As filed with the Securities and Exchange Commission on September 4, 2013
Registration No. 333-189821
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-11
FOR REGISTRATION
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
SOTHERLY HOTELS LP
(Exact name of Registrant as specified in its governing instruments)
410 W. Francis Street
Williamsburg, Virginia 23185
(757) 229-5648
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Andrew M. Sims
Chief Executive Officer
Sotherly Hotels Inc.
410 W. Francis Street
Williamsburg, Virginia 23185
(757) 229-5648
(757) 564-8801 (Telecopy)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications, including communications sent to agent for service, should be sent to:
Thomas J. Egan, Jr., Esq. Pamela K. Dayanim, Esq. Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, DC 20006 (202) 452-7000 |
John A. Good, Esq. Justin R. Salon, Esq. Bass, Berry & Sims PLC 1201 Pennsylvania Avenue, Suite 300 Washington, DC 20004 (202) 827-2957 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Securities Exchange Act of 1934).
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-accelerated Filer | x | Smaller reporting company | ¨ |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed or supplemented without notice. We may not sell the securities described in this preliminary prospectus until the registration statement that we have filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale of these securities is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 4, 2013
PROSPECTUS
$
SOTHERLY HOTELS LP
% Senior Unsecured Notes Due 2018
Sotherly Hotels LP, which we refer to in this prospectus as the Issuer or the Operating Partnership, is offering and selling % Senior Unsecured Notes due 2018, or the notes. The notes will be issued in denominations of $25 and integral multiples of $25 in excess thereof, will mature on , 2018 and will bear interest at a fixed rate of % per year. Interest on the notes will be payable quarterly in arrears, beginning , 2013.
The notes will be unsecured obligations of the Issuer and will rank equally with all of the Issuers existing and future unsecured indebtedness and senior in right of payment to any of the Issuers future obligations that are by their terms expressly subordinated or junior in right of payment to the notes.
We may, at our option, on or after , 2016 redeem some or all of the notes as described in Description of NotesOptional Redemption. We have applied to list the notes on the NASDAQ® Global Market under the symbol SOHOL. We expect trading in the notes to begin within 30 days of 2013, the original issue date. We may from time to time purchase the notes in the open market or otherwise.
Investing in the notes involves certain risks. See Risk Factors beginning on page 14.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Public Offering Price(1) |
Underwriting Discounts and Commissions(2) |
Proceeds to Issuer(3) |
||||||||
Per note |
$ | $ | ||||||||
Total |
$ | $ |
(1) | Plus accrued interest, if any, from . |
(2) | See Underwriting for additional disclosure regarding the underwriting discounts and expenses payable to the underwriters by us. |
(3) | Before deducting expenses of the offering. |
The underwriters may also purchase up to an additional $ aggregate principal amount of the notes from us at the public offering price per note, less the underwriting discounts and commissions, within 30 days from the date of this prospectus, solely to cover over-allotments, if any.
It is expected that delivery of the notes in book-entry form only will be made through the facilities of The Depository Trust Company on or about against payment therefor in immediately available funds.
We expect to deliver the notes on or about , 2013.
The date of this prospectus is , 2013.
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MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY |
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35 | ||||
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37 | ||||
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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57 | ||||
INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES |
76 | |||
80 | ||||
84 | ||||
88 | ||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
92 | |||
95 | ||||
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113 | ||||
128 | ||||
129 | ||||
131 | ||||
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131 | ||||
F-1 |
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You should rely only on the information contained in this prospectus. Neither the underwriters nor we have authorized any other person to provide you with different or additional information. If anyone provides you with different, additional or inconsistent information, you should not rely on it. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.
All brand and trade names, logos or trademarks contained or referred to in this prospectus are the property of their respective owners, and their appearance in this prospectus may not in any way be construed as participation by, or endorsement of, this offering by any of our franchisors. For more information, see Our Principal Agreements Franchise Agreements.
We use market data and industry forecasts and projections throughout this prospectus, including data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there can be no assurance that any of the forecasts or projections will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently investigated or verified this information.
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This summary highlights the information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding whether to invest in the notes. You should carefully read this entire prospectus, including the information under the heading Risk Factors and all information included in this prospectus.
Explanatory Note
Unless the context otherwise requires or where otherwise indicated, in this prospectus, all references to Operating Partnership or the Issuer means only Sotherly Hotels LP, formerly MHI Hospitality, L.P., a Delaware limited partnership. All references in this prospectus to Sotherly means only Sotherly Hotels Inc., a Maryland corporation and the sole general partner of the Operating Partnership. All references in this prospectus to the Company, we, us and our refer to Sotherly Hotels Inc. and its subsidiaries and predecessors, including the Operating Partnership, unless the context otherwise requires or where otherwise indicated.
There are a few differences between Sotherly and the Operating Partnership, which are reflected in the disclosure in this prospectus. We believe it is important to understand the differences between Sotherly and the Operating Partnership in the context of how Sotherly Hotels Inc. and Sotherly Hotels LP operate as an interrelated consolidated company. Sotherly Hotels Inc. is a self-managed and self-administered real estate investment trust, or REIT, whose only material asset is its ownership of partnership interests of Sotherly Hotels LP. As a result, Sotherly Hotels Inc. does not conduct business itself, other than acting as the sole general partner of Sotherly Hotels LP, and issuing public equity from time to time. As general partner with control of Sotherly Hotels LP, Sotherly consolidates Sotherly Hotels LP for financial reporting purposes. Substantially all of the Companys operations are conducted through Sotherly Hotels LP, and Sotherly Hotels LP holds, directly or indirectly, substantially all the assets of the Company and ownership interests in the Companys joint venture. Sotherly Hotels LP conducts the operations of the Companys business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Sotherly Hotels Inc., which are generally contributed by Sotherly to Sotherly Hotels LP in exchange for partnership units, Sotherly Hotels LP generates the capital required by the Companys business through Sotherly Hotels LPs operations or by Sotherly Hotels LPs direct or indirect incurrence of indebtedness.
Company Overview
Sotherly was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in the Mid-Atlantic and Southern United States. On December 21, 2004, Sotherly successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. As of the date of this prospectus, Sotherly owns approximately 78.3% of the partnership units in the Operating Partnership. Limited partners (including certain of Sotherlys officers and directors) own the remaining Operating Partnership units.
Our portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels located in seven states with an aggregate of 2,424 rooms and approximately 120,200 square feet of meeting space. Nine of these hotels are wholly-owned by subsidiaries of the Operating Partnership and operate under the Hilton, Crowne Plaza, Sheraton and Holiday Inn brands and are managed on a day-to-day basis by MHI Hotels Services, LLC, or MHI Hotels Services. We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture with The Carlyle Group, or Carlyle. Our portfolio is concentrated in markets that we believe possess multiple demand generators and have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we expect will be capable of providing strong risk-adjusted returns.
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In order for Sotherly to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, our wholly-owned hotel properties are leased to MHI Hospitality TRS, LLC, or our TRS Lessee, and managed by MHI Hotels Services, an eligible independent management company owned and controlled by certain individuals, including Andrew M. Sims, Sotherlys chairman and chief executive officer, Kim E. Sims, a current director of Sotherly, Christopher L. Sims, a former director of Sotherly, and William J. Zaiser, Sotherlys former executive vice president and chief financial officer. Our TRS Lessee is wholly-owned by MHI Hospitality TRS Holding, Inc., or MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessee is disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes. MHI Hotels Services and its predecessors have been in continuous operation since 1957. By using MHI Hotels Services as the management company, we intend to continue to capitalize on its extensive experience to seek above-average operating results. MHI Hotels Services and its predecessors have operated for many years in markets where we have a presence, and its operations are driven primarily by a focused sales, marketing and food and beverage strategy that is critical to the success of a full-service hotel.
The following chart generally depicts our corporate structure as of the date of this prospectus:
Market Opportunity
As a result of the global economic recession, commencing in 2008 through early 2010, the U.S. lodging industry experienced substantial declines in operating performance driven by declining U.S. gross domestic product, or GDP, high unemployment levels, low consumer confidence and a reduction in the availability of credit. In addition to facing declining operating results, hotel owners were adversely impacted by a significant decline in the availability of debt financing for working capital, renovations and acquisitions. For the past three years, the lodging industry has experienced a recovery in revenue per available room, or RevPAR, and in financing activity. The breadth and sustainability of the recovery will be dependent on a variety of factors,
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including asset location, individual market performance, and property condition. New supply of hotel rooms has not yet emerged as a major factor impacting the recovery, and we believe the supply of new hotels is likely to remain low for the next several years due to the limited availability of debt financing dedicated to new construction projects. As a result, we believe well-located, properly positioned, and well managed hotels will continue to benefit from the ongoing lodging recovery and demand for hotel rooms.
In addition, we believe that a continued recovery in U.S. GDP growth, coupled with limited growth in new hotel room supply, will lead to increases in lodging industry RevPAR and operating profit. In March 2013, PKF Hospitality Research, a leading industry analytic expert, reported that lodging fundamentals are currently as sound as they have been in the past 30 years, and that hotel rates and RevPAR gains should be double the historic averages through 2015.
Competitive Strengths
We believe the following factors differentiate us from other owners, acquirers and investors in hotel properties:
| Stable Portfolio of High Quality Properties. Our properties consist of well-located, geographically diverse, full-service hotels predominantly in the central business districts of cities in the Mid-Atlantic and Southeastern United States. Our hotels typically offer attractive amenities such as swimming pools, fitness centers, food and beverage facilities, parking and meeting space. Since Sotherlys initial public offering, each of our hotels has undergone a substantial renovation program to enhance the quality and performance of the property. |
| Longtime Relationships with Leading Full-Service Hotel Brands. Our senior management team has developed strong relationships with many of the top full-service hotels brands in the upscale to upper-upscale categories, which is characterized by such brands as Hilton, Crowne Plaza, and Sheraton, and has received numerous awards from nationally recognized hotel franchisors, such as Intercontinental Hotels Group, Starwood Hotels and Hilton Hotels. |
| Existing Portfolio Repositioned, Relicensed and Renovated. From 2007 through 2009, we expended approximately $76.7 million in capital improvements resulting in the substantial renovation and licensing (or re-licensing) of five of our nine wholly-owned properties. For the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011, and 2010, we have expended approximately $3.2 million, $2.9 million, $6.0 million and $2.9 million, respectively, for a total of approximately $14.9 million in capital improvements, which included substantial renovation of our property in Raleigh, North Carolina, which we re-branded as the DoubleTree by Hilton Raleigh Brownstone University, and the first phase of renovation of the guest rooms at the Hilton Philadelphia Airport in Philadelphia, Pennsylvania and the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. We believe this substantial level of capital investment and our upbranding efforts have positioned our properties to capture revenue opportunities in their respective markets and outperform our competitors as these locations mature. |
| Strategic Focus on Select Southern Markets. We are focusing our growth strategy on the major markets in the Southern United States, which we believe have and will continue to benefit from attractive demographic and economic growth characteristics. We believe this region also reflects an attractive business climate with respect to governmental and regulatory policies and taxation. In addition, our hotels are located predominantly in central business district markets near stable demand generators, such as large state universities, convention centers, corporate headquarters, sports venues and office parks and in markets that we believe have significant barriers to entry for new product delivery. |
| Prudent and Flexible Capital Structure. During the last three years, we have refinanced over 60% of the debt on our wholly-owned hotel properties, taking advantage of the current attractive interest rate |
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environment. As of June 30, 2013, we had approximately $134.9 million of secured debt, of which approximately $85.8 million, or 63.6%, was fixed, at an average rate of 5.0% (exclusive of Sotherlys 12.0% Series A Cumulative Redeemable Preferred Stock, or the Preferred Stock). Approximately $49.1 million, or 36.4%, of our secured debt is at a variable interest rate, which bore an average interest rate of 3.6% at June 30, 2013. |
| Experienced Management Team. We believe the Companys and its predecessors longevity in the industry and its success through many market cycles, together with managements experience in the lodging industry, is indicative of the Companys conservative and disciplined approach toward hotel acquisition, ownership and operation. The members of our senior management team, led by Messrs. Sims, Folsom and Domalski, have significant experience in the lodging, capital markets, finance, and accounting industries, and have worked together at Sotherly since 2006. Mr. Sims, Sotherlys chairman and chief executive officer, has spent his entire career with Sotherly and its predecessor, and has over 35 years of experience in the lodging industry as an operator, owner, developer, and financier. Mr. Folsom has nearly eight years of experience with Sotherly and 13 years of experience working in public real estate companies and in the real estate capital markets. Mr. Domalski has nearly 29 years of experience as an accountant and auditor and has worked at Sotherly since 2005. |
Our Strategy
Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the Southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe that we will be able to source significant external growth opportunities through our management teams extensive network of industry, corporate and institutional relationships.
Our core strategy for our portfolio is intended to create value by acquiring performing hotel properties at significant discounts to replacement cost, as well as acquiring underperforming hotels and subsequently renovating, rehabilitating, repositioning, and up-branding these assets. Once these assets have benefited from this turnaround strategy, they become part of our core portfolio. We believe we can optimize performance within the portfolio by superior management practices and by timely and recurring capital expenditures to maintain and enhance the physical property.
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Our Properties
As of the date of this prospectus, our portfolio consisted of the following 10 hotel properties:
Wholly-Owned Properties |
Number of Rooms |
Location | Date of Acquisition |
Years Built / Renovated (1) |
Chain Designation | |||||||
Hilton Philadelphia Airport |
331 | Philadelphia, PA | December 21, 2004 | 1972/2005/2013 | Upper Upscale | |||||||
Hilton Wilmington Riverside |
272 | Wilmington, NC | December 21, 2004 | 1970/2007 | Upper Upscale | |||||||
Hilton Savannah DeSoto |
246 | Savannah, GA | December 21, 2004 | 1968/2008 | Upper Upscale | |||||||
Sheraton Louisville Riverside |
180 | Jeffersonville, IN | September 20, 2006 | 1972/2008 | Upper Upscale | |||||||
Crowne Plaza Jacksonville Riverfront |
292 | Jacksonville, FL | July 22, 2005 | 1970/2006/2013 | Upscale | |||||||
Crowne Plaza Tampa Westshore |
222 | Tampa, FL | October 29, 2007 | 1973/2008 | Upscale | |||||||
Crowne Plaza Hampton Marina |
173 | Hampton, VA | April 24, 2008 | 1988/2008 | Upscale | |||||||
Holiday Inn Laurel West |
207 | Laurel, MD | December 21, 2004 | 1985/2005 | Upper MidScale | |||||||
DoubleTree by Hilton Brownstone-University |
190 | Raleigh, NC | December 21, 2004 | 1971/2002/2011 | Upscale | |||||||
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|
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Total Rooms in Our Wholly-Owned Portfolio |
2,113 | |||||||||||
Joint Venture Property |
||||||||||||
Crowne Plaza Hollywood Beach Resort (2) |
311 | Hollywood, FL | August 9, 2007 | 1972/2006 | Upscale | |||||||
|
|
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Total Rooms in Our Portfolio |
2,424 | |||||||||||
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(1) | Year Renovated represents the year in which the replacement of a significant portion of the hotels furniture, fixtures or equipment was completed. |
(2) | We own this hotel through a joint venture in which we have a 25% interest. |
The following table illustrates certain key operating metrics for the twelve months ended June 30, 2013 for our portfolio.
Wholly-Owned Properties |
Average Occupancy(1) |
ADR(2) | RevPAR(3) | |||||||||
Hilton Philadelphia Airport |
78.6 | % | $ | 135.53 | $ | 106.48 | ||||||
Hilton Wilmington Riverside |
73.4 | % | $ | 133.25 | $ | 97.77 | ||||||
Hilton Savannah DeSoto |
71.7 | % | $ | 136.21 | $ | 97.61 | ||||||
Sheraton Louisville Riverside |
64.3 | % | $ | 130.06 | $ | 83.59 | ||||||
Crowne Plaza Jacksonville Riverfront |
58.6 | % | $ | 97.54 | $ | 57.19 | ||||||
Crowne Plaza Tampa Westshore |
67.8 | % | $ | 102.13 | $ | 69.24 | ||||||
Crowne Plaza Hampton Marina |
53.3 | % | $ | 92.93 | $ | 49.55 | ||||||
Holiday Inn Laurel West |
66.7 | % | $ | 88.89 | $ | 59.29 | ||||||
DoubleTree by Hilton Brownstone-University |
71.1 | % | $ | 109.14 | $ | 77.57 | ||||||
Totals/ Weighted Averages in Our Wholly-Owned Portfolio |
68.1 | % | $ | 117.16 | $ | 79.77 | ||||||
Joint Venture Property |
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Crowne Plaza Hollywood Beach Resort(4) |
80.7 | % | $ | 156.21 | $ | 126.10 | ||||||
Totals/ Weighted Averages in Our Portfolio |
68.5 | % | $ | 118.79 | $ | 81.42 |
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(1) | Average Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the number of rooms sold by the total number of rooms available, expressed as a percentage. |
(2) | Average Daily Rate, or ADR, represents the average rate paid for rooms sold, calculated by dividing total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by total daily rooms sold. |
(3) | RevPAR is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
(4) | We own this hotel through a joint venture in which we have a 25% interest. |
The selected operating data presented above should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
Our Partnership Information
The Issuer is a Delaware limited partnership formed in August 2004. The Issuer changed its name from MHI Hospitality, L.P. to Sotherly Hotels LP effective August 2, 2013. Our principal executive offices are located at 410 W. Francis Street, Williamsburg, VA 23185. Our telephone number is (757) 229-5648. Our website is http://www.sotherlyhotels.com. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this prospectus.
Employees
We currently employ eight full-time persons. All persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.
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The Offering
The following summary contains basic information about the notes and the offering and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the notes, you should read the section of this prospectus entitled Description of Notes.
Issuer |
Sotherly Hotels LP |
Securities Offered |
$ million aggregate principal amount of the notes (or $ million if the underwriters overallotment option is exercised in full). |
Maturity Date |
, 2018. |
Interest Rate |
% per annum, computed on the basis of a 360-day year of twelve 30-day months, from . |
Interest Payment Dates |
, , , and of each year, commencing , 2013. |
Price to Public |
% of the principal amount, plus accrued interest, if any, from . |
Ranking |
The notes will be senior unsecured indebtedness of Sotherly Hotels LP, will rank equally with our other senior unsecured indebtedness and will be effectively subordinated to our secured indebtedness and structurally subordinated to all indebtedness of our subsidiaries. As of June 30, 2013, we had consolidated indebtedness of approximately $151.0 million, which is comprised of approximately $134.9 million of secured debt and approximately $16.1 million of unsecured debt. Of the approximately $151.0 million consolidated indebtedness outstanding at June 30, 2013, approximately $138.5 million was held by our subsidiaries and approximately $12.5 million relates to 12,458 shares of Preferred Stock, including 2,460 shares that were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million and the remainder of which we intend to redeem with a portion of the net proceeds of this offering. |
Use of Proceeds |
We estimate that the net proceeds from the offering of the notes pursuant to this prospectus, after deducting the underwriting discount and estimated offering costs and expenses payable by us, will be approximately $ (or $ if the over-allotment option is exercised in full). We intend to use a portion of the net proceeds from this offering to redeem 100% of the outstanding shares of the Preferred Stock plus any accrued but unpaid dividends and any make-whole amounts or premium then due and payable on such Preferred Stock, which we estimate to be approximately $11.0 million. We intend to use the remaining net proceeds from the offering of the notes for general corporate purposes. See Use of Proceeds in this prospectus. |
Optional Redemption |
We may, at our option, redeem the notes in whole or in part at any time, or from time to time, on or after , 2016 at a |
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redemption price equal to % of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to the date of redemption as described in Description of Notes Optional Redemption in this prospectus. The notes will not be entitled to the benefit of any sinking fund. The notes will not be subject to repayment at the option of the holder at any time prior to maturity, except in connection with a Change of Control Repurchase Event as defined under Description of Notes Certain Covenants Offer to Repurchase Upon a Change of Control Repurchase Event in this prospectus. |
Change of Control Offer to Purchase |
If a Change of Control Repurchase Event as defined under Description of Notes Certain Covenants Offer to Repurchase Upon a Change of Control Repurchase Event occurs, we must offer to repurchase the notes at a repurchase price equal to % of the aggregate principal amount plus any accrued and unpaid interest to, but not including, the repurchase date. |
Default |
The notes will contain events of default, the occurrence of which may result in the acceleration of our obligations under the notes in certain circumstances. See Description of Notes Events of Default; Modification and Waiver in this prospectus. |
Certain Covenants |
We will issue the notes under an indenture, which is referred to as the Indenture, to be dated as of the issuance date between us and Wilmington Trust, National Association, as the trustee. The Indenture contains covenants that limit our ability to incur, or permit our subsidiaries to incur, third-party indebtedness if certain debt to asset value and/or interest coverage ratios would be exceeded. These covenants are subject to a number of important exceptions, qualifications, limitations and specialized definitions. See Description of Notes Certain Covenants in this prospectus. |
Form |
The notes will be evidenced by global notes deposited with the trustee for the notes, as custodian for The Depository Trust Company, or DTC. Beneficial interests in the global notes will be shown on, and transfers of those beneficial interests can only be made through, records maintained by DTC and its participants. See Description of Notes Book-entry, Delivery and Form in this prospectus. |
Denominations |
We will issue the notes only in denominations of $25 and integral multiples of $25 in excess thereof. |
Payment of Principal and Interest |
Principal and interest on the notes will be payable in U.S. dollars or other legal tender, coin or currency of the United States of America. |
Future Issuances |
We may, from time to time, without notice to or consent of the holders, increase the aggregate principal amount of the notes outstanding by issuing additional notes in the future with the same terms as the notes, except for the issue date and offering price, and such additional notes shall be consolidated with the notes issued in this offering and form a single series. |
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Listing |
We have applied to list the notes on the NASDAQ® Global Market under the symbol SOHOL. If the listing is approved, trading of the notes on the NASDAQ® Global Market is expected to commence within a 30-day period after the initial delivery of the notes. Currently, there is no public market for the notes. |
Trustee, Registrar and Paying Agent |
Wilmington Trust, National Association. |
Governing Law |
The Indenture and the notes will be governed by the laws of the State of New York. The Indenture will be subject to the provisions of the Trust Indenture Act of 1939, as amended. |
Material Tax Considerations |
You should consult your tax advisors concerning the U.S. federal income tax consequences of owning the notes in light of your own specific situation, as well as consequences arising under the laws of any other taxing jurisdiction. See Material U.S. Federal Income Tax Considerations. |
Risk Factors |
An investment in the notes involves certain risks. You should carefully consider the risks described under Risk Factors beginning on page 14 of this prospectus before making an investment decision. |
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Summary Financial Information
The following table sets forth, on an historical basis, certain summary consolidated financial and operating data for Sotherly Hotels LP and its subsidiaries. The financial results for the Crowne Plaza Hollywood Beach Resort, in which we have a 25.0% indirect interest, are not consolidated as we account for our investment under the equity method of accounting. You should read the following summary historical financial and operating data in conjunction with the consolidated historical financial statements and notes thereto of Sotherly Hotels LP and its subsidiaries and Managements Discussion and Analysis of Financial Condition and Results of Operations, included in this prospectus.
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Statement of Operations |
||||||||||||||||||||
Total Revenues |
$ | 87,343,220 | $ | 81,172,504 | $ | 77,382,344 | $ | 71,518,726 | $ | 70,762,732 | ||||||||||
Total Operating Expenses excluding Depreciation and Amortization |
(68,376,569 | ) | (65,807,786 | ) | (62,451,362 | ) | (59,224,407 | ) | (58,810,002 | ) | ||||||||||
Depreciation and Amortization |
(8,661,769 | ) | (8,702,880 | ) | (8,506,802 | ) | (8,420,085 | ) | (6,346,222 | ) | ||||||||||
Net Operating Income |
10,304,882 | 6,661,838 | 6,424,180 | 3,874,234 | 5,606,509 | |||||||||||||||
Interest Income |
16,158 | 14,808 | 22,305 | 41,999 | 72,547 | |||||||||||||||
Interest Expense |
(12,382,146 | ) | (10,821,815 | ) | (10,030,517 | ) | (9,661,871 | ) | (6,811,460 | ) | ||||||||||
Other Income (Expense) Net |
(1,965,376 | ) | (1,424,620 | ) | 546,115 | 927,924 | (1,263,304 | ) | ||||||||||||
Income Tax Benefit (Provision) |
(1,301,229 | ) | (905,455 | ) | (214,344 | ) | 1,807,126 | 1,475,695 | ||||||||||||
Net Loss |
(5,327,711 | ) | (6,475,243 | ) | (3,252,261 | ) | (3,010,587 | ) | (920,014 | ) | ||||||||||
Statement of Cash Flows |
||||||||||||||||||||
Cash from Operations net |
$ | 9,011,957 | $ | 7,550,142 | $ | 4,728,270 | $ | 3,182,605 | $ | 7,214,566 | ||||||||||
Cash used in Investing net |
(3,156,121 | ) | (6,130,273 | ) | (3,469,608 | ) | (11,007,214 | ) | (51,931,701 | ) | ||||||||||
Cash from (used in) Financing net |
(3,090,079 | ) | (2,798 | ) | (1,756,261 | ) | 9,595,949 | 42,447,582 | ||||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
$ | 2,765,757 | $ | 1,417,071 | $ | (497,599 | ) | $ | 1,771,340 | $ | (2,269,553 | ) | ||||||||
Balance Sheet (1) |
||||||||||||||||||||
Investments in Hotel Properties net |
$ | 176,427,904 | $ | 181,469,432 | $ | 183,898,660 | $ | 188,587,507 | $ | 154,295,611 | ||||||||||
Properties Under Development |
| | | | 33,101,773 | |||||||||||||||
Total Assets |
204,030,869 | 209,299,446 | 209,583,431 | 213,959,755 | 211,218,434 | |||||||||||||||
Line of Credit |
| 25,537,290 | 75,197,858 | 75,522,858 | 73,187,858 | |||||||||||||||
Mortgage Loans |
135,674,432 | 94,157,825 | 72,192,253 | 72,738,250 | 72,256,168 | |||||||||||||||
Series A Preferred Interest |
14,227,650 | 25,353,698 | | | | |||||||||||||||
Total Liabilities |
166,698,739 | 165,416,203 | 158,775,128 | 160,118,529 | 157,442,238 | |||||||||||||||
Partners Capital |
37,332,130 | 43,883,243 | 50,808,303 | 53,841,226 | 53,776,196 | |||||||||||||||
Operating Data |
||||||||||||||||||||
Average Number of Available Rooms |
2,113 | 2,111 | 2,110 | 2,071 | 1,775 | |||||||||||||||
Total Number of Available Room Nights |
773,358 | 770,334 | 770,150 | 755,942 | 649,499 | |||||||||||||||
Occupancy Percentage(2) |
68.9 | % | 66.2 | % | 66.0 | % | 60.4 | % | 62.0 | % | ||||||||||
Average Daily Rate (ADR)(3) |
$ | 114.22 | $ | 110.24 | $ | 104.42 | $ | 107.21 | $ | 119.50 | ||||||||||
RevPAR |
$ | 78.65 | $ | 72.94 | $ | 68.93 | $ | 64.74 | $ | 74.04 | ||||||||||
Additional Financial Data |
||||||||||||||||||||
FFO(5) |
$ | 3,924,733 | $ | 2,923,539 | $ | 5,971,900 | $ | 5,997,948 | $ | 6,292,400 | ||||||||||
Adjusted FFO(5) |
9,470,684 | 5,577,805 | 5,315,321 | 2,848,314 | 4,881,390 | |||||||||||||||
Hotel EBITDA(6) |
22,439,770 | 18,708,019 | 17,639,548 | 14,771,907 | 14,224,058 |
(1) | As of the period end. |
(2) | Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage. |
(3) | ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold. |
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(4) | RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
(5) | Industry analysts and investors use Funds from Operations, or 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, or NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with U.S. generally accepted accounting principles, or 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. |
Adjusted FFO accounts for certain additional items that are not in NAREITs definition of FFO, including any unrealized gain (loss) on 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.
The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Net Loss |
$ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||
Depreciation and amortization |
8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||
Equity in depreciation and amortization of joint venture |
590,675 | 567,803 | 546,055 | 545,580 | 545,659 | |||||||||||||||
(Gain)/loss on disposal of assets |
| 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO |
$ | 3,924,733 | $ | 2,923,539 | $ | 5,971,900 | $ | 5,997,948 | $ | 6,292,400 | ||||||||||
Unrealized (gain)/loss on hedging activities(A) |
13,752 | 77,152 | (830,614 | ) | (1,220,161 | ) | 691,268 | |||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,026,677 | 1,309,075 | | | | |||||||||||||||
(Increase)/decrease in deferred income taxes |
1,412,467 | 685,189 | 174,035 | (1,929,473 | ) | (1,652,278 | ) | |||||||||||||
Impairment of note receivable |
110,871 | | | | 300,000 | |||||||||||||||
Aborted offering costs |
| 582,850 | | | | |||||||||||||||
Equity in gain on extinguishment of debt of joint venture |
| | | | (750,000 | ) | ||||||||||||||
Loss on early extinguishment of debt(B) |
1,982,184 | | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted FFO |
$ | 9,470,684 | $ | 5,577,805 | $ | 5,315,321 | $ | 2,848,314 | $ | 4,881,390 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(A) | Includes equity in unrealized loss on hedging activities of joint venture. |
(B) | Reflected in interest expense for the periods presented above. |
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(6) | Hotel EBITDA represents the portion of net operating income before depreciation and amortization and corporate general and administrative expenses that relate to our nine wholly-owned properties. |
The following is a reconciliation of net loss to hotel EBITDA for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Net Loss |
$ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||
Interest expense |
12,382,146 | 10,821,815 | 10,030,517 | 9,661,871 | 6,811,460 | |||||||||||||||
Interest income |
(16,158 | ) | (14,808 | ) | (22,305 | ) | (41,999 | ) | (72,547 | ) | ||||||||||
Income tax provision (benefit) |
1,301,229 | 905,455 | 214,344 | (1,807,126 | ) | (1,475,695 | ) | |||||||||||||
Depreciation and amortization |
8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||
Equity in (earnings)/loss of joint venture |
(172,172 | ) | 60,094 | (16,931 | ) | 249,367 | (48,496 | ) | ||||||||||||
(Gain)/loss on disposal of assets |
| 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||
Unrealized (gain)/loss on hedging activities |
| (72,649 | ) | (700,488 | ) | (1,220,161 | ) | 691,268 | ||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,026,677 | 1,309,075 | | | | |||||||||||||||
Impairment of note receivable |
110,871 | | | | 300,000 | |||||||||||||||
Corporate general and administrative |
4,078,826 | 4,025,794 | 3,389,764 | 3,170,627 | 2,940,979 | |||||||||||||||
Net lease rental income |
(350,000 | ) | (447,000 | ) | (443,000 | ) | (445,000 | ) | (471,862 | ) | ||||||||||
Other fee income |
(255,707 | ) | (235,493 | ) | (238,198 | ) | (248,040 | ) | (197,790 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Hotel EBITDA |
$ | 22,439,770 | $ | 18,708,019 | $ | 17,639,548 | $ | 14,771,907 | $ | 14,224,058 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table sets forth the operating data on a weighted average basis for the Operating Partnership, inclusive of its 25.0% indirect interest in the Crowne Plaza Hollywood Beach Resort:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Operating Data |
||||||||||||||||||||
Weighted Average Number of Available Rooms |
2,197 | 2,188 | 2,188 | 2,149 | 1,857 | |||||||||||||||
Pro-rata Total of Available Room Nights |
801,815 | 798,713 | 798,529 | 784,321 | 677,956 | |||||||||||||||
Occupancy Percentage(1) |
69.2 | % | 66.6 | % | 66.5 | % | 60.8 | % | 61.8 | % | ||||||||||
Average Daily Rate (ADR)(2) |
$ | 115.56 | $ | 111.22 | $ | 105.12 | $ | 107.79 | $ | 120.78 | ||||||||||
RevPAR(3) |
$ | 80.00 | $ | 74.11 | $ | 69.92 | $ | 65.49 | $ | 74.69 |
(1) | Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage. |
(2) | ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold. |
(3) | RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus. The forward-looking statements 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. The factors listed under Risk Factors in this prospectus, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Such risks and uncertainties include, among other things, risks and uncertainties related to:
| national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services; |
| risks associated with the hotel industry, including competition, increases in wages 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 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 maintain adequate insurance coverage; and |
| other factors, including those discussed in Risk Factors in this prospectus. |
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this prospectus. All forward-looking statements speak only as of the date of this prospectus. 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 prospectus, except as required by law. In addition, our past results are not necessarily indicative of our future results.
13
An investment in the notes involves various risks. The following are the material risks that apply to an investment in the notes. You should carefully consider the risks described below, together with the other information included in this prospectus before making a decision to invest in the notes. Any of the following risks could materially adversely affect our business, operations, industry or financial position or our future financial performance.
Risks Related to the Offering
The notes are unsecured obligations of the Operating Partnership and not obligations of Sotherly or our subsidiaries and will be subordinated to any of the Operating Partnerships future secured indebtedness to the extent of the value of the assets securing such indebtedness and effectively subordinated to any future obligations of the Operating Partnerships subsidiaries. Structural subordination increases the risk that we will be unable to meet our obligations on the notes when they mature.
The notes will be unsecured unsubordinated obligations of the Operating Partnership and will rank equally in right of payment with all of the Operating Partnerships other unsecured indebtedness and senior in right of payment to any of the Operating Partnerships future obligations that are by their terms expressly subordinated or junior in right of payment to the notes. The notes will be effectively subordinated to any of the Operating Partnerships existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. At June 30, 2013, we had consolidated debt of approximately $151.0 million, which is comprised of approximately $134.9 million of secured debt and approximately $16.1 million of unsecured debt.
The notes are obligations exclusively of the Operating Partnership and not of any of its subsidiaries. None of the Operating Partnerships subsidiaries is a guarantor of the notes and the notes are not required to be guaranteed by any subsidiaries we, the Operating Partnership, may acquire or create in the future. The notes are also effectively subordinated to all of the liabilities of the Operating Partnerships subsidiaries, to the extent of their assets, since they are separate and distinct legal entities with no obligation to pay any amounts due under the Issuers indebtedness, including the notes, or to make any funds available to make payments on the notes, whether by paying dividends or otherwise. The Operating Partnerships right to receive any assets of any subsidiary in the event of a bankruptcy or liquidation of the subsidiary, and therefore the right of the Operating Partnerships creditors to participate in those assets, will be effectively subordinated to the claims of that subsidiarys creditors, including trade creditors, in each case to the extent that the Operating Partnership is not recognized as a creditor of such subsidiary. In addition, even where the Operating Partnership is recognized as a creditor of a subsidiary, the Operating Partnerships rights as a creditor with respect to certain amounts are subordinated to other indebtedness of that subsidiary, including secured indebtedness to the extent of the assets securing such indebtedness. As of June 30, 2013, 100% of our consolidated secured indebtedness, or $134.9 million, was in the form of mortgages secured by properties owned by subsidiaries of the Operating Partnership, and none of our properties were unencumbered as of June 30, 2013.
The notes restrict, but do not eliminate, the Operating Partnerships ability to incur additional debt or take other action that could negatively impact holders of the notes.
Subject to specified limitations in the Indenture and as described under Description of NotesCertain Covenants, the Indenture does not contain any provisions that would limit the Operating Partnerships ability or the ability of its subsidiaries to incur indebtedness, including indebtedness that would be senior to the notes.
There are limited covenants in the Indenture.
The Indenture does not:
| prevent our subsidiaries from incurring indebtedness which would effectively rank senior to the notes; |
14
| prevent us from incurring secured indebtedness that would rank senior to the notes to the extent of the value of the assets securing the indebtedness; or |
| prevent us from incurring unsecured indebtedness that is equal or subordinate in right of payment to the notes. |
For these reasons, you should not consider the covenants in the Indenture as a significant factor in evaluating whether to invest in the notes.
An increase in the level of our outstanding indebtedness, or other events, could have an adverse impact on our business, properties, capital structure, financial condition, results of operations or prospects, which could adversely impact the trading prices for, or the liquidity of, the notes. Any such event could also adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in future debt agreements.
Certain financial covenants in the Indenture rely on definitions that use non-GAAP measures and/or are subject to managements good faith discretion, which could make it difficult for holders of our notes to determine independently whether we are in compliance with certain financial covenants relating to the notes.
The Indenture governing the notes contains financial covenants that restrict us or any of our subsidiaries from incurring indebtedness in amounts that would cause certain ratios specified in the Indenture, or Covenant Ratios, not to exceed certain fixed values (see Description of NotesCertain CovenantsLimitations on Incurrence of Debt). The Covenant Ratios are calculated by reference to various specialized definitions specific to the Indenture, some of which utilize non-GAAP financial measures. If we had been subject to the covenants in the Indenture as of June 30, 2013, our Ratio of Debt to Adjusted Total Asset Value would have been 0.42 and our Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense would have been 3.32. For instance, certain definitions on which the Covenant Ratios rely reflect various adjustments to add or subtract certain items from GAAP consolidated net income and interest expense. In addition, management of Sotherly, our general partner, has discretion in calculating certain elements of the Covenant Ratios. For example, the definition of Consolidated Income Available for Debt Service allows management of Sotherly to determine in good faith whether, and the extent to which, certain non-recurring or other unusual items will be added back to our consolidated net income (calculated in accordance with GAAP) for purposes of calculating the Covenant Ratios. As a result of the foregoing, the financial statements that we include in future filings with the SEC, which are required to be prepared in accordance with GAAP, may employ different financial measures from those used in the Covenant Ratios, which may make it difficult for holders of our notes to determine independently whether we are in compliance with certain financial covenants.
Under certain circumstances, we may redeem the notes before maturity, and you may be unable to reinvest the proceeds at the same or a higher rate of return.
We may redeem all or a portion of the notes at any time after 2016, as described under Description of NotesOptional Redemption. If a redemption does occur, you may be unable to reinvest the money you receive in the redemption at a rate that is equal to or higher than the rate of return on the notes.
General market conditions and other unpredictable factors could materially and adversely affect market prices for the notes.
There can be no assurance about the market prices for the notes. Several factors, many of which are beyond our control, will influence the market value of the notes. Factors that might influence the market value of the notes include, but are not limited to:
| our creditworthiness, financial condition, performance and prospects; |
| the market for similar securities; and |
| economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally (including the occurrence of market disruption events). |
15
If you purchase notes, whether in this offering or in the secondary market, the notes may subsequently trade at a discount to the price that you paid for them.
There is no established trading market for the notes, which could make it more difficult for you to sell your notes and could adversely affect their price.
The notes constitute a new issue of securities for which no established trading market exists. Consequently, it may be difficult for you to sell your notes. If the notes are traded after their initial issuance, they may trade at a discount, depending upon:
| our financial condition; |
| prevailing interest rates; |
| the time remaining on the maturity of the notes; |
| their subordination to our existing and future liabilities; |
| the outstanding principal amount of the notes; |
| the market for similar securities; and |
| other factors beyond our control, including general economic conditions and conditions affecting lodging companies. |
We have applied to list the notes on the NASDAQ® Global Market; however, we cannot assure you of the development or liquidity of any trading market for the notes following this offering.
Risks Related to Our Debt and Financing
We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the notes. Increased leverage as a result of this offering may harm our financial condition and results of operations.
Our ability to make payments on and to refinance our indebtedness, including the notes, will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. As of June 30, 2013, we had consolidated debt of approximately $151.0 million, which is comprised of approximately $134.9 million secured and approximately $16.1 million unsecured debt. Of the approximately $16.1 million of unsecured debt as of June 30, 2013, approximately $12.5 million is related to the 12,458 shares of Preferred Stock issued and outstanding as of June 30, 2013 (of which 2,460 shares were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million). We intend to redeem the remaining 9,998 shares of Preferred Stock with a portion of the net proceeds of this offering. The Preferred Stock is treated as debt under GAAP. See Use of Proceeds.
Our level of indebtedness could have important consequences to you, because:
| it could affect adversely the Operating Partnerships ability to satisfy its financial obligations, including those relating to the notes; |
| a portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; |
| it may impair our ability to obtain additional financing in the future and/or to refinance existing debt; |
| it could require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing; |
| it may force us to dispose of one or more of our properties, possibly on unfavorable terms; |
| it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and |
| it may make us more vulnerable to downturns in our business, our industry or the economy in general. |
16
We have debt obligations maturing in 2014, and if we are not successful in extending the term of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our overall financial condition could be materially and adversely affected.
We will be required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. 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 $6.0 million. Subject to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015. In August 2014, our indebtedness to an affiliate of Carlyle related to our joint venture investment in the Crowne Plaza Hollywood Beach Resort matures. In August 2014, the mortgage on our Hilton Philadelphia Airport matures, but we may extend such mortgage until March 2017 pursuant to certain terms and conditions. The total aggregate amount of our debt obligations maturing in 2014 is approximately $38.3 million, which represents approximately 25.7% of our total debt obligations.
We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. If we are unable to extend these loans, we may be required to repay the outstanding principal amount at maturity or a portion of such indebtedness upon refinance. If we do not have sufficient funds to repay any portion of the indebtedness, it may be necessary to raise capital through additional debt financing, private or public offerings of debt securities or equity financings. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available to meet our financial obligations. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies or we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses and potentially reducing cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be reinvested in equally profitable real property investments. Moreover, the terms of any additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the extent we cannot repay our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.
For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder Sotherlys ability to meet the REIT distribution requirements imposed by the Internal Revenue Code of 1986, as amended, or the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. See Description of Notes Events of Default for a discussion of potential implications should any of our hotels be foreclosed on due to a default.
We must comply with financial covenants in our mortgage loan agreements.
Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.
If we violate the financial covenants contained in 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
17
make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.
Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.
Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. In addition, our organizational documents contain no limitations on the amount of debt that we may incur, and Sotherlys board of directors may change our financing policy at any time. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:
| our cash flows from operations may be insufficient to make required payments of principal and interest; |
| our debt may increase our vulnerability to adverse economic and industry conditions; |
| we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for funds available for operations and capital expenditures, future business opportunities or other purposes; and |
| the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced. |
Risks Related to Our Business and Properties
If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance, financial results and ability to meet our financial obligations may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.
The performance of the lodging industry and the general economy historically have been closely linked. In an economic downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels, which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating revenues, which will lower our cash flow and may affect our ability to maintain compliance with our debt obligations, including the Operating Partnerships obligations under the notes. We incurred a net loss of approximately $5.3 million for our 2012 fiscal year. A renewed economic downturn may produce continued losses. A weakening of the economy may adversely and materially affect our industry, business, results of operations and ability to meet our financial obligations and we cannot predict the likelihood, severity or duration of any such downturn. Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term business strategy.
Geographic concentration of our hotels makes our business vulnerable to economic downturns in the Mid-Atlantic and Southern United States.
Our hotels are located in the Mid-Atlantic and Southern United States. As a result, economic conditions in the Mid-Atlantic and Southern United States significantly affect our revenues and the value of our hotels to a greater
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extent than if we had a more geographically diversified portfolio. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any resulting oversupply or reduced demand for hotels in the Mid-Atlantic and Southern United States and in our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to meet our financial obligations.
We own a limited number of hotels and significant adverse changes at one hotel may impact our ability to meet our financial obligations.
As of June 30, 2013, our portfolio consisted of nine wholly-owned properties and one joint venture property with a total of 2,424 rooms. Significant adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly, on our ability to meet our financial obligations.
We are subject to risks of increased hotel operating expenses and decreased hotel revenues.
Our leases with our TRS Lessee provide for the payment of rent based in part on gross revenues from our hotels. Our TRS Lessee is subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but not limited to the following:
| wage and benefit costs; |
| repair and maintenance expenses; |
| energy costs; |
| property taxes; |
| insurance costs; and |
| other operating expenses. |
Any increases in these operating expenses can have a significant adverse impact on our TRS Lessees ability to pay rent and other operating expenses and, consequently, our earnings, cash flow and ability to meet our financial obligations.
In keeping with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely affect our financial performance and our ability to meet our financial obligations.
We have in the past and may continue to develop or acquire hotels in geographic areas in which our management may have little or no operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient demand at new hotel properties, therefore, could adversely affect our financial performance and our ability to meet our financial obligations.
We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our financial performance and ability to meet our financial obligations are dependent on the management of our hotels by MHI Hotels Services.
Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or manage our hotels. Instead, we lease all of our hotels to subsidiaries of our TRS Lessee, and our TRS Lessee retains third-party managers to operate our hotels pursuant to management agreements.
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Under the terms of our management agreements with MHI Hotels Services and the REIT qualification rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on MHI Hotels Services to operate our hotels as provided in the management agreements. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel. Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR and ADR, we may not be able to force MHI Hotels Services to change its method of operation of our hotels. Additionally, in the event that we need to replace MHI Hotels Services or any other management companies in the future, we may be required by the terms of the applicable management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
Our ability to meet our financial obligations is subject to fluctuations in our financial performance, operating results and capital improvements requirements.
We lease all of our hotels to our TRS Lessee. Our TRS Lessee is subject to hotel operating risks, including risks of sustaining operating losses after payment of hotel operating expenses, including management fees. Among the factors which could cause our TRS Lessee to fail to make required rent payments are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among the factors that could reduce the net operating profits of our TRS Lessee are decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates at our hotels. We cannot assure you that we will continue to generate sufficient cash to meet our financial obligations.
Hedging against interest rate exposure may adversely affect us and our hedges may fail to protect us from the losses that the hedges were designed to offset.
Subject to maintaining Sotherlys qualification as a REIT, we may continue to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:
| interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; |
| the financial instruments we select may not have the effect of reducing our interest rate risk; |
| the duration of the hedge may not match the duration of the related liability; |
| the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
| the hedging counterparty owing money in the hedging transaction may default on its obligation to pay. |
As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, may fail to protect us from the losses that the hedges were designed to offset and could have a material adverse effect on us.
Sotherlys tax indemnification obligations, which were not the result of arms-length negotiations and which apply in the event that we sell certain properties, could subject us to liability, which we currently estimate to be approximately $9.2 million, and limit our operating flexibility and our ability to meet our financial obligations.
If we dispose of certain of our hotels, we would be obligated to indemnify the original contributors (including their permitted transferees and persons who are taxable on the income of a contributor or permitted
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transferee) against certain tax consequences of the sale pursuant to the tax indemnity agreements, the terms of which were not the result of arms-length negotiations. These original contributors include Andrew M. Sims, Sotherlys chairman and chief executive officer, William J. Zaiser, Sotherlys former executive vice president and chief financial officer, Kim E. Sims, a current Sotherly director, and Christopher L. Sims, a former Sotherly director. We have agreed to pay a certain amount of a contributors tax liability with respect to gains allocated to such contributor under Section 704(c) of the Code if we dispose of a property contributed by such contributor in a taxable transaction during a protected period, which continues until the earlier of:
| 10 years after the contribution of such property; or |
| the date on which the contributor no longer owns, in the aggregate, at least 25.0% of the units we issued to the contributor at the time of its contribution of property to the Operating Partnership. |
This tax indemnity will be equal to a certain amount of the federal and state income tax liability a contributor incurs with respect to the gain allocated to such contributor upon such sale based on a sliding scale percentage. Specifically, we are responsible for indemnifying the contributors for 100.0% of their tax liability during the first five years after contribution and for 50.0% of their tax liability during the sixth year, and will indemnify them for: 40.0%, during the seventh year; 30.0%, during the eighth year; 20.0%, during the ninth year; and 10.0%, during the tenth year. The terms of the tax indemnity agreements also require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment.
As over eight years have elapsed since the properties were contributed, if we were to sell, during 2013 in a taxable transaction, the five hotels that were contributed to us in Sotherlys initial public offering in exchange for partnership units in the Operating Partnership (including our property in Jeffersonville, Indiana, which we substituted under the tax indemnity and related agreements for the property in Williamsburg, Virginia as part of an exchange pursuant to Section 1031 of the Code) our estimated total tax indemnification obligation to our indemnified contributors, including the gross-up payment, would be approximately $9.2 million, which amount will decrease until the end of 2014, at which time the indemnification agreement expires.
We may realize reduced revenue because our management company may experience conflicts of interest in connection with the management of its other properties.
MHI Hotels Services may experience conflicts of interest in connection with the management of other properties located nearby in the same geographic market as our hotel properties. Currently, MHI Hotels Services manages a small city-center property in the same geographic market as one of our hotel properties and also manages another property in the same geographic market as a second property in our portfolio. The fees that MHI Hotels Services earns for managing our properties are largely fixed under our management agreements and may be less than the fees it earns for other properties it manages or may manage in the future. Because MHI Hotels Services oversees the marketing and solicitation of individual and group business, it may have a greater financial incentive to direct prospective guests and customers to properties that we do not own, which would have a negative impact on our revenue and our ability to meet our financial conditions.
