The Essex Warrant and the Warrant are carried at fair value with changes in fair value reported in earnings as long as they remain classified as a derivative liability.

The warrant derivative liability was valued at September 30, 2013 and December 31, 2012 using the Monte Carlo simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer group’s future expected stock prices and minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the warrant.

The Company classifies 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.

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2013
Warrant	$	—	$	(7,990,712	)	$	—
December 31, 2012
Warrant		—		(4,969,752	)		—

Cumulative Mandatorily Redeemable Preferred Stock and Preferred Interest – We account for the Company’s Preferred Stock and the Operating Partnership’s Series A Preferred Interest (the “Preferred Interest”) based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock was mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance. The Company’s sole source of funds to meet its obligations under the Articles Supplementary are special distributions from the Operating Partnership which the Company, as general partner, may declare at its sole discretion.

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

15

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

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 (the “Code”). As a REIT, the Company generally will not be subject to federal income tax on that portion of its net income that does not relate to MHI Hospitality TRS, LLC, our wholly-owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2013, we have no uncertain tax positions. In addition, we recognize obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. As of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which we are subject generally include 2009 through 2012. In addition, as of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally also include 2004 through 2008.

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

Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees, and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 30,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Company’s independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2013.

The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Under either the 2004 Plan or the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of September 30, 2013, no performance-based stock awards have been granted under the 2004 Plan. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan totaled $17,880 and $60,731, respectively for the three months and nine months ended September 30, 2013 and $13,078 and $39,233, respectively, for the three months and nine months ended September 30, 2012. As of September 30, 2013, no awards have been granted under the 2013 Plan.

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

Segment Information – We have determined that our business is conducted in one reportable segment, hotel ownership.

Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications – Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

Recent Accounting Pronouncements – There are no recent accounting pronouncements which we believe will have a material impact on our consolidated financial statements.

3. Acquisition of Hotel Properties

There were no new acquisitions during the nine months ended September 30, 2013.

16

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2013 and December 31, 2012 consisted of the following:

	September 30, 2013			December 31, 2012
	(unaudited)
Land and land improvements	$	19,578,692		$	19,429,571
Buildings and improvements		183,246,701			181,209,101
Furniture, fixtures and equipment		31,186,483			33,716,700
		234,011,876			234,355,372
Less: accumulated depreciation		(59,987,511	)		(57,927,468	)
	$	174,024,365		$	176,427,904

5. Debt

Credit Facility. During a portion of the nine months ended September 30, 2012, we had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company. The credit facility was established during the second quarter of 2006 and replaced a $23.0 million secured, revolving credit facility with BB&T. On March 5, 2012, we extinguished the credit facility in conjunction with the refinance of the mortgage on the Hilton Philadelphia Airport.

17

Mortgage Debt.As of September 30, 2013 and December 31, 2012, we had $139,784,729 and $135,674,432 of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels as of September 30, 2013:

Property	Balance Outstanding as of				Prepayment Penalties			Maturity Date			Amortization Provisions			Interest Rate
	September 30, 2013		December 31, 2012
	(unaudited)
Crowne Plaza Hampton Marina	$	5,951,500	$	7,559,625		None			06/30/2014	(1)	$	16,000	(2)		LIBOR plus 4.55	%(3)
Crowne Plaza Jacksonville Riverfront		13,853,898		14,135,234		None			07/10/2015	(4)		25 years			LIBOR plus 3.00	%
Crowne Plaza Tampa Westshore		13,672,037		13,872,077		None			06/18/2017			25 years			5.60	%
DoubleTree by Hilton Brownstone – University		15,582,552		7,816,867			(5)		08/01/2018			30 years			4.78	%
Hilton Philadelphia Airport		28,927,294		29,502,666		None			08/30/2014	(6)		25 years			LIBOR plus 3.00	%(7)
Hilton Savannah DeSoto		21,705,310		22,051,314		Yes	(8)		08/01/2017			25 years	(9)		6.06	%
Hilton Wilmington Riverside		21,046,409		21,416,922		Yes	(8)		04/01/2017			25 years	(10)		6.21	%
Holiday Inn Laurel West		7,182,558		7,300,465		Yes	(11)		08/05/2021			25 years			5.25	%(12)
Sheraton Louisville Riverside		11,863,171		12,019,262			(5)		01/06/2017			25 years			6.24	%
Total	$	139,784,729	$	135,674,432

(1) The note provides that the mortgage can be extended until June 30, 2015 if certain conditions have been satisfied.

(2) The Company is required to make monthly principal payments of $16,000.

(3) The note bears a minimum interest rate of 5.00%.

(4) The note provides that the mortgage can be extended until July 10, 2016 if certain conditions have been satisfied.

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

(6) The note provides that the mortgage can be extended until March 1, 2017 if certain conditions have been satisfied.

(7) The note bears a minimum interest rate of 3.50%.

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

(9) The note provided for payments of interest only until August 1, 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures on August 1, 2017.

(10) The note provided for payments of interest only until April 1, 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in April 1, 2017.

(11) Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

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

With the exception of our mortgage on the Crowne Plaza Tampa Westshore, as of September 30, 2013, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. The Crowne Plaza Tampa Westshore did not realize sufficient operating performance for the four calendar quarters ended September 30, 2013 to meet the debt service coverage requirements of the mortgage loan agreement. While we believe that the property should be able to meet the debt service coverage requirements in future periods, without a waiver from the lender, we may be required to repay all or a portion of the outstanding indebtedness. We continue to be in compliance under the terms of the covenants in our mortgage loan agreement for the Crowne Plaza Jacksonville Riverfront by providing approximately $0.7 million cash collateral.

18

Total mortgage debt maturities as of September 30, 2013 without respect to any additional loan extensions for the following twelve-month periods were as follows:

September 30, 2014	$	37,168,940
September 30, 2015		15,487,777
September 30, 2016		2,134,026
September 30, 2017		63,932,193
September 30, 2018		14,798,936
Thereafter		6,262,857
Total future maturities	$	139,784,729

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

Other Loans. On February 9, 2009, an indirect subsidiary of ours which is a member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the “Carlyle Affiliate Lender”), for the purpose of improving our liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount we contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at both September 30, 2013 and December 31, 2012 was $3,650,220 and $4,025,220, respectively.

Bridge Financing. On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. On December 21, 2011, the Company entered into an amendment to the agreement extending the right to borrow the remainder of the available financing until May 31, 2013. The principal amount borrowed bore interest at the rate of 9.25% per annum, payable quarterly in arrears. The outstanding balance on the Bridge Financing at September 30, 2013 and December 31, 2012 was $0.0 million.

6. Preferred Stock, Preferred Interest and Warrants

Preferred Stock. On April 18, 2011, the Company entered into a securities purchase agreement with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share.

The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary, which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Company’s board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company’s Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.

Concurrent with the issuance of the Preferred Stock, the Operating Partnership issued the Preferred Interest to the Company in an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes the general partner to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect the Preferred Stock. In addition, the Operating Partnership issued the Warrant to purchase 1,900,000 partnership units at an amount equal to the consideration received by the Company upon exercise of the Essex Warrant, as amended.

19

On June 15, 2012, the Company entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.

On June 18, 2012, we used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special distribution by the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock. The redemption resulted in a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the redeemed shares were written off.

On March 26, 2013, we used the net proceeds of an expansion of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, $0.1 million in unamortized issuance costs related to the redeemed shares were written off.

On August 1, 2013, we used the net proceeds of a new mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, $0.1 million in unamortized issuance costs related to the redeemed shares were written off.

On September 30, 2013, we used a portion of the proceeds of the unsecured notes offering to make a special distribution by the Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million. In addition, $0.4 million in unamortized issuance costs related to the redeemed shares were written off.

As of September 30, 2013 and December 31, 2012, there were 0 and 14,228 shares of the Preferred Stock issued and outstanding, respectively.

Warrants. The Essex Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the Company’s common stock. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant shall be adjusted in the event of payment of cash dividends to holders of common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment does not take into account dividends declared prior to January 1, 2012. At September 30, 2013, the adjusted exercise price was $2.04 per share. The Essex Warrant expires on October 18, 2016. The Essex Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Essex Warrant are both subject to additional adjustments under certain circumstances. The Essex Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Essex Warrant, the holders of the Essex Warrant will be entitled to participate in certain future securities offerings of the Company.

Concurrently with the issuance of the Essex Warrant, the Operating Partnership issued the Warrant to the Company. Under the terms of the Warrant, the Company is obligated to exercise the Warrant immediately and concurrently if at any time the Essex Warrant is exercised by its holders. In that event, the Operating Partnership shall issue an equivalent number of the partnership units and shall be entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.

On the date of issuance, we determined the fair market value of the warrants was approximately $1.6 million using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years, and is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statements of operations over the period of issuance to the mandatory redemption date of the Preferred Stock.

7. Commitments and Contingencies

Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to the Savannah hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. These areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for the three months and nine months ended September 30, 2013 totaled $15,867 and $48,490, respectively, and totaled $17,074 and $49,136 for the three months and nine months ended September 30, 2012, respectively, for this operating lease.

20

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

We lease a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expired August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value no earlier than August 1, 2018, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2013 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612 for the three months and nine months ended September 30, 2012, respectively.

We lease a parking lot adjacent to the Crowne Plaza Tampa Westshore under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense totaled $651 and $1,952 for the three months and nine months ended September 30, 2013, respectively, and totaled $638 and $1,864 for the three months and nine months ended September 30, 2012, respectively.

We lease certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires in September 2017, requiring annual payments of $6,020. Rent expense totaled $1,505 and $4,515 for the three months and nine months ended September 30, 2013, respectively, and totaled $1,285 and $3,765 for the three months and nine months ended September 30, 2012, respectively.

We lease 4,836 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced September 1, 2009 and expires August 31, 2018. Rent expense totaled $15,848 and $43,348 for the three months and nine months ended September 30, 2013, respectively, and totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2012, respectively.

We lease 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that commenced December 14, 2009 and expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $10,911 and $32,982 for the three months and nine months ended September 30, 2013, respectively, and totaled $11,474 and $33,746 for the three months and nine months ended September 30, 2012, respectively.

We also lease certain furniture and equipment under financing arrangements expiring between August 2013 and September 2017.

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

September 30, 2014	$	426,523
September 30, 2015		382,240
September 30, 2016		329,482
September 30, 2017		121,186
September 30, 2018		86,953
Total future minimum lease payments	$	1,346,384

Management Agreements – At September 30, 2013, each of our wholly-owned operating hotels, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. We entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).

Franchise Agreements – As of September 30, 2013, all of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee of 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between October 2014 and April 2023.

21

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the Sheraton Louisville Riverside and the DoubleTree by Hilton Brownstone-University an amount equal to ¹/₁₂ of the annual real estate taxes due for the properties. In addition, the lender on the DoubleTree by Hilton Brownstone-University requires that we escrow an amount equal to ¹/₁₂ of our annual insurance premiums. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina, the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone-University and equal 4.0% of room revenues for the Hilton Philadelphia Airport.

Pursuant to the terms of the fifth amendment to the then-existing credit agreement and until its termination in March 2012, we were required to escrow with our lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, we were required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.

Litigation – We are not involved in any material litigation, 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, all of which we expect to be covered by insurance. We do not expect any pending legal proceedings to have a material impact on our financial condition or results of operations.

8. Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.

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

On August 16, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.

On April 1, 2013, one holder of units in the Operating Partnership redeemed 31,641 units for an equivalent number of shares of the Company’s common stock.

On March 1, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.

On January 25, 2013, the Company awarded an aggregate of 30,500 shares of unrestricted stock to certain executives and employees as well as 15,000 shares of restricted stock to certain of its independent directors.

On January 1, 2013, the Company granted 30,000 restricted shares to its Chief Financial Officer in accordance with the terms of his employment contract.

On February 2, 2012, the Company awarded an aggregate of 29,500 shares of unrestricted stock to certain executives and employees as well as 1,500 shares of unrestricted stock and 15,000 shares of restricted stock to certain of its independent directors.

As of September 30, 2013 and December 31, 2012, the Company had 10,206,927 and 9,999,786 shares of common stock outstanding, respectively.

Warrants for Shares of Common Stock – The Company has granted no warrants representing the right to purchase common stock other than the Essex Warrant described in Note 6.

Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.

22

On April 1, 2013, May 1, 2012 and August 1, 2012, the Company redeemed 10,000, 6,000 and 6,000 units, respectively, in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $69,080 pursuant to the terms of the partnership agreement.

As of September 30, 2013 and December 31, 2012, the total number of Operating Partnership units outstanding was 2,831,198 and 2,972,839, with a fair market value of approximately $13.4 million and $9.9 million, respectively, based on the price per share of the common stock on such respective dates.

9. Related Party Transactions

MHI Hotels Services. As of September 30, 2013, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer as well as a current member of its Board of Directors and a former member of its Board of Directors) owned approximately 11.2% of the Company’s outstanding common stock and 1,720,029 Operating Partnership units. The following is a summary of the transactions with MHI Hotels Services:

Accounts Receivable – We were due $10,127 and $8,657 from MHI Hotels Services at September 30, 2013 and December 31, 2012, respectively.

Shell Island Sublease – We have a sublease arrangement with MHI Hotels Services on its expired leasehold interests in the Shell Island Resort in Wrightsville Beach, North Carolina. Leasehold revenue was $87,500 for each of the three month periods ended September 30, 2013 and 2012 and was $262,500 for each of the nine month periods ended September 30, 2013 and 2012. The underlying leases at Shell Island expired on December 31, 2011.

Strategic Alliance Agreement – On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to us and the management of our hotels by MHI Hotels Services.

Management Agreements – Each of the hotels that we wholly-owned at September 30, 2013, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. We entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company and the Operating Partnership upon their formation, MHI Hotels Services agreed that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.

Base management fees earned by MHI Hotels Services totaled $639,404 and $1,992,717 for the three months and nine months ended September 30, 2013, respectively, and $649,445 and $1,994,398 for the three months and nine months ended September 30, 2012, respectively. In addition, estimated incentive management fees of $15,955 and $78,082 were accrued for the three months and nine months ended September 30, 2013, respectively, and estimated incentive management fees of $54,095 and $166,145 were accrued for the three months and nine months ended September 30, 2012, respectively.

Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services, for our employees, as well as those employees that are employed by MHI Hotels Services that work exclusively for our hotel properties. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were $615,762 and $1,910,486 for the three months and nine months ended September 30, 2013, respectively and $564,659 and $1,785,547 for the three months and nine months ended September 30, 2012, respectively.

23

Redemption of Units in Operating Partnership – During 2012 and the nine months ended September 30, 2013, the Operating Partnership redeemed 22,000 limited partnership units held by a trust controlled by two current members and one former member of our Board of Directors for a total of $69,080 pursuant to the terms of the Partnership Agreement.

Holders of the Preferred Stock and Essex Warrant – As set forth in the Articles Supplementary, the holders of Preferred Stock, Essex Illiquid, LLC and Richmond Hill Capital Partners, LLC, were entitled to elect one (1) member of the Company’s board of directors. The member of the board of directors elected by the holders of Preferred Stock holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Illiquid, LLC, as well as Richmond Hill Capital Partners, LLC.

On June 15, 2012, the Company entered into an amendment of its then-existing Bridge Financing that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property. The Company’s ability to borrow under the Bridge Financing ended May 31, 2013.

On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.8 million.

On July 10, 2012, the Company amended the terms of the outstanding Essex Warrant by establishing a modified excepted holder limit (as defined in the Company’s Articles of Amendment and Restatement) for Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.

On March 26, 2013, the Company redeemed 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.

On August 1, 2013, the Company redeemed 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.

On September 30, 2013, the Company redeemed the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.7 million.

10. Retirement Plan

We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions and which requires that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All employer matching funds vest immediately in accordance with the “safe harbor” provision. Company contributions to the plan totaled $6,200 and $42,379 for the three months and nine months ended September 30, 2013, respectively, and $12,308 and $48,113 for the three months and nine months ended September 30, 2012, respectively.

24

11. Unconsolidated Joint Venture

We own a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Investment in hotel properties, net	$	64,745,596	$	65,899,055
Cash and cash equivalents		3,332,624		3,298,009
Accounts receivable		104,078		301,921
Prepaid expenses, inventory and other assets		830,289		1,409,924
TOTAL ASSETS	$	69,012,587	$	70,908,909
LIABILITIES
Mortgage loans, net	$	32,600,000	$	33,100,000
Accounts payable and other accrued liabilities		2,794,650		2,995,271
Advance deposits		324,331		257,950
TOTAL LIABILITIES		35,718,981		36,353,221
TOTAL MEMBERS’ EQUITY		33,293,606		34,555,688
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	69,012,587	$	70,908,909

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	2,549,657		$	2,285,771		$	11,047,955		$	9,748,930
Food and beverage department		476,836			509,019			1,869,821			1,864,182
Other operating departments		316,895			337,036			1,102,859			953,643
Total revenue		3,343,388			3,131,826			14,020,635			12,566,755
Expenses
Hotel operating expenses
Rooms department		707,671			647,369			2,332,407			2,130,035
Food and beverage department		433,192			425,006			1,474,361			1,489,930
Other operating departments		145,219			141,882			435,108			484,500
Indirect		1,625,053			1,551,360			5,300,822			5,027,190
Total hotel operating expenses		2,911,135			2,765,617			9,542,698			9,131,655
Depreciation and amortization		560,951			542,683			1,634,906			1,825,653
General and administrative		27,180			11,987			85,023			62,958
Total operating expenses		3,499,266			3,320,287			11,262,627			11,020,266
Net operating income (loss)		(155,878	)		(188,461	)		2,758,008			1,546,489
Interest expense		(437,605	)		(440,161	)		(1,305,327	)		(1,315,745	)
Unrealized gain (loss) on hedging activities		102,936			(21,232	)		285,238			(169,741	)
Net income (loss)	$	(490,547	)	$	(649,854	)	$	1,737,919		$	61,003

25

12. Indirect Hotel Operating Expenses

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

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
General and administrative	$	1,768,605	$	1,747,412	$	5,328,181	$	5,171,402
Sales and marketing		1,836,140		1,765,457		5,549,907		5,411,702
Repairs and maintenance		1,199,038		1,174,889		3,451,004		3,489,280
Utilities		1,195,522		1,278,568		3,221,738		3,444,575
Franchise fees		756,311		741,205		2,350,664		2,229,515
Management fees, including incentive		655,359		703,537		2,070,799		2,160,543
Insurance		358,688		340,513		1,075,083		1,001,717
Property taxes		608,300		688,083		1,776,710		2,045,141
Other		60,274		44,717		185,772		173,205
Total indirect hotel operating expenses	$	8,438,237	$	8,484,381	$	25,009,858	$	25,127,080

13. Income Taxes

The components of the income tax provision for the three months and nine months ended September 30, 2013 and 2012 are as follows:

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Current:
Federal	$	17,400	$	9,250	$	85,301	$	(39,717	)
State		191		1,439		56,766		9,548
		17,591		10,689		142,067		(30,169	)
Deferred:
Federal		60,013		11,578		1,048,762		880,342
State		16,358		5,712		278,006		240,527
		76,371		17,290		1,326,768		1,120,869
	$	93,962	$	27,979	$	1,468,835	$	1,090,700

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

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense (benefit)	$	(688,108	)	$	(702,855	)	$	(783,255	)	$	(2,084,592	)
Effect of non-taxable REIT (income) loss		765,521			723,683			1,917,318			2,925,217
State income tax expense (benefit)		16,549			7,151			334,772			250,075
	$	93,962		$	27,979		$	1,468,835		$	1,090,700

As of September 30, 2013 and December 31, 2012, we had a net deferred tax asset of $1,237,759 and $2,649,282, respectively, of which, approximately $0.6 million and $1.9 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by such time. As of September 30, 2013 and December 31, 2012, approximately $0.3 million of the net deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. We believe that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

26

14. Earnings (Loss) Per Share and Unit

Earnings (Loss) Per Share – The computation of basic and diluted earnings per share is presented below. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following the Company’s election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss attributable to the Company for basic computation	$	(1,649,722	)	$	(1,615,020	)	$	(2,934,048	)	$	(5,563,029	)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest		(37,847	)		(27,738	)		(56,319	)		(74,373	)
Net loss attributable to the Company for dilutive computation	$	(1,687,569	)	$	(1,642,758	)	$	(2,990,367	)	$	(5,637,402	)
Denominator
Weighted average number of common shares outstanding for basic computation		10,181,927			9,999,786			10,137,021			9,994,246
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number common shares outstanding for dilutive computation		11,203,156			10,801,390			11,088,876			10,603,240
Basic net loss per share	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per share	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)

Earnings (Loss) Per Unit – The computation of basic and diluted earnings (loss) per unit is presented below.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Denominator
Weighted average number of units outstanding for basic computation		13,038,125			12,974,647			13,037,422			12,974,399
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number of units outstanding for dilutive computation		14,059,354			13,776,251			13,989,277			13,583,393
Basic net loss per unit	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per unit	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)

15. Subsequent Events

On October 11, 2013, we paid a quarterly dividend (distribution) of $0.04 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record on September 13, 2013.

27

On October 22, 2013, we authorized payment of a quarterly dividend (distribution) of $0.045 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record as of December 13, 2013. The dividend (distribution) is to be paid on January 10, 2014.

On October 23, 2013, the Company redeemed a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant Shares, as defined in the Essex Warrant, (the “Redeemed Warrant Shares”) for an aggregate cash purchase price of $3.2 million. The Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Essex Warrant, and all exercise and other rights of the holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated and extinguished.

Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed 900,000 Issuable Warrant Units, as defined in the Warrant, for an aggregate cash purchase price of $3.2 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upper-upscale and upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the initial properties.

Our hotel portfolio currently consists of ten full-service, primarily upper-upscale and upscale hotels, with 2,424 rooms which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Nine of these hotels, totaling 2,113 rooms, are 100% owned by subsidiaries of the Operating Partnership. We also own a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. As of September 30, 2013, we owned the following hotel properties:

Property	Number of Rooms		Location	Date of Acquisition	Chain Designation
Wholly-owned
Crowne Plaza Hampton Marina		173	Hampton, VA	April 24, 2008	Upscale
Crowne Plaza Jacksonville Riverfront		292	Jacksonville, FL	July 22, 2005	Upscale
Crowne Plaza Tampa Westshore		222	Tampa, FL	October 29, 2007	Upscale
DoubleTree by Hilton Brownstone-University		190	Raleigh, NC	December 21, 2004	Upscale
Hilton Philadelphia Airport		331	Philadelphia, PA	December 21, 2004	Upper Upscale
Hilton Savannah DeSoto		246	Savannah, GA	December 21, 2004	Upper Upscale
Hilton Wilmington Riverside		272	Wilmington, NC	December 21, 2004	Upper Upscale
Holiday Inn Laurel West		207	Laurel, MD	December 21, 2004	Upper Mid-Scale
Sheraton Louisville Riverside		180	Jeffersonville, IN	September 20, 2006	Upper Upscale
		2,113
Joint Venture Property
Crowne Plaza Hollywood Beach Resort(1)		311	Hollywood, FL	August 9, 2007	Upscale
Total		2,424

(1) We own this hotel through a joint venture in which we have a 25.0% interest.

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 78.3% interest in our Operating Partnership, with the remaining interest being held by limited partners who were the contributors of our initial properties and related assets.

To qualify as a REIT, we cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to MHI Hospitality TRS, LLC (our “TRS Lessee”), which then engages an eligible independent hotel management company to operate the hotels under a management contract. Our TRS Lessee has engaged MHI Hotels Services to manage our wholly-owned hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

28

Key Operating Metrics

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

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

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

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

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities and room supplies), 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.

Results of Operations

The following table illustrates the key operating metrics for each of the three months and nine months ended September 30, 2013 and 2012 for our nine wholly-owned properties.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
Occupancy %		69.0	%		71.0	%		69.5	%		71.2	%
ADR	$	114.00		$	112.81		$	119.02		$	114.73
RevPAR	$	78.66		$	80.15		$	82.68		$	81.67

Comparison of the Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012

Revenue. Total revenue for the three months ended September 30, 2013 decreased approximately $0.3 million, or 1.4%, to approximately $21.5 million compared to total revenue of approximately $21.8 million for the three months ended September 30, 2012. Increases in revenue at our properties in Wilmington, North Carolina; Savannah, Georgia; Raleigh, North Carolina; and Jeffersonville, Indiana were offset by decreases in revenue at the remainder of our properties.

Room revenue decreased approximately $0.3 million, or 1.9%, to approximately $15.3 million for the three months ended September 30, 2013 compared to room revenue of approximately $15.6 million for the three months ended September 30, 2012. The decrease in room revenue for the three months ended September 30, 2013 resulted from a 2.9% decrease in occupancy which was offset by a 1.1% increase in ADR as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton. Our property in Jeffersonville, Indiana also experienced a significant increase in room revenue. During the three months ended September 30, 2013, our property in Tampa, Florida did not experience the benefit of high demand that it did in the three months ended September 30, 2012 from the Republican National Convention. All our properties were affected by the decline in demand from federal government and military related travel as a result of the sequester and impending shutdown of the federal government.

Food and beverage revenues remained at approximately $5.1 million for the three months ended September 30, 2013 compared to food and beverage revenues for the three months ended September 30, 2012. Increases in food and beverage revenue at our properties in Wilmington, North Carolina; Raleigh, North Carolina; Philadelphia, Pennsylvania and Jacksonville, Florida were offset by decreases in banqueting revenue at our other properties.

Revenue from other operating departments decreased approximately $0.1 million, or 6.5%, to approximately $1.0 million for the three months ended September 30, 2013 compared to revenue from other operating departments of approximately $1.1 million for the three months ended September 30, 2012.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $16.2 million for the three months ended September 30, 2013, a decrease of approximately $0.2 million, or 1.4%, compared to total hotel operating expenses of approximately $16.4 million for the three months ended September 30, 2012.

29

Rooms expense for the three months ended September 30, 2013 decreased approximately $0.1 million, or 1.9%, to approximately $4.3 million compared to rooms expense for the three months ended September 30, 2012 of approximately $4.4 million.

Food and beverage expenses for the three months ended September 30, 2013 decreased approximately $0.1 million, or 2.8%, to approximately $3.4 million compared to food and beverage expenses of approximately $3.5 million for the three months ended September 30, 2012. Most of the decrease in food and beverage expense was related to cost control measures which enabled us to increase food and beverage margins from 31.8% to 34.4%.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2013 decreased approximately $0.1 million, or 0.5%, to approximately $8.4 million compared to indirect expenses of approximately $8.5 million for the three months ended September 30, 2012. Decreased energy and utility expenses due to lower energy prices, lower management fees due to a lower incentive management fee, and lower real estate taxes offset increases in other indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2013 decreased approximately $0.2 million, or 5.2%, to $2.0 million compared to depreciation and amortization of approximately $2.2 million for the three months ended September 30, 2012.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2013 decreased approximately $0.1 million, or 11.4%, to approximately $0.9 million compared to general and administrative expenses of approximately $1.0 million for the three months ended September 30, 2012. The decrease mostly relates to higher legal costs in the prior period.

Interest Expense. Interest expense for the three months ended September 30, 2013 increased approximately $1.5 million, or 59.6%, to approximately $3.9 million compared to interest expense of approximately $2.4 million for the three months ended September 30, 2012. Most of the increase related to the premiums paid of approximately $0.9 million to redeem the remaining outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.5 million. In addition, we realized additional cost related to the write-off of unamortized loan costs of the mortgage on the DoubleTree by Raleigh Brownstone-University of approximately $0.2 million. The costs offset a decrease in other interest expense related to a lower effective interest rate on our outstanding debt.

Equity Income (Loss) in Joint Venture. Equity income in joint venture for the three months ended September 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the three months ended September 30, 2013, we realized a net loss of approximately $0.1 million related to our 25.0% interest compared to net loss of approximately $0.2 million for the three months ended September 30, 2012. For the three months ended September 30, 2013, the hotel reported occupancy of 73.9%, ADR of $120.57 and RevPAR of $89.11. This compares with results reported by the hotel for the three months ended September 30, 2012 of occupancy of 72.4%, ADR of $110.29 and RevPAR of $79.89.

Unrealized Gain (Loss) on Warrant Derivative. The Company recognized an unrealized loss of approximately $0.3 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the three months ended September 30, 2013 compared to an unrealized loss of approximately $1.7 million for the three months ended September 30, 2012. The unrealized gains and losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision for the three months ended September 30, 2013 increased approximately $0.1 million to approximately $0.1 million compared to an income tax provision of approximately $0.0 million for the three months ended September 30, 2012. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Net Loss. We realized a net loss for the three months ended September 30, 2013 of approximately $2.1 million which remained constant compared to the three months ended September 30, 2012 as a result of the operating results discussed above.

Comparison of the Nine months ended September 30, 2013 to the Nine months ended September 30, 2012

Revenue. Total revenue for both the nine months ended September 30, 2013 and the same period in 2012 remained at approximately $66.9 million. Increases in revenue at our properties in Wilmington and Raleigh, North Carolina; Philadelphia, Pennsylvania and Jeffersonville, Indiana were offset by decreases in revenue at our other properties.

30

Room revenue increased approximately $0.4 million, or 0.9%, to approximately $47.7 million for the nine months ended September 30, 2013 compared to room revenue of approximately $47.3 million for the nine months ended September 30, 2012. The increase in room revenue for the nine months ended September 30, 2013 resulted from a 3.7% increase in ADR which was offset by a 2.4% decrease in occupancy as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase in room revenue as a result of the rebranding to a DoubleTree by Hilton.

Food and beverage revenues decreased approximately $0.3 million, or 1.8%, to approximately $15.9 million for the nine months ended September 30, 2013 compared to food and beverage revenues of approximately $16.2 million for the nine months ended September 30, 2012. Decreases in food and beverage revenue at our properties in Savannah, Georgia; Hampton, Virginia and Tampa, Florida were partially offset by increases in banqueting revenue at our property in Raleigh, North Carolina.

Revenue from other operating departments decreased approximately $0.1 million, or 3.6%, to approximately $3.3 million for the nine months ended September 30, 2013 compared to revenue from other operating departments of approximately $3.4 million for the nine months ended September 30, 2012.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, were approximately $48.5 million for the nine months ended September 30, 2013, a decrease of approximately $0.6 million, or 1.2%, compared to total hotel operating expenses of approximately $49.1 million for the nine months ended September 30, 2012.

Rooms expense for the nine months ended September 30, 2013 increased approximately $0.1 million, or 0.6%, to approximately $12.9 million compared to rooms expense of approximately $12.8 million for the nine months ended September 30, 2012.