The Operating Partnership has substantial dealings with related parties and a number of its principal agreements were not negotiated at arms-length.
The Operating Partnership has substantial dealings with parties related to certain members of Sotherlys management team and certain of Sotherlys directors, including with MHI Hotels Services. While we believe the arrangements and transactions with related parties are fair and in the best interest of the Operating Partnership, they were not negotiated on an arms-length basis and may be less favorable to us than we could have obtained from third parties.
The Operating Partnership will have increased reporting and compliance obligations.
Following this offering, the Operating Partnership will be required to comply with rigorous reporting and compliance obligations. In particular, but without limitation, the Operating Partnership will be required to file
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periodic and other reports under the Exchange Act and to establish and maintain effective disclosure controls and internal control over financial reporting pursuant to the Sarbanes-Oxley Act. Preparing and filing annual and quarterly reports and other information with the Securities and Exchange Commission, or the SEC, and other compliance with these rules and regulations will involve a material increase in regulatory, legal and accounting expenses and the attention of management, and there can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. We believe the Operating Partnership is well positioned to comply with these regulations, given the extensive experience of the management team in complying with similar regulations applicable to Sotherly.
Risks Related to the Lodging Industry
Our ability to meet our financial obligations and the value of our hotels in general may be adversely affected by factors in the lodging industry.
Operating Risks
Our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
| competition from other hotel properties in our markets; |
| over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels; |
| dependence on business and commercial travelers and tourism; |
| increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists; |
| increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by increased room rates; |
| changes in interest rates and in the availability, cost and terms of debt financing; |
| changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; |
| adverse effects of international, national, regional and local economic and market conditions; |
| adverse effects of a downturn in the lodging industry; and |
| risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below. |
These factors could reduce the net income of our TRS Lessee, which in turn could adversely affect the value of our hotels and our ability to meet our financial obligations.
Competition for Acquisitions
We may compete for investment opportunities with entities that may have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Seasonality of Hotel Business
The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to meet our financial obligations, including the payment of any amounts due under the notes.
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Investment Concentration in Particular Segments of Single Industry
Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the full-service upscale and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our financial condition and the extent to which cash may be available meet our financial obligations, including the payment of any amounts due under the notes.
Capital Expenditures
Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts for capital improvements to the secured properties on a monthly basis. For the years ended December 31, 2012 and 2011, we spent approximately $2.9 million and approximately $6.0 million, respectively, on capital improvements to our hotels. Capital improvements and renovation projects may give rise to the following risks:
| possible environmental problems; |
| construction cost overruns and delays; |
| a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; and |
| uncertainties as to market demand or a loss of market demand after capital improvements have begun. |
The costs of all these capital improvements as well as future capital improvements could adversely affect our financial condition and amounts available to meet our financial obligations, including the payment of any amounts due under the notes.
Operating our hotels under franchise agreements could increase our operating costs and lower our net income.
Our hotels operate under franchise agreements which subject us to risks in the event of negative publicity related to one of our franchisors.
The maintenance of the franchise licenses for our hotels is subject to our franchisors operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that our lessee, the management company and we follow their standards. Failure by us, our TRS Lessee or the management company to maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel. As a condition of continuing a franchise license, a franchisor could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.
If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license or to operate the hotel without a franchise license. The loss of a franchise license could significantly decrease the revenues at the hotel and reduce the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations, and our ability to meet our financial obligations.
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Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or refinance our hotels, which could have a material adverse effect on us.
Franchise agreements typically contain covenants that may affect our ability to sell or refinance a hotel, including requirements to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisors consent is not forthcoming, the terms of a sale or refinancing may be less favorable to us than would otherwise be the case. Some of our franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the transferee agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels, we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less favorable to us, which could have a material adverse effect on our financial condition and the execution of our strategies.
Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to meet our financial obligations.
We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general economic conditions, and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks, including risks associated with:
| construction delays or cost overruns that may increase project costs; |
| receipt of zoning, occupancy and other required governmental permits and authorizations; |
| development costs incurred for projects that are not pursued to completion; |
| acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project; |
| financing; and |
| governmental restrictions on the nature or size of a project. |
We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a project on time or within budget would increase our operating costs and reduce our net income and our ability to meet our financial obligations.
Uninsured and underinsured losses could adversely affect our operating results and our ability to meet our financial obligations.
We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist activities such as those on September 11, 2001, or losses from domestic terrorist activities such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage in conjunction with the Terrorism Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured losses resulting from acts of terrorism. The program is currently set to expire on December 31, 2014. If the program is not renewed, we do not intend to obtain terrorism insurance on our hotel properties as we anticipate it will be costly or unavailable. Lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could reduce our net income and limit our ability to meet our other financial obligations.
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In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
Noncompliance with governmental regulations could adversely affect our operating results.
Environmental Matters
Our hotels may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:
| our knowledge of the contamination; |
| the timing of the contamination; |
| the cause of the contamination; or |
| the party responsible for the contamination of the property. |
There may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.
The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability meet our financial obligations.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADAs requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to meet our financial obligations could be adversely affected.
Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
The hotel properties that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might include:
| liabilities for environmental conditions; |
| losses in excess of our insured coverage; |
| accrued but unpaid liabilities incurred in the ordinary course of business; |
| tax, legal and regulatory liabilities; |
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| claims of customers, vendors or other persons dealing with the Companys predecessors prior to our formation or acquisition transactions that had not been asserted or were unknown prior to the Companys formation or acquisition transactions; and |
| claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of our properties. |
In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations and our ability to meet our financial obligations.
Future terrorist activities may adversely affect, and create uncertainty in, our business.
Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years. Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business and meet our financial obligations, our ability to insure our properties and/or our results of operations and financial condition, as a whole.
We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for our hotels.
Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the outbreaks of SARS and avian flu in 2003 had a severe impact on the travel industry, and the outbreaks of H1N1 flu threatened to have a similar impact. A prolonged recurrence of SARS, avian flu, H1N1 flu or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for our hotels and adversely affect our financial conditions, results of operations and our ability to meet our financial obligations.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions is limited.
The real estate market is affected by many factors that are beyond our control, including:
| adverse changes in international, national, regional and local economic and market conditions; |
| changes in interest rates and in the cost and terms of debt financing; |
| absence of liquidity in credit markets which limits the availability and amount of debt financing; |
| changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; |
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| the ongoing need for capital improvements, particularly in older structures; |
| changes in operating expenses; and |
| civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Sandy in October 2012, Hurricane Katrina in New Orleans in August 2005, which may result in uninsured losses, and acts of war or terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001. |
We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to meet our financial obligations.
Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available to meet our financial obligations. In addition, the presence of significant mold could expose us to liability from our guests, employees or the management company and others if property damage or health concerns arise and could harm our reputation.
Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to meet our financial obligations.
Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to meet our financial obligations could be adversely affected.
Federal Income Tax Risks
The federal income tax laws governing REITs are complex.
Sotherly intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Sotherly has not requested or obtained a ruling from the Internal Revenue Service, or the IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that Sotherly will be successful in operating in a manner that will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax
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consequences of Sotherlys qualification as a REIT. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. Sotherly and its stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect Sotherlys ability to qualify as a REIT.
Failure to make distributions could subject Sotherly to tax.
In order to maintain its qualification as a REIT, each year Sotherly must pay out to its stockholders in distributions at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid and excluding net capital gain. To the extent that Sotherly satisfies this distribution requirement, but distributes less than 100.0% of its taxable income, Sotherly will be subject to federal corporate income tax on its undistributed taxable income. In addition, Sotherly will be subject to a 4.0% nondeductible excise tax if the actual amount that it pays out to its stockholders in a calendar year is less than the minimum amount specified under federal tax laws. Sotherlys only source of funds to make these distributions comes from rent received from its TRS Lessee, which in turn receives revenues from hotel operations, and dividends from MHI Holding. Accordingly, Sotherly may be required to borrow money or sell assets to make distributions sufficient to enable it to pay out enough of its taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4.0% nondeductible excise tax in a particular year.
Failure to qualify as a REIT would subject Sotherly to federal income tax.
If Sotherly fails to qualify as a REIT in any taxable year, it will be required to pay federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause Sotherly to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results in order to pay any such tax. Unless it is entitled to relief under certain statutory provisions, Sotherly would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost its qualification. If Sotherly lost its REIT status, its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, Sotherly would no longer be required to make distributions to its stockholders, and it would not be able to deduct any stockholder distributions in computing its taxable income. This would substantially reduce Sotherlys earnings, cash available to pay distributions, and the value of common stock.
Failure to qualify as a REIT may cause Sotherly to reduce or eliminate distributions to its stockholders, and Sotherly may face increased difficulty in raising capital or obtaining financing.
If Sotherly fails to remain qualified as a REIT, it may have to reduce or eliminate any distributions to its stockholders in order to satisfy its income tax liabilities. Any distributions that Sotherly does make to its stockholders would be treated as taxable dividends to the extent of its current and accumulated earnings and profits. This may result in negative investor and market perception regarding the market value of Sotherlys common stock, and the value of its common stock may be reduced. In addition, Sotherly and the Operating Partnership may face increased difficulty in raising capital or obtaining financing if Sotherly fails to qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of its market valuation.
MHI Holding increases our overall tax liability.
Our TRS Lessee is a single-member limited liability company that is wholly-owned by MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessee is disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes, such that the assets, liabilities, income, gains, losses, credits and deductions of our TRS Lessee are treated as the assets, liabilities, income, gains, losses,
28
credits and deductions of MHI Holding for U.S. federal income tax purposes. MHI Holding is subject to federal and state income tax on its taxable income, which will consist of the revenues from the hotels leased by Sotherlys TRS Lessee, net of the operating expenses for such hotels and rent payments. Accordingly, although Sotherlys ownership of MHI Holding and the TRS Lessee will allow Sotherly to participate in the operating income from its hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any, will be available for distribution to Sotherly.
Sotherly will incur a 100.0% excise tax on transactions with MHI Holding and the TRS Lessee that are not conducted on an arms-length basis. For example, to the extent that the rent paid by the TRS Lessee exceeds an arms-length rental amount, such amount potentially will be subject to this excise tax. Sotherly intends that all transactions among itself, MHI Holding and the TRS Lessee will be conducted on an arms-length basis and, therefore, that the rent paid by the TRS Lessee will not be subject to this excise tax.
Even if Sotherly remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.
Even if Sotherly remains qualified for taxation as a REIT, it may be subject to certain federal, state and local taxes on its income and assets. For example:
| it will be required to pay tax on undistributed REIT taxable income; |
| it may be required to pay alternative minimum tax on its items of tax preference; |
| if it has net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it must pay tax on that income at the highest corporate rate; |
| if it sells a property in a prohibited transaction, its gain from the sale would be subject to a 100.0% penalty tax. A prohibited transaction would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business; and |
| MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its income, which will consist of the revenues from the hotels leased from the Operating Partnership, net of the operating expenses for such hotels and rent payments. |
Complying with REIT requirements may cause Sotherly to forgo attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To qualify as a REIT for federal income tax purposes, Sotherly must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its stock. Thus, compliance with the REIT requirements may hinder Sotherlys ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for its stockholders.
Complying with REIT requirements may force Sotherly to liquidate otherwise attractive investments, which could result in an overall loss on its investments.
To maintain qualification as a REIT, Sotherly must ensure that at the end of each calendar quarter at least 75.0% of the value of its assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of Sotherlys investment in securities (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of Sotherlys assets (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0% of the value of Sotherlys total assets can be represented by securities of one or more taxable REIT subsidiaries. If Sotherly fails to comply with these
29
requirements at the end of any calendar quarter, it must correct such failure within 30 days after the end of the calendar quarter to avoid losing its REIT status and suffering adverse tax consequences. If Sotherly fails to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, Sotherly may be able to preserve its REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, Sotherly will be required to dispose of the assets causing the failure within six months after the last day of the quarter in which the failure occurred, and it will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets. As a result, Sotherly may be required to liquidate otherwise attractive investments.
Taxation of dividend income could make Sotherlys common stock less attractive to investors and reduce the market price of its common stock.
The federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended at any time. Any new laws or interpretations may take effect retroactively and could adversely affect Sotherly or could adversely affect its stockholders. Under recently-enacted legislation, qualified dividends, which include dividends from domestic C corporations that are paid to non-corporate stockholders, are subject to a reduced maximum rate of tax of 20.0%. Because REITs generally do not pay corporate-level taxes as a result of the dividends paid deduction to which they are entitled, dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from non-REIT corporations would be subject to lower tax rates.
If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, Sotherly could cease to qualify as a REIT and suffer other adverse consequences.
We believe that the Operating Partnership will continue to qualify to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including Sotherly, will be required to pay tax on its allocable share of the Operating Partnerships income. We cannot assure you, however, that the IRS will not challenge the Operating Partnerships status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for federal income tax purposes, Sotherly could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause Sotherly to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including Sotherly.
Sotherlys failure to qualify as a REIT would have serious adverse consequences to its stockholders.
Sotherly elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ended December 31, 2004. Sotherly believes it has operated so as to qualify as a REIT under the Code and believes that its current organization and method of operation comply with the rules and regulations promulgated under the Code to enable Sotherly to continue to qualify as a REIT. However, it is possible that Sotherly has been organized or has operated in a manner that would not allow it to qualify as a REIT, or that its future operations could cause it to fail to qualify. Qualification as a REIT requires Sotherly to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex sections of the Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within its control. For example, in order to qualify as a REIT, Sotherly must satisfy a 75.0% gross income test pursuant to Code Section 856(c)(3) and a 95.0% gross income test pursuant to Code Section 856(c)(2) each taxable year. In addition, Sotherly must pay dividends to its stockholders aggregating annually at least 90.0% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a
30
quarterly basis. While historically Sotherly has satisfied the distribution requirement discussed above by making cash distributions to its stockholders, Sotherly may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in Sotherlys case because its holds its assets through the Operating Partnership.
If MHI Holding does not qualify as a taxable REIT subsidiary, or if Sotherlys hotel manager does not qualify as an eligible independent contractor, Sotherly would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to its shareholders.
Rent paid by a lessee that is a related party tenant of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. Sotherly currently leases substantially all of its hotels to the TRS Lessee, which is a disregarded entity for U.S. federal income tax purposes and is wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects to continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a related party tenant with respect to Sotherlys properties that are managed by an independent hotel management company that qualifies as an eligible independent contractor. Sotherly believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary for federal income tax purposes, but there can be no assurance that the IRS will not challenge this status or that a court would not sustain such a challenge. If the IRS were successful in such challenge, it is possible that Sotherly would fail to meet the asset tests applicable to REITs and substantially all of its income would fail to be qualifying income for purposes of the two gross income tests. If Sotherly failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax purposes.
Additionally, if Sotherlys hotel manager does not qualify as an eligible independent contractor, Sotherly would fail to qualify as a REIT. Each hotel management company that enters into a management contract with the TRS Lessee must qualify as an eligible independent contractor under the REIT rules in order for the rent paid by the TRS Lessee to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own, directly or through its shareholders, more than 35.0% of Sotherlys outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although Sotherly intends to monitor ownership of its shares by its hotel manager and their owners, there can be no assurance that these ownership levels will not be exceeded.
Investors may be subject to a 3.8% Medicare tax in connection with an investment in the notes.
The U.S. tax laws impose a 3.8% Medicare tax on the net investment income (i.e., interest, dividends, capital gains, annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately), and of estates and trusts. Interest on the notes and gains from the disposition of the notes may be subject to the Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the Medicare tax to an investment in the notes in light of such investors particular circumstances.
Investors may be subject to U.S. withholding tax under the Foreign Account Tax Compliance Act.
On March 18, 2010, the Hiring Incentives to Restore Employment Act, or the HIRE Act, was enacted in the United States. The HIRE Act includes provisions known as the Foreign Account Tax Compliance Act, or FATCA, that generally impose a 30% U.S. withholding tax on withholdable payments, which consist of (i) U.S.-source dividends, interest, rents and other fixed or determinable annual or periodical income paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2016 to (a) foreign financial institutions unless (x) they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners or (y) they comply with the terms of any FATCA intergovernmental agreement executed between the authorities in their jurisdiction and the United States, and (b) non-financial foreign entities (i.e., foreign entities that are not foreign financial institutions) unless they
31
certify certain information regarding their direct and indirect U.S. owners. Final regulations under FATCA were issued by the IRS on January 17, 2013. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.
Under a grandfathering rule, FATCA does not apply to any payments made under an obligation that is outstanding on July 1, 2014 (provided such obligation is not materially modified subsequent to such date) and any gross proceeds from the disposition of such obligation. The notes will be grandfathered obligations for FATCA purposes provided they are not materially modified after July 1, 2014. However, if the notes are materially modified after July 1, 2014, interest on the notes may be subject to FATCA withholding. Prospective investors should consult their own tax advisors regarding the potential implications of FATCA with respect to an investment in the notes in light of their particular circumstances.
32
We estimate that the net proceeds from the offering of the notes pursuant to this prospectus, after deducting the underwriting discount and estimated offering costs and expenses payable by us, will be approximately $ (or $ if the over-allotment option is exercised in full). We intend to use a portion of the net proceeds from this offering to redeem 100% of the outstanding shares of Sotherlys Preferred Stock as required by the Preferred Stock instrument, plus any accrued but unpaid dividends and any make-whole amounts or premium then due and payable on such Preferred Stock, which we estimate to be approximately $11.0 million. We intend to use the remaining net proceeds from the offering of the notes for general corporate purposes.
Pending the permanent use of the net proceeds of this offering, we may invest the net proceeds in interest-bearing, short-term investment-grade securities, money-market accounts or other investments that are consistent with Sotherlys intention to elect and qualify to be taxed as a REIT.
33
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY
There is no established trading market for partnership units of the Operating Partnership. The Operating Partnership does not currently propose to offer partnership units to the public, and does not currently expect that a public market for those units will develop.
Partnership Unitholder Information
As of June 30, 2013, there were 13 holders of the Operating Partnerships common partnership units.
Distributions
The Operating Partnership has paid the following distributions per common partnership unit for 2011, 2012 and for the first two quarters of 2013:
Quarter End |
2011 | 2012 | 2013 | |||||||||
March 31st |
| $ | 0.020 | $ | 0.035 | |||||||
June 30th |
| $ | 0.020 | $ | 0.035 | |||||||
September 30th |
$ | 0.020 | $ | 0.030 | ||||||||
December 31st |
$ | 0.020 | $ | 0.030 |
Future distributions by the Operating Partnership will be at the discretion of Sotherlys board of directors, acting on behalf of Sotherly as general partner of the Operating Partnership, and will depend on quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the annual distribution requirements under the REIT provisions of the Code, the terms of Sotherlys Preferred Stock instrument and such other factors as Sotherlys board of directors deem relevant. The amount, timing and frequency of the distributions will be authorized and declared by Sotherlys board of directors, in its sole discretion, based upon a variety of factors deemed relevant by the directors, and no assurance can be given that the distribution policy will not change in the future.
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, Sotherly amended its dividend policy and reduced the level of its cash dividend payments. Reducing and suspending Sotherlys dividend during 2009 and 2010 did not jeopardize its REIT status as its 2009 distributions exceeded the minimum annual distribution requirement and operating losses in 2010 eliminated any distribution requirement for 2010. In July 2011, in part due to improving operating trends, Sotherly reevaluated its quarterly dividend policy and reinstated its quarterly dividend distribution.
Sotherlys ability to make common stock distributions is constrained by the terms of the Preferred Stock instrument. The Preferred Stock instrument permits Sotherly to pay a dividend on its common stock subject to certain requirements, including liquidity thresholds. At present, Sotherly meets and exceeds these requirements to pay a dividend on its common stock in an amount minimally necessary in order to maintain its status as a REIT. The Preferred Stock instrument requires a minimum liquidity position of $7.5 million as a condition to payment of a dividend on Sotherlys common stock. We intend to use a portion of the net proceeds from this offering to redeem 100% of the outstanding shares of Sotherlys Preferred Stock, plus any whole amounts or premium then due and payable. Once we have redeemed the outstanding shares of Sotherlys Preferred Stock, all of these restrictions will no longer apply.
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The following table sets forth the Operating Partnerships capitalization as of June 30, 2013:
| on an actual basis; and |
| on an as -adjusted basis to give effect to this offering, the Partnerships distribution to Sotherly for redemption of 2,460 shares of Preferred Stock on August 2, 2013, and the application of the net proceeds of this offering as described under Use of Proceeds: |
As of June 30, 2013 | ||||||||
Historical | Pro Forma(1) | |||||||
Cash |
||||||||
Cash and cash equivalents |
$ | 6,561,784 | $ | 11,838,306 | ||||
Restricted cash |
4,257,037 | 4,257,037 | ||||||
|
|
|
|
|||||
Total cash |
10,818,821 | 16,095,343 | ||||||
|
|
|
|
|||||
Debt |
||||||||
Secured mortgage debt |
134,893,689 | 134,893,689 | ||||||
Other loans |
3,650,220 | 3,650,220 | ||||||
Unsecured Notes(2) |
| 20,000,000 | ||||||
Series A Cumulative Redeemable Preferred Stock, $0.01 par value |
12,457,552 | | ||||||
|
|
|
|
|||||
Total debt |
151,001,461 | 158,543,909 | ||||||
Equity |
||||||||
General partner account |
594,463 | 582,504 | ||||||
Limited partner accounts |
34,303,512 | 33,119,545 | ||||||
|
|
|
|
|||||
Total equity |
34,897,975 | 33,702,049 | ||||||
|
|
|
|
|||||
Total capitalization |
$ | 185,899,436 | $ | 192,245,958 | ||||
|
|
|
|
(1) | Assumes no exercise of the underwriters over-allotment option. |
(2) | Assumes a $20 million aggregate principal amount of notes issued in this offering. |
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RATIO OF EARNINGS TO FIXED CHARGES
Our historical ratios of earnings to fixed charges for the periods indicated are set forth in the table below. The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For purposes of computing these ratios, earnings consist of income before income taxes plus interest expense and fixed charges consist of interest expense exclusive of capitalized interest.
In each period during which earnings were insufficient to cover fixed charges, the Operating Partnership met all financial obligations.
Six
Months Ended June 30, 2013 |
Year Ended | |||||||||||||||||||||||
December 31, 2012 |
December 31, 2011 |
December 31, 2010 |
December 31, 2009 |
December 31, 2008 |
||||||||||||||||||||
Ratio of Earnings to Fixed Charges: |
0.99 | 0.71 | 0.54 | 0.73 | 0.55 | 0.54 | ||||||||||||||||||
Deficiency |
$ | 48,060 | $ | 3,620,855 | $ | 4,994,395 | $ | 2,738,663 | $ | 4,448,544 | $ | 3,872,432 |
For a description of our historical income available for debt service to interest expense ratios as they would have been calculated pursuant to the Indenture covenants, see Managements Discussion and Analysis of Financial Condition and Results of Operations Financial Covenants Unsecured Notes.
36
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth, on an historical basis, certain summary consolidated financial and operating data for Sotherly Hotels LP and its subsidiaries. The financial results for the Crowne Plaza Hollywood Beach Resort, in which we have a 25.0% indirect interest, are not consolidated as we account for our investment under the equity method of accounting. You should read the following summary historical financial and operating data in conjunction with the consolidated historical financial statements and notes thereto of Sotherly Hotels LP and its subsidiaries and Managements Discussion and Analysis of Financial Condition and Results of Operations, included in this prospectus.
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Statement of Operations |
||||||||||||||||||||
Total Revenues |
$ | 87,343,220 | $ | 81,172,504 | $ | 77,382,344 | $ | 71,518,726 | $ | 70,762,732 | ||||||||||
Total Operating Expenses excluding Depreciation and Amortization |
(68,376,569 | ) | (65,807,786 | ) | (62,451,362 | ) | (59,224,407 | ) | (58,810,002 | ) | ||||||||||
Depreciation and Amortization |
(8,661,769 | ) | (8,702,880 | ) | (8,506,802 | ) | (8,420,085 | ) | (6,346,222 | ) | ||||||||||
Net Operating Income |
10,304,882 | 6,661,838 | 6,424,180 | 3,874,234 | 5,606,509 | |||||||||||||||
Interest Income |
16,158 | 14,808 | 22,305 | 41,999 | 72,547 | |||||||||||||||
Interest Expense |
(12,382,146 | ) | (10,821,815 | ) | (10,030,517 | ) | (9,661,871 | ) | (6,811,460 | ) | ||||||||||
Other Income (Expense) Net |
(1,965,376 | ) | (1,424,620 | ) | 546,115 | 927,924 | (1,263,304 | ) | ||||||||||||
Income Tax Benefit (Provision) |
(1,301,229 | ) | (905,455 | ) | (214,344 | ) | 1,807,126 | 1,475,695 | ||||||||||||
Net Loss |
(5,327,711 | ) | (6,475,243 | ) | (3,252,261 | ) | (3,010,587 | ) | (920,014 | ) | ||||||||||
Statement of Cash Flows |
||||||||||||||||||||
Cash from Operations net |
$ | 9,011,957 | $ | 7,550,142 | $ | 4,728,270 | $ | 3,182,605 | $ | 7,214,566 | ||||||||||
Cash used in Investing net |
(3,156,121 | ) | (6,130,273 | ) | (3,469,608 | ) | (11,007,214 | ) | (51,931,701 | ) | ||||||||||
Cash from (used in) Financing net |
(3,090,079 | ) | (2,798 | ) | (1,756,261 | ) | 9,595,949 | 42,447,582 | ||||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
$ | 2,765,757 | $ | 1,417,071 | $ | (497,599 | ) | $ | 1,771,340 | $ | (2,269,553 | ) | ||||||||
Balance Sheet(1) |
||||||||||||||||||||
Investments in Hotel Properties net |
$ | 176,427,904 | $ | 181,469,432 | $ | 183,898,660 | $ | 188,587,507 | $ | 154,295,611 | ||||||||||
Properties Under Development |
| | | | 33,101,773 | |||||||||||||||
Total Assets |
204,030,869 | 209,299,446 | 209,583,431 | 213,959,755 | 211,218,434 | |||||||||||||||
Line of Credit |
| 25,537,290 | 75,197,858 | 75,522,858 | 73,187,858 | |||||||||||||||
Mortgage Loans |
135,674,432 | 94,157,825 | 72,192,253 | 72,738,250 | 72,256,168 | |||||||||||||||
Series A Preferred Interest |
14,227,650 | 25,353,698 | | | | |||||||||||||||
Total Liabilities |
166,698,739 | 165,416,203 | 158,775,128 | 160,118,529 | 157,442,238 | |||||||||||||||
Partners Capital |
37,332,130 | 43,883,243 | 50,808,303 | 53,841,226 | 53,776,196 | |||||||||||||||
Operating Data |
||||||||||||||||||||
Average Number of Available Rooms |
2,113 | 2,111 | 2,110 | 2,071 | 1,775 | |||||||||||||||
Total Number of Available Room Nights |
773,358 | 770,334 | 770,150 | 755,942 | 649,499 | |||||||||||||||
Occupancy Percentage(2) |
68.9 | % | 66.2 | % | 66.0 | % | 60.4 | % | 62.0 | % | ||||||||||
Average Daily Rate (ADR)(3) |
$ | 114.22 | $ | 110.24 | $ | 104.42 | $ | 107.21 | $ | 119.50 | ||||||||||
RevPAR |
$ | 78.65 | $ | 72.94 | $ | 68.93 | $ | 64.74 | $ | 74.04 | ||||||||||
Additional Financial Data |
||||||||||||||||||||
FFO(5) |
$ | 3,924,733 | $ | 2,923,539 | $ | 5,971,900 | $ | 5,997,948 | $ | 6,292,400 | ||||||||||
Adjusted FFO(5) |
9,470,684 | 5,577,805 | 5,315,321 | 2,848,314 | 4,881,390 | |||||||||||||||
Hotel EBITDA(6) |
22,439,770 | 18,708,019 | 17,639,548 | 14,771,907 | 14,224,058 |
(1) | As of the period end. |
(2) | Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage. |
(3) | ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold. |
(4) | RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
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(5) | 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 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. |
Adjusted FFO accounts for certain additional items that are not in NAREITs definition of FFO, including any unrealized gain (loss) on 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.
The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Net Loss |
$ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||
Depreciation and amortization |
8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||
Equity in depreciation and amortization of joint venture |
590,675 | 567,803 | 546,055 | 545,580 | 545,659 | |||||||||||||||
(Gain)/loss on disposal of assets |
| 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FFO |
$ | 3,924,733 | $ | 2,923,539 | $ | 5,971,900 | $ | 5,997,948 | $ | 6,292,400 | ||||||||||
Unrealized (gain)/loss on hedging activities(A) |
13,752 | 77,152 | (830,614 | ) | (1,220,161 | ) | 691,268 | |||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,026,677 | 1,309,075 | | | | |||||||||||||||
(Increase)/decrease in deferred income taxes |
1,412,467 | 685,189 | 174,035 | (1,929,473 | ) | (1,652,278 | ) | |||||||||||||
Impairment of note receivable |
110,871 | | | | 300,000 | |||||||||||||||
Aborted offering costs |
| 582,850 | | | | |||||||||||||||
Equity in gain on extinguishment of debt of joint venture |
| | | | (750,000 | ) | ||||||||||||||
Loss on early extinguishment of debt(B) |
1,982,184 | | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted FFO |
$ | 9,470,684 | $ | 5,577,805 | $ | 5,315,321 | $ | 2,848,314 | $ | 4,881,390 | ||||||||||
|
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|
|
|
|
|
|
|
|
(A) | Includes equity in unrealized loss on hedging activities of joint venture. |
(B) | Reflected in interest expense for the periods presented above. |
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(6) | Hotel EBITDA represents the portion of net operating income before depreciation and amortization and corporate general and administrative expenses that relate to our nine wholly-owned properties. |
The following is a reconciliation of net loss to hotel EBITDA for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Net Loss |
$ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||
Interest expense |
12,382,146 | 10,821,815 | 10,030,517 | 9,661,871 | 6,811,460 | |||||||||||||||
Interest income |
(16,158 | ) | (14,808 | ) | (22,305 | ) | (41,999 | ) | (72,547 | ) | ||||||||||
Income tax provision (benefit) |
1,301,229 | 905,455 | 214,344 | (1,807,126 | ) | (1,475,695 | ) | |||||||||||||
Depreciation and amortization |
8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||
Equity in (earnings)/loss of joint venture |
(172,172 | ) | 60,094 | (16,931 | ) | 249,367 | (48,496 | ) | ||||||||||||
(Gain)/loss on disposal of assets |
| 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||
Unrealized (gain)/loss on hedging activities |
| (72,649 | ) | (700,488 | ) | (1,220,161 | ) | 691,268 | ||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,026,677 | 1,309,075 | | | | |||||||||||||||
Impairment of note receivable |
110,871 | | | | 300,000 | |||||||||||||||
Corporate general and administrative |
4,078,826 | 4,025,794 | 3,389,764 | 3,170,627 | 2,940,979 | |||||||||||||||
Net lease rental income |
(350,000 | ) | (447,000 | ) | (443,000 | ) | (445,000 | ) | (471,862 | ) | ||||||||||
Other fee income |
(255,707 | ) | (235,493 | ) | (238,198 | ) | (248,040 | ) | (197,790 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Hotel EBITDA |
$ | 22,439,770 | $ | 18,708,019 | $ | 17,639,548 | $ | 14,771,907 | $ | 14,224,058 | ||||||||||
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|
|
|
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|
|
The following table sets forth the operating data on a weighted average basis for the Operating Partnership inclusive of its 25.0% indirect interest in the Crowne Plaza Hollywood Beach Resort:
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
||||||||||||||||
Operating Data |
||||||||||||||||||||
Weighted Average Number of Available Rooms |
2,197 | 2,188 | 2,188 | 2,149 | 1,857 | |||||||||||||||
Pro-rata Total of Available Room Nights |
801,815 | 798,713 | 798,529 | 784,321 | 677,956 | |||||||||||||||
Occupancy Percentage(1) |
69.2 | % | 66.6 | % | 66.5 | % | 60.8 | % | 61.8 | % | ||||||||||
Average Daily Rate (ADR)(2) |
$ | 115.56 | $ | 111.22 | $ | 105.12 | $ | 107.79 | $ | 120.78 | ||||||||||
RevPAR(3) |
$ | 80.00 | $ | 74.11 | $ | 69.92 | $ | 65.49 | $ | 74.69 |
(1) | Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage. |
(2) | ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold. |
(3) | RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
As used in this section, the terms we, us, our or the Company refer to Sotherly Hotels Inc., a Maryland corporation, together with its consolidated subsidiaries, including Sotherly Hotels LP, a Delaware limited partnership, which may be referred to herein as the Operating Partnership. Sotherly Hotels Inc., the sole general partner of the Operating Partnership, which may be referred to herein as Sotherly, is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. Sotherly commenced operations in December 2004 when it completed its initial public offering and thereafter consummated the acquisition of the initial properties. Sotherly owns all of its interest in its real estate investments through the Operating Partnership.
Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-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 non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle.
As of June 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 MidScale | ||||||
Sheraton Louisville Riverside |
180 | Jeffersonville, IN | September 20, 2006 | Upper Upscale | ||||||
|
|
|||||||||
2,113 | ||||||||||
Joint Venture Property |
||||||||||
Crowne Plaza Hollywood Beach |
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% interest. |
We conduct substantially all our business through the Operating Partnership. Sotherly is the sole general partner of the Operating Partnership, and owns an approximate 78.3% interest in the Operating Partnership, with the remaining interest being held by limited partners who were contributors of our original hotel properties and related assets.
To qualify as a REIT, Sotherly cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessee, a wholly-owned subsidiary of our Operating Partnership, which then engages a 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 Holding are consolidated into the Operating Partnerships financial statements for accounting purposes. The earnings of MHI Holding are subject to taxation similar to other C corporations.
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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 hotels restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See Non-GAAP Financial Measures.
Results of Operations
The following table illustrates the key operating metrics for each of the six months ended June 30, 2013 and 2012 for our nine wholly-owned properties.
Six months ended June 30, 2013 |
Six months ended June 30, 2012 |
|||||||
Occupancy % |
69.7 | % | 71.2 | % | ||||
ADR |
$ | 121.54 | $ | 115.70 | ||||
RevPAR |
$ | 84.72 | $ | 82.43 |
Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012
Revenue. Total revenue for the six months ended June 30, 2013 increased approximately $0.3 million, or 0.7%, to approximately $45.4 million compared to total revenue of approximately $45.1 million for the six months ended June 30, 2012. Each of our properties experienced increases in revenue except our Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; and Hampton, Virginia properties.
Room revenue increased approximately $0.7 million, or 2.2%, to approximately $32.4 million for the six months ended June 30, 2013 compared to room revenue of approximately $31.7 million for the six months ended June 30, 2012. The increase in room revenue for the six months ended June 30, 2013 resulted from a 5.1% increase in ADR which was offset by a 2.2% decrease in occupancy 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.
Food and beverage revenues decreased approximately $0.4 million, or 3.1%, to approximately $10.8 million for the six months ended June 30, 2013 compared to food and beverage revenues of approximately $11.2 million for the six months ended June 30, 2012. Decreases in food and beverage revenue at our properties in Savannah, Georgia and Tampa, Florida were offset by increases in banqueting revenue at our property in Raleigh, North Carolina.
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Revenue from other operating departments decreased approximately $0.1 million, or 2.2%, to approximately $2.2 million for the six months ended June 30, 2013 compared to revenue from other operating departments of approximately $2.3 million for the six months ended June 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 $32.3 million for the six months ended June 30, 2013, a decrease of approximately $0.4 million, or 1.1%, compared to total hotel operating expenses of approximately $32.7 million for the six months ended June 30, 2012.
Rooms expense for the six months ended June 30, 2013 increased approximately $0.2 million, or 1.9%, to approximately $8.6 million compared to rooms expense of approximately $8.4 million for the six months ended June 30, 2012.
Food and beverage expenses for the six months ended June 30, 2013 decreased approximately $0.5 million, or 6.0%, to approximately $6.9 million compared to food and beverage expenses of approximately $7.4 million for the six months ended June 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 34.2% to 36.1%.
Indirect expenses at our wholly-owned properties for the six months ended June 30, 2013 remained constant at approximately $16.6 million compared to indirect expenses for the six months ended June 30, 2012. While franchise fees increased directly in proportion to the increase in revenue, 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. Repairs and maintenance, sales and marketing expenses, insurance, personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.
Depreciation and Amortization. Depreciation and amortization expense for the six months ended June 30, 2013 decreased approximately $0.3 million, or 6.7%, to $4.1 million compared to depreciation and amortization of approximately $4.4 million for the six months ended June 30, 2012.
Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2013 increased approximately $0.1 million, or 5.9%, to approximately $2.2 million compared to corporate and general administrative expenses of approximately $2.1 million the six months ended June 30, 2012.
Interest Expense. Interest expense for the six months ended June 30, 2013 decreased approximately $2.6 million, or 33.8%, to approximately $5.0 million compared to interest expense of approximately $7.6 million for the six months ended June 30, 2012. Most of the decrease related to the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility of approximately $0.5 million, the premium paid of approximately $0.8 million to redeem approximately 45% of the outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.7 million in the prior period which were offset by the premium paid to redeem 1,902 shares of Preferred Stock of approximately $0.2 million and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.1 million in the current period. The remaining decrease related to a lower effective interest rate on our outstanding debt.
Equity Income in Joint Venture. Equity income in joint venture for the six months ended June 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the six months ended June 30, 2013, our 25.0% share of the net income of the hotel increased approximately $0.4 million, or 213.5%, to approximately $0.6 million compared to net income of approximately $0.2 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, the hotel reported occupancy of 87.2%, ADR of $173.14 and RevPAR of $150.97. This compares with results reported by the hotel for the six months ended June 30, 2012 of occupancy of 84.0%, ADR of $156.94 and RevPAR of $131.85.
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Unrealized Loss on Warrant Derivative. We recognized an unrealized loss of approximately $2.7 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the six months ended June 30, 2013 as well as an unrealized loss of approximately the same amount for the six months ended June 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 six months ended June 30, 2013 increased approximately $0.3 million, or 29.4%, to approximately $1.4 million compared to an income tax provision of approximately $1.1 million for the six months ended June 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 six months ended June 30, 2013 compared to the six months ended June 30, 2012.
Net Loss. The net loss for the six months ended June 30, 2013 decreased approximately $2.6 million, or 67.5%, to approximately $1.3 million as compared to a net loss of approximately $3.9 million for the six months ended June 30, 2012 as a result of the operating results discussed above.
Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
The following table illustrates the key operating metrics for the years ended December 31, 2012 and 2011 for our nine wholly-owned operating properties.
Year
ended December 31, 2012 |
Year
ended December 31, 2011 |
|||||||
Occupancy % |
68.9 | % | 66.2 | % | ||||
ADR |
$ | 114.22 | $ | 110.24 | ||||
RevPAR |
$ | 78.65 | $ | 72.94 |
Revenue. Total revenue for the year ended December 31, 2012 was approximately $87.3 million, an increase of approximately $6.1 million, or 7.6%, from total revenue for the year ended December 31, 2011 of approximately $81.2 million. Revenue increases were strongest at our DoubleTree by Hilton Brownstone - University and the Crowne Plaza Tampa Westshore properties.
Room revenues at our properties for the year ended December 31, 2012 increased approximately $4.6 million, or 8.3%, to approximately $60.8 million compared to room revenues for the year ended December 31, 2011 of approximately $56.2 million. The increase in room revenue was mostly attributable to increases in occupancy at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida and Tampa, Florida. Our recently renovated property in Raleigh, North Carolina as well as our property in Savannah, Georgia experienced significant increases in ADR as well. We expect occupancy and ADR to increase as demand continues to strengthen as the overall economy continues to improve.
Food and beverage revenues at our properties for the year ended December 31, 2012 increased approximately $1.5 million, or 7.2%, to approximately $22.0 million compared to food and beverage revenues for the year ended December 31, 2011 of approximately $20.5 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the DoubleTree by Hilton Brownstone - University, the Holiday Inn Laurel West and the Crowne Plaza Tampa Westshore.
Other operating revenues for the year ended December 31, 2012 increased approximately $0.1 million, or 1.2%, to approximately $4.6 million compared to other operating revenues for the year ended December 31, 2011 of approximately $4.5 million. Higher guaranteed no-show fees and garage revenue offset a decrease in the payments received in respect of the expired Shell Island sublease.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.5 million,
43
or 4.1%, for the year ended December 31, 2012 to approximately $64.3 million compared to hotel operating expenses for the year ended December 31, 2011 of approximately $61.8 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for more than two-thirds of the increase in hotel operating expenses.
Rooms expense at our properties for the year ended December 31, 2012 increased approximately $0.8 million, or 4.9%, to approximately $16.6 million compared to rooms expense of approximately $15.8 million for the year ended December 31, 2011. The increase in rooms expense was directly related to the 8.3% increase in room revenue.
Food and beverage expenses at our properties for the year ended December 31, 2012 increased approximately $0.7 million, or 4.9%, to approximately $14.3 million compared to food and beverage expense of approximately $13.6 million for the year ended December 31, 2011. The increase in food and beverage expense was generally attributable to the 7.2% increase in food and beverage revenue.
Indirect expenses at our properties for the year ended December 31, 2012 increased approximately $1.1 million, or 3.6%, to approximately $32.9 million compared to indirect expenses of approximately $31.8 million for the year ended December 31, 2011. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. The overall increase in indirect expenses was offset by a decrease in energy costs, the non-recurrence of costs associated with Hurricane Irene at our property in Hampton, Virginia and the expiration of the sublease at Shell Island on December 31, 2011.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2012 remained constant at approximately $8.7 million compared to depreciation and amortization expense for the year ended December 31, 2011. We expect depreciation and amortization to remain at approximately this level for the current portfolio of hotels.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2012 increased approximately $0.1 million, or 1.3%, to approximately $4.1 million compared to corporate general and administrative expenses of approximately $4.0 million for the year ended December 31, 2011. The absence in the current year of charges related to our aborted stock offering in 2011 was offset by higher salaries of our employees and legal fees.
Interest Expense. Interest expense for the year ended December 31, 2012 increased approximately $1.6 million, or 14.4%, to approximately $12.4 million compared to approximately $10.8 million of interest expense for the year ended December 31, 2011. If not for the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility in March 2012 of approximately $0.5 million, the premium paid to redeem approximately 11,514 shares of Preferred Stock in June 2012 of approximately $0.8 million and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.7 million, we would have experienced a reduction in interest expense of approximately $0.4 million.
Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture was approximately $0.2 million for the year ended December 31, 2012 compared to equity in the loss of joint venture of approximately $0.1 million for the year ended December 31, 2011 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. The improvement was attributable to a 12.6% increase in net operating income as well as a curtailment of unrealized losses on hedging activities. For the year ended December 31, 2012, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.2%, ADR of $147.37 and RevPAR of $116.66. This compares with results reported by the hotel for the year ended December 31, 2011 of occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82.
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Unrealized Loss on Warrant Derivative. The unrealized loss on the Warrant derivative for the year ended December 31, 2012 increased approximately $0.7 million, or 54.8%, to approximately $2.0 million compared to the unrealized loss of approximately $1.3 million for the year ended December 31, 2011. The current year loss was predominantly attributable to the increase in market price of the underlying common stock whereas the prior year loss was predominantly attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.
Income Tax Provision. The income tax provision for the year ended December 31, 2012 increased approximately $0.4 million, or 43.7%, to approximately $1.3 million compared to approximately $0.9 million for the year ended December 31, 2011. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Net Loss. Net loss for the year ended December 31, 2012 decreased approximately $1.2 million to approximately $5.3 million compared to net loss of approximately $6.5 million for the year ended December 31, 2011 as a result of the operating results discussed above.
Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010
The following table illustrates the key operating metrics for the years ended December 31, 2011 and 2010 for our nine wholly-owned operating properties.
Year
ended December 31, 2011 |
Year
ended December 31, 2010 |
|||||||
Occupancy % |
66.2 | % | 66.0 | % | ||||
ADR |
$ | 110.24 | $ | 104.42 | ||||
RevPAR |
$ | 72.94 | $ | 68.93 |
Revenue. Total revenue for the year ended December 31, 2011 was approximately $81.2 million, an increase of approximately $3.8 million, or 4.9%, from total revenue for the year ended December 31, 2010 of approximately $77.4 million. Increases in revenue at the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore offset slight decreases in revenue at the Holiday Inn Laurel West and the DoubleTree by Hilton Brownstone-University.
Room revenues at our properties for the year ended December 31, 2011 increased approximately $3.1 million, or 5.8%, to approximately $56.2 million compared to room revenues for the year ended December 31, 2010 of approximately $53.1 million. The increase in room revenue was mostly attributable to increases in occupancy at our recently renovated properties in Jeffersonville, Indiana; Hampton, Virginia; and Tampa, Florida.
Food and beverage revenues at our properties for the year ended December 31, 2011 increased approximately $0.6 million, or 2.9%, to approximately $20.5 million compared to food and beverage revenues for the year ended December 31, 2010 of approximately $19.9 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the Crowne Plaza Tampa Westshore and the Hilton Wilmington Riverside.
Other operating revenues for the year ended December 31, 2011 increased approximately $0.1 million, or 2.6%, to approximately $4.5 million compared to other operating revenues for the year ended December 31, 2010 of approximately $4.4 million. Higher guaranteed no-show fees offset decreases in pay-per-view movie revenue.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.7 million, or 4.6%, for the year ended December 31, 2011 to approximately $61.8 million compared to hotel operating
45
expenses for the year ended December 31, 2010 of approximately $59.1 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for approximately half the increase in hotel operating expenses.
Rooms expense at our properties for the year ended December 31, 2011 increased approximately $0.7 million, or 5.0%, to approximately $15.8 million compared to rooms expense of approximately $15.1 million for the year ended December 31, 2010. The increase in rooms expense was directly related to the 5.8% increase in room revenue.
Food and beverage expenses at our properties for the year ended December 31, 2011 increased approximately $0.4 million, or 2.8%, to approximately $13.6 million compared to food and beverage expense of approximately $13.2 million for the year ended December 31, 2010. The increase in food and beverage expense was generally attributable to the 2.9% increase in food and beverage revenue.
Indirect expenses at our properties for the year ended December 31, 2011 increased approximately $1.8 million, or 5.9%, to approximately $31.8 million compared to indirect expenses of approximately $30.0 million for the year ended December 31, 2010. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees, franchise fees and energy costs.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2011 increased approximately $0.2 million, or 2.3%, to approximately $8.7 million compared to depreciation and amortization expense of approximately $8.5 million for the year ended December 31, 2010.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2011 increased approximately $0.6 million, or 18.8%, to approximately $4.0 million compared to corporate general and administrative expenses of approximately $3.4 million for the year ended December 31, 2010 due mostly to the charge in the third quarter for fees related to our aborted stock offering.
Interest Expense. Interest expense for the year ended December 31, 2011 increased approximately $0.8 million, or 7.9%, to approximately $10.8 million compared to approximately $10.0 million of interest expense for the year ended December 31, 2010. The increase was the combined result of a lower effective interest rate on our line of credit in the period prior to the June 2010 amendment to the then-existing credit agreement as well as higher interest costs in the current period associated with the April 2011 issuance of Preferred Stock.
Equity Income (Loss) in Joint Venture. Equity loss in the joint venture was approximately $60.1 thousand for the year ended December 31, 2011 compared to equity income in the joint venture of approximately $17.0 thousand for the year ended December 31, 2010 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. A 228.4% increase in net operating income was offset by higher interest expense and unrealized losses on hedging activities. For the year ended December 31, 2011, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82. This compares with results reported by the hotel for the year ended December 31, 2010 of occupancy of 80.0%, ADR of $120.73 and RevPAR of $96.53.
Unrealized Loss on Warrant Derivative. The Company recognized an unrealized loss of approximately $1.3 million on the value of the Warrant derivative issued in April 2011 to the purchasers of Sotherlys Preferred Stock. The loss predominantly was attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.
Income Tax Provision. The income tax provision for the year ended December 31, 2011 increased approximately $0.7 million, or 321.6%, to approximately $0.9 million compared to approximately $0.2 million
46
for the year ended December 31, 2010. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2011 compared to the year ended December 31, 2010.
Net Loss. Net loss for the year ended December 31, 2011 increased approximately $2.2 million to approximately $6.5 million compared to net loss of approximately $3.3 million for the year ended December 31, 2010 as a result of the operating results discussed above.