Food and beverage expenses for the nine months ended September 30, 2013 decreased approximately $0.5 million, or 5.0%, to approximately $10.3 million compared to food and beverage expenses of approximately $10.8 million for the nine months ended September 30, 2012. Most of the decrease in food and beverage expense was directly related to the decrease in food and beverage revenues. Despite the decrease in food and beverage revenue, cost control measures enabled us to increase food and beverage margins from 33.5% to 35.6%.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2013 decreased approximately $0.1 million, or 0.5%, to approximately $25.0 million, compared to indirect expenses of approximately $25.1 million for the nine months ended September 30, 2012. Decreased energy and utility expenses due to lower energy prices, lower management fees due to a lower incentive management fee, and lower real estate taxes offset those and other increases in other indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 2013 decreased approximately $0.4 million, or 6.2%, to $6.1 million compared to depreciation and amortization of approximately $6.5 million for the nine months ended September 30, 2012.

Corporate General and Administrative. Corporate general and administrative expenses for both the nine months ended September 30, 2013 and the same period in 2012 remained constant at approximately $3.1 million.

Interest Expense. Interest expense for the nine months ended September 30, 2013 decreased approximately $1.1 million, or 11.0%, to approximately $8.9 million compared to interest expense of approximately $10.0 million for the nine months ended September 30, 2012. Most of the decrease related to a lower effective interest rate on our outstanding debt.

Equity Income in Joint Venture. Equity income in joint venture for the nine months ended September 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the nine months ended September 30, 2013, our 25.0% share of the net income of the hotel increased approximately $0.4 million to approximately $0.4 million compared to net income of approximately $0.0 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, the hotel reported occupancy of 82.7%, ADR of $157.32 and RevPAR of $130.12. This compares with results reported by the hotel for the nine months ended September 30, 2012 of occupancy of 80.1%, ADR of $142.78 and RevPAR of $114.41.

Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $3.0 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the nine months ended September 30, 2013 as well as an unrealized loss of approximately $4.3 million for the nine months ended September 30, 2012. The unrealized losses are mostly attributable to the change in the market price of our common stock.

Income Taxes. The income tax provision for the nine months ended September 30, 2013 increased approximately $0.4 million, or 34.7%, to approximately $1.5 million compared to an income tax provision of approximately $1.1 million for the nine months ended September 30, 2012. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

31

Net Loss. The net loss for the nine months ended September 30, 2013 decreased approximately $3.4 million, or 47.8%, to approximately $3.8 million as compared to a net loss of approximately $7.2 million for the nine months ended September 30, 2012 as a result of the operating results discussed above.

Non-GAAP Financial Measures

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

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

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

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, costs associated with the departure of executive officers and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.

32

The following is a reconciliation of net loss to FFO and Adjusted FFO for the three months and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
Net loss	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Depreciation and amortization		2,038,000			2,150,007			6,121,871			6,525,561
Equity in depreciation and amortization of joint venture		140,238			135,671			408,727			456,413
FFO	$	60,430		$	190,480		$	2,758,072		$	(239,880	)
Unrealized (gain)/loss on hedging activities(1)		(25,734	)		5,308			(71,309	)		42,435
Unrealized (gain)/loss on warrant derivative		340,750			1,659,750			3,020,960			4,344,650
(Increase)/decrease in deferred income taxes		93,771			26,540			1,411,523			1,194,851
Loss on early extinguishment of debt(2)		1,598,556			—			1,935,692			1,982,184
Adjusted FFO	$	2,067,773		$	1,882,078		$	9,054,938		$	7,324,240

(1) Includes equity in unrealized loss on hedging activities of joint venture.

(2) Reflected in interest expense for the periods presented above.

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

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

33

The following is a reconciliation of net loss to Hotel EBITDA for the three months and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
Net income (loss)	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Interest expense		3,899,128			2,442,620			8,912,319			10,014,982
Interest income		(3,579	)		(4,133	)		(11,139	)		(11,985	)
Income tax provision (benefit)		93,962			27,979			1,468,835			1,090,700
Depreciation and amortization		2,038,000			2,150,007			6,121,871			6,525,561
Equity in (earnings)/loss of joint venture		122,637			162,463			(434,479	)		(15,251	)
Unrealized (gain)/loss on warrant derivative		340,750			1,659,750			3,020,960			4,344,650
Corporate general and administrative		866,551			978,473			3,084,023			3,073,008
Net lease rental income		(87,500	)		(87,500	)		(262,500	)		(262,500	)
Other fee income		(45,651	)		(46,977	)		(205,810	)		(188,501	)
Hotel EBITDA	$	5,106,490		$	5,187,484		$	17,921,554		$	17,348,810

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the nine months ended September 30, 2013 was approximately $8.0 million. We expect that the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to our stockholders (and unitholders) in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gains.

Investing Activities. We spent approximately $4.3 million during the nine months ended September 30, 2013 on capital expenditures, of which, approximately $2.4 million related to the routine replacement of furniture, fixtures and equipment and $1.9 million related to renovation of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $1.6 million during the nine months ended September 30, 2013 into reserves required by the lenders for the Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport, Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh Brownstone -University and the Crowne Plaza Hampton Marina according to the provisions of the loan agreements. During the nine months ended September 30, 2013, we received reimbursements from those reserves of approximately $1.1 million for capital expenditures related to those properties for periods ending on or before June 30, 2013.

Financing Activities. On March 26, 2013, we used the net proceeds of the mortgage on the DoubleTree by Hilton Raleigh Brownstone-University to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million.

On June 17, 2013, we provided approximately $0.9 million in cash collateral to the lender for the Crowne Plaza Jacksonville Riverfront in order to comply with the terms of the loan agreement following the property’s failure to meet its debt service coverage test for the period ended March 31, 2013. On September 25, 2013, we received back a portion of the cash collateral of approximately $0.2 million as a result of improvement in the property’s debt service coverage ratio.

On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia. Pursuant to the agreement, we reduced the outstanding indebtedness by approximately $1.1 million.

On August 2, 2013, we used approximately $2.7 million of the net proceeds of a new mortgage on the DoubleTree by Hilton Raleigh Brownstone-University to redeem 2,460 shares of Preferred Stock. The remainder of the proceeds was used to pay transaction costs and for working capital.

On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes in the aggregate amount of $27.6 million. The proceeds were used to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million, pay accrued and unpaid cash dividends, pay transaction costs and for working capital.

34

Capital Expenditures

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

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

Liquidity and Capital Resources

As of September 30, 2013, we had cash and cash equivalents of approximately $29.1 million, of which approximately $5.3 million was reserved for real estate taxes, insurance, capital improvement and certain other expenses, or otherwise restricted. We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt).

On March 25, 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University with its existing lender. We used the net proceeds to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million. The redemption resulted in a prepayment fee of approximately $0.2 million.

On June 30, 2013, the mortgage on the Crowne Plaza Hampton Marina was extended until June 30, 2014 and we reduced the mortgage balance by approximately $1.1 million. Pursuant to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015.

On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone-University in Raleigh, North Carolina. The maturity date is August 1, 2018. Approximately $0.7 million of the loan proceeds were placed into a restricted reserve – which we expect to be disbursed to us in the near future as we have satisfied the financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing mortgage indebtedness, to pay closing costs, to redeem 2,460 shares of the Company’s Preferred Stock for an aggregate redemption price of approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.

On September 30, 2013, we issued 8.0% senior unsecured notes in the aggregate amount of $27.6 million. The proceeds were used to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and stock dividends and for working capital.

On October 23, 2013, we redeemed a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant Shares for an aggregate cash purchase price of $3.2 million.

Due to a pullback in government and military business, our property in Tampa, Florida did not realize sufficient operating performance for the four calendar quarters ended September 30, 2013 to meet the debt service coverage requirements of the mortgage loan agreement. While we believe that the property should be able to meet the debt service coverage requirements in future periods, without a waiver from the lender, we may be required to repay all or a portion of the outstanding indebtedness. If we are required to repay all of the outstanding indebtedness, we may raise additional capital, refinance the indebtedness with another lender, use working capital or a combination thereof.

In June 2014, the mortgage on the Crowne Plaza Hampton Marina matures. We intend to extend the maturity to June 2015 pursuant to the terms and conditions of the mortgage. Pursuant to those terms, we anticipate that we may be required to reduce the mortgage balance by an amount up to $1.5 million. We intend to draw upon working capital to secure the extension.

35

In August 2014, our indebtedness to an affiliate of Carlyle related to our joint venture investment in the Crowne Plaza Hollywood Beach matures. The maturity of the indebtedness coincides with the maturity of the mortgage on the Crowne Plaza Hollywood Beach. We anticipate the mortgage will be refinanced at an amount greater than the amount of current indebtedness and that the joint venture will distribute an amount equal to the net proceeds of the refinancing. Although the joint venture has a commitment from a lender, we can provide no assurances that the joint venture will be able to refinance the mortgage on the prospective terms or at all. We intend to repay our existing indebtedness with distributions from the joint venture and/or from working capital.

In August 2014, the mortgage on the Hilton Philadelphia Airport matures, but we may extend such mortgage until March 2017 pursuant to certain terms and conditions. We intend to extend the mortgage until March 2017 pursuant to the terms and conditions of the mortgage.

We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may be forced to dispose of hotel properties on disadvantageous terms. To the extent we cannot repay our outstanding debt, we risk losing some or all of these properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.

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

Beyond the funding of any required principal reduction on our existing indebtedness or acquisitions, repayment of the loan from the Carlyle entity that is the other member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, and obligations under our tax indemnity agreements, if any, in the near-term, our medium and long-term capital needs will generally include the retirement of maturing mortgage debt,. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of some or all the following:

• The issuance of additional shares of preferred stock;

• The issuance of additional shares of our common stock;

• The issuance of senior, unsecured debt;

• The issuance of additional units in the Operating Partnership;

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

• The selective disposition of core or non-core assets;

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

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

Financial Covenants

Mortgage Loans

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

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

36

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

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

With the exception of our mortgage on the Crowne Plaza Tampa Westshore, as of September 30, 2013, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. As previously discussed, due to a pullback in government and military business, the property did not realize sufficient operating performance for the four calendar quarters ended September 30, 2013 to meet the debt service coverage requirements of the mortgage loan agreement. While we believe that the property should be able to meet the debt service coverage requirements in future quarters, without a waiver from the lender, we may be required to repay all or a portion of the outstanding indebtedness. We continue to be in compliance under the terms of the covenants in our mortgage loan agreement for the Crowne Plaza Jacksonville Riverfront by providing approximately $0.7 million cash collateral.

Unsecured Notes

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

These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were or would have been applicable at September 30, 2013 and December 31, 2012, respectively.

37

	September 30, 2013			December 31, 2012
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense
Net income (loss)(1)	$	(1,878,383	)	$	(5,327,711	)
Interest expense(1)		11,279,483			12,382,146
Provision for taxes(1)		1,679,364			1,301,229
Equity in (income) loss of joint venture(1)		(591,400	)		(172,172	)
Unrealized loss on warrant derivative(1)		702,987			2,026,677
Impairment of note receivable(1)		110,871			110,871
Depreciation and amortization(1)		8,258,079			8,661,769
Corporate general and administrative expenses(1)		4,089,841			4,078,826
Income Available for Debt Service(1)	$	23,650,842		$	23,061,635
Interest expense(1)	$	11,279,483		$	12,382,146
Distributions on Preferred Interest(1)(2)		(2,657,821	)		(3,106,981	)
Amortization of issuance costs(1)(2)		(1,483,939	)		(1,971,796	)
Stabilized Consolidated Interest Expense	$	7,137,723		$	7,303,369
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense		3.31			3.16
Ratio of Debt to Adjusted Total Asset Value:
Mortgage loans	$	139,784,729		$	135,674,432
Loans payable		3,650,220			4,025,220
Unsecured notes		27,600,000			—
Total debt	$	171,034,949			139.699,652
Income Available for Debt Service(1)	$	23,650,842		$	23,061,635
Capitalization Rate		7.5	%		7.5	%
		315,344,560			307,488,467
Cash and cash equivalents, total		29,052,211			10,255,610
Adjusted Total Asset Value		344,396,771			317,744,077
Ratio of Debt to Adjusted Total Asset Value		0.50			0.44

(1) Represents the four preceding calendar quarters.

(2) Includes prepayment fee and write-off of unamortized issuance costs associated with the redemption of Preferred Stock and Preferred Interest redeemed during the period.

Dividend Policy

In December 2008, in the interest of capital preservation and based on the expectation that the U.S. economy, and in particular the lodging industry, would continue to face declining operating trends through 2010, we amended our dividend policy and reduced the level of our cash dividend payments. Reducing and suspending our dividend during 2009 and 2010 did not jeopardize our REIT status as our 2009 distributions exceeded the minimum annual distribution requirement and operating losses in 2010 eliminated any distribution requirement for 2010.

38

In July 2011, in part due to improving operating trends, we reevaluated our quarterly dividend policy and reinstated our quarterly common stock dividend (distribution). On July 18, 2011, we authorized the first payment of a quarterly dividend (distribution) of $0.02 per common share (and unit) to our stockholders (and unitholders of the Operating Partnership) of record as of September 15, 2011 which was paid on October 11, 2011. Dividends (distributions) have been declared in each subsequent quarterly period. In July 2012, we authorized an increase in the quarterly dividend (distribution) to $0.03 per common share (and unit). In January 2013, we authorized another increase in the quarterly dividend (distribution) to $0.035 per common share (and unit). In July 2013, we increased the quarterly dividend (distribution) to $0.04 per common share (and unit) and increased the quarterly dividend (distribution) again in October 2013 to $0.045 per common share (and unit).

The amount of future common stock distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future.

Off-Balance Sheet Arrangements

Through a joint venture with a Carlyle subsidiary, we own a 25.0% indirect, noncontrolling interest in an entity (the “JV Owner”) that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida. We have the right to receive a pro rata share of operating surpluses and we have an obligation to fund our pro rata share of operating shortfalls. We also have the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. The Crowne Plaza Hollywood Beach Resort is leased to another entity (the “Joint Venture Lessee”) in which we also own a 25.0% indirect, noncontrolling interest.

The property is currently encumbered by a $32.6 million mortgage which matures in August 2014, requires monthly payments of interest at a rate of LIBOR plus additional interest of 1.94% and requires annual principal payments of $0.5 million. In conjunction with the loan, the joint venture executed an interest-rate swap with a notional amount and maturity tied to the projected outstanding balance and maturity date of the loan. The Crowne Plaza Hollywood Beach Resort secures the mortgage.

Carlyle owns a 75.0% controlling interest in the JV Owner and the Joint Venture Lessee. Carlyle may elect to dispose of the Crowne Plaza Hollywood Beach Resort without our consent. We account for our noncontrolling 25.0% interest in all of these entities under the equity method of accounting.

Inflation

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

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

Geographic Concentration and Seasonality

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

The operations of our hotel properties have historically been seasonal, and the results of operations depend on the location and type of market in which an individual hotel resides. Our hotels are predominately in high demand markets in the Southeastern United States and often experience slow periods from mid-November through mid-February, with the exception of hotels located in markets, namely in Florida, that experience significant room demand during this period.

39

Critical Accounting Policies

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

Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7 to 39 years for buildings and improvements and 3 to 10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties, which were contributed to us in connection with our initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of a hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss is recognized.

There were no charges for impairment of hotel properties recorded for the three months and nine months ended September 30, 2013 or 2012.

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

Revenue Recognition. Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2013. Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Recent Accounting Pronouncements

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

Forward Looking Statements

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

40

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

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

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

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

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

• management and performance of our hotels;

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

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

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

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

• our ability to successfully expand into new markets;

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

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

• our ability to maintain adequate insurance coverage.

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

These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into other interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.

As of September 30, 2013, we had approximately $118.7 million of fixed-rate debt and approximately $52.4 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.29%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the Crowne Plaza Hampton Marina and the Hilton Philadelphia Airport of 0.45% and 0.50%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the mortgage on the Hilton Philadelphia Airport, the mortgage on the Crowne Plaza Jacksonville Riverfront and the loan from the Carlyle Affiliate Lender remain at approximately $52.3 million, the balance at September 30, 2013, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $415,000.

41

As of December 31, 2012, we had approximately $98.7 million of fixed-rate debt and approximately $55.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.78%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the Crowne Plaza Hampton Marina and the Hilton Philadelphia Airport of 0.45% and 0.50%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the mortgage on the Hilton Philadelphia Airport, the mortgage on the Crowne Plaza Jacksonville Riverfront and the loan from the Carlyle Affiliate Lender remain at approximately $55.2 million, the balance at December 31, 2012, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $467,000.

Item 4. Controls and Procedures

Sotherly Hotels Inc.

The Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc. have evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end of the period covered by this report, the disclosure controls and procedures of the Company were effective.

As of September 30, 2013, there was no change in either the internal control over financial reporting of Sotherly Hotels Inc. identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotel 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

The Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner of Sotherly Hotels LP, have 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, and have concluded that as of the end of the period covered by this report, the disclosure controls and procedures of the Operating Partnership were effective.

As of September 30, 2013, there was no change in either the internal control over financial reporting of Sotherly Hotels LP identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotel LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over financial reporting.

42

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Except as set forth below, 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, 2012 and our periodic report on Form 10-Q for the period ended June 30, 2013.

We have substantial financial leverage.

As of September 30, 2013, we had consolidated debt of approximately $171.0 million, which is comprised of approximately $139.8 million secured and approximately $31.2 million unsecured debt. Of the approximately $31.2 million of unsecured debt as of September 30, 2013, approximately $27.6 million is related to the 8.0% senior unsecured notes due September 30, 2018. Historically, we have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding programs. Limitations upon our access to additional debt could adversely affect our ability to fund these programs or acquire hotels in the future.

Our financial leverage could negatively affect our business and financial results, including the following:

• require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, working capital, capital expenditures, future business opportunities, paying dividends or other purposes;

• limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements and other purposes;

• adversely affect our ability to satisfy our financial obligations, including those related to the Notes;

• limit our ability to refinance existing debt;

• require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing;

• force us to dispose of one or more of our properties, possibly on unfavorable terms;

• increase our vulnerability to adverse economic and industry conditions, and to interest rate fluctuations;

• force us to issue additional equity, possibly on terms unfavorable to existing shareholders;

• limit our flexibility to make, or react to, changes in our business and our industry; and

• place us at a competitive disadvantage, compared to our competitors that have less debt.

We must comply with financial covenants in our mortgage loan agreements and in the indenture.

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

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

If we violate the financial covenants in the indenture, we may attempt to cure that violation by engaging in one or more transactions pursuant to the cure provision in the indenture.

If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through debt financing, private or public offerings of debt securities, additional equity financing, or by disposing of an asset. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.

43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 24, 2013, the Operating Partnership’s Registration Statement on Form S-11 (SEC File No. 333-189821) was declared effective by the Securities and Exchange Commission.

On September 30, 2013, the Company and the Operating Partnership executed an Underwriting Agreement pursuant to which the Operating Partnership agreed to sell $24.0 million of the Operating Partnership’s 8.00% senior unsecured notes due 2018 to the underwriters named therein, with an over-allotment option to purchase up to an additional $3.6 million of the Notes. The managing underwriter of the offering was Sandler O’Neill + Partners, L.P. The co-managers were Ladenburg Thalman & Co. Inc., J.J. B. Hilliard, W.L. Lyons, LLC, Incapital LLC and Boening & Scattergood, Inc. The offering closed on September 30, 2013. The Operating Partnership issued Notes in the aggregate amount of $27.6 million (including $3.6 million issued pursuant to the underwriters’ over-allotment option) at a price of $25 per Note. The Notes have been registered under the Exchange Act and are listed on the Nasdaq Global Market. Our net proceeds from the offering were approximately $25.6 million, after deducting underwriting discounts of approximately $1.1 million and offering expenses of approximately $0.9 million.

On September 30, 2013, the Operating Partnership used a portion of the proceeds to make a special distribution to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and stock dividends in the amount of approximately $0.3 million.

On October 23, 2013, the Operating Partnership used a portion of the proceeds to redeem 900,000 Issuable Warrant Units, as defined in the Warrant, issued to the Company for an aggregate cash purchase price of $3.2 million. Concurrently with the redemption of the 900,000 Issuable Warrant Units, the Company used the same cash received from the Operating Partnership to redeem a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant Shares, as defined in the Essex Warrant, for an aggregate cash purchase price of $3.2 million.

Ryan P. Taylor, a current member of the Company’s board of directors as previously designated by the holders of the Preferred Stock, is the Managing Partner of Richmond Hill Investment Co., LP and a Managing Director of Richmond Hill Investments, LLC, affiliated entities of the redeemed holders of the Preferred Stock and the redeemed holders of the Essex Warrant.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

Exhibit Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of the Company.(1)
3.3	Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)
3.4	Articles Supplementary of the Company.(3)
3.6	Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)
3.7	Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)
3.8	Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)
3.9	Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)
4.6	Senior Unsecured Note issued by Sotherly Hotels LP.

44

Exhibit Number	Description of Exhibit
4.7	Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee.
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.3	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
31.4	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.3	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.4	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873).

(2) Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

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

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

(5) Incorporated by reference to the document previously filed as an exhibit to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013. (333-189821).

45

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SOTHERLY HOTELS INC.
Date: November 7, 2013	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer
	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

46

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SOTHERLY HOTELS LP
	By:	SOTHERLY HOTELS INC. Its General Partner
Date: November 7, 2013	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer
	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

47

EXHIBIT INDEX

Exhibit Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of the Company.(1)
3.3	Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (2)
3.4	Articles Supplementary of the Company.(3)
3.6	Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (3)
3.7	Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(4)
3.8	Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(4)
3.9	Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP. (5)
4.6	Senior Unsecured Note issued by Sotherly Hotels LP.
4.7	Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee.
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company.
31.3	Certification of Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
31.4	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company.
32.3	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.
32.4	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership.

48

Exhibit Number	Description of Exhibit
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873).

(2) Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

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

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

(5) Incorporated by reference to the document previously filed as an exhibit to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013. (333-189821).

49

EX-4.6

Exhibit 4.6

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.14 OF THE INDENTURE.

THIS NOTE IS IN REGISTERED FORM WITHIN THE MEANING OF TREASURY REGULATIONS SECTION 1.871-14(c)(1)(i) FOR U.S. FEDERAL INCOME AND WITHHOLDING TAX PURPOSES.

SOTHERLY HOTELS LP

8.00% Senior Unsecured Notes due 2018

	CUSIP No. 83600E 208
	ISIN US83600E2081
No. 1	$27,600,000

SOTHERLY HOTELS LP, a Delaware limited partnership (the “Issuer”), for value received, promises to pay to Cede & Co., or its registered assigns, the principal sum of TWENTY-SEVEN MILLION SIX HUNDRED THOUSAND AND 00/100 DOLLARS or such other amount as is provided in a schedule attached hereto on September 30, 2018.

Interest Payment Dates: December 30, March 30, June 30 and September 30, commencing December 30, 2013.

Record Dates: December 15, March 15, June 15 and September 15.

Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place.

IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officer.

Dated: September 30, 2013

SOTHERLY HOTELS LP, as Issuer,
By:	Sotherly Hotels Inc., its general partner
	By:	/s/ David R. Folsom
		Name:	David R. Folsom
		Title:	Chief Operating Officer

2

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

This is one of the 8.00% Senior Unsecured Notes due 2018 described in the within-mentioned Indenture.

Dated: September 30, 2013

WILMINGTON TRUST, NATIONAL ASSOCIATION, as Trustee,
By:	/s/ W. T. Morris, II
	Authorized Signatory

8.00% Senior Unsecured Notes due 2018

Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated.

SECTION 1. Interest. Sotherly Hotels LP, a Delaware limited partnership (the “Issuer”), promise to pay interest on the principal amount of this Note at 8.00% per annum from September 30, 2013, until maturity. The Issuer will pay interest quarterly on December 30, March 30, June 30 and September 30 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an “Interest Payment Date”), commencing December 30, 2013. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from September 30, 2013. The Issuer shall pay interest on overdue principal and premium, if any, from time to time on demand to the extent lawful at the interest rate applicable to the Notes; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

SECTION 2. Method of Payment. The Issuer will pay interest on the Notes to the Persons who are registered Holders at the close of business on the December 15, March 15, June 15 or September 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be issued in denominations of $25 and integral multiples of $25 in excess thereof. The Issuer shall pay principal, premium, if any, and interest on the Notes in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts (“U.S. Legal Tender”). Principal, premium, if any, and interest on the Notes will be payable at the office or agency of the Issuer maintained for such purpose except that, at the option of the Issuer, the payment of interest may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders of Notes. Until otherwise designated by the Issuer, the Issuer’s office or agency will be the office of the Trustee maintained for such purpose.

SECTION 3. Paying Agent and Registrar. Initially, Wilmington Trust, National Association, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuer may change any Paying Agent or Registrar without notice to any Holder. Except as provided in the Indenture, the Issuer or any of its Subsidiaries may act in any such capacity.

SECTION 4. Indenture. The Issuer issued the Notes under an Indenture dated as of September 30, 2013 (“Indenture”) by and between the Issuer and the Trustee. Subject to the terms of the Indenture, the Issuer shall be entitled to issue Additional Notes pursuant to Section 2.01 of the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code §§ 77aaa-77bbbb) (the “Trust Indenture Act”). The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling.

SECTION 5. Optional Redemption. At any time on or after September 30, 2016, the Issuer will be entitled at its option to redeem all or any portion of the Notes at a redemption price equal to 101% of the principal amount of such Notes plus any accrued and unpaid interest to, but not including, the Redemption Date (subject to the right of each Holder on the relevant Record Date to receive interest due on the relevant Interest Payment Date).

SECTION 6. Notice of Redemption. Subject to Section 3.03 of the Indenture, notice of any optional redemption of any Notes will be delivered to holders (with a copy to the Trustee) at their addresses, as shown in the Notes register, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, the redemption price and the principal amount of the Notes held by the holder to be redeemed. No Notes of $25 or less shall be redeemed in part. On and after the Redemption Date interest ceases to accrue on Notes or portions thereof called for redemption subject to Section 3.04 of the Indenture.

3

SECTION 7. Mandatory Redemption or Sinking Fund Payment. Except as set forth in Section 9 herein, the Issuer shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes.

SECTION 8. Repurchase at Option of Holder. Upon the occurrence of a Change of Control Repurchase Event, and subject to certain conditions set forth in the Indenture, the Issuer will be required to offer to purchase all of the outstanding Notes at a purchase price equal to 102% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase.

SECTION 9. Denominations, Transfer Exchange. The Notes are in registered form without coupons in denominations of $25 and integral multiples of $25 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer and the Registrar are not required to transfer or exchange any Note selected for redemption. Also, the Issuer and the Registrar are not required to transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed.

SECTION 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes.

SECTION 11. Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture and the Notes as provided in the Indenture.

SECTION 12. Defaults and Remedies. If an Event of Default occurs and is continuing (other than as specified in clauses (8) and (9) of Section 6.01 that occurs with respect to the Issuer), the Trustee or the Holders of not less than 25% in principal amount of the then outstanding Notes may declare the principal of, premium, if any, and accrued interest on the Notes to be due and payable immediately in accordance with the provisions of Section 6.02. Notwithstanding the foregoing, in the case of an Event of Default arising from clause (8) or (9) of Section 6.01, with respect to the Issuer, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default if it determines that withholding notice is in their interest in accordance with Section 7.05. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default and its consequences under the Indenture except a Default in the payment of principal of, or interest on, any Note as specified in Section 6.01(1) and (2).

SECTION 13. Restrictive Covenants. The Indenture contains certain covenants as set forth in Article Four of the Indenture.

SECTION 14. No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture, or in any of the Notes or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Issuer or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. Such waiver and release are part of the consideration for issuance of the Notes.

SECTION 15. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.

SECTION 16. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

4

SECTION 17. CUSIP and ISIN Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP and ISIN numbers to be printed on the Notes and the Trustee may use CUSIP or ISIN numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon.

SECTION 18. Registered Form. The Notes are in registered form within meaning of Treasury Regulations Section 1.871-14(c)(1)(i) for U.S. federal income and withholding tax purposes.

SECTION 19. Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of New York.

The Issuer will furnish to any Holder upon written request and without charge a copy of the Indenture.

5

ASSIGNMENT FORM

I or we assign and transfer this Note to

Print or type name, address and zip code of assignee or transferee)

(Insert Social Security or other identifying number of assignee or transferee)

and irrevocably appoint              agent to transfer this Note on the books of the Issuer. The agent may substitute another to act for him.

Dated:	Signed:
	(Sign exactly as name appears on the other side of this Note)
Signature Guarantee:
	Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

6

OPTION OF HOLDER TO ELECT PURCHASE

This undersigned Holder elects to have this Note purchased by the Issuer pursuant to Section 4.06 of the Indenture:

If you want to elect to have only part of this Note purchased by the Issuer pursuant to Section 4.06 of the Indenture, state the amount (in denominations of $25 and integral multiples of $25 in excess thereof): $

Dated:	Signed:
	(Sign exactly as name appears on the other side of this Note)
Signature Guarantee:
	Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

7

SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTES

The following exchanges of a part of this Global Note for an interest in another Global Note or for a Physical Note, or exchanges of a part of another Global Note or Physical Note for an interest in this Global Note, have been made:

Date of
Exchange Amount of
decrease in
Principal Amount
of The Global Note Amount of increase
in Principal
Amount
of this
Global Note Principal
Amount
of this Global
Note
following such
decrease
(or increase) Signature of
authorized
signatory
of Trustee of
Note
custodian

8

EX-4.7

Exhibit 4.7

SOTHERLY HOTELS LP

as Issuer,

and

WILMINGTON TRUST, NATIONAL ASSOCIATION,

as Trustee

INDENTURE

Dated as of September 30, 2013

8.00% Senior Unsecured Notes due 2018

RECONCILIATION AND TIE BETWEEN THE TRUST INDENTURE ACT AND THIS INDENTURE

Trust Indenture Act Section	Indenture Section
310(a)(1)	7.10
(a)(2)	7.10
(a)(3)	N.A.
(a))(4)	N.A.
(a)(5)	7.08; 7.10
(b)	7.08; 7.10; 10.02
(c)	N.A.
311(a)	7.11
(b)	7.11
(c)	N.A.
312(a)	2.05
(b)	10.03
(c)	10.03
313(a)	7.06
(b)(1)	7.06
(b)(2)	7.06
(c)	7.06;10.02
(d)	7.06
314(a)	4.05; 10.02
(b)	N.A.
(c)(1)	7.02; 10.04; 10.05
(c)(2)	7.02; 10.04; 10.05
(c)(3)	N.A.
(d)	N.A.
(e)	10.05
(f)	N.A.
315(a)	7.01(b); 7.02(a)
(b)	7.05; 10.02
(c)	7.01
(d)	6.05; 7.01(c)
(e)	6.11
316(a)(last sentence)	2.09
(a)(1)(A)	6.05
(a)(1)(B)	6.04
(a)(2)	9.02
(b)	6.07
(c)	9.04
317(a)(1)	6.08
(a)(2)	6.09
(b)	2.04
318(a)	10.01
(c)	10.01

NOTE: THIS RECONCILIATION AND TIE SHALL NOT, FOR ANY PURPOSE, BE DEEMED A PART OF THIS INDENTURE.

Table of Contents

ARTICLE ONE Definitions and Incorporation by Reference	1
SECTION 1.01 Definitions	1
SECTION 1.02 Other Definitions	5
SECTION 1.03 Incorporation by Reference of Trust Indenture Act	6
SECTION 1.04 Rules of Construction	6
ARTICLE TWO The Notes	6
SECTION 2.01 Form and Dating	6
SECTION 2.02 Execution, Authentication and Denomination; Additional Notes	7
SECTION 2.03 Registrar and Paying Agent	8
SECTION 2.04 Paying Agent To Hold Assets in Trust	8
SECTION 2.05 Holder Lists	8
SECTION 2.06 Transfer and Exchange	8
SECTION 2.07 Replacement Notes	9
SECTION 2.08 Outstanding Notes	9
SECTION 2.09 Treasury Notes	9
SECTION 2.10 Temporary Notes	9
SECTION 2.11 Cancellation	9
SECTION 2.12 Defaulted Interest	10
SECTION 2.13 CUSIP and ISIN Numbers	10
SECTION 2.14 Book-Entry Provisions for Global Notes	10
SECTION 2.15 Tax Withholding.	11
SECTION 2.16 Treatment of the Notes.	12
ARTICLE THREE Redemption	12
SECTION 3.01 Notices to Trustee	12
SECTION 3.02 Selection of Notes To Be Redeemed	12
SECTION 3.03 Notice of Redemption	12
SECTION 3.04 Effect of Notice of Redemption	13
SECTION 3.05 Deposit of Redemption Price	13
SECTION 3.06 Notes Redeemed in Part	14
SECTION 3.07 Mandatory Redemption	14
ARTICLE FOUR Covenants	14
SECTION 4.01 Payment of Notes	14
SECTION 4.02 Maintenance of Office or Agency	14
SECTION 4.03 Existence	14
SECTION 4.04 Compliance Certificate; Notice of Default	14
SECTION 4.05 Waiver of Stay, Extension or Usury Laws	15
SECTION 4.06 Change of Control Repurchase Event.	15
SECTION 4.07 Limitation on Incurrence of Debt.	16
SECTION 4.08 Provision of Financial Information	16
SECTION 4.09 Maintenance of Properties	16
SECTION 4.10 Insurance	17
SECTION 4.11 Payment of Taxes and Other Claims	17
ARTICLE FIVE Successor Corporation	17
SECTION 5.01 Consolidation Merger and Sale of Assets	17
ARTICLE SIX Default and Remedies	17
SECTION 6.01 Events of Default	17
SECTION 6.02 Acceleration	19

SECTION 6.03 Other Remedies	19
SECTION 6.04 Waiver of Past Defaults	19
SECTION 6.05 Control by Majority	19
SECTION 6.06 Limitation on Suits	20
SECTION 6.07 Rights of Holders To Receive Payment	20
SECTION 6.08 Collection Suit by Trustee	20
SECTION 6.09 Trustee May File Proofs of Claim	20
SECTION 6.10 Priorities	21
SECTION 6.11 Undertaking for Costs	21
SECTION 6.12 Restoration of Rights and Remedies	21
ARTICLE SEVEN Trustee	21
SECTION 7.01 Duties of Trustee	21
SECTION 7.02 Rights of Trustee	22
SECTION 7.03 Individual Rights of Trustee	23
SECTION 7.04 Trustee’s Disclaimer	23
SECTION 7.05 Notice of Default	23
SECTION 7.06 Reports by Trustee to Holders	23
SECTION 7.07 Compensation and Indemnity	24
SECTION 7.08 Replacement of Trustee	24
SECTION 7.09 Successor Trustee by Merger, Etc.	25
SECTION 7.10 Eligibility, Disqualification	25
SECTION 7.11 Preferential Collection of Claims Against the Issuer	25
ARTICLE EIGHT Discharge of Indenture, Defeasance	25
SECTION 8.01 Termination of the Issuer’s Obligations	25
SECTION 8.02 Legal Defeasance and Covenant Defeasance	26
SECTION 8.03 Conditions to Legal Defeasance or Covenant Defeasance	27
SECTION 8.04 Application of Trust Money	28
SECTION 8.05 Repayment to the Issuer	28
SECTION 8.06 Reinstatement	28
ARTICLE NINE Amendments, Supplements and Waivers	29
SECTION 9.01 Without Consent of Holders	29
SECTION 9.02 With Consent of Holders	29
SECTION 9.03 Compliance with the Trust Indenture Act	30
SECTION 9.04 Revocation and Effect of Consents	30
SECTION 9.05 Notation on or Exchange of Notes	31
SECTION 9.06 Trustee To Sign Amendments, Etc.	31
ARTICLE TEN Miscellaneous	31
SECTION 10.01 Trust Indenture Act Controls	31
SECTION 10.02 Notices	31
SECTION 10.03 Communications by Holders with Other Holders	32
SECTION 10.04 Certificate and Opinion as to Conditions Precedent	32
SECTION 10.05 Statements Required in Certificate or Opinion	32
SECTION 10.06 Rules by Paying Agent or Registrar	33
SECTION 10.07 Legal Holidays	33
SECTION 10.08 Governing Law; Waiver of Jury Trial	33
SECTION 10.09 No Adverse Interpretation of Other Agreements	33
SECTION 10.10 No Recourse Against Others	33
SECTION 10.11 Successors	33
SECTION 10.12 Duplicate Originals	33
SECTION 10.13 Severability	33
SECTION 10.14 U.S.A. Patriot Act	33
SECTION 10.15 Force Majeure	33

INDENTURE dated as of September 30, 2013, between Sotherly Hotels LP, a Delaware limited partnership (the “Issuer”), and Wilmington Trust, National Association, a national banking association, existing under the laws of the United States of America, as Trustee (the “Trustee”).

The Issuer has duly authorized the creation of an issue of 8.00% Senior Unsecured Notes due 2018 and, to provide therefor, the Issuer has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when duly issued and executed by the Issuer and authenticated and delivered hereunder, the valid and binding obligations of the Issuer and to make this Indenture a valid and binding agreement of the Issuer has been done.

THIS INDENTURE WITNESSETH

For and in consideration of the premises and the purchase of the Notes by the Holders thereof, the parties hereto covenant and agree, for the equal and proportionate benefit of all Holders, as follows:

ARTICLE ONE

Definitions and Incorporation by Reference

SECTION 1.01 Definitions. Set forth below are certain defined terms used in this Indenture.

“Adjusted Total Asset Value” as of any date means the sum of (i) Stabilized Asset Value, (ii) Non-Stabilized Asset Value and (iii) total cash and cash equivalents of the Issuer and its Subsidiaries on a consolidated basis determined in accordance with GAAP.

“Affiliate” means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agent” means any Registrar or Paying Agent.

“Asset Under Renovation” means as of any date any hotel asset directly or indirectly owned by the Issuer, any Subsidiary or any Unconsolidated Entity, that is designated by the Issuer in its discretion as the recipient or beneficiary of capital expenditures in an amount greater than 4% of such hotel asset’s total revenues for the preceding 12 months.

“Bankruptcy Law” means Title 11 of the United States Code, as amended, or any insolvency or other similar Federal or state law for the relief of debtors.

“Board of Directors” means, as to any Person, the board of directors (or similar governing body) of such Person or any duly authorized committee thereof.

“Board Resolution” means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day” means a day other than a Saturday, Sunday or any other day on which banking institutions in New York City and/or the location of the Corporate Trust Office of the Trustee are authorized or required by law, regulation or executive order to close.

“Capital Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting), including partnership or limited liability company interests, whether general or limited, in the equity of such Person (including without limitation all warrants, options, derivative instruments, or rights of subscription or conversion relating to or affecting Capital Stock), whether outstanding on the Issue Date or issued thereafter, including all Common Stock and Preferred Stock.

1

“Capitalization Rate” means 7.5%.

“Change of Control Repurchase Event” means (A) the acquisition by any Person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of the Capital Stock entitling that Person to exercise more than 50% of the total voting power of all the Capital Stock entitled to vote generally in the election of the REIT’s directors (except that such Person will be deemed to have beneficial ownership of all securities that such Person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and (B) following the closing of any transaction referred to in subsection (A), neither the Issuer, the REIT nor the acquiring or surviving entity has a class of Common Stock or Common Units (or American Depositary Receipts representing such Common Stock or Common Units) listed on the New York Stock Exchange (the “NYSE”), the NYSE Amex Equities (the “NYSE Amex”) or the Nasdaq Stock Market or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or the Nasdaq Stock Market.

“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute or statutes thereto.

“Common Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) that have no preference on liquidation or with respect to distributions over any other class of Capital Stock, including partnership interests, whether general or limited, of such Person’s equity, whether outstanding on the Issue Date or issued thereafter, including all series and classes of common stock.

“Common Units” means the common units of Issuer, as defined in Issuer’s limited partnership agreement.

“Consolidated Income Available for Debt Service” means, for the four complete calendar quarters preceding the date of determination, Consolidated Net Income of the Issuer and its Subsidiaries plus amounts that have been deducted for but minus amounts that have been added for (a) Consolidated Interest Expense plus dividends on mandatorily redeemable or mandatorily convertible preferred stock and prepayment penalties included in GAAP interest expense, (b) provision for taxes of the Issuer and its Subsidiaries based on income, (c) depreciation and amortization and all other non-cash items deducted for purposes of calculating Consolidated Net Income, (d) provision for gains and losses on sales or other dispositions of properties and other investments, (e) extraordinary items, (f) non-recurring or other unusual items, as determined by the Issuer in good faith and (g) corporate, general and administrative expenses.

“Consolidated Interest Expense” means, for the four complete calendar quarters preceding the date of determination, the aggregate amount of interest expense for the Issuer and its Subsidiaries for such period determined accordance with GAAP, excluding any interest that is (i) payable in respect of Capital Stock, (ii) capitalized or (iii) payable in a form other than cash.

“Consolidated Net Income” means, for the four complete calendar quarters preceding the date of determination, the amount of net income (or loss) of the Issuer and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

“Corporate Trust Office” for administration of this Indenture means the corporate trust office of the Trustee located at Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890, Attn: Corporate Capital Markets, or such other office, designated by the Trustee by written notice to the Issuer, at which at any particular time its corporate trust business shall be administered.

“Debt” means, as of any date, without duplication, any indebtedness of the Issuer or any Subsidiary, whether or not contingent, solely in respect of (i) borrowed money evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by a mortgage, pledge, lien, charge, encumbrance or any security interest existing on property owned by the Issuer or any Subsidiary or (iii) reimbursement obligations in connection with any letters of credit actually issued or amounts representing the balance deferred and unpaid of the purchase price of any property except any such balance that constitutes an accrued expense or trade payable; but in the case of items of indebtedness incurred under (i) through (iii) above only to the extent that any such items (other than letters of credit) would appear as a liability on the Issuer’s consolidated balance sheet in accordance with GAAP; and also includes,

2

to the extent not otherwise included, any obligation of the Issuer or any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), indebtedness of another person (other than the Issuer or any Subsidiary). Notwithstanding anything to the contrary in the foregoing, “Debt” shall exclude all Capital Stock of the REIT, the Issuer or any Subsidiary.

“Default” means any event that is, or after notice or passage of time or both would be, an Event of Default pursuant to Article Six hereof.

“Depository” means The Depository Trust Company, New York, New York, or a successor thereto registered under the Exchange Act or other applicable statute or regulation.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto.

“GAAP” means generally accepted accounting principles, as in effect from time to time, as used in the United States of America, applied on a consistent basis; provided, that solely for purposes of any calculation required by the financial covenants contained herein, “GAAP” shall mean generally accepted accounting principles as used in the United States of America, on the date hereof, applied on a consistent basis.

“Holder” means any registered holder on the books of the Registrar, from time to time, of the Notes.

“Indenture” means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof.

“Intercompany Debt” means Debt to which the only parties are the REIT, any of its subsidiaries, the Issuer and any Subsidiary, or Debt owed to the REIT arising from routine cash management practices, but only so long as such Debt is held solely by any of the REIT, any of its subsidiaries, the Issuer and any Subsidiary.

“interest” means, unless the context otherwise requires, with respect to the Notes, interest on the Notes.

“Interest Payment Date” means the Stated Maturity of an installment of interest on the Notes including, without limitation, dates specified as interest payment dates in the Global Note.

“Issue Date” means September 30, 2013.

“Non-Stabilized Asset” means, as of any date, any hotel asset owned by the Issuer, any Subsidiary or any Unconsolidated Entity that (i) is, or within the preceding 24 months has been, an Asset Under Renovation, or (ii) has, within the preceding 24 months, (A) completed a brand change, (B) been subject to an event, or a series of events, giving rise to a material casualty or (C) is in, or has completed, condemnation proceedings in respect of all or any part of such hotel asset.

“Non-Stabilized Asset Value” as of any date means the total “as-stabilized” value of all Non-Stabilized Assets as determined by an appraisal for each Non-Stabilized Asset which will be commissioned by the Issuer from a certified MAI appraiser in December of each year during which any Notes remain outstanding.

“Notes” means, collectively, the Issuer’s 8.00% Senior Unsecured Notes due 2018 issued in accordance with Section 2.02 (whether issued on the Issue Date, issued as Additional Notes, or otherwise issued after the Issue Date) treated as a single class of securities under this Indenture.

“Officer” means any of the following with respect to any Person: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, Chief Accounting Officer, Chief Operating Officer, the President, any Vice President (whether or not designated by a number or numbers or word or words added before or after the title “Vice President”), the Treasurer, any Assistant Treasurer, the Controller, the General Counsel or the Secretary or any Assistant Secretary of such Person.

“Officer’s Certificate” means a certificate signed by an Officer of the REIT, as the sole general partner of the Issuer, which complies with the requirements of Section 314(e) of the Trust Indenture Act.

3

“Opinion of Counsel” means a written opinion from legal counsel who is reasonably acceptable to the Trustee and meets the requirements of Section 10.05 (and Section 9.06, as applicable). The counsel may be an employee of, or counsel to the Issuer.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint- stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

“Preferred Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) that have a preference on liquidation or with respect to distributions over any other class of Capital Stock, including preferred partnership interests, whether general or limited, or such Person’s preferred or preference stock, whether outstanding on the Issue Date or issued thereafter, including all series and classes of such preferred or preference stock.

“principal” means, with respect to the Notes, the principal of and premium, if any, on the Notes.

“Prospectus” means the prospectus, dated September 25, 2013, relating to the original issuance of the Notes.

“Record Date” means the applicable Record Date specified in the Notes.

“Redemption Date” when used with respect to any Note to be redeemed, means the date fixed for such redemption pursuant to this Indenture and the Notes.

“Redemption Price” when used with respect to any Note to be redeemed, means the price fixed for such redemption, payable in immediately available funds, pursuant to this Indenture and the Notes.

“REIT” means Sotherly Hotels Inc.

“Responsible Officer” means, when used with respect to the Trustee, any officer in the Corporate Trust Office of the Trustee to whom any corporate trust matter is referred because of such officer’s knowledge of and familiarity with the particular subject and shall also mean any officer who shall have direct responsibility for the administration of this Indenture.

“SEC” means the U.S. Securities and Exchange Commission.

“Securities Act” means the U.S. Securities Act of 1933, as amended, or any successor statute or statutes thereto.

“Significant Subsidiary” with respect to any Person, means any Subsidiary of such Person that satisfies the criteria for a “significant subsidiary” set forth in Rule 1-02(w) of Regulation S-X under the Exchange Act, as such regulation is in effect on the Issue Date.

“Stabilized Asset” means, as of any date, any hotel asset owned by the Issuer, any Subsidiary or any Unconsolidated Entity that does not constitute a Non-Stabilized Asset.

“Stabilized Asset Value” as of any date means the total value of all Stabilized Assets determined by dividing (i) Stabilized Consolidated Income Available for Debt Service by (ii) the Capitalization Rate.

“Stabilized Consolidated Income Available for Debt Service” as of any date means Consolidated Income Available for Debt Service of the Issuer and its Subsidiaries, excluding any portion of Consolidated Income Available for Debt Service attributable to a Non-Stabilized Asset.

“Stabilized Consolidated Interest Expense” as of any date means Consolidated Interest Expense of the Issuer and its Subsidiaries, excluding any portion of Consolidated Interest Expense relating to Debt that is secured by a Non-Stabilized Asset.

4

“Stated Maturity” means:

(1) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable; and

(2) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable.

“Subsidiary” means a corporation, partnership or limited liability company, a majority of the outstanding Voting Stock of which is owned or controlled, directly or indirectly, by the Issuer or by one or more Subsidiaries of the Issuer.

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended.

“Trustee” means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor.

“Unconsolidated Entity” means a Person, other than a Subsidiary, in which the Issuer holds a direct or indirect ownership interest that is accounted for under the equity method of accounting or the cost method of accounting.

“U.S. Legal Tender” means such coin or currency of the United States of America that at the time of payment shall be legal tender for the payment of public and private debts.

“U.S.A. Patriot Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. 107-56, as amended and signed into law October 26, 2001.

“Voting Stock” means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person.

SECTION 1.02 Other Definitions.

Term	Defined in Section
“Additional Notes”	2.02
“Authentication Order”	2.02
“Change of Control Offer”	4.06(a)
“Change of Control Payment”	4.06(b)
“Change of Control Payment Date”	4.06(b)
“Covenant Defeasance”	8.02(c)
“Event of Default”	6.01
“Financial Information”	4.08
“Global Note”	2.01
“Initial Global Notes”	2.01
“Initial Notes”	2.02
“Legal Defeasance”	8.02(b)
“Issuer”	Preamble
“Participants”	2.15(a)
“Paying Agent”	2.03
“Physical Notes”	2.01
“purchase”	4.08(a)(3)
“Registrar”	2.03
“Required Filing Dates”	4.08
“Trustee”	Preamble

5

SECTION 1.03 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act, such provision is incorporated by reference in, and made a part of, this Indenture. The following Trust Indenture Act terms used in this Indenture have the following meanings:

“indenture securities” means the Notes.

“obligor” on the indenture securities means the Issuer or any other obligor on the Notes.

All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings assigned to them therein.

SECTION 1.04 Rules of Construction. Unless the context otherwise requires:

(1) a term has the meaning assigned to it;

(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP;

(3) “or” is not exclusive;

(4) words in the singular include the plural, and words in the plural include the singular;

(5) “herein,” “hereof” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

(6) the words “including,” “includes” and similar words shall be deemed to be followed by “without limitation”;

(7) unsecured Indebtedness shall not be deemed to be subordinate or junior to secured Indebtedness merely by virtue of its nature as unsecured Indebtedness;

(8) secured Indebtedness shall not be deemed to be subordinate or junior to any other secured Indebtedness merely because it has a junior priority with respect to the same collateral;

(9) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP;

(10) the amount of any Preferred Stock that does not have a fixed redemption, repayment or repurchase price shall be the maximum liquidation value of such Preferred Stock; and

(11) all references to the date the Notes were originally issued shall refer to the Issue Date, except as otherwise specified.

ARTICLE TWO

The Notes

SECTION 2.01 Form and Dating. The Notes and the Trustee’s certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or to conform to usage. The Issuer shall approve the form of the Notes and any notation, legend or endorsement on them. Each Note shall show the date of its authentication.

The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Issuer and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.

The Notes shall be issued initially in the form of a single permanent global Note in registered form, substantially in the form set forth in Exhibit A (the “Initial Global Notes”), deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer and authenticated by the Trustee as hereinafter provided and shall bear the legend set forth in Exhibit B.

6

The Notes issued after the Issue Date shall be issued initially in the form of one or more global Notes in registered form, substantially in the form set forth in Exhibit A, deposited with the Trustee, as custodian for the Depository, duly executed by the Issuer and authenticated by the Trustee as hereinafter provided and shall bear any legends required by applicable law (together with the Initial Global Notes, the “Global Notes”) or as Physical Notes.

The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and/or Registrar as hereinafter provided. Notes issued in exchange for interests in a Global Note pursuant to Section 2.14 may be issued in the form of permanent certificated Notes in registered form in substantially the form set forth in Exhibit A and bearing the applicable legends, if any (the “Physical Notes”).

Additional Notes ranking pari passu with the Initial Notes (as defined in Section 2.02) may be created and issued from time to time by the Issuer without notice to or consent of the Holders and shall be consolidated with and form a single class with the Initial Notes and shall have the same terms as to status, redemption or otherwise (other than with respect to the purchase price thereof and the date from which the interest accrues) as the Initial Notes; provided that the Issuer’s ability to issue Additional Notes shall be subject to the Issuer’s compliance with Section 4.07. Except as described under Article Nine, the Initial Notes and any Additional Notes subsequently issued under this Indenture will be treated as a single class for all purposes under this Indenture, including waivers, amendments, redemptions and offers to purchase, and shall vote together as one class on all matters with respect to the Notes; provided further that if the Additional Notes are not fungible with the Notes for U.S. Federal income tax purposes the Additional Notes will have a separate CUSIP number, if applicable. Unless the context requires otherwise, references to “Notes” for all purposes of this Indenture include any Additional Notes that are actually issued.

SECTION 2.02 Execution, Authentication and Denomination; Additional Notes. One Officer of the Issuer (who shall have been duly authorized by all requisite corporate actions) shall sign the Notes for the Issuer by manual, facsimile, .pdf attachment or other electronically transmitted signature.

If an Officer whose signature is on a Note was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Note, the Note shall nevertheless be valid.

A Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture.

The Trustee shall authenticate (i) on the Issue Date, Notes for original issue in the aggregate principal amount not to exceed $27,600,000 (the “Initial Notes”) and (ii) additional Notes (the “Additional Notes”) in an unlimited amount (so long as not otherwise prohibited by the terms of this Indenture) (x) in exchange for a like principal amount of Initial Notes or (y) in exchange for a like principal amount of Additional Notes, in each case upon a written order of the Issuer in the form of a certificate of an Officer of the Issuer (an “Authentication Order”). Each such Authentication Order shall specify the amount of Notes to be authenticated and the date on which the Notes are to be authenticated, whether the Notes are to be Initial Notes or Additional Notes and whether the Notes are to be issued as Physical Notes or Global Notes or such other information as the Trustee may reasonably request. In addition, with respect to authentication pursuant to clause (i) or (ii) of the first sentence of this paragraph, each such Authentication Order from the Issuer shall be accompanied by an Opinion of Counsel and Officer’s Certificate of the Issuer, each in a form reasonably satisfactory to the Trustee.

All Notes issued under this Indenture shall be treated as a single class for all purposes under this Indenture. The Additional Notes shall bear any legend required by applicable law.

The Trustee may appoint an authenticating agent reasonably acceptable to the Issuer to authenticate Notes. Unless otherwise provided in the appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuer and Affiliates of the Issuer.

The Notes shall be issuable only in registered form without coupons in denominations of $25 and integral multiples of $25 in excess thereof.

7

SECTION 2.03 Registrar and Paying Agent. The Issuer shall maintain or cause to be maintained an office or agency of a financial institution in the United States of America where (a) Notes may be presented or surrendered for registration of transfer or for exchange (such institution, the “Registrar”), (b) Notes may, subject to Section 2 of the Notes, be presented or surrendered for payment (such institution, the “Paying Agent”). The Issuer may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain or cause to be maintained an office or agency in the United States of America, for such purposes. The Issuer may act as Registrar or Paying Agent, except that for the purposes of Articles Three and Eight and Section 4.06, neither the Issuer nor any Affiliate of the Issuer shall act as Paying Agent. The Registrar, as an agent of the Issuer, shall keep a register, including ownership, of the Notes and of their transfer and exchange. The Issuer, upon notice to the Trustee, may have one or more co-registrars and one or more additional paying agents reasonably acceptable to the Trustee. The term “Registrar” includes any co-registrar and the term “Paying Agent” includes any additional paying agent. The Issuer initially appoints the Trustee as Registrar and Paying Agent until such time as the Trustee has resigned or a successor has been appointed.

The Issuer shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuer shall notify the Trustee, in advance, of the name and address of any such Agent. If the Issuer fails to maintain a Registrar or Paying Agent, the Trustee shall act as such.

SECTION 2.04 Paying Agent To Hold Assets in Trust. The Issuer shall require each Paying Agent other than the Trustee or the Issuer or any Subsidiary of the Issuer to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, or interest on, the Notes (whether such assets have been distributed to it by the Issuer or any other obligor on the Notes), and shall notify the Trustee of any Default by the Issuer (or any other obligor on the Notes) in making any such payment. The Issuer at any time prior to the occurrence and continuation of an Event of Default, may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Issuer to the Paying Agent, the Paying Agent shall have no further liability for such assets.

SECTION 2.05 Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least two Business Days prior to each Interest Payment Date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Holders, which list may be conclusively relied upon by the Trustee.

SECTION 2.06 Transfer and Exchange. Subject to Section 2.14, when Notes are presented to the Registrar with a request to register the transfer of such Notes or to exchange such Notes for an equal principal amount of Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transaction are met; provided, however, that the Notes surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Registrar, duly executed by the Holder thereof or his or her attorney duly authorized in writing. To permit registrations of transfers and exchanges, at the Registrar’s request, the Issuer shall execute and the Trustee shall authenticate Notes upon receipt of an Authentication Order, along with any other required deliverables hereunder. No service charge shall be made for any registration of transfer or exchange, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith.

Without the prior written consent of the Issuer, the Registrar shall not be required to register the transfer of or exchange of any Note (i) during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Notes and ending at the close of business on the day of such mailing, (ii) selected for redemption in whole or in part pursuant to Article Three, except the unredeemed portion of any Note being redeemed in part and (iii) beginning at the opening of business on any Record Date and ending on the close of business on the related Interest Payment Date.

8

Any Holder of a beneficial interest in a Global Note shall, by acceptance of such beneficial interest, agree that transfers of beneficial interests in such Global Notes may be effected only through a book-entry system maintained by the Holder of such Global Note (or its agent) in accordance with the applicable legends thereon, and that ownership of a beneficial interest in the Note shall be required to be reflected in a book-entry system.

SECTION 2.07 Replacement Notes. If a mutilated Note is surrendered to the Trustee or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Issuer shall issue and the Trustee shall authenticate, upon receipt of an Authentication Order, a replacement Note if the Trustee’s and Issuer’s requirements are met. Such Holder shall provide an indemnity bond or other indemnity, sufficient in the judgment of both the Issuer and the Trustee, to protect the Issuer, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. The Issuer may charge such Holder for its out-of-pocket expenses in replacing a Note pursuant to this Section 2.07, including fees and expenses of counsel and of the Trustee.

Every replacement Note is an additional obligation of the Issuer.

The provisions of this Section 2.07 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of lost, destroyed or wrongfully taken Notes.

SECTION 2.08 Outstanding Notes. Notes outstanding at any time are all the Notes that have been authenticated by the Trustee except those cancelled by it, those delivered to it for cancellation and those described in this Section 2.08 as not outstanding. A Note does not cease to be outstanding because the Issuer or any of its respective Affiliates hold the Note (subject to the provisions of Section 2.09).

If a Note is replaced pursuant to Section 2.07 (other than a mutilated Note surrendered for replacement), it ceases to be outstanding unless a Responsible Officer of the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. A mutilated Note ceases to be outstanding upon surrender of such Note and replacement thereof pursuant and subject to Section 2.07.

If the principal amount of any Note is considered paid under Section 4.01, it ceases to be outstanding and interest ceases to accrue. If on a Redemption Date or the Stated Maturity the Trustee or Paying Agent (other than the Issuer or an Affiliate thereof) holds U.S. Legal Tender or U.S. Government Obligations sufficient to pay all of the principal and interest due on the Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them ceases to accrue.

SECTION 2.09 Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer or any of its Affiliates shall be disregarded as required by the Trust Indenture Act, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Responsible Officer of the Trustee, actually knows are so owned shall be disregarded. Notes so owned which have been pledged in good faith shall not be disregarded if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right to deliver any such direction, waiver or consent with respect to the Notes and that the pledgee is not the Issuer or any obligor upon the Notes or any Affiliate of the Issuer or of such other obligor.

SECTION 2.10 Temporary Notes. Until definitive Notes are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Issuer consider appropriate for temporary Notes. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Until such exchange, temporary Notes shall be entitled to the same rights, benefits and privileges as definitive Notes. Notwithstanding the foregoing, so long as the Notes are represented by a Global Note, such Global Note may be in typewritten form.

SECTION 2.11 Cancellation. The Issuer at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Issuer or a Subsidiary of the Issuer), and no one else, shall cancel and, at the written direction of the Issuer, shall dispose of all Notes surrendered for transfer, exchange, payment or cancellation in accordance with its customary procedures. Subject to Section 2.07, the Issuer may not issue new Notes to replace Notes that they have paid or delivered to the

9

Trustee for cancellation. If the Issuer shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 2.11.

SECTION 2.12 Defaulted Interest. If the Issuer defaults in a payment of interest on the Notes, it shall pay the defaulted interest (which amount shall be determined by the Issuer in accordance with the terms of the Notes), plus (to the extent lawful) any interest payable on the defaulted interest, in any lawful manner. The Issuer may pay the defaulted interest to the persons who are Holders on a subsequent special record date determined by the Issuer, which date shall be the 15th day next preceding the date fixed by the Issuer for the payment of defaulted interest or the next succeeding Business Day if such date is not a Business Day. At least 15 days before any such subsequent special record date, the Issuer shall mail to each Holder, with a copy to the Trustee, a notice that states the subsequent special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid.

SECTION 2.13 CUSIP and ISIN Numbers. The Issuer in issuing the Notes may use “CUSIP” or “ISIN” numbers, and if so, the Trustee shall use the “CUSIP” or “ISIN” numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the “CUSIP” or “ISIN” numbers printed in the notice or on the Notes, and that reliance may be placed only on the other identification numbers printed on the Notes. The Issuer shall promptly notify the Trustee of any change in the “CUSIP” or “ISIN” numbers.

SECTION 2.14 Book-Entry Provisions for Global Notes.

(a) The Global Notes initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) if applicable, bear the legend set forth in Exhibit B.