Sources and Uses of Cash
The following narrative discusses our sources and uses of cash for the six months ended June 30, 2013.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders of the Operating Partnership and stockholders of Sotherly as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the six months ended June 30, 2013 was approximately $7 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), quarterly payments of dividends on the Preferred Stock, and the payment of dividends (distributions) to unitholders of the Operating Partnership and stockholders of Sotherly in accordance with federal income tax laws, which require us to make annual distributions to Sotherlys stockholders of at least 90.0% of our REIT taxable income, excluding net capital gains.
Investing Activities. Approximately $3.2 million was spent during the six months ended June 30, 2013 on capital expenditures, of which, approximately $2.3 million related to the routine replacement of furniture, fixtures and equipment and $0.9 million related to renovation of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $1.0 million during the six months ended June 30, 2013 into reserves required by the lenders for the Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport, Sheraton Louisville Riverside and the Crowne Plaza Hampton Marina according to the provisions of the loan agreements. During the six months ended June 30, 2013, we received reimbursements from those reserves of approximately $0.8 million for capital expenditures related to those properties for periods ending on or before March 31, 2013.
Financing Activities. On March 26, 2013, the Company used the net proceeds of the mortgage on the DoubleTree by Hilton 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 propertys failure to meet its debt service coverage test for the period ended March 31, 2013.
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, the Company reduced the outstanding indebtedness by approximately $1.1 million.
The following narrative discusses our sources and uses of cash for the year ended December 31, 2012.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders of the Operating Partnership and stockholders of Sotherly as well as repayments of indebtedness, is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2012 was approximately $9.0 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund the Companys operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to Sotherlys stockholders of at least 90.0% of our REIT taxable income, excluding net capital gains.
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Investing Activities. Approximately $2.9 million was spent during the year ended December 31, 2012 on capital expenditures, of which, approximately $1.4 million related to the routine replacement of furniture, fixtures and equipment and $1.5 million related to the completion of our renovation of our property in Raleigh, North Carolina as well as renovation of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $2.0 million during the year ended December 31, 2012 into reserves required by the lenders for the Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport, Sheraton Louisville Riverside, Crowne Plaza Jacksonville Riverfront and the Crowne Plaza Hampton Marina according to the provisions of the loan agreements as well as the administrator of the then-existing credit agreement. During the year ended December 31, 2012, we received reimbursements from those reserves of approximately $1.1 million for capital expenditures related to those properties for periods ending on or before September 30, 2012.
Financing Activities. On March 5, 2012, we obtained a mortgage on the Hilton Philadelphia Airport for $30.0 million and used the proceeds to extinguish the credit facility and repay a portion of the outstanding indebtedness on the $10.0 million loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC, or the Note Agreement.
On June 18, 2012, we obtained a mortgage on the Crowne Plaza Tampa Westshore for $14.0 million and used the proceeds to repay the outstanding indebtedness on the Note Agreement and to redeem approximately 11,514 shares of Preferred Stock.
On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida and used the proceeds to repay the outstanding indebtedness on the property and to pay transaction costs.
During the year ended December 31, 2012, we paid approximately $2.5 million of scheduled principal payments toward the mortgages on our properties.
During the year ended December 31, 2012, we also paid approximately $1.1 million in deferred financing costs in relation to the mortgages discussed above.
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 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 June 30, 2013, we had cash and cash equivalents of approximately $10.8 million, of which approximately $4.3 million was reserved for real estate taxes, capital improvement and certain other expenses, or otherwise restricted. We believe our overall liquidity and capital structure will improve as a result of this offering. We expect to use approximately $11.0 million of the net proceeds of this offering to redeem 100% of the
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outstanding shares of Sotherlys Preferred Stock, plus any accrued but unpaid dividends and any make-whole amounts or premium then due and payable on such Preferred Stock. We anticipate having approximately $ (or $ if the over-allotment option is exercised in full) of additional cash available after this offering, which we expect will provide increased liquidity to fund ongoing operations and allow us to pursue acquisition opportunities. 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, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and quarterly payment of dividends on the Preferred Stock.
In March 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.
In June 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 $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. Subject 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 can be disbursed to the Company upon satisfaction of certain 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 Sotherlys 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.
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.
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Mortgage Debt
As of June 30, 2013 and December 31, 2012, we had approximately $134.9 million and $135.7 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels:
Balance Outstanding as of | ||||||||||||||||||||||||
Property |
June 30, 2013 |
December 31, 2012 |
Prepayment Penalties |
Maturity Date |
Amortization Provisions |
Interest Rate | ||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Crowne Plaza Hampton Marina |
$ | 5,999,500 | $ | 7,559,625 | None | 06/2014 | (1) | $16,000 | (2) | |
LIBOR
plus 4.55 |
%(3) | ||||||||||||
Crowne Plaza Jacksonville Riverfront |
13,948,116 | 14,135,234 | None | 07/2015 | (4) | 25 years | |
LIBOR plus 3.00 |
% | |||||||||||||||
Crowne Plaza Tampa Westshore |
13,738,236 | 13,872,077 | None | 06/2017 | 25 years | 5.60 | % | |||||||||||||||||
DoubleTree by Hilton Brownstone University |
9,958,327 | 7,816,867 | None | 10/2016 | (5) | 25 years | 5.25 | % | ||||||||||||||||
Hilton Philadelphia Airport |
29,118,931 | 29,502,666 | None | 08/2014 | (6) | 25 years | |
LIBOR
plus 3.00 |
%(7) | |||||||||||||||
Hilton Savannah DeSoto |
21,822,392 | 22,051,314 | Yes | (8) | 07/2017 | 25 years | (9) | 6.06 | % | |||||||||||||||
Hilton Wilmington Riverside |
21,171,831 | 21,416,922 | Yes | (8) | 03/2017 | 25 years | (10) | 6.21 | % | |||||||||||||||
Holiday Inn Laurel West |
7,221,697 | 7,300,465 | Yes | (11) | 08/2021 | 25 years | 5.25 | %(12) | ||||||||||||||||
Sheraton Louisville Riverside |
11,914,659 | 12,019,262 | (13) | 01/2017 | 25 years | 6.24 | % | |||||||||||||||||
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Total |
$ | 134,893,689 | $ | 135,674,432 | ||||||||||||||||||||
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(1) | The note provides that the mortgage can be extended until June 2015 if certain conditions have been satisfied. |
(2) | We are 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 2016 if certain conditions have been satisfied. |
(5) | The note provides that after five years, the mortgage can be extended if certain conditions have been satisfied for an additional five-year period at a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest. |
(6) | The note provides that the mortgage can be extended until March 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 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017. |
(10) | The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017. |
(11) | Pre-payment can be made with penalty until 90 days before the fifth anniversary of the commencement date of the loan or from such date until 90 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%. |
(13) | With limited exception, the note may not be prepaid until two months before maturity. |
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Contractual Obligations
The following table outlines our contractual obligations as of December 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).
Payments due by period (in thousands) | ||||||||||||||||||||
Contractual Obligations |
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
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Mortgage loans, including interest |
$ | 162,816 | $ | 17,111 | $ | 59,156 | $ | 78,955 | $ | 7,594 | ||||||||||
Other loans, including interest |
4,249 | 147 | 4,102 | | | |||||||||||||||
Ground, building, office and equipment leases |
1,344 | 502 | 651 | 191 | | |||||||||||||||
Redeemable preferred stock |
20,385 | 1,425 | 2,939 | 16,021 | | |||||||||||||||
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Totals |
$ | 188,794 | $ | 19,185 | $ | 66,848 | $ | 95,167 | $ | 7,594 | ||||||||||
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In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that require us to indemnify the contributors of our initial properties against tax liabilities in the event we sell those properties in a taxable transaction during a 10-year period. As of June 30, 2013, such indemnification obligations could result in aggregate payments of approximately $9.2 million. Our obligations under the tax indemnity agreements may effectively preclude us from selling or disposing of certain of the initial hotels in taxable transactions or reducing our consolidated indebtedness below approximately $11.0 million.
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.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing.
Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.
As of June 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. 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 $0.9 million cash collateral.
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Unsecured Notes
The unsecured notes offered by this prospectus contain certain covenants and restrictions that require us to meet certain financial ratios and include certain financial measures that are not calculated in accordance with GAAP. See Description of Notes Certain Covenants. These financial measures are presented below for the sole purpose of evaluating the Companys compliance with the key financial covenants as if they had been applicable at June 30, 2013, December 31, 2012 and December 31, 2011.
June 30, 2013 |
December 31, 2012 |
December 31, 2011 |
||||||||||
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
||||||||||||
Net income (loss)(1) |
$ | (1,855,773 | ) | $ | (5,327,711 | ) | $ | (6,475,243 | ) | |||
Interest expense(1) |
9,822,975 | 12,382,146 | 10,821,815 | |||||||||
Provision for taxes(1) |
1,613,381 | 1,301,229 | 905,455 | |||||||||
Equity in (income) loss of joint venture(1) |
(551,574 | ) | (172,172 | ) | 60,094 | |||||||
Unrealized loss on warrant derivative(1) |
2,021,987 | 2,026,677 | 1,309,075 | |||||||||
Unrealized gain on hedging activities(1) |
| | (72,649 | ) | ||||||||
Impairment of note receivable(1) |
110,871 | 110,871 | | |||||||||
Loss on disposal of assets(1) |
| | 128,099 | |||||||||
Depreciation and amortization(1) |
8,370,086 | 8,661,769 | 8,702,880 | |||||||||
Corporate general and administrative expenses(1) |
4,201,764 | 4,078,826 | 4,025,794 | |||||||||
Income Available for Debt Service(1) |
$ | 23,733,717 | $ | 23,061,635 | $ | 19,405,320 | ||||||
Interest expense(1) |
$ | 9,822,975 | $ | 12,382,146 | $ | 10,821,815 | ||||||
Distributions on Preferred Interest(1)(2) |
(1,883,169 | ) | (3,106,981 | ) | (2,122,205 | ) | ||||||
Amortization of issuance costs(1)(2) |
(787,962 | ) | (1,971,796 | ) | (1,106,279 | ) | ||||||
Stabilized Consolidated Interest Expense |
$ | 7,151,844 | $ | 7,303,369 | $ | 7,593,331 | ||||||
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense |
3.32 | 3.16 | 2.56 | |||||||||
Ratio of Debt to Adjusted Total Asset Value: |
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Line of credit |
$ | | $ | | $ | 25,537,290 | ||||||
Mortgage loans |
134,893,689 | 135,674,432 | 94,157,825 | |||||||||
Loans payable |
3,650,220 | 4,025,220 | 9,275,220 | |||||||||
Total debt |
$ | 138,543,909 | 139.699,652 | 128,970,335 | ||||||||
Income Available for Debt Service(1) |
$ | 23,733,717 | $ | 23,061,635 | $ | 19,405,320 | ||||||
Capitalization Rate |
7.5 | % | 7.5 | % | 7.5 | % | ||||||
316,449,560 | 307,488,467 | 258,737,600 | ||||||||||
Cash and cash equivalents |
10,818,821 | 10,255,610 | 7,100,350 | |||||||||
Adjusted Total Asset Value |
327,268,381 | 317,744,077 | 265,837,950 | |||||||||
Ratio of Debt to Adjusted Total Asset Value |
0.42 | 0.44 | 0.49 |
(1) | Represents the four preceding calendar quarters. |
(2) | Includes prepayment fee and write-off of associated issuance costs associated with the portion of the Preferred Interest redeemed during the period. |
Off-Balance Sheet Arrangements
Through a joint venture with a Carlyle subsidiary, we own a 25.0% indirect, noncontrolling interest in an entity, or 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,
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in addition to our pro rata share of net sale proceeds. The Crowne Plaza Hollywood Beach Resort is leased to another entity, or 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.
Critical Accounting Policies
The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.
Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with GAAP 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, which were acquired from third parties
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contributed to us in connection with Sotherlys 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 propertys estimated fair market value would be recorded and an impairment loss recognized.
There were no charges for impairment of hotel properties recorded in 2012, 2011 or 2010.
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 customers 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 December 31, 2012. 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.
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 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
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Governors of the National Association of Real Estate Investment Trusts, or 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 companys 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 NAREITs 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.
The following is a reconciliation of net loss to FFO and Adjusted FFO for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Six Months Ended June 30, 2013 |
Six Months Ended June 30, 2012 |
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
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Net Loss |
$ | (1,654,717 | ) | $ | (5,126,655 | ) | $ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||||
Depreciation and amortization |
4,083,871 | 4,375,554 | 8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||||||||
Equity in depreciation and amortization of joint venture |
268,489 | 320,742 | 590,675 | 567,803 | 546,055 | 545,580 | 545,659 | |||||||||||||||||||||
(Gain)/loss on disposal of assets |
| | | 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||||||||
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FFO |
$ | 2,697,643 | $ | (430,359 | ) | $ | 3,924,733 | $ | 2,923,539 | $ | 5,971,900 | $ | 5,997,948 | $ | 6,292,400 | |||||||||||||
Unrealized (gain)/loss on hedging activities(1) |
(45,575 | ) | 37,127 | 13,752 | 77,152 | (830,614 | ) | (1,220,161 | ) | 691,268 | ||||||||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,680,210 | 2,684,900 | 2,026,677 | 1,309,075 | | | | |||||||||||||||||||||
(Increase)/decrease in deferred income taxes |
1,317,752 | 1,168,311 | 1,412,467 | 685,189 | 174,035 | (1,929,473 | ) | (1,652,278 | ) | |||||||||||||||||||
Impairment of note receivable |
| | 110,871 | | | | 300,000 | |||||||||||||||||||||
Aborted offering costs |
| | | 582,850 | | | | |||||||||||||||||||||
Equity in gain on extinguishment of debt of joint venture |
| | | | | | (750,000 | ) | ||||||||||||||||||||
Loss on early extinguishment of debt(2) |
337,136 | 1,982,184 | 1,982,184 | | | | | |||||||||||||||||||||
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Adjusted FFO |
$ | 6,987,166 | $ | 5,442,163 | $ | 9,470,684 | $ | 5,577,805 | $ | 5,315,321 | $ | 2,848,314 | $ | 4,881,390 | ||||||||||||||
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(1) | Includes equity in unrealized loss on hedging activities of joint venture. |
(2) | Reflected in interest expense for the periods presented above. |
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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.
The Companys calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.
The following is a reconciliation of net loss to Hotel EBITDA for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:
Six Months Ended June 30, 2013 |
Six Months Ended June 30, 2012 |
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
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Net Loss |
$ | (1,654,717 | ) | $ | (5,126,655 | ) | $ | (5,327,711 | ) | $ | (6,475,243 | ) | $ | (3,252,261 | ) | $ | (3,010,587 | ) | $ | (920,014 | ) | |||||||
Interest expense |
5,013,191 | 7,572,362 | 12,382,146 | 10,821,815 | 10,030,517 | 9,661,871 | 6,811,460 | |||||||||||||||||||||
Interest income |
(7,559 | ) | (7,852 | ) | (16,158 | ) | (14,808 | ) | (22,305 | ) | (41,999 | ) | (72,547 | ) | ||||||||||||||
Income tax provision (benefit) |
1,374,873 | 1,062,721 | 1,301,229 | 905,455 | 214,344 | (1,807,126 | ) | (1,475,695 | ) | |||||||||||||||||||
Depreciation and amortization |
4,083,871 | 4,375,554 | 8,661,769 | 8,702,880 | 8,506,802 | 8,420,085 | 6,346,222 | |||||||||||||||||||||
Equity in (earnings)/loss of joint venture |
(557,116 | ) | (177,714 | ) | (172,172 | ) | 60,094 | (16,931 | ) | 249,367 | (48,496 | ) | ||||||||||||||||
(Gain)/loss on disposal of assets |
| | | 128,099 | 171,304 | 42,870 | 320,533 | |||||||||||||||||||||
Unrealized (gain)/loss on hedging activities |
| | | (72,649 | ) | (700,488 | ) | (1,220,161 | ) | 691,268 | ||||||||||||||||||
Unrealized (gain)/loss on warrant derivative |
2,680,210 | 2,684,900 | 2,026,677 | 1,309,075 | | | | |||||||||||||||||||||
Impairment of note receivable |
| | 110,871 | | | | 300,000 | |||||||||||||||||||||
Corporate general and administrative |
2,217,471 | 2,094,534 | 4,078,826 | 4,025,794 | 3,389,764 | 3,170,627 | 2,940,979 | |||||||||||||||||||||
Net lease rental income |
(175,000 | ) | (175,000 | ) | (350,000 | ) | (447,000 | ) | (443,000 | ) | (445,000 | ) | (471,862 | ) | ||||||||||||||
Other fee income |
(160,159 | ) | (141,525 | ) | (255,707 | ) | (235,493 | ) | (238,198 | ) | (248,040 | ) | (197,790 | ) | ||||||||||||||
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Hotel EBITDA |
$ | 12,815,065 | $ | 12,161,325 | $ | 22,439,770 | $ | 18,708,019 | $ | 17,639,548 | $ | 14,771,907 | $ | 14,224,058 | ||||||||||||||
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Overview
Sotherly is a self-managed and self-administered real estate investment trust, or REIT, that was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in the Mid-Atlantic and Southern United States. On December 21, 2004, Sotherly successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. Sotherly conducts its business through Sotherly Hotels LP, Sotherlys operating partnership, of which Sotherly is the general partner. Sotherly owns approximately 78.3% of the partnership units in the Operating Partnership. Limited partners (including certain of Sotherlys officers and directors) own the remaining Operating Partnership units.
Our portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels located in seven states with an aggregate of 2,424 rooms and approximately 120,200 square feet of meeting space. Nine of these hotels are wholly-owned by subsidiaries of the Operating Partnership and operate under the Hilton, Crowne Plaza, Sheraton and Holiday Inn brands and are managed on a day to day basis by MHI Hotels Services. We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. Our portfolio is concentrated in markets that we believe possess multiple demand generators and have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we expect will be capable of providing strong risk-adjusted returns.
Since Sotherlys initial public offering in 2004, we have invested approximately $145 million in new hotel properties, in capital improvements to new and existing properties, and in joint ventures. From 2005 to 2008, our asset base approximately doubled, as we purchased five wholly-owned hotels and one additional hotel that was a joint venture project with Carlyle. By 2012, we had completed the renovation and repositioning of over 80% of our wholly-owned assets and successfully relicensed the majority of our hotels during this same period. Our repositioning efforts have garnered numerous awards from our franchisors for the quality of our renovations and the high level of guest satisfaction. Our renovations have also allowed us to align our hotels with more upscale brands from our franchisors. We believe this substantial level of capital investment and our upbranding efforts have positioned our properties to capture revenue opportunities in their respective markets and outperform our competitors as these locations mature.
In order for Sotherly to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessee and managed by MHI Hotels Services, an eligible independent management company. Our TRS Lessee is a wholly-owned subsidiary of MHI Holding, which we refer to collectively with our TRS Lessee as MHI TRS. MHI TRS is a taxable REIT subsidiary for federal income tax purposes.
Market Opportunity
As a result of the global economic recession, commencing in 2008 through early 2010, the U.S. lodging industry experienced substantial declines in operating performance driven by declining U.S. gross domestic product, or GDP, high unemployment levels, low consumer confidence and a reduction in the availability of credit. In addition to facing declining operating results, hotel owners were adversely impacted by a significant decline in the availability of debt financing for working capital, renovations and acquisitions. For the past three years, the lodging industry has experienced a recovery in revenue per available room and in financing activity. The breadth and sustainability of the recovery will be dependent on a variety of factors, including asset location, individual market performance, and property condition. New supply of hotel rooms has not yet emerged as a major factor impacting the recovery, and we believe the supply of new hotels is likely to remain low for the next several years due to the limited availability of debt financing dedicated to new construction projects. As a result, we believe well-located, properly positioned, and well managed hotels will continue to benefit from the ongoing lodging recovery and demand for hotel rooms.
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Operating performance in the lodging industry historically has correlated with U.S. GDP growth and we believe the national economy has stabilized and its nascent growth mirrors the recovery of revenue per available room in the U.S. lodging industry. As continued growth characterizes the domestic economy, industry experts are projecting that lodging fundamentals will remain strong over the near term.
Industry fundamentals have shown strong improvements since the recession of 2008 through early 2010. Smith Travel Research, a leading provider of supply and demand data for the lodging industry, reported that, the national hotel industry experienced its first positive month of year-over-year improvement in revenue per available room in early 2010. The industry has continued to trend in a positive direction since that time, as shown in the table below.
Source: STR
In addition to an improvement in operating fundamentals, commercial lenders report an expansion in the availability of credit. As shown in the table below, the commercial mortgage-backed security, or CMBS, market, which has historically provided a significant amount of debt financing to the real estate industry, has seen a significant increase in new issuances since the market lows of 2009.
1. YTD as of August 2013
Source: Commercial Mortgage Alert
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As credit has become more available, credit spreads continue to decline relative to benchmark treasury yields, thus providing hotel borrowers attractive overall borrowing rates for acquisition financing or refinancing of existing debt. As the table below demonstrates, credit spreads have declined significantly. This allows hotel owners to benefit from lower overall costs of financing.
Source: Commercial Mortgage Alert, August 16, 2013.
Although market conditions have improved, new room supply remains constrained, as we believe construction lending remains difficult to obtain and land and commodity costs remain high. The chart below provides an historic view of room supply in the upper upscale category of hotels, which represent the majority of the type of hotels owned by us. Rooms supply growth has lagged historic averages for over three years. Existing hotel owners benefit from constrained new supply, as pricing power is conveyed with additional demand.
Source: STR
We share the traditionally held belief that lodging demand is correlated to GDP growth. As shown below, U.S. GDP growth is projected to increase over the next several years.
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Source: IMF World Economic Outlook, May 2013.
We believe that a continued recovery in U.S. GDP growth, coupled with limited growth in new hotel room supply, will lead to increases in lodging industry revenue per available room and operating profit. In March 2013, PKF Hospitality Research, a leading industry analytic expert, reported that lodging fundamentals are as currently sound as they have been in the past 30 years, and that hotel rates and revenue per available room gains should be double the historic averages through 2015.
Competitive Strengths
We believe the following factors differentiate us from other owners, acquirers and investors in hotel properties:
Stable Portfolio of High Quality Properties. Our properties consist of well-located, geographically diverse, full-service hotels predominantly in the central business districts of cities in the Mid-Atlantic and Southeastern United States. Our hotels typically offer attractive amenities such as swimming pools, fitness centers, food and beverage facilities, parking and meeting space. Since Sotherlys initial public offering, each of our hotels has undergone a substantial renovation program to enhance the quality and performance of the property.
Longtime Relationships with Leading Full-Service Hotel Brands. Our senior management team has developed strong relationships with many of the top full-service hotels brands in the upscale to upper-upscale categories, which is characterized by such brands as Hilton, Crowne Plaza, and Sheraton, and has received numerous awards from nationally recognized hotel franchisors, such as Intercontinental Hotels Group, Starwood Hotels and Hilton Hotels.
Existing Portfolio Repositioned, Relicensed and Renovated. From 2007 through 2009, we expended approximately $76.7 million in capital improvements resulting in the substantial renovation and licensing (or re-licensing) of five of our nine wholly-owned properties. For the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011, and 2010, we have expended approximately $3.2 million, $2.9 million, $6.0 million and $2.9 million, respectively, for a total of approximately $14.9 million in capital improvements, which included substantial renovation of our property in Raleigh, North Carolina, which we re-branded as the DoubleTree by Hilton Raleigh Brownstone University, and the first phase of renovation of the guest rooms at the Hilton Philadelphia Airport in Philadelphia, Pennsylvania and the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. We believe this substantial level of capital investment and our upbranding efforts have positioned our properties to capture revenue opportunities in their respective markets and outperform our competitors as these locations mature.
Strategic Focus on Select Southern Markets. We are focusing our growth strategy on the major markets in the Southern United States, which we believe have and will continue to benefit from attractive demographic and
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economic growth characteristics. We believe this region also reflects an attractive business climate with respect to governmental and regulatory policies and taxation. In addition, our hotels are located predominantly in central business district markets near stable demand generators, such as large state universities, convention centers, corporate headquarters, sports venues and office parks and in markets that we believe have significant barriers to entry for new product delivery.
Prudent and Flexible Capital Structure. During the last three years, we have refinanced over 60% of the debt on our wholly-owned hotel properties, taking advantage of the current attractive interest rate environment. As of June 30, 2013, we had approximately $134.9 million of secured debt, of which approximately $85.8 million, or 63.6%, was fixed, at an average rate of 5.0% (exclusive of the Preferred Stock). Approximately $49.1 million, or 36.4%, of our secured debt is at a variable interest rate, which bore an average interest rate of 3.6% at June 30, 2013. The weighted average term of our debt at June 30, 2013 was approximately 3 years. However, should we exercise our options to extend the mortgages on our properties in Philadelphia and Jacksonville pursuant to the terms of those agreements, the weighted average term of our debt at June 30, 2013 would be approximately 4 years.
Experienced Management Team. We believe the Companys and its predecessors longevity in the industry and its success through many market cycles, together with managements experience in the lodging industry, is indicative of the Companys conservative and disciplined approach toward hotel acquisition, ownership and operation. The members of our senior management team, led by Messrs. Sims, Folsom and Domalski, have significant experience in the lodging, capital markets, finance, and accounting industries, and have worked together at Sotherly since 2006. Mr. Sims, Sotherlys chairman and chief executive officer, has spent his entire career with Sotherly and its predecessor, and has over 35 years of experience in the lodging industry as an operator, owner, developer, and financier. Mr. Folsom has nearly eight years of experience with Sotherly and 13 years of experience working in public real estate companies and in the real estate capital markets. Mr. Domalski has nearly 29 years of experience as an accountant and auditor and has worked at Sotherly since 2005.
Our Strategy and Investment Criteria
Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the Southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe that we will be able to source significant external growth opportunities through our management teams extensive network of industry, corporate and institutional relationships.
Our investment criteria are further detailed below:
| Geographic Growth Markets: We are focusing our growth strategy on the major markets in the Southern region of the United States. Our management team remains confident in the long-term growth potential associated with this part of the United States. These markets have historically been characterized by population growth, economic expansion, growth in new businesses and growth in the resort, recreation and leisure segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for acquisitions only if we believe these new markets will provide similar long-term growth prospects. |
| Full-Service Hotels: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall primarily under the upscale to upper-upscale categories and include such brands as Hilton, DoubleTree by Hilton, Sheraton and Crowne Plaza. We do not own economy branded hotels. We believe that full-service hotels with upscale to upper-upscale brands will outperform the broader U.S. hotel industry and thus offer the highest returns on invested capital. |
| Significant Barriers to Entry: We intend to execute a strategy that entails the acquisition of hotels in prime locations with significant barriers to entry. We seek to acquire properties that will benefit from the licensing of brands that are not otherwise present in the market and provide us with geographic exclusivity which helps to protect the value of our investment. |
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| Proximity to Demand Generators: We seek to acquire hotel properties located in central business districts near multiple demand generators for both leisure and business travelers within the respective markets, including large state universities, airports, convention centers, corporate headquarters, sports venues and office parks. |
We typically define underperforming hotels as those that are poorly managed, suffer from significant deferred maintenance and capital improvement and that are not properly positioned in their respective markets. In pursuing these opportunities, we hope to improve revenue and cash flow and increase the long-term value of the underperforming hotels we acquire. Our ultimate goal is to achieve a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing hotel. In analyzing a potential investment in an underperforming hotel property, we typically characterize the investment opportunity as one of the following:
| Up-branding Opportunity: The acquisition of properties that can be upgraded physically and enhanced operationally to qualify for what we view as higher quality franchise brands, including Hilton, DoubleTree by Hilton, Crowne Plaza and Sheraton. |
| Shallow-Turn Opportunity: The acquisition of an underperforming but structurally sound hotel that requires moderate renovation to re-establish the hotel in its market. |
| Deep-Turn Opportunity: The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of both the business components of the operations as well as the physical plant of the hotel, including extensive renovation of the building, furniture, fixtures and equipment. |
Typically, in our experience, a deep turn opportunity takes a total of approximately four years from the initial acquisition of a property to achieving full post-renovation stabilization. Therefore, when evaluating future opportunities in underperforming hotels, we intend to focus on up-branding and shallow-turn opportunities, and to pursue deep-turn opportunities on a more limited basis and in joint venture partnerships if possible.
Investment Vehicles. In pursuit of our investment strategy, we may employ various traditional and non-traditional investment vehicles:
| Direct Purchase Opportunity: Our traditional investment strategy is to acquire direct ownership interests via the Operating Partnership in properties that meet our investment criteria, including opportunities that involve full-service, upscale and upper-upscale properties in identified geographic growth markets that have significant barriers to entry for new product delivery. Such properties, or portfolio of properties, may or may not be acquired subject to a mortgage by the seller or third-party. |
| Distressed Debt Opportunities: In sourcing acquisitions for our core growth strategy, we may pursue investments in debt instruments that are collateralized by hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to our stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures. |
| Joint Venture/Mezzanine Lending Opportunities: We may, from time to time, undertake a significant renovation and rehabilitation project that we characterize as a deep-turn opportunity. In such cases, we may acquire a functionally obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income commonly referred to as the negative carry associated with such extensive renovation programs. We will not pursue joint venture or mezzanine programs in which we would become a de facto lender to the real estate community. |
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Portfolio and Asset Management Strategy
We intend to ensure that the management of our hotel properties maximizes market share, as evidenced by RevPAR penetration indices, and that our market share yields the optimum level of revenues for our hotels in their respective markets. Our strategy is designed to actively manage our hotels operating expenses in an effort to maximize Hotel EBITDA.
Over our long history in the lodging industry we have refined many portfolio and asset management techniques that we believe provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market trends, one-time or exceptional revenue opportunities, and/or changes in the regulatory climate that may impact costs. We review daily revenue results and revenue management strategies at the hotels, and we focus on MHI Hotels Services ability to produce high quality revenues that translate to higher marginal profitability. We look for alternative forms of revenues, such as leasing roof-top space for cellular towers and other communication devices and also look to lease space to third parties in our hotels, which may include, but are not limited to, gift shops or restaurants. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal property taxes. We generally appeal tax increases in an effort to secure lower tax payments and routinely pursue strategies that allow for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.
We also require detailed and refined reporting data from MHI Hotels Services, which includes detailed accounts of revenues, revenue segments, expenses and forecasts based on current and historic booking patterns. We also believe we optimize and successfully manage capital costs at our hotels while ensuring that adequate product standards are maintained to provide guest satisfaction and compliance with franchise brand standards.
None of our hotels is managed by a major national or global hotel franchise company. Through our long history in the lodging industry, we have found that management of our hotels by management companies other than franchisors is preferable to and more profitable than management derived from the major franchise companies, specifically with respect to optimization of operating expenses and the delivery of guest services.
Our portfolio management strategy includes our effort to optimize labor costs. The labor force in our hotels is predominately non-unionized, with only one property, the Jacksonville Crowne Plaza, having a total of approximately ten employees subject to collective bargaining. Further, the labor force at our hotels is eligible to receive health and other insurance coverage through MHI Hotels Services, which self-insures. Self-insuring has, in our opinion, provided significant cash savings over traditional insurance company sponsored plans.
Asset Disposition Strategy. When a property no longer fits with our investment objectives, we will pursue traditional and non-traditional means of disposal:
| Direct Sale: Most commonly we will dispose of properties through a direct sale of the property for cash so that our investment capital can be redeployed according to the investment strategies outlined above. |
| Capital Recycling: Under this asset disposition strategy, we will seek to purchase a hotel in connection with the requirements of a tax-free exchange. Such a strategy may be deployed in order to mitigate the tax consequences to us that a direct sale might cause. |
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Our Properties
As of June 30, 2013, our portfolio consisted of the following properties:
Wholly-Owned Properties |
Number of Rooms |
Location |
Date of Acquisition |
Acquisition Cost(1) |
Years
Built/Renovated (2) |
Chain | ||||||||||
Hilton Philadelphia Airport |
331 | Philadelphia, PA | 12/21/2004 | $ | 25,271,240 | 1972/2005/2013 | Upper Upscale | |||||||||
Hilton Wilmington Riverside |
272 | Wilmington, NC | 12/21/2004 | 25,646,760 | 1970/2007 | Upper Upscale | ||||||||||
Hilton Savannah DeSoto |
246 | Savannah, GA | 12/21/2004 | 27,279,940 | 1968/2008 | Upper Upscale | ||||||||||
Sheraton Louisville Riverside |
180 | Jeffersonville, IN | 9/20/2006 | 7,600,200 | 1972/2008 | Upper Upscale | ||||||||||
Crowne Plaza Jacksonville Riverfront |
292 | Jacksonville, FL | 7/22/2005 | 22,000,000 | 1970/2006/2013 | Upscale | ||||||||||
Crowne Plaza Tampa Westshore |
222 | Tampa, FL | 10/29/2007 | 13,500,000 | 1973/2008 | Upscale | ||||||||||
Crowne Plaza Hampton Marina |
173 | Hampton, VA | 4/24/2008 | 7,742,000 | 1988/2008 | Upscale | ||||||||||
Holiday Inn Laurel West |
207 | Laurel, MD | 12/21/2004 | 12,200,200 | 1985/2005 | Upper MidScale | ||||||||||
DoubleTree by Hilton Brownstone-University |
190 | Raleigh, NC | 12/21/2004 | 9,396,120 | 1971/2002/2011 | Upscale | ||||||||||
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Total Rooms in Our Wholly-Owned Portfolio |
2,113 | |||||||||||||||
Joint Venture Property |
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Crowne Plaza Hollywood Beach Resort(3) |
311 | Hollywood, FL | 8/9/2007 | $ | 74,000,000 | 1972/2006 | Upscale | |||||||||
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Total Rooms in Our Portfolio |
2,424 | |||||||||||||||
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(1) | Excludes transfer costs. |
(2) | Year Renovated represents the year in which the replacement of a significant portion of the hotels furniture, fixtures or equipment was completed. |
(3) | We own this hotel through a joint venture in which we own a 25% interest. |
Insurance. Our current properties are covered by insurance of the type and amount we believe are customary for these types of properties, including limited terrorism insurance.
Competition. The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular geographic area could have a material adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel properties we acquire in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided, and price are the principal competitive factors affecting our hotels.
Our hotels currently compete primarily in the full-service upscale and upper-upscale segments of the market. Positive competitive factors affecting our position include geographic location, markets with growth potential and strong franchise partners, while certain disadvantages to our position include limited geographic diversity and smaller size in relation to larger competitors.
Operating Data. Room revenue is the most important category of revenue and drives other revenue categories such as food, beverage 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; |
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| 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 the product of ADR and occupancy. |
The following table illustrates the actual key operating metrics for the twelve months ended June 30, 2013 for our portfolio.
Wholly-Owned Properties |
Average Occupancy(1) |
ADR(2) | RevPAR(3) | |||||||||
Hilton Philadelphia Airport |
78.6 | % | $ | 135.53 | $ | 106.48 | ||||||
Hilton Wilmington Riverside |
73.4 | % | $ | 133.25 | $ | 97.77 | ||||||
Hilton Savannah DeSoto |
71.7 | % | $ | 136.21 | $ | 97.61 | ||||||
Sheraton Louisville Riverside |
64.3 | % | $ | 130.06 | $ | 83.59 | ||||||
Crowne Plaza Jacksonville Riverfront |
58.6 | % | $ | 97.54 | $ | 57.19 | ||||||
Crowne Plaza Tampa Westshore |
67.8 | % | $ | 102.13 | $ | 69.24 | ||||||
Crowne Plaza Hampton Marina |
53.3 | % | $ | 92.93 | $ | 49.55 | ||||||
Holiday Inn Laurel West |
66.7 | % | $ | 88.89 | $ | 59.29 | ||||||
DoubleTree by Hilton Brownstone - University |
71.1 | % | $ | 109.14 | $ | 77.57 | ||||||
Totals/ Weighted Averages in Our Wholly-Owned Portfolio |
68.1 | % | $ | 117.16 | $ | 79.77 | ||||||
Joint Venture Property |
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Crowne Plaza Hollywood Beach Resort(4) |
80.7 | % | $ | 156.21 | $ | 126.10 | ||||||
Totals/ Weighted Averages in Our Portfolio |
68.5 | % | $ | 118.79 | $ | 81.42 |
(1) | Average Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the number of rooms sold by the total number of rooms available, expressed as a percentage. |
(2) | ADR represents the average rate paid for rooms sold, calculated by dividing total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by total daily rooms sold. |
(3) | RevPAR is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services. |
(4) | We own this hotel through a joint venture in which we have a 25% interest. |
The selected operating data presented above should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
Wholly-owned properties.
Hilton Philadelphia Airport. The Hilton Philadelphia Airport is contiguous to the Philadelphia Airport and located approximately eight miles south of Philadelphias central business district at 4509 Island Avenue in Philadelphia, Pennsylvania. The property is located within three miles of the Lincoln Financial Field, Wells Fargo Center (formerly known as the Wachovia Spectrum Center) and the Citizens Bank Park which are homes to Philadelphias professional football, basketball, ice hockey, and baseball franchises. MHI Hotels Services and its affiliates have managed the Hilton Philadelphia Airport since 1994. The Company is currently renovating this hotel and expects to invest approximately $1.5 million in upgrading the hotels rooms, baths, guest corridors, and other selected furniture, fixtures, and equipment throughout the hotel.
Key Highlights and Demand Generators. The Hilton Philadelphia Airport generates demand from transient travelers and corporate meetings. The top five accounts by revenue for 2012 were Virgin America, Airport Accommodations, American Diabetes Association, Air Canada, and Boeing. The hotel also benefits from large conventions at the Philadelphia Convention Center. The hotels locations near the Philadelphia professional sports complexes generates leisure demand for hotel rooms. We believe the Hilton Philadelphia Airport is a market leader in the upscale, full-service hotel sector in the Philadelphia airport market.
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Guest Rooms. The Hilton Philadelphia Airport is comprised of 331 guest rooms, including three suites, in a nine-story L-shaped tower. All rooms provide modern conveniences including high-speed internet access.
Food and Beverage. The hotel has three dining options located on the premises. Landing Restaurant features continental and regional cuisine and an upscale buffet for breakfast and lunch. Players Sports Bar features a full-service bar with a sports theme. Café Express provides light fare and beverages in the hotel lobby.
Other Amenities. Other amenities include direct access to the general aviation facilities of the Philadelphia International Airport, business center, fitness center, indoor swimming pool, whirlpool spa, recreational facilities, and 10,000 square feet of meeting space in the hotel.
Operating and Occupancy Information. The following tables show certain historical data regarding the Hilton Philadelphia Airport.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 12,523,740 | $ | 11,930,208 | $ | 10,976,745 | $ | 10,516,195 | $ | 12,313,520 | ||||||||||
ADR |
$ | 134.21 | $ | 128.57 | $ | 116.05 | $ | 116.68 | $ | 134.44 | ||||||||||
Occupancy % |
77.0 | % | 76.8 | % | 78.3 | % | 74.6 | % | 75.6 | % | ||||||||||
RevPAR |
$ | 103.38 | $ | 98.75 | $ | 90.86 | $ | 87.04 | $ | 101.64 |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 6,642,637 | $ | 6,302,316 | $ | 6,041,839 | $ | 5,497,442 | $ | 5,063,214 | ||||||||||
ADR |
$ | 139.43 | $ | 136.88 | $ | 128.91 | $ | 114.14 | $ | 116.47 | ||||||||||
Occupancy % |
79.5 | % | 76.4 | % | 78.2 | % | 80.4 | % | 72.6 | % | ||||||||||
RevPAR |
$ | 110.88 | $ | 104.62 | $ | 100.85 | $ | 91.76 | $ | 84.51 |
Hilton Wilmington Riverside. The Hilton Wilmington Riverside is located five miles from the Wilmington International Airport at 301 North Water Street in Wilmington, North Carolina. The Hilton Wilmington Riverside was originally constructed in 1971 and expanded in 1999. The property is the only hotel located directly on the downtown Riverwalk and is situated across from the USS North Carolina Battleship Memorial. MHI Hotels Services and its affiliates have managed the Hilton Wilmington Riverside since 1989. The hotel was completely renovated in 2007.
Key Highlights and Demand Generators. The top five accounts by revenue for 2012 were CP Brunswick, PPD, GE, North Carolina Local Government Information Systems, and North Carolina Bar Association. Due to the hotels meeting space, group business accounts for over 50.0% of room revenues. State associations and educational related conferences contribute to the hotels business demand.
Guest Rooms. The Hilton Wilmington Riverside originally was constructed with 178 rooms and expanded in 1999 for a current total of 272 rooms in a nine-story structure. All rooms are equipped with high-speed internet service.
Food and Beverage. The hotel has three dining options located on the premises. Ruths Chris Steakhouse is a popular steakhouse located just off the hotel lobby. Innovations features American cuisine and daily chefs specials. Currents Riverview Café offers coffee, cocktails and lite fare in the lobby and provides panoramic views of the Cape Fear River.
Other Amenities. Other amenities include an outdoor pool overlooking the Cape Fear River, fitness center, business center, gift shop and 20,000 square feet of meeting space in the hotel.
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Operating and Occupancy Information. The following tables show certain historical data regarding the Hilton Wilmington Riverside.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 9,539,537 | $ | 9,114,480 | $ | 8,514,210 | $ | 8,657,897 | $ | 8,887,827 | ||||||||||
ADR |
$ | 129.48 | $ | 124.81 | $ | 122.26 | $ | 121.98 | $ | 125.83 | ||||||||||
Occupancy % |
74.0 | % | 73.6 | % | 70.1 | % | 71.5 | % | 71.0 | % | ||||||||||
RevPAR |
$ | 95.82 | $ | 91.81 | $ | 85.76 | $ | 87.21 | $ | 89.28 |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 4,918,740 | $ | 4,751,396 | $ | 4,661,950 | $ | 4,233,660 | $ | 4,416,284 | ||||||||||
ADR |
$ | 137.67 | $ | 129.97 | $ | 124.79 | $ | 122.09 | $ | 123.05 | ||||||||||
Occupancy % |
72.6 | % | 73.9 | % | 75.90 | % | 70.4 | % | 72.9 | % | ||||||||||
RevPAR |
$ | 99.91 | $ | 95.98 | $ | 94.69 | $ | 85.99 | $ | 89.70 |
Hilton Savannah DeSoto. The Hilton Savannah DeSoto hotel is located at 15 East Liberty Street in historic downtown Savannah, Georgia. The Hilton Savannah DeSoto overlooks Madison Square in the center of Savannahs historic district. A hotel has occupied the site since 1890 and the current building was constructed in 1968. The hotel offers views of the Savannah skyline and the Savannah River. The Hilton Savannah DeSoto is connected via an enclosed atrium to a luxury condominium building. MHI Hotels Services and its affiliates have managed the Hilton Savannah DeSoto since 1994. The hotel was completely renovated in 2008.
Key Highlights and Demand Generators. The Hilton Savannah DeSoto has historically generated its corporate demand from upscale business travelers and corporate meetings conducted by regional organizations. The top five accounts by revenue for 2012 were Armstrong Atlantic State University, Tauck, National Association of Credit Unions, NetJets, and Southern SRAS Museums Conference. The historic sites of Savannah create demand from the leisure segment. Group business, primarily the association and corporate meeting segments, account for more than 50.0% of the Hilton Savannah DeSotos business.
Guest Rooms. The Hilton Savannah DeSoto is a 15-story structure with 246 traditionally-styled guest rooms including five suites and an executive level. All rooms are equipped with high-speed internet access.
Food and Beverage. The hotel has three dining options located on the premises. The DeSoto Grille serves authentic Savannah cuisine and a buffet at both breakfast and lunch. Beulahs, located in the lobby area, serves coffees, juices, baked fresh daily breakfast breads, sandwiches and salads. The Lions Den is the hotels lounge.
Other Amenities. Other amenities include a business center, a fitness center, second-floor rooftop with an outdoor pool, complimentary access to the Downtown Athletic Club, gift shop and 20,000 square feet of meeting space in the hotel.
Operating and Occupancy Information. The following tables show certain historical information regarding the Hilton Savannah DeSoto.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 8,851,984 | $ | 8,405,396 | $ | 7,977,247 | $ | 6,989,162 | $ | 7,499,444 | ||||||||||
ADR |
$ | 132.59 | $ | 123.85 | $ | 117.52 | $ | 125.01 | $ | 137.23 | ||||||||||
Occupancy % |
74.2 | % | 75.6 | % | 75.6 | % | 62.3 | % | 60.7 | % | ||||||||||
RevPAR |
$ | 98.32 | $ | 93.61 | $ | 88.84 | $ | 77.84 | $ | 83.29 |
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Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 4,659,532 | $ | 4,746,939 | $ | 4,343,541 | $ | 4,159,611 | $ | 3,615,682 | ||||||||||
ADR |
$ | 144.29 | $ | 136.77 | $ | 127.63 | $ | 122.05 | $ | 131.95 | ||||||||||
Occupancy % |
72.5 | % | 77.5 | % | 76.4 | % | 76.5 | % | 61.5 | % | ||||||||||
RevPAR |
$ | 104.65 | $ | 106.02 | $ | 97.55 | $ | 93.42 | $ | 81.20 |
Sheraton Louisville Riverside. The Sheraton Louisville Riverside is located near Interstate 65 and directly on the Ohio River at 700 West Riverside Drive in historic Jeffersonville, Indiana. The hotel is five miles from Louisville International Airport and one mile from the Louisville central business district. The hotel was completely renovated in 2008.
Key Highlights and Demand Generators. The top five accounts by revenue for this hotel in 2012 were Humana, Deloitte, Heartland, CSI, and ACL. The property is located on the Ohio River at the base of the Second Street bridge that accesses the Louisville central business district one mile to the south. The hotel caters primarily to the citys corporate community, including Humana and Yum Products, as well as special sporting events such as the Kentucky Derby and University of Louisville athletics.
Guest Rooms. The Sheraton Louisville Riverside is composed of 180 guest rooms.
Food and Beverage. The hotel offers two dining options on the premises. The Bristol Bar and Grille offers fine dining in a casual atmosphere. The Lobby Bar offers full-service bar with light fare menu. Five additional restaurants are contiguous to the hotel.
Other Amenities. Other amenities include an indoor pool, club lounge, fitness center, business center and 7,600 square feet of meeting space in the hotel.
Operating and Occupancy Information. The following tables show certain historical information, from the date of re-opening the Sheraton Louisville Riverside after extensive renovations.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 5,148,511 | $ | 4,895,268 | $ | 4,523,283 | $ | 3,726,328 | $ | 1,915,775 | ||||||||||
ADR |
$ | 123.73 | $ | 118.37 | $ | 108.56 | $ | 109.39 | $ | 120.95 | ||||||||||
Occupancy % |
63.1 | % | 62.9 | % | 63.4 | % | 51.6 | % | 35.7 | % | ||||||||||
RevPAR |
$ | 78.04 | $ | 74.51 | $ | 68.85 | $ | 56.40 | $ | 43.20 |
* | Represents eight months of operations. |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 3,284,659 | $ | 2,933,415 | $ | 2,555,587 | $ | 2,239,935 | $ | 1,856,087 | ||||||||||
ADR |
$ | 150.79 | $ | 138.98 | $ | 127.87 | $ | 117.24 | $ | 116.85 | ||||||||||
Occupancy % |
66.9 | % | 64.4 | % | 61.3 | % | 58.6 | % | 48.5 | % | ||||||||||
RevPAR |
$ | 100.82 | $ | 89.54 | $ | 78.44 | $ | 68.75 | $ | 56.66 |
Crowne Plaza Jacksonville Riverfront. The Crown Plaza Jacksonville Riverfront is located at 1201 Riverplace Boulevard in downtown Jacksonville, Florida. The hotel is approximately fifteen minutes from the airport and close to the Prime Osborn Center, Alltel Stadium, the Jacksonville Landing and historic San Marco neighborhood shops and restaurants. The hotel was renovated in 2006 when it changed brands from Hilton to Crowne Plaza and currently is undergoing additional renovations, where the Company expects to invest approximately $4.0 million in upgrades and improvements to the hotel.
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Key Highlights and Demand Generators. The top five accounts by revenue for this hotel in 2012 were ASPCA, Steinmart, Winn Dixie, Medfirst, Redox. The property is located on the preferred south bank of the St. Johns River in the citys central business district and directly on the Riverwalk. The hotel caters primarily to local corporate clients as well as hosting regional corporate and association conferences. The waterfront Riverwalk location appeals to leisure guests.
Guest Rooms. The Crowne Plaza Jacksonville Riverfront features 292 luxury guestrooms, including 30 Junior Suites. All rooms are equipped with high-speed internet access.
Food and Beverage. The hotel has four dining options located on the premises. Ruths Chris Steakhouse is a popular steakhouse, located on the waterfront with a view of the citys skyline. The American Grille is a full-service three-meal restaurant with regional fare. Crowne Bar is a lobby bar featuring a variety of drinks and light fare. Riverfront Lounge, an outdoor venue, features light fare and a variety of drink specialties.