Members of, or participants in, the Depository (“Participants”) shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Issuer, the Trustee and any agent of the Issuer or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Trustee or any agent of the Issuer or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and Participants, the operation of customary practices governing the exercise of the rights of a Holder of any Note.

(b) Transfers of Global Notes shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred or exchanged for Physical Notes in accordance with the rules and procedures of the Depository and the provisions of this Section 2.14. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Notes if (i) the Depository notifies the Issuer that it is unwilling or unable to act as Depository for any Global Note, the Issuer so notifies the Trustee in writing and a successor Depository is not appointed by the Issuer within 90 days of such notice or (ii) a Default or Event of Default has occurred and is continuing and the Registrar has received a written request from any owner of a beneficial interest in a Global Note to issue Physical Notes. Upon any issuance of a Physical Note in accordance with this Section 2.14(b) the Trustee is required to register such Physical Note in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). All such Physical Notes shall bear the applicable legends, if any.

(c) In connection with any transfer or exchange of a portion of the beneficial interest in a Global Note to beneficial owners pursuant to paragraph (b) of this Section 2.14, the Registrar shall (if one or more Physical Notes are to be issued) reflect on its books and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of authorized denominations in an aggregate principal amount equal to the principal amount of the beneficial interest in the Global Note so transferred.

10

(d) In connection with the transfer of a Global Note as an entirety to beneficial owners pursuant to paragraph (b) of this Section 2.14, such Global Note shall be deemed to be surrendered to the Trustee for cancellation, and (i) the Issuer shall execute, and (ii) the Trustee shall upon written instructions from the Issuer authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in such Global Note, an equal aggregate principal amount of Physical Notes of authorized denominations.

(e) The Holder of any Global Note may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Notes.

(f) The Registrar shall retain copies of all letters, notices and other written communications received pursuant to this Section 2.14. The Issuer shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar.

The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Participants or beneficial owners of interests in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

The Trustee shall have no responsibility or liability for the actions or omissions of the Depository, or the accuracy of the books and records of the Depository.

(g) Cancellation and/or Adjustment of Global Note. At such time as all beneficial interests in a particular Global Note have been exchanged for Physical Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Physical Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or the Depository at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depository at the direction of the Trustee to reflect such increase.

SECTION 2.15 Tax Withholding.

(a) In the event that any withholding tax is imposed on payments to a Holder, such tax shall reduce the amount otherwise distributable to such Holder in accordance with this Section 2.15. The Trustee or Paying Agent is hereby authorized and directed to retain from amounts otherwise distributable to the Holders sufficient funds for the payment of any tax that is legally owed with respect to such payment (but such authorization shall not prevent the Trustee or the Paying Agent from contesting any such tax in appropriate proceedings and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings; provided, however, that the Trustee or the Paying Agent shall not be required to contest any tax). The amount of any withholding tax imposed with respect to a Holder shall be treated as cash distributed to such Holder at the time it is withheld by the Trustee or Paying Agent and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a payment (such as a payment to a non-U.S. Holder), the Trustee or the Paying Agent may in its sole discretion withhold such amounts in accordance with this paragraph.

(b) Prior to the receipt of any interest payment, any Holder or its transferee that is a United States person (as defined in Section 7701(a)(30) of the Code) shall (i) provide the Trustee and the Paying Agent with Internal Revenue Service Form W-9 (or successor form) or (ii) otherwise establish to the satisfaction of the

11

Trustee and the Paying Agent that it is exempt from backup withholding. Each Holder or its transferee agrees by acceptance of a Note that, upon request of the Issuer, the Trustee or the Paying Agent, such Holder or its transferee will provide the Issuer, the Trustee or the Paying Agent with a Internal Revenue Service Form W-9 (or successor form) to the extent legally able to do so and that each Holder or its transferee shall notify the Trustee or Paying Agent should subsequent circumstances render such forms or exemptions incorrect or invalid. The Trustee and the Paying Agent shall be fully protected in relying upon, and each Holder or its transferee by its acceptance of a Note hereunder agrees to indemnify and hold the Trustee and the Paying Agent harmless against all claims or liability of any kind arising in connection with or related to the Trustee’s and the Paying Agent’s reliance upon, any documents, forms or information provided by any Holder or its transferee to the Issuer, the Trustee or the Paying Agent pursuant to this Section 2.15.

(c) Prior to the receipt of any interest payment, any Holder, and upon transfer, any transferee that is not a United States person (as defined in Section 7701(a)(30) of the Code) shall provide the Trustee and the Paying Agent with Internal Revenue Service Form W-8BEN, Form W-8ECI or other applicable Internal Revenue Service Form W-8 (or successor forms). Each Holder or transferee agrees by acceptance of a Note that, upon request of the Issuer, the Trustee or the Paying Agent, such Holder or transferee will provide the Issuer, the Trustee or the Paying Agent with a Internal Revenue Service Form W-8BEN, W-8ECI or other applicable Internal Revenue Service Form W-8 (or successor forms) to the extent legally able to do so and that each Holder or its transferee shall notify the Trustee or Paying Agent should subsequent circumstances render such forms incorrect or invalid. The Trustee and the Paying Agent shall be fully protected in relying upon, and each Holder or its transferee by its acceptance of a Note hereunder agrees to indemnify and hold the Trustee and the Paying Agent harmless against all claims or liability of any kind arising in connection with or related to the Trustee’s and the Paying Agent’s reliance upon, any documents, forms or information provided by any Holder or its transferee to the Issuer, the Trustee or the Paying Agent pursuant to this Section 2.15.

SECTION 2.16 Treatment of the Notes. The Issuer will treat the Notes as indebtedness of the Issuer that is in registered form within the meaning of Treasury Regulations Section 1.871-14(c)(1)(i). The Issuer will further treat the amounts payable in respect of the principal amount of such Notes as interest for all United States federal income and withholding tax purposes.

ARTICLE THREE

Redemption

SECTION 3.01 Notices to Trustee. The Notes may be redeemed, in whole, or from time to time in part, subject to the conditions and at the redemption prices set forth in Section 5 of the form of Notes set forth in Exhibit A hereto, which is hereby incorporated by reference and made a part of this Indenture, together with accrued and unpaid interest to the Redemption Date. If the Issuer elects to redeem Notes pursuant to Section 5 of the Notes, it shall notify the Trustee in writing of the Redemption Date, the Redemption Price and the principal amount of Notes to be redeemed. The Issuer shall give notice of redemption to the Trustee at least 45 days before the Redemption Date (unless a shorter notice shall be agreed to by the Trustee in writing), together with such documentation and records as shall enable the Trustee to select the Notes to be redeemed.

SECTION 3.02 Selection of Notes To Be Redeemed. If less than all of the Notes are to be redeemed at any time pursuant to Section 5 of the Notes, the Trustee shall select Notes for redemption as follows:

(x) in compliance with the guidelines of the Depository and requirements of the principal national securities exchange, if any, on which the Notes are then listed; or

(y) on a pro rata basis, by lot or by another method consistent with the customary procedures of the Depository.

No Notes of $25 or less shall be redeemed in part.

SECTION 3.03 Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Issuer shall deliver a notice of redemption by first class mail, postage prepaid, by electronic means or as otherwise provided in accordance with the procedures of the Depository, to each Holder whose Notes are to be

12

redeemed at its registered address (with a copy to the Trustee), except that redemption notices may be mailed more than 60 days prior to a Redemption Date if the notice is issued in connection with a defeasance of the Notes or a satisfaction and discharge of this Indenture pursuant to Article Eight hereof. Notices of redemption may be given prior to the completion of an Equity Offering, and any redemption or notice may, at the Issuer’s discretion, be subject to the completion of an Equity Offering. At the Issuer’s request, the Trustee shall forward the notice of redemption in the Issuer’s name and at the Issuer’s expense. Each notice for redemption shall identify the Notes (including the CUSIP or ISIN number) to be redeemed and shall state:

(1) the Redemption Date;

(2) the Redemption Price and the amount of accrued interest, if any, to be paid;

(3) the name and address of the Paying Agent;

(4) that Notes called for redemption shall be surrendered to the Paying Agent to collect the Redemption Price plus accrued interest, if any;

(5) that, unless the Issuer defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Notes is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Notes redeemed;

(6) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after the Redemption Date, and upon surrender and cancellation of such Note, a new Note or Notes in aggregate principal amount equal to the unredeemed portion thereof will be issued; and

(7) if fewer than all the Notes are to be redeemed, the identification of the particular Notes (or portion thereof) to be redeemed, as well as the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes to be outstanding after such partial redemption.

The notice, if mailed or delivered in a manner herein provided, shall be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note designated for redemption in whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Except as otherwise provided in this Article Three, notices of redemption may not be conditional.

At the Issuer’s request, the Trustee shall deliver the notice of redemption in the name of the Issuer in a manner provided herein and at its expense; provided that the Issuer shall have delivered to the Trustee, at least five Business Days before notice of redemption is required to be mailed or delivered or caused to be mailed or delivered to Holders pursuant to this Section 3.03 (unless a shorter notice shall be agreed to by the Trustee), an Officer’s Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph.

SECTION 3.04 Effect of Notice of Redemption. Once notice of redemption is delivered in accordance with Section 3.03, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price plus accrued interest, if any. Upon surrender to the Trustee or Paying Agent, such Notes called for redemption shall be paid at the Redemption Price (which shall include accrued interest thereon to, but not including, the Redemption Date), but installments of interest, the maturity of which is on or prior to the Redemption Date, shall be payable to Holders of record at the close of business on the relevant Record Dates. On and after the Redemption Date, interest shall cease to accrue on Notes or portions thereof called for redemption and the only right of the Holders of such Notes will be to receive payment of the Redemption Price unless the Issuer shall have not complied with its obligations pursuant to Section 3.05.

SECTION 3.05 Deposit of Redemption Price. On or before 10:00 a.m. New York City time (or such later time as has been agreed to by the Paying Agent) on the Redemption Date, the Issuer shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Redemption Price plus accrued and unpaid interest and any premium, if any, of all Notes to be redeemed on that date. The Paying Agent shall promptly return to the Issuer any money deposited with the Paying Agent by the Issuer in excess of the amounts necessary to pay the Redemption Price of, and accrued and unpaid interest on, all Notes to be redeemed or purchased.

13

If the Issuer complies with the preceding paragraph, then, unless the Issuer defaults in the payment of such Redemption Price plus accrued interest, if any, interest on the Notes to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Notes are presented for payment.

SECTION 3.06 Notes Redeemed in Part. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note or Notes in principal amount equal to the unredeemed portion of the original Note or Notes shall be issued in the name of the Holder thereof upon surrender and cancellation of the original Note or Notes. It is understood that, notwithstanding anything in this Indenture to the contrary, only an Authentication Order and not an Opinion of Counsel or Officer’s Certificate is required for the Trustee to authenticate such new Note under this Section 3.06.

SECTION 3.07 Mandatory Redemption. The Issuer will not be required to make any mandatory redemption (except as provided in Section 4.06 in connection with a Change of Control Repurchase Event) or sinking fund payments with respect to the Notes.

ARTICLE FOUR

Covenants

SECTION 4.01 Payment of Notes. The Issuer shall pay the principal of, premium, if any, and interest on the Notes in the manner provided in the Notes and this Indenture. An installment of principal of, or interest on, the Notes shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Issuer or an Affiliate thereof) holds no later than 12:00 p.m. (New York City time) on that date U.S. Legal Tender designated for and sufficient to pay the installment. Interest on the Notes will be computed on the basis of a 360-day year comprised of twelve 30-day months.

The Issuer shall pay interest on overdue principal (including post-petition interest in a proceeding under any Bankruptcy Law), and overdue interest, to the extent lawful, at the same rate per annum borne by the Notes.

SECTION 4.02 Maintenance of Office or Agency. The Issuer shall maintain in the United States of America, the office or agency required under Section 2.03 (which may be an office of the Trustee or an affiliate of the Trustee or Registrar). The Issuer shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations and surrenders may be made at the address of the Corporate Trust Office.

The Issuer may also, from time to time, designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Issuer shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

The Issuer hereby initially designates the Corporate Trust Office of the Trustee, as such office of the Issuer in accordance with Section 2.03.

SECTION 4.03 Existence. Subject to Article Five, the Issuer will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (by partnership agreement and statute) and franchises; provided, however, that the Issuer shall not be required to preserve any right or franchise if it determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the Holders.

SECTION 4.04 Compliance Certificate; Notice of Default.

(a) The Issuer shall deliver to the Trustee, within 120 days after each December 31, commencing with December 31, 2013, an Officer’s Certificate signed by the principal executive officer, principal financial officer, principal operating officer or principal accounting officer of the Issuer stating that a review of the activities of

14

the Issuer and its Subsidiaries has been made under the supervision of the signing Officer with a view to determining whether the Issuer and its Subsidiaries have kept, observed, performed and fulfilled their obligations under this Indenture and further stating, as to each such Officer signing such certificate, that, to the best of such Officer’s knowledge, the Issuer and its Subsidiaries during such preceding fiscal year have kept, observed, performed and fulfilled each and every such covenant and no Default occurred during such year and at the date of such certificate there is no Default that has occurred and is continuing or, if such signers do know of such Default, the certificate shall specify such Default and what action, if any, the Issuer is taking or propose to take with respect thereto.

(b) The Issuer shall deliver to the Trustee within 30 days after the Issuer become aware (unless such Default has been cured before the end of the 30-day period) of the occurrence of any Default an Officer’s Certificate specifying the Default and what action, if any, the Issuer is taking or propose to take with respect thereto.

SECTION 4.05 Waiver of Stay, Extension or Usury Laws. The Issuer covenants (to the extent permitted by applicable law) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive such Issuer from paying all or any portion of the principal of and/or interest on the Notes, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture, and (to the extent permitted by applicable law) each hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

SECTION 4.06 Change of Control Repurchase Event.

(a) If a Change of Control Repurchase Event occurs, unless the Issuer has provided notice of the redemption of the Bonds pursuant to Section 3.03, each holder of Notes will have the right to require the Issuer to purchase some or all (in principal amounts of $25 or an integral multiple of $25) of such Holder’s Notes pursuant to the offer described below (the “Change of Control Offer”).

(b) Any Change of Control Offer will include a cash offer price of 102% of the principal amount of any Notes purchased plus accrued and unpaid interest to the date of purchase (the “Change of Control Payment”). If a Change of Control Offer is required, within 30 days following a Change of Control Repurchase Event, the Issuer will deliver a notice in a manner provided herein to each Holder (with a copy to the Trustee) describing the Change of Control Repurchase Event and offering to repurchase Notes on a specified date (the “Change of Control Payment Date”). The Change of Control Payment Date will be no earlier than 30 days and no later than 60 days from the date the notice is mailed.

(c) On the Change of Control Payment Date, the Issuer will, to the extent lawful:

(1) accept for payment all Notes properly tendered and not withdrawn pursuant to the Change of Control Offer;

(2) deposit the Change of Control Payment with the paying agent in respect of all Notes so accepted; and

(3) deliver to the Trustee the Notes accepted and an Officer’s Certificate stating the aggregate principal amount of all Notes purchased by the Issuer.

(d) The Paying Agent will promptly mail to each Holder of Notes properly tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail, or cause to be transferred by book entry, to each Holder a new Note in principal amount equal to any unpurchased portion of the Notes surrendered.

(e) The Issuer will comply with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations to the extent those laws and regulations are applicable to any Change of Control Offer. If the provisions of any of the applicable securities laws or securities regulations conflict with the

15

provisions of this Section 4.06, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described above by virtue of that compliance.

(f) The Issuer shall not be required to make a Change of Control Offer upon a Change of Control Repurchase Event if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer or if notice of redemption has been given pursuant to Section 5 of the Notes. Notwithstanding anything to the contrary contained herein, a Change of Control Offer may be made in advance of a Change of Control Repurchase Event, subject to one or more conditions precedent, including, but not limited to, the consummation of such Change of Control, if a definitive agreement is in place for the transaction that will give rise to a Change of Control Repurchase Event at the time the Offer to Purchase is made.

SECTION 4.07 Limitation on Incurrence of Debt.

(a) The Issuer will not, and will not permit any Subsidiary to, incur any Debt, other than Intercompany Debt, including that which is subordinate in right of payment to the Notes, if, immediately after giving effect to the incurrence of such Debt and the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value would be greater than 0.65 to 1.0.

(b) The Issuer will not, and will not permit any Subsidiary to, incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense on the date on which such additional Debt is to be incurred, on a pro forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.5 to 1.0.

SECTION 4.08 Provision of Financial Information. Whether or not the Issuer is subject to Section 13 or 15(d) of the Exchange Act, during any time that any Notes remain outstanding, the Issuer will, to the extent permitted under the Exchange Act, file with the SEC the annual reports, quarterly reports and other documents which the Issuer would have been required to file with the SEC pursuant to such Section 13 or 15(d) if the Issuer were so subject (the “Financial Information”), such documents to be filed with the SEC on or prior to the respective dates (the “Required Filing Dates”) by which the Issuer would have been required so to file such documents if the Issuer were so subject; provided, however, that notwithstanding the foregoing, during any period in which the Issuer is not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, the REIT may elect to satisfy the Issuer’s obligations under this section by filing with the SEC the Financial Information required to be filed by the REIT under Sections 13 or 15(d) of the Exchange Act. The Issuer also will in any event (unless available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (or successor system)) within 15 days of each Required Filing Date (i) transmit by mail to all Holders, without cost to such Holders, copies of the Financial Information; and (ii) file with the Trustee copies of the Financial Information. If the filing of the Financial Information by the Issuer or the REIT, as applicable, with the SEC is not permitted under the Exchange Act, the Issuer will promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of the Financial Information to any prospective Holder.

Delivery of any such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer’s Certificates). The Trustee shall have no liability or responsibility for the filing, content or timeliness of any report delivered hereunder (aside from the report required under Section 7.06 hereunder).

SECTION 4.09 Maintenance of Properties. The Issuer will cause all of its material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in judgment of the Issuer may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the Issuer and its Subsidiaries shall not be prevented from selling or otherwise disposing of for value their respective properties in the ordinary course of its business.

16

SECTION 4.10 Insurance. The Issuer will, and will cause each of its Subsidiaries to, keep all of its insurable properties insured against loss or damage at least equal to their then full insurable value with insurers of recognized responsibility and having an A.M. Best policy holder’s rating of not less than A-V.

SECTION 4.11 Payment of Taxes and Other Claims. The Issuer will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon the income, profits or property of the Issuer or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Issuer or any Subsidiary; provided, however, that the Issuer shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings or for which the Issuer has set apart and maintains an adequate reserve. Neither the Trustee, nor any Agent, shall be responsible or have liability for the payment of tax, assessment, charge or levy, other than such as may be required under the normal course of the Trustee’s or Agent’s business.

ARTICLE FIVE

Successor Corporation

SECTION 5.01 Consolidation Merger and Sale of Assets.

(a) Issuer shall not consolidate with or merge with or into, or sell, convey, transfer or otherwise dispose of all or substantially all of its and its Subsidiaries’ (taken as a whole) property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person (other than a Subsidiary) to merge with or into it unless:

(1) the Issuer shall be the continuing Person, or the Person (if other than such Issuer) formed by such consolidation or into which the Issuer is merged or that acquired such property and assets of the Issuer shall be a corporation, limited liability company, partnership (including a limited partnership) or trust organized and validly existing under the laws of the United States of America or any state of the United States or the District of Columbia and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Issuer with respect to the Notes and under this Indenture;

(2) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and

(3) the Issuer delivers to the Trustee an Officer’s Certificate (attaching the arithmetic computations to demonstrate compliance with clause (3) above) and an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture complies with this Section 5.01 and that all conditions precedent provided for herein relating to such transaction have been complied with and, with respect to the Opinion of Counsel, that the supplemental indenture constitutes a valid and binding obligation enforceable against the Issuer, or the Person (if other than the Issuer) formed by such consolidation or into which such Issuer is merged or that acquired all or substantially all of such Issuer’s and its Subsidiaries’ property and assets.

ARTICLE SIX

Default and Remedies

SECTION 6.01 Events of Default. Each of the following is an “Event of Default”:

(1) default in the payment of principal of, or premium, if any, on any Note when they are due and payable at maturity, upon acceleration, redemption or otherwise;

(2) default in the payment of interest on any Note when they are due and payable, and such default continues for a period of 30 days;

17

(3) the Issuer or its Subsidiaries do not comply with their obligations under Section 5.01;

(4) the Issuer fails to tender payment for the Notes upon a Change of Control Repurchase Event when required under Section 4.06, when such payment remains unpaid 60 consecutive days after issuance of requisite notice;

(5) the Issuer or its Subsidiaries default in the performance of or breach any other covenant or agreement of the Issuer or the Subsidiaries in this Indenture or under the Notes (other than a default specified in clause (1), (2), (3) or (4) above) and such default or breach continues for 90 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Notes;

(6) there occurs with respect to any issue or issues of Debt of the Issuer or any Significant Subsidiary having an outstanding principal amount in excess of $17,500,000 singly or in aggregate principal amount for all such issues of all such Persons, whether such Debt now exists or shall hereafter be created,

(i) an event of default that has caused the Holder thereof to declare such Debt to be due and payable prior to its Stated Maturity and such Debt has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or

(ii) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default;

provided, however, that in the case of either (i) or (ii) above, if such event of default, acceleration or payment default is contested by the Issuer, a final and non-appealable judgment or order confirming the existence of the default and/or the lawfulness of the acceleration, as the case may be, shall have been entered;

(7) any final and non-appealable judgment or order for the payment of money in excess of $17,500,000 singly or in the aggregate for all such final judgments or orders against all such Persons:

(i) shall be rendered against the Issuer or any Significant Subsidiary and shall not be paid or discharged and

(ii) there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $17,500,000 during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect;

(8) a court of competent jurisdiction enters a decree or order for:

(i) relief in respect of the Issuer or any Significant Subsidiary in an involuntary case under any applicable Bankruptcy Law now or hereafter in effect,

(ii) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or any Significant Subsidiary or

(iii) the winding up or liquidation of the affairs of the Issuer or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or

(9) the Issuer or any Significant Subsidiary:

(i) commences a voluntary case under any applicable Bankruptcy Law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under such law,

(ii) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or such Significant Subsidiary or for all or substantially all of the property and assets of the Issuer or such Significant Subsidiary or

(iii) effects any general assignment for the benefit of its creditors.

18

SECTION 6.02 Acceleration. If an Event of Default (other than an Event of Default specified in clause (8) or (9) of Section 6.01 that occurs with respect to the Issuer) occurs and is continuing under this Indenture, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Issuer (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall, upon receipt of an offer from such Holders to provide the Trustee with an indemnity satisfactory to it against costs, liability or expense, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (8) of Section 6.01 has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (8) of Section 6.01 shall be remedied or cured by the Issuer or the applicable Significant Subsidiary or waived by the Holders of the relevant Debt within 60 days after the declaration of acceleration with respect thereto.

If an Event of Default with respect to the outstanding Notes occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes may declare the principal thereof, premium, if any, and all unpaid interest thereon to be due and payable immediately.

The Holders of at least a majority in aggregate principal amount of the outstanding Notes by written notice to the Issuer and to the Trustee may waive all past Defaults and rescind and annul a declaration of acceleration and its consequences if:

(x) all existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived; and

(y) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction.

No such rescission shall affect any subsequent Default or impair any right consequent thereto.

SECTION 6.03 Other Remedies. If a Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, or interest on, the Notes or to enforce the performance of any provision of the Notes or this Indenture.

The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon a Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.

SECTION 6.04 Waiver of Past Defaults. Subject to Sections 2.09, 6.07 and 9.02, the Holders of a majority in principal amount of the outstanding Notes (which may include consents obtained in connection with a tender offer or exchange offer of Notes) by notice to the Trustee may waive an existing Default and its consequences, except a Default in the payment of principal of, or interest on, any Note as specified in Section 6.01(1) or (2). The Issuer shall deliver to the Trustee an Officer’s Certificate stating that the requisite percentage of Holders have consented to such waiver and attaching copies of such consents. When a Default is waived, it is cured and ceases.

SECTION 6.05 Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Notes, upon receipt of an offer from such Holders to provide the Trustee with an indemnity satisfactory to it against any costs, liability or expense, may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Subject to Section 7.01, however, the Trustee may refuse to follow any direction that conflicts with any law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction received from the Holders of Notes; provided, however, that the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

19

SECTION 6.06 Limitation on Suits. No Holder shall have any right to institute any proceeding with respect to this Indenture or for any remedy thereunder, unless:

(1) the Holder gives the Trustee written notice of a continuing Event of Default;

(2) the Holders of not less than 25% in aggregate principal amount of outstanding Notes make a written request to the Trustee to pursue the remedy;

(3) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense;

(4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and

(5) during such 60-day period, the Holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request (it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any rights under this Indenture, except in the manner herein provided and for equal and ratable benefit of all Holders).

However, such limitations do not apply to the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder.

A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder.

SECTION 6.07 Rights of Holders To Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and premium, if any, and interest on, a Note, on or after the respective due dates therefor, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder.

SECTION 6.08 Collection Suit by Trustee. If a Default in payment of principal or interest specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuer or any other obligor on the Notes for the whole amount of principal and accrued interest and fees remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate per annum borne by the Notes and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

SECTION 6.09 Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relating to the Issuer, its creditors or their property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee hereunder.

Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. The Trustee shall be entitled to participate as a member of any official committee of creditors in the matters as it deems necessary or advisable.

20

SECTION 6.10 Priorities. If the Trustee collects any money or property pursuant to this Article Six, it shall pay out the money or property in the following order:

First: to the Trustee (and/or any Agent) for amounts due hereunder, including under Section 7.07;

Second: to Holders for interest accrued on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest;

Third: to Holders for principal amounts due and unpaid on the Notes, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal; and

Fourth: to the Issuer.

The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10.

SECTION 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the outstanding Notes.

SECTION 6.12 Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceedings or any other proceedings, the Issuer, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies hereunder of the Trustee and the Holders shall continue as though no such proceeding has been instituted.

ARTICLE SEVEN

Trustee

SECTION 7.01 Duties of Trustee.

(a) If a Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs.

(b) Except during the continuance of a Default:

(1) The Trustee need perform only those duties as are specifically set forth herein or in the Trust Indenture Act and no duties, covenants, responsibilities or obligations shall be implied in this Indenture against the Trustee.

(2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates (including Officer’s Certificates) or opinions (including Opinions of Counsel) furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture.

21

(c) Notwithstanding anything to the contrary herein, the Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, bad faith or its own willful misconduct, except that:

(1) This paragraph does not limit the effect of Section 7.01(b).

(2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.

(3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.

(d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or take any action at the request or direction of Holders if it shall have reasonable grounds for believing that repayment of such funds is not assured to it.

(e) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to this Section 7.01.

(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuer. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law or unless otherwise agreed with the Issuer.

(g) In the absence of bad faith, negligence or willful misconduct on the part of the Trustee, the Trustee shall not be responsible for the application of any money by any Paying Agent other than the Trustee.

SECTION 7.02 Rights of Trustee. Subject to Section 7.01:

(a) The Trustee may rely conclusively on any resolution, certificate (including any Officer’s Certificate), statement, instrument, opinion (including any Opinion of Counsel), notice, request, direction, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document.

(b) Before the Trustee acts or refrains from acting, it may require an Officer’s Certificate and an Opinion of Counsel, which shall conform to the provisions of Section 10.05. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officer’s Certificate or Opinion of Counsel.

(c) Without limiting the Trustee’s (acting in any capacity hereunder) rights or protections under Section 7.07, the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) appointed with due care.

(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers under this Indenture.

(e) The Trustee may consult with counsel of its selection and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel.

(f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby.

(g) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate (including any Officer’s Certificate), statement, instrument, opinion (including any Opinion of Counsel), notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled, upon reasonable notice to the Issuer, to examine the books, records, and premises of the Issuer, personally or by agent or attorney at the sole cost of the Issuer.

22

(h) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder, or otherwise advance funds in any case whatsoever.

(i) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as duties.

(j) Except with respect to Sections 4.01 and 4.05, the Trustee shall have no duty to inquire as to the performance of the Issuer with respect to the covenants contained in Article Four. In addition, the Trustee shall not be deemed to have knowledge of an Event of Default except (i) any Default or Event of Default occurring pursuant to Section 4.01, 6.01(1) or 6.01(2) or (ii) any Default or Event of Default actually known to a Responsible Officer.

(k) The rights, privileges, protections, immunities and benefits given to the Trustee, including its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder.

(l) In no event shall either party hereto be responsible or liable for special, indirect, punitive or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether such party has been advised of the likelihood of such loss or damage and regardless of the form of action.

SECTION 7.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuer, its Subsidiaries or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee shall comply with Sections 7.10 and 7.11.

SECTION 7.04 Trustee’s Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Issuer’s use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuer in this Indenture or any document issued in connection with the sale of Notes or any statement in the Notes other than the Trustee’s certificate of authentication. The Trustee makes no representations with respect to the effectiveness or adequacy of this Indenture.

SECTION 7.05 Notice of Default. If a Default occurs and is continuing and is deemed to be actually known to a Responsible Officer of the Trustee pursuant to Section 7.02(j), the Trustee shall mail to each Holder notice of the uncured Default within 90 days after the Trustee is deemed to know such Default occurred. Except in the case of a Default in payment of principal of, or interest on, any Note, including an accelerated payment and the failure to make a payment pursuant to a Change of Control Offer or a Default in complying with the provisions of Article Five, the Trustee may withhold the notice if and so long as the Board of Directors, the executive committee, or a trust committee of directors and/or Responsible Officers, of the Trustee in good faith determines that withholding the notice is in the interest of the Holders.

SECTION 7.06 Reports by Trustee to Holders. Within 60 days after each November 1, beginning with November 1, 2014, the Trustee shall, to the extent that any of the events described in Trust Indenture Act § 313(a) occurred within the previous twelve months, but not otherwise, mail to each Holder a brief report dated as of such date that complies with Trust Indenture Act § 313(a). The Trustee also shall comply with Trust Indenture Act §§ 313(b), 313(c) and 313(d).

A copy of each report at the time of its mailing to Holders shall be mailed to the Issuer and filed with the SEC and each securities exchange, if any, on which the Notes are listed.

The Issuer shall notify the Trustee if the Notes become listed on any securities exchange or of any delisting thereof and the Trustee shall comply with the Trust Indenture Act § 313(d).

23

SECTION 7.07 Compensation and Indemnity. The Issuer shall pay to the Trustee (acting in any capacity hereunder) from time to time such compensation as the Issuer and the Trustee shall from time to time agree in writing for its services hereunder. The Trustee’s compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances (including reasonable fees and expenses of counsel) incurred or made by it in addition to the compensation for its services, except any such disbursements, expenses and advances as may be attributable to the Trustee’s negligence, bad faith or willful misconduct. Such expenses shall include the reasonable fees and expenses of the Trustee’s agents and counsel.

The Issuer shall indemnify each of the Trustee (acting in any capacity hereunder) or any predecessor Trustee and its agents for, and hold them harmless against, any and all loss, damage, claims including taxes (other than taxes based upon, measured by or determined by the income of the Trustee), liability or expense incurred by them except for such actions to the extent caused by any negligence, bad faith or willful misconduct on their part, arising out of or in connection with this Indenture including the reasonable costs and expenses of defending themselves against or investigating any claim or liability in connection with the exercise or performance of any of the Trustee’s rights, powers or duties hereunder. The Trustee shall notify the Issuer promptly of any claim asserted against the Trustee or any of its agents for which it may seek indemnity, provided that failure to provide such notice shall not relieve the Issuer of its obligations in this Section 7.07. The Issuer may, at the request of the Trustee, defend the claim and the Trustee shall cooperate in the defense; provided that the Trustee and its agents subject to the claim may have separate counsel and the Issuer shall pay the reasonable fees and expenses of such counsel; provided, however, that the Issuer shall not be required to pay such fees and expenses if the Issuer assumes the Trustee’s defense and there is no conflict of interest between the Issuer and the Trustee and its agents subject to the claim in connection with such defense as reasonably determined by the Trustee. The Issuer need not pay for any settlement made without its written consent (which shall not be unreasonably withheld). The Issuer need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Trustee through its negligence, bad faith or willful misconduct.

Notwithstanding anything to the contrary in this Indenture, to secure the Issuer’s payment obligations to the Trustee (acting in any capacity hereunder) hereunder, the Trustee shall have a lien prior to the Notes against all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held in trust to pay principal and interest on particular Notes.

When the Trustee incurs expenses or renders services after a Default specified in Section 6.01(8) or 6.01(9) occurs, such expenses and the compensation for such services shall be paid to the extent allowed under any Bankruptcy Law.

Notwithstanding any other provision in this Indenture, the provisions of this Article Seven shall survive the satisfaction and discharge of this Indenture or the resignation or removal of the Trustee and the subsequent appointment of a successor Trustee.

SECTION 7.08 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee’s acceptance of appointment as provided in this Section 7.08. The Trustee may resign with 60 days prior written notice by so notifying the Issuer in writing. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Issuer and the Trustee and may appoint a successor Trustee. The Issuer may remove the Trustee if:

(1) the Trustee fails to comply with Section 7.10;

(2) the Trustee is adjudged a bankrupt or an insolvent;

(3) a receiver or other public officer takes charge of the Trustee or its property; or

(4) the Trustee becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Issuer shall notify each Holder of such event and shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Issuer.

24

A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuer. Immediately after that, the retiring Trustee shall transfer, after payment of all sums then owing to the Trustee pursuant to Section 7.07, all property held by it as Trustee to the successor Trustee, subject to the lien provided in Section 7.07, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder.

If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the Holders of at least 10% in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee at the expense of the Issuer.

If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.

Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Issuer’s obligations under Section 7.07 shall continue for the benefit of the retiring Trustee.

Any removed or resigning Trustee shall have no liability or responsibility for the action or inaction of any Successor Trustee.

SECTION 7.09 Successor Trustee by Merger, Etc.. Any business entity into which the Trustee may be merged or converted or with which it may be consolidated, or any entity resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any entity succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto.

SECTION 7.10 Eligibility, Disqualification. This Indenture shall always have a Trustee who satisfies the requirement of Trust Indenture Act §§ 310(a)(1), 310(a)(2) and 310(a)(5). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with Trust Indenture Act § 310(b); provided, however, that there shall be excluded from the operation of Trust Indenture Act § 310(b)(1) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Issuer is outstanding, if the requirements for such exclusion set forth in Trust Indenture Act § 310(b)(1) are met. The provisions of Trust Indenture Act § 310 shall apply to the Issuer and any other obligor of the Notes.

SECTION 7.11 Preferential Collection of Claims Against the Issuer. The Trustee, in its capacity as Trustee hereunder, shall comply with Trust Indenture Act § 311(a), excluding any creditor relationship listed in Trust Indenture Act § 311(b). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act § 311(a) to the extent indicated.

ARTICLE EIGHT

Discharge of Indenture, Defeasance

SECTION 8.01 Termination of the Issuer’s Obligations. The Issuer may terminate its obligations under the Notes and this Indenture, and this Indenture shall cease to be of further effect, except those obligations referred to in the penultimate paragraph of this Section 8.01, if:

(1) either

(A) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust) have been delivered to the Trustee for cancellation; or

25

(B) all Notes not theretofore delivered to the Trustee for cancellation (1) have become due and payable or (2) will become due and payable within one year, or are to be called for redemption within one year, under arrangements reasonably satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of maturity or redemption, as the case may be, together with irrevocable instructions from the Issuer directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be;

(2) the Issuer has paid all other sums payable under this Indenture by the Issuer, and

(3) the Issuer has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with.

In the case of clause (B) of this Section 8.01, and subject to the next sentence and notwithstanding the foregoing paragraph, the Issuer’s obligations in Sections 2.05, 2.06, 2.07, 2.08, 7.07, 8.05 and 8.06 shall survive until the Notes are no longer outstanding pursuant to the last paragraph of Section 2.08. After the Notes are no longer outstanding, the Issuer’s obligations in Sections 7.07, 8.05 and 8.06 shall survive.

After such delivery or irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Issuer’s obligations under the Notes and this Indenture except for those surviving obligations specified above.

SECTION 8.02 Legal Defeasance and Covenant Defeasance.

(a) The Issuer may, at its option and at any time, elect to have either paragraph (b) or (c) below be applied to all outstanding Notes upon compliance with the conditions set forth in Section 8.03.

(b) Upon the Issuer’s exercise under Section 8.02(a) hereof of the option applicable to this Section 8.02(b), the Issuer shall, subject to the satisfaction of the conditions set forth in Section 8.03, be deemed to have been discharged from its obligations with respect to all outstanding Notes on the date the conditions set forth below are satisfied (hereinafter, “Legal Defeasance”). For this purpose, Legal Defeasance means that the Issuer shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, which shall thereafter be deemed to be “outstanding” only for the purposes of Section 8.04 hereof and the other Sections of this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Indenture and this Indenture (and the Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder:

(i) the rights of Holders of outstanding Notes to receive, solely from the trust fund described in Section 8.04, and as more fully set forth in such Section 8.04, payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due;

(ii) the Issuer’s obligations with respect to such Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and Section 4.02 hereof;

(iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer’s obligations in connection therewith; and

(iv) the provisions of this Article Eight applicable to Legal Defeasance.

Subject to compliance with this Article Eight, the Issuer may exercise its option under this Section 8.02(b) notwithstanding the prior exercise of its option under Section 8.02(c).

(c) Upon the Issuer’s exercise under Section 8.02(a) hereof of the option applicable to this Section 8.02(c), the Issuer shall, subject to the satisfaction of the conditions set forth in Section 8.03, be released from its respective obligations under the covenants contained in Sections 4.03 (other than with respect

26

to the legal existence of the Issuer), 4.04, 4.07 through 4.11 and clause (3) of Section 5.01(a) with respect to the outstanding Notes on and after the date the conditions set forth in Section 8.03 are satisfied (hereinafter, “Covenant Defeasance”), and the Notes shall thereafter be deemed not “outstanding” for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed “outstanding” for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute an Event of Default under Section 6.01, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. In addition, upon the Issuer’s exercise under paragraph (a) hereof of the option applicable to this paragraph (c), subject to the satisfaction of the conditions set forth in Section 8.03, clauses (3), (4) and (5) of Section 6.01 shall not constitute Events of Default.

SECTION 8.03 Conditions to Legal Defeasance or Covenant Defeasance. The following shall be the conditions to the application of either Section 8.02(b) or 8.02(c) hereof to the outstanding Notes:

(1) the Issuer shall irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. Legal Tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient (without reinvestment), in the opinion of a nationally recognized firm of independent public accountants selected by the Issuer, to pay the principal of and accrued interest and premium, if any, on the Notes on the stated date for payment or on the Redemption Date of the Notes;

(2) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States of America confirming that:

(a) the Issuer has received from, or there has been published by the Internal Revenue Service, a ruling, or

(b) since the date of this Indenture, there has been a change in the applicable U.S. Federal income tax law,

in either case to the effect that, and based thereon this Opinion of Counsel shall confirm that the Holders and beneficial owners will not recognize income, gain or loss for U.S. Federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred, which Opinion of Counsel must be based upon a ruling of the Internal Revenue Service to the same effect or a change in applicable federal income tax law or related treasury regulations after the date of the Indenture, and

(c) an Opinion of Counsel to the effect that the defeasance trust does not constitute an “investment company” within the meaning of the Investment Company Act of 1940 and, after the passage of 91 days following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally;

(3) in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an Opinion of Counsel in the United States of America reasonably acceptable to the Trustee confirming that the Holders and beneficial owners will not recognize income, gain or loss for U.S. Federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;

(4) no Default shall have occurred and be continuing on the date of such deposit (other than a Default resulting from the borrowing of funds to be applied to such deposit and any similar and simultaneous deposit relating to other indebtedness and, in each case, the granting of liens on the deposited funds in connection therewith) or insofar as Events of Default due to certain events of bankruptcy, insolvency or reorganization in respect of us are concerned, during the period ending on the 91st day after the date of such deposit;

(5) the Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any other material agreement or instrument (other than this Indenture) to which the

27

Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound (other than any such Default or default relating to any indebtedness being defeased from any borrowing of funds to be applied to such deposit and any similar and simultaneous deposit relating to such indebtedness, and the granting of liens on the deposited funds in connection therewith);

(6) the Issuer shall have delivered to the Trustee an Officer’s Certificate stating that the deposit was not made by them with the intent of preferring the Holders over any other creditors of the Issuer or with the intent of defeating, hindering, delaying or defrauding any other of its creditors or others; and

(7) the Issuer shall have delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that the conditions provided for in, in the case of the Officer’s Certificate, clauses (1) through (6), as applicable, and, in the case of the Opinion of Counsel, clauses (2), if applicable, and/or (3) and (5) of this Section 8.03 have been complied with.

In the case of Legal Defeasance, the Issuer will be deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 91st day after it has made the deposit referred to above, and the provisions of this Indenture will cease to be applicable with respect to the Notes (except for, among other matters, certain obligations to register the transfer of or exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold funds for payment in trust) if the above conditions are fulfilled.

SECTION 8.04 Application of Trust Money. Subject to Section 8.05, the Trustee or Paying Agent shall hold in trust all U.S. Legal Tender and U.S. Government Obligations deposited with it pursuant to this Article Eight, and shall apply the deposited U.S. Legal Tender and the money from U.S. Government Obligations in accordance with this Indenture to the payment of the principal of and the interest on the Notes. The Trustee shall be under no obligation to invest said U.S. Legal Tender and U.S. Government Obligations, except as it may agree with the Issuer.

The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Legal Tender and U.S. Government Obligations deposited pursuant to Section 8.03 or the principal and interest received in respect thereof, other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes.

Anything in this Article Eight to the contrary notwithstanding, the Trustee shall deliver or pay to the Issuer from time to time upon the Issuer’s request any U.S. Legal Tender and U.S. Government Obligations held by it as provided in Section 8.03 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.

SECTION 8.05 Repayment to the Issuer. The Trustee and the Paying Agent shall pay to the Issuer upon request any money held by them for the payment of principal or interest that remains unclaimed for two years (or as otherwise provided under the governing law hereunder). After payment to the Issuer, Holders entitled to such money shall look to the Issuer for payment as general creditors unless an applicable law designates another Person.

SECTION 8.06 Reinstatement. If the Trustee or Paying Agent is unable to apply any U.S. Legal Tender and U.S. Government Obligations in accordance with this Article Eight by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuer’s obligations under this Indenture, and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article Eight until such time as the Trustee or Paying Agent is permitted to apply all such U.S. Legal Tender and U.S. Government Obligations in accordance with this Article Eight; provided that if the Issuer has made any payment of interest on, or principal of, any Notes because of the reinstatement of its obligations, the Issuer shall be subrogated to the rights of the Holders of such Notes to receive such payment from the U.S. Legal Tender and U.S. Government Obligations held by the Trustee or Paying Agent.

28

ARTICLE NINE

Amendments, Supplements and Waivers

SECTION 9.01 Without Consent of Holders.

(a) The Issuer and the Trustee, together, may amend or supplement this Indenture or the Notes without notice to or consent of any Holder:

(1) to cure any ambiguity, omission, defect or inconsistency;

(2) to provide for the assumption by a successor corporation of the obligations of the Issuer under this Indenture;

(3) to provide for uncertificated Notes in addition to or in place of certificated Notes;

(4) to add guarantees with respect to the Notes or to secure the Notes;

(5) to add to the covenants of the Issuer or a Subsidiary for the benefit of the Holders or to surrender any right or power conferred upon the Issuer or a Subsidiary;

(6) to make any change that does not adversely affect the rights of any Holder, as evidenced by an Officer’s Certificate delivered to the Trustee (upon which it may fully rely);

(7) to comply with any requirement of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act;

(8) to make any amendment to the provisions of this Indenture relating to the transfer and legending of Notes; provided, however, that (a) compliance with this Indenture as so amended would not result in Notes being transferred in violation of the Securities Act or any other applicable securities law and (b) such amendment does not materially and adversely affect the rights of Holders to transfer Notes;

(9) to conform the text of this Indenture or the Notes to any provision of the “Description of Notes” section of the Prospectus; to the extent that such provision in the “Description of notes” section of the Prospectus was intended to be a substantially verbatim recitation of a provision of this Indenture or the Notes, as evidenced by an Officer’s Certificate delivered to the Trustee (upon which it may fully rely);

(10) evidence and provide for the acceptance of appointment by a successor trustee, provided that the successor trustee is otherwise qualified and eligible to act as such under the terms of this Indenture;

(11) provide for a reduction in the minimum denominations of the Notes;

(12) comply with the rules of any applicable securities depositary; or

(13) to provide for the issuance of Additional Notes in accordance with the limitations set forth in this Indenture.

SECTION 9.02 With Consent of Holders.

(a) Subject to Section 6.07, the Issuer and the Trustee, together, with the consent of the Holder or Holders of not less than a majority in aggregate principal amount of the outstanding Notes may amend or supplement this Indenture or the Notes, without notice to any other Holders. Subject to Section 6.07, the Holder or Holders of not less than a majority in aggregate principal amount of the outstanding Notes may waive compliance with any provision of this Indenture or the Notes without notice to any other Holders.

(b) Notwithstanding Section 9.02(a), without the consent of each Holder affected, no amendment or waiver may:

(1) change the Stated Maturity of the principal of, or any installment of interest on, any Note;

29

(2) reduce the principal amount of, or premium, if any, or interest on, any Note;

(3) change the place or currency of payment of principal of, or premium, if any, or interest on, any Note;

(4) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note;

(5) reduce the above-stated percentages of outstanding Notes the consent of whose Holders is necessary to modify or amend this Indenture;

(6) waive a default in the payment of principal of, premium, if any, or interest on the Notes (except a rescission of the declaration of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes then outstanding and a waiver of the payment default that resulted from such acceleration, so long as all other existing Events of Default, other than the nonpayment of the principal of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived);

(7) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with Sections 6.02 and 6.04; or

(8) modify or change any provisions of this Indenture affecting the ranking of the Notes as to right of payment thereof in any manner adverse to the Holders of the Notes.

(c) It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver but it shall be sufficient if such consent approves the substance thereof.

(d) A consent to any amendment, supplement or waiver under this Indenture by any Holder given in connection with an exchange (in the case of an exchange offer) or a tender (in the case of a tender offer) of such Holder’s Notes shall not be rendered invalid by such tender or exchange.

(e) After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Issuer shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Issuer to give such notice to all Holders, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver.

SECTION 9.03 Compliance with the Trust Indenture Act. Every amendment, waiver or supplement of this Indenture or the Notes shall comply with the Trust Indenture Act as then in effect.

SECTION 9.04 Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder’s Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of his Note by notice to the Trustee or the Issuer received before the date on which the Trustee receives an Officer’s Certificate certifying that the Holders of the requisite principal amount of Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver.

The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall be at least 30 days prior to the first solicitation of such consent. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. The Issuer shall inform the Trustee in writing of the fixed record date if applicable.

After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (1) through (9) of Section 9.02(b), in which case, the amendment, supplement or

30

waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder’s Note; provided, however, that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of, and interest on, a Note, on or after the respective due dates therefor, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder.

SECTION 9.05 Notation on or Exchange of Notes. If an amendment, supplement or waiver changes the terms of a Note, the Issuer may require the Holder of the Note to deliver it to the Trustee. The Issuer shall provide the Trustee with an appropriate notation on the Note about the changed terms and cause the Trustee to return it to the Holder at the Issuer’s expense. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Note shall issue, and the Trustee shall authenticate, a new Note that reflects the changed terms. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver.

SECTION 9.06 Trustee To Sign Amendments, Etc. The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article Nine; provided, however, that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee’s own rights, duties or immunities under this Indenture. The Trustee shall receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officer’s Certificate each stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture, all conditions precedent thereto have been compiled with and constitutes legal, valid and binding obligations of the Issuer enforceable in accordance with its terms, subject to customary exceptions. Such Opinion of Counsel shall be at the expense of the Issuer.

ARTICLE TEN

Miscellaneous

SECTION 10.01 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required or deemed to be included in this Indenture by the Trust Indenture Act, such required or deemed provision shall control.

SECTION 10.02 Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by telex, by nationally recognized overnight courier service, by telecopy or email or registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

If to the Issuer:

Sotherly Hotels LP

c/o Sotherly Hotels Inc.

410 W. Francis Street

Williamsburg, Virginia 23185

Facsimile: (757) 564-8801

Attention: David R. Folsom, President and Chief Operating Officer

E-mail: davefolsom@sotherlyhotels.com

with copies (which will not constitute notice) to:

Baker & McKenzie LLP

815 Pennsylvania Avenue, N.W.

Washington, DC 20006

Facsimile: (202) 452-7074

Attention: Thomas J. Egan, Jr.

E-mail: thomas.egan@bakermckenzie.com

31

Bass, Berry & Sims PLC

1201 Pennsylvania Avenue, Suite 300

Washington, DC 20004

Facsimile: (202) 403-3658

Attention: Justin R. Salon

E-mail: jsalon@bassberry.com

if to the Trustee:

Wilmington Trust, National Association

Rodney Square North

1100 N. Market Street

Wilmington, DE 19890

Telephone: (302) 636-6432

Facsimile: (302) 636-4145

Attention: W. Thomas Morris II

Email: tmorris@wilmingtontrust.com

Each of the Issuer and the Trustee by written notice to each other such Person may designate additional or different addresses for notices to such Person. Any notice or communication to the Issuer and the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered; when replied to; when receipt is acknowledged, if telecopied; five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee); and next Business Day if by nationally recognized overnight courier service.

Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed.

Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

SECTION 10.03 Communications by Holders with Other Holders. Holders may communicate pursuant to Trust Indenture Act § 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Issuer, the Trustee, the Registrar and any other Person shall have the protection of Trust Indenture Act § 312(c).

SECTION 10.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Issuer to the Trustee to take any action under this Indenture, the Issuer shall furnish to the Trustee at the request of the Trustee:

(1) an Officer’s Certificate, in form and substance satisfactory to the Trustee, stating that, in the opinion of the signers, all conditions precedent to be performed or effected by the Issuer, if any, provided for in this Indenture relating to the proposed action have been complied with; and

(2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

SECTION 10.05 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture, other than the Officer’s Certificate required by Section 4.05, shall include:

(1) a statement that the Person making such certificate or opinion has read such covenant or condition;

(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

32

(3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with or satisfied; and

(4) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact, an Opinion of Counsel may rely on an Officer’s Certificate or certificates of public officials.

SECTION 10.06 Rules by Paying Agent or Registrar. The Paying Agent or Registrar may make reasonable rules and set reasonable requirements for their functions.

SECTION 10.07 Legal Holidays. If a Payment Date is not a Business Day, payment shall be made on the next succeeding day that is a Business Day, and no interest shall accrue for the intervening period. If a Record Date is not a Business Day, the Record Date shall be unaffected.

SECTION 10.08 Governing Law; Waiver of Jury Trial. This Indenture, the Notes will be governed by and construed in accordance with the laws of the State of New York. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE NOTES OR THE TRANSACTION CONTEMPLATED HEREBY.

SECTION 10.09 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Issuer or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.

SECTION 10.10 No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer in this Indenture, or in any of the Notes or because of the creation of any indebtedness represented hereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Issuer or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. Such waiver and release are part of the consideration for issuance of the Notes.

SECTION 10.11 Successors. All agreements of the Issuer in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor.

SECTION 10.12 Duplicate Originals. All parties may sign any number of copies of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement. Delivery of an executed counterpart of a signature page to this Indenture by facsimile, .pdf transmission, email or other electronic means shall be effective as delivery of a manually executed counterpart of this Indenture.

SECTION 10.13 Severability. To the extent permitted by applicable law, in case any one or more of the provisions in this Indenture or in the Notes shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law.

SECTION 10.14 U.S.A. Patriot Act. The parties hereto acknowledge that in accordance with Section 326 of the U.S.A. Patriot Act, the Trustee, like all financial institutions and in order to help fight the funding of terrorism and money laundering, is required to obtain, verify, and record information that identifies each person or legal entity that establishes a relationship or opens an account with the Trustee. The parties to this Indenture agree that they will provide the Trustee with such information as it may request in order for the Trustee to satisfy the requirements of the U.S.A. Patriot Act.

SECTION 10.15 Force Majeure. In no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or

33

military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions or utilities, communications or computer (software and hardware) services; it being understood that the Trustee shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.

[signature pages follow]

34

SIGNATURES

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed all as of the date first written above.

SOTHERLY HOTELS LP, as Issuer,
By:	Sotherly Hotels Inc., its general partner
By:	/s/ David R. Folsom
	Name:	David R. Folsom
	Title:	Chief Operating Officer
WILMINGTON TRUST, NATIONAL ASSOCIATION, as Trustee,
By:	/s/ W. Thomas Morris, II
	Name:	W. Thomas Morris, II
	Title:	Vice President

EXHIBIT A

[Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture]

SOTHERLY HOTELS LP

8.00% Senior Unsecured Notes due 2018

CUSIP No. 83600E 208

ISIN US83600E2081

No. [    ] $[        ]

SOTHERLY HOTELS LP, a Delaware limited partnership (the “Issuer”), for value received, promises to pay to Cede & Co., or its registered assigns, the principal sum of [            ] DOLLARS [or such other amount as is provided in a schedule attached hereto]* on September 30, 2018.

Interest Payment Dates: December 30, March 30, June 30 and September 30, commencing December 30, 2013.

Record Dates: December 15, March 15, June 15 and September 15.

Reference is made to the further provisions of this Note contained herein, which will for all purposes have the same effect as if set forth at this place.

IN WITNESS WHEREOF, the Issuer has caused this Note to be signed manually or by facsimile by its duly authorized officer.

Dated:

SOTHERLY HOTELS LP, as Issuer,
By:	Sotherly Hotels Inc., its general partner
	By:
		Name:
		Title:

* This language should be included only if the Note is issued in global form.

A-1

[FORM OF] TRUSTEE’S CERTIFICATE OF AUTHENTICATION

This is one of the 8.00% Senior Unsecured Notes due 2018 described in the within-mentioned Indenture.

Dated: September 30, 2013

WILMINGTON TRUST, NATIONAL ASSOCIATION,
as Trustee,
By:
	Authorized Signatory

A-2

(Reverse of Note)

8.00% Senior Unsecured Notes due 2018

Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated.

SECTION 1. Interest. Sotherly Hotels LP, a Delaware limited partnership (the “Issuer”), promise to pay interest on the principal amount of this Note at 8.00% per annum from September 30, 2013, until maturity. The Issuer will pay interest quarterly on December 30, March 30, June 30 and September 30 of each year, or if any such day is not a Business Day, on the next succeeding Business Day (each an “Interest Payment Date”), commencing December 30, 2013. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from September 30, 2013. The Issuer shall pay interest on overdue principal and premium, if any, from time to time on demand to the extent lawful at the interest rate applicable to the Notes; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

SECTION 2. Method of Payment. The Issuer will pay interest on the Notes to the Persons who are registered Holders at the close of business on the December 15, March 15, June 15 or September 15 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes will be issued in denominations of $25 and integral multiples of $25 in excess thereof. The Issuer shall pay principal, premium, if any, and interest on the Notes in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts (“U.S. Legal Tender”). Principal, premium, if any, and interest on the Notes will be payable at the office or agency of the Issuer maintained for such purpose except that, at the option of the Issuer, the payment of interest may be made by check mailed to the Holders at their respective addresses set forth in the register of Holders of Notes. Until otherwise designated by the Issuer, the Issuer’s office or agency will be the office of the Trustee maintained for such purpose.

SECTION 3. Paying Agent and Registrar. Initially, Wilmington Trust, National Association, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuer may change any Paying Agent or Registrar without notice to any Holder. Except as provided in the Indenture, the Issuer or any of its Subsidiaries may act in any such capacity.

SECTION 4. Indenture. The Issuer issued the Notes under an Indenture dated as of September 30, 2013 (“Indenture”) by and between the Issuer and the Trustee. Subject to the terms of the Indenture, the Issuer shall be entitled to issue Additional Notes pursuant to Section 2.01 of the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code §§ 77aaa-77bbbb) (the “Trust Indenture Act”). The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling.

SECTION 5. Optional Redemption. At any time on or after September 30, 2016, the Issuer will be entitled at its option to redeem all or any portion of the Notes at a redemption price equal to 101% of the principal amount of such Notes plus any accrued and unpaid interest to, but not including, the Redemption Date (subject to the right of each Holder on the relevant Record Date to receive interest due on the relevant Interest Payment Date).

SECTION 6. Notice of Redemption. Subject to Section 3.03 of the Indenture, notice of any optional redemption of any Notes will be delivered to holders (with a copy to the Trustee) at their addresses, as shown in the Notes register, not more than 60 nor less than 30 days prior to the date fixed for redemption. The notice of redemption will specify, among other items, the redemption price and the principal amount of the Notes held by the holder to be redeemed. No Notes of $25 or less shall be redeemed in part. On and after the Redemption Date interest ceases to accrue on Notes or portions thereof called for redemption subject to Section 3.04 of the Indenture.

A-3

SECTION 7. Mandatory Redemption or Sinking Fund Payment. Except as set forth in Section 9 herein, the Issuer shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes.

SECTION 8. Repurchase at Option of Holder. Upon the occurrence of a Change of Control Repurchase Event, and subject to certain conditions set forth in the Indenture, the Issuer will be required to offer to purchase all of the outstanding Notes at a purchase price equal to 102% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase.

SECTION 9. Denominations, Transfer Exchange. The Notes are in registered form without coupons in denominations of $25 and integral multiples of $25 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer and the Registrar are not required to transfer or exchange any Note selected for redemption. Also, the Issuer and the Registrar are not required to transfer or exchange any Notes for a period of 15 days before a selection of Notes to be redeemed.

SECTION 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes.

SECTION 11. Amendment, Supplement and Waiver. Subject to certain exceptions, the Indenture and the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, and any existing Default or compliance with any provision may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture and the Notes as provided in the Indenture.

SECTION 12. Defaults and Remedies. If an Event of Default occurs and is continuing (other than as specified in clauses (8) and (9) of Section 6.01 that occurs with respect to the Issuer), the Trustee or the Holders of not less than 25% in principal amount of the then outstanding Notes may declare the principal of, premium, if any, and accrued interest on the Notes to be due and payable immediately in accordance with the provisions of Section 6.02. Notwithstanding the foregoing, in the case of an Event of Default arising from clause (8) or (9) of Section 6.01, with respect to the Issuer, all outstanding Notes will become due and payable without further action or notice. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default if it determines that withholding notice is in their interest in accordance with Section 7.05. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default and its consequences under the Indenture except a Default in the payment of principal of, or interest on, any Note as specified in Section 6.01(1) and (2).

SECTION 13. Restrictive Covenants. The Indenture contains certain covenants as set forth in Article Four of the Indenture.

SECTION 14. No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Issuer in the Indenture, or in any of the Notes or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Issuer or of any successor Person thereof. Each Holder, by accepting the Notes, waives and releases all such liability. Such waiver and release are part of the consideration for issuance of the Notes.

SECTION 15. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.

SECTION 16. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entirety), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

A-4

SECTION 17. CUSIP and ISIN Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuer has caused CUSIP and ISIN numbers to be printed on the Notes and the Trustee may use CUSIP or ISIN numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon.

SECTION 18. Registered Form. The Notes are in registered form within meaning of Treasury Regulations Section 1.871-14(c)(1)(i) for U.S. federal income and withholding tax purposes.

SECTION 19. Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of New York.

The Issuer will furnish to any Holder upon written request and without charge a copy of the Indenture.

A-5

ASSIGNMENT FORM

I or we assign and transfer this Note to

Print or type name, address and zip code of assignee or transferee)

(Insert Social Security or other identifying number of assignee or transferee)

and irrevocably appoint              agent to transfer this Note on the books of the Issuer. The agent may substitute another to act for him.

Dated:	Signed:
	(Sign exactly as name appears on the other side of this Note)
Signature Guarantee:
	Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

A-6

OPTION OF HOLDER TO ELECT PURCHASE

This undersigned Holder elects to have this Note purchased by the Issuer pursuant to Section 4.06 of the Indenture:

If you want to elect to have only part of this Note purchased by the Issuer pursuant to Section 4.06 of the Indenture, state the amount (in denominations of $25 and integral multiples of $25 in excess thereof): $

Dated:	Signed:
	(Sign exactly as name appears on the other side of this Note)
Signature Guarantee:
	Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee)

A-7

SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTES^a

The following exchanges of a part of this Global Note for an interest in another Global Note or for a Physical Note, or exchanges of a part of another Global Note or Physical Note for an interest in this Global Note, have been made:

Date of
Exchange Amount of
decrease in
Principal Amount
of The Global Note Amount of increase
in Principal Amount
of this
Global Note Principal Amount
of this Global Note
following such
decrease
(or increase) Signature of
authorized signatory
of Trustee of Note
custodian

^a  This schedule should be included only if the Note is issued in global form.

A-8

EXHIBIT B

FORM OF LEGEND

Each Global Note authenticated and delivered hereunder shall bear the following legend:

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.14 OF THE INDENTURE.