Other Amenities. The hotel offers 12,000 square feet of flexible meeting space, a fitness center, gift shop, business center, outdoor riverside pool, covered parking and a water taxi service to downtown venues.
Operating and Occupancy Information. The following tables show certain historical data regarding the Crowne Plaza Jacksonville Riverfront.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 6,332,016 | $ | 5,738,863 | $ | 5,846,195 | $ | 6,152,815 | $ | 7,585,013 | ||||||||||
ADR |
$ | 95.72 | $ | 101.29 | $ | 100.63 | $ | 102.35 | $ | 116.90 | ||||||||||
Occupancy % |
61.9 | % | 53.2 | % | 54.5 | % | 56.4 | % | 60.7 | % | ||||||||||
RevPAR |
$ | 59.25 | $ | 53.85 | $ | 54.82 | $ | 57.73 | $ | 70.97 |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 3,197,805 | $ | 3,434,380 | $ | 2,984,441 | $ | 3,069,678 | $ | 3,394,127 | ||||||||||
ADR |
$ | 96.73 | $ | 93.53 | $ | 99.72 | $ | 97.53 | $ | 103.55 | ||||||||||
Occupancy % |
62.6 | % | 69.1 | % | 56.6 | % | 59.6 | % | 62.0 | % | ||||||||||
RevPAR |
$ | 60.50 | $ | 64.62 | $ | 56.47 | $ | 58.08 | $ | 64.22 |
Crowne Plaza Tampa Westshore. The Crowne Plaza Tampa Westshore is located at 5303 West Kennedy Boulevard in Tampa, Florida. The hotel is situated on 3.82 acres in Tampas Westshore Corridor, the citys corporate, entertainment, restaurant and shopping district, and is within two miles of Tampa International Airport. The property is located contiguous to the I-275 Memorial Highway Interchange, the citys most traveled highway. The Westshore Mall is located one-tenth of a mile to the east of the hotel. The hotel was completely renovated in 2008 and reopened for business in March 2009.
Key Highlights and Demand Generators. The top five accounts by revenue for this hotel in 2012 were Joint War Fighting, Avantair GE Energy Environmental Services, MacDill Air Force Base, and Bloomin Brands. The hotel is located in close proximity to the Westshore office market, airport and various sports venues, including a professional football stadium and the New York Yankees spring training facility. The hotel is situated near military and defense contract installations and caters primarily to local, corporate and military clients as well as hosting regional corporate and association conferences.
Guest Rooms. The hotel features 222 rooms, including 44 suites. All rooms are equipped with high-speed internet access.
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Food and Beverage. Mezzo Restaurant and Lounge is located off the lobby and provides three-meal service in a casual atmosphere. Tampas Mojito Restaurant and Lounge is located on the premises.
Other Amenities. Other amenities include an outdoor pool, fitness center, business center and 10,000 square feet of meeting space in the hotel.
Operating and Occupancy Information. The following tables show certain historical data, from the date of opening post-renovation, regarding the Crowne Plaza Tampa Westshore.
Year Ended December 31, | ||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009* | ||||||||||||
Room Revenue |
$ | 5,795,816 | $ | 5,071,150 | $ | 4,374,288 | $ | 2,232,175 | ||||||||
ADR |
$ | 100.77 | $ | 96.82 | $ | 88.89 | $ | 82.00 | ||||||||
Occupancy % |
70.8 | % | 64.6 | % | 60.7 | % | 40.7 | % | ||||||||
RevPAR |
$ | 71.33 | $ | 62.58 | $ | 53.98 | $ | 33.40 |
* | Represents ten months of operations. |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009* | |||||||||||||||
Room Revenue |
$ | 3,029,627 | $ | 3,214,848 | $ | 2,789,444 | $ | 2,380,913 | $ | 705,481 | ||||||||||
ADR |
$ | 102.34 | $ | 99.89 | $ | 101.67 | $ | 90.89 | $ | 84.21 | ||||||||||
Occupancy % |
73.7 | % | 79.7 | % | 68.3 | % | 65.2 | % | 32.3 | % | ||||||||||
RevPAR |
$ | 75.40 | $ | 79.57 | $ | 69.42 | $ | 59.25 | $ | 27.16 |
* | Represents one month of operations. |
Crowne Plaza Hampton Marina. Less than a half mile off interstate 64, the hotel is centrally located between Williamsburg and Virginia Beach at 700 Settlers Landing Road in Hampton, Virginia. The Crowne Plaza Hampton Marina Hotel is the only waterfront hotel in Hampton, Virginia and is near Hampton University and contiguous to the Virginia Air & Space Museum. This property features 173 guestrooms and suites, an outdoor pool, meeting facilities, and multiple dining options all located in a marina setting. The hotel was completely renovated in 2008 to 2009.
Key Highlights and Demand Generators. The top five accounts by revenue for this hotel in 2012 were Delta Airlines, Hampton University, M2 Pictures, Boo Williams, and University of Virginia. The property is located on the Hampton River in downtown Hampton, Virginia, a short walk from Hampton University, Hampton Coliseum and the Air and Space Museum. The downtown waterfront setting is attractive to leisure guests. Additionally, the hotel is situated in close proximity to major defense and defense contractor installations and caters primarily to local government and military complexes such as NASA Langley, Langley Airforce Base, Fort Monroe, Newport News Shipbuilding and the Norfolk Naval Base.
Guest Rooms. The hotel features 173 guestrooms and suites. All rooms are equipped with high-speed internet access.
Food and Beverage. The hotel has four dining options located on the premises. The Regatta Grille features waterfront dining with a southern cuisine. Oyster Alley is an outdoor dockside restaurant that offers drinks and a light fare menu. Latitude 37 serves light fare and cordials in a waterfront lounge setting with a sophisticated nautical theme. Java Junkie is a sandwich shop on the hotel premises.
Other Amenities. Other Amenities at the Crowne Plaza Hampton Marina include an outdoor pool, fitness center, business center and 7,600 square feet of meeting space in the hotel.
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Operating and Occupancy Information. The following tables show certain historical data, from the date of purchase, regarding the Crowne Plaza Hampton Marina.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 3,217,702 | $ | 3,449,851 | $ | 3,245,826 | $ | 2,955,592 | $ | 1,266,096 | ||||||||||
ADR |
$ | 90.50 | $ | 88.48 | $ | 89.39 | $ | 97.20 | $ | 101.00 | ||||||||||
Occupancy % |
56.2 | % | 61.7 | % | 57.5 | % | 48.4 | % | 28.9 | % | ||||||||||
RevPAR |
$ | 50.89 | $ | 54.63 | $ | 51.40 | $ | 47.08 | $ | 29.21 |
* | Represents eight months of operations. |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 1,474,070 | $ | 1,567,235 | $ | 1,725,584 | $ | 1,495,326 | $ | 1,453,232 | ||||||||||
ADR |
$ | 95.53 | $ | 90.26 | $ | 90.55 | $ | 90.77 | $ | 98.99 | ||||||||||
Occupancy % |
49.3 | % | 55.1 | % | 60.9 | % | 52.9 | % | 47.2 | % | ||||||||||
RevPAR |
$ | 47.08 | $ | 49.78 | $ | 55.11 | $ | 48.03 | $ | 46.68 |
Holiday Inn Laurel West. The Holiday Inn Laurel West is located at 15101 Sweitzer Lane in Laurel, Maryland, near I-95 and Route 198 between Washington, D.C. and Baltimore, Maryland. The Holiday Inn Laurel West opened in 1985 with 125 guest rooms and in 1989 completed an addition of 80 rooms for a current total of 207 guest rooms. The hotel was renovated in 2005.
Key Highlights and Demand Generators. The hotel is conveniently located at the entrance to a corporate office park with major employers such as United Parcel Service, SunTrust, and the Washington Suburban Sanitary Commission. The top five accounts by revenue for 2012 were Worldstrides, EF Smithsonian, L&L Travel, Corporate Lodging Consultants and Bright Spark Student Travel. Much of the leisure demand is generated from its easy access off I-95 and proximity to the Washington, DC, Baltimore and Annapolis areas. Major government installations are located in close proximity to the hotel including the National Agriculture Research Center, National Security Administration, NASA, Fort Mead and Secret Service Training.
Guest Rooms. The hotel contains 207 guestrooms in a six story mid-rise structure. All rooms are equipped with high-speed internet access.
Food and Beverage. The hotel has two dining options located on the premises. Outback Steakhouse serves dinner, featuring steak and seafood, and provides bar service. Atrium Café serves three meals in the atrium of the hotel.
Other Amenities. Other amenities include a business center, executive level accommodations with keyed access and upgraded amenities, a 8,000 square foot atrium area with indoor pool, sauna, whirlpool, exercise room, game room, putting green, billiards, shuffleboard and gift shop and over 8,000 square feet of meeting and banquet space in the hotel.
Operating and Occupancy Information. The following tables show certain historical information regarding Holiday Inn Laurel West.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 4,495,818 | $ | 4,090,326 | $ | 4,116,447 | $ | 4,181,469 | $ | 4,310,740 | ||||||||||
ADR |
$ | 88.66 | $ | 89.01 | $ | 88.77 | $ | 92.70 | $ | 96.42 | ||||||||||
Occupancy % |
66.9 | % | 60.8 | % | 61.4 | % | 59.7 | % | 59.0 | % | ||||||||||
RevPAR |
$ | 59.34 | $ | 54.14 | $ | 54.48 | $ | 55.34 | $ | 56.90 |
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Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 2,398,388 | $ | 2,414,440 | $ | 2,163,150 | $ | 2,244,767 | $ | 2,365,793 | ||||||||||
ADR |
$ | 92.40 | $ | 91.93 | $ | 91.13 | $ | 90.61 | $ | 97.06 | ||||||||||
Occupancy % |
69.3 | % | 69.7 | % | 63.4 | % | 66.1 | % | 65.1 | % | ||||||||||
RevPAR |
$ | 64.01 | $ | 64.09 | $ | 57.73 | $ | 59.91 | $ | 63.14 |
DoubleTree by Hilton Brownstone - University. The DoubleTree by Hilton Brownstone University is located near the central Raleigh business district and adjacent to North Carolina State University, at 1707 Hillsborough Street in Raleigh, North Carolina. The DoubleTree by Hilton Brownstone University was built in 1971 as an independent property and operated as a Hilton for 20 years. MHI Hotels Services and its affiliates have managed the DoubleTree by Hilton Brownstone University since 1999. In November 2011, the hotel was rebranded from Holiday Inn Brownstone to the DoubleTree by Hilton Brownstone University, after completion of an approximate capital improvement program of approximately $4.5 million and the execution of a license agreement with Hilton Worldwide.
The hotel leases land adjacent to the hotel for use as a parking lot. The lease provides for annual rent of $76,104 and expires in August 2016 with options to renew for up to three additional 10-year periods with an option to purchase the leased property at fair market value at the end of the original lease term in August 2016, subject to payment of an annual fee of $9,000 and other conditions.
Key Highlights and Demand Generators. The DoubleTree by Hilton Brownstone-University generates transient business demand from corporate and government related entities. The top five accounts by revenue for 2012 were North Carolina State University, Amtrak, Allscripts, Neighborworks America, and Partners in Team Travel. Group business demand is generated through these entities and additionally through conventions, North Carolina State University special events (sports and educational), youth sporting events, state association meetings and government training. Weddings, special events, and religious celebrations generate leisure demand for this property. We believe the hotels strong ties to North Carolina State University and the expansion of the downtown convention center provide for opportunities in RevPAR growth.
Guest Rooms. The hotel is comprised of 190 guest rooms in an eight-story building. The property site is also improved with 18 additional and separate apartment suites. All rooms are equipped with high-speed internet access.
Food and Beverage. The Harvest Grille Restaurant and Harvest Grille Bistro located on the premises are both open for breakfast, dinner and lunch.
Other Amenities. Other amenities include an outdoor swimming pool, complimentary on-site fitness facility, access to the YMCA, and 15,000 square feet of meeting space in the hotel.
Operating and Occupancy Information. The following tables show certain historical information regarding the DoubleTree by Hilton Brownstone-University.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 4,918,893 | $ | 3,491,691 | $ | 3,518,842 | $ | 3,527,654 | $ | 4,310,289 | ||||||||||
ADR |
$ | 104.12 | $ | 85.87 | $ | 78.71 | $ | 82.91 | $ | 90.59 | ||||||||||
Occupancy % |
67.9 | % | 59.4 | % | 65.5 | % | 62.3 | % | 69.5 | % | ||||||||||
RevPAR |
$ | 70.73 | $ | 51.02 | $ | 51.55 | $ | 51.68 | $ | 62.98 |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 2,796,521 | $ | 2,335,603 | $ | 1,803,420 | $ | 1,726,758 | $ | 1,752,881 | ||||||||||
ADR |
$ | 111.44 | $ | 101.35 | $ | 84.30 | $ | 76.16 | $ | 85.69 | ||||||||||
Occupancy % |
73.0 | % | 66.6 | % | 63.2 | % | 67.0 | % | 60.4 | % | ||||||||||
RevPAR |
$ | 81.32 | $ | 67.54 | $ | 53.28 | $ | 51.02 | $ | 51.79 |
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Joint venture properties.
Crowne Plaza Hollywood Beach Resort. The Crowne Plaza Hollywood Beach Resort Hotel opened in September 2007 is owned through a joint venture with Carlyle. A winner of the InterContinental Hotels Group 2008 Renovation Award, the resort is centrally located to enjoy both the Intracoastal Waterway and Atlantic Ocean access.
Key Highlights and Demand Generators. The Crowne Plaza Hollywood Beach Resort is located in a high growth area in close proximity to both Fort Lauderdale and Miami. The hotel is situated near the Hollywood Conference Center, Gulfstream Park, Hard Rock Casino, Sun Life Stadium home to Miamis NFL and MLB teams, as well as South Floridas famous beaches and nightlife. The top five accounts by revenue for 2012 were Transat Tours, American College of Neuropsychopharmacology, Hotelbeds, JetBlue, and ESPN Productions.
Guest Rooms. The Crowne Plaza Hollywood Beach Resort features 311 luxury guestrooms and suites with upscale resort-style amenities.
Food and Beverage. The resort offers two dining options and a coffee bar on the premises. With seating both inside and outside the resort, Elements Bistro serves an Asian/Caribbean fused menu for breakfast, lunch and dinner. The poolside Lava Tiki Bar & Grille offers hearty bar food and signature cocktails. Located in the resort lobby, the Cool Beans Coffee Bar has a full selection of Starbucks coffees.
Other Amenities. The resort also has a health and fitness center, gift shop, business center, outdoor open-air infinity-edge pool overlooking the Intracoastal Waterway, and 10,000 square feet of full-service banquet and meeting space.
Operating and Occupancy Information. The following tables show certain historical information, from the date of purchase, regarding the Crowne Plaza Hollywood Beach Resort.
Year Ended December 31, | ||||||||||||||||||||
Metric |
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Room Revenue |
$ | 13,279,070 | $ | 12,012,048 | $ | 10,957,552 | $ | 9,719,185 | $ | 10,185,886 | ||||||||||
ADR |
$ | 147.37 | $ | 133.29 | $ | 120.73 | $ | 121.06 | $ | 151.64 | ||||||||||
Occupancy % |
79.2 | % | 79.4 | % | 80.0 | % | 70.7 | % | 59.0 | % | ||||||||||
RevPAR |
$ | 116.66 | $ | 105.82 | $ | 96.52 | $ | 85.62 | $ | 89.49 |
Six Months Ended June 30, | ||||||||||||||||||||
Metric |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Room Revenue |
$ | 8,498,298 | $ | 7,463,159 | $ | 6,678,598 | $ | 6,367,126 | $ | 5,253,389 | ||||||||||
ADR |
$ | 173.14 | $ | 156.94 | $ | 139.28 | $ | 134.98 | $ | 137.27 | ||||||||||
Occupancy % |
87.2 | % | 84.0 | % | 85.2 | % | 83.8 | % | 68.0 | % | ||||||||||
RevPAR |
$ | 150.97 | $ | 131.85 | $ | 118.64 | $ | 113.11 | $ | 93.33 |
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Federal Tax and Realty Tax Data. The following table presents the federal tax basis for the real property, exclusive of furniture and equipment, for each of our hotels as of December 31, 2012, as well as the method of depreciation, depreciable life and the 2012 annual real estate tax for each property:
Property |
Taxable Basis |
Method | Life | 2012 Realty Tax | ||||||||||
Hilton Philadelphia Airport |
$ | 29,464,156 | VAR(1) | 10-40 years | $ | 591,635 | ||||||||
Hilton Wilmington Riverside |
27,325,726 | VAR(1) | 7-40 years | 189,122 | ||||||||||
Hilton Savannah DeSoto |
24,727,102 | VAR(1) | 7-40 years | 318,322 | ||||||||||
Sheraton Louisville Riverside |
21,649,490 | SL(2) | 20-40 years | 280,234 | (3) | |||||||||
Crowne Plaza Jacksonville Riverfront |
24,125,659 | VAR(1) | 20-40 years | 429,129 | ||||||||||
Crowne Plaza Tampa Westshore |
34,853,100 | SL(2) | 20-40 years | 203,050 | ||||||||||
Crowne Plaza Hampton Marina |
10,889,905 | SL(2) | 10-40 years | 82,208 | ||||||||||
Holiday Inn Laurel West |
12,704,641 | VAR(1) | 20-40 years | 159,925 | ||||||||||
DoubleTree by Hilton Brownstone University |
13,291,787 | VAR(1) | 7-40 years | 57,119 | (4) |
(1) | MACRS (Modified Accelerated Cost Recovery System) for additions and improvements prior to 2005 and straight line for improvements thereafter. |
(2) | Straight line. |
(3) | Includes annual contribution to the Jeffersonville Urban Enterprise Association. |
(4) | Includes reimbursed real estate taxes on adjoining ground lease. |
Tax Status
While the Operating Partnership is generally not subject to federal and state income taxes, the unitholders of the Operating Partnership, including Sotherly, are subject to tax on their respective shares of the Operating Partnerships taxable income.
Sotherly has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership. MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss through December 31, 2012 of $6.3 million and has paid no income taxes since its formation. In addition to a deferred tax asset of approximately $1.9 million for these cumulative tax loss carryforwards, MHI Holding had a deferred tax asset of approximately $0.4 million attributable to start-up expenses related to the opening of several of its hotels which was not deductible when incurred and is being amortized over 15 years and deferred tax assets of approximately $0.2 million attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay amounts.
Sotherly elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 2004. In order to maintain its qualification as a REIT, Sotherly must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90.0% of its taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to its stockholders. Sotherly has adhered to these requirements each taxable year since its formation in 2004 and intends to continue to adhere to these requirements and maintain its qualification for taxation as a REIT. As a REIT, Sotherly generally will not be subject to federal corporate income tax on that portion of its net income that is distributed to its stockholders. If Sotherly fails to qualify for taxation as a REIT in any taxable year, and no relief provision applies, it will be subject to federal income taxes at regular corporate rates (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the fifth taxable year after the year in which it failed to qualify as a REIT. Even if Sotherly qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
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Legal Proceedings
We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.
Environmental Matters
In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owners ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owners ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel properties.
Employees
We currently employ eight full-time persons, all of whom work at our corporate office in Williamsburg, Virginia. All persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.
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INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of Sotherlys investment policies and policies with respect to certain other activities, including financing matters and conflicts of interest. The Operating Partnership does not have separate investment policies or policies with respect to the other activities described in this section.
The policies described in this section may be amended or revised from time to time at the discretion of Sotherlys board of directors, without a vote of Sotherlys stockholders. Any change to any of these policies by Sotherlys board of directors, however, would be made only after a thorough review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, Sotherlys board of directors believes that it is advisable to do so in our and Sotherlys stockholders best interests. We cannot assure you that our investment objectives will be attained.
Investments in Real Estate or Interests in Real Estate
We have invested principally in full-service, upscale and upper-upscale hotels located in the primary markets of the Mid-Atlantic and Southern United States. We are focusing our investments in the major markets of the Southern United States. We conduct substantially all of our investment activities through the Operating Partnership and its subsidiaries. Sotherlys primary investment objective is to enhance stockholder value over time by improving the operating results of our initial properties and by identifying, acquiring and repositioning additional hotel properties that we expect to generate enhanced revenue, improved cash flow performance and long-term appreciation.
There are no limitations on the amount or percentage of our total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location or facility type. Our policy is to acquire assets primarily for income and long-term appreciation.
Additional criteria with respect to our hotel investments are described in the section entitled Our Business and Properties Our Strategy and Investment Criteria in this prospectus.
Investments in Mortgages, Structured Financings and Other Lending Policies
In sourcing acquisitions for our core turnaround growth strategy, we may pursue investments in debt instruments that are collateralized by underperforming hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to Sotherlys stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures. We do not have a policy limiting our ability to invest in loans secured by properties or to make loans to other persons. We may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We may make loans to joint ventures in which we may participate in the future. However, neither Sotherly nor the Operating Partnership intend to engage in significant lending activities.
Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers
We may, from time to time, undertake a significant renovation and rehabilitation project and chose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income. For information concerning our joint venture or mezzanine lending opportunities, please see the section entitled Our Business and Properties Our Strategy and Investment Criteria in this prospectus.
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We may also invest in securities of other issuers in connection with acquisitions of indirect interests in properties, which we expect will typically be general or limited partnership interests in special purpose partnerships that own properties. We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. However, we do not anticipate investing in other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we do not intend that our investments in securities will require us to register as an investment company under the Investment Company Act of 1940, as amended, and we intend to divest securities before any registration would be required.
We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.
Disposition Policy
Although we have no current plans to dispose of properties within our portfolio, we will consider doing so, subject to REIT qualification and prohibited transaction rules, if our management determines that a sale of a property would be in our best interests based on the price being offered for the property, the operating performance of the property, the tax consequences of the sale and other factors and circumstances surrounding the proposed sale. When a property no longer fits with our investment objectives, we will pursue traditional and non-traditional means of disposal. For further information concerning our asset disposition strategy, please see the section entitled Our Business and Properties Our Strategy and Investment Criteria in this prospectus. For a discussion of the implications of disposing of certain of our properties, see the section entitled Risk Factors in this prospectus.
Financing Policies
At June 30, 2013, we had total consolidated indebtedness of approximately $151.0 million, which we estimate was between 49% and 54% of the value of our assets, which is in line with our targeted debt levels of 45% to 55% of the value of our assets.
Equity Capital Policies
Subject to applicable law and the requirements for listed companies on NASDAQ, Sotherlys board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing stockholders of Sotherly will have no preemptive right to additional stock issued in any offering, and any offering might cause a dilution of investment. Sotherly may in the future issue common stock in connection with acquisitions. The Operating Partnership also may issue units in connection with acquisitions of property.
Sotherly may, under certain circumstances, purchase common stock in the open market or in private transactions with its stockholders, if those purchases are approved by Sotherlys board of directors. Sotherlys board of directors has no present intention of causing Sotherly to repurchase any of Sotherlys stock, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.
Sotherlys stockholders have had the opportunity since June 2006 to participate in a dividend reinvestment plan, or DRIP, sponsored and administered by American Stock Transfer & Trust Company, or AST, which allows them to acquire additional shares of Sotherlys common stock by automatically reinvesting their cash
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dividends. The additional shares are purchased on the open market by the DRIP administrator. The share price of stock acquired pursuant to the DRIP is the average price of all shares purchased with the reinvested distributions by the DRIP administrator on behalf of all DRIP participants relating to a particular distribution by us. The DRIP administrator charges participants under the DRIP commissions and other fees according to the fee schedule provided by AST in connection with any acquisition of shares. We do not subsidize or otherwise provide any discount to DRIP participants in connection with the acquisition of common stock under the DRIP. Stockholders who do not participate in the DRIP continue to receive cash distributions as declared.
Conflicts of Interest Policy
Sotherlys current board of directors consists of Andrew M. Sims, General Anthony C. Zinni, J. Paul Carey, Edward S. Stein, David J. Beatty, James P. OHanlon, Kim E. Sims, David R. Folsom and Ryan P. Taylor.
MHI Hotels Services is owned and controlled by, among others, members of the Sims family, including Andrew Sims, Sotherlys chairman and chief executive officer, and Kim Sims, a member of Sotherlys board of directors. MHI Hotels Services manages our hotel properties pursuant to a management agreement with our TRS Lessee. In addition, unless a majority of Sotherlys independent directors concludes otherwise, MHI Hotels Services has a right of first offer to manage hotels we acquire in the future, subject to certain exceptions, and receives substantial management fees based on the revenues and operating profit of our hotels. Our management agreements with MHI Hotels Services, including the financial terms thereof, were not negotiated on an arms-length basis and may be less favorable to us than we could have obtained from third parties. See the Certain Relationships and Related Party Transactions section of this prospectus.
Sotherlys bylaws require that certain transactions between us and any of Sotherlys directors, officers or employees must be approved by a majority of Sotherlys disinterested directors, and we have adopted polices designed to reduce potential conflicts of interest in accordance with Sotherlys bylaws. Additionally, Sotherlys Nominating, Corporate Governance and Compensation Committee, which is composed entirely of independent directors, oversees risks associated with conflicts of interest. However, we cannot assure you that these policies will be successful in eliminating the influence of these conflicts. Neither Sotherlys charter or bylaws, nor any of our policies, restrict any of Sotherlys directors, officers, stockholders or affiliates from conducting, for their own account, or on behalf of others, business activities of the type we conduct. Pursuant to employment agreements entered into with Sotherlys chief executive officer, chief financial officer and chief operating officer, such individuals have agreed not to solicit certain of our employees or engage in certain competitive activities with us.
The Maryland General Corporation Law provides that a contract or other transaction between a corporation and any of that corporations directors or any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of (i) the common directorship or interest, (ii) the fact that the director was present at the meeting at which the contract or transaction is approved or (iii) the fact that the directors vote was counted in favor of the contract or transaction, if:
| the fact of the common directorship or interest is disclosed to the board or a committee of the board, and the board or that committee authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even if the disinterested directors constitute less than a quorum; |
| the fact of the common directorship or interest is disclosed to stockholders entitled to vote on the contract or transaction, and the contract or transaction is approved by a majority of the votes cast by the stockholders entitled to vote on the matter, other than votes of stock owned of record or beneficially by the interested director, corporation, firm or other entity; or |
| the contract or transaction is fair and reasonable to the corporation. |
Reporting Policies
After the offering, the Operating Partnership will become subject to the information reporting requirements of the Exchange Act. Pursuant to these requirements, the Operating Partnership will file periodic reports and other information, including audited financial information, with the SEC.
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Pursuant to the requirements of the Exchange Act, Sotherly files periodic reports, proxy statements and other information, including audited financial statements, with the SEC. Sotherly makes available to its stockholders audited annual financial statements and annual reports through its website located at www.sotherlyhotels.com. The information contained in or accessed through our website is not part of and is not incorporated into this prospectus.
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EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information on the directors and executive officers of Sotherly. The Operating Partnership is managed by Sotherly, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers. All of Sotherlys directors are elected annually at the annual meeting of Sotherlys stockholders, except for one director who is elected annually by the holders of the Preferred Stock. Following the redemption of the Preferred Stock with a portion of the net proceeds of this offering, all of Sotherlys directors will be elected annually by Sotherlys common stockholders.
Name |
Age |
Position with the Company |
Director/ Officer Since | |||
Andrew M. Sims |
56 | Chairman of the Board of Directors and Chief Executive Officer | 2004 | |||
David R. Folsom |
48 | Director, President and Chief Operating Officer | 2011 / 2011 / 2006 | |||
Anthony E. Domalski |
51 | Vice President and Chief Financial Officer | 2013 | |||
David J. Beatty |
69 | Director | 2011 | |||
J. Paul Carey |
55 | Director | 2004 | |||
James P. OHanlon |
70 | Director | 2007 | |||
Kim E. Sims |
58 | Director | 2004 | |||
Edward S. Stein |
66 | Director | 2004 | |||
Anthony C. Zinni |
69 | Director | 2004 | |||
Ryan P. Taylor |
37 | Director | 2011 |
Executive Officers
Set forth below is biographical information for Sotherlys executive officers.
Andrew M. Sims is Sotherlys chief executive officer and chairman of the board and has served in such capacities since its inception in August 2004. In addition, Mr. Sims served as Sotherlys president from our inception through December 31, 2010. He served as President of MHI Hotels Services from 1995 until August 2004 after serving for seven years as Vice President of Finance and Development. As President of MHI Hotels Services, Mr. Sims oversaw company operations as well as the areas of accounting and finance, marketing, development and franchise relations. Andrew M. Sims is the brother of Kim E. Sims. Mr. Sims serves as a director of MHI Hotels Services. Mr. Sims has a bachelor of science degree in commerce from Washington & Lee University.
The board of directors of Sotherly concluded that Mr. Sims has the relevant professional experience and skills to serve as director of Sotherly because he has spent over thirty years in the hospitality industry and has experience operating, developing and owning hotel properties. Mr. Sims has held several positions in hotel management, including president of the hotel management company, MHI Hotels Services. Most recently, as chief executive officer, Mr. Sims has developed and expanded our hotel portfolio and managed franchise, banking and third party service-provider relations. Mr. Sims employment agreement with Sotherly provides that Sotherly must nominate him to serve as a director.
David R. Folsom is Sotherlys president and chief operating officer. He was appointed to the position of president in January 2011 and to the position of chief operating officer in January 2006. Mr. Folsom was appointed as a director in 2011. Mr. Folsom assists the chief executive officer in the execution of Sotherlys strategic business plan and coordinates Sotherlys capital raising and borrowing efforts, as well as sourcing and conducting due diligence on potential acquisitions to facilitate the companys growth. Prior to joining Sotherly, Mr. Folsom was Vice President of Paragon Real Estate, a Cleveland-based early stage real estate venture focusing on distressed multi-family assets in 2005. From 2001 to 2005, he was an investment banker with BB&T Capital Markets, where he served in the Real Estate Securities Group and Debt Capital Markets Groups. While at
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BB&T, Mr. Folsom participated in over 70 equity, debt and preferred stock underwritings, as well as financial advisory transactions across many industries. He was a member of the lead underwriting team that took Sotherly public in 2004. Mr. Folsom served as a commissioned officer in the U.S. Marine Corps, is a graduate of the U.S. Naval Academy and received a master of business administration degree from Georgetown University. In 2012, Mr. Folsom also acted as an adjunct professor at the College of William and Mary.
The board of directors of Sotherly concluded that Mr. Folsom has the relevant professional experience and skills to serve as director of the Sotherly because of his current positions as president and chief operating officer of Sotherly as well as his past investment banking and real estate financing experience.
Anthony E. Domalski is Sotherlys vice president and chief financial officer, a position to which he was appointed as of January 1, 2013. Prior to this role, Mr. Domalski was Sotherlys chief accounting officer since May 2005. He joined Sotherly in May 2005 and was appointed an officer by the board of directors in July 2006. A certified public accountant, he is responsible for financial analysis, cash management, investment, risk management and financial and tax reporting. From 2001 to 2005, Mr. Domalski served as Chief Financial Officer for SwissFone, Inc., a Washington, DC based telecommunications company, where he assisted in a management-led buyout of the U.S. international wholesale division from Swisscom, AG. Prior to his tenure at SwissFone, Inc., Mr. Domalski held several other senior financial positions in the telecommunications and hospitality industry and spent nine years at a local public accounting firm. Mr. Domalski is a member of the American Institute of Certified Public Accountants. Mr. Domalski received a bachelor of science degree in accounting and finance from the University of Maryland.
Directors
Set forth below is biographical information for Sotherlys directors who are not executive officers.
David J. Beatty previously served as a director of Sotherly from the completion of Sotherlys initial public offering in December 2004 until 2007 and resumed service as a director of Sotherly in 2011. He also serves as chairman of Sotherlys audit committee. He began his 40 plus year career in finance and real estate development as head of marketing operations for George Kaufman real estate development group in 1972. He was a founder of Essex Commercial Mortgage in 1987 and founder and President of CENIT Commercial Mortgage Corp. in 1990. In 2001, Mr. Beatty founded TowneBank Commercial Mortgage, LLC, where he currently serves as President. TowneBank Commercial Mortgage, LLC specializes in placing debt and equity for the lodging industry. He has been President of Guest Quarters, Inc. (1979-1982), Treasurer and Chief Financial Officer of Guest Quarters Development Group (1982-1986) and President of mortgage financing for Lawson-Essex, Inc. (1987-1990). Mr. Beatty received a bachelor of arts degree from Georgetown University and a master of business administration degree from the Darden School of Business at the University of Virginia.
The board of directors of Sotherly concluded that Mr. Beatty has the relevant professional experience and skills to serve as director of Sotherly, as evidenced by Mr. Beattys current and former service as director of Sotherly, because of his corporate and financial leadership as president and chief financial officer of a hotel company as well as his current position of president at TowneBank Commercial Mortgage, LLC.
J. Paul Carey became a director of Sotherly prior to completion of Sotherlys initial public offering in December 2004. Mr. Carey currently is a private investor. From October 2003 to March 2013, Mr. Carey served as the Managing Partner for JPT Partners, a privately held investment partnership created to acquire and manage transaction-processing companies in the education and financial services industry, a position he held since October 2003. Prior to his position with JPT Partners, Mr. Carey served as the Chief Executive Officer of Enumerate Solutions, Inc., a venture backed software company, from November 2001 until October 2003. Mr. Carey also served as the Executive Vice President for Sallie Mae and was responsible for financial reporting from August 1997 to April 2001, and as a partner with LCL Ltd., a financial advisory management and investment firm, from March 1993 to August 1997. He serves on the board of Opportunity Scholarships, Inc., an
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early stage company in the educational financial services market. Mr. Carey received a master of business administration degree from the University of Maryland and a bachelor of arts degree from The Catholic University of America.
The board of directors of Sotherly concluded that Mr. Carey has the relevant professional experience and skills to serve as director of Sotherly because of his significant financial expertise. Mr. Carey has twenty-seven years of experience in finance and financial services, holding principal executive officer positions in financial reporting, financial planning and analysis, budgeting, asset-liability management and other areas of financial management. During his time at Sallie Mae, in addition to financial reporting, Mr. Carey was responsible for all investor and regulatory relations and management.
James P. OHanlon became a director of Sotherly in March 2007 and serves on Sotherlys Nominating, Corporate Governance and Compensation Committee, or the NCGC Committee, as well as the audit committee. Mr. OHanlon retired from Dominion Energy in January 2003 after serving as President and Chief Operating Officer for three years. He previously served as Chief Operating Officer of Dominion Generation, a generating unit of Dominion Resources, upon its formation in May 1999. Prior to his employment with Dominion Generation, Mr. OHanlon was with a subsidiary of Virginia Power since 1989 and served as Vice President-Nuclear Services, Vice President-Nuclear Operations and subsequently, Senior Vice President-Nuclear. He is a Captain (retired) in the U.S. Naval Reserves. Since 2003, Mr. OHanlon has provided consulting services in the areas of management appraisals, budget reviews and safety assessments. Mr. OHanlon received a bachelor of science degree in Marine Engineering from the United States Naval Academy and completed studies in nuclear engineering at the U.S. Naval Nuclear Power School. He has also pursued postgraduate studies at Penn State University and the University of Virginia, Darden School of Business.
The board of directors of Sotherly concluded that Mr. OHanlon has the relevant professional experience and skills to serve as director of Sotherly because of his corporate leadership as president and chief operating officer at one of the nations largest energy generation companies. Mr. OHanlons former positions provide a practical background of business and technical experience while serving in executive, management and supervisory positions.
Ryan P. Taylor became a director of Sotherly in 2011. He is the Managing Partner of Richmond Hill Investment Co., LP, or Richmond Hill, an investment firm launched in December 2010 that is dedicated to the preservation and growth of capital through disciplined, long-term value investing. In addition, Mr. Taylor is a Managing Director of Essex Equity Capital Management, LLC, or Essex Equity, where he joined in June 2008 and is primarily responsible for the firms investment activities, including sourcing, researching, monitoring and portfolio management. The entities have combined assets under management of approximately $500 million. Prior to joining Essex Equity, Mr. Taylor spent 10 years at Greenhill & Co., Inc. most recently as a Principal. Mr. Taylor joined Greenhill & Co., Inc. in 1998. Mr. Taylor earned a B.B.A. in Finance with Honors from the University of Texas at Austin in 1998.
The board of directors of Sotherly concluded that Mr. Taylor has the relevant professional experience and skills to serve as director of Sotherly because of his investment banking and real estate financing experience. As set forth in the Articles Supplementary, the holder(s) of Preferred Stock have the exclusive right, voting separately as a single class, to elect one member of Sotherlys board of directors. The holders of the Preferred Stock have designated Ryan P. Taylor to serve as a director on Sotherlys board of directors.
Kim E. Sims became a director of Sotherly upon completion of Sotherlys initial public offering in December 2004 and is the President and a director of MHI Hotels Services, a position he has held since December 2004. Mr. Sims served as Executive Vice President of Operations of MHI Hotels Services from 1995 until 2004 and has provided thirty years of service at MHI Hotels Services. He has a bachelor of science degree in commerce from Washington & Lee University. Kim E. Sims is the brother of Andrew M. Sims.
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The board of directors of Sotherly concluded that Mr. Sims has the relevant professional experience and skills to serve as director of Sotherly because of his more than thirty year experience in hotel management and operations. As president of MHI Hotels Services, Mr. Sims has an expertise in the hospitality industry that enhances the dialogue of the board of directors. Under the terms of our strategic alliance agreement which expires in 2014, MHI Hotels Services has the right to nominate, during the term of the agreement, one person for election to Sotherlys board of directors at each annual meeting of stockholders for so long as Andrew M. Sims, Kim E. Sims, Christopher L. Sims, a former director, and their affiliates and families own, in the aggregate, not less than 1.5 million units in the Operating Partnership or shares of Sotherlys common stock. MHI Hotels Services nominee for director is Kim E. Sims.
Edward S. Stein became a director of Sotherly upon completion of the Companys initial public offering in December 2004 and is chairman of Sotherlys NCGC Committee and is a member of the Sotherlys audit committee. He is a founding partner of the Norfolk, Virginia law firm of Weinberg and Stein. Mr. Stein has practiced law in the areas of real estate, estate planning, probate, corporate law and business law since 1974. He is admitted to the Virginia Bar and is a member of the Norfolk and Portsmouth and Virginia Bar Associations. Mr. Stein received a bachelor of arts degree from Harvard University and a juris doctor degree from the University of Virginia School of Law.
The board of directors of Sotherly concluded that Mr. Stein has the relevant professional experience and skills to serve as director of Sotherly because he has spent more than thirty-five years practicing business, tax and corporate law and had served effectively as counsel for fourteen years to MHI Hotels Services. Mr. Stein also has developed and rehabilitated real estate and has experience in venture capital transactions.
General Anthony C. Zinni became a director of Sotherly in December 2004 upon completion of its initial public offering and is a member of Sotherlys NCGC Committee. General Zinni has been a director at BAE Systems, since 2001 and served as Chief Executive Officer on an interim basis during 2009. General Zinni also served as a director of DynCorp International from 2006-2008 and served as the Executive Vice President of DynCorp International, from July 2008-December 2008. He retired from the U.S. Marine Corps after 39 years of service in October 2000. During his military career, General Zinni served as the Commanding General, First Marine Expeditionary Force from 1994 to 1996, and as Commander-in-Chief, U.S. Central Command from 1997 to 2000. General Zinni has participated in numerous humanitarian operations and Presidential diplomatic missions. In November 2001, General Zinni was appointed senior adviser and U.S. envoy to the Middle East by Secretary of State Colin Powell. Since November 2000, General Zinni has consulted in the areas of defense, military, national security, foreign policy and regional issues. Since 2008, he has served as a professor at Cornell University. In 2008, he also served as a professor at Duke University. General Zinni received a bachelor of arts degree in economics from Villanova University. He also earned a master of arts degree in international relations from Salve Regina College, a master of science degree in management and supervision from Central Michigan University, and honorary doctorate degrees from both the College of William and Mary and the Marine Maritime Academy.
The board of directors of Sotherly concluded that General Zinni has the relevant professional experience and skills to serve as director of Sotherly because he is a skilled and experienced leader who has a strong background in corporate governance. General Zinnis leadership experience includes almost forty years in the U.S. Marine Corps and, most recently, as a director and executive officer of BAE Systems and DynCorp International, two large global security and defense public companies. General Zinni has served on four private company boards in addition to his public company board involvement.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In accordance with Sotherlys audit committee charter and procedures established by Sotherlys audit committee, Sotherlys audit committee or another independent body of Sotherlys board is responsible for reviewing and approving the terms and conditions of all related party transactions. Any transaction, in which the amount involved exceeds $120,000, and in which a director or executive officer of Sotherly or a member of the immediate family of a director or officer of Sotherly has a direct or indirect material interest, would need to be approved by Sotherlys audit committee or another independent body of Sotherlys board prior to its entering into such transaction. The Operating Partnership is managed by Sotherly, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers. The procedures for review and approval of certain relationships and related transactions are contained in Sotherlys audit committee charter which is available on our website at www.sotherlyhotels.com.
All new related party transactions that were not previously approved were reviewed and approved by Sotherlys audit committee or another independent body of Sotherlys board in 2012, unless otherwise indicated.
Transactions with MHI Hotels Services
MHI Hotels Services is currently the management company for each of our hotels.
MHI Hotels Services, the management company, is owned and controlled by certain individuals, including Andrew M. Sims, Sotherlys chairman and chief executive officer, Kim E. Sims, a current director of Sotherly, Christopher L. Sims, a former director of Sotherly, and William J. Zaiser, Sotherlys former executive vice president and chief financial officer. As of June 30, 2013, each of Andrew M. Sims and Kim E. Sims, both of whom are current directors of Sotherly, beneficially own, directly or indirectly, approximately 22.75% of the total outstanding ownership interests of MHI Hotels Services. One of Sotherlys current directors and a former director, Kim E. Sims and Christopher L. Sims, respectively, are currently officers and employees of MHI Hotels Services. Andrew M. Sims, Kim E. Sims, Christopher L. Sims and William J. Zaiser are also directors of MHI Hotels Services.
Strategic Alliance Agreement
On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services pursuant to which (i) MHI Hotels Services agrees to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to MHI Hotels Services and (ii) unless a majority of Sotherlys independent directors in good faith concludes for valid business reasons that another management company should manage a hotel owned by us, we agree to offer MHI Hotels Services or its subsidiaries the right to manage hotel properties that we acquire in the United States. Pursuant to the strategic alliance agreement, the Crowne Plaza Jacksonville Riverfront, acquired in July 2005, the Sheraton Louisville Riverside, opened in May 2008, the Crowne Plaza Hampton Marina, acquired in April 2008, and the Crowne Plaza Tampa Westshore, opened in March 2009, are managed by MHI Hotels Services.
In addition, during the term of the agreement, which expires in December 2014, MHI Hotels Services has the right to nominate one person for election to Sotherlys board of directors at the annual meeting of Sotherlys stockholders, subject to the approval of such nominee by Sotherlys NCGC Committee for so long as Andrew M. Sims, Kim E. Sims, Christopher L. Sims, a former director of Sotherly, and their families and affiliates, hold, in the aggregate, not less than 1.5 million units of the Operating Partnership or shares of Sotherlys common stock. MHI Hotels Services nominee for director is Kim E. Sims.
Management Agreements
Pursuant to the terms of a master management agreement, we have engaged MHI Hotels Services as the property manager for eight of our wholly-owned hotels. Certain of Sotherlys executive officers and certain of our directors are also directors of MHI Hotels Services.
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The master management agreement has a term of ten years for our six initial hotels and a term of ten years for each hotel we acquire in the future that becomes subject to such agreement, including the Crowne Plaza Jacksonville Riverfront and the Crowne Plaza Hampton Marina. During the third quarter of 2006, we sold the Holiday Inn Downtown Williamsburg and purchased the former Louisville Ramada Riverfront Inn, now the Sheraton Louisville Riverside, substituting the Louisville property for the Williamsburg property pursuant to the terms of the master management agreement. MHI Hotels Services benefits from the payment of management fees by us pursuant to our master management agreement. MHI Hotels Services receives a base management fee equal to a percentage of each hotels revenues (2.0% for the first year, 2.5% for the second year and 3.0% thereafter). Pursuant to the master management agreement, MHI Hotels Services receives an incentive fee equal to 10% of the amount by which gross operating profit of the hotels on an aggregate basis for a given year exceeds gross operating profits for the same hotels, on an aggregate basis, for a prior year, subject to a maximum amount of 0.25% of the aggregate gross revenue of the hotels.
In January 2008, the master management agreement was amended to revise certain provisions relating to payment by our TRS Lessee to MHI Hotels Services of a project management fee equal to five percent (5%) of the total project costs associated with the management, coordination, planning and execution of a major repositioning or product improvement plan for a Company hotel, subject to certain conditions.
In January 2009, we entered into a new management agreement with MHI Hotels Services solely for the management of the Crowne Plaza Tampa Westshore. The audit committee reviewed and approved this new management agreement in January 2009. The agreement changes certain provisions from those contained in the master management agreement for our other eight wholly-owned properties. Specifically, if we terminate the management agreement for convenience, we will pay MHI Hotels Services base and incentive management fees through the end of the initial year of the agreement or ninety days, whichever is greater, as opposed to terms of the master management agreement which provides that MHI Hotels Services must be paid the base and incentive fees for the remainder of the initial or renewal term. The provisions of the new agreement related to base management and incentive management fees are the same as those contained in the master management agreement, except that the incentive fee is calculated on a stand-alone basis for the Crowne Plaza Tampa Westshore, and not on an aggregate basis with the other eight properties. In addition, provisions relating to the submission and approval of the operating budgets were amended.
Any amendment, supplement or modification of the master management agreement and the Tampa management agreement must be in writing signed by all parties and approved by a majority of Sotherlys independent directors. If the master management agreement terminates as to all of the hotels covered in connection with a default under the master management agreement, the strategic alliance agreement will also terminate. The master management agreement expires for the majority of our hotels in December 2014. The few remaining hotels will be subject to the master management agreement until no later than April 2018. The Tampa management agreement expires in March 2019.
For the years ended December 31, 2012 and 2011, we paid management fees of approximately $2.8 million and $2.5 million, respectively, inclusive of incentive management fees of approximately $0.2 million and $0.1 million, respectively, to MHI Hotels Services.
Shell Island Resort
In connection with the Shell Island Resort, in 2004 we entered into sublease arrangements with MHI Hotels LLC and MHI Hotels Two, Inc., affiliates of the management company, MHI Hotels Services. Under the sublease arrangements, MHI Hotels LLC and MHI Hotels Two, Inc. paid us a fixed annual rent of $640,000. Consequent to the cancellation of the management companys contract to manage the condominium rental program for the resort and expiration of the underlying leases in December 2011 and pursuant to the terms of the sublease, in 2012 the Operating Partnership received $350,000 from MHI Hotels Services and will continue to receive a reduced set of minimum payments through December 2014.
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Employee Medical Benefits
We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services, to pay for the employer portion of the plan covering our employees and those of MHI Hotels Services that work exclusively for our properties. For the years ended December 31, 2012 and 2011, we paid $126,919 and $115,381, respectively, for the employer portion of the plan covering our employees and $1,662,936 and $1,749,787, respectively, for the employer portion of the plan covering those employees that work exclusively for our properties under our management agreements with MHI Hotels Services.
Transactions with Richmond Hill Investment Co., LP, Essex Equity Capital Management, LLC and Their Affiliates
On April 18, 2011, Sotherly entered into a Securities Purchase Agreement, or the Purchase Agreement, with Essex Illiquid, LLC and Richmond Hill, which we refer to collectively as the Investors, under which Sotherly issued and sold to the Investors in a private placement 25,000 shares of Sotherlys Preferred Stock and the Warrant to purchase 1,900,000 shares of the Sotherlys common stock, par value $0.01 per share, for an aggregate purchase price of $25.0 million. On December 21, 2011, and on July 10, 2012, Sotherly amended the terms of the Warrant. Pursuant to the Warrant amendments, (i) the exercise price per share of common stock covered by the Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends and (ii) Sotherly established a modified excepted holder limit (as defined in the Sotherlys Articles of Amendment and Restatement) for the Investors.
Ryan P. Taylor is a director and Managing Partner of Richmond Hill and a Managing Director of Essex Equity, an affiliate of Essex Illiquid, LLC and Essex Equity High Income Joint Investment Vehicle, LLC. As set forth in the Articles Supplementary, the holder(s) of Sotherlys Preferred Stock have the exclusive right, voting separately as a single class, to elect one member of Sotherlys board of directors. The holders of the Preferred Stock have designated Ryan P. Taylor to serve as a director on Sotherlys board of directors. Upon the redemption of all of the shares of the Preferred Stock with a portion of the net proceeds from this offering, the holder(s) of Sotherlys Preferred Stock will no longer have the right to elect one member of Sotherlys board of directors and Mr. Taylor will no longer be entitled to serve as a member of Sotherlys board of directors.