THIS NOTE IS IN REGISTERED FORM WITHIN THE MEANING OF TREASURY REGULATIONS SECTION 1.871-14(c)(1)(i) FOR U.S. FEDERAL INCOME AND WITHHOLDING TAX PURPOSES.

B-1

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, Andrew M. Sims, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, Anthony E. Domalski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013

By:	/s/ Anthony E. Domalski
Name:	Anthony E. Domalski
Title:	Chief Financial Officer

EX-31.3

EXHIBIT 31.3

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, Andrew M. Sims, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	Chief Executive Officer Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

EX-31.4

EXHIBIT 31.4

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, Anthony E. Domalski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels LP;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2013

By:	/s/ Anthony E. Domalski
Name:	Anthony E. Domalski
Title:	Chief Financial Officer Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotherly Hotels Inc. (the “Corporation”) on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew M. Sims, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Date: November 7, 2013

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotherly Hotels Inc. (the “Corporation”) on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony E. Domalski, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Date: November 7, 2013

By:	/s/ Anthony E. Domalski
Name:	Anthony E. Domalski
Title:	Chief Financial Officer

EX-32.3

EXHIBIT 32.3

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotherly Hotels LP (the “Operating Partnership”) on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew M. Sims, Chief Executive Officer of Sotherly Hotels Inc., sole general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.

Date: November 7, 2013

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	Chief Executive Officer Sotherly Hotels Inc., sole general partner of Sotherly Hotels LP

EX-32.4

EXHIBIT 32.4

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sotherly Hotels LP (the “Operating Partnership”) on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony E. Domalski, Chief Financial Officer of Sotherly Hotels Inc., sole general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.

Date: November 7, 2013

By:	/s/ Anthony E. Domalski
Name:	Anthony E. Domalski
Title:	Chief Financial Officer Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

XML

Retirement Plan

9 Months Ended

Sep. 30, 2013

Compensation And Retirement Disclosure [Abstract]

Retirement Plan

10. Retirement Plan

We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions and which requires that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All employer matching funds vest immediately in accordance with the “safe harbor” provision. Company contributions to the plan totaled $6,200 and $42,379 for the three months and nine months ended September 30, 2013, respectively, and $12,308 and $48,113 for the three months and nine months ended September 30, 2012, respectively.

XML

Earnings (Loss) Per Share and Unit - Earnings Per Share, Basic and Diluted (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Numerator
Net loss attributable to the Company for basic computation	$ (1,649,722)	$ (1,615,020)	$ (2,934,048)	$ (5,563,029)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest	(37,847)	(27,738)	(56,319)	(74,373)
Net loss attributable to the Company for dilutive computation	$ (1,687,569)	$ (1,642,758)	$ (2,990,367)	$ (5,637,402)
Denominator
Weighted average number of common shares outstanding for basic computation	10,181,927	9,999,786	10,137,021	9,994,246
Dilutive effect of warrants	1,021,229	801,604	951,855	608,994
Weighted average number common shares outstanding for dilutive computation	11,203,156	10,801,390	11,088,876	10,603,240
Basic net loss per share	$ (0.16)	$ (0.16)	$ (0.29)	$ (0.56)
Diluted net loss per share	$ (0.15)	$ (0.15)	$ (0.27)	$ (0.53)

XML

Consolidated Statements of Operations (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
REVENUE
Rooms department	$ 15,290,818	$ 15,580,600	$ 47,692,797	$ 47,281,173
Food and beverage department	5,121,631	5,071,821	15,947,997	16,247,828
Other operating departments	1,046,188	1,118,792	3,258,298	3,379,880
Total revenue	21,458,637	21,771,213	66,899,092	66,908,881
Hotel operating expenses
Rooms department	4,300,441	4,383,150	12,877,637	12,803,795
Food and beverage department	3,358,603	3,456,698	10,273,994	10,812,234
Other operating departments	121,715	125,023	347,739	365,961
Indirect	8,438,237	8,484,381	25,009,858	25,127,080
Total hotel operating expenses	16,218,996	16,449,252	48,509,228	49,109,070
Depreciation and amortization	2,038,000	2,150,007	6,121,871	6,525,561
Corporate general and administrative	866,551	978,473	3,084,023	3,073,008
Total operating expenses	19,123,547	19,577,732	57,715,122	58,707,639
NET OPERATING INCOME	2,335,090	2,193,481	9,183,970	8,201,242
Other income (expense)
Interest expense	(3,899,128)	(2,442,620)	(8,912,319)	(10,014,982)
Interest income	3,579	4,133	11,139	11,985
Equity income (loss) in joint venture	(122,637)	(162,463)	434,479	15,251
Unrealized loss on warrant derivative	(340,750)	(1,659,750)	(3,020,960)	(4,344,650)
Net loss before income taxes	(2,023,846)	(2,067,219)	(2,303,691)	(6,131,154)
Provision for income tax	(93,962)	(27,979)	(1,468,835)	(1,090,700)
Net loss	(2,117,808)	(2,095,198)	(3,772,526)	(7,221,854)
Add: Net loss attributable to the noncontrolling interest	468,086	480,178	838,478	1,658,825
Net loss per unit
NET LOSS ATTRIBUTABLE TO THE COMPANY	(1,649,722)	(1,615,020)	(2,934,048)	(5,563,029)
Weighted average number of units outstanding
Basic	13,038,125	12,974,647	13,037,422	12,974,399
Diluted	14,059,354	13,776,251	13,989,277	13,583,393
Net loss per share attributable to the Company
Basic	$ (0.16)	$ (0.16)	$ (0.29)	$ (0.56)
Diluted	$ (0.15)	$ (0.15)	$ (0.27)	$ (0.53)
Weighted average number of shares outstanding
Basic	10,181,927	9,999,786	10,137,021	9,994,246
Diluted	11,203,156	10,801,390	11,088,876	10,603,240
Sotherly Hotels LP [Member]
REVENUE
Rooms department	15,290,818	15,580,600	47,692,797	47,281,173
Food and beverage department	5,121,631	5,071,821	15,947,997	16,247,828
Other operating departments	1,046,188	1,118,792	3,258,298	3,379,880
Total revenue	21,458,637	21,771,213	66,899,092	66,908,881
Hotel operating expenses
Rooms department	4,300,441	4,383,150	12,877,637	12,803,795
Food and beverage department	3,358,603	3,456,698	10,273,994	10,812,234
Other operating departments	121,715	125,023	347,739	365,961
Indirect	8,438,237	8,484,381	25,009,858	25,127,080
Total hotel operating expenses	16,218,996	16,449,252	48,509,228	49,109,070
Depreciation and amortization	2,038,000	2,150,007	6,121,871	6,525,561
Corporate general and administrative	866,551	978,473	3,084,023	3,073,008
Total operating expenses	19,123,547	19,577,732	57,715,122	58,707,639
NET OPERATING INCOME	2,335,090	2,193,481	9,183,970	8,201,242
Other income (expense)
Interest expense	(3,899,128)	(2,442,620)	(8,912,319)	(10,014,982)
Interest income	3,579	4,133	11,139	11,985
Equity income (loss) in joint venture	(122,637)	(162,463)	434,479	15,251
Unrealized loss on warrant derivative	(340,750)	(1,659,750)	(3,020,960)	(4,344,650)
Net loss before income taxes	(2,023,846)	(2,067,219)	(2,303,691)	(6,131,154)
Provision for income tax	(93,962)	(27,979)	(1,468,835)	(1,090,700)
Net loss	$ (2,117,808)	$ (2,095,198)	$ (3,772,526)	$ (7,221,854)
Net loss per unit
Basic	$ (0.16)	$ (0.16)	$ (0.29)	$ (0.56)
Diluted	$ (0.15)	$ (0.15)	$ (0.27)	$ (0.53)
Weighted average number of units outstanding
Basic	13,038,125	12,974,647	13,037,422	12,974,399
Diluted	14,059,354	13,776,251	13,989,277	13,583,393

XML

Acquisition of Hotel Properties

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Acquisition of Hotel Properties

3. Acquisition of Hotel Properties

There were no new acquisitions during the nine months ended September 30, 2013.

XML

Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Derivative Instruments Measured at Fair Value

The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2013
Warrant	$	—	$	(7,990,712	)	$	—
December 31, 2012
Warrant		—		(4,969,752	)		—

XML

Unconsolidated Joint Venture

9 Months Ended

Sep. 30, 2013

Equity Method Investments And Joint Ventures [Abstract]

Unconsolidated Joint Venture

11. Unconsolidated Joint Venture

We own a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Investment in hotel properties, net	$	64,745,596	$	65,899,055
Cash and cash equivalents		3,332,624		3,298,009
Accounts receivable		104,078		301,921
Prepaid expenses, inventory and other assets		830,289		1,409,924
TOTAL ASSETS	$	69,012,587	$	70,908,909
LIABILITIES
Mortgage loans, net	$	32,600,000	$	33,100,000
Accounts payable and other accrued liabilities		2,794,650		2,995,271
Advance deposits		324,331		257,950
TOTAL LIABILITIES		35,718,981		36,353,221
TOTAL MEMBERS’ EQUITY		33,293,606		34,555,688
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	69,012,587	$	70,908,909

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	2,549,657		$	2,285,771		$	11,047,955		$	9,748,930
Food and beverage department		476,836			509,019			1,869,821			1,864,182
Other operating departments		316,895			337,036			1,102,859			953,643
Total revenue		3,343,388			3,131,826			14,020,635			12,566,755
Expenses
Hotel operating expenses
Rooms department		707,671			647,369			2,332,407			2,130,035
Food and beverage department		433,192			425,006			1,474,361			1,489,930
Other operating departments		145,219			141,882			435,108			484,500
Indirect		1,625,053			1,551,360			5,300,822			5,027,190
Total hotel operating expenses		2,911,135			2,765,617			9,542,698			9,131,655
Depreciation and amortization		560,951			542,683			1,634,906			1,825,653
General and administrative		27,180			11,987			85,023			62,958
Total operating expenses		3,499,266			3,320,287			11,262,627			11,020,266
Net operating income (loss)		(155,878	)		(188,461	)		2,758,008			1,546,489
Interest expense		(437,605	)		(440,161	)		(1,305,327	)		(1,315,745	)
Unrealized gain (loss) on hedging activities		102,936			(21,232	)		285,238			(169,741	)
Net income (loss)	$	(490,547	)	$	(649,854	)	$	1,737,919		$	61,003

XML

Unconsolidated Joint Venture - Summarized Financial Information of Investment (Detail) (Equity Method Investments [Member], USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Equity Method Investments [Member]
ASSETS
Investment in hotel properties, net	$ 64,745,596		$ 64,745,596		$ 65,899,055
Cash and cash equivalents	3,332,624		3,332,624		3,298,009
Accounts receivable	104,078		104,078		301,921
Prepaid expenses, inventory and other assets	830,289		830,289		1,409,924
TOTAL ASSETS	69,012,587		69,012,587		70,908,909
LIABILITIES
Mortgage loans, net	32,600,000		32,600,000		33,100,000
Accounts payable and other accrued liabilities	2,794,650		2,794,650		2,995,271
Advance deposits	324,331		324,331		257,950
TOTAL LIABILITIES	35,718,981		35,718,981		36,353,221
TOTAL MEMBERS' EQUITY	33,293,606		33,293,606		34,555,688
TOTAL LIABILITIES AND MEMBERS' EQUITY	69,012,587		69,012,587		70,908,909
Revenue
Rooms department	2,549,657	2,285,771	11,047,955	9,748,930
Food and beverage department	476,836	509,019	1,869,821	1,864,182
Other operating departments	316,895	337,036	1,102,859	953,643
Total revenue	3,343,388	3,131,826	14,020,635	12,566,755
Hotel operating expenses
Rooms department	707,671	647,369	2,332,407	2,130,035
Food and beverage department	433,192	425,006	1,474,361	1,489,930
Other operating departments	145,219	141,882	435,108	484,500
Indirect	1,625,053	1,551,360	5,300,822	5,027,190
Total hotel operating expenses	2,911,135	2,765,617	9,542,698	9,131,655
Depreciation and amortization	560,951	542,683	1,634,906	1,825,653
General and administrative	27,180	11,987	85,023	62,958
Total operating expenses	3,499,266	3,320,287	11,262,627	11,020,266
Net operating income (loss)	(155,878)	(188,461)	2,758,008	1,546,489
Interest expense	(437,605)	(440,161)	(1,305,327)	(1,315,745)
Unrealized gain (loss) on hedging activities	102,936	(21,232)	285,238	(169,741)
Net income (loss)	$ (490,547)	$ (649,854)	$ 1,737,919	$ 61,003

XML

Debt - Schedule of Mortgage Debt Obligations on Hotels (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Debt Instrument [Line Items]
Mortgage loans	$ 139,784,729	$ 135,674,432
Crowne Plaza Hampton Marina [Member]
Debt Instrument [Line Items]
Amortization Provisions	16,000
Mortgage [Member]
Debt Instrument [Line Items]
Mortgage loans	139,784,729	135,674,432
Mortgage [Member] | Crowne Plaza Hampton Marina [Member]
Debt Instrument [Line Items]
Mortgage loans	5,951,500	7,559,625
Prepayment Penalties	None
Maturity Date	Jun. 30, 2014
Amortization Provisions	16,000
Excess Interest rate over LIBOR on mortgage debt	4.55%
Mortgage [Member] | Crowne Plaza Jacksonville Riverfront [Member]
Debt Instrument [Line Items]
Mortgage loans	13,853,898	14,135,234
Prepayment Penalties	None
Maturity Date	Jul. 10, 2015
Amortization schedule for level payments of principal and interest	25 years
Excess Interest rate over LIBOR on mortgage debt	3.00%
Mortgage [Member] | Crowne Plaza Tampa Westshore [Member]
Debt Instrument [Line Items]
Mortgage loans	13,672,037	13,872,077
Prepayment Penalties	None
Maturity Date	Jun. 18, 2017
Amortization schedule for level payments of principal and interest	25 years
Interest rate applicable to the mortgage loan	5.60%
Mortgage [Member] | DoubleTree by Hilton Brownstone - University [Member]
Debt Instrument [Line Items]
Mortgage loans	15,582,552	7,816,867
Maturity Date	Aug. 01, 2018
Amortization schedule for level payments of principal and interest	30 years
Interest rate applicable to the mortgage loan	4.78%
Mortgage [Member] | Hilton Philadelphia Airport [Member]
Debt Instrument [Line Items]
Mortgage loans	28,927,294	29,502,666
Prepayment Penalties	None
Maturity Date	Aug. 30, 2014
Amortization schedule for level payments of principal and interest	25 years
Excess Interest rate over LIBOR on mortgage debt	3.00%
Mortgage [Member] | Hilton Savannah DeSoto [Member]
Debt Instrument [Line Items]
Mortgage loans	21,705,310	22,051,314
Prepayment Penalties	Yes
Maturity Date	Aug. 01, 2017
Amortization schedule for level payments of principal and interest	25 years
Interest rate applicable to the mortgage loan	6.06%
Mortgage [Member] | Hilton Wilmington Riverside [Member]
Debt Instrument [Line Items]
Mortgage loans	21,046,409	21,416,922
Prepayment Penalties	Yes
Maturity Date	Apr. 01, 2017
Amortization schedule for level payments of principal and interest	25 years
Interest rate applicable to the mortgage loan	6.21%
Mortgage [Member] | Holiday Inn Laurel West [Member]
Debt Instrument [Line Items]
Mortgage loans	7,182,558	7,300,465
Prepayment Penalties	Yes
Maturity Date	Aug. 05, 2021
Amortization schedule for level payments of principal and interest	25 years
Interest rate applicable to the mortgage loan	5.25%
Mortgage [Member] | Sheraton Louisville Riverside [Member]
Debt Instrument [Line Items]
Mortgage loans	$ 11,863,171	$ 12,019,262
Maturity Date	Jan. 06, 2017
Amortization schedule for level payments of principal and interest	25 years
Interest rate applicable to the mortgage loan	6.24%

XML

Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2013

Commitments And Contingencies Disclosure [Abstract]

Schedule of Minimum Future Lease Payments

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

September 30, 2014	$	426,523
September 30, 2015		382,240
September 30, 2016		329,482
September 30, 2017		121,186
September 30, 2018		86,953
Total future minimum lease payments	$	1,346,384

XML

Debt (Tables)

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

Schedule of Mortgage Debt Obligations on Hotels

The following table sets forth our mortgage debt obligations on our hotels as of September 30, 2013:

Property	Balance Outstanding as of				Prepayment Penalties			Maturity Date			Amortization Provisions			Interest Rate
	September 30, 2013		December 31, 2012
	(unaudited)
Crowne Plaza Hampton Marina	$	5,951,500	$	7,559,625		None			06/30/2014	(1)	$	16,000	(2)		LIBOR plus 4.55	%(3)
Crowne Plaza Jacksonville Riverfront		13,853,898		14,135,234		None			07/10/2015	(4)		25 years			LIBOR plus 3.00	%
Crowne Plaza Tampa Westshore		13,672,037		13,872,077		None			06/18/2017			25 years			5.60	%
DoubleTree by Hilton Brownstone – University		15,582,552		7,816,867			(5)		08/01/2018			30 years			4.78	%
Hilton Philadelphia Airport		28,927,294		29,502,666		None			08/30/2014	(6)		25 years			LIBOR plus 3.00	%(7)
Hilton Savannah DeSoto		21,705,310		22,051,314		Yes	(8)		08/01/2017			25 years	(9)		6.06	%
Hilton Wilmington Riverside		21,046,409		21,416,922		Yes	(8)		04/01/2017			25 years	(10)		6.21	%
Holiday Inn Laurel West		7,182,558		7,300,465		Yes	(11)		08/05/2021			25 years			5.25	%(12)
Sheraton Louisville Riverside		11,863,171		12,019,262			(5)		01/06/2017			25 years			6.24	%
Total	$	139,784,729	$	135,674,432

(1) The note provides that the mortgage can be extended until June 30, 2015 if certain conditions have been satisfied.

(2) The Company is required to make monthly principal payments of $16,000.

(3) The note bears a minimum interest rate of 5.00%.

(4) The note provides that the mortgage can be extended until July 10, 2016 if certain conditions have been satisfied.

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

(6) The note provides that the mortgage can be extended until March 1, 2017 if certain conditions have been satisfied.

(7) The note bears a minimum interest rate of 3.50%.

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

(9) The note provided for payments of interest only until August 1, 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures on August 1, 2017.

(10) The note provided for payments of interest only until April 1, 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in April 1, 2017.

(11) Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

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

Schedule of Future Mortgage Debt Maturities

 Total mortgage debt maturities as of September 30, 2013 without respect to any additional loan extensions for the following twelve-month periods were as follows:

September 30, 2014	$	37,168,940
September 30, 2015		15,487,777
September 30, 2016		2,134,026
September 30, 2017		63,932,193
September 30, 2018		14,798,936
Thereafter		6,262,857
Total future maturities	$	139,784,729

XML

Retirement Plan - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Compensation And Retirement Disclosure [Abstract]
Employer contribution for first 3% of employee contributions			100.00%
Employer contribution for next 2% of employee contributions			50.00%
Percentage of first specified employee contributions			3.00%
Percentage of next specified employee contributions			2.00%
Company contribution for retirement plan	$ 6,200	$ 12,308	$ 42,379	$ 48,113

XML

Summary of Significant Accounting Policies - Derivative Instruments Measured at Fair Value (Detail) (Warrant [Member], USD $)	Sep. 30, 2013	Dec. 31, 2012
Level 1 [Member]
Derivatives, Fair Value [Line Items]
Derivative instruments measured at fair value
Level 2 [Member]
Derivatives, Fair Value [Line Items]
Derivative instruments measured at fair value	(7,990,712)	(4,969,752)
Level 3 [Member]
Derivatives, Fair Value [Line Items]
Derivative instruments measured at fair value

XML

Debt - Schedule of Future Mortgage Debt Maturities (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Debt Disclosure [Abstract]
September 30, 2014	$ 37,168,940
September 30, 2015	15,487,777
September 30, 2016	2,134,026
September 30, 2017	63,932,193
September 30, 2018	14,798,936
Thereafter	6,262,857
Total future maturities	$ 139,784,729	$ 135,674,432

XML

Indirect Hotel Operating Expenses - Summary of Indirect Hotel Operating Expenses (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	$ 8,438,237	$ 8,484,381	$ 25,009,858	$ 25,127,080
General and Administrative [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	1,768,605	1,747,412	5,328,181	5,171,402
Sales and Marketing [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	1,836,140	1,765,457	5,549,907	5,411,702
Repairs and Maintenance [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	1,199,038	1,174,889	3,451,004	3,489,280
Utilities [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	1,195,522	1,278,568	3,221,738	3,444,575
Franchise Fees [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	756,311	741,205	2,350,664	2,229,515
Management Fees including Incentive [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	655,359	703,537	2,070,799	2,160,543
Insurance [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	358,688	340,513	1,075,083	1,001,717
Property Taxes [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	608,300	688,083	1,776,710	2,045,141
Other Expenses [Member]
Component Of Operating Cost And Expense [Line Items]
Total indirect hotel operating expenses	$ 60,274	$ 44,717	$ 185,772	$ 173,205

XML

Earnings (Loss) Per Share and Unit (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share, Basic and Diluted

Earnings (Loss) Per Share – The computation of basic and diluted earnings per share is presented below.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss attributable to the Company for basic computation	$	(1,649,722	)	$	(1,615,020	)	$	(2,934,048	)	$	(5,563,029	)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest		(37,847	)		(27,738	)		(56,319	)		(74,373	)
Net loss attributable to the Company for dilutive computation	$	(1,687,569	)	$	(1,642,758	)	$	(2,990,367	)	$	(5,637,402	)
Denominator
Weighted average number of common shares outstanding for basic computation		10,181,927			9,999,786			10,137,021			9,994,246
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number common shares outstanding for dilutive computation		11,203,156			10,801,390			11,088,876			10,603,240
Basic net loss per share	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per share	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)

Computation of Basic and Diluted Earnings (loss) Per Unit

Earnings (Loss) Per Unit – The computation of basic and diluted earnings (loss) per unit is presented below.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Denominator
Weighted average number of units outstanding for basic computation		13,038,125			12,974,647			13,037,422			12,974,399
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number of units outstanding for dilutive computation		14,059,354			13,776,251			13,989,277			13,583,393
Basic net loss per unit	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per unit	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)

XML

Commitments and Contingencies - Schedule of Minimum Future Lease Payments (Detail) (USD $)	Sep. 30, 2013
Operating Leases Future Minimum Payments Due [Abstract]
September 30, 2014	$ 426,523
September 30, 2015	382,240
September 30, 2016	329,482
September 30, 2017	121,186
September 30, 2018	86,953
Total future minimum lease payments	$ 1,346,384

XML

Investment in Hotel Properties (Tables)

9 Months Ended

Sep. 30, 2013

Real Estate [Abstract]

Schedule of Hotel Properties

Investment in hotel properties as of September 30, 2013 and December 31, 2012 consisted of the following:

	September 30, 2013			December 31, 2012
	(unaudited)
Land and land improvements	$	19,578,692		$	19,429,571
Buildings and improvements		183,246,701			181,209,101
Furniture, fixtures and equipment		31,186,483			33,716,700
		234,011,876			234,355,372
Less: accumulated depreciation		(59,987,511	)		(57,927,468	)
	$	174,024,365		$	176,427,904

XML

Consolidated Statements of Cash Flows (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net loss	$ (3,772,526)	$ (7,221,854)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	6,121,871	6,525,561
Equity income in joint venture	(434,479)	(15,251)
Unrealized (gain) loss on warrant derivative	3,020,960	4,344,650
Amortization of deferred financing costs	1,316,697	1,804,221
Paid-in-kind interest	186,293	316,386
Charges related to equity-based compensation	171,460	110,400
Changes in assets and liabilities:
Restricted cash	(395,207)	276,227
Accounts receivable	(479,434)	(752,263)
Prepaid expenses, inventory and other assets	(350,217)	(318,123)
Deferred income taxes	1,411,523	1,194,851
Accounts payable and other accrued liabilities	938,320	1,401,593
Advance deposits	263,618	602,154
Due from affiliates	(1,470)	17,534
Net cash provided by operating activities	7,997,409	8,286,086
Cash flows from investing activities:
Improvements and additions to hotel properties	(4,254,358)	(2,517,705)
Distributions from joint venture	750,000	250,000
Funding of restricted cash reserves	(1,554,466)	(1,552,843)
Proceeds of restricted cash reserves	1,104,440	1,215,972
Net cash used in investing activities	(3,954,384)	(2,604,576)
Cash flows from financing activities:
Proceeds of mortgage debt	7,187,287	44,000,000
Proceeds of unsecured notes	27,600,000
Redemption of Series A Preferred Interest	(14,413,943)	(11,513,602)
Payments on credit facility		(25,537,290)
Pledge of cash collateral	(662,075)
Dividends and distributions paid	(1,302,198)	(778,038)
Redemption of units in operating partnership	(32,900)	(36,180)
Payment of deferred financing costs	(1,677,913)	(1,102,397)
Payments on mortgage debt and loans	(4,131,990)	(6,648,775)
Net cash provided by (used in) financing activities	12,566,268	(1,616,282)
Net increase (decrease) in cash and cash equivalents	16,609,293	4,065,228
Cash and cash equivalents at the beginning of the period	7,175,716	4,409,959
Cash and cash equivalents at the end of the period	23,785,009	8,475,187
Supplemental disclosures:
Cash paid during the period for interest	7,761,110	8,292,859
Cash paid during the period for income taxes	143,138	115,284
Sotherly Hotels LP [Member]
Cash flows from operating activities:
Net loss	(3,772,526)	(7,221,854)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	6,121,871	6,525,561
Equity income in joint venture	(434,479)	(15,251)
Unrealized (gain) loss on warrant derivative	3,020,960	4,344,650
Amortization of deferred financing costs	1,316,697	1,804,221
Paid-in-kind interest	186,293	316,386
Charges related to equity-based compensation	171,460	110,400
Changes in assets and liabilities:
Restricted cash	(395,207)	276,227
Accounts receivable	(479,434)	(752,263)
Prepaid expenses, inventory and other assets	(350,217)	(318,123)
Deferred income taxes	1,411,523	1,194,851
Accounts payable and other accrued liabilities	938,320	1,401,593
Advance deposits	263,618	602,154
Due from affiliates	(1,470)	17,534
Net cash provided by operating activities	7,997,409	8,286,086
Cash flows from investing activities:
Improvements and additions to hotel properties	(4,254,358)	(2,517,705)
Distributions from joint venture	750,000	250,000
Funding of restricted cash reserves	(1,554,466)	(1,552,843)
Proceeds of restricted cash reserves	1,104,440	1,215,972
Net cash used in investing activities	(3,954,384)	(2,604,576)
Cash flows from financing activities:
Proceeds of mortgage debt	7,187,287	44,000,000
Proceeds of unsecured notes	27,600,000
Redemption of Series A Preferred Interest	(14,413,943)	(11,513,602)
Payments on credit facility		(25,537,290)
Pledge of cash collateral	(662,075)
Dividends and distributions paid	(1,302,198)	(778,038)
Redemption of units in operating partnership	(32,900)	(36,180)
Payment of deferred financing costs	(1,677,913)	(1,102,397)
Payments on mortgage debt and loans	(4,131,990)	(6,648,775)
Net cash provided by (used in) financing activities	12,566,268	(1,616,282)
Net increase (decrease) in cash and cash equivalents	16,609,293	4,065,228
Cash and cash equivalents at the beginning of the period	7,175,716	4,409,959
Cash and cash equivalents at the end of the period	23,785,009	8,475,187
Supplemental disclosures:
Cash paid during the period for interest	7,761,110	8,292,859
Cash paid during the period for income taxes	$ 143,138	$ 115,284

XML

Organization and Description of Business

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Organization and Description of Business

1. Organization and Description of Business

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

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

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2013, was approximately 78.3% owned by the Company, and its subsidiaries, lease the hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC (“MHI Hotels Services”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

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

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

On March 5, 2012, we obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport. The mortgage bears interest at a rate of 30-day LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is August 30, 2014, with an extension option until March 1, 2017, contingent upon the extension or acceptable replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish our indebtedness under the then-existing credit facility, for working capital, and to prepay a portion of our indebtedness under our then-existing agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which we, at such time, had the right to borrow up to $10.0 million on or before December 31, 2011 (the “Bridge Financing”). With this transaction, our syndicated credit facility was extinguished and the Crowne Plaza Tampa Westshore hotel property was released from such mortgage encumbrance.

On June 15, 2012, we entered into an amendment of our Bridge Financing that provided, subject to a $1.5 million prepayment which we made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property.

On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Company’s Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”) to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.

On June 18, 2012, we obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in Tampa, Florida. The mortgage bears interest at a rate of 5.60% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is June 18, 2017. Proceeds of the mortgage were used to pay the outstanding indebtedness under the then-existing Bridge Financing and to make a special distribution from the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock referenced above.

On June 22, 2012, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until September 30, 2013. Under the terms of the extension, we were required to make monthly principal payments of $16,000 and additional quarterly principal payments to the lender of $200,000 each on July 1, 2012, October 1, 2012, January 1, 2013 and April 1, 2013. Interest payable monthly pursuant to the mortgage remained at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum.

On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. The mortgage bears interest at a rate of LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The maturity date is July 10, 2015, but may be extended for an additional year pursuant to certain terms and conditions. The mortgage also contains an “earn-out” feature which allows for an additional draw of up to $3.0 million during the term of the loan contingent upon satisfaction of certain debt service coverage and loan-to-value covenants. Proceeds of the mortgage were used to repay the existing mortgage indebtedness and to pay closing costs.

On March 22, 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University hotel property with our existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loan’s principal amount was increased to $10.0 million, the prepayment penalty was removed and the interest rate was fixed at 5.25%; if the mortgage loan is extended, it will adjust to a rate of 3.00% plus the current 5-year U.S. Treasury bill rate of interest, with an interest rate floor of 5.25%. The remaining original terms of the agreement remained the same.

On March 26, 2013, we used the net proceeds of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends.

On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to approximately $6.0 million and are required to continue to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage will remain at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum. Pursuant to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015.

On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone – University in Raleigh, North Carolina. The mortgage bears interest at a rate of 4.78% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule. The maturity date is August 1, 2018. Approximately $0.7 million of the loan proceeds were placed into a restricted reserve which can be disbursed to us upon satisfaction of certain financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing indebtedness, to pay closing costs, to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.

On September 30, 2013, the Operating Partnership issued 8.0% senior unsecured notes (the “Notes”) in the aggregate amount of $27.6 million. The indenture requires quarterly payments of interest and matures on September 30, 2018. The proceeds were used to make a special distribution to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million.

XML

Investment in Hotel Properties

9 Months Ended

Sep. 30, 2013

Real Estate [Abstract]

Investment in Hotel Properties

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2013 and December 31, 2012 consisted of the following:

	September 30, 2013			December 31, 2012
	(unaudited)
Land and land improvements	$	19,578,692		$	19,429,571
Buildings and improvements		183,246,701			181,209,101
Furniture, fixtures and equipment		31,186,483			33,716,700
		234,011,876			234,355,372
Less: accumulated depreciation		(59,987,511	)		(57,927,468	)
	$	174,024,365		$	176,427,904

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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., formerly MHI Hospitality Corporation, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2013 and December 31, 2012 and for the three months and nine months ended September 30, 2013 and 2012. The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. 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. All significant inter-company balances and transactions have been eliminated.

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

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

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

Investment in Joint Venture – Investment in joint venture represents our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0 million junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these entities. We account for our investment in the joint venture under the equity method of accounting and are entitled to receive our pro rata share of annual cash flow. We also have the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.

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

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Company’s potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment, and cash that is otherwise restricted pursuant to certain requirements in our various mortgage agreements.

Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

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

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2013 and December 31, 2012 were $207,864 and $240,489, respectively. Amortization expense for each of the three month periods ended September 30, 2013 and 2012 totaled $10,875 and for each of the nine month periods ended September 30, 2013 and 2012 totaled $32,625.

Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. 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 balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument

designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

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

We account for the warrant to purchase 1,900,000 shares of the Company’s common stock (the “Essex Warrant”) as well as the warrant to purchase 1,900,000 partnership units that was issued to the Company by the Operating Partnership (the “Warrant”) based upon the guidance enumerated in Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging: Contracts in Entity’s Own Stock. Both the Essex Warrant and the Warrant contain a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive and therefore is classified as a derivative liability. The Essex Warrant and the Warrant are carried at fair value with changes in fair value reported in earnings as long as they remain classified as a derivative liability.

The warrant derivative liability was valued at September 30, 2013 and December 31, 2012 using the Monte Carlo simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer group’s future expected stock prices and minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the warrant.

The Company classifies 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.

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2013
Warrant	$	—	$	(7,990,712	)	$	—
December 31, 2012
Warrant		—		(4,969,752	)		—

Cumulative Mandatorily Redeemable Preferred Stock and Preferred Interest – We account for the Company’s Preferred Stock and the Operating Partnership’s Series A Preferred Interest (the “Preferred Interest”) based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock was mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance. The Company’s sole source of funds to meet its obligations under the Articles Supplementary are special distributions from the Operating Partnership which the Company, as general partner, may declare at its sole discretion.

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

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

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 (the “Code”). As a REIT, the Company generally will not be subject to federal income tax on that portion of its net income that does not relate to MHI Hospitality TRS, LLC, our wholly-owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2013, we have no uncertain tax positions. In addition, we recognize obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. As of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which we are subject generally include 2009 through 2012. In addition, as of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally also include 2004 through 2008.

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

Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees, and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 30,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Company’s independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2013.

The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Under either the 2004 Plan or the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of September 30, 2013, no performance-based stock awards have been granted under the 2004 Plan. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan totaled $17,880 and $60,731, respectively for the three months and nine months ended September 30, 2013 and $13,078 and $39,233, respectively, for the three months and nine months ended September 30, 2012. As of September 30, 2013, no awards have been granted under the 2013 Plan.

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

Segment Information – We have determined that our business is conducted in one reportable segment, hotel ownership.

Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications – Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

Recent Accounting Pronouncements – There are no recent accounting pronouncements which we believe will have a material impact on our consolidated financial statements.

XML

Preferred Stock, Preferred Interest and Warrants - Additional Information (Detail) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended								9 Months Ended
	Sep. 30, 2013	Aug. 30, 2013	Mar. 26, 2013	Jun. 18, 2012	Apr. 18, 2011	Aug. 01, 2013	Dec. 31, 2012	Jun. 15, 2012	Sep. 30, 2013 Warrant [Member]	Apr. 18, 2011 Warrant [Member]	Sep. 30, 2013 Essex Warrant [Member]	Apr. 18, 2011 Essex Warrant [Member]	Sep. 30, 2013 Essex Warrant [Member] Maximum [Member]	Sep. 30, 2013 Series A Cumulative Redeemable Preferred Stock [Member]	Dec. 31, 2012 Series A Cumulative Redeemable Preferred Stock [Member]	Apr. 18, 2011 Series A Cumulative Redeemable Preferred Stock [Member]
Preferred Units [Line Items]
Gross proceeds from securities purchase agreement					$ 25.0
Preferred stock, shares issued	0				25,000		0							0	14,228
Warrant purchase common stock										1,900,000	1,900,000	1,900,000	1,900,000
Preferred stock, par value	$ 0.01				$ 0.01		$ 0.01							$ 0.01	$ 0.01	$ 0.01
Preferred stock pursuant to Articles Supplementary																27,650
Preferred Stock liquidation preference pursuant to Articles Supplementary																$ 1,000.00
Preferred Stock cash dividend of liquidation preference																10.00%
Preferred Stock dividend of liquidation preference on additional shares																2.00%
Preference share, aggregate redemption price	10.7		2.1			2.1		12.3
Preference stock, shares agreed for redemption			1,902	11,514		2,460		11,514
Amortization of issuance costs	0.4	0.1	0.1	0.7
Prepayment fee	0.7	0.2	0.2	0.8
Preferred stock, shares outstanding	0						0							0	14,228
Expiry date of Warrant	Oct. 18, 2016
Common stock exercise price	2.04									2.25
Fair value of Warrant	$ 1.6
Risk-free interest rate, fair value assumptions									2.26%
Dividend yield, fair value assumptions									5.00%
Expected volatility, fair value assumptions									60.00%
Expected term, fair value assumptions									5 years 6 months

XML

Unconsolidated Joint Venture (Tables)

9 Months Ended

Sep. 30, 2013

Equity Method Investments And Joint Ventures [Abstract]

Summarized Financial Information of Investment

Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

	September 30, 2013		December 31, 2012
	(unaudited)
ASSETS
Investment in hotel properties, net	$	64,745,596	$	65,899,055
Cash and cash equivalents		3,332,624		3,298,009
Accounts receivable		104,078		301,921
Prepaid expenses, inventory and other assets		830,289		1,409,924
TOTAL ASSETS	$	69,012,587	$	70,908,909
LIABILITIES
Mortgage loans, net	$	32,600,000	$	33,100,000
Accounts payable and other accrued liabilities		2,794,650		2,995,271
Advance deposits		324,331		257,950
TOTAL LIABILITIES		35,718,981		36,353,221
TOTAL MEMBERS’ EQUITY		33,293,606		34,555,688
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	69,012,587	$	70,908,909

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	2,549,657		$	2,285,771		$	11,047,955		$	9,748,930
Food and beverage department		476,836			509,019			1,869,821			1,864,182
Other operating departments		316,895			337,036			1,102,859			953,643
Total revenue		3,343,388			3,131,826			14,020,635			12,566,755
Expenses
Hotel operating expenses
Rooms department		707,671			647,369			2,332,407			2,130,035
Food and beverage department		433,192			425,006			1,474,361			1,489,930
Other operating departments		145,219			141,882			435,108			484,500
Indirect		1,625,053			1,551,360			5,300,822			5,027,190
Total hotel operating expenses		2,911,135			2,765,617			9,542,698			9,131,655
Depreciation and amortization		560,951			542,683			1,634,906			1,825,653
General and administrative		27,180			11,987			85,023			62,958
Total operating expenses		3,499,266			3,320,287			11,262,627			11,020,266
Net operating income (loss)		(155,878	)		(188,461	)		2,758,008			1,546,489
Interest expense		(437,605	)		(440,161	)		(1,305,327	)		(1,315,745	)
Unrealized gain (loss) on hedging activities		102,936			(21,232	)		285,238			(169,741	)
Net income (loss)	$	(490,547	)	$	(649,854	)	$	1,737,919		$	61,003

XML

Organization and Description of Business - Additional Information (Detail) (USD $)	0 Months Ended	1 Months Ended				9 Months Ended				9 Months Ended	0 Months Ended	9 Months Ended		0 Months Ended	1 Months Ended	9 Months Ended	1 Months Ended		9 Months Ended	1 Months Ended	9 Months Ended				1 Months Ended	9 Months Ended
	Jun. 15, 2012	Sep. 30, 2013	Aug. 30, 2013	Mar. 26, 2013	Jun. 18, 2012	Sep. 30, 2013 Hotel	Aug. 01, 2013	Sep. 30, 2013 Crowne Plaza Hollywood [Member]	Sep. 30, 2013 Operating Partnership [Member]	Sep. 30, 2013 Senior Unsecured Notes [Member]	Mar. 05, 2012 TD Bank [Member]	Sep. 30, 2013 TD Bank [Member]	Dec. 31, 2011 Essex Equity High Income Joint Investment Vehicle, LLC [Member]	Jun. 15, 2012 Bridge Financing [Member]	Jun. 18, 2012 C1 Bank [Member]	Sep. 30, 2013 C1 Bank [Member]	Jun. 28, 2013 TowneBank [Member]	Jun. 22, 2012 TowneBank [Member]	Sep. 30, 2013 TowneBank [Member]	Jul. 10, 2012 Fifth Third Bank [Member]	Sep. 30, 2013 Fifth Third Bank [Member]	Mar. 26, 2013 Hilton Brownstone-University Hotel [Member]	Mar. 22, 2013 Hilton Brownstone-University Hotel [Member]	Mar. 22, 2013 Hilton Brownstone-University Hotel [Member] Mortgage [Member]	Aug. 01, 2013 CIBC [Member]	Sep. 30, 2013 CIBC [Member]	Jun. 15, 2012 Series A Cumulative Redeemable Preferred Stock [Member]	Aug. 01, 2013 Series A Cumulative Redeemable Preferred Stock [Member] CIBC [Member]
Organization Consolidation and Presentation of Financial Statements [Line Items]
Date of incorporation						Aug. 20, 2004
Date of commencement of business						Dec. 21, 2004
Number of hotels acquired before commencement of business						6
Percentage of noncontrolling interest holding in Crowne Plaza Hollywood Beach Resort								25.00%
Percentage of operating partnership owned								25.00%	78.30%
Amount of mortgage loan	$ 1,500,000									$ 27,600,000	$ 30,000,000			$ 1,500,000	$ 14,000,000					$ 14,300,000			$ 10,000,000	$ 8,000,000	$ 15,600,000
Additional interest rate											3.00%						4.55%	4.55%
Amortization schedule for level payments of principal and interest on a monthly basis											25 years				25 years										30 years
Debt instrument maturity date										Sep. 30, 2018		Aug. 30, 2014									Jul. 10, 2015					Aug. 01, 2018
Extended maturity date of mortgage loan						Jun. 30, 2014						Mar. 01, 2017				Jun. 18, 2017			Sep. 30, 2013
Maximum borrowing capacity													10,000,000
Amount of undrawn term loan commitments	7,000,000													7,000,000
Reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property														2,000,000
Preference share, aggregate redemption price	12,300,000	10,700,000		2,100,000		10,700,000	2,100,000															2,100,000					12,300,000	2,100,000
Preference stock, shares agreed for redemption	11,514			1,902	11,514		2,460															1,902					11,514
Interest rate on amount borrowed										8.00%					5.60%										4.78%
Proceeds of the mortgage used to redeem Preferred Stock															11,514													2,460
Principal payment on extended maturity agreement - monthly																	16,000	16,000
Principal payment on extended maturity agreement - quarterly																		200,000
Repayment dates 1																			Jul. 01, 2012
Repayment dates 2																			Oct. 01, 2012
Repayment dates 3																			Jan. 01, 2013
Repayment dates 4																			Apr. 01, 2013
Minimum rate of interest																	5.00%	5.00%
Interest rate on amount borrowed																				3.00%
Amortization schedule for level payments of principal and interest on a monthly basis																				25 years
Additional draw up of mortgaged																				3,000,000
Interest floor rate																							5.25%
Interest rate if mortgage loan is extended																							5.25%
Mortgage bears interest rate after 5 years																							3.00%
Principal payment of loan under extension agreement																	1,100,000
Reduced principal balance of loan under extension agreement																	6,000,000
Extended maturity date of mortgage loan						Jun. 30, 2015
Loan proceeds were placed into a restricted reserve																									700,000
Prepayment fee		700,000	200,000	200,000	800,000																				200,000
Operating partnership aggregate amount of unsecured senior notes										$ 27,600,000

XML

Debt - Additional Information (Detail) (USD $)	9 Months Ended					9 Months Ended	1 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Jun. 15, 2012	Apr. 18, 2011	Sep. 30, 2013 Crowne Plaza Jacksonville Riverfront [Member]	Sep. 30, 2013 Senior Unsecured Notes [Member]	Jun. 30, 2008 Other Loans [Member]	Sep. 30, 2013 Other Loans [Member]	Dec. 31, 2012 Other Loans [Member]	Feb. 09, 2009 Other Loans [Member] Subsidiary [Member]	Dec. 21, 2011 Available Bridge Financing [Member]	Sep. 30, 2013 Mortgage [Member]	Dec. 31, 2012 Mortgage [Member]
Debt Instrument [Line Items]
Secured revolving credit facility	$ 23,000,000
Mortgage loan outstanding balance												139,784,729	135,674,432
Operating Partnership issued senior unsecured notes						8.00%
Borrowed amount			1,500,000			27,600,000				4,750,000
Debt instrument maturity date						Sep. 30, 2018	Aug. 01, 2014
Notes face value						101.00%
Interest rate on loan							LIBOR plus additional interest of 3.00%
Repayments of interest and principal							50.0% of any distributions
Outstanding balance on the loan								3,650,220	4,025,220
Right to borrow				10,000,000
Interest rate on loan											9.25%
Outstanding balance on the Bridge Financing	0	0
Cash collateral provided					$ 700,000

XML

Subsequent Events - Additional Information (Detail) (Subsequent Event [Member], USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended			9 Months Ended
	Oct. 22, 2013	Oct. 23, 2013	Oct. 11, 2013	Sep. 30, 2013
Subsequent Event [Member]
Subsequent Event [Line Items]
Dividend paid			$ 0.04
Dividend distributed	$ 0.045
Dividend payment date				Jan. 10, 2014
Aggregate number of issuable warrant shares		900,000
Aggregate cash purchase price of warrants issued		$ 3.2
Aggregate number of issuable warrant units		900,000

XML

Income Taxes - Income Tax Provision (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Current:
Federal	$ 17,400	$ 9,250	$ 85,301	$ (39,717)
State	191	1,439	56,766	9,548
Total	17,591	10,689	142,067	(30,169)
Deferred:
Federal	60,013	11,578	1,048,762	880,342
State	16,358	5,712	278,006	240,527
Total	76,371	17,290	1,326,768	1,120,869
Income tax (expense) benefit	$ 93,962	$ 27,979	$ 1,468,835	$ 1,090,700

XML

Related Party Transactions - Additional Information (Detail) (USD $)	1 Months Ended		0 Months Ended	1 Months Ended	9 Months Ended					9 Months Ended	12 Months Ended	3 Months Ended		9 Months Ended
	Apr. 30, 2013	Aug. 01, 2012	Jun. 15, 2012	May 01, 2012	Sep. 30, 2013	Aug. 01, 2013	Mar. 26, 2013	Dec. 31, 2012	Jun. 18, 2012	Sep. 30, 2013 Board of Directors [Member] Members	Dec. 31, 2012 Board of Directors [Member]	Sep. 30, 2013 MHI Hotels Services [Member]	Sep. 30, 2012 MHI Hotels Services [Member]	Sep. 30, 2013 MHI Hotels Services [Member]	Sep. 30, 2012 MHI Hotels Services [Member]	Dec. 31, 2012 MHI Hotels Services [Member]
Related Party Transaction [Line Items]
Company's outstanding common stock owned by members of MHI Hotels Services												11.20%		11.20%
Operating partnership units owned by members of MHI Hotels Services												1,720,029		1,720,029
Due from MHI Hotels Services					$ 10,127			$ 8,657				$ 10,127		$ 10,127		$ 8,657
Leasehold revenue												87,500	87,500	262,500	262,500
Expiry date of leasehold interests												Dec. 31, 2011		Dec. 31, 2011
Strategic alliance agreement term														10 years
Expiry date of master management agreement												Between December 2014 and April 2018.		Between December 2014 and April 2018.
Management fee of gross revenues for first full fiscal year												2.00%		2.00%
Management fee of gross revenues for second full fiscal year												2.50%		2.50%
Management fee of gross revenues for every year thereafter												3.00%		3.00%
Period of incentive management fee due within end of the fiscal year												90 days		90 days
Incentive management of increase in gross operating profit												10.00%		10.00%
Maximum incentive management fee of gross revenues												0.25%		0.25%
Additional agreement, expiry date														March 2019
Base management fees earned by related party												639,404	649,445	1,992,717	1,994,398
Incentive management fees earned by related party												15,955	54,095	78,082	166,145
Employee medical benefits paid												615,762	564,659	1,910,486	1,785,547
Redemption of units in limited partnership	10,000	6,000		6,000						22,000	22,000
Number of members controlled by related party										2
Number of former members controlled by related party										1
Operating partnership stock redemption value					32,900					69,080
Amount of mortgage loan			1,500,000
Amount of undrawn term loan commitments			7,000,000
Reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property			2,000,000
Preference stock, shares agreed for redemption			11,514			2,460	1,902		11,514
Preference share, aggregate redemption price			12,300,000		10,700,000	2,100,000	2,100,000
Prepayment fee pursuant to the provisions of the articles supplementary			$ 800,000		$ 700,000	$ 200,000	$ 200,000

XML

Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	972,350	972,350
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	49,000,000	49,000,000
Common stock, shares issued	10,206,927	9,999,786
Common stock, shares outstanding	10,206,927	9,999,786
Series A Cumulative Redeemable Preferred Stock [Member]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	27,650	27,650
Preferred stock, shares issued	0	14,228
Preferred stock, shares outstanding	0	14,228
Sotherly Hotels LP [Member]
General Partner, units issued	130,382	129,727
General Partner, units outstanding	130,382	129,727
Limited Partner, units issued	12,907,743	12,842,898
Limited Partner, units outstanding	12,907,743	12,842,898

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

7. Commitments and Contingencies

Ground, Building and Submerged Land Leases – We lease 2,086 square feet of commercial space next to the Savannah hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. These areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for the three months and nine months ended September 30, 2013 totaled $15,867 and $48,490, respectively, and totaled $17,074 and $49,136 for the three months and nine months ended September 30, 2012, respectively, for this operating lease.

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

We lease a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expired August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value no earlier than August 1, 2018, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2013 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612 for the three months and nine months ended September 30, 2012, respectively.

We lease a parking lot adjacent to the Crowne Plaza Tampa Westshore under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense totaled $651 and $1,952 for the three months and nine months ended September 30, 2013, respectively, and totaled $638 and $1,864 for the three months and nine months ended September 30, 2012, respectively.

We lease certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires in September 2017, requiring annual payments of $6,020. Rent expense totaled $1,505 and $4,515 for the three months and nine months ended September 30, 2013, respectively, and totaled $1,285 and $3,765 for the three months and nine months ended September 30, 2012, respectively.

We lease 4,836 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced September 1, 2009 and expires August 31, 2018. Rent expense totaled $15,848 and $43,348 for the three months and nine months ended September 30, 2013, respectively, and totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2012, respectively.

We lease 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that commenced December 14, 2009 and expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $10,911 and $32,982 for the three months and nine months ended September 30, 2013, respectively, and totaled $11,474 and $33,746 for the three months and nine months ended September 30, 2012, respectively.

We also lease certain furniture and equipment under financing arrangements expiring between August 2013 and September 2017.

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

September 30, 2014	$	426,523
September 30, 2015		382,240
September 30, 2016		329,482
September 30, 2017		121,186
September 30, 2018		86,953
Total future minimum lease payments	$	1,346,384

Management Agreements – At September 30, 2013, each of our wholly-owned operating hotels, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. We entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).

Franchise Agreements – As of September 30, 2013, all of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee of 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between October 2014 and April 2023.

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the Sheraton Louisville Riverside and the DoubleTree by Hilton Brownstone-University an amount equal to ¹/₁₂ of the annual real estate taxes due for the properties. In addition, the lender on the DoubleTree by Hilton Brownstone-University requires that we escrow an amount equal to ¹/₁₂ of our annual insurance premiums. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina, the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone-University and equal 4.0% of room revenues for the Hilton Philadelphia Airport.

Pursuant to the terms of the fifth amendment to the then-existing credit agreement and until its termination in March 2012, we were required to escrow with our lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, we were required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.

Litigation – We are not involved in any material litigation, 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, all of which we expect to be covered by insurance. We do not expect any pending legal proceedings to have a material impact on our financial condition or results of operations.

XML

Consolidated Statement of Changes in Equity (USD $)	Total	Common Stock [Member]	Additional Paid-In Capital [Member]	Distributions in Excess of Retained Earnings [Member]	Noncontrolling Interest [Member]
Balances, beginning at Dec. 31, 2012	$ 37,332,130	$ 99,998	$ 57,020,979	$ (27,179,392)	$ 7,390,545
Balances, shares, beginning at Dec. 31, 2012		9,999,786
Issuance of restricted common stock awards	171,460	755	170,705
Issuance of restricted common stock awards, shares		75,500
Dividends and distributions declared	(1,434,544)			(1,118,154)	(316,390)
Redemption of units in operating partnership	(32,900)				(32,900)
Conversion of units in operating partnership to shares of common stock		1,316	309,163		(310,479)
Conversion of units in operating partnership to shares of common stock, shares		131,641
Net loss	(3,772,526)			(2,934,048)	(838,478)
Balances, ending at Sep. 30, 2013	$ 32,263,620	$ 102,069	$ 57,500,847	$ (31,231,594)	$ 5,892,298
Balances, shares, ending at Sep. 30, 2013		10,206,927

XML

Consolidated Balance Sheets (USD $)	Sep. 30, 2013	Dec. 31, 2012
ASSETS
Investment in hotel properties, net	$ 174,024,365	$ 176,427,904
Investment in joint venture	8,323,446	8,638,967
Cash and cash equivalents	23,785,009	7,175,716
Restricted cash	5,267,202	3,079,894
Accounts receivable	1,958,357	1,478,923
Accounts receivable-affiliate	10,127	8,657
Prepaid expenses, inventory and other assets	1,985,343	1,684,951
Shell Island sublease, net	300,245	480,392
Deferred income taxes	1,237,759	2,649,282
Deferred financing costs, net	3,536,730	2,406,183
TOTAL ASSETS	220,428,583	204,030,869
LIABILITIES
Mortgage loans	139,784,729	135,674,432
Loans payable	3,650,220	4,025,220
Unsecured notes	27,600,000
Series A Preferred Stock		14,227,650
Accounts payable and other accrued liabilities	7,728,337	6,786,684
Advance deposits	889,440	625,822
Dividends and distributions payable	521,525	389,179
Warrant derivative liability	7,990,712	4,969,752
TOTAL LIABILITIES	188,164,963	166,698,739
Commitments and contingencies (see Note 7)
Sotherly Hotels Inc. stockholders' equity
Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
Common stock, par value $0.01, 49,000,000 shares authorized, 10,206,927 shares and 9,999,786 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	102,069	99,998
Additional paid in capital	57,500,847	57,020,979
Distributions in excess of retained deficit	(31,231,594)	(27,179,392)
Total Sotherly Hotels Inc. stockholders' equity	26,371,322	29,941,585
PARTNERS' CAPITAL
Noncontrolling interest	5,892,298	7,390,545
TOTAL EQUITY	32,263,620	37,332,130
TOTAL LIABILITIES AND EQUITY	220,428,583	204,030,869
Sotherly Hotels LP [Member]
ASSETS
Investment in hotel properties, net	174,024,365	176,427,904
Investment in joint venture	8,323,446	8,638,967
Cash and cash equivalents	23,785,009	7,175,716
Restricted cash	5,267,202	3,079,894
Accounts receivable	1,958,357	1,478,923
Accounts receivable-affiliate	10,127	8,657
Prepaid expenses, inventory and other assets	1,985,343	1,684,951
Shell Island sublease, net	300,245	480,392
Deferred income taxes	1,237,759	2,649,282
Deferred financing costs, net	3,536,730	2,406,183
TOTAL ASSETS	220,428,583	204,030,869
LIABILITIES
Mortgage loans	139,784,729	135,674,432
Loans payable	3,650,220	4,025,220
Unsecured notes	27,600,000
Series A Preferred Stock		14,227,650
Accounts payable and other accrued liabilities	7,728,337	6,786,684
Advance deposits	889,440	625,822
Dividends and distributions payable	521,525	389,179
Warrant derivative liability	7,990,712	4,969,752
TOTAL LIABILITIES	188,164,963	166,698,739
Commitments and contingencies (see Note 7)
PARTNERS' CAPITAL
General Partner: 130,382 and 129,727 units issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	557,601	617,909
Limited Partners: 12,907,743 and 12,842,898 units issued and outstanding as of September 30, 2013 and December 31, 2012, respectively	31,706,019	36,714,221
TOTAL PARTNERS' CAPITAL	32,263,620	37,332,130
TOTAL LIABILITIES AND EQUITY	$ 220,428,583	$ 204,030,869

XML

Income Taxes - Reconciliation of Statutory Federal Income Tax Provision (Benefit) (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Tax Expense Benefit Continuing Operations Income Tax Reconciliation [Abstract]
Statutory federal income tax expense (benefit)	$ (688,108)	$ (702,855)	$ (783,255)	$ (2,084,592)
Effect of non-taxable REIT (income) loss	765,521	723,683	1,917,318	2,925,217
State income tax expense (benefit)	16,549	7,151	334,772	250,075
Income tax (expense) benefit	$ 93,962	$ 27,979	$ 1,468,835	$ 1,090,700

XML

Indirect Hotel Operating Expenses (Tables)

9 Months Ended

Sep. 30, 2013

Other Income And Expenses [Abstract]

Summary of Indirect Hotel Operating Expenses

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

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
General and administrative	$	1,768,605	$	1,747,412	$	5,328,181	$	5,171,402
Sales and marketing		1,836,140		1,765,457		5,549,907		5,411,702
Repairs and maintenance		1,199,038		1,174,889		3,451,004		3,489,280
Utilities		1,195,522		1,278,568		3,221,738		3,444,575
Franchise fees		756,311		741,205		2,350,664		2,229,515
Management fees, including incentive		655,359		703,537		2,070,799		2,160,543
Insurance		358,688		340,513		1,075,083		1,001,717
Property taxes		608,300		688,083		1,776,710		2,045,141
Other		60,274		44,717		185,772		173,205
Total indirect hotel operating expenses	$	8,438,237	$	8,484,381	$	25,009,858	$	25,127,080

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., formerly MHI Hospitality Corporation, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2013 and December 31, 2012 and for the three months and nine months ended September 30, 2013 and 2012. The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. 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. All significant inter-company balances and transactions have been eliminated.

Investment in Hotel Properties

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

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

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

Investment in Joint Venture

Investment in Joint Venture – Investment in joint venture represents our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0 million junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these entities. We account for our investment in the joint venture under the equity method of accounting and are entitled to receive our pro rata share of annual cash flow. We also have the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.

Cash and Cash Equivalents

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

Concentration of Credit Risk

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Company’s potential risk.

Restricted Cash

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment, and cash that is otherwise restricted pursuant to certain requirements in our various mortgage agreements.

Accounts Receivable

Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

Inventories

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

Franchise License Fees

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2013 and December 31, 2012 were $207,864 and $240,489, respectively. Amortization expense for each of the three month periods ended September 30, 2013 and 2012 totaled $10,875 and for each of the nine month periods ended September 30, 2013 and 2012 totaled $32,625.

Deferred Financing Costs

Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. 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

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument

designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

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

We account for the warrant to purchase 1,900,000 shares of the Company’s common stock (the “Essex Warrant”) as well as the warrant to purchase 1,900,000 partnership units that was issued to the Company by the Operating Partnership (the “Warrant”) based upon the guidance enumerated in Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging: Contracts in Entity’s Own Stock. Both the Essex Warrant and the Warrant contain a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive and therefore is classified as a derivative liability. The Essex Warrant and the Warrant are carried at fair value with changes in fair value reported in earnings as long as they remain classified as a derivative liability.

The warrant derivative liability was valued at September 30, 2013 and December 31, 2012 using the Monte Carlo simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer group’s future expected stock prices and minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the warrant.

The Company classifies 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.

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2013
Warrant	$	—	$	(7,990,712	)	$	—
December 31, 2012
Warrant		—		(4,969,752	)		—

Cumulative Mandatorily Redeemable Preferred Stock and Preferred Interest

Cumulative Mandatorily Redeemable Preferred Stock and Preferred Interest – We account for the Company’s Preferred Stock and the Operating Partnership’s Series A Preferred Interest (the “Preferred Interest”) based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock was mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance. The Company’s sole source of funds to meet its obligations under the Articles Supplementary are special distributions from the Operating Partnership which the Company, as general partner, may declare at its sole discretion.

Noncontrolling Interest in Operating Partnership

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

Revenue Recognition

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

Income Taxes

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 (the “Code”). As a REIT, the Company generally will not be subject to federal income tax on that portion of its net income that does not relate to MHI Hospitality TRS, LLC, our wholly-owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of September 30, 2013, we have no uncertain tax positions. In addition, we recognize obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. As of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which we are subject generally include 2009 through 2012. In addition, as of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally also include 2004 through 2008.

Stock-based Compensation

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

Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees, and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 30,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Company’s independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2013.

The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Under either the 2004 Plan or the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of September 30, 2013, no performance-based stock awards have been granted under the 2004 Plan. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan totaled $17,880 and $60,731, respectively for the three months and nine months ended September 30, 2013 and $13,078 and $39,233, respectively, for the three months and nine months ended September 30, 2012. As of September 30, 2013, no awards have been granted under the 2013 Plan.

Comprehensive Income (Loss)

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

Segment Information

Segment Information – We have determined that our business is conducted in one reportable segment, hotel ownership.

Use of Estimates

Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Reclassifications – Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

Recent Accounting Pronouncements

Recent Accounting Pronouncements – There are no recent accounting pronouncements which we believe will have a material impact on our consolidated financial statements.