On April 18, 2011, Sotherly entered into the Note Agreement with Essex Equity High Income Joint Investment Vehicle, LLC. Pursuant to the terms of the Note Agreement, Sotherly had the right to borrow up to $10.0 million on or before December 31, 2011. The principal amount borrowed under the Note Agreement bears interest at the rate of 9.25% per annum, payable quarterly in arrears. On December 21, 2011, and June 15, 2012, Sotherly entered into amendments to the Note Agreement to (i) extend the lenders loan commitment by 17 months through May 31, 2013 and (ii) increase the undrawn term loan commitments under the Note Agreement to $7.0 million. All amounts due under the Note Agreement were repaid and the Note Agreement expired on March 31, 2013.
Transactions with Employees and Consultant
Effective as of January 1, 2013, Sotherlys board of directors, as recommended by Sotherlys NCGC Committee, unanimously approved a consulting agreement, or the Consulting Agreement, between Sotherly and WJZ Consulting LLC, or the Consultant, the managing member of which is Mr. Zaiser, Sotherlys former chief financial officer.
The Consulting Agreement terminates on December 31, 2015 and provides for targeted, annual consulting fees payable during the consulting period. In addition, pursuant to the Consulting Agreement, Sotherly and the Consultant expect that the consulting services to be performed shall require a targeted amount of hours per month dedicated by the Consultant to Sotherly. The Consultant is entitled to receive $207,000 in 2013, $165,000 in 2014 and $123,000 in 2015 for services performed under the Consulting Agreement during those periods.
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Effective as of June 24, 2013, and following the approval by a committee consisting of Sotherlys independent directors, we hired Robert E. Kirkland, IV to serve as our Compliance Officer at an annual salary of $70,000 and Ashley S. Kirkland to serve as our Legal Analyst at an annual salary of $60,000. Ashley S. Kirkland is Andrew Sims daughter. Robert E. Kirkland, IV and Ashley S. Kirkland are married. Neither Robert E. Kirkland, IV nor Ashley S. Kirkland are executive officers of Sotherly or the Operating Partnership.
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Strategic Alliance Agreement
MHI Hotels Services is currently the management company for each of our hotels.
On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services pursuant to which (i) MHI Hotels Services agrees to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to MHI Hotels Services, and (ii) unless a majority of Sotherlys independent directors in good faith concludes for valid business reasons that another management company should manage a hotel owned by us, we agree to offer MHI Hotels Services or its subsidiaries the right to manage hotel properties that we acquire in the United States.
In addition, during the term of the agreement, which expires in December 2014, MHI Hotels Services has the right to nominate one person for election to Sotherlys board of directors at the annual meeting of Sotherlys stockholders, subject to the approval of such nominee by Sotherlys NCGC Committee for so long as certain of Sotherlys officers and directors, Andrew Sims, Kim Sims, and Christopher Sims, and their families and affiliates, hold, in the aggregate, not less than 1.5 million units of the Operating Partnership or shares of Sotherlys common stock.
Lease Agreements
In order for us to maintain qualification as a REIT, neither Sotherly nor the Operating Partnership or its subsidiaries can operate our hotels directly. Our wholly-owned hotels are leased to our TRS Lessee, which has engaged MHI Hotels Services to manage the hotels. Each lease for the wholly-owned hotels has a non-cancelable term of three to ten years, subject to earlier termination upon the occurrence of certain contingencies described in the lease.
During the term of each lease, our TRS Lessee is obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent accrues and is paid monthly. Percentage rent is calculated by multiplying fixed percentages by gross room revenues, in excess of certain threshold amounts and is paid monthly or quarterly, according to the terms of the agreement.
Management Agreements
Pursuant to the terms of two management agreements, we, through our TRS Lessee, have engaged MHI Hotels Services as the property manager for our existing hotel portfolio. One of the management agreements, which we refer to as the master management agreement, covers all our wholly-owned hotels in our portfolio, excluding the Crowne Plaza Tampa Westshore. The second agreement relates to the Crowne Plaza Tampa Westshore. Except as described below, we intend to offer MHI Hotels Services the opportunity to manage any hotels we acquire in the future that we lease to our TRS Lessee. In addition, the joint venture entity which leases the Crowne Plaza Hollywood Beach Resort has also entered into a management agreement with MHI Hotels Services on terms that vary from those described below. The following terms apply only to our wholly-owned hotels.
Term. The management agreements with MHI Hotels Services have initial terms of ten years from the date of commencement of management activities at each property. The master management agreement covering our wholly-owned hotels, excluding the Crowne Plaza Tampa Westshore, expires between December 2014 and April 2018. The separate management agreement covering the Crowne Plaza Tampa Westshore expires in March 2019. The term of the management agreements with respect to each hotel may be renewed by MHI Hotels Services for two successive periods of five years each upon the mutual agreement of MHI Hotels Services and our TRS Lessee, subject to the satisfaction of certain performance tests, provided that at the time the option to renew is
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exercised, MHI Hotels Services is not then in default under the management agreements. If at the time of the exercise of any renewal period MHI Hotels Services is in default, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then our TRS Lessee may terminate the management agreements. If MHI Hotels Services desires to exercise any option to renew, it must give our TRS Lessee written notice of its election to renew the management agreements no less than 90 days before the expiration of the then current term of the management agreements.
Any amendment, supplement or modification of the management agreements must be in writing signed by all parties and approved by a majority of Sotherlys independent directors.
Amounts Payable under the Management Agreements. MHI Hotels Services receives a base management fee, and, if the hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.
The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be a percentage of the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our wholly-owned hotels is as follows:
2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
Crowne Plaza Hampton Marina(1) |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 2.0 | % | 2.0 | % | ||||||||||||||
Crowne Plaza Tampa Westshore(2) |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 2.5 | % | 2.0 | % | 2.0 | % | ||||||||||||||
Crowne Plaza Jacksonville Riverfront |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
DoubleTree by Hilton Brownstone-University |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
Hilton Philadelphia Airport |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
Hilton Savannah DeSoto |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
Hilton Wilmington Riverside |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
Holiday Inn Laurel West |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||||||||||||
Sheraton Louisville Riverside(3) |
3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % |
(1) | In 2010, the management company abated the increase in management fee for the Crowne Plaza Hampton for 2010. |
(2) | In January 2009, we entered a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore. The provisions of the new agreement related to base management fee are the same as those contained in the master management agreement. The provisions of the new agreement related to the incentive management fee are the same as those contained in the master management agreement except that it is calculated separately and not aggregated with the other properties covered by the master management agreement. |
(3) | Pursuant to the master management agreement, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was 10 years. The management company agreed to substitute the Sheraton Louisville Riverside for the Holiday Inn Downtown Williamsburg for remainder of the term of the agreement. |
The base management fee for a hotel acquired in the future which is first leased by our TRS Lessee, other than on the first day of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full fiscal year such hotel is managed. There is no fee cap on the base management fee.
Subsequently Acquired Hotel Properties
First full calendar year and any partial calendar year |
2.0 | % | ||
Second calendar year |
2.5 | % | ||
Third calendar year and thereafter |
3.0 | % |
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The incentive management fee under the master management agreement, if any, will be 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 all our hotels, with the exception of the Tampa property, 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 fee may not exceed 0.25% of the aggregate gross revenue of all of the hotels included in the incentive fee calculation for the year in which the incentive fee is earned. The calculation of the incentive fee will not include results of hotels for the fiscal year in which they are initially leased, or for the fiscal year in which they are sold, and newly acquired or leased hotels will be included in the calculation beginning in the second full calendar year such hotel is managed. The management agreement for the management of the Tampa property includes a similar provision for payment of an incentive management fee on a stand-alone basis.
Early Termination. The master management agreement may be terminated with respect to one or more of the hotels earlier than the stated term, if certain events occur, including:
| a sale of a hotel or the substitution of a newly acquired hotel for an existing hotel; |
| the failure of MHI Hotels Services to satisfy certain performance standards with respect to any of the future hotels or with respect to the six initial hotels after the expiration of the initial 10-year term; |
| in the event of a casualty to, condemnation of, or force majeure involving a hotel; or |
| upon a default by MHI Hotels Services or us that is not cured prior to the expiration of any applicable cure periods. |
The management agreement for the Crowne Plaza Tampa Westshore may also be terminated for convenience with 90 days notice to MHI Hotels Services.
Termination Fees. In certain cases of early termination of the master management agreement with respect to one or more of the hotels and the management agreement for our Tampa property, we must pay MHI Hotels Services a termination fee, plus any amounts otherwise due to MHI Hotels Services pursuant to the terms of that management agreement. We will be obligated to pay termination fees in such circumstances provided that MHI Hotels Services is not then in default, subject to certain cure and grace periods.
New Acquisitions; Strategic Alliance Agreement. Pursuant to the strategic alliance agreement with MHI Hotels Services, we have agreed to engage MHI Hotels Services for the management of any hotels acquired in the future unless a majority of Sotherlys independent directors in good faith concludes, for valid business reasons, that another management company should manage any newly acquired hotels. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the strategic alliance agreement will also terminate.
Franchise Agreements
Our hotels operate under franchise licenses from national hotel companies.
We anticipate that most of the additional hotels we acquire will be operated under franchise licenses. We believe that the publics perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.
Our TRS Lessee holds the franchise licenses for our wholly-owned hotels. MHI Hotels Services must operate each of our hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.
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The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must comply with the franchisors standards and requirements with respect to:
| training of operational personnel; |
| safety; |
| maintaining specified insurance; |
| the types of services and products ancillary to guest room services that may be provided; |
| display of signage; |
| marketing techniques including print media, billboards, and promotions standards; and |
| the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. |
Additionally, as the franchisee, our TRS Lessee is required to pay the franchise fees described below.
The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:
Franchise Fee(1) | Marketing/Reservation Fee(1) |
Expiration Date |
||||||||||
Crowne Plaza Hampton Marina |
5.0 | % | 3.5 | % | 10/07/2018 | |||||||
Crowne Plaza Jacksonville Riverfront |
5.0 | % | 3.5 | % | 04/01/2016 | |||||||
Crowne Plaza Tampa Westshore |
5.0 | % | 3.5 | % | 03/06/2019 | |||||||
DoubleTree by Hilton Brownstone-University |
5.0 | % | 4.0 | % | 11/30/2021 | |||||||
Hilton Philadelphia Airport |
5.0 | % | 3.5 | % | 10/31/2014 | |||||||
Hilton Savannah DeSoto |
5.0 | % | 4.0 | % | 07/31/2017 | |||||||
Hilton Wilmington Riverside |
5.0 | % | 4.0 | % | 03/31/2018 | |||||||
Holiday Inn Laurel West |
5.0 | % | 2.5 | % | 10/05/2015 | |||||||
Sheraton Louisville Riverside |
5.0 | % | 3.5 | % | 04/25/2023 |
(1) | Represents the percentage of room revenues payable to the franchisor. |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units of the Operating Partnership and outstanding shares of Sotherlys common stock as of the date of this prospectus for each person or group known to us to be holding more than 5.0% of the Operating Partnerships partnership units, or Sotherlys common stock, each director and named executive officer of Sotherly and for the current directors and executive officers of Sotherly as a group. The table shows the number of partnership interests or units in the Operating Partnership and shares of Sotherlys common stock the person beneficially owns, as determined by the rules of the SEC. The Operating Partnership is obligated to redeem each unit at the request of the holder thereof for the cash value of one share of Sotherlys common stock or, at Sotherlys option, one share of Sotherlys common stock, which is traded on the NASDAQ® Global Market. As of the date of this prospectus, there are 13,038,125 partnership units of the Operating Partnership outstanding held by 13 partners and Sotherly had outstanding 10,206,927 shares of its common stock, $0.01 par value per share.
Name of Beneficial Owner(1) | Number of Shares of Sotherly Beneficially Owned |
Number of Units of the Operating Partnership Beneficially Owned |
Percent of Partnership Units |
Total | Percent of Common Stock(2) |
|||||||||||||||
General Partner of Operating Partnership |
||||||||||||||||||||
Sotherly Hotels Inc. |
| 12,106,927 | (3) | 81.0 | (4) | 12,106,927 | (3) | | ||||||||||||
Directors, Executive Officers and 5% Holders of Sotherly Hotels Inc. Common Stock or Operating Partnership Units |
||||||||||||||||||||
Ryan P. Taylor/Essex Illiquid, LLC/Richmond Hill Capital Partners, LP |
1,900,000 | (5) | | 1,900,000 | 15.8 | |||||||||||||||
Andrew M. Sims(6) |
747,055 | (7) | 549,997 | (8) | 4.2 | 1,297,052 | 12.1 | |||||||||||||
Edmunds White Partners, LLC |
997,414 | (9) | | | 997,414 | 9.8 | ||||||||||||||
Palogic Value Management, L.P |
811,152 | (10) | | | 811,152 | 8.0 | ||||||||||||||
Cheong Family |
368,168 | (11) | 364,086 | (11) | 2.8 | 732,254 | 7.0 | |||||||||||||
Kim E. Sims(6) |
125,250 | (8) | 384,997 | (8) | 3.0 | 510,247 | 4.8 | |||||||||||||
Edward S. Stein |
22,500 | (12) | 333,099 | (13) | 2.6 | 355,599 | 3.4 | |||||||||||||
William J. Zaiser |
48,625 | (14) | 214,981 | (15) | 1.7 | 263,606 | 2.5 | |||||||||||||
David R. Folsom |
234,506 | (16) | | | 234,506 | 2.3 | ||||||||||||||
James P. OHanlon |
53,250 | (17) | | | 53,250 | * | ||||||||||||||
Anthony E. Domalski |
46,000 | (18) | | 46,000 | * | |||||||||||||||
General Anthony C. Zinni |
31,428 | (12) | | | 31,428 | * | ||||||||||||||
J. Paul Carey |
28,500 | (12) | | | 28,500 | * | ||||||||||||||
David J. Beatty |
10,222 | (19) | | | 10,222 | * | ||||||||||||||
All executive officers and directors of the Company as a group (10 persons) |
3,198,711 | 1,232,112 | 9.5 | 4,430,823 | 33.3 |
* | Represents less than 1% of the number of shares of common stock of Sotherly. |
(1) | Unless otherwise indicated, the named stockholders have sole voting power with respect to all shares shown as being beneficially owned by them. Includes all restricted stock grants, including those that will vest on December 31, 2013. |
(2) | Assumes that all units of the Operating Partnership held by such person or group of persons are redeemed for common stock of Sotherly (regardless of when such units are redeemable) on a one-for-one basis. Assumes that all warrants to purchase shares of Sotherlys common stock held by such person or group of persons are exercised (only if exercisable within 60 days). The total number of shares of Sotherlys common stock outstanding used in calculating the ownership interest of the named holders of units in the Operating Partnership and the named holders of warrants to purchase shares of Sotherlys common stock is based on the deemed conversion or exercise of only the units or warrants, as applicable, owned by such holder into shares of Sotherlys common stock. |
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(3) | Includes units representing both general and limited partnership interests in the Operating Partnership as well as a warrant to purchase 1,900,000 additional partnership units. |
(4) | Sotherly currently owns a 1% interest in the Operating Partnership as general partner and an approximately 76.9% interest in the Operating Partnership as a limited partner and owns a warrant to purchase 1,900,000 additional partnership units. Assumes that all warrants to purchase additional partnership units are exercised (only if exercisable within 60 days). The total number of units in the Operating Partnership used in calculating the ownership interest of Sotherly is based on the deemed exercise of the warrants. |
(5) | Based on information set forth in a Schedule 13D/A filed with the SEC on July 17, 2012, Essex Illiquid, LLC, Richmond Hill Investments, LLC, Basil Maher, and M. Brian Maher have shared voting and dispositive power over 1,748,000,000 shares, through their ownership of warrants to purchase shares of Sotherlys common stock. Based on information set forth in a Schedule 13D/A filed with the SEC on July 17, 2012, Richmond Hill Capital Partners, LP, Richmond Hill Advisors, LLC, Richmond Hill Investment Co., LP, Richmond Hill Capital Management, LLC, collectively, the Richmond Hill Entities, and Ryan P. Taylor have shared voting and dispositive power over 152,000 shares, through their ownership of warrants to purchase shares of Sotherlys common stock. Ryan P. Taylor, Sotherlys director, is affiliated with both Essex Illiquid, LLC and the Richmond Hill Entities. Mr. Taylor disclaims beneficial ownership over the shares of Sotherlys common stock and the related warrants. Each of Essex Illiquid, LLC and Richmond Hill Investments, LLC, on the one hand, and each Richmond Hill Entity, on the other hand, disclaim beneficial ownership of any securities held by the other. The address of each of Essex Illiquid, LLC, Richmond Hill Investments, LLC, Richmond Hill Capital Partners, LP, Richmond Hill Advisors, LLC, Richmond Hill Investment Co., LP, Richmond Hill Capital Management, LLC, and Ryan P. Taylor is 375 Hudson Street, 12th Floor, New York, New York 10014. The address of both Basil Maher and M. Brian Maher is c/o Essex Equity Management, LLC, 70 South Orange Avenue, Suite 105, Livingston, New Jersey 07039. |
(6) | Andrew M. Sims and Kim E. Sims are siblings. |
(7) | Includes 68,500 shares of the common stock of Sotherly granted under Sotherlys 2004 Long Term Incentive Plan, or the 2004 Plan including 15,000 shares of Sotherlys common stock granted pursuant to Mr. Sims employment agreement with Sotherly that were fully vested on January 1, 2011. Includes 156,250 shares held by Susan L. Sims, Andrew M. Sims spouse. Includes 271,250 shares held by the family limited partnership of Andrew M. Sims. |
(8) | Andrew M. Sims and Kim E. Sims each received 605,166 units in connection with Sotherlys initial public offering. On July 22, 2005, the family limited partnerships of Andrew M. Sims and Kim E. Sims each received 23,850 units in connection with our acquisition of the Hilton Jacksonville Riverfront Hotel. Includes 35,981 units held by the Edgar Sims Irrevocable Trust for which Andrew M. Sims, Kim E. Sims and Christopher L. Sims, a former director, serve as co-trustees. Andrew M. Sims redeemed 115,000 units for common stock on June 7, 2011. Kim E. Sims redeemed 80,000 units for common stock on March 1, 2007, 50,000 units for common stock on August 28, 2007, 50,000 units for common stock on October 3, 2011, 50,000 units for common stock on March 1, 2013 and 50,000 units for common stock on August 14, 2013. |
(9) | Based on information set forth in a Schedule 13G/A filed with the SEC on February 13, 2013, Edmunds White Partners, LLC has voting and dispositive power over 997,414 shares. The address of Edmunds White Partners, LLC is 10831 Ridgefield Parkway, Richmond, Virginia 23233. |
(10) | Based on information set forth in a Schedule 13G/A filed with the SEC on January 23, 2013, Palogic Value Management, L.P., Palogic Value Fund, L.P., Palogic Capital Management, LLC and Ryan L. Vardeman, collectively, the Palogic Entities, have shared voting and dispositive power over 811,152 shares of Sotherlys common stock. Palogic Value Fund is the record and direct beneficial owner of the 811,152 shares. Palogic Value Management is the investment manager and general partner of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Value Fund. Palogic Capital Management is the general partner of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Value Management. Ryan Vardeman is the sole member of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Capital Management. The address of each of the Palogic Entities is c/o Taylor H. Wilson, Esq., Haynes and Boone, LLP, 2323 Victory Avenue, Suite 700, Dallas, Texas 75219. |
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(11) | Represents 308,234 units held by Khersonese Investment (USA) Inc., 6,832 units held by IPAX and 49,020 units held by Phileo Land Company. Supreme Corp. redeemed 368,168 units for Sotherlys common stock on March 22, 2010. These entities are indirectly controlled by members of the Cheong Family, including Kee Cheok Cheong, Kee Fong Cheong, Kee Seong Cheong, Kee Lai Cheong and Kee Soon Cheong. The address of these four entities is 13th Floor, Bangunan Pak Peng Box #1 No.75, Jalan Petaling, 50000 Kuala Lumpur, Malaysia. |
(12) | Includes 15,500 shares of restricted stock of Sotherly granted under the 2004 Plan all of which were fully vested on December 31, 2012. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013. |
(13) | Represents 333,099 units held by the Celia K. Krichman Charitable Trust, of which Edward S. Stein is a Trustee. Mr. Stein disclaims beneficial ownership of these units. |
(14) | Includes 29,075 shares of Sotherlys common stock granted under the 2004 Plan. |
(15) | The family limited partnership of William J. Zaiser received 206,830 units in connection with Sotherlys initial public offering and an additional 8,151 units in connection with the acquisition of the Hilton Jacksonville Riverfront Hotel on July 22, 2005. |
(16) | Includes 84,363 shares of Sotherlys common stock granted under the 2004 Plan, including 60,000 shares of Sotherlys common stock granted pursuant to Mr. Folsoms employment agreement with Sotherly that were fully vested on January 1, 2011. |
(17) | Includes 13,500 shares of restricted stock of Sotherly granted under the 2004 Plan, all of which were fully vested on December 31, 2012. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013. Includes 8,000 shares held by Claudia OHanlon, Mr. OHanlons spouse. |
(18) | Includes 39,750 shares of Sotherlys common stock granted under the 2004 Plan, including 30,000 shares of restricted common stock granted pursuant to Mr. Domalskis employment agreement with Sotherly that will vest in equal amounts of 6,000 shares on each December 31 in the five-year period of 2013 through 2017. |
(19) | Includes 4,500 shares of restricted stock of Sotherly granted under the 2004 Plan all of which are fully vested. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013. |
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This description sets forth certain terms of the notes that we are offering pursuant to this prospectus. In this section, we use capitalized words to signify terms that are specifically defined in the indenture, or the Indenture, to be dated as of the closing date, by and between us and Wilmington Trust, National Association, as trustee and collateral agent, or the trustee. This section contains definitions of certain capitalized terms that are used herein. We refer you to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used in this prospectus for which no definition is provided. As used in this section, all references to we, our and us mean Sotherly Hotels LP, a Delaware limited partnership.
Because this section is a summary, it does not describe every aspect of the notes or the Indenture. We urge you to read the Indenture because that document and not this summary defines your rights as a holder of notes. Please review a copy of the Indenture. You may obtain a copy of the Indenture from us without charge. See Where You Can Find More Information. You may also review the Indenture at the trustees corporate trust office at Wilmington Trust, National Association, Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890, Attn: Corporate Capital Markets.
General
The terms of the notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended, or the Trust Indenture Act.
The notes will be a single series under the Indenture, initially in the aggregate principal amount of $ million ($ if the underwriters overallotment option is exercised in full). This series may be reopened and we may, from time to time, issue additional notes of the same series without the consent of any of the holders of the notes. The notes will mature (unless previously redeemed) on , 2018. The notes will be redeemable in whole or in part at any time or from time to time on and after , 2016, at a redemption price equal to % of the principal amount redeemed plus accrued and unpaid interest to, but not including, the redemption date as described under Optional Redemption of the Notes below. The notes will be issued only in fully registered form without coupons, in denominations of $25.00 and integral multiples of $25.00 in excess thereof. The notes will be evidenced by a global note in book-entry form, except under the limited circumstances described under Certificated Notes. Currently there is no public market for the notes.
The notes are not convertible into or exchangeable for our partnership interests or shares of common stock of Sotherly.
Ranking
The notes will be our direct, senior unsecured obligations and will:
| rank equally with each other and with all of our existing and future unsecured and unsubordinated indebtedness outstanding from time to time; |
| rank senior to all of our future indebtedness that by its terms is expressly subordinate to the notes; |
| effectively rank junior to any of our future secured indebtedness to the extent of the value of the assets securing such indebtedness; and |
| effectively be structurally subordinated to all existing and future indebtedness and other obligations of each of our subsidiaries, including the claims of mortgage lenders holding secured indebtedness, as to the specific property receiving each lenders mortgage and other secured indebtedness. |
The notes are our obligations exclusively, and are not the obligations of any of our subsidiaries and will not be guaranteed by any of our subsidiaries or by Sotherly. Accordingly, the indebtedness incurred by any of our subsidiaries will have to be satisfied in full before you will be able to realize any value from our encumbered or indirectly held properties. As of June 30, 2013, we had consolidated indebtedness of approximately $151.0 million,
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which is comprised of approximately $134.9 million of secured debt and approximately $16.1 million unsecured debt. Of the approximately $151.0 million consolidated indebtedness outstanding at June 30, 2013, approximately $138.5 million was held by our subsidiaries and approximately $12.5 million relates to 12,458 shares of Preferred Stock (of which, 2,460 shares were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million). We intend to redeem the remaining 9,998 shares of Preferred Stock with a portion of the net proceeds of this offering. Sotherly, our subsidiaries or we may also incur additional indebtedness in the future, including secured indebtedness, subject to the provisions described under Certain Covenants Limitations on Incurrence of Debt.
Interest and Maturity
The notes will bear interest at the rate per annum set forth on the cover page of this prospectus from, and including, , 2013, and the subsequent interest periods will be the periods from, and including, an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. Interest is payable quarterly in arrears on , , and of each year, commencing , 2013, to the persons in whose names the notes are registered at the close of business on , , or , as the case may be, immediately before the relevant interest payment date.
Interest payments will be made only on a Business Day. If any interest payment is due on a non-Business Day, we will make the payment on the next day that is a Business Day. Payments made on the next Business Day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a Default under the notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a Business Day.
Accrued and unpaid interest is also payable on the date of maturity or earlier redemption of the notes. Interest on the notes will be computed on the basis of a 360-day year of twelve 30-day months.
The notes will mature (unless previously redeemed) on , 2018. Unless we redeem the notes prior to their maturity date, we will redeem the notes at their principal amount on the maturity date.
Business Day means a day other than a Saturday, Sunday or any other day on which banking institutions in New York City or the location of the corporate trust office of the trustee are authorized or required by law, regulation or executive order to close.
Default means any event that is, or after notice or passage of time or both would be, an Event of Default (as defined below).
Optional Redemption of the Notes
We may redeem the notes in whole or in part, at any time and from time to time on or after , 2016 at a redemption price equal to % of the principal amount of the notes being redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date.
We are required to give notice of such redemption not less than 30 days nor more than 60 days prior to the redemption date to each Holders address appearing in the securities register maintained by the trustee. In the event we elect to redeem less than all of the notes, the particular notes to be redeemed will be selected by the trustee by such method as the trustee shall deem fair and appropriate.
Holder means any registered holder on the books of the Registrar, from time to time, of the notes.
Merger, Consolidation or Sale
We may consolidate or merge with or into any other corporation, and we may sell, lease or convey all or substantially all of our assets to any corporation, provided that the successor entity, if other than us, is organized
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and existing under the laws of the United States of America or any United States, or U.S., state or the District of Columbia and assumes all of our obligations to:
| pay or deliver the principal and any premium, if any, and any interest on, the notes; and |
| perform and observe all of our other obligations under the Indenture; |
and provided further that no Event of Default (as defined below) shall have occurred and be continuing.
Except as described below under Certain Covenants Offer to Repurchase Upon a Change of Control Repurchase Event, the Indenture does not provide for any right of acceleration in the event of a consolidation, merger, sale of all or substantially all of the assets, recapitalization or change in our stock ownership. In addition, the Indenture does not contain any provision which would protect the Holders of notes against a sudden and dramatic decline in credit quality resulting from takeovers, recapitalizations or similar restructurings.
Certain Covenants
Offer to Repurchase Upon a Change of Control Repurchase Event
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 REITs 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 we, the REIT nor the acquiring or surviving entity has a class of common securities (or American Depositary Receipts representing such securities) listed on the New York Stock Exchange, or the NYSE, the NYSE Amex Equities, or 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.
If a Change of Control Repurchase Event occurs, unless we have exercised our option to redeem the notes as described under Optional Redemption of the Notes, we will make an offer to each Holder to repurchase all or any part (in a principal amount of $25 and integral multiples of $25 in excess thereof) of that Holders notes at a repurchase price in cash equal to % of the aggregate principal amount of notes repurchased plus any accrued and unpaid interest on the notes repurchased to, but not including, the date of repurchase. Within 30 days following any Change of Control Repurchase Event or, at our option, prior to any Change of Control Repurchase Event, but after the public announcement of the Change of Control Repurchase Event, we will give notice to each Holder with copies to the trustee and the paying agent (if other than the trustee) describing the transaction or transactions that constitute or may constitute the Change of Control Repurchase Event and offering to repurchase notes on the payment date specified in the notice, which will be no earlier than 30 days and no later than 60 days from the date such notice is given. The notice shall, if given prior to the date of consummation of the Change of Control Repurchase Event, state that the offer to purchase is conditioned on the Change of Control Repurchase Event occurring on or prior to the payment date specified in the notice.
We will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control Repurchase Event. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control Repurchase Event provisions of the notes, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control Repurchase Event provisions of the Indenture by virtue of such conflict.
On the Change of Control Repurchase Event payment date, we will, to the extent lawful:
| Accept for payment all notes or portions of notes properly tendered pursuant to our offer; |
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| Deposit with the trustee an amount equal to the aggregate purchase price in respect of all notes or portions of notes properly tendered; and |
| Deliver or cause to be delivered to the trustee the notes properly accepted, together with an officers certificate stating the aggregate principal amount of notes being purchased by us. |
The trustee will promptly mail to each Holder of notes properly tendered the purchase price for the notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book-entry) to each Holder a new note equal in principal amount to any unpurchased portion of any notes surrendered; provided that each new note will be in a principal amount of $25 and integral multiples of $25 in excess thereof.
We will not be required to make an offer to repurchase the notes upon a Change of Control Repurchase Event if (i) we or our successor delivered a notice to redeem in the manner, at the times and otherwise in compliance with the optional redemption and repayment provision described above prior to the occurrence of the Change of Control Repurchase Event (and all of the notes are redeemed pursuant to such redemption on the related redemption date); or (ii) a third party makes an offer in respect of the notes in the manner, at the times and otherwise in compliance with the requirements for an offer made by us and such third party purchases all notes properly tendered and not withdrawn under its offer.
There can be no assurance that sufficient funds will be available at the time of any Change of Control Repurchase Event to make required repurchases of notes tendered. Our failure, or the failure of our successor or any third party, as applicable, to repurchase the notes upon a Change of Control Repurchase Event would result in an Event of Default under the Indenture. It is possible that we will not have sufficient funds at the time of the Change of Control Repurchase Event to make the required repurchase of the notes.
Capital Stock means, with respect to any entity, 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 entity (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 of the notes or issued thereafter, including without limitation, in the case of Sotherly, all common stock and preferred stock of Sotherly outstanding from time to time.
Limitations on Incurrence of Debt
We 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.
In addition to the foregoing limitation on the incurrence of Debt, we 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.
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 us and our subsidiaries on a consolidated basis determined in accordance with GAAP.
Asset Under Renovation as of any date means any hotel asset owned by us, any subsidiary or any Unconsolidated Entity that is designated by us in our discretion as the recipient or beneficiary of capital expenditures that are in an amount greater than 4% of a hotel assets total revenues for the preceding 12 months.
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Capitalization Rate means 7.5%.
Consolidated Income Available for Debt Service means, in each case calculated for the four complete calendar quarters preceding the date of determination, Consolidated Net Income of us and our consolidated 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 us and our consolidated 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 us 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 us and our consolidated subsidiaries for such period determined in 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.
Debt means, as of any date, without duplication, any indebtedness of us 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 us 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 our consolidated balance sheet in accordance with GAAP. The term Debt also includes, to the extent not otherwise included, any obligation of us 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 us or any subsidiary), but excludes Capital Stock (as defined above) of Sotherly, us, or our subsidiaries.
Intercompany Debt means Debt to which the only parties are Sotherly, any of its subsidiaries, us or any of our subsidiaries, or Debt owed to Sotherly arising from routine cash management practices, but only so long as such Debt is held solely by any of Sotherly, any of its subsidiaries, us and any of our subsidiaries.
Non-Stabilized Asset as of any date means any hotel asset owned by us, 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 of each such Non-Stabilized Asset commissioned by us from a certified MAI appraiser in December of each year during which any notes remain outstanding.
Stabilized Asset means any hotel asset owned by us, 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.
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Stabilized Consolidated Income Available for Debt Service means, for the four complete calendar quarters preceding the date of determination, our Consolidated Income Available for Debt Service, excluding any portion of Consolidated Income Available for Debt Service attributable to a Non-Stabilized Asset.
Stabilized Consolidated Interest Expense means, for the four complete calendar quarters preceding the date of determination, our Consolidated Interest Expense, excluding any portion of Consolidated Interest Expense relating to Debt that is secured by a Non-Stabilized Asset.
Unconsolidated Entity means an entity, other than one of our consolidated subsidiaries, in which we own a direct or indirect interest that is accounted for under the equity method of accounting or the cost method of accounting.
Information Rights
During any period in which any notes are outstanding, the Indenture will provide that, whether or not we are subject to Sections 13 or 15(d) of the Exchange Act, we will, to the extent permitted under the Exchange Act, file with the SEC the annual reports, quarterly reports and other documents that we would have been required to file with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act (collectively, the Financial Information) if we were subject to such requirements; notwithstanding the foregoing, during any period in which we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, Sotherly, as our sole general partner, may elect to satisfy our obligations under this section by filing with the SEC the Financial Information required to be filed by Sotherly under Sections 13 or 15(d) of the Exchange Act.
Unless the Financial Information is available through the SECs Electronic Data Gathering, Analysis and Retrieval System (or a successor system), we will, in any event, within 15 days after the respective dates on which a periodic report on Form 10-K or Form 10-Q, as the case may be, was required to be filed with the SEC or would have been required to be filed with the SEC if we were subject to Section 13 or 15(d) of the Exchange Act as a non-accelerated filer (as such term is defined in Rule 12b-2 under the Exchange Act):
| transmit by mail (or other permissible means under the Exchange Act) to all Holders of notes, without cost to such Holders, copies of the Financial Information; and |
| file with the trustee copies of the Financial Information. |
If the filing of the Financial Information by us or Sotherly, as applicable, with the SEC is not permitted under the Exchange Act, we 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 reports, information and documents to the trustee is for informational purposes only and its receipt of such reports, information or other documents shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including our or any other Persons compliance with any of its covenants thereunder. Neither the trustee nor any paying agent shall have any obligation to monitor or confirm, on a continuing basis or otherwise, our or any other Persons compliance with the covenants described herein or with respect to any reports or other documents filed pursuant to the Indenture.
Maintenance of Properties
We will cause all of our material properties used or useful in the conduct of our business or the business of any subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements of these properties, all as in our judgment may be necessary so that the business carried on in connection with these properties may be properly and advantageously conducted at all times; provided, however, that we and our subsidiaries shall not be prevented from selling or otherwise disposing of for value their respective properties in the ordinary course of business.
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Insurance
We will, and will cause each of our 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 holders rating of not less than A-V.
Payment of Taxes and Other Claims
We will pay or discharge or cause to be paid or discharged, before the same shall become delinquent: (i) all taxes, assessments and governmental charges levied or imposed upon us or any subsidiary or upon the income, profits or property of us or any subsidiary; and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of us or any subsidiary; provided, however, that we 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 we have set apart and maintain an adequate reserve.
Events of Default
The following are Events of Default under the Indenture with respect to the notes:
| default in the payment of any interest on the notes when due and payable, which continues for 30 days; |
| default in the payment of any principal of or premium on the notes when due; |
| default in tendering payment for the notes upon a Change of Control Repurchase Event, when such payment remains unpaid 60 days after issuance of the requisite notice; |
| default in the performance of any other obligation contained in the Indenture for the benefit of the notes, which continues for 90 days after written notice; |
| specified events in bankruptcy, insolvency or reorganization of us or any Significant Subsidiary; |
| an event of default, as defined in any bond, note, debenture or other evidence of Debt of us or any Significant Subsidiary in excess of $17,500,000 singly or in aggregate principal amount which becomes accelerated so as to be due and payable prior to the date on which the same would otherwise become due and payable and such acceleration(s) shall not have been annulled or rescinded within 30 days of notice of such acceleration(s) to us or the Significant Subsidiary; provided, however, that if such event of default, acceleration(s) or payment default(s) are contested by us, a final and non-appealable judgment or order confirming the existence of the default(s) and/or the lawfulness of the acceleration(s), as the case may be, shall have been entered; and |
| 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 us 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. |
Book-entry and other indirect Holders of the notes should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or rescind an acceleration of maturity.
Annually, within 120 days following each December 31 while the notes are outstanding, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture, or else specifying any Default and the nature and status thereof. We will also deliver to the trustee a written notification of any uncured Default within 30 days after we become aware of such uncured Default.
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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.
Significant Subsidiary means each of our significant subsidiaries, if any, as defined in Rule 1-02(w) of Regulation S-X under the Securities Act.
Remedies if an Event of Default Occurs
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.
At any time after the trustee or the Holders of the notes have accelerated the repayment of the principal, premium, if any, and all unpaid interest on the notes, but before the trustee has obtained a judgment or decree for payment of money due, the Holders of a majority in aggregate principal amount of outstanding notes may rescind and annul that acceleration and its consequences, provided that all payments and/or deliveries due, other than those due as a result of acceleration, have been made and all Events of Default have been remedied or waived.
The Holders of a majority in principal amount of the outstanding notes may waive any default with respect to that series, except a default:
| in the payment of any amounts due and payable or deliverable under the notes; or |
| in an obligation contained in, or a provision of, the Indenture which cannot be modified under the terms of the Indenture without the consent of each Holder of the notes. |
The Holders of a majority in principal amount of the outstanding notes 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 with respect to the notes, provided that (i) such direction is not in conflict with any rule of law or the Indenture, (ii) the trustee may take any other action deemed proper by the trustee that is not inconsistent with such direction and (iii) the trustee need not take any action that might involve it in personal liability or be unduly prejudicial to the Holders not joining therein. Subject to the provisions of the Indenture relating to the duties of the trustee, before proceeding to exercise any right or power under the Indenture at the direction of the Holders, the trustee is entitled to receive from those Holders security or indemnity satisfactory to the trustee against the costs, expenses and liabilities which it might incur in complying with any direction.
A Holder of the notes will have the right to institute a proceeding with respect to the Indenture or for any remedy under the Indenture, if:
| that Holder previously gives to the trustee written notice of a continuing Event of Default with respect to the notes; |
| the Holders of not less than 25% in principal amount of the outstanding notes have made written request; |
| such Holder or Holders have offered to indemnify the trustee against the costs, expenses and liabilities incurred in connection with such request; |
| the trustee has not received from the Holders of a majority in principal amount of the outstanding notes a direction 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 the 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 the Indenture, except in the manner herein provided and for equal and ratable benefit of all Holders); and |
| the trustee fails to institute the proceeding within 60 days. |
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However, the Holder of a note has the right, which is absolute and unconditional, to receive payment of the principal of and interest on such note on the respective due dates (or, in the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment and such rights shall not be impaired without the consent of such Holder.
Modification and Waiver
Some types of changes require the consent of each Holder of the notes, other types require the consent of the Holders of a majority of the principal amount of outstanding notes, and other types do not require the consent of any Holders of the notes.
Without the consent of the Holder of each note affected, an amendment or waiver may not:
| change the stated maturity of the principal of, or any installment of interest on, any note; |
| reduce the principal amount of, or premium, if any, or interest on, any note; |
| change the place or currency of payment of principal of, or premium, if any, or interest on, any note; or |
| 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. |
The Holders of a majority in principal amount of the notes may waive compliance with any provision of (or waive any Event of Default under) the Indenture or the notes without notice to any Holder. The Holders of a majority in principal amount of the notes may waive compliance by us with any provision or the Indenture or the notes without notice to any Holder.
We and the trustee may also amend and modify the Indenture without the consent of any Holder for any of the following purposes:
| to evidence the succession of another person to us and the assumption by any such successor of the covenants of us contained in the Indenture and the notes; |
| to add to our covenants for the benefit of the Holders or to surrender any right or power conferred in the Indenture upon us; |
| to add Events of Default for the benefit of the Holders; |
| to add or change any provisions of the Indenture to facilitate the issuance of bearer securities; |
| to evidence and provide for the acceptance of appointment by a successor trustee with respect to the notes and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the trustees thereunder by more than one trustee; |
| to cure any ambiguity, to correct or supplement any provision in the Indenture which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to other matters or questions arising under the Indenture that shall not be inconsistent with the provisions of the Indenture or to make any other changes, provided that in each case, such provisions shall not adversely affect the interests of the Holders of notes in any material respect as we determine in good faith; |
| to secure the notes; |
| to qualify or maintain qualifications of the Indenture under the Trust Indenture Act; or |
| to supplement any of the provisions of the Indenture as is necessary to permit or facilitate the defeasance or discharge of the notes under specified provisions of the Indenture, provided that any such action shall not adversely affect the interests of the Holders in any material respect as we determine in good faith. |
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The Registrar and Paying Agent
We have initially designated the trustee as the registrar and paying agent for the notes. Payments of interest and principal will be made, and the notes will be transferable, at the office of the paying agent, or at such other place or places as may be designated pursuant to the Indenture. For notes which we issue in book-entry form evidenced by a global security, payments will be made to a nominee of the depository.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect as to all notes, when:
(1) | either: |
a. | all notes that have been authenticated, except lost, stolen or destroyed notes that have been replaced or paid and notes for which payment has been deposited in trust and thereafter repaid to us, have been delivered to the trustee for cancellation; or |
b. | all notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or shall become due and payable within one year and we have irrevocably deposited with the trustee or the paying agent, in trust, for the benefit of the Holders, cash in U.S. dollars and/or non-callable government securities in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the entire indebtedness on the notes not delivered to the trustee for cancellation for principal, premium, if any, and accrued interest, to the date of maturity or redemption; |
(2) | we have paid all sums payable by us under the Indenture with respect to the notes; |
(3) | we have delivered irrevocable instructions to the trustee to apply the deposited money toward the payment of the notes at maturity or on the redemption date, as the case may be; and |
(4) | we have delivered to the trustee an officers certificate and an opinion of counsel stating that the conditions precedent to the satisfaction and discharge of the notes have been satisfied. |
Legal Defeasance and Covenant Defeasance
Legal Defeasance.
We 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 we have made the deposit referred to below, and the provisions of the 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:
(1) | we have irrevocably deposited with the trustee, in trust, cash in U.S. dollars and/or non-callable government securities that will provide funds in amount sufficient, in the opinion of a nationally recognized public accounting firm, to pay the principal of, premium, if any, and accrued interest on the notes at the time such payments are due or on the applicable redemption date in accordance with the terms of the Indenture; |
(2) | we have delivered to the trustee: |
a. | an opinion of counsel to the effect that Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of the defeasance and will be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such 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 |
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b. | 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) | no Event of Default will have occurred and be continuing on the date of such deposit, 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, and such deposit shall not result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which we are a party or by which we are bound; |
(4) | we shall have delivered to the trustee an officers certificate and an opinion of counsel, each stating that, subject to certain assumptions and exclusions, all conditions precedent provided for or relating to the defeasance have been complied with; and |
(5) | the trustee shall have received such other documents, assurances and opinions of counsel as the trustee shall have reasonably required. |
Covenant Defeasance.
We will not need to comply with certain restrictive covenants, and the provisions of the Indenture will cease to be applicable with respect to an Event of Default under the notes other than an Event of Default due to our failure to pay the principal of or interest on the notes when due, upon:
(1) | the satisfaction of the conditions described in clauses 1, 2(b), 3, 4 and 5 under Legal Defeasance above; and |
(2) | our delivery to the trustee of an opinion of counsel to the effect that the Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such defeasance had not occurred. |
If we exercise our option to omit compliance with certain provisions of the Indenture as described in the immediately preceding paragraph and the notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or non-callable government securities on deposit with the trustee may not be sufficient to pay amounts due on the notes at the time of acceleration resulting from such Event of Default. In such event, we will remain liable for such payments.
No Personal Liability
The Indenture provides that 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 us 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 (as defined above) thereof. Each Holder, by accepting the notes, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes.
Governing Law
The Indenture and the notes will be governed by the laws of the State of New York.
Sinking Fund
The notes are not entitled to any sinking fund payments.
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Listing
We have applied to list the notes on the Nasdaq Global Market under the symbol SOHOL. If approved, we expect trading in the notes to begin within 30 days after the original issue date of the notes.
Trading Characteristics
We expect the notes to trade flat, meaning that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the notes that is not included in the trading price. Any portion of the trading price of a Note that is attributable to accrued and unpaid interest will be treated as ordinary interest income for U.S. federal income tax purposes and will not be treated as part of the amount realized for purposes of determining gain or loss on the disposition of the note.
Book-entry, Delivery and Form
We have obtained the information in this section concerning The Depository Trust Company, or DTC, and its book-entry systems and procedures from sources that we believe to be reliable. We take no responsibility for an accurate portrayal of this information. In addition, the description of the clearing system in this section reflects our understanding of the rules and procedures of DTC as they are currently in effect. DTC could change its rules and procedures at any time.
The notes will initially be represented by one or more fully registered global notes. Each such global note will be deposited with, or on behalf of, DTC or any successor thereto and registered in the name of Cede & Co. (DTCs nominee).
So long as DTC or its nominee is the registered owner of the global securities representing the notes, DTC or such nominee will be considered the sole owner and Holder of the notes for all purposes of the notes and the Indenture. Except as provided below, owners of beneficial interests in the notes will not be entitled to have the notes registered in their names, will not receive or be entitled to receive physical delivery of the notes in definitive form and will not be considered the owners or Holders under the Indenture, including for purposes of receiving any reports delivered by us or the trustee pursuant to the Indenture. Accordingly, each person owning a beneficial interest in a note must rely on the procedures of DTC or its nominee and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, in order to exercise any rights of a Holder.
Unless and until we issue the notes in fully certificated, registered form under the limited circumstances described under the heading Certificated Notes:
| you will not be entitled to receive a certificate representing your interest in the notes; |
| all references in this prospectus to actions by Holders will refer to actions taken by DTC upon instructions from its direct participants; and |
| all references in this prospectus to payments and notices to Holders will refer to payments and notices to DTC or Cede & Co., as the registered Holder of the notes, for distribution to you in accordance with DTC procedures. |
The Depository Trust Company
DTC will act as securities depositary for the notes. The notes will be issued as fully registered notes registered in the name of Cede & Co. DTC is:
| a limited-purpose trust company organized under the New York Banking Law; |
| a banking organization under the New York Banking Law; |
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| a member of the Federal Reserve System; |
| a clearing corporation under the New York Uniform Commercial Code; and |
| a clearing agency registered under the provisions of Section 17A of the Exchange Act. |
DTC holds securities that its direct participants deposit with DTC. DTC facilitates the settlement among direct participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in direct participants accounts, thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its direct participants. Indirect participants of DTC, such as securities brokers and dealers, banks and trust companies, can also access the DTC system if they maintain a custodial relationship with a direct participant.
Purchases of notes under DTCs system must be made by or through direct participants, which will receive a credit for the notes on DTCs records. The ownership interest of each beneficial owner is in turn to be recorded on the records of direct participants and indirect participants. Beneficial owners will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct participants or indirect participants through which such beneficial owners entered into the transaction. Transfers of ownership interests in the notes are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the notes, except as provided under Certificated Notes.
To facilitate subsequent transfers, all notes deposited with DTC are registered in the name of DTCs nominee, Cede & Co. The deposit of notes with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the notes. DTCs records reflect only the identity of the direct participants to whose accounts such notes are credited, which may or may not be the beneficial owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Book-entry format
Under the book-entry format, the paying agent will pay interest or principal payments to Cede & Co., as nominee of DTC. DTC will forward the payment to the direct participants, who will then forward the payment to the indirect participants or to you as the beneficial owner. You may experience some delay in receiving your payments under this system. Neither we, the trustee, nor any paying agent has any direct responsibility or liability for the payment of principal or interest on the notes to owners of beneficial interests in the notes.
DTC is required to make book-entry transfers on behalf of its direct participants and is required to receive and transmit payments of principal, premium, if any, and interest on the notes. Any direct participant or indirect participant with which you have an account is similarly required to make book-entry transfers and to receive and transmit payments with respect to the notes on your behalf. We and the trustee under the Indenture have no responsibility for any aspect of the actions of DTC or any of its direct or indirect participants. In addition, we and the trustee under the Indenture have no responsibility or liability for any aspect of the records kept by DTC or any of its direct or indirect participants relating to or payments made on account of beneficial ownership interests in the notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We also do not supervise these systems in any way.