XML

Equity - Additional Information (Detail) (USD $)	1 Months Ended			9 Months Ended		1 Months Ended		1 Months Ended	9 Months Ended	0 Months Ended	1 Months Ended		9 Months Ended		1 Months Ended
	Apr. 30, 2013	Aug. 01, 2012	May 01, 2012	Sep. 30, 2013 Directors	Dec. 31, 2012	Jan. 31, 2013 Chief Financial Officer [Member]	Feb. 02, 2012 Executives and Employees [Member]	Feb. 28, 2012 Directors [Member]	Sep. 30, 2013 Operating Partnership Units [Member]	Aug. 16, 2013 Common Stock [Member]	Apr. 30, 2013 Common Stock [Member]	Mar. 31, 2013 Common Stock [Member]	Sep. 30, 2013 Common Stock [Member]	Jan. 25, 2013 Common Stock [Member] Executives and Employees [Member]	Jan. 25, 2013 Common Stock [Member] Directors [Member]	Feb. 02, 2012 Common Stock [Member] Directors [Member]	Sep. 30, 2013 Series A Cumulative Redeemable Preferred Stock [Member]
Class of Stock [Line Items]
Preferred stock, shares authorized				1,000,000													27,650
Common stock, shares authorized				49,000,000	49,000,000
Common stock, par value				$ 0.01	$ 0.01
Voting right				Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders.
Conversion of units in operating partnership to shares of common stock, shares										50,000	31,641	50,000	131,641
Non-restricted shares issued							29,500							30,500		1,500
Restricted shares issued						30,000		15,000							15,000
Common stock, shares outstanding				10,206,927	9,999,786
Number of trading days				10 days
Common stock exchange ratio				1
Number of board of director				2
Redemption of units in operating partnership	10,000	6,000	6,000
Operating partnership stock redemption value				$ 32,900					$ 69,080
Operating partnership units outstanding				2,831,198	2,972,839
Fair market value operating partnership				$ 13,400,000	$ 9,900,000

XML

Earnings (Loss) Per Share and Unit - Computation of Basic and Diluted Earnings (loss) Per Unit (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Numerator
Net loss	$ (2,117,808)	$ (2,095,198)	$ (3,772,526)	$ (7,221,854)
Denominator
Weighted average number of units outstanding for basic computation	13,038,125	12,974,647	13,037,422	12,974,399
Dilutive effect of warrants	1,021,229	801,604	951,855	608,994
Weighted average number of units outstanding for dilutive computation	14,059,354	13,776,251	13,989,277	13,583,393
Basic net loss per unit	$ (0.16)	$ (0.16)	$ (0.29)	$ (0.56)
Diluted net loss per unit	$ (0.15)	$ (0.15)	$ (0.27)	$ (0.53)

XML

Debt - Schedule of Mortgage Debt Obligations on Hotels (Parenthetical) (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013
Debt Instrument [Line Items]
Number of months for prepayment before maturity	2 months
Treasury floor rate of interest	5.25%
Crowne Plaza Hampton Marina [Member]
Debt Instrument [Line Items]
Debt Instrument periodic payment	$ 16,000
Interest rate	5.00%
Hilton Philadelphia Airport [Member]
Debt Instrument [Line Items]
Interest rate	3.50%
Hilton Savannah DeSoto [Member]
Debt Instrument [Line Items]
Year of Prepayment	6 years
Penalty Prepayment	90 days
Payments of principal and interest	25 years
Maturity date	Aug. 01, 2017
Hilton Wilmington Riverside [Member]
Debt Instrument [Line Items]
Year of Prepayment	6 years
Penalty Prepayment	90 days
Payments of principal and interest	25 years
Maturity date	Apr. 01, 2017
Holiday Inn Laurel West [Member]
Debt Instrument [Line Items]
Number of days before maturity date that loan can be prepaid with penalty	180 days
Interest rate	3.00%

XML

Acquisition of Hotel Properties - Additional Information (Detail)	9 Months Ended
	Sep. 30, 2013 Acquisition
Business Combinations [Abstract]
New acquisitions	0

XML

Investment in Hotel Properties - Schedule of Hotel Properties (Detail) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Property, Plant and Equipment [Line Items]
Total Gross	$ 234,011,876	$ 234,355,372
Less: accumulated depreciation	(59,987,511)	(57,927,468)
Total Net	174,024,365	176,427,904
Land and Land Improvements [Member]
Property, Plant and Equipment [Line Items]
Total Gross	19,578,692	19,429,571
Buildings and Improvements [Member]
Property, Plant and Equipment [Line Items]
Total Gross	183,246,701	181,209,101
Furniture, Fixtures and Equipment [Member]
Property, Plant and Equipment [Line Items]
Total Gross	$ 31,186,483	$ 33,716,700

XML

Preferred Stock, Preferred Interest and Warrants

9 Months Ended

Sep. 30, 2013

Text Block [Abstract]

Preferred Stock, Preferred Interest and Warrants

6. Preferred Stock, Preferred Interest and Warrants

Preferred Stock. On April 18, 2011, the Company entered into a securities purchase agreement with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share.

The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary, which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Company’s board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company’s Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.

Concurrent with the issuance of the Preferred Stock, the Operating Partnership issued the Preferred Interest to the Company in an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes the general partner to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect the Preferred Stock. In addition, the Operating Partnership issued the Warrant to purchase 1,900,000 partnership units at an amount equal to the consideration received by the Company upon exercise of the Essex Warrant, as amended.

On June 15, 2012, the Company entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.

On June 18, 2012, we used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special distribution by the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock. The redemption resulted in a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the redeemed shares were written off.

On March 26, 2013, we used the net proceeds of an expansion of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, $0.1 million in unamortized issuance costs related to the redeemed shares were written off.

On August 1, 2013, we used the net proceeds of a new mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, $0.1 million in unamortized issuance costs related to the redeemed shares were written off.

On September 30, 2013, we used a portion of the proceeds of the unsecured notes offering to make a special distribution by the Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million. In addition, $0.4 million in unamortized issuance costs related to the redeemed shares were written off.

As of September 30, 2013 and December 31, 2012, there were 0 and 14,228 shares of the Preferred Stock issued and outstanding, respectively.

Warrants. The Essex Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the Company’s common stock. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant shall be adjusted in the event of payment of cash dividends to holders of common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment does not take into account dividends declared prior to January 1, 2012. At September 30, 2013, the adjusted exercise price was $2.04 per share. The Essex Warrant expires on October 18, 2016. The Essex Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Essex Warrant are both subject to additional adjustments under certain circumstances. The Essex Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Essex Warrant, the holders of the Essex Warrant will be entitled to participate in certain future securities offerings of the Company.

Concurrently with the issuance of the Essex Warrant, the Operating Partnership issued the Warrant to the Company. Under the terms of the Warrant, the Company is obligated to exercise the Warrant immediately and concurrently if at any time the Essex Warrant is exercised by its holders. In that event, the Operating Partnership shall issue an equivalent number of the partnership units and shall be entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.

On the date of issuance, we determined the fair market value of the warrants was approximately $1.6 million using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years, and is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statements of operations over the period of issuance to the mandatory redemption date of the Preferred Stock.

XML

Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Provision

The components of the income tax provision for the three months and nine months ended September 30, 2013 and 2012 are as follows:

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Current:
Federal	$	17,400	$	9,250	$	85,301	$	(39,717	)
State		191		1,439		56,766		9,548
		17,591		10,689		142,067		(30,169	)
Deferred:
Federal		60,013		11,578		1,048,762		880,342
State		16,358		5,712		278,006		240,527
		76,371		17,290		1,326,768		1,120,869
	$	93,962	$	27,979	$	1,468,835	$	1,090,700

Reconciliation of Statutory Federal Income Tax Provision (Benefit)

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

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense (benefit)	$	(688,108	)	$	(702,855	)	$	(783,255	)	$	(2,084,592	)
Effect of non-taxable REIT (income) loss		765,521			723,683			1,917,318			2,925,217
State income tax expense (benefit)		16,549			7,151			334,772			250,075
	$	93,962		$	27,979		$	1,468,835		$	1,090,700

XML

Commitments and Contingencies - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Operating Leased Assets [Line Items]
Original lump sum rent payment received			$ 990
Rental income recognized under lease term			0
Annual payment for first year	426,523		426,523
Annual payment for second year	382,240		382,240
Maximum [Member] | Furniture and Equipment [Member]
Operating Leased Assets [Line Items]
Financing arrangement expiration date			Sep. 30, 2017
Minimum [Member] | Furniture and Equipment [Member]
Operating Leased Assets [Line Items]
Financing arrangement expiration date			Aug. 31, 2013
Double Tree by Hilton Brownstone University [Member]
Operating Leased Assets [Line Items]
Duration of operating lease term			50 years
Operating lease, expiring date			Aug. 31, 2016
Duration period under renewal option second			10 years
Expiration date one under renewal option second			Aug. 31, 2026
Expiration date two under renewal option second			Aug. 31, 2036
Expiration date three under renewal option second			Aug. 31, 2046
Rent expense	23,871	23,871	71,612	71,612
Land leased under second amendment dated			Apr. 28, 1998
Purchase of leased land at fair market value subject to annual fee payment			9,000
Crowne Plaza Tampa Westshore [Member]
Operating Leased Assets [Line Items]
Operating lease, expiring date			Jul. 31, 2014
Rent expense	651	638	1,952	1,864
Lease agreement			5 years
Commencement Date Of Agreement			Jul. 31, 2009
Annual payment			2,432
Additional renewal of agreement			5 years
Saint Johns River [Member]
Operating Leased Assets [Line Items]
Rent expense	1,505	1,285	4,515	3,765
Lease agreement			5 years
Annual payment			6,020
Lease renewable expiration date			Sep. 30, 2017
Williamsburg Virginia [Member]
Operating Leased Assets [Line Items]
Area of commercial space leased			4,836
Rent expense	15,848	13,750	43,348	41,250
Commencement Date Of Agreement			Sep. 01, 2009
Lease renewable expiration date			Aug. 31, 2018
Maryland [Member]
Operating Leased Assets [Line Items]
Area of commercial space leased			1,632
Operating lease, expiring date			Feb. 28, 2017
Rent expense	10,911	11,474	32,982	33,746
Commencement Date Of Agreement			Dec. 14, 2009
Annual payment for first year	22,848		22,848
Annual payment for second year	45,696		45,696
Percentage increment			2.75%
Expiry date of additional agreement			March 2019
Franchise fees of room revenues			5.00%
Restricted cash reserve			Amount equal to 1/12of the annual real estate taxes due for the properties
Monthly contribution of room revenues			3.00%
Maryland [Member] | Crowne Plaza Hampton Marina [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | Crowne Plaza Jacksonville Riverfront [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | DoubleTree by Hilton Brownstone - University [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Annual insurance premium	0.0833		0.0833
Maryland [Member] | Hilton Philadelphia Airport [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | Hilton Savannah DeSoto [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | Hilton Wilmington Riverside [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | Sheraton Louisville Riverside [Member]
Operating Leased Assets [Line Items]
Monthly contribution of room revenues			4.00%
Maryland [Member] | Maximum [Member]
Operating Leased Assets [Line Items]
Operating lease, expiring date			Apr. 30, 2018
Additional fees of room revenues			6.00%
Franchise agreement expiry date			April 2023
Maryland [Member] | Minimum [Member]
Operating Leased Assets [Line Items]
Operating lease, expiring date			Dec. 31, 2014
Additional fees of room revenues			2.50%
Franchise agreement expiry date			October 2014
Savannah Hotel Property [Member]
Operating Leased Assets [Line Items]
Area of commercial space leased			2,086
Operating lease, expiring date			Oct. 31, 2006
Duration period under renewal option second			5 years
Expiration date one under renewal option second			Oct. 31, 2011
Expiration date two under renewal option second			Oct. 31, 2016
Expiration date three under renewal option second			Oct. 31, 2021
Rent expense	$ 15,867	$ 17,074	$ 48,490	$ 49,136
Savannah Hotel Property [Member] | Six Year Operating Lease Property [Member]
Operating Leased Assets [Line Items]
Duration of operating lease term			6 years
Savannah Hotel Property [Member] | Ninety Nine Year Operating Lease Property [Member]
Operating Leased Assets [Line Items]
Duration of operating lease term			99 years
Operating lease, expiring date			Jul. 31, 2086

XML

Related Party Transactions

9 Months Ended

Sep. 30, 2013

Related Party Transactions [Abstract]

Related Party Transactions

9. Related Party Transactions

MHI Hotels Services. As of September 30, 2013, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer as well as a current member of its Board of Directors and a former member of its Board of Directors) owned approximately 11.2% of the Company’s outstanding common stock and 1,720,029 Operating Partnership units. The following is a summary of the transactions with MHI Hotels Services:

Accounts Receivable – We were due $10,127 and $8,657 from MHI Hotels Services at September 30, 2013 and December 31, 2012, respectively.

Shell Island Sublease – We have a sublease arrangement with MHI Hotels Services on its expired leasehold interests in the Shell Island Resort in Wrightsville Beach, North Carolina. Leasehold revenue was $87,500 for each of the three month periods ended September 30, 2013 and 2012 and was $262,500 for each of the nine month periods ended September 30, 2013 and 2012. The underlying leases at Shell Island expired on December 31, 2011.

Strategic Alliance Agreement – On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to us and the management of our hotels by MHI Hotels Services.

Management Agreements – Each of the hotels that we wholly-owned at September 30, 2013, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. We entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company and the Operating Partnership upon their formation, MHI Hotels Services agreed that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.

Base management fees earned by MHI Hotels Services totaled $639,404 and $1,992,717 for the three months and nine months ended September 30, 2013, respectively, and $649,445 and $1,994,398 for the three months and nine months ended September 30, 2012, respectively. In addition, estimated incentive management fees of $15,955 and $78,082 were accrued for the three months and nine months ended September 30, 2013, respectively, and estimated incentive management fees of $54,095 and $166,145 were accrued for the three months and nine months ended September 30, 2012, respectively.

Employee Medical Benefits – We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services, for our employees, as well as those employees that are employed by MHI Hotels Services that work exclusively for our hotel properties. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were $615,762 and $1,910,486 for the three months and nine months ended September 30, 2013, respectively and $564,659 and $1,785,547 for the three months and nine months ended September 30, 2012, respectively.

Redemption of Units in Operating Partnership – During 2012 and the nine months ended September 30, 2013, the Operating Partnership redeemed 22,000 limited partnership units held by a trust controlled by two current members and one former member of our Board of Directors for a total of $69,080 pursuant to the terms of the Partnership Agreement.

Holders of the Preferred Stock and Essex Warrant – As set forth in the Articles Supplementary, the holders of Preferred Stock, Essex Illiquid, LLC and Richmond Hill Capital Partners, LLC, were entitled to elect one (1) member of the Company’s board of directors. The member of the board of directors elected by the holders of Preferred Stock holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Illiquid, LLC, as well as Richmond Hill Capital Partners, LLC.

On June 15, 2012, the Company entered into an amendment of its then-existing Bridge Financing that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property. The Company’s ability to borrow under the Bridge Financing ended May 31, 2013.

On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.8 million.

On July 10, 2012, the Company amended the terms of the outstanding Essex Warrant by establishing a modified excepted holder limit (as defined in the Company’s Articles of Amendment and Restatement) for Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.

On March 26, 2013, the Company redeemed 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.

On August 1, 2013, the Company redeemed 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.

On September 30, 2013, the Company redeemed the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.7 million.

XML

Debt

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

Debt

5. Debt

Credit Facility. During a portion of the nine months ended September 30, 2012, we had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company. The credit facility was established during the second quarter of 2006 and replaced a $23.0 million secured, revolving credit facility with BB&T. On March 5, 2012, we extinguished the credit facility in conjunction with the refinance of the mortgage on the Hilton Philadelphia Airport.

Mortgage Debt.As of September 30, 2013 and December 31, 2012, we had $139,784,729 and $135,674,432 of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels as of September 30, 2013:

Property	Balance Outstanding as of				Prepayment Penalties			Maturity Date			Amortization Provisions			Interest Rate
	September 30, 2013		December 31, 2012
	(unaudited)
Crowne Plaza Hampton Marina	$	5,951,500	$	7,559,625		None			06/30/2014	(1)	$	16,000	(2)		LIBOR plus 4.55	%(3)
Crowne Plaza Jacksonville Riverfront		13,853,898		14,135,234		None			07/10/2015	(4)		25 years			LIBOR plus 3.00	%
Crowne Plaza Tampa Westshore		13,672,037		13,872,077		None			06/18/2017			25 years			5.60	%
DoubleTree by Hilton Brownstone – University		15,582,552		7,816,867			(5)		08/01/2018			30 years			4.78	%
Hilton Philadelphia Airport		28,927,294		29,502,666		None			08/30/2014	(6)		25 years			LIBOR plus 3.00	%(7)
Hilton Savannah DeSoto		21,705,310		22,051,314		Yes	(8)		08/01/2017			25 years	(9)		6.06	%
Hilton Wilmington Riverside		21,046,409		21,416,922		Yes	(8)		04/01/2017			25 years	(10)		6.21	%
Holiday Inn Laurel West		7,182,558		7,300,465		Yes	(11)		08/05/2021			25 years			5.25	%(12)
Sheraton Louisville Riverside		11,863,171		12,019,262			(5)		01/06/2017			25 years			6.24	%
Total	$	139,784,729	$	135,674,432

(1) The note provides that the mortgage can be extended until June 30, 2015 if certain conditions have been satisfied.

(2) The Company is required to make monthly principal payments of $16,000.

(3) The note bears a minimum interest rate of 5.00%.

(4) The note provides that the mortgage can be extended until July 10, 2016 if certain conditions have been satisfied.

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

(6) The note provides that the mortgage can be extended until March 1, 2017 if certain conditions have been satisfied.

(7) The note bears a minimum interest rate of 3.50%.

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

(9) The note provided for payments of interest only until August 1, 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures on August 1, 2017.

(10) The note provided for payments of interest only until April 1, 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in April 1, 2017.

(11) Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

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

With the exception of our mortgage on the Crowne Plaza Tampa Westshore, as of September 30, 2013, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. The Crowne Plaza Tampa Westshore did not realize sufficient operating performance for the four calendar quarters ended September 30, 2013 to meet the debt service coverage requirements of the mortgage loan agreement. While we believe that the property should be able to meet the debt service coverage requirements in future periods, without a waiver from the lender, we may be required to repay all or a portion of the outstanding indebtedness. We continue to be in compliance under the terms of the covenants in our mortgage loan agreement for the Crowne Plaza Jacksonville Riverfront by providing approximately $0.7 million cash collateral.

Total mortgage debt maturities as of September 30, 2013 without respect to any additional loan extensions for the following twelve-month periods were as follows:

September 30, 2014	$	37,168,940
September 30, 2015		15,487,777
September 30, 2016		2,134,026
September 30, 2017		63,932,193
September 30, 2018		14,798,936
Thereafter		6,262,857
Total future maturities	$	139,784,729

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

Other Loans. On February 9, 2009, an indirect subsidiary of ours which is a member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the “Carlyle Affiliate Lender”), for the purpose of improving our liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount we contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at both September 30, 2013 and December 31, 2012 was $3,650,220 and $4,025,220, respectively.

Bridge Financing. On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. On December 21, 2011, the Company entered into an amendment to the agreement extending the right to borrow the remainder of the available financing until May 31, 2013. The principal amount borrowed bore interest at the rate of 9.25% per annum, payable quarterly in arrears. The outstanding balance on the Bridge Financing at September 30, 2013 and December 31, 2012 was $0.0 million.

XML

Consolidated Statements of Changes in Partners' Capital (USD $)	Total	Sotherly Hotels LP [Member]	Sotherly Hotels LP [Member] General Partner [Member]	Sotherly Hotels LP [Member] Limited Partner [Member]
Balances, beginning at Dec. 31, 2012		$ 37,332,130	$ 617,909	$ 36,714,221
Balances, units, beginning at Dec. 31, 2012			129,727	12,842,898
Issuance of partnership units		171,460	3,059	168,401
Issuance of partnership units, number of units			755	74,745
Redemption of limited partnership units		(32,900)	(476)	(32,424)
Redemption of limited partnership units, number of units			(100)	(9,900)
Distributions declared		(1,434,544)	(14,345)	(1,420,199)
Net loss	(3,772,526)	(3,772,526)	(48,546)	(3,723,980)
Balances, ending at Sep. 30, 2013		32,263,620	557,601	31,706,019
Balances, units, ending at Sep. 30, 2013			130,382	12,907,743
Balances, beginning at Jun. 30, 2013
Net loss	(2,117,808)	(2,117,808)
Balances, ending at Sep. 30, 2013		$ 32,263,620

XML

Income Taxes - Additional Information (Detail) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Income Tax Disclosure [Abstract]
Deferred tax asset	$ 1,237,759	$ 2,649,282
Accumulated net operating losses	600,000	1,900,000
Start up expense related to company	300,000	300,000
Amortized period	15 years
Loss carryforwards, expired	2024
Valuation allowances	$ 0

XML

Unconsolidated Joint Venture - Additional Information (Detail)	Sep. 30, 2013 acre
Schedule of Equity Method Investments [Line Items]
Option of purchase of land	3
Crowne Plaza Hollywood [Member]
Schedule of Equity Method Investments [Line Items]
Company's noncontrolling indirect equity interest	25.00%
Carlyle [Member]
Schedule of Equity Method Investments [Line Items]
Percentage of indirect controlling interest owned by an affiliated related party, Carlyle	75.00%

XML

Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended					3 Months Ended		9 Months Ended						9 Months Ended									9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Segment	Sep. 30, 2012	Dec. 31, 2012	Sep. 30, 2013 Directors [Member]	Sep. 30, 2013 Executives and Employees [Member]	Sep. 30, 2013 Chief Financial Officer [Member]	Sep. 30, 2013 Carlyle [Member]	Sep. 30, 2013 Crowne Plaza Hollywood [Member]	Sep. 30, 2013 2004 Plan [Member]	Sep. 30, 2012 2004 Plan [Member]	Sep. 30, 2013 2004 Plan [Member]	Sep. 30, 2012 2004 Plan [Member]	Sep. 30, 2013 2013 Plan [Member]	Sep. 30, 2013 Warrant [Member]	Sep. 30, 2013 Essex Warrant [Member]	Apr. 18, 2011 Essex Warrant [Member]	Sep. 30, 2013 Minimum [Member]	Sep. 30, 2013 Minimum [Member] MHI Hospitality TRS, LLC [Member]	Sep. 30, 2013 Minimum [Member] Buildings and Improvements [Member]	Sep. 30, 2013 Minimum [Member] Furniture, Fixtures and Equipment [Member]	Sep. 30, 2013 Maximum [Member]	Sep. 30, 2013 Maximum [Member] MHI Hospitality TRS, LLC [Member]	Sep. 30, 2013 Maximum [Member] 2004 Plan [Member]	Sep. 30, 2013 Maximum [Member] 2013 Plan [Member]	Sep. 30, 2013 Maximum [Member] Essex Warrant [Member]	Sep. 30, 2013 Maximum [Member] Buildings and Improvements [Member]	Sep. 30, 2013 Maximum [Member] Furniture, Fixtures and Equipment [Member]
Summary Of Significant Accounting Policies [Line Items]
Estimated useful lives of the assets																					7 years	3 years						39 years	10 years
Company's noncontrolling indirect equity interest										25.00%
Percentage of indirect controlling interest owned by an affiliated related party, Carlyle									75.00%
Junior participation in the existing mortgage	$ 22,000,000		$ 22,000,000
Federal Deposit Insurance Corporation protection limits	250,000		250,000
Un-amortized franchise fees	207,864		207,864		240,489
Amortization expense	10,875	10,875	32,625	32,625
Warrant purchase common stock																1,900,000	1,900,000	1,900,000									1,900,000
Uncertain tax positions of company			0
Years under income tax examination																			2009	2004			2012	2008
Restricted and performance stock awards permitted to grant to employees																									350,000	750,000
Shares issued to certain executives and employees			337,438			81,500	255,938
Shares issued to the Vice President and General Counsel								30,000
Unvested shares issued to independent directors			15,000
Vesting period of employment contract							5 years
Performance-based stock awards granted													0		0
Compensation cost recognized			$ 171,460	$ 110,400							$ 17,880	$ 13,078	$ 60,731	$ 39,233
Number of reportable segments			1

XML

Indirect Hotel Operating Expenses

9 Months Ended

Sep. 30, 2013

Other Income And Expenses [Abstract]

Indirect Hotel Operating Expenses

12. Indirect Hotel Operating Expenses

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

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
General and administrative	$	1,768,605	$	1,747,412	$	5,328,181	$	5,171,402
Sales and marketing		1,836,140		1,765,457		5,549,907		5,411,702
Repairs and maintenance		1,199,038		1,174,889		3,451,004		3,489,280
Utilities		1,195,522		1,278,568		3,221,738		3,444,575
Franchise fees		756,311		741,205		2,350,664		2,229,515
Management fees, including incentive		655,359		703,537		2,070,799		2,160,543
Insurance		358,688		340,513		1,075,083		1,001,717
Property taxes		608,300		688,083		1,776,710		2,045,141
Other		60,274		44,717		185,772		173,205
Total indirect hotel operating expenses	$	8,438,237	$	8,484,381	$	25,009,858	$	25,127,080

XML

Equity

9 Months Ended

Sep. 30, 2013

Equity [Abstract]

Equity

8. Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.

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

On August 16, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.

On April 1, 2013, one holder of units in the Operating Partnership redeemed 31,641 units for an equivalent number of shares of the Company’s common stock.

On March 1, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.

On January 25, 2013, the Company awarded an aggregate of 30,500 shares of unrestricted stock to certain executives and employees as well as 15,000 shares of restricted stock to certain of its independent directors.

On January 1, 2013, the Company granted 30,000 restricted shares to its Chief Financial Officer in accordance with the terms of his employment contract.

On February 2, 2012, the Company awarded an aggregate of 29,500 shares of unrestricted stock to certain executives and employees as well as 1,500 shares of unrestricted stock and 15,000 shares of restricted stock to certain of its independent directors.

As of September 30, 2013 and December 31, 2012, the Company had 10,206,927 and 9,999,786 shares of common stock outstanding, respectively.

Warrants for Shares of Common Stock – The Company has granted no warrants representing the right to purchase common stock other than the Essex Warrant described in Note 6.

Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.

On April 1, 2013, May 1, 2012 and August 1, 2012, the Company redeemed 10,000, 6,000 and 6,000 units, respectively, in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $69,080 pursuant to the terms of the partnership agreement.

As of September 30, 2013 and December 31, 2012, the total number of Operating Partnership units outstanding was 2,831,198 and 2,972,839, with a fair market value of approximately $13.4 million and $9.9 million, respectively, based on the price per share of the common stock on such respective dates.

XML

Subsequent Events

9 Months Ended

Sep. 30, 2013

Subsequent Events [Abstract]

Subsequent Events

15. Subsequent Events

On October 11, 2013, we paid a quarterly dividend (distribution) of $0.04 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record on September 13, 2013.

On October 22, 2013, we authorized payment of a quarterly dividend (distribution) of $0.045 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record as of December 13, 2013. The dividend (distribution) is to be paid on January 10, 2014.

On October 23, 2013, the Company redeemed a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant Shares, as defined in the Essex Warrant, (the “Redeemed Warrant Shares”) for an aggregate cash purchase price of $3.2 million. The Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Essex Warrant, and all exercise and other rights of the holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated and extinguished.

Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed 900,000 Issuable Warrant Units, as defined in the Warrant, for an aggregate cash purchase price of $3.2 million.

XML

Income Taxes

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

The components of the income tax provision for the three months and nine months ended September 30, 2013 and 2012 are as follows:

	Three months ended September 30, 2013		Three months ended September 30, 2012		Nine months ended September 30, 2013		Nine months ended September 30, 2012
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Current:
Federal	$	17,400	$	9,250	$	85,301	$	(39,717	)
State		191		1,439		56,766		9,548
		17,591		10,689		142,067		(30,169	)
Deferred:
Federal		60,013		11,578		1,048,762		880,342
State		16,358		5,712		278,006		240,527
		76,371		17,290		1,326,768		1,120,869
	$	93,962	$	27,979	$	1,468,835	$	1,090,700

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

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense (benefit)	$	(688,108	)	$	(702,855	)	$	(783,255	)	$	(2,084,592	)
Effect of non-taxable REIT (income) loss		765,521			723,683			1,917,318			2,925,217
State income tax expense (benefit)		16,549			7,151			334,772			250,075
	$	93,962		$	27,979		$	1,468,835		$	1,090,700

As of September 30, 2013 and December 31, 2012, we had a net deferred tax asset of $1,237,759 and $2,649,282, respectively, of which, approximately $0.6 million and $1.9 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by such time. As of September 30, 2013 and December 31, 2012, approximately $0.3 million of the net deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. We believe that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 06, 2013
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Entity Registrant Name	SOTHERLY HOTELS INC.
Entity Central Index Key	0001301236
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		10,206,927
Sotherly Hotels LP [Member]
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Entity Registrant Name	Sotherly Hotels LP
Entity Central Index Key	0001313536
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer

XML

Earnings (Loss) Per Share and Unit

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Earnings (Loss) Per Share and Unit

14. Earnings (Loss) Per Share and Unit

Earnings (Loss) Per Share – The computation of basic and diluted earnings per share is presented below. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following the Company’s election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss attributable to the Company for basic computation	$	(1,649,722	)	$	(1,615,020	)	$	(2,934,048	)	$	(5,563,029	)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest		(37,847	)		(27,738	)		(56,319	)		(74,373	)
Net loss attributable to the Company for dilutive computation	$	(1,687,569	)	$	(1,642,758	)	$	(2,990,367	)	$	(5,637,402	)
Denominator
Weighted average number of common shares outstanding for basic computation		10,181,927			9,999,786			10,137,021			9,994,246
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number common shares outstanding for dilutive computation		11,203,156			10,801,390			11,088,876			10,603,240
Basic net loss per share	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per share	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)

Earnings (Loss) Per Unit – The computation of basic and diluted earnings (loss) per unit is presented below.

	Three months ended September 30, 2013			Three months ended September 30, 2012			Nine months ended September 30, 2013			Nine months ended September 30, 2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss	$	(2,117,808	)	$	(2,095,198	)	$	(3,772,526	)	$	(7,221,854	)
Denominator
Weighted average number of units outstanding for basic computation		13,038,125			12,974,647			13,037,422			12,974,399
Dilutive effect of warrants		1,021,229			801,604			951,855			608,994
Weighted average number of units outstanding for dilutive computation		14,059,354			13,776,251			13,989,277			13,583,393
Basic net loss per unit	$	(0.16	)	$	(0.16	)	$	(0.29	)	$	(0.56	)
Diluted net loss per unit	$	(0.15	)	$	(0.15	)	$	(0.27	)	$	(0.53	)