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The trustee will not recognize you as a Holder under the Indenture, and you can only exercise the rights of a Holder indirectly through DTC and its direct participants. DTC has advised us that it will only take action regarding a note if one or more of the direct participants to whom the note is credited directs DTC to take such action and only in respect of the portion of the aggregate principal amount of the notes as to which that participant or participants has or have given that direction. DTC can only act on behalf of its direct participants. Your ability to pledge notes to non-direct participants, and to take other actions, may be limited because you will not possess a physical certificate that represents your notes.
Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the notes unless authorized by a direct participant in accordance with DTCs procedures. Under its usual procedures, DTC will mail an omnibus proxy to us as soon as possible after the record date. The omnibus proxy assigns Cede & Co.s consenting or voting rights to those direct participants to whose accounts the notes are credited on the record date (identified in a listing attached to the omnibus proxy).
Certificated Notes
Unless and until they are exchanged, in whole or in part, for notes in definitive form in accordance with the terms of the notes, the notes may not be transferred except (1) as a whole by DTC to a nominee of DTC or (2) by a nominee of DTC to DTC or another nominee of DTC or (3) by DTC or any such nominee to a successor of DTC or a nominee of such successor.
We will issue the notes to you or your nominees, in fully certificated registered form, rather than to DTC or its nominees, only if:
| we advise the trustee in writing that DTC is no longer willing or able to discharge its responsibilities properly or that DTC is no longer a registered clearing agency under the Exchange Act, and the trustee or we are unable to locate a qualified successor within 90 days; |
| an Event of Default has occurred and is continuing under the Indenture and a request for such exchange has been made; or |
| we, at our option, elect to terminate the book-entry system through DTC. |
If any of the three above events occurs, DTC is required to notify all direct participants that notes in fully certificated registered form are available through DTC. DTC will then surrender the global note representing the notes along with instructions for re-registration. The trustee will re-issue the notes in fully certificated registered form and will recognize the registered Holders of the certificated notes as Holders under the Indenture.
Unless and until we issue the notes in fully certificated, registered form, (1) you will not be entitled to receive a certificate representing your interest in the notes; (2) all references in this prospectus to actions by Holders will refer to actions taken by the depositary upon instructions from their direct participants; and (3) all references in this prospectus to payments and notices to Holders will refer to payments and notices to the depositary, as the registered Holder of the notes, for distribution to you in accordance with its policies and procedures.
Additional Notes and Additional Series of Notes
We may from time to time, without notice to or the consent of the Holders of the notes, create and issue additional notes ranking equally and ratably with the notes, except for potential differences, including, but not limited to, the issue prices, issue dates and interest accrued prior to the issue dates. The notes offered hereby and any additional notes that we may issue would be governed by the Indenture. No additional notes may be issued if an Event of Default has occurred and is continuing with respect to the notes.
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The following description of certain terms of the agreement of limited partnership of the Operating Partnership is only a summary. For a complete description, we refer you to the Agreement of Limited Partnership of Sotherly Hotels LP, as amended, a copy of which is an exhibit to this registration statement.
Management
The Operating Partnership was formed on August 19, 2004 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. Pursuant to the partnership agreement, Sotherly Hotels Inc., as general partner of the Operating Partnership, has, subject to certain protective rights of limited partners described below, full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of lessees and to cause changes in the Operating Partnerships line of business and distribution policies.
The partnership agreement does not require the partners of the Operating Partnership to hold an annual meeting and the Operating Partnership does not intend to hold annual meetings of the partners, given the general partners management responsibility and discretion.
Transferability of Interests
Sotherly may not voluntarily withdraw from the Operating Partnership or transfer or assign its interest in the Operating Partnership or engage in any transaction which would result in a change of control of Sotherly unless:
| We receive the consent of limited partners holding more than 50.0% of the partnership interests of the limited partners (other than those held by the general partner or any subsidiary); |
| The consent of limited partners (including the general partner or any subsidiary) holding more than 66.7% of the percentage interests of the limited partnership interests (including those held by the general partner or any subsidiary) is obtained and as a result of such transaction all limited partners will receive for each partnership unit an amount of cash, securities or other property equal in value to the product of the conversion factor and the greatest amount of cash, securities or other property paid in the transaction to a holder of one share of Sotherlys common stock, provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50.0% of the outstanding shares of Sotherlys common stock, each holder of units shall be given the option to exchange its units for the greatest amount of cash, securities or other property that a limited partner would have received had it (A) exercised its redemption right (described below) and (B) sold, tendered or exchanged pursuant to the offer shares of Sotherlys common stock received upon exercise of the redemption right immediately prior to the expiration of the offer; or |
| The consent of limited partners (including the general partner or any subsidiary) holding more than 66.7% of the percentage interests of the limited partnership interests (including those held by the general partner or any subsidiary) is obtained and Sotherly is the surviving entity in the transaction and either (A) Sotherlys stockholders do not receive cash, securities or other property in the transaction or (B) all limited partners (other than any subsidiary of the general partner) receive for each partnership unit an amount of cash, securities or other property having a value that is no less than the product of the conversion factor and the greatest amount of cash, securities or other property received in the transaction by Sotherlys stockholders. |
| In addition, in the event of a change of control of Sotherly, the limited partners will have the right, for a period of 30 days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the partnership agreement. |
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Sotherly also may (i) transfer all or any portion of its general partnership interest to an affiliate of the general partner, and following such transfer, may withdraw as the general partner and (ii) engage in a transaction required by law or by the rules of any national securities exchange on which Sotherlys common stock is listed.
Limited partners may not transfer their units without Sotherlys written consent as general partner.
Capital Contribution
Sotherly currently own a 1.0% interest as general partner and an approximately 76.9% interest as limited partner in the Issuer. The partnership agreement provides that if the Operating Partnership requires additional funds at any time in excess of funds available to the Operating Partnership from borrowing or capital contributions, Sotherly may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership. Under the partnership agreement, Sotherly is obligated to contribute the proceeds of any offering of shares of stock as additional capital to the Operating Partnership. Sotherly is authorized to cause the Operating Partnership to issue partnership interests for less than fair market value if Sotherly has concluded in good faith that such issuance is in both the Operating Partnerships and Sotherlys best interests. If Sotherly contributes additional capital to the Operating Partnership, it will receive additional units and Sotherlys percentage interest will be increased on a proportionate basis based upon the amount of such additional capital contributions and the value of the Operating Partnership at the time of such contributions. Conversely, the percentage interests of the limited partners will be decreased on a proportionate basis in the event of additional capital contributions by Sotherly. In addition, if Sotherly contributes additional capital to the Operating Partnership, we will revalue the property of the Operating Partnership to its fair market value (as determined by Sotherly) and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the partnership agreement if there were a taxable disposition of such property for its fair market value (as determined by us) on the date of the revaluation. The Series A Preferred Interests held by the General Partner in connection with the issuance of Sotherlys Series A Preferred Stock include a right to receive special distributions and preferred distributions. The Operating Partnership may issue additional preferred partnership interests, in connection with acquisitions of property or otherwise, which could have priority over common partnership interests with respect to distributions from the Operating Partnership, including the partnership interests Sotherly owns as the general partner.
Redemption Rights
Pursuant to the partnership agreement, the limited partners received redemption rights which enable them to cause the Issuer to redeem their units in exchange for cash or, at Sotherlys option, shares of common stock of Sotherly. The cash redemption amount per unit is based on the average of the market price of Sotherlys common stock for the 10 trading days immediately preceding the notice of redemption. The number of shares of Sotherlys common stock issuable upon redemption of units held by limited partners may be adjusted upon the occurrence of certain events such as stock dividends, stock subdivisions or combinations. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption rights if the delivery of Sotherlys common stock to the redeeming limited partner would:
| result in any person owning, directly or indirectly, common stock in excess of the stock ownership limit in Sotherlys charter; |
| result in shares of Sotherlys common stock being owned by fewer than 100 persons (determined without reference to any rules of attribution); |
| result in Sotherly being closely held within the meaning of Section 856(h) of the Code; |
| cause Sotherly to own, actually or constructively, 10.0% or more of the ownership interests in a tenant of Sotherlys, the Operating Partnerships or a subsidiary partnerships real property, within the meaning of Section 856(d)(2)(B) of the Code other than a taxable REIT subsidiary if the requirements of Section 856(d)(8)(B) of the Code are satisfied; |
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| cause any of our hotel management companies to fail to qualify as an eligible independent contractor within the meaning of Section 856(d)(9) of the Code; or |
| cause the acquisition of Sotherlys common stock by such redeeming limited partner to be integrated with any other distribution of common stock for purposes of complying with the registration provisions of the Securities Act. |
Sotherly may, in its sole and absolute discretion, waive any of these restrictions.
With respect to the units issued in connection with the acquisition of our initial properties, the redemption rights may be exercised by the limited partners at any time after the first anniversary of our acquisition of these properties; provided, however, unless Sotherly otherwise agrees:
| a limited partner may not exercise the redemption right for fewer than 1,000 units or, if such limited partner holds fewer than 1,000 units, the limited partner must redeem all of the units held by such limited partner; |
| a limited partner may not exercise the redemption right for more than the number of units that would, upon redemption, result in such limited partner or any other person owning, directly or indirectly, common stock of Sotherly in excess of the ownership limitation in Sotherlys charter; and |
| a limited partner may not exercise the redemption right more than two times annually. |
The aggregate number of shares of the Sotherlys common stock issuable upon exercise of the redemption rights is 2,881,198. The number of shares of the Sotherlys common stock issuable upon exercise of the redemption rights will be adjusted to account for stock splits, mergers, consolidations or similar pro rata stock transactions.
The partnership agreement requires that the Operating Partnership be operated in a manner that enables Sotherly to satisfy the requirements for being classified as a REIT, to avoid any federal income or excise tax liability imposed by the Code (other than any federal income tax liability associated with Sotherlys retained capital gains) and to ensure that the partnership will not be classified as a publicly traded partnership taxable as a corporation under Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, the Operating Partnership generally will pay all of our administrative costs and expenses, including:
| all expenses relating to Sotherlys continuity of existence and our subsidiaries operations; |
| all expenses relating to offerings and registration of securities; |
| all expenses associated with the preparation and filing of any of Sotherlys and the Operating Partnerships periodic or other reports and communications under federal, state or local laws or regulations; |
| all expenses associated with Sotherlys compliance with laws, rules and regulations promulgated by any regulatory body; and |
| all of Sotherlys other operating or administrative costs incurred in the ordinary course of business on behalf of the Operating Partnership. |
These expenses, however, do not include any of Sotherlys administrative and operating costs and expenses incurred that are attributable to hotel properties that are owned by Sotherly directly rather than by the Operating Partnership or its subsidiaries.
Distributions
The partnership agreement provides that the Operating Partnership will distribute cash at such time and in such amounts as determined by Sotherly in its sole discretion, to Sotherly and the limited partners in accordance with their respective percentage interests in the Operating Partnership. Furthermore, the partnership agreement
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provides that the Operating Partnership shall distribute amounts sufficient to enable Sotherly to pay stockholder dividends that will allow Sotherly to meet the distribution requirements to qualify as a REIT and avoid any federal income or excise tax liability.
Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the partnership, including any partner loans, any remaining assets of the partnership will be distributed to Sotherly and the limited partners with positive capital accounts in accordance with their respective positive capital account balances.
Allocations
Profits and losses of the partnership (including depreciation and amortization deductions) for each fiscal year generally are allocated to Sotherly and the limited partners in accordance with the respective percentage interests in the partnership. All of the foregoing allocations are subject to compliance with the provisions of Sections 704(b), 704(c) and 706 of the Code and Treasury regulations promulgated thereunder. The Operating Partnership expects to use the traditional method under Section 704(c) of the Code for allocating items with respect to contributed property acquired in connection with the offering for which the fair market value differs from the adjusted tax basis at the time of contribution.
Term
The Operating Partnership has perpetual duration unless dissolved upon:
| Sotherlys bankruptcy, dissolution, removal or withdrawal (unless the limited partners elect to continue the partnership); |
| the passage of 90 days after the sale or other disposition of all or substantially all the assets of the partnership; |
| the redemption of all units (other than those held by Sotherly, if any); or |
| an election by Sotherly in its capacity as the general partner. |
Tax Matters
Pursuant to the partnership agreement, Sotherly is the tax matters partner of the Operating Partnership and, as such, Sotherly has authority to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership.
Indemnification
Subject to any terms, conditions or restrictions set forth in the Operating Partnerships partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other person from and against all claims and demands whatsoever. The amended and restated partnership agreement of the Operating Partnership generally requires the Operating Partnership to indemnify Sotherly and the directors, officers and employees of Sotherly, and any affiliates of either Sotherly or the Operating Partnership and certain other specific persons to the fullest extent permitted by the law against all losses, claims, damages, liabilities, including reasonable legal fees and expenses, or similar events except for those which arise from bad faith, improper receipt of a personal benefit or where there was reasonable knowledge that the act or omission leading to the activity was unlawful.
Sotherly provides insurance from a commercial carrier against certain liabilities that could be incurred by Sotherlys directors and officers.
Insofar as the foregoing provisions permit indemnification of Sotherlys directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income tax consequences that a holder of the notes may consider relevant to the purchase, ownership and disposition of the notes, but does not purport to be a complete analysis of all potential tax consequences. Baker & McKenzie LLP has acted as our tax counsel, has reviewed this discussion, and is of the opinion that this discussion is accurate in all material respects. The following discussion is based upon the Code, current, temporary and proposed U.S. Treasury regulations issued under the Code, or collectively the Treasury Regulations, the legislative history of the Code, IRS rulings, pronouncements, interpretations and practices, and judicial decisions now in effect, all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a holder of the notes. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a holder in light of such holders particular circumstances or to holders subject to special rules, including, without limitation:
| a broker-dealer or a dealer in securities or currencies; |
| an S corporation; |
| a bank, thrift or other financial institution; |
| a regulated investment company or a real estate investment trust; |
| an insurance company; |
| a tax-exempt organization; |
| a person subject to the alternative minimum tax provisions of the Code; |
| a person holding the notes as part of a hedge, straddle, conversion, integrated or other risk reduction or constructive sale transaction; |
| a partnership or other pass-through entity; |
| a person deemed to sell the notes under the constructive sale provisions of the Code; |
| a U.S. person whose functional currency is not the U.S. dollar; or |
| a U.S. expatriate or former long-term resident. |
In addition, this discussion is limited to persons that purchase the notes in this offering for cash at their issue price (as defined below in U.S. Holders Original Issue Discount) and that hold the notes as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address the effect of any applicable state, local, non-U.S. or other tax laws, including gift and estate tax laws.
As used herein, U.S. Holder means a beneficial owner of the notes that is, for U.S. federal income tax purposes:
| an individual who is a citizen or resident of the United States; |
| a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons that have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
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If an entity treated as a partnership for U.S. federal income tax purposes holds the notes, the tax treatment of an owner of the entity generally will depend upon the status of the particular owner and the activities of the entity. If you are an owner of an entity treated as a partnership for U.S. federal income tax purposes, you should consult your tax advisor regarding the tax consequences of the purchase, ownership and disposition of the notes.
We have not sought and will not seek any rulings from the IRS with respect to the matters discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the notes or that any such position would not be sustained.
THIS SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS, POTENTIAL CHANGES IN APPLICABLE TAX LAWS AND THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS, AND ANY TAX TREATIES.
U.S. Holders
Interest
A U.S. Holder generally will be required to recognize and include in gross income any stated interest as ordinary income at the time it is paid or accrued on the notes in accordance with such holders method of accounting for U.S. federal income tax purposes.
Original Issue Discount
If the issue price of a note is less than its stated redemption price at maturity, then the note will be treated as being issued with original issue discount, or OID, for U.S. federal income tax purposes unless the difference between the notes issue price and its stated redemption price at maturity is less than a statutory de minimis amount, as defined below. Generally, the issue price of a note is the first price at which a substantial amount of the issue is sold to purchasers other than bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. The stated redemption price at maturity of a note is the total of all payments to be made under the note other than qualified stated interest (generally, stated interest that is unconditionally payable in cash or property at least annually at a single fixed rate or at certain floating rates that properly take into account the length of the interval between stated interest payments). The stated interest on the notes will qualify as qualified stated interest, and the stated redemption price at maturity will equal the principal amount of the notes.
If the notes are issued with OID, a U.S. Holder generally will be required to include such OID in income as it accrues on a constant yield basis in advance of the receipt of cash payments to which such income is attributable. Under the constant yield method, a U.S. Holder must include in income in each taxable year the sum of the daily portions of OID for each date on which the U.S. Holder held the note during the taxable year, regardless of the U.S. Holders method of accounting for U.S. federal income tax purposes. The constant yield method generally requires U.S. Holders to include in income increasingly greater amounts of OID in successive accrual periods. A U.S. Holders tax basis in a note is increased by each accrual of OID and decreased by each payment other than a payment of qualified stated interest.
The amount of OID on the notes is de minimis if it is less than 0.0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity. Rather than being characterized as interest, any payment attributable to such de minimis OID is characterized as if it were gain from the sale of the notes, and a pro rata amount of such de minimis OID must be included in income as principal payments are received on the notes.
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Additional Amounts
Upon the occurrence of certain events, we may be required to make certain payments in excess of stated interest and the principal amount of the notes. These contingencies may implicate the provisions of Treasury regulations relating to contingent payment debt instruments. We intend to take the position that the notes should not be treated as contingent payment debt instruments because of these additional payments. This position is based in part on assumptions regarding the likelihood, as of the date of issuance of the notes, that such additional amounts will have to be paid. Assuming such position is respected, any additional amounts paid to a U.S. Holder would be taxable as described below in U.S. Holders-Sale or Other Taxable Disposition of the Notes. This position is binding on a holder unless such holder discloses its contrary position in the manner required by applicable Treasury regulations. The IRS, however, may take a position contrary to our position, which could affect the timing and character of a holders income and the timing of our deductions with respect to the notes. Holders are urged to consult their tax advisors regarding the potential application to the notes of the contingent payment debt instrument rules and the consequences thereof. The remainder of this discussion assumes that the notes are not treated as contingent payment debt instruments.
Sale or Other Taxable Disposition of the Notes
A U.S. Holder will recognize gain or loss on the sale, exchange, redemption (including a partial redemption), retirement or other taxable disposition of a note equal to the difference between the sum of the cash and the fair market value of any property received in exchange therefor (less a portion allocable to any accrued and unpaid stated interest, which generally will be taxable as ordinary income if not previously included in such holders income) and the U.S. Holders adjusted tax basis in the note. A U.S. Holders adjusted tax basis in a note (or a portion thereof) generally will be the U.S. Holders cost therefor decreased by any payment on the note other than a payment of qualified stated interest. This gain or loss will generally constitute capital gain or loss. In the case of a non-corporate U.S. Holder, including an individual, if the note has been held for more than one year, such capital gain may be subject to reduced federal income tax rates. The deductibility of capital losses is subject to certain limitations.
Medicare Tax
Certain individuals, trusts and estates are subject to a Medicare tax of 3.8% on the lesser of (i) net investment income, or (ii) the excess of modified adjusted gross income over a threshold amount. Net investment income generally includes interest income and net gains from the disposition of notes, unless such interest payments or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). U.S. Holders are encouraged to consult with their tax advisors regarding the possible implications of the Medicare tax on their ownership and disposition of notes in light of their individual circumstances.
Information Reporting and Backup Withholding
A U.S. Holder may be subject to information reporting and backup withholding when such holder receives interest and principal payments on the notes or proceeds upon the sale or other disposition of such notes (including a redemption or retirement of the notes). Certain holders (including, among others, corporations and certain tax-exempt organizations) generally are not subject to information reporting or backup withholding. A U.S. Holder will be subject to backup withholding if such holder is not otherwise exempt and:
| such holder fails to furnish its taxpayer identification number, or TIN, which, for an individual is ordinarily his or her social security number; |
| the IRS notifies the payor that such holder furnished an incorrect TIN; |
| in the case of interest payments such holder is notified by the IRS of a failure to properly report payments of interest or dividends; |
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| in the case of interest payments, such holder fails to certify, under penalties of perjury, that such holder has furnished a correct TIN and that the IRS has not notified such holder that it is subject to backup withholding; or |
| such holder does not otherwise establish an exemption from backup withholding. |
A U.S. Holder should consult its tax advisor regarding its qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. Holder will be allowed as a credit against the holders U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.
Non-U.S. Holders
For purposes of this discussion, Non-U.S. Holder means a beneficial owner of the notes that is not a U.S. Holder. Special rules may apply to holders that are partnerships or entities treated as partnerships for U.S. federal income tax purposes and to Non-U.S. Holders that are subject to special treatment under the Code, including controlled foreign corporations, passive foreign investment companies, certain U.S. expatriates, and foreign persons eligible for benefits under an applicable income tax treaty with the United States. Such Non-U.S. Holders should consult their tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them, including any reporting requirements.
Interest
Interest paid to a Non-U.S. Holder on the notes will not be subject to U.S. federal withholding tax provided that:
| such holder does not directly or indirectly, actually or constructively own a 10% or greater interest in our capital or profits; |
| such holder is not a controlled foreign corporation with respect to which we are a related person within the meaning of Section 864(d)(4) of the Code; |
| such holder is not a bank that received such interest on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and |
(i) | the Non-U.S. Holder certifies in a statement provided to us or our paying agent, under penalties of perjury, that it is not a U.S. person within the meaning of the Code and provides its name and address, |
(ii) | a securities clearing organization, bank or other financial institution that holds customers securities in the ordinary course of its trade or business and holds the notes on behalf of the Non-U.S. Holder certifies to us or our paying agent under penalties of perjury that it, or the financial institution between it and the Non-U.S. Holder, has received from the Non-U.S. Holder a statement, under penalties of perjury, that such holder is not a U.S. person and provides us or our paying agent with a copy of such statement or |
(iii) | the Non-U.S. Holder holds its notes directly through a qualified intermediary and certain conditions are satisfied. |
A Non-U.S. Holder generally will also be exempt from withholding tax on interest if such amount is effectively connected with such holders conduct of a U.S. trade or business (and, if an income tax treaty applies, is attributable to a U.S. permanent establishment) (as discussed below under Non-U.S. Holders U.S. Trade or Business) and the holder provides us with a properly executed IRS Form W-8ECI (or applicable successor form).
If a Non-U.S. Holder does not satisfy the requirements above, interest paid to such Non-U.S. Holder generally will be subject to a 30% U.S. federal withholding tax. Such rate may be reduced or eliminated under a
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tax treaty between the United States and the Non-U.S. Holders country of residence. To claim a reduction or exemption under a tax treaty, a Non-U.S. Holder must generally complete an applicable IRS Form W-8 (i.e., IRS Form W-8BEN) (or applicable successor form) and claim the reduction or exemption on the form.
Additional Amounts
Upon the occurrence of certain events, we may be required to make certain payments in excess of stated interest and the principal amount of the notes. Such payments may be treated as interest or as other income subject to U.S. federal withholding tax. A Non-U.S. Holder that is subject to U.S. federal withholding tax should consult its tax advisors as to whether it can obtain a refund for all or a portion of any amounts withheld.
Sale or Other Taxable Disposition of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal income tax or withholding tax on gain recognized on the sale, exchange, redemption, retirement or other disposition of a note so long as (1) the gain is not effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (or, if a tax treaty applies, the gain is not attributable to a U.S. permanent establishment maintained by such Non-U.S. Holder) and (2) in the case of a Non-U.S. Holder who is an individual, such Non-U.S. Holder is not present in the United States for 183 days or more in the taxable year of disposition or certain other requirements are not met. A Non-U.S. Holder who is an individual and does not meet this exemption should consult his or her tax advisor regarding the potential liability for U.S. federal income tax on such holders gain realized on the sale, exchange, redemption, retirement or other disposition of a note.
U.S. Trade or Business
If interest paid on a note or gain from a disposition of a note is effectively connected with a Non-U.S. Holders conduct of a U.S. trade or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains a U.S. permanent establishment to which such amounts are generally attributable), the Non-U.S. Holder generally will be subject to U.S. federal income tax on the interest or gain on a net basis in the same manner as if it were a U.S. Holder. A Non-U.S. Holder that is a non-U.S. corporation may be subject to an additional branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to certain adjustments, unless it qualifies for a lower rate under an applicable income tax treaty. For this purpose, interest on a note or gain from a disposition of a note will be included in effectively connected earnings and profits if the interest or gain is effectively connected with the conduct by the foreign corporation of a trade or business in the United States.
Backup Withholding and Information Reporting
Backup withholding generally will not apply to payments of principal or interest made by us or our paying agents, in their capacities as such, to a Non-U.S. Holder of a note if the holder certifies as to its non-U.S. status in the manner described above under Non-U.S. Holders Interest. However, information reporting generally will still apply with respect to payments of interest.
Payments of the proceeds from a disposition by a Non-U.S. Holder of a note made to or through a foreign office of a broker will not be subject to information reporting or backup withholding, except that information reporting (but generally not backup withholding) may apply to those payments, if the broker has certain enumerated connections with the U.S., provided, however, that such information reporting will not apply if the broker has documentary evidence in its records that the Non-U.S. Holder is a non-U.S. person and certain other conditions are met, or the Non-U.S. Holder otherwise establishes an exemption from information reporting.
Payment of the proceeds from a disposition by a Non-U.S. Holder of a note made to or through the U.S. office of a broker generally is subject to information reporting and backup withholding unless the holder or
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beneficial owner certifies as to its non-U.S. status in the manner described above under Non-U.S. Holders Interest or otherwise establishes an exemption from information reporting and backup withholding.
A Non-U.S. Holder should consult its tax advisor regarding the application of withholding and backup withholding in its particular circumstance and the availability of and procedure for obtaining an exemption from withholding and backup withholding under current Treasury Regulations. In this regard, the current Treasury Regulations provide that a certification may not be relied on if we or our agent (or other party) knows or has reason to know that the certification may be false. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a credit against the holders U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.
FATCA
The Foreign Account Tax Compliance Act, or FATCA, generally imposes a 30% U.S. withholding tax on withholdable payments, which consist of (i) U.S.-source dividends, interest, rents and other fixed or determinable annual or periodical income paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2016 to (a) foreign financial institutions unless (x) they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners or (y) they comply with the terms of any FATCA intergovernmental agreement executed between the authorities in their jurisdiction and the United States and (b) non-financial foreign entities (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct and indirect U.S. owners. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.
Under a grandfathering rule, FATCA does not apply to any payments made under an obligation that is outstanding on July 1, 2014 (provided such obligation is not materially modified subsequent to such date) and any gross proceeds from the disposition of such obligation. Accordingly, the notes should be grandfathered obligations for FATCA purposes (provided they are not materially modified after July 1, 2014), such that payments on these notes should not be subject to FATCA. Prospective investors are encouraged to consult with their tax advisors regarding the possible implications of FATCA on an investment in notes in light of such holders individual circumstances.
General Tax Considerations Relating to Our Structure
The Operating Partnership is organized as a Delaware limited partnership. The Operating Partnership is treated as a partnership for U.S. federal income tax purposes and not as an association taxable as a corporation. As a partnership, the Operating Partnership is not subject to tax at the entity level. Instead, each of the Operating Partnerships partners includes such partners allocable share of the Operating Partnerships items of taxable income, gains, losses, deductions and credits in determining such partners taxable income, whether or not the Operating Partnership makes distributions to such partner.
Section 7704 of the Code provides that a publicly traded partnership shall be treated as a corporation for U.S. federal income tax purposes unless such partnership has met and continues to meet certain requirements regarding the types of gross income received by such partnership. Section 7704 of the Code defines publicly traded partnership as any partnership if interests in such partnership are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. We have conducted our affairs and activities, and intend to continue to conduct our affairs and activities, in a manner to ensure that the Operating Partnership will not be treated as a publicly traded partnership. If the Operating Partnership were treated as a publicly traded partnership and thus is taxable as a corporation, the Operating Partnership would pay U.S. federal income tax at corporate rates on its net income, and distributions to its partners in general would be dividends to the extent of the Operating Partnerships earnings and profits, with distributions in excess thereof being treated first as a return of capital and thereafter as capital gain.
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In the opinion of Baker & McKenzie LLP, the Operating Partnership has been properly treated as a partnership for U.S. federal income tax purposes, and not as a publicly traded partnership within the meaning of Section 7704 of the Code, commencing with its taxable year ended December 31, 2004. However, we have not sought, and will not seek, a ruling from the IRS that the Operating Partnership is treated as a partnership for U.S. federal income tax purposes.
Under Section 704(b) of the Code, a partnerships tax allocations generally will be respected for U.S. federal income tax purposes if they have substantial economic effect or they are in accordance with the partners interests in the partnership. If a partnerships allocations do not comply with Section 704(b) of the Code, the IRS may reallocate partnership tax items in accordance with the interests of the partners in the partnership. We believe that the Operating Partnerships allocations should be respected for U.S. federal income tax purposes.
General Considerations Regarding Sotherlys REIT Status
The Operating Partnerships sole general partner is Sotherly. Sotherly was incorporated as a Maryland corporation in August 2004, and elected to be taxable as a REIT commencing with its taxable year ending December 31, 2004. Sotherly conducts all of its activities and holds all of its assets through the Operating Partnership. As a REIT, Sotherly receives a dividends paid deduction for amounts that it distributes to its stockholders. Accordingly, Sotherly generally is not subject to U.S. federal income tax on that portion of its net income that it distributes to stockholders. This treatment substantially eliminates the double taxation (at the corporate and stockholder levels) that generally results from investment in a non-REIT C corporation.
The Code provisions governing the federal income tax treatment of REITs and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, the Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof. If a partnership, including any entity that is treated as a partnership for federal income tax purposes, holds Sotherlys common stock, the federal income tax treatment of the partner in the partnership will generally depend on the status of the partner and the activities of the partnership.
REIT Qualification
Sotherly elected to be taxable as a REIT commencing with its taxable year ending December 31, 2004. This section of the prospectus discusses the laws governing the tax treatment of a REIT and its stockholders, which are highly technical and complex. Sotherly has conducted its business operations each taxable year since its formation in 2004 in conformity with the requirements for REIT qualification, and Sotherly intends to operate its business operations in conformity with these requirements so as to maintain its status as a REIT. In the opinion of Baker & McKenzie LLP, Sotherly has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT for its taxable years ended December 31, 2004 through December 31, 2012, and Sotherlys organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2013 and thereafter. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in Sotherlys circumstances, however, no assurance can be given that Sotherly will be able to maintain its REIT status for any particular year.
Maintenance of REIT status depends on Sotherlys ability to meet various qualification requirements imposed upon REITs by the Code, on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership,. Sotherlys ability to maintain REIT status also depends on its satisfaction of certain asset tests, some of which depend upon the fair market values of assets directly or indirectly owned by Sotherly. Precise values for such assets may not be readily determinable or available. While Sotherly intends to continue to operate in conformity with the REIT requirements and in a manner that will allow it to maintain its REIT status, no assurance can be given that the actual results of Sotherlys operations for any taxable year will allow it to satisfy such requirements or that Sotherly will be able to maintain its status as a REIT.
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Taxation of Sotherly
As a REIT, Sotherly generally is not subject to U.S. federal income tax on that portion of its net income that it distributes to stockholders. This treatment substantially eliminates the double taxation (at the corporate and stockholder levels) that generally results from investment in a non-REIT C corporation. However, Sotherly is subject to U.S. federal tax as follows:
1. Sotherly is subject to tax at regular corporate rates on any undistributed adjusted REIT taxable income, including undistributed net capital gain (adjusted REIT taxable income is the taxable income of a REIT subject to specified adjustments, including a deduction for dividends paid).
2. Under certain circumstances, Sotherly may be subject to the alternative minimum tax on its items of tax preference.
3. If Sotherly has (a) net income from the sale or other disposition of foreclosure property (including foreign currency gain that is attributable to otherwise permitted income from foreclosure property) which is held primarily for sale to customers in the ordinary course of business or (b) other nonqualifying income from foreclosure property, Sotherly is subject to tax at the highest corporate rate on such income. Foreclosure property generally is property acquired on foreclosure or otherwise on default on a loan secured by such real property or a lease of such property.
4. If Sotherly has net income from prohibited transactions, which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, generally other than foreclosure property and property involuntarily converted, such income is subject to a 100.0% penalty tax.
5. If Sotherly fails to satisfy the 75.0% gross income test or the 95.0% gross income test (as discussed below), but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly is subject to a 100.0% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which it fails the 75.0% gross income test or the 95.0% gross income test multiplied by (b) a fraction intended to reflect Sotherlys profitability.
6. If Sotherly fails to satisfy the asset test (as discussed below) but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly may be subject to a tax that would be the greater of (a) $50,000; or (b) an amount determined by multiplying the highest rate of tax for corporations by the net income generated by the assets for the period beginning on the first date of the failure and ending on the day Sotherly disposes of the assets (or otherwise satisfies the requirements for maintaining REIT qualification).
7. If Sotherly fails to satisfy one or more requirements for REIT qualification, other than the 95.0% and 75.0% gross income tests and other than the asset test, but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly may be subject to a $50,000 penalty for each failure.
8. If Sotherly fails to distribute during each calendar year at least the sum of (1) 85.0% of its ordinary income for such year, (2) 95.0% of its capital gain net income for such year, and (3) any undistributed taxable income from prior periods, Sotherly is subject to a nondeductible 4.0% excise tax on the excess of such required distribution over the amounts distributed.
9. If Sotherly acquires any appreciated assets from a C corporation (i.e., a corporation generally subject to full corporate level tax) in a transaction in which the basis of the assets in its hands is determined by reference to the basis of the assets (or any other property) in the hands of the C corporation, Sotherly may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if it recognizes gain on a disposition of such assets during the 10-year period following their acquisition from the non-REIT C corporation. This tax is referred to as the Built-in Gains Tax. The Built-in Gains Tax would not apply if the asset acquired in such manner was exchanged for a replacement property in a qualifying exchange under Code Section 1031. However, a sale of the replacement property within that same 10-year period would be subject to the Built-in Gains Tax.
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10. Sotherly may be subject to a 100.0% excise tax if its dealings with its taxable REIT subsidiaries, defined below, are not at arms length.
11. Any earnings of a taxable REIT subsidiary will effectively be subject to a corporate-level tax.
12. Sotherly may elect to retain and pay federal income tax on its net long-term capital gain, in which case a stockholder would include its proportionate share of Sotherlys undistributed long-term capital gain in its income, would be allowed a credit for its proportionate share of the tax deemed to have paid, and an adjustment would be made to increase the stockholders tax basin in its Sotherly common stock.
Requirements for REIT Qualification
Organizational Requirements
An entity must satisfy the following requirements in order to qualify as a REIT under the Code: (1) it must be a corporation, trust or association that would be taxable as a domestic corporation but for the REIT provisions of the Code, (2) it must elect to be taxed as a REIT and satisfy relevant filing and other administrative requirements, (3) it must be managed by one or more trustees or directors, (4) its beneficial ownership must be evidenced by transferable shares or by transferable certificates of beneficial interest, (5) it must not be a financial institution or an insurance company subject to special provisions of the federal income tax laws, (6) it must use a calendar year for U.S. federal income tax purposes, (7) it must have at least 100 beneficial owners for at least 335 days of each taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months and (8) it must not be closely held (i.e., at any time during the last half of any taxable year, more than 50.0% in value of its outstanding capital stock must not be owned, directly or indirectly through the application of certain attribution rules, by five or fewer individuals, as such term is defined in the Code to include certain entities).
To monitor compliance with the stock ownership requirements, a REIT is generally required to maintain records regarding the actual ownership of its common stock. A REIT must demand written statements each year from the record holders of 5.0% or more of its common stock (or such lesser percentage as is required by applicable Treasury Regulations) pursuant to which the record holders must disclose the actual owners of the stock (i.e., the persons required to include in gross income the dividends paid by the REIT). A REIT must maintain a list of those persons failing or refusing to comply with this demand as part of its records. A REIT could be subject to monetary penalties if it fails to comply with these record-keeping requirements. A stockholder that fails or refuses to comply with the demand is required by the Treasury Regulations to submit a statement with its tax return disclosing such stockholders actual ownership of the REITs common stock and other information. If in any taxable year a REIT did not know, and with the exercise of reasonable diligence could not have known, that it failed to meet the requirement that it cannot be closely held, the REIT will be treated as having met such requirement for such taxable year.
Sotherly has complied with the organizational and record-keeping requirements described above for each taxable year since its formation, and it intends to continue to comply with these requirements in order to maintain its status as a REIT.
Asset Tests
At the close of each quarter of its taxable year, Sotherly generally must satisfy three tests relating to the nature of its assets. First, at least 75.0% of the value of Sotherlys total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items and government securities (as well as certain temporary investments in stock or debt instruments purchased with the proceeds of new capital raised by us). Second, although the remaining 25.0% of its assets generally may be invested without restriction, securities in this class generally may not exceed (1) 5.0% of the value of its total assets as to any one nongovernment issuer, (2) 10.0% of the outstanding voting securities of any one issuer, or (3) 10.0% of the value
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of the outstanding securities of any one issuer. Third, not more than 25.0% of the total value of its assets can be represented by securities of one or more taxable REIT subsidiaries. Securities for purposes of the above 5.0% and 10.0% asset tests may include debt securities, including debt issued by a partnership.
Debt of an issuer will not count as a security for purposes of the 10.0% value test if the security qualifies for any of a number of applicable exceptions, for example, as straight debt, as specially defined for this purpose to include certain debt issued by partnerships, and to include certain other debt that is not considered to be abusive and that presents minimal opportunity to share in the business profits of the issuer. Solely for purposes of the 10.0% value test, a REITs interest in the assets of a partnership will be based upon the REITs proportionate interest in any securities issued by the partnership (including, for this purpose, the REITs interest as a partner in the partnership and any debt securities issued by the partnership, but excluding any securities qualifying for the straight debt or other exceptions described above), valuing any debt instrument at its adjusted issue price.
After initially meeting the asset tests at the close of any quarter, Sotherly will not lose its qualification as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If Sotherly fails to satisfy the asset tests because it acquires securities during a quarter, Sotherly can cure this failure by disposing of the non-qualifying assets within 30 days after the close of that quarter. If Sotherly fails the 5.0% asset test or the 10.0% asset test at the end of any quarter, and such failure is not cured within 30 days thereafter, it may dispose of sufficient assets or otherwise satisfy the requirements of such asset tests within six months after the last day of the quarter in which its identification of the failure to satisfy those asset tests occurred to cure the violation, provided that the non-permitted assets do not exceed the lesser of 1.0% of the total value of its assets at the end of the relevant quarter or $10,000,000. If Sotherly fails any of the other asset tests, or its failure of the 5.0% and 10.0% asset tests is in excess of this amount, as long as the failure was due to reasonable cause and not willful neglect and, following its identification of the failure, filed a schedule in accordance with the Treasury Regulations describing each asset that caused the failure, Sotherly is permitted to avoid disqualification as a REIT, after the 30-day cure period, by taking steps to satisfy the requirements of the applicable asset test within six months after the last day of the quarter in which its identification of the failure to satisfy the REIT asset test occurred, including the disposition of sufficient assets to meet the asset tests and paying a tax equal to the greater of (1) $50,000 or (2) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate (currently 35.0%).
Sotherly has complied with the foregoing REIT asset tests each tax year since its election to be taxable as a REIT, and it intends to monitor compliance with such tests on an ongoing basis. We can provide no assurance, however, that the IRS will agree with Sotherlys determinations in this regard. To the extent that Sotherly fails one or more of the asset tests and does not fall within any of the safe harbors described above, Sotherly may fail to maintain its REIT status.
Gross Income Tests
To maintain its qualification as a REIT, Sotherly must satisfy two gross income tests each year. First, at least 75.0% of its gross income for each taxable year, excluding gross income from prohibited transactions, must be derived from investments relating to real property or mortgages on real property, including rents from real property, dividends received from other REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as qualified temporary investment income, (i.e., income that is attributable to temporary investments in stock and debt securities of new capital proceeds from stock issuances and public debt offerings and that is received in the one-year period beginning on the date new capital is received). Second, at least 95.0% of Sotherlys gross income in each taxable year, excluding gross income from prohibited transactions, must be derived from sources of income that qualify under the 75.0% gross income test and other dividends, interest, gain from the sale or disposition of stock or securities, and certain other categories of income.
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Rents will qualify as rents from real property in satisfying the gross income tests only if several conditions are met, including the following:
| The rent must not be based in whole or in part on the income or profits of any person. An amount will not be disqualified, however, solely by being based on a fixed percentage or percentages of receipts or sales or, if it is based on the net income or profits of a lessee which derives substantially all of its income with respect to such property from subleasing of substantially all of such property, to the extent that the rents paid by the sublessees would qualify as rents from real property, if earned directly by Sotherly. |
| If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the total rent that is attributable to the personal property will not qualify as rents from real property if it exceeds 15.0% of the total rent received under the lease. |
| For rents received to qualify as rents from real property, Sotherly generally must not operate or manage the property or furnish or render certain services to the lessees of such property, other than through an independent contractor, as defined in the Code, who is adequately compensated and from which Sotherly derives or receives no income or through a taxable REIT subsidiary. Sotherly is permitted, however, to perform services that are usually or customarily rendered in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. Additionally, Sotherly may directly or indirectly provide non-customary services to lessees of its properties without disqualifying all of the rents from the property if the gross income from such services does not exceed 1.0% of the total gross income from the property. In such a case, only the amounts for non-customary services are not treated as rents from real property, and the provision of the services does not disqualify all of the rents from treatment as rents from real property. For purposes of this test, gross income received from such non-customary services is deemed to be at least 150.0% of the direct cost of providing the services. Sotherly is permitted to provide services to lessees through a taxable REIT subsidiary without disqualifying the rental income received from lessees as rents from real property. |
| Rental income will not qualify as rents from real property if Sotherly directly or indirectly (through application of certain constructive ownership rules) owns (i) in the case of any lessee which is a corporation, stock possessing 10.0% or more of the total combined voting power of all classes of stock entitled to vote, or 10.0% or more of the total value of shares of all classes of stock, of such lessee or (ii) in the case of any lessee which is not a corporation, an interest of 10.0% or more in the assets or net profits of such lessee. Rental payments from a taxable REIT subsidiary, however, will qualify as rents from real property even if Sotherly owns more than 10.0% of the total value or combined voting power of the taxable REIT subsidiary if (i) at least 90.0% of the property is leased to unrelated lessees and the rent paid by the taxable REIT subsidiary is substantially comparable to the rent paid by the unrelated lessees for comparable space or (ii) the property is a qualified lodging facility or a qualified health care facility and certain additional requirements are satisfied. |
Sotherly has complied with the foregoing REIT gross income tests each taxable year since its election to be taxable as a REIT, and the bulk of its income has primarily consisted of rents from real property. None of the rents under its leases has been based on the income or profits of any person, and none of the rents that Sotherly has received and which are attributable to personal property has exceeded 15.0% of the total rents received under any lease. Furthermore, all or most of the services performed with respect to Sotherlys properties have been services that are usually or customarily rendered in connection with the rental of real property and not rendered to the occupant(s) of such property. Sotherly intends to monitor compliance with the REIT gross income tests on an ongoing basis but we can provide no assurances that the actual future sources of Sotherlys income will allow it to continue to satisfy these tests.
Even if Sotherly were to fail to satisfy one or both of the 75.0% gross income test and the 95.0% gross income test for any taxable year, it may still qualify as a REIT for that year if it is eligible for relief under
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specific provisions of the Code. These relief provisions generally will be available if (1) Sotherlys failure to meet these tests was due to reasonable cause and not due to willful neglect; (2) Sotherly attaches a schedule of its income sources to its federal income tax return; and (3) any incorrect information on the schedule is not due to fraud with intent to evade tax. It is not possible, however, to state whether, in all circumstances, Sotherly would be entitled to the benefit of these relief provisions. If these relief provisions are inapplicable, Sotherly will not qualify as a REIT. Even where these relief provisions apply, a tax would be imposed upon the profit attributable to the amount by which Sotherly fails to satisfy the particular gross income test.
Annual Distribution Requirements
To qualify as a REIT, Sotherly is required to distribute to its stockholders each year in an amount equal to at least (1) the sum of (a) 90.0% of its REIT taxable income (computed without regard to the dividends paid deduction and its net capital gain) and (b) 90.0% of the net income (after tax), if any, from foreclosure property, minus (2) the sum of certain items of non-cash income over 5.0% of its REIT taxable income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before Sotherly timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration, provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable to stockholders in the year in which paid, even though the distributions relate to Sotherlys prior taxable year for purposes of the 90.0% distribution requirement.
To the extent that Sotherly does not distribute all of its REIT taxable income, Sotherly will be subject to tax on the undistributed amount at regular corporate tax rates, as the case may be. However, Sotherly can elect to pass through any of the taxes paid on its undistributed net capital gain income to its stockholders on a pro rata basis. Furthermore, if Sotherly should fail to distribute during each calendar year at least the sum of (1) 85.0% of its ordinary income for such year, (2) 95.0% of its capital gain net income for such year, and (3) any undistributed taxable income from prior periods, Sotherly would be subject to a non-deductible 4.0% excise tax on the excess of such required distribution over the sum of the amounts distributed (including any deemed distribution of net capital gain). For these and other purposes, dividends that Sotherly declares in October, November or December of one taxable year and payable to a stockholder of record on a specific date in any such month shall be treated as both paid by and received by the stockholder during such taxable year, provided that the dividend is actually paid by Sotherly by January 31 of the following taxable year.
If Sotherly fails to meet the distribution requirements as a result of an adjustment to its tax return by the IRS or it determines that it understated income on a filed return, Sotherly may be able to retroactively cure the failure by paying a deficiency dividend (plus applicable penalties and interest) within a specified period.
Commencing with its taxable year ended December 31, 2004, Sotherly has satisfied the annual distribution requirements described above. It is possible, however, that in the future Sotherly may not have sufficient cash or other liquid assets to meet the distribution requirements, due to timing differences between the actual receipt of income and actual payment of expenses on the one hand, and the inclusion of such income and deduction of such expenses in computing its REIT taxable income on the other hand. Further, as described below, it is possible that, from time to time, Sotherly may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds its allocable share of cash attributable to that sale. To avoid any problem with the distribution requirements, Sotherly will closely monitor the relationship between its REIT taxable income and cash flow and, if necessary and feasible, will borrow funds or issue stock to satisfy the distribution requirement.
Qualified REIT Subsidiaries
For purposes of the requirements described herein, any corporation Sotherly owns that is a qualified REIT subsidiary will not be treated as a corporation separate from Sotherly and all of its assets, liabilities and items of income, deduction and credit will be treated as Sotherlys assets, liabilities and items of income, deduction and credit. A qualified REIT subsidiary is a corporation, other than a taxable REIT subsidiary, all of the capital stock of which is owned by a REIT.
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Ownership of Partnership Interests
A REIT that is a partner in an entity treated as a partnership for federal tax purposes is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the requirements described herein. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of the REIT requirements, including the asset and income tests described below. Accordingly, Sotherlys proportionate share of the assets, liabilities and items of income of the Operating Partnership and of any other partnership, joint venture, limited liability company or other entity treated as a partnership for federal tax purposes in which it directly or indirectly owns an interest, will be treated as its assets, liabilities and items of income.
Taxable REIT Subsidiaries
A REIT is permitted to own up to 100.0% of the stock of one or more taxable REIT subsidiaries. The subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. In addition, if a taxable REIT subsidiary owns, directly or indirectly, securities representing 35.0% or more of the vote or value of a subsidiary corporation, that subsidiary will automatically be treated as a taxable REIT subsidiary of the parent REIT. A taxable REIT subsidiary is subject to federal, state and local income tax (where applicable), as a regular C corporation.
Generally, a taxable REIT subsidiary may earn income that would not be qualifying income under the REIT income tests if earned directly by the parent REIT. Several provisions in the Code regarding the arrangements between a REIT and a taxable REIT subsidiary ensure, however, that the taxable REIT subsidiary will be subject to an appropriate level of federal income tax. For example, the Code limits the ability of a taxable REIT subsidiary to deduct interest payments made to its parent REIT in excess of a certain amount. In addition, the Code imposes a 100.0% tax on transactions between a taxable REIT subsidiary and its parent REIT or the REITs tenants that are not conducted on an arms-length basis. Moreover, the value of any securities held by a REIT in all of its taxable REIT subsidiaries cannot be worth more than 25.0% of the REITs total asset value.
We cannot provide any assurance that any taxable REIT subsidiaries that Sotherly currently owns or will form in the future will not be limited in their ability to deduct interest payments (if any) made to Sotherly, or that the IRS would not seek to impose a 100.0% tax on Sotherly to the extent any taxable REIT subsidiary is undercompensated for any services it may perform for its tenants or the tenants of partnerships in which Sotherly owns an interest, or on a portion of the payments received by it from, or expenses deducted by, its taxable REIT subsidiaries.
Prohibited Transaction Rules
Any gain that a REIT recognizes from the sale of property held as inventory or otherwise held primarily for sale to customers in the ordinary course of business (excluding sales of foreclosure property and sales conducted by taxable REIT subsidiaries) will be treated as income from a prohibited transaction that is subject to a 100.0% penalty tax. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of business is a question of fact that depends on all of the facts and circumstances of the particular transaction. Under a statutory safe harbor, however, Sotherly will not be subject to the 100.0% tax with respect to a sale of property if (1) the property has been held for at least two years for the production of rental income prior to the sale, (2) capitalized expenditures on the property in the two years preceding the sale are less than 30.0% of the net selling price of the property and (3) (a) Sotherly either has seven or fewer sales of property (excluding certain property obtained through foreclosure and certain involuntary conversions) in the year of sale or (b) the aggregate tax basis of property sold during the year of sale is 10.0% or less of the aggregate tax basis of all of its assets as of the beginning of the taxable year, or (c) the aggregate fair market value of property sold during the year of sale is 10.0% or less of the aggregate fair market value of all of its assets as of the beginning of the taxable year, in each case excluding sales of foreclosure property and involuntary conversions. In addition, in order for the 10.0% safe harbor to apply, substantially all of the marketing and development expenditures with
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respect to the property sold must be made through an independent contractor from whom Sotherly derives no income. Although Sotherly will attempt to ensure that none of its sales of property will constitute a prohibited transaction, it cannot provide assurances that none of such sales will be so treated. In the event that the IRS were to successfully contend that such sales are prohibited transactions Sotherly would be required to pay the 100.0% penalty tax on any gains resulting from any such sales.
Failure to Qualify
If Sotherly fails to satisfy one or more requirements for REIT qualification, other than the gross income tests and asset tests, it may retain its REIT qualification if the failures are due to reasonable cause and not willful neglect, and if Sotherly pays a penalty of $50,000 for each such failure.
If Sotherly fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, it will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to its stockholders in any year in which Sotherly fails to qualify will not be deductible, nor will they be required to be made. Unless entitled to relief under specific statutory provisions, Sotherly will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether Sotherly would be entitled to such statutory relief.
Foreclosure Property
Foreclosure property is real property (including interests in real property) and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was made, entered into or acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes an election to treat the property as foreclosure property. Treatment of property as foreclosure property generally continues until the end of the third taxable year following the year during which the REIT acquires or takes possession of the property, but this period ends prematurely if, before the end of the third year, (1) the REIT makes a lease of the property under which it will receive rents not qualified for purposes of the 75.0% gross income test, (2) the REIT begins construction on the property (other than by continuing a project at least 10.0 % completed when default became imminent), or (3) the REIT uses the property in a trade or business on a day more than 90 days after it acquired the property. The IRS may, however, extend the period if the REIT establishes to the IRSs satisfaction that an extension is necessary for the orderly liquidation of the REITs interests in such property, but no such extension may prolong the period beyond the sixth taxable year following the year during which the REIT acquires or takes possession of the property.
REITs generally are subject to tax at the maximum corporate rate (currently 35.0%) on any net income from foreclosure property. Net income from foreclosure property is the excess of (1) gain on sales and exchanges of foreclosure property that the REIT holds for sale to customers in the ordinary course of a trade or business and (2) gross income from foreclosure property other than rents from real property, interest on real property mortgages, refunds of real property taxes and gains on dispositions of real property not held for sale to customers in the ordinary course of business, over deductions directly connected with the production of the above income. Net income from foreclosure property qualifies under both the 75.0% and the 95.0% gross income tests described above.
Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100.0% tax on gains from prohibited transactions, even if the property is held primarily for sale to customers in the ordinary course of a trade or business.
If there were a default on any leases of the properties held by its operating partnership such that Sotherly acquires possession of the subject property, and Sotherly elects to treat such property as foreclosure property,
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Sotherlys net income from any foreclosure property should qualify under both the 75.0% and the 95.0% gross income tests. Sotherly will be subject to federal income tax on such net income, however.
Distressed Debt Acquisitions
The REIT rules provide that in order to determine whether interest income on a mortgage loan is treated as qualifying income for purposes of the 75.0% gross income test when the loan is secured by both real property and other property, the loan value of the real property and the amount of the loan must be calculated. The loan value of the real property is the fair market value of the real property, determined as of the date on which the commitment by a REIT to purchase the loan becomes binding on the REIT. The amount of the loan is the highest principal amount of the loan outstanding during the taxable year. Accordingly, if the loan value of the real property is equal to or exceeds the amount of the loan, 100.0% of the interest income on the loan will be attributed to the real property, even though a significant portion of any security for the loan may be property other than real property. If the amount of the loan exceeds the loan value of the real property, the interest income apportioned to the real property is the amount equal to the interest income multiplied by a fraction, the numerator of which is the loan value of the real property and the denominator of which is the amount of the loan. The interest income apportioned to the other property securing the loan is the amount equal to the excess of the total interest income over the interest income apportioned to the real property.
If a REIT acquires distressed mortgage debt at a discount, the use of the highest principal amount of the debt as the amount of the loan can cause the REIT to recognize nonqualifying income and hold a nonqualifying asset, even though the price paid by the REIT for the debt may be less than the fair market value of the real property securing the debt. The IRS has been asked to issue guidance on this matter and to clarify that the amount of the loan with respect to the acquisition by a REIT of distressed mortgage debt should be the REITs highest adjusted tax basis in the debt during the year instead of the highest principal amount of the debt. As of the date of this offering, any clarifying guidance has yet to be issued.
Sotherly may acquire distressed debt instruments that are collateralized by under-performing hotel properties. If such debt is also secured by other property, Sotherly will be required to apportion the interest income on such debt as described above. It is possible that as a result of such apportionment, part of the interest income may be treated as non-qualifying income for purposes of the 75.0% gross income test, and a portion of the hotel properties securing the debt may be treated as a non-qualifying asset. This in turn may make it difficult for Sotherly to continue to comply with the REIT qualification requirements.
Hedging Transactions
Sotherly may enter into hedging transactions with respect to one or more of its assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Any income from a hedging transaction to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred by Sotherly to acquire or own real estate assets, which is clearly identified as such before the close of the day on which it was acquired, originated or entered into, including gain from the disposition of such a transaction, will be disregarded for purposes of the 75.0% and 95.0% gross income tests. There are also rules for disregarding income for purposes of the 75.0% and 95.0% gross income tests with respect to hedges of certain foreign currency risks. To the extent Sotherly enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both the 75.0% and 95.0% gross income tests. Sotherly intends to structure any hedging transactions in a manner that does not jeopardize its ability to qualify as a REIT.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes forward-looking statements and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.
To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.
As of June 30, 2013, we had approximately $98.3 million of fixed-rate debt and approximately $52.7 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.66%. 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 entity that is the other member of the Crowne Plaza Hollywood Beach Resort joint venture, the Carlyle Affiliate Lender, remain at approximately $52.7 million, the balance at June 30, 2013, the impact on our annual interest incurred and cash flows of a one percent increase in 30 day LIBOR would be approximately $448,000.
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.
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Sandler ONeill & Partners, L.P. is acting as representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated , 2013, each underwriter named below has severally agreed to purchase from us, and we have agreed to sell to that underwriter, the principal amount of notes set forth opposite that underwriters name at the public offering price less the underwriting discount set forth on the cover page of this prospectus:
Underwriters |
Principal Amount of Notes |
|||
Sandler ONeill & Partners, L.P. |
$ | |||
Total |
$ | |||
|
|
The underwriting agreement provides that the obligations of the underwriters to purchase the notes included in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The underwriters are obligated to purchase all of the notes if they purchase any of the notes. The underwriters obligations to purchase the notes from us are several and not joint.
The underwriters propose to offer the notes directly to the public initially at the public offering price set forth on the cover page of this prospectus, plus accrued interest, if any, from , 2013 to the date of delivery of the notes, and to certain dealers at the public offering price minus a concession not to exceed % of the principal amount of the notes. The underwriters may allow, and dealers may reallow, a concession not to exceed % of the principal amount of the notes on sales to other dealers. After the initial offering of the notes to the public, the public offering price and other selling terms may be changed by the underwriters.
The notes consist of a new issue of securities with no established trading market. We have applied to list the notes on the NASDAQ® Global Market. If the listing is approved, we expect trading of the notes to begin within the 30-day period after the initial delivery of the notes. Even if the notes are listed, there may be little or no secondary market for the notes. The representative of the underwriters has advised us that, following completion of the offering of the notes, one or more underwriters intend to make a market in the notes after the initial offering, although they are under no obligation to do so. The underwriters may discontinue any market making activities at any time without notice. We can give no assurance as to development, maintenance or liquidity of any trading market for the notes.
The following table shows the total underwriting discounts that we will pay to the underwriters in connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option:
Underwriters |
Per Note | Without Option Exercise |
With Full Option Exercise |
|||||||||
Public Offering Price |
$ | 25.0000 | $ | $ | ||||||||
Underwriting Discount |
% | % | % | |||||||||
Proceeds to Us |
$ | $ | $ |
Certain expenses associated with the offer and the sale of the notes, exclusive of the underwriting discount, are estimated to be approximately $ and will be paid by us. We will pay all of our expenses and costs in connection with this offering, including the discount and commissions payable to the underwriters. In addition to the underwriting discounts and commissions, we will reimburse the underwriters for their reasonable out-of-pocket expenses incurred in connection with their engagement as underwriters, including, without limitation, all marketing, syndication and travel expenses and legal fees and expenses up to a maximum aggregate amount of $100,000 if the offering is consummated and up to a maximum aggregate amount of $70,000 if the offering is not consummated.
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In connection with the offering, the representative of the underwriters may purchase and sell notes in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves sales of notes in excess of the principal amount of notes to be purchased by the underwriters in the offering, which creates a short position. Covering transactions involve purchases of the notes in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of certain bids or purchases of notes made for the purpose of preventing or retarding a decline in the market price of the notes while the offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the underwriters, in covering short positions or making stabilizing purchases, repurchase notes originally sold by the syndicate member.
Any of these activities may cause the price of the notes to be higher than the price that otherwise would exist in the absence of such activities. These activities, if commenced, may be discontinued at any time.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the underwriters may be required to make in respect of any of those liabilities.
Conflicts of Interest
The underwriters have not historically, but may in the future, provide investment banking and advisory services to us and our affiliates in the ordinary course of business, for which they have received, or may receive, compensation for such services.
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The financial statements of the Operating Partnership and its subsidiaries as of December 31, 2012 included in this prospectus and the related notes to those financial statements, have been audited by PBMares, LLP (formerly Witt Mares, PLC), an independent registered public accounting firm, as stated in their report appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
Certain legal matters in connection with this offering, including the validity of the notes, will be passed upon for us by Baker & McKenzie LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Bass Berry & Sims PLC.
WHERE YOU CAN FIND MORE INFORMATION
We maintain a website, www.sotherlyhotels.com, which contains additional information concerning Sotherly and the Operating Partnership. Sotherly files, and the Operating Partnership will file, annual, quarterly and special reports, proxy statements and other information, as applicable, with the SEC. You may read and copy any document Sotherly or the Operating Partnership files with the SEC at the SECs public reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC (http://www.sec.gov).
The Operating Partnership has filed a Registration Statement of which this prospectus is a part and related exhibits with the SEC under the Securities Act. The Registration Statement contains additional information about us. You may inspect the Registration Statement and exhibits without charge at the office of the SEC at Room 1580, 100 F Street, N.E., Washington, D.C. 20549, and you may obtain copies from the SEC at prescribed rates.
Sotherly makes available free of charge through its website all of its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements and other reports filed with the SEC as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Sotherly has also posted on this website its Code of Business Conduct and the charters of its Audit and Nominating, Corporate Governance and Compensation Committees of its board of directors. The information contained in or accessed through our website is neither part of nor incorporated into this prospectus.
This prospectus does not contain all of the information included in the registration statement. We have omitted certain parts of the registration statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the registration statement, including its exhibits and schedules, which may be found at the SECs website at http://www.sec.gov. Statements contained in this prospectus and any accompanying prospectus supplement about the provisions or contents of any contract, agreement or any other document referred to are not necessarily complete. Please refer to the actual exhibit for a more complete description of the matters involved.
131
Sotherly Hotels LP |
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F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Schedule IIIReal Estate and Accumulated Depreciation as of December 31, 2012 |
F-29 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of the General Partner of
Sotherly Hotels LP (formerly MHI Hospitality, L.P.)
Williamsburg, Virginia
We have audited the accompanying consolidated balance sheets of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries (the Partnership) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in partners capital, and cash flows for each of the three years in the period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule of real estate and accumulated depreciation as of December 31, 2012. These consolidated financial statements are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnerships internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ PBMares, LLP
Norfolk, Virginia
August 9, 2013
F-2
SOTHERLY HOTELS LP
JUNE 30, 2013 (UNAUDITED) AND
DECEMBER 31, 2012 AND 2011
December 31, | June 30, | |||||||||||
2011 | 2012 | 2013 | ||||||||||
(unaudited) | ||||||||||||
ASSETS |
||||||||||||
Investment in hotel properties, net |
$ | 181,469,432 | $ | 176,427,904 | $ | 174,718,233 | ||||||
Investment in joint venture |
8,966,795 | 8,638,967 | 8,446,083 | |||||||||
Cash and cash equivalents |
4,409,959 | 7,175,716 | 6,561,784 | |||||||||
Restricted cash |
2,690,391 | 3,079,894 | 4,257,037 | |||||||||
Accounts receivable, net |
1,702,616 | 1,478,923 | 2,158,065 | |||||||||
Accounts receivable-affiliate |
24,880 | 8,657 | 10,665 | |||||||||
Prepaid expenses, inventory and other assets |
1,877,456 | 1,684,951 | 2,294,047 | |||||||||
Note receivable, net |
100,000 | | | |||||||||
Shell Island sublease, net |
720,588 | 480,392 | 360,294 | |||||||||
Deferred income taxes |
4,061,749 | 2,649,282 | 1,331,530 | |||||||||
Deferred financing costs, net |
3,275,580 | 2,406,183 | 2,152,654 | |||||||||
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TOTAL ASSETS |
$ | 209,299,446 | $ | 204,030,869 | $ | 202,290,392 | ||||||
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LIABILITIES |
||||||||||||
Line of credit |
$ | 25,537,290 | $ | | $ | | ||||||
Mortgage loans |
94,157,825 | 135,674,432 | 134,893,689 | |||||||||
Loans payable |
9,275,220 | 4,025,220 | 3,650,220 | |||||||||
Series A Preferred Interest |
25,353,698 | 14,227,650 | 12,457,552 | |||||||||
Accounts payable and accrued liabilities |
7,437,246 | 6,786,684 | 7,403,468 | |||||||||
Advance deposits |
453,077 | 625,822 | 881,192 | |||||||||
Partner distributions payable |
258,772 | 389,179 | 456,334 | |||||||||
Warrant derivative liability |
2,943,075 | 4,969,752 | 7,649,962 | |||||||||
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TOTAL LIABILITIES |
165,416,203 | 166,698,739 | 167,392,417 | |||||||||
Commitments and contingencies (see Note 7) |
||||||||||||
PARTNERS CAPITAL |
||||||||||||
General Partner: 129,387, 129,727 and 130,382 units issued and outstanding as of December 31, 2011 and 2012 and June 30, 2013, respectively |
683,691 | 617,909 | 594,463 | |||||||||
Limited Partners: 12,809,238, 12,842,898 and 12,907,743 units issued and outstanding as of December 31, 2011 and 2012 and June 30, 2013, respectively |
43,199,552 | 36,714,221 | 34,303,512 | |||||||||
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TOTAL PARTNERS CAPITAL |
43,883,243 | 37,332,130 | 34,897,975 | |||||||||
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TOTAL LIABILITIES AND PARTNERS CAPITAL |
$ | 209,299,446 | $ | 204,030,869 | $ | 202,290,392 | ||||||
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The accompanying notes are an integral part of these financial statements.
F-3
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
December 31, | June 30, | |||||||||||||||||||
2010 | 2011 | 2012 | 2012 | 2013 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
REVENUE |
||||||||||||||||||||
Rooms department |
$ | 53,090,084 | $ | 56,187,231 | $ | 60,824,016 | $ | 31,700,572 | $ | 32,401,979 | ||||||||||
Food and beverage department |
19,905,509 | 20,482,457 | 21,961,328 | 11,176,007 | 10,826,366 | |||||||||||||||
Other operating departments |
4,386,751 | 4,502,816 | 4,557,876 | 2,261,088 | 2,212,109 | |||||||||||||||
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Total revenue |
77,382,344 | 81,172,504 | 87,343,220 | 45,137,667 | 45,440,454 | |||||||||||||||
EXPENSES |
||||||||||||||||||||
Hotel operating expenses |
||||||||||||||||||||
Rooms department |
15,090,190 | 15,841,985 | 16,613,769 | 8,420,645 | 8,577,196 | |||||||||||||||
Food and beverage department |
13,248,212 | 13,617,847 | 14,284,057 | 7,355,536 | 6,915,391 | |||||||||||||||
Other operating departments |
697,037 | 537,969 | 480,307 | 240,938 | 226,025 | |||||||||||||||
Indirect |
30,026,159 | 31,784,191 | 32,919,610 | 16,642,698 | 16,571,618 | |||||||||||||||
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Total hotel operating expenses |
59,061,598 | 61,781,992 | 64,297,743 | 32,659,817 | 32,290,230 | |||||||||||||||
Depreciation and amortization |
8,506,802 | 8,702,880 | 8,661,769 | 4,375,554 | 4,083,871 | |||||||||||||||
Corporate general and administrative |
3,389,764 | 4,025,794 | 4,078,826 | 2,094,534 | 2,217,471 | |||||||||||||||
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|||||||||||
Total operating expenses |
70,958,164 | 74,510,666 | 77,038,338 | 39,129,905 | 38,591,572 | |||||||||||||||
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NET OPERATING INCOME |
6,424,180 | 6,661,838 | 10,304,882 | 6,007,762 | 6,848,882 | |||||||||||||||
Other income (expense) |
||||||||||||||||||||
Interest expense |
(10,030,517 | ) | (10,821,815 | ) | (12,382,146 | ) | (7,572,362 | ) | (5,013,191 | ) | ||||||||||
Interest income |
22,305 | 14,808 | 16,158 | 7,852 | 7,559 | |||||||||||||||
Equity income (loss) in joint venture |
16,931 | (60,094 | ) | 172,172 | 177,714 | 557,116 | ||||||||||||||
Unrealized loss on warrant derivative |
| (1,309,075 | ) | (2,026,677 | ) | (2,684,900 | ) | (2,680,210 | ) | |||||||||||
Unrealized gain on hedging activities |
700,488 | 72,649 | | | | |||||||||||||||
Impairment of note receivable |
| | (110,871 | ) | | | ||||||||||||||
Loss on disposal of assets |
(171,304 | ) | (128,099 | ) | | | | |||||||||||||
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Net loss before income taxes |
(3,037,917 | ) | (5,569,788 | ) | (4,026,482 | ) | (4,063,934 | ) | (279,844 | ) | ||||||||||
Income tax (provision) benefit |
(214,344 | ) | (905,455 | ) | (1,301,229 | ) | (1,062,721 | ) | (1,374,873 | ) | ||||||||||
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Net loss |
$ | (3,252,261 | ) | $ | (6,475,243 | ) | $ | (5,327,711 | ) | $ | (5,126,655 | ) | $ | (1,654,717 | ) | |||||
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Net loss per unit |
||||||||||||||||||||
Basic |
$ | (0.25 | ) | $ | (0.50 | ) | $ | (0.41 | ) | $ | (0.40 | ) | $ | (0.13 | ) | |||||
Diluted |
$ | (0.25 | ) | $ | (0.50 | ) | $ | (0.39 | ) | $ | (0.38 | ) | $ | (0.12 | ) | |||||
Weighted average number of units outstanding |
||||||||||||||||||||
Basic |
12,893,444 | 12,934,325 | 12,973,953 | 12,974,306 | 13,037,064 | |||||||||||||||
Diluted |
12,909,444 | 13,117,767 | 13,625,561 | 13,425,660 | 13,948,646 |
The accompanying notes are an integral part of these financial statements.
F-4
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
General Partner | Limited Partners | Total | ||||||||||||||||||
Units | Amount | Units | Amount | |||||||||||||||||
Balances at December 31, 2009 |
128,346 | $ | 783,908 | 12,706,204 | $ | 53,057,318 | $ | 53,841,226 | ||||||||||||
Issuance of partnership units |
761 | 1,405 | 75,414 | 139,222 | 140,627 | |||||||||||||||
Amortization of deferred grants of partnership units |
| 1,140 | | 112,860 | 114,000 | |||||||||||||||
Redemption of limited partnership units |
(150 | ) | (914 | ) | (14,850 | ) | (34,375 | ) | (35,289 | ) | ||||||||||
Net loss |
| (32,522 | ) | | (3,219,739 | ) | (3,252,261 | ) | ||||||||||||
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Balances at December 31, 2010 |
128,957 | $ | 753,017 | 12,766,768 | $ | 50,055,286 | $ | 50,808,303 | ||||||||||||
Issuance of partnership units |
455 | 749 | 45,045 | 74,181 | 74,930 | |||||||||||||||
Distributions declared |
| (5,176 | ) | | (512,421 | ) | (517,597 | ) | ||||||||||||
Redemption of limited partnership units |
(25 | ) | (146 | ) | (2,575 | ) | (7,004 | ) | (7,150 | ) | ||||||||||
Net loss |
| (64,753 | ) | | (6,410,490 | ) | (6,475,243 | ) | ||||||||||||
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Balances at December 31, 2011 |
129,387 | $ | 683,691 | 12,809,238 | $ | 43,199,552 | $ | 43,883,243 | ||||||||||||
Issuance of partnership units |
460 | 1,104 | 45,540 | 109,296 | 110,400 | |||||||||||||||
Distributions declared |
| (12,976 | ) | | (1,284,646 | ) | (1,297,622 | ) | ||||||||||||
Redemption of limited partnership units |
(120 | ) | (633 | ) | (11,880 | ) | (35,547 | ) | (36,180 | ) | ||||||||||
Net loss |
| (53,277 | ) | | (5,274,434 | ) | (5,327,711 | ) | ||||||||||||
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Balances at December 31, 2012 |
129,727 | $ | 617,909 | 12,842,898 | $ | 36,714,221 | $ | 37,332,130 | ||||||||||||
Issuance of partnership units |
755 | 2,561 | 74,745 | 163,919 | 166,480 | |||||||||||||||
Redemption of limited partnership units |
(100 | ) | (329 | ) | (9,900 | ) | (32,571 | ) | (32,900 | ) | ||||||||||
Distributions declared |
| (9,130 | ) | | (903,888 | ) | (913,018 | ) | ||||||||||||
Net loss |
| (16,548 | ) | | (1,638,169 | ) | (1,654,717 | ) | ||||||||||||
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Balances at June 30, 2013 |
130,382 | $ | 594,463 | 12,907,743 | $ | 34,303,512 | $ | 34,897,975 | ||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-5
SOTHERLY HOTELS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
December 31, | June 30, | |||||||||||||||||||
2010 | 2011 | 2012 | 2012 | 2013 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net loss |
$ | (3,252,261 | ) | $ | (6,475,243 | ) | $ | (5,327,711 | ) | $ | (5,126,655 | ) | $ | (1,654,717 | ) | |||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
8,506,802 | 8,702,880 | 8,661,769 | 4,375,554 | 4,083,871 | |||||||||||||||
Equity in (income) loss of joint venture |
(16,931 | ) | 60,094 | (172,172 | ) | (177,714 | ) | (557,116 | ) | |||||||||||
Loss on disposal of assets |
171,304 | 128,099 | | | | |||||||||||||||
Impairment of note receivable |
| | 110,871 | | | |||||||||||||||
Unrealized gain on hedging activities |
(700,488 | ) | (72,649 | ) | | | | |||||||||||||
Unrealized loss on warrant derivative |
| 1,309,075 | 2,026,677 | 2,684,900 | 2,680,210 | |||||||||||||||
Amortization of deferred financing costs |
1,308,255 | 1,106,279 | 1,971,796 | 1,628,344 | 430,396 | |||||||||||||||
Paid-in-kind interest |
| 353,698 | 387,554 | 245,573 | 131,449 | |||||||||||||||
Charges related to equity-based compensation |
254,626 | 74,930 | 110,400 | 110,400 | 166,480 | |||||||||||||||
Changes in assets and liabilities: |
||||||||||||||||||||
Restricted cash |
(682,321 | ) | 129,976 | 377,908 | 444,269 | (126,397 | ) | |||||||||||||
Accounts receivable |
(243,220 | ) | 165,764 | 212,822 | (1,682,614 | ) | (679,141 | ) | ||||||||||||
Inventory, prepaid expenses and other assets |
(371,523 | ) | 380,260 | 122,645 | (323,045 | ) | (642,708 | ) | ||||||||||||
Deferred income taxes |
174,035 | 685,189 | 1,412,467 | 1,103,579 | 1,317,752 | |||||||||||||||
Accounts payable and accrued liabilities |
(443,326 | ) | 1,074,323 | (1,072,036 | ) | 1,258,711 | 1,564,135 | |||||||||||||
Advance deposits |
8,249 | (102,825 | ) | 172,745 | 446,549 | 255,370 | ||||||||||||||
Due from affiliates |
15,069 | 30,292 | 16,222 | 8,257 | (2,008 | ) | ||||||||||||||
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Net cash provided by operating activities |
4,728,270 | 7,550,142 | 9,011,957 | 4,996,108 | 6,967,576 | |||||||||||||||
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Cash flows from investing activities: |
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Improvements and additions to hotel properties |
(2,886,325 | ) | (5,979,832 | ) | (2,908,114 | ) | (2,163,680 | ) | (3,167,840 | ) | ||||||||||
Distributions from joint venture |
238,386 | 437,500 | 500,000 | 250,000 | 750,000 | |||||||||||||||
Funding of restricted cash reserves |
(1,956,410 | ) | (2,347,877 | ) | (1,983,383 | ) | (993,239 | ) | (972,570 | ) | ||||||||||
Proceeds from restricted cash reserves |
1,134,741 | 1,733,231 | 1,215,972 | 903,457 | 814,713 | |||||||||||||||
Proceeds from sale of assets |
| 26,705 | 19,404 | | | |||||||||||||||
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Net cash used in investing activities |
(3,469,608 | ) | (6,130,273 | ) | (3,156,121 | ) | (2,003,462 | ) | (2,575,697 | ) | ||||||||||
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Cash flows from financing activities: |
||||||||||||||||||||
Proceeds of Series A Preferred Interest |
| 25,000,000 | | | | |||||||||||||||
Redemption of Series A Preferred Interest |
| | (11,513,602 | ) | (11,513,602 | ) | (1,901,547 | ) | ||||||||||||
Distributions paid |
| (258,825 | ) | (1,167,216 | ) | (518,465 | ) | (845,863 | ) | |||||||||||
Pledge of cash collateral |
| | | | (892,890 | ) | ||||||||||||||
Proceeds of loans |
| 5,000,000 | | | | |||||||||||||||
Payments on line of credit |
(325,000 | ) | (49,660,569 | ) | (25,537,290 | ) | (25,537,290 | ) | | |||||||||||
Proceeds of mortgage refinancing |
| 27,700,000 | 44,000,000 | 44,000,000 | 2,225,613 | |||||||||||||||
Payments on mortgage debt and loans |
(730,783 | ) | (5,953,178 | ) | (7,773,393 | ) | (6,028,749 | ) | (3,381,357 | ) | ||||||||||
Redemption of units in operating partnership |
(35,289 | ) | (7,150 | ) | (36,180 | ) | (14,640 | ) | (32,900 | ) | ||||||||||
Payment of deferred financing costs |
(665,189 | ) | (1,823,076 | ) | (1,102,398 | ) | (824,319 | ) | (176,867 | ) | ||||||||||
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|||||||||||
Net cash used in financing activities |
(1,756,261 | ) | (2,798 | ) | (3,090,079 | ) | (437,065 | ) | (5,005,811 | ) | ||||||||||
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Net increase (decrease) in cash and cash equivalents |
(497,599 | ) | 1,417,071 | 2,765,757 | 2,555,581 | (613,932 | ) | |||||||||||||
Cash and cash equivalents at the beginning of the period |
3,490,487 | 2,992,888 | 4,409,959 | 4,409,959 | 7,175,716 | |||||||||||||||
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Cash and cash equivalents at the end of the period |
$ | 2,992,888 | $ | 4,409,959 | $ | 7,175,716 | $ | 6,965,540 | $ | 6,561,784 | ||||||||||
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Supplemental disclosures: |
||||||||||||||||||||
Cash paid during the year for interest |
$ | 8,870,424 | $ | 8,705,123 | $ | 10,412,434 | $ | 6,062,706 | $ | 4,528,329 | ||||||||||
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Cash paid during the year for income taxes |
$ | 21,694 | $ | 48,351 | $ | 117,447 | $ | 104,595 | $ | 108,147 | ||||||||||
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The accompanying notes are an integral part of these financial statements.
F-6
SOTHERLY HOTELS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Organization and Description of Business |
Sotherly Hotels LP (formerly MHI Hospitality, L.P.) (the Partnership), a Delaware limited partnership, commenced operations on December 21, 2004 when its general partner and majority unitholder, Sotherly Hotels Inc. (formerly, MHI Hospitality Corporation) (the Company), completed its initial public offering (IPO), contributed the proceeds to the Partnership and consummated the acquisition of six hotel properties (initial properties).
The Company is a self-managed and self-administered real estate investment trust (REIT) and was formed 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 Partnership 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 Partnership. The Company, as general partner, conducts substantially all of its operations through the Partnership and the Companys administrative expenses are the obligations of the Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Partnerships behalf.
For the Company to qualify as a REIT, neither the Company nor the Partnership can operate hotels. Therefore, our wholly-owned hotels are leased to a subsidiary of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC, (collectively, MHI TRS), a wholly-owned subsidiary of the Partnership. MHI TRS then engages a 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 these notes to consolidated financial statements to the Partnership, we, us and our refer to Sotherly Hotels LP and its subsidiaries and predecessors, unless the context otherwise requires or where otherwise indicated.
Significant transactions occurring during the period ended June 30, 2013 and three prior fiscal years include the following:
On June 4, 2010, the Partnership entered into a fifth amendment to its then-existing credit agreement with Branch Banking & Trust Company (BB&T), as administrative agent and lender, to address the sufficiency of the borrowing base. The amendment revised the methodology used to value the Partnerships existing hotel properties in the borrowing base and modified certain other aspects of the then-existing credit agreement, as amended, including fixing the interest rate spread for the variable LIBOR-based interest rate at 4.00% and a minimum LIBOR of 0.75%. The amendment converted the facility to non-revolving, eliminated the Partnerships ability to re-borrow principal paid in the future and established minimum repayments equal to 50% of excess cash flow, as defined in the agreement, payable quarterly. Pursuant to the amendment, the Partnership was required to fund reserves for insurance and real estate taxes as well as a reserve for the replacement of furniture, fixtures and equipment equal to 3.0% of gross room revenues. The amendment also modified the fixed charge covenant, eliminated the leverage covenant, placed limits on capital expenditures and required prepayments from a portion of the proceeds of future equity offerings of up to $21.7 million. In the event that the Partnership made prepayments totaling $21.7 million, the excess cash flow prepayment requirement would terminate. The amendment allowed the Partnership to pay additional dividends in any fiscal quarter, subject to the existing cap of 90% of the prior years funds from operations (FFO) provided certain liquidity thresholds and other
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conditions were met. The amendment provided for a contingent extension of the maturity date for one year to May 2012, provided that certain valuation and other criteria were met, including payment of an extension fee and an extension or refinancing of the Jacksonville mortgage.
On April 18, 2011, the Partnership entered into a sixth amendment to the then-existing credit agreement. Among other things, the amendment: (i) extended the final maturity date of the credit facility to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Partnership reduced the outstanding balance on its existing credit facility by approximately $22.7 million.
On April 18, 2011, the Company entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the Investors), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Companys Series A Cumulative Redeemable Preferred Stock (the Preferred Stock), and a warrant (the Essex Warrant) to purchase 1,900,000 shares of the Companys common stock, par value $0.01 per share, for a purchase price of $25.0 million.
Coincident with the issuance of the Preferred Stock, the Partnership issued a Series A Preferred Interest (the Preferred Interest) in the Partnership 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 cause the Partnership to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Companys obligations with respect to the Preferred Stock. In addition, the Partnership issued the Company a warrant (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.
The Partnership used the net proceeds from the issuance of the Preferred Interest and Warrant to partially prepay the amounts owed by the Partnership under its then-existing credit agreement.
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 on behalf of the Partnership on or before December 31, 2011 (the Bridge Financing). The principal amount borrowed bears interest at the rate of 9.25% per annum, payable quarterly in arrears and matures on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.
On June 30, 2011, the Partnership entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2012. Under the terms of the extension, the Partnership makes monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. The Partnership also pledged $750,000 in cash collateral held by the lender in an interest-bearing account.
On August 1, 2011, the Partnership entered into agreements with PNC Bank, National Association, in its capacity as trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable to the mortgage loan is fixed at 8.0% and the lender has waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Partnership tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loans current outstanding principal amount to $14.0 million, and the lender waived certain covenants requiring the Partnership to further pay down principal under certain circumstances.
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On August 5, 2011, the Partnership obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Partnerships indebtedness under its credit facility.
On October 17, 2011, the Partnership obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on its property in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period, at the Partnerships option if certain conditions have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of the Partnerships indebtedness under its credit facility.
On December 15, 2011, the Partnership obtained a 5-year, $12.2 million mortgage with Goldman Sachs Commercial Mortgage Capital, L.P. on the Sheraton Louisville Riverside in Jeffersonville, Indiana. The mortgage bears interest at a rate of 6.2415% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Partnerships indebtedness under its credit facility.
On December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC to extend the lenders loan commitment by 17 months through May 31, 2013.
On December 21, 2011, the Company also amended the terms of the outstanding Essex Warrant issued by the Company in favor of the Investors. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment did not take in to account quarterly dividends declared prior to January 1, 2012.
On March 5, 2012, the Partnership 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 mortgages 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 the Partnerships indebtedness under the then-existing credit facility, prepay a portion of the Companys indebtedness under the Bridge Financing and for working capital. With this transaction, the Partnerships syndicated credit facility was extinguished and the Crowne Plaza Tampa Westshore hotel property was released from such mortgage encumbrance.
On June 15, 2012, the Company entered into an amendment of its 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.
On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Companys 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, the Partnership 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
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level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgages 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 to the Company for the purpose of redeeming the 11,514 shares of Preferred Stock referenced above.
On June 22, 2012, the Partnership 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, 2013. Under the terms of the extension, the Partnership was 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, the Partnership 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, the Partnership 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 its existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loans 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, the Company redeemed 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. The Partnership made a special distribution to the Company with respect to its Preferred Interest in order to fund the redemption, redeeming an equivalent portion of the Preferred Interest.
On June 28, 2013, the Partnership 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, the Partnership made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to approximately $6.0 million and is 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, the Partnership may extend the maturity date of the loan to June 30, 2015.
2. | Summary of Significant Accounting Policies |
Basis of Presentation The consolidated financial statements of the Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Partnership, pursuant to the terms of the Partnership Agreement.
Investment in Hotel Properties Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable
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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 the Partnerships accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
The Partnership reviews its 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 propertys estimated fair market value would be recorded and an impairment loss recognized.
Investment in Joint Venture Investment in joint venture represents the Partnerships 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. The Partnership accounts for its investment in the joint venture under the equity method of accounting and is entitled to receive its pro rata share of annual cash flow. The Partnership also has the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale proceeds.
Cash and Cash Equivalents The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk The Partnership holds cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the FDIC) protection limits of $250,000. The Partnerships 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 Partnerships potential risk.
Restricted Cash Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment as well as cash collateral pursuant to certain requirements in the then-existing credit agreement and the Partnerships various mortgage agreements.
Accounts Receivable Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Inventories Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.
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Franchise License Fees Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of June 30, 2013 and as of December 31, 2012 and 2011 were $218,739, $240,489 and $284,090, respectively. Amortization expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $21,750, $21,750, $43,500, $46,912 and $48,350, respectively.
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 The Partnerships 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 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.
The Partnership uses derivative instruments to add stability to interest expense and to manage its exposure to interest-rate movements. To accomplish this objective, the Partnership primarily used an interest-rate swap, which was required under its then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for the Partnership making fixed-rate payments without exchange of the underlying principal amount. The Partnership valued its interest-rate swap at fair value, which it defines 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. The Partnership also uses derivative instruments in the Companys stock to obtain more favorable terms on its financing. The Partnership does not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
The Partnership accounts for the Warrant based upon the guidance enumerated in Accounting Standards Codification (ASC) 815-40, Derivatives and Hedging: Contracts in Entitys Own Stock. The Essex Warrant contains a provision that could require an adjustment to the exercise price if the Company issued securities deemed to be dilutive to the Essex Warrant. Under the terms of the Warrant, the Partnership is obligated to issue additional partnership units in exchange for the consideration received by the Company upon exercise of the Essex Warrant, and therefore is classified as a derivative liability. The Warrant is carried at fair value with changes in fair value reported in earnings as long as the Warrant remains classified as a derivative liability.
The Partnerships warrant derivative liability was valued at June 30, 2013 as well as at December 31, 2012 and 2011 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 groups 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.
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The Partnership 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 Partnership 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 | ||||||||||
June 30, 2013 |
||||||||||||
Warrant |
$ | | $ | (7,649,962 | ) | $ | | |||||
December 31, 2012 |
||||||||||||
Warrant |
| (4,969,752 | ) | | ||||||||
December 31, 2011 |
||||||||||||
Warrant |
| (2,943,075 | ) | |
Preferred Interest The Partnership accounts for its Series A Preferred Interest based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock is 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 Companys sole source of funds to meet its obligations under the Articles Supplementary are the special distributions from the Partnership which the Company, as general partner, may declare at its sole discretion.
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 Partnership is generally not subject to federal and state income taxes as the unitholders of the Partnership are subject to tax on their respective shares of the Partnerships taxable income.
The Partnerships taxable REIT subsidiary, whose operations are reflected in its consolidated financial statements, is subject to federal, state and local income taxes. The Partnership accounts 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 June 30, 2013, the Partnership had no uncertain tax positions. The Partnerships policy is to recognize obligations for interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which the Partnership is subject generally include 2009 through 2012. In addition, as of June 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 Companys 2004 Long-Term Incentive Plan (the 2004 Plan) and its 2013 Long-Term Incentive Plan (the 2013 Plan) permit the grant of stock options, restricted (non-vested) stock
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and performance stock compensation awards to employees of the Partnership for up to 350,000 and 750,000 shares of common stock, respectively. The Company and the Partnership believe that such awards better align the interests of their employees with those of their stockholders and unitholders. Under the terms of the Partnership Agreement, the Company, as general partner, is authorized to issue additional partnership units to itself in connection with the issuance of shares of common stock in the Company in exchange for the net proceeds received by the Company in connection with any such issuance.
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 the Companys executives and employees, all have vested except 30,000 issued to the Chief Financial Officer upon execution of his employment contract which will vest pro-rata on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Companys independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2013. As of June 30, 2013, no awards have been granted under the 2013 Plan.
The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Companys 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 June 30, 2013, no performance-based stock awards have been granted under either the 2004 Plan or the 2013 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 for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $43,026, $26,155, $157,230, $121,190 and $223,204, respectively.
Comprehensive Income (Loss) Comprehensive income (loss), as defined, includes all changes in partners capital (net assets) during a period from non-owner sources. The Partnership does not have any items of comprehensive income (loss) other than net income (loss).
Segment Information The Partnership has determined that its business is conducted in one reportable segment: hotel ownership.
Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements There are no recent accounting pronouncements which the Partnership believes will have a material impact on its consolidated financial statements.
3. | Acquisition of Hotel Properties |
There were no new acquisitions during the six months ended June 30, 2013 or 2012, or for the years ended December 31, 2012, 2011 or 2010.
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4. | Investment in Hotel Properties |
Investment in hotel properties as of June 30, 2013 and as of December 31, 2012 and 2011 consisted of the following:
December 31, 2011 |
December 31, 2012 |
June 30, 2013 |
||||||||||
(unaudited) | ||||||||||||
Land and land improvements |
$ | 19,373,908 | $ | 19,429,571 | $ | 19,555,434 | ||||||
Buildings and improvements |
179,585,304 | 181,209,101 | 182,213,649 | |||||||||
Furniture, fixtures and equipment |
32,419,505 | 33,716,700 | 30,986,922 | |||||||||
|
|
|
|
|
|
|||||||
231,378,717 | 234,355,372 | 232,756,005 | ||||||||||
Less: accumulated depreciation |
(49,909,285 | ) | (57,927,468 | ) | (58,037,772 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 181,469,432 | $ | 176,427,904 | $ | 174,718,233 | |||||||
|
|
|
|
|
|
5. | Debt |
Credit Facility. During 2010, 2011 and a portion of the year ended December 31, 2012, the Partnership had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company.
On June 4, 2010, the Partnership entered into a fifth amendment to its then-existing credit agreement modifying certain provisions of the agreement including an increase in the rate of interest to LIBOR plus additional interest of 4.00%; a LIBOR floor of 0.75%; a conversion to a non-revolving facility; a provision for mandatory quarterly pre-payments based on excess cash flow, as defined in the amendment, as well as a mandatory prepayment if the Company, as co-borrower, raises equity within certain parameters; and provides an option to extend the maturity for one year if certain conditions are met.
On April 18, 2011, the Partnership entered into a sixth amendment to the then-existing credit agreement which, among other things, (i) extended the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Partnership reduced the outstanding balance on its then-existing credit facility by approximately $22.7 million. In March 2012, the Partnerships syndicated credit facility was extinguished.
The Partnership had borrowings under the credit facility of $0, $0 and $25,537,290 at June 30, 2013 and at December 31, 2012 and 2011, respectively.
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Mortgage Debt. As of June 30, 2013 and as of December 31, 2012 and 2011, the Partnership had $134,893,689, $135,674,432 and $94,157,825 of outstanding mortgage debt, respectively. The following table sets forth the Partnerships mortgage debt obligations on our hotels.
Property |
Balance Outstanding as of | Prepayment Penalties |
Maturity Date |
Amortization Provisions |
Interest Rate |
|||||||||||||||||||||
December 31, 2011 |
December 31, 2012 |
June 30, 2013 |
||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
Crowne Plaza Hampton Marina |
$ | 8,151,625 | $ | 7,559,625 | $ | 5,999,500 | None | 06/2014 | (1) | $ | 16,000 | (2) | |
LIBOR plus 4.55 |
%(3) | |||||||||||
Crowne Plaza Jacksonville Riverfront |
14,000,000 | 14,135,234 | 13,948,116 | None | 07/2015 | (4) | 25 years | |
LIBOR plus 3.00 |
% | ||||||||||||||||
Crowne Plaza Tampa Westshore |
| 13,872,077 | 13,738,236 | None | 06/2017 | 25 years | 5.60 | % | ||||||||||||||||||
DoubleTree by Hilton Brownstone University |
7,980,385 | 7,816,867 | 9,958,327 | None | 10/2016 | (5) | 25 years | 5.25 | % | |||||||||||||||||
Hilton Philadelphia Airport |
| 29,502,666 | 29,118,931 | None | 08/2014 | (6) | 25 years | |
LIBOR plus 3.00 |
%(7) | ||||||||||||||||
Hilton Savannah DeSoto |
22,488,916 | 22,051,314 | 21,822,392 | Yes(8) | 07/2017 | 25 years | (9) | 6.06 | % | |||||||||||||||||
Hilton Wilmington Riverside |
21,884,909 | 21,416,922 | 21,171,831 | Yes(8) | 03/2017 | 25 years | (10) | 6.21 | % | |||||||||||||||||
Holiday Inn Laurel West |
7,451,990 | 7,300,465 | 7,221,697 | Yes(11) | 08/2021 | 25 years | 5.25 | %(12) | ||||||||||||||||||
Sheraton Louisville Riverside |
12,200,000 | 12,019,262 | 11,914,659 | (13) | 01/2017 | 25 years | 6.24 | % | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 94,157,825 | $ | 135,674,432 | $ | 134,893,689 | ||||||||||||||||||||
|
|
|
|
|
|
(1) | The note provides that the mortgage can be extended until June 2015 if certain conditions have been satisfied. |
(2) | The Partnership 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 2016 if certain conditions have been satisfied. |
(5) | The note provides that after five years, the mortgage can be extended if certain conditions have been satisfied for additional five year period at a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest. |
(6) | The note provides that the mortgage can be extended until March 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 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017. |
(10) | The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017. |
(11) | Pre-payment can be made with penalty until 90 days before the fifth anniversary of the commencement date of the loan or from such date until 90 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%. |
(13) | With limited exception, the note may not be prepaid until two months before maturity. |
F-16
Total mortgage debt maturities as of June 30, 2013 without respect to any additional loan extensions for the following twelve-month periods were as follows:
June 30, 2014 |
$ | 9,031,123 | ||
June 30, 2015 |
30,706,188 | |||
June 30, 2016 |
15,262,169 | |||
June 30, 2017 |
53,659,368 | |||
June 30, 2018 |
19,920,622 | |||
Thereafter |
6,314,219 | |||
|
|
|||
Total future maturities |
$ | 134,893,689 | ||
|
|
Loan from Carlyle Affiliate Lender. On February 9, 2009, the indirect subsidiary of the Partnership 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 the Partnerships 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 the Partnership 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 June 30, 2013 and at December 31, 2012 and 2011 was $3,650,220, $4,025,220 and $4,275,220, respectively.
Available 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 to May 31, 2013. The principal amount borrowed bore interest at the rate of 9.25% per annum, payable quarterly in arrears. At June 30, 2013 and at December 31, 2012 and 2011, the Company had borrowings under the Bridge Financing of $0.0 million, $0.0 million and $5.0 million, respectively.
6. | Preferred Interest and Warrants |
Preferred Interest. On April 18, 2011, the Company completed a private placement to the Investors pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Essex Warrant to purchase 1,900,000 shares of the Companys 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 Companys Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Companys board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Companys Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Companys 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.
F-17
Concurrently with the issuance of the Preferred Stock, the 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 Companys obligations with respect to the Preferred Stock. In addition, the 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 Companys 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 of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the redeemed shares were written off.
On June 18, 2012, the Partnership used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special distribution to the Company for the purpose of redeeming the 11,514 shares of Preferred Stock.
On March 26, 2013, the Partnership used the net proceeds of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution to the Company for the purpose of redeeming 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.
As of June 30, 2013 and as of December 31, 2012 and 2011, there were 12,458, 14,228 and 25,354 shares of the Preferred Stock issued and outstanding, respectively.
As of June 30, 2013 and as of December 31, 2012 and 2011, the redemption value of the Preferred Interest was $12,457,552, $14,227,650 and $25,353,698, respectively.
Warrants. The Essex Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the Companys common stock at an exercise price of $2.25 per share. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment does not take into account quarterly dividends declared prior to January 1, 2012. At June 30, 2013, the adjusted exercise price was $2.08 per share. The Essex Warrant expires on October 18, 2016. The holders of the Essex Warrant 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.
Concurrently with the issuance of the Essex Warrant, the 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 Partnership shall issue an equivalent number of 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, the Company and the Partnership determined the fair market value of the Warrant and the Essex Warrant were each 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. On the date of issuance, the fair value of the warrant is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statements of operations over the period from issuance to the mandatory redemption date of the Preferred Stock.
F-18
7. | Commitments and Contingencies |
Ground, Building and Submerged Land Leases The Partnership leases 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, the Partnership signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $32,623, $32,062, $65,812, $66,198 and $60,049, respectively.
The Partnership leases, 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.
The Partnership leases a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Partnership holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for each of the six-month periods ended June 30, 2013 and 2012 was $47,741 and for each of the years ended December 31, 2012, 2011 and 2010 was $95,482.
In conjunction with the sublease arrangement for the property at Shell Island which expired in December 2011, the Partnership incurred an annual lease expense for a leasehold interest other than the purchased leasehold interest. Lease expense for each of the years ended December 31, 2011 and 2010 was $195,000.
The Partnership leases land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 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 for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $1,226, $1,226, $2,515, $2,806 and $2,641, respectively.
The Partnership leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year operating lease requiring annual payments of $4,961 which expired September 18, 2012. A new operating lease was executed requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $3,010, $2,480, $5,920, $4,961 and $4,961, respectively.
The Company, as general partner, leases 3,542 square feet of commercial office space in Williamsburg, Virginia under an agreement which expires August 31, 2015. Rent expense for each of the six-month periods ended June 30, 2013 and 2012 was $27,500 and for each of the years ended December 31, 2012, 2011 and 2010 was $55,000.
The Company, as general partner, leases 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for
F-19
the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $22,074, $22,272, $44,927, $44,320 and $44,041, respectively.
The Partnership also leases 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:
June 30, 2014 |
$ | 464,960 | ||
June 30, 2015 |
376,491 | |||
June 30, 2016 |
266,758 | |||
June 30, 2017 |
90,385 | |||
|
|
|||
Total future minimum lease payments |
$ | 1,198,594 | ||
|
|
Management Agreements Each of the operating hotels that the Partnership wholly-owned at June 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. The Partnership 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 June 30, 2013, the Partnerships hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Partnership is 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, the Partnership is required to escrow with its lender on the Hilton Wilmington Riverside and the Hilton Savannah DeSoto an amount equal to 1/12 of the annual real estate taxes due for the properties. The Partnership is also required by several of its lenders to establish individual property improvement funds to cover the cost of replacing capital assets at its properties. Each month, contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Hampton Marina 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, the Partnership was required to escrow with its 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, the Partnership was required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.
Litigation The Partnership is not involved in any material litigation, nor, to its knowledge, is any material litigation threatened against the Partnership. The Partnership is involved in routine litigation arising out of the ordinary course of business, all of which the Partnership expects to be covered by insurance and none of which it expects will have a material impact on its 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
F-20
remaining authorized shares have been issued. Under the terms of the Partnership Agreement, the Company, as general partner, may cause the Partnership to issue additional preferred partnership interests in exchange for the proceeds of the issuance of any additional shares of preferred stock.
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 Companys common stock and holders of the Partnerships units other than the Company are entitled to receive distributions when authorized by the Companys board of directors out of assets of the Partnership available for the payment of distributions.
On January 25, 2013, the Company was issued 45,500 partnership units and 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 was issued 30,000 partnership units and 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 was issued 46,000 partnership units and 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.
On March 22, 2011, the Company was issued 29,500 partnership units and issued 17,500 shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.
On January 1, 2011, the Company was issued 16,000 partnership units and granted 16,000 non-restricted shares to its Chief Operating Officer and President in accordance with the terms of his employment contract, as amended.
On June 7, 2010, the Company was issued 21,000 partnership units and granted 21,000 shares of restricted stock to its Vice President and General Counsel in accordance with the terms of his employment contract.
During February 2010, the Company was issued 30,175 partnership units and awarded 18,175 shares of non-restricted stock to certain executives and 12,000 shares of restricted stock to its independent directors.
In addition, on February 1, 2010, the Company was issued 15,000 partnership units and awarded 15,000 shares of non-restricted stock to its Chief Executive Officer in accordance with the terms of his renewed employment contract.
On January 1, 2010, the Company was issued 10,000 partnership units and issued 10,000 non-restricted shares to its Chief Operating Officer in accordance with the terms of his employment contract, as amended.
Warrants for Shares of Common Stock The Company has granted no warrants representing the right to purchase shares of common stock other than the Essex Warrant described in Note 6.
Partnership Units Holders of partnership units, other than the general partner, have certain redemption rights, which enable them to cause the Partnership to redeem their units in exchange for shares of the Companys 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 Companys 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.
F-21
During the six months ended June 30, 2013 and the years ended December 31, 2012, 2011 and 2010, the Company redeemed a total of 39,600 units in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $111,519 pursuant to the terms of the Partnership Agreement.
As of June 30, 2013 and as of December 31, 2012 and 2011, the total number of Partnership units outstanding was 13,038,125, 12,972,625 and 12,938,625, respectively.
Distributions The following table presents the quarterly distributions declared and payable per unit for the years ended December 31, 2010, 2011, 2012 and for the first two quarters of 2013:
Quarter Ended |
2010 | 2011 | 2012 | 2013 | ||||||||||||
March 31, |
$ | 0.000 | $ | 0.000 | $ | 0.020 | $ | 0.035 | ||||||||
June 30, |
$ | 0.000 | $ | 0.000 | $ | 0.020 | $ | 0.035 | ||||||||
September 30, |
$ | 0.000 | $ | 0.020 | $ | 0.030 | ||||||||||
December 31, |
$ | 0.000 | $ | 0.020 | $ | 0.030 |
9. | Related Party Transactions |
MHI Hotels Services. As of June 30, 2013, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Companys chief executive officer, its former chief financial officer, a member of its Board of Directors and a former member of its Board of Directors) owned 1,089,641 shares, or approximately 10.7%, of the Companys outstanding common stock as well as 1,877,972 partnership units. The following is a summary of the transactions between the Partnership and MHI Hotels Services:
Accounts Receivable At June 30, 2013 and at December 31, 2012 and 2011, the Partnership was due $10,665, $8,657 and $24,880, respectively, from MHI Hotels Services.
Shell Island Sublease The Partnership has a sublease arrangement with MHI Hotels Services on its expired leasehold interests in the property at Shell Island. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Company earned $175,000, $175,000, $350,000, $640,000 and $640,000, respectively, in leasehold revenue. The underlying leases at Shell Island expired on December 31, 2011.
Strategic Alliance Agreement On December 21, 2004, the Partnership entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.
Management Agreements Each of the operating hotels that the Partnership wholly-owned at June 30, 2013, December 31, 2012 and 2011, 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. The Partnership 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 Partnership upon its 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.
F-22
For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, MHI Hotels Services earned $1,415,439, $1,457,006, $2,818,842, $2,469,853 and $2,082,627, respectively, in management fees, which are included in indirect expenses in the accompanying statements of operations.
Employee Medical Benefits The Partnership pays the cost of employee medical benefits for its employees, as well as those employees that work exclusively for our hotel properties, through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Partnership paid $1,294,724, $1,220,888, $2,344,734, $2,448,431 and $2,185,475, respectively, for benefits, which are included in indirect expenses in the consolidated statements of operations.
Construction Management Services The Partnership has engaged MHI Hotels Services to manage various aspects of renovations at various hotels. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Partnership paid $0, $0, $0, $0 and $208,400, respectively, in construction management fees, which are capitalized as part of the cost of the renovations.
Redemption of Units in Operating Partnership During the six months ended June 30, 2013 and the years ended December 31, 2012, 2011 and 2010, the Partnership redeemed a total of 39,600 units held by a trust controlled by two current members and one former member of our Board of Directors for a total of $111,519 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, are entitled to elect one (1) member of the Companys 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 December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC, an affiliate of Essex Equity Capital Management, LLC, of which one member of the board of directors of the Company is a Managing Director, to extend the lenders loan commitment by 17 months through May 31, 2013.
On December 21, 2011, the Company also amended the terms of the outstanding Essex Warrant. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per share amount of such cash dividends.
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.
On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Companys 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 July 10, 2012, the Company amended the terms of the outstanding Essex Warrant by establishing a modified excepted holder limit (as defined in the Companys Articles of Amendment and Restatement) for the Investors.
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.
F-23
10. | Retirement Plans |
The Partnership began a 401(k) plan for qualified employees on April 1, 2006. The plan is subject to safe harbor provisions which require that the Partnership match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All Partnership matching funds vest immediately in accordance with the safe harbor provisions. Partnership contributions to the plan for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 were $36,719, $35,806, $54,865, $46,890 and $43,787, respectively.
11. | Unconsolidated Joint Venture |
The Partnership owns 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:
December 31, 2011 | December 31, 2012 | June 30, 2013 | ||||||||||
(unaudited) | ||||||||||||
ASSETS |
||||||||||||
Investment in hotel property, net |
$ | 67,682,291 | $ | 65,899,055 | $ | 65,176,882 | ||||||
Cash and cash equivalents |
2,589,871 | 3,298,009 | 3,098,076 | |||||||||
Accounts receivable |
255,233 | 301,921 | 159,870 | |||||||||
Prepaid expenses, inventory and other assets |
2,059,130 | 1,409,924 | 955,101 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL ASSETS |
$ | 72,586,525 | $ | 70,908,909 | $ | 69,389,929 | ||||||
|
|
|
|
|
|
|||||||
LIABILITIES |
||||||||||||
Mortgage loan, net |
$ | 33,600,000 | $ | 33,100,000 | $ | 32,600,000 | ||||||
Accounts payable and other accrued liabilities |
2,817,582 | 2,995,271 | 2,633,014 | |||||||||
Advance deposits |
301,952 | 257,950 | 372,762 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL LIABILITIES |
36,719,534 | 36,353,221 | 35,605,776 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL MEMBERS EQUITY |
35,866,991 | 34,555,688 | 33,784,153 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 72,586,525 | $ | 70,908,909 | $ | 69,389,929 | ||||||
|
|
|
|
|
|
F-24
Year Ended December 31, 2010 |
Year Ended December 31, 2011 |
Year Ended December 31, 2012 |
Six months ended June 30, 2012 |
Six months ended June 30, 2013 |
||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
Revenue |
||||||||||||||||||||
Rooms department |
$ | 10,957,552 | $ | 12,012,048 | $ | 13,279,070 | $ | 7,463,159 | $ | 8,498,298 | ||||||||||
Food and beverage department |
2,094,611 | 2,580,101 | 2,529,851 | 1,355,163 | 1,392,985 | |||||||||||||||
Other operating departments |
1,085,434 | 1,107,392 | 1,238,243 | 616,608 | 785,964 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenue |
14,137,597 | 15,699,541 | 17,047,164 | 9,434,930 | 10,677,247 | |||||||||||||||
Expenses |
||||||||||||||||||||
Hotel operating expenses |
||||||||||||||||||||
Rooms department |
2,384,074 | 2,514,887 | 2,847,660 | 1,482,667 | 1,624,736 | |||||||||||||||
Food and beverage department |
1,643,261 | 1,909,535 | 1,996,968 | 1,064,924 | 1,041,169 | |||||||||||||||
Other operating departments |
622,769 | 581,402 | 596,842 | 342,618 | 289,890 | |||||||||||||||
Indirect |
6,427,040 | 6,191,902 | 6,661,672 | 3,475,831 | 3,675,768 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total hotel operating expenses |
11,077,144 | 11,197,726 | 12,103,142 | 6,366,040 | 6,631,563 | |||||||||||||||
Depreciation and amortization |
2,184,219 | 2,196,212 | 2,362,692 | 1,282,969 | 1,073,955 | |||||||||||||||
General and administrative |
199,372 | 83,040 | 79,380 | 50,971 | 57,843 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
13,460,735 | 13,476,978 | 14,545,214 | 7,699,980 | 7,763,361 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
676,862 | 2,222,563 | 2,501,950 | 1,734,950 | 2,913,886 | |||||||||||||||
Interest expense |
(1,134,528 | ) | (1,780,283 | ) | (1,758,244 | ) | (875,584 | ) | (867,723 | ) | ||||||||||
Interest income |
4,883 | | | | | |||||||||||||||
Loss on expiration of option purchase |
| (75,000 | ) | | | | ||||||||||||||
Unrealized gain (loss) on hedging activities |
520,505 | (607,656 | ) | (55,008 | ) | (148,509 | ) | 182,302 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 67,722 | $ | (240,376 | ) | $ | 688,698 | $ | 710,857 | $ | 2,228,465 | |||||||||
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|
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12. | Indirect Hotel Operating Expenses |
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
Year Ended December 31, 2010 |
Year Ended December 31, 2011 |
Year Ended December 31, 2012 |
Six months ended June 30, 2012 |
Six months ended June 30, 2013 |
||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
General and administrative |
$ | 6,157,354 | $ | 6,454,042 | $ | 6,813,616 | $ | 3,423,990 | $ | 3,559,576 | ||||||||||
Sales and marketing |
6,645,736 | 6,644,654 | 7,133,300 | 3,646,245 | 3,713,767 | |||||||||||||||
Repairs and maintenance |
4,178,563 | 4,518,327 | 4,606,547 | 2,314,391 | 2,251,966 | |||||||||||||||
Utilities |
4,480,836 | 4,609,509 | 4,425,441 | 2,166,007 | 2,026,216 | |||||||||||||||
Franchise fess |
2,434,020 | 2,627,147 | 2,875,875 | 1,488,310 | 1,594,353 | |||||||||||||||
Management fees, including incentive |
2,082,627 | 2,469,853 | 2,818,842 | 1,457,006 | 1,415,440 | |||||||||||||||
Property taxes |
2,397,671 | 2,621,896 | 2,643,931 | 1,374,636 | 1,168,410 | |||||||||||||||
Insurance |
1,232,735 | 1,276,527 | 1,369,800 | 661,205 | 716,395 | |||||||||||||||
Other |
416,617 | 562,236 | 232,258 | 110,908 | 125,495 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total indirect hotel operating expenses |
$ | 30,026,159 | $ | 31,784,191 | $ | 32,919,610 | $ | 16,642,698 | $ | 16,571,618 | ||||||||||
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F-25
13. | Income Taxes |
Our consolidated financial statements include the operations of our taxable REIT subsidiary, which is subject to federal, state and local income taxes on its taxable income. In certain jurisdictions, the operations of the Partnership are subject to state and local taxes as well. The components of the provision for (benefit from) income taxes for the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012, 2011 and 2010 are as follows:
Year
Ended December 31, 2010 |
Year
Ended December 31, 2011 |
Year
Ended December 31, 2012 |
Six months
ended June 30, 2012 |
Six months
ended June 30, 2013 |
||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
Current: |
||||||||||||||||||||
Federal |
$ | | $ | 113,919 | $ | (113,699 | ) | $ | (48,967 | ) | $ | 50,501 | ||||||||
State and local |
40,309 | 106,347 | 2,461 | 8,109 | 56,575 | |||||||||||||||
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|
|
|
|||||||||||
40,309 | 220,266 | (111,238 | ) | (40,858 | ) | 107,076 | ||||||||||||||
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|
|||||||||||
Deferred: |
||||||||||||||||||||
Federal |
163,548 | 576,136 | 1,136,334 | 868,764 | 1,006,149 | |||||||||||||||
State and local |
10,487 | 109,053 | 276,133 | 234,815 | 261,648 | |||||||||||||||
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|
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|||||||||||
174,035 | 685,189 | 1,412,467 | 1,103,579 | 1,267,797 | ||||||||||||||||
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|
|
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|||||||||||
$ | 214,344 | $ | 905,455 | $ | 1,301,229 | $ | 1,062,721 | $ | 1,374,873 | |||||||||||
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|
A reconciliation of the statutory federal income tax provision (benefit) to the Companys provision for (benefit from) income tax is as follows (in thousands):
Year Ended December 31, 2010 |
Year Ended December 31, 2011 |
Year Ended December 31, 2012 |
Six months ended 2012 |
Six months ended 2013 |
||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
Statutory federal income tax benefit |
$ | (1,032,981 | ) | $ | (1,893,728 | ) | $ | (1,369,004 | ) | $ | (1,381,738 | ) | $ | (95,147 | ) | |||||
Effect of non-taxable REIT loss |
1,196,529 | 2,583,783 | 2,391,639 | 2,201,535 | 1,151,797 | |||||||||||||||
State income tax provision |
50,796 | 215,400 | 278,594 | 242,924 | 318,223 | |||||||||||||||
$ | 214,344 | $ | 905,455 | $ | 1,301,229 | $ | 1,062,721 | $ | 1,374,873 | |||||||||||
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As of June 30, 2013 and as of December 31, 2012 and 2011, the Partnership had a net deferred tax asset of approximately $1.3 million, $2.6 million and $4.1 million, respectively, of which, approximately $0.6 million, $1.9 million and $3.4 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2028 if not utilized by such time. As of June 30, 2013 and as of December 31, 2012 and 2011, approximately $0.3 million, $0.4 million and $0.4 million, respectively, of the deferred tax asset is attributable to the Partnerships share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort and start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, all of which were not deductible when incurred and are now being amortized over 15 years. The remainder of the deferred tax asset is attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay. The Partnership believes that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.
F-26
14. | Earnings (Loss) per Unit |
The computation of basic and diluted earnings per unit is presented below.
Year ended December 31, 2010 |
Year ended December 31, 2011 |
Year ended December 31, 2012 |
Six months ended June 30, 2012 |
Six months ended June 30, 2013 |
||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
Numerator |
||||||||||||||||||||
Net loss |
$ | (3,252,261 | ) | $ | (6,475,243 | ) | $ | (5,327,711 | ) | $ | (5,126,655 | ) | $ | (1,654,717 | ) | |||||
|
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|||||||||||
Denominator |
||||||||||||||||||||
Weighted average number of units outstanding |
12,893,444 | 12,934,325 | 12,973,953 | 12,974,306 | 13,037,064 | |||||||||||||||
Dilutive effect of stock awards |
16,000 | | | | | |||||||||||||||
Dilutive effect of warrant |
| 183,442 | 651,608 | 451,354 | 911,582 | |||||||||||||||
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Weighted average number of common shares outstanding for dilutive computation |
12,909,444 | 13,117,767 | 13,625,561 | 13,425,660 | 13,948,646 | |||||||||||||||
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|
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Basic net loss per unit |
$ | (0.25 | ) | $ | (0.50 | ) | $ | (0.41 | ) | $ | (0.40 | ) | $ | (0.13 | ) | |||||
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Diluted net loss per unit |
$ | (0.25 | ) | $ | (0.50 | ) | $ | (0.39 | ) | $ | (0.38 | ) | $ | (0.12 | ) | |||||
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Diluted net income (loss) per share takes into consideration the pro forma dilution of certain unvested stock awards during 2010 as well as the Warrant discussed in Note 6 issued in April 2011.
15. | Quarterly Operating Results (Unaudited) |
Quarters Ended 2012 | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Total revenue |
$ | 20,025,146 | $ | 25,112,522 | $ | 21,771,213 | $ | 20,434,338 | ||||||||
Total operating expenses |
18,719,004 | 20,410,903 | 19,577,732 | 18,330,698 | ||||||||||||
Net operating income |
1,306,142 | 4,701,619 | 2,193,481 | 2,103,640 | ||||||||||||
Net income (loss) |
(2,980,344 | ) | (2,146,311 | ) | (2,095,198 | ) | 1,894,143 |
Quarters Ended 2011 | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Total revenue |
$ | 18,535,572 | $ | 23,129,720 | $ | 20,015,186 | $ | 19,492,027 | ||||||||
Total operating expenses |
17,586,783 | 19,351,054 | 19,191,343 | 18,381,485 | ||||||||||||
Net operating income (loss) |
948,789 | 3,778,666 | 823,843 | 1,110,542 | ||||||||||||
Net income (loss) |
(1,336,470 | ) | (243,501 | ) | (1,494,902 | ) | (3,400,370 | ) |
16. | Subsequent Events |
On July 11, 2013, the Company (and Partnership) paid a quarterly dividend (distribution) of $0.035 per common share (and unit) to those stockholders (and unitholders) of record on June 14, 2013.
On July 22, 2013, the Company (and Partnership) authorized payment of a quarterly dividend (distribution) of $0.04 per common share (and unit) to those stockholders (and unitholders) of record as of September 13, 2013. The dividend (distribution) is to be paid on October 11, 2013.
On August 1, 2013, the Partnership 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
F-27
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 the Partnership 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 to the Company of approximately $2.7 million with respect to its Preferred Interest to facilitate the redemption of 2,460 shares of the Companys Preferred Stock and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.
On August 2, 2013, the Partnership changed its name from MHI Hospitality, L.P. to Sotherly Hotels LP.
F-28
SOTHERLY HOTELS INC.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2012
(in thousands)
Initial Costs | Costs Capitalized Subsequent to Acquisition |
Gross Amount At End of Year | Life on Which Operations is | |||||||||||||||||||||||||||||||||||||||||||
Description |
Encum- brances |
Land | Building & Improvements |
Land | Building & Improvements |
Land | Building & Improvements |
Total | Accumulated Depreciation |
Date of Construction |
Date Acquired |
|||||||||||||||||||||||||||||||||||
Crowne Plaza Hampton |
$ | 7,560 | $ | 1,061 | $ | 6,733 | $ | 33 | $ | 3,302 | $ | 1,094 | $ | 10,035 | $ | 11,129 | $ | (1,304 | ) | 1988 | 2008 | 3-39 years | ||||||||||||||||||||||||
Crowne Plaza Jacksonville |
14,135 | 7,090 | 14,604 | 51 | 2,813 | 7,141 | 17,417 | 24,558 | (3,442 | ) | 1970 | 2005 | 3-39 years | |||||||||||||||||||||||||||||||||
Crowne Plaza Tampa Westshore |
13,872 | 4,153 | 9,670 | 273 | 21,965 | 4,426 | 31,635 | 36,061 | (3,728 | ) | 1973 | 2007 | 3-39 years | |||||||||||||||||||||||||||||||||
Hilton Philadelphia Airport |
29,503 | 2,100 | 22,031 | 84 | 3,599 | 2,184 | 25,630 | 27,814 | (5,604 | ) | 1972 | 2004 | 3-39 years | |||||||||||||||||||||||||||||||||
Hilton Savannah DeSoto Savannah, Georgia |
22,051 | 600 | 13,562 | 14 | 10,876 | 614 | 24,438 | 25,052 | (5,698 | ) | 1968 | 2004 | 3-39 years | |||||||||||||||||||||||||||||||||
Hilton Wilmington Riverside Wilmington, North Carolina |
21,417 | 785 | 16,829 | 112 | 9,967 | 897 | 26,796 | 27,693 | (8,103 | ) | 1970 | 2004 | 3-39 years | |||||||||||||||||||||||||||||||||
DoubleTree by Hilton Brownstone University Raleigh, North Carolina |
7,817 | 815 | 7,416 | 184 | 4,623 | 999 | 12,039 | 13,038 | (2,852 | ) | 1971 | 2004 | 3-39 years | |||||||||||||||||||||||||||||||||
Holiday Inn Laurel West Laurel, Maryland |
7,300 | 900 | 9,443 | 187 | 2,416 | 1,087 | 11,859 | 12,946 | (2,985 | ) | 1985 | 2004 | 3-39 years | |||||||||||||||||||||||||||||||||
Sheraton Louisville Riverside Jeffersonville, Indiana |
12,019 | 782 | 6,891 | 206 | 14,469 | 988 | 21,360 | 22,348 | (2,961 | ) | 1972 | 2006 | 3-39 years | |||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||||
$ | 135,674 | $ | 18,286 | $ | 107,179 | $ | 1,144 | $ | 74,030 | $ | 19,430 | $ | 181,209 | $ | 200,639 | $ | (36,677 | ) | ||||||||||||||||||||||||||||
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F-29
RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION
RECONCILIATION OF REAL ESTATE
Balance at December 31, 2009 |
$ | 192,529 | ||
Improvements |
3,394 | |||
Disposal of Assets |
(37 | ) | ||
|
|
|||
Balance at December 31, 2010 |
$ | 195,886 | ||
Improvements |
3,380 | |||
Disposal of Assets |
(307 | ) | ||
|
|
|||
Balance at December 31, 2011 |
$ | 198,959 | ||
Improvements |
1,807 | |||
Disposal of Assets |
(127 | ) | ||
|
|
|||
Balance at December 31, 2012 |
$ | 200,639 | ||
|
|
RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at December 31, 2009 |
$ | 20,871 | ||
Current Expense |
5,295 | |||
Disposal of Assets |
(21 | ) | ||
|
|
|||
Balance at December 31, 2010 |
$ | 26,145 | ||
Current Expense |
5,325 | |||
Disposal of Assets |
(166 | ) | ||
|
|
|||
Balance at December 31, 2011 |
$ | 31,304 | ||
Current Expense |
5,500 | |||
Disposal of Assets |
(127 | ) | ||
|
|
|||
Balance at December 31, 2012 |
$ | 36,677 | ||
|
|
F-30
Senior Unsecured Notes
SOTHERLY HOTELS LP
Senior Unsecured Notes
PROSPECTUS
, 2013
SANDLER ONEILL + PARTNERS, L.P.
Until , 2013, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses of the sale and distribution of the securities being registered (assuming no exercise of the underwriters over-allotment option), all of which are being borne by the Registrant.
SEC registration fee |
$ | 3,137.20 | ||
FINRA filing fee |
3,950 | |||
NASDAQ listing fee |
* | |||
Printing fees |
* | |||
Legal fees and expenses |
* | |||
Accounting fees and expense |
* | |||
Trustee fees and expenses |
* | |||
Blue sky fees and expenses |
* | |||
Miscellaneous |
* | |||
|
|
|||
Total |
$ | * | ||
|
|
* | To be filed by amendment. |
All expenses, except the SEC registration fee, the FINRA filing fee and the NASDAQ listing fee, are estimated.
Item 32. Sales To Special Parties.
Not applicable.
Item 33. Recent Sales of Unregistered Securities.
In April 2011, the Operating Partnerships general partner, Sotherly, sold to Essex Illiquid, LLC and Richmond Hill Capital Partners, LP in a private placement 25,000 shares of Sotherlys Series A Cumulative Redeemable Preferred Stock and a warrant to purchase 1,900,000 shares of Sotherlys common stock, par value $0.01 per share, for a purchase price of $25.0 million, the proceeds of which were contributed to the Operating Partnership in exchange for series A preferred interests and a warrant to purchase 1,900,000 operating partnership units. The Operating Partnership used the net proceeds from the private placement to partially prepay the amounts owed by Sotherly under its credit agreement. The securities described above were issued in reliance on Section 4(a)(2) of the Securities Act.
Item 34. Indemnification of Directors and Officers.
Subject to any terms, conditions or restrictions set forth in the Operating Partnerships partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other person from and against all claims and demands whatsoever. The amended and restated partnership agreement of the Operating Partnership generally requires the Operating Partnership to indemnify Sotherly and the directors, officers and employees of Sotherly, and any affiliates of either Sotherly or the Operating Partnership and certain other specific persons to the fullest extent permitted by the law against all losses, claims, damages, liabilities, including reasonable legal fees and expenses, or similar events relating to the operations of the Operating Partnership except for those which arise from bad faith, improper receipt of a personal benefit or where there was reasonable knowledge that the act or omission leading to the activity was unlawful.
Sotherly provides insurance from a commercial carrier against certain liabilities that could be incurred by the Companys directors and officers.
II-1
Item 35. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) | Financial Statements. The following financial statements are filed as part of this registration statement on Form S-11. |
Sotherly Hotels LP |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Schedule IIIReal Estate and Accumulated Depreciation as of December 31, 2012 |
F-29 |
(b) | Exhibits. The Exhibit Index filed herewith and appearing immediately before the exhibits hereto is incorporated by reference. |
Item 37. Undertakings.
(a) | The undersigned registrant hereby undertakes that: |
1) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(b) | The undersigned registrant hereby further undertakes that: |
1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration state in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the Issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Williamsburg, Commonwealth of Virginia, on September 3, 2013.
SOTHERLY HOTELS LP, | ||
by its General Partner, SOTHERLY HOTELS INC. | ||
By: |
/s/ DAVID R. FOLSOM | |
Name: | David R. Folsom | |
Its: | President and Chief Operating Officer |
II-3
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Name and Signature |
Title |
Date | ||
/S/ ANDREW M. SIMS Andrew M. Sims |
Chief Executive Officer and Chairman of the Board of Directors of Sotherly Hotels Inc. (Principal Executive Officer of Sotherly Hotels Inc.) |
September 3, 2013 | ||
/S/ DAVID R. FOLSOM David R. Folsom |
President and Director of Sotherly Hotels Inc. | September 3, 2013 | ||
/S/ ANTHONY E. DOMALSKI Anthony E. Domalski |
Chief Financial Officer of Sotherly Hotels Inc. (Principal Financial Officer and Principal Accounting Officer of Sotherly Hotels Inc.) | September 3, 2013 | ||
Gen. Anthony C. Zinni |
Director of Sotherly Hotels Inc. |
|||
J. Paul Carey |
Director of Sotherly Hotels Inc. |
|||
/S/ EDWARD S. STEIN* Edward S. Stein |
Director of Sotherly Hotels Inc. |
September 3, 2013 | ||
/S/ DAVID J. BEATTY* David J. Beatty |
Director of Sotherly Hotels Inc. |
September 3, 2013 | ||
/S/ JAMES P. OHANLON* James P. OHanlon |
Director of Sotherly Hotels Inc. |
September 3, 2013 | ||
/S/ KIM E. SIMS* Kim E. Sims |
Director of Sotherly Hotels Inc. |
September 3, 2013 | ||
Ryan P. Taylor |
Director of Sotherly Hotels Inc. |
* | Executed pursuant to power of attorney. |
II-4
EXHIBIT INDEX
Exhibit No. |
Description of Exhibit | |
1.1 | Form of Underwriting Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP and Sandler ONeill & Partners, L.P. as representative of the Underwriters named therein | |
3.1 | Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP(1) | |
3.2 | Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP(2) | |
3.3 | Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP | |
4.1 | Form of Senior Unsecured Note (included as Exhibit A to the Form of Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee) | |
4.2 | Form of Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee | |
4.3 | Warrant, dated April 18, 2011, by MHI Hospitality, L.P. issued to Sotherly Hotels Inc. | |
5.1 | Opinion of Baker & McKenzie LLP* | |
8.1 | Opinion of Baker & McKenzie LLP with respect to tax matters* | |
10.1 | Strategic Alliance Agreement between MHI Hospitality Corporation, MHI Hospitality, L.P. and MHI Hotels Services, LLC.(3) | |
10.2 | Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.(3) | |
10.3 | Amendment Number 2, dated January 14, 2008 to the Master Management Agreement, dated December 21, 2004, as amended, by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.(4) | |
10.4 | Contribution Agreement dated August 23, 2004 by and between the owners of Capitol Hotel Associates L.P., L.L.P. and MHI Hospitality, L.P.(5) | |
10.5 | Contribution Agreement dated August 23, 2004 by and between the owners of Savannah Hotel Associates LLC and MHI Hospitality, L.P.(5) | |
10.6 | Contribution Agreement dated August 23, 2004 by and between KDCA Partnership, MAVAS LLC, and MHI Hospitality, L.P.(1) | |
10.7 | Contribution Agreement dated September 8, 2004 by and between Elpizo Limited Partnership, Phileo Land Corporation and MHI Hospitality, L.P.(1) | |
10.8 | Asset Purchase Agreement dated August 19, 2004 by and between Accord LLC, West Laurel Corporation and MHI Hotels Services, LLC.(1) | |
10.9 | Agreement to Assign and Sublease Common Space Lease and Form of Sublease by and between MHI Hospitality, L.P. and MHI Hotels, LLC.(3) | |
10.10 | Agreement to Assign and Sublease Commercial Space Lease and Form of Sublease by and between MHI Hospitality, L.P. and MHI Hotels Two, Inc.(3) | |
10.11 | Lease Agreement by and between Philadelphia Hotel Associates, LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K).(3) | |
10.12 | Management Restructuring Agreement by and between MHI Hospitality TRS, LLC, MHI Hotels Services, LLC and MHI Hospitality, L.P.(6) |
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Exhibit No. |
Description of Exhibit | |
10.13 | Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc.(3) | |
10.14 | Loan Agreement dated as of July 22, 2005, by and between MHI Jacksonville LLC and Mercantile Safe Deposit and Trust Company.(7) | |
10.15 | Promissory Note dated as of July 22, 2005, made by MHI Jacksonville LLC to Mercantile Safe Deposit and Trust Company.(7) | |
10.16 | Purchase, Sale and Contribution Agreement by and between BIT Holdings Seventeen, Inc, MHI Hospitality, L.P., and MHI Hotels, LLC.(8) | |
10.17 | Purchase Agreement by and between MCZ/Centrum Florida VI and MHI Hollywood LLC.(9) | |
10.18 | Third Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC.(10) | |
10.19 | Fourth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC, dated September 1, 2006.(10) | |
10.20 | Fifth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC.(11) | |
10.21 | First Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of July 25, 2006.(12) | |
10.22 | Second Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of August 4, 2006.(12) | |
10.23 | Purchase Agreement dated July 6, 2006, between Riverfront Inn, LLC and MHI Hospitality Corporation.(13) | |
10.24 | Strategic Alliance Agreement dated September 8, 2006 by and among MHI Hospitality, L.P., MHI Hospitality Corporation and Coakley & Williams Hotel Management Company.(14) | |
10.25 | Promissory Note dated March 29, 2007, made by Capitol Hotel Associates, L.P., L.L.P. and MONY Life Insurance Company.(15) | |
10.26 | Limited Liability Company Agreement of MHI/Carlyle Hotel Investment Program I, L.L.C. dated April 26, 2007.(16) | |
10.27 | Limited Liability Company Agreement of MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007.(16) | |
10.28 | Program Agreement for MHI/Carlyle Hotel Investment Program I, L.L.C. and MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007.(16) | |
10.29 | Agreement to Purchase Hotel dated May 25, 2007 between MCZ/Centrum Florida VI Owner, L.L.C. and MHI Hollywood LLC.(11) | |
10.30 | Purchase Agreement between MHI Hospitality Corporation and VanTampa Plaza Hotel, Inc. dated July 16, 2007.(17) | |
10.31 | Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company.(18) | |
10.32 | Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and Hampton Redevelopment and Housing Authority dated April 24, 2008.(19) | |
10.33 | Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated December 1, 1998.(19) |
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Exhibit No. |
Description of Exhibit | |
10.34 | $7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project) Series 1998A.(19) | |
10.35 | Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998.(19) | |
10.36 | Promissory Note by MHI Hotel Investments Holdings, LLC, dated February 9, 2009.(20) | |
12.1 | Schedule of Computation of Ratio of Earnings to Fixed Charges | |
21.1 | List of Subsidiaries of Sotherly Hotels LP | |
23.1 | Consent of PBMares, LLP | |
23.2 | Consent of Baker & McKenzie LLP (included in Exhibits 5.1 and 8.1)* | |
24.1 | Power of attorney (included in signature page) | |
25.1 | A Statement of Eligibility on Form T-1 of Wilmington Trust, National Association, as the Trustee under the Indenture |
* | To be filed by amendment. |
| Previously filed. |
(1) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. |
(2) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011. |
(3) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011. |
(4) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2008. |
(5) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Pre-Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 15, 2004. |
(6) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Pre-Effective Amendment No. 3 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on November 15, 2004. |
(7) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2005. |
(8) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, filed with the Securities and Exchange Commission on August 11, 2005. |
(9) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005. |
(10) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006. |
(11) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2007. |
(12) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the Securities and Exchange Commission on August 8, 2006. |
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(13) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2006. |
(14) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 22, 2007. |
(15) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007. |
(16) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007. |
(17) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2007. |
(18) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2007. |
(19) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities and Exchange Commission on May 7, 2008. |
(20) | Incorporated by reference to the document previously filed as an exhibit to Sotherlys Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2009. |
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EXHIBIT 1.1
SOTHERLY HOTELS LP
(a Delaware limited partnership)
$[] []% Senior Notes Due 2018
UNDERWRITING AGREEMENT
Dated: [], 2013
SOTHERLY HOTELS LP
(a Delaware limited partnership)
$[] []% Senior Notes Due 2018
UNDERWRITING AGREEMENT
[], 2013
Sandler ONeill & Partners, L.P.
as Representative of the several Underwriters
named in Schedule I hereto
1251 Avenue of the Americas, 6th Floor
New York, New York 10020
Ladies and Gentlemen:
Sotherly Hotels Inc. (formerly known as MHI Hospitality Corporation), a Maryland real estate investment trust (the Company), and Sotherly Hotels LP (formerly known as MHI Hospitality, L.P.), a Delaware limited partnership (the Operating Partnership), confirm their respective agreements with the underwriters named in Schedule I hereto (the Underwriters, which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Sandler ONeill & Partners, L.P. is acting as representative (in such capacity, the Representative), with respect to the sale by the Operating Partnership and the purchase by the Underwriters of an aggregate of $[] principal amount of the []% Senior Notes due 2018 (the Senior Notes) of the Operating Partnership and (ii) with respect to the grant by the Operating Partnership to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase an additional $[] aggregate principal amount of Senior Notes to cover over-allotments, if any. The aforesaid Senior Notes (the Initial Securities) to be purchased by the Underwriters and all or any part of the Senior Notes subject to the option described in Section 2(b) hereof (the Option Securities) are hereinafter called, collectively, the Securities. The Securities are to be issued under an indenture (the Indenture) between the Operating Partnership and Wilmington Trust, National Association, as trustee (the Trustee).
The Operating Partnership understands that the Underwriters propose to make a public offering of the Securities as soon as the Representative deems advisable after this Agreement has been executed and delivered.
The Operating Partnership has filed with the Securities and Exchange Commission (the Commission) a registration statement on Form S-11 (No. 333-189821), including the related preliminary prospectus or prospectuses, covering the registration of the offer and sale of the Securities under the Securities Act of 1933, as amended (the 1933 Act). Promptly after execution and delivery of this Agreement, the Operating Partnership will prepare and file a
prospectus in accordance with the provisions of Rule 430A (Rule 430A) of the rules and regulations of the Commission under the 1933 Act (the 1933 Act Regulations) and Rule 424(b) of the 1933 Act Regulations (Rule 424(b)). The information included in such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to Rule 430A(b) is hereinafter called the Rule 430A Information. Such registration statement, including the amendments, exhibits and any schedules thereto, as well as the Rule 430A Information, but excluding the Statement of Eligibility and Qualification on Form T-1 of the Trustee (as defined below), as of the time it became effective, is hereinafter called the Registration Statement. Any registration statement filed by the Operating Partnership pursuant to Rule 462(b) of the 1933 Act Regulations is hereinafter called the Rule 462(b) Registration Statement and, after such filing (if any), the term Registration Statement shall include the Rule 462(b) Registration Statement. Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, if any, is hereinafter called a preliminary prospectus. The final prospectus, in the form first furnished to the Underwriters for use in connection with the offering of the Securities, is hereinafter called the Prospectus. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).
The Securities will be issued to Cede & Co. as nominee of the Depository Trust Company (DTC) pursuant to a blanket letter of representations, dated as of [], 2013 (the DTC Agreement), between the Operating Partnership and DTC.
As used in this Agreement:
Applicable Time means [] [A.M./P.M.], New York City time, on [], 2013 or such other time as agreed by the Operating Partnership and the Representative.
General Disclosure Package means any Issuer General Use Free Writing Prospectuses (as defined below) issued prior to the Applicable Time, the prospectus that is included in the Registration Statement as of the Applicable Time and the information included on Schedule III hereto, all considered together.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined in Rule 433 of the 1933 Act Regulations (Rule 433), including, without limitation, any free writing prospectus (as defined in Rule 405 of the 1933 Act Regulations (Rule 405)) relating to the Securities that is (i) required to be filed with the Commission by the Operating Partnership, (ii) a road show that is a written communication within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the offering of the Securities that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Operating Partnerships records pursuant to Rule 433(g).
Issuer General Use Free Writing Prospectus means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a bona fide electronic road show, as defined in Rule 433 (the Bona Fide Electronic Road Show)), as specified in Schedule III hereto.
Issuer Limited Use Free Writing Prospectus means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Operating Partnership. The Operating Partnership represents and warrants to each Underwriter as of the date hereof, the Applicable Time, the Closing Time, and each Date of Delivery (as defined below), if any, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the Registration Statement and any post-effective amendment thereto (i) have been prepared by the Operating Partnership in conformity with the requirements of the 1933 Act and the 1933 Act Regulations. No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the knowledge of the Operating Partnership, contemplated. The Operating Partnership has complied with each request, if any, from the Commission for additional information.
Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, at the Applicable Time, at the Closing Time and at each Date of Delivery, if any, complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the Trust Indenture Act of 1939, as amended (the Trust Indenture Act) and the rules and regulations of the Commission thereunder (the Trust Indenture Rules). The preliminary prospectus that is included in the General Disclosure Package, at the time it was filed, complied, and the Prospectus and each amendment or supplement thereto, as of their respective issue dates, complied and will comply, in all material respects with the 1933 Act, the 1933 Act Regulations, the Trust Indenture Act and the Trust Indenture Rules. Each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with the offering of the Securities were or will be substantially identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Accurate Disclosure. Neither the Registration Statement nor any post-effective amendment thereto, at the respective times it became effective, at the Closing Time or at any Date of Delivery, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. At the Applicable Time, at the Closing Time and at each Date of
Delivery, if any, neither (A) the General Disclosure Package nor (B) any individual Issuer Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Time or at any Date of Delivery, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of the time of the filing of the Final Term Sheet (as defined in Section 3(a)(ii)), the General Disclosure Package, when considered together with the Final Term Sheet, will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The representations and warranties in this Section 1(a)(ii) shall not apply to (i) that part of the Registration Statement which constitutes the Statement of Eligibility and Qualification on Form T-1 of the Trustee under the Trust Indenture Act or (ii) statements in or omissions from the Registration Statement (or any amendment thereto), the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with written information furnished to the Operating Partnership by any Underwriter through the Representative expressly for use therein. For purposes of this Agreement, the only information so furnished are (i) the concession and reallowance figures appearing in the Prospectus in the section entitled Underwriting and (ii) the seventh and eighth paragraphs appearing in the Prospectus in the section entitled Underwriting relating to stabilization transactions, over-allotment transactions, syndicate covering transactions and, if applicable, penalty bids in which the Underwriters may engage (collectively, the Underwriter Information).
(iii) Issuer Free Writing Prospectuses. No Issuer Free Writing Prospectus conflicts or will conflict with the information contained in the Registration Statement or the Prospectus, or any preliminary or other prospectus deemed to be a part thereof that has not been superseded or modified. Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the 1933 Act and the 1933 Act Regulations on the date of first use, and the Operating Partnership has complied with any filing requirements applicable to such Issuer Free Writing Prospectus pursuant to the 1933 Act Regulations. The Operating Partnership has not made any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representative; provided, that such consent is deemed to have been given with respect to each Issuer Free Writing Prospectus identified on Schedule III. The Operating Partnership has retained in accordance with the 1933 Act Regulations all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the 1933 Act Regulations.
The first sentence of this Section 1(a)(iii) shall not apply to the Underwriting Information.
(iv) Not Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, and at the date hereof, the Operating Partnership is not an ineligible issuer, as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Operating Partnership be considered an ineligible issuer.
(v) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Registration Statement, the General Disclosure Package, and the Prospectus are independent public accountants with respect to the Operating Partnership as required by the 1933 Act, the 1933 Act Regulations, and the Public Company Accounting Oversight Board.
(vi) Financial Statements; Non-GAAP Financial Measures. The financial statements together with the related schedules and notes thereto of the Operating Partnership and its consolidated subsidiaries included in the Registration Statement, the General Disclosure Package and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the 1934 Act), as applicable, and present fairly the financial position of the entities purported to be shown thereby (including the Operating Partnership and its consolidated subsidiaries) as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the U.S. (GAAP) applied on a consistent basis throughout the periods covered thereby, and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein; the selected financial data and the summary financial information included in the Registration Statement, the General Disclosure Package and the Prospectus have been derived from the accounting records of the Operating Partnership and its consolidated subsidiaries and present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement; and the pro forma financial information and the related notes thereto included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information shown therein and have been prepared in accordance with the applicable requirements of the 1933 Act and the 1934 Act, as applicable, and the assumptions underlying such pro forma financial information are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement, the General Disclosure Package or the Prospectus under the 1933 Act or the 1933 Act Regulations. All disclosures contained in the Registration Statement, the General Disclosure Package or the Prospectus regarding non-GAAP
financial measures (as such term is defined by the rules and regulations of the Commission) comply in all material respects with Regulation G of the 1934 Act and Item 10 of Regulation S-K of the 1933 Act Regulations, to the extent applicable. The ratio of earnings to fixed charges (actual and, if any, pro forma) included in the Registration Statement, the General Disclosure Package and the Prospectus under the caption Ratios of Earnings to Fixed Charges have been calculated in compliance with Item 503(d) of Regulation S-K of the 1933 Act Regulations.
(vii) No Material Adverse Change in Business. Except as otherwise stated in the Registration Statement, the General Disclosure Package and the Prospectus, since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, (A) there has been no material adverse change in or affecting the properties described in the Registration Statement, General Disclosure Package and the Prospectus as owned or leased by the Operating Partnership (each, a Property and collectively, the Properties) or in the business, condition (financial or otherwise), results of operations, partners equity, earnings, business affairs or business prospects of the Operating Partnership and its direct and indirect subsidiaries (each a Subsidiary and collectively the Subsidiaries) as one enterprise, whether or not arising in the ordinary course of business (a Material Adverse Effect); (B) there have been no transactions entered into by the Operating Partnership or the Subsidiaries, other than those in the ordinary course of business, which are material with respect to the Operating Partnership and the Subsidiaries considered as one enterprise, (C) there has been no liability or obligation, direct or contingent (including off-balance sheet obligations), which is material to the Operating Partnership and the Subsidiaries considered as one enterprise, incurred by the Operating Partnership or any of the Subsidiaries, except obligations incurred in the ordinary course of business, and (D) there has been no distribution of any kind declared, paid or made by the Operating Partnership on any units of limited partnership interest in the Operating Partnership (OP Units), or other form of ownership interests in the Operating Partnership.
(viii) Good Standing of the Operating Partnership. The Operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the laws of the State of Delaware, has all limited partnership power and limited partnership authority to own, lease and operate its properties, conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and enter into and perform its obligations under this Agreement, the DTC Agreement and the Indenture, and is duly qualified as a foreign limited partnership to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not, singly or in the aggregate, result in a Material Adverse Effect. The Company is the sole general partner of the Operating Partnership. The Amended and Restated Agreement of Limited Partnership of the Operating Partnership, as amended (the Operating Partnership Agreement), filed as an exhibit to the Registration Statement, is in full force and effect.
(ix) Good Standing of the Subsidiaries. Except as set forth on Schedule 1(a)(ix), none of the Subsidiaries meets the definition of a significant subsidiary (as such term is defined in Rule 1-02 of Regulation S-X). The only Subsidiaries are the subsidiaries listed on Exhibit 21 to the Registration Statement.
(x) Capitalization. The Registration Statement, the General Disclosure Package and the Prospectus accurately describe the aggregate percentage interests in the Operating Partnership held by the Company and any limited partners. The outstanding partnership interests of the Operating Partnership have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding partnership interests of the Operating Partnership was issued in violation of the preemptive or other similar rights of any securityholder of the Operating Partnership.
(xi) Authorization and Description of Securities. The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when duly executed, authenticated, issued and delivered against payment therefor as provided herein and in the Indenture, will be duly and validly issued and outstanding, and shall constitute a valid and binding obligation of the Operating Partnership, entitled to the benefits provided in the Indenture, and enforceable against the Operating Partnership in accordance with its terms. The Operating Partnership has the requisite partnership power and authority to enter into this Agreement, to issue the Securities, and to enter into the Indenture and to perform its obligations contemplated hereby and thereby. The Securities have been issued and delivered by the Operating Partnership pursuant to this Agreement against payment of the consideration set forth herein; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Operating Partnership. The Securities conform in all material respects to all statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus and such description conforms in all material respects to the rights set forth in the instruments defining the same. No holder of Securities will be subject to personal liability by reason of being such a holder. Any certificates to be used to evidence the Securities will, at the Closing Time, be in due and proper form and will comply in all material respects with all applicable legal requirements, the requirements of the Operating Partnership Agreement and the requirements of the NASDAQ Global Market (the NASDAQ). Upon payment of the purchase price and delivery of the Securities in accordance herewith, each of the Underwriters will receive good, valid, and marketable title to the Securities, free and clear of all security interests, mortgages, pledges, liens, encumbrances, claims, restrictions, and equities.
(xii) Authorization and Description of Agreement. The Agreement has been duly authorized, executed and delivered by the Operating Partnership and, when duly executed and delivered in accordance with its terms by the other parties thereto, constitutes, as the case may be, a valid and binding agreement of the Operating Partnership, enforceable against the Operating Partnership in accordance with its terms. The Agreement conforms in all material respects to all statements relating
thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus and such description conforms in all material respects to the terms set forth in the Agreement.
(xiii) Authorization and Description of Indenture. The Indenture has been duly authorized by the Operating Partnership and, at the Closing Time, will be duly qualified under the Trust Indenture Act and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of the Operating Partnership enforceable against the Operating Partnership in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to enforcement of creditors rights generally, and general equitable principles relating to the availability of remedies. The Indenture conforms, in all material respects to the statements and descriptions relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(xiv) Authorization of Partnership Agreements. The Operating Partnership Agreement and the partnership agreement, limited liability company operating agreement, and each other similar organizational document of each of the Subsidiaries have been duly and validly authorized, executed and delivered by the parties thereto and are valid and binding agreements of the parties thereto, enforceable against such parties in accordance with their terms. The Operating Partnership Agreement conforms in all material respects to all statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus, and such description conforms in all material respects to the terms set forth in the Operating Partnership Agreement.
(xv) Authorization of DTC Agreement. The DTC Agreement has been duly authorized, executed and delivered by the Operating Partnership and is a valid and binding obligation of the Operating Partnership, enforceable against the Operating Partnership in accordance with its terms, except as the enforcement thereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to enforcement of creditors rights generally, and general equitable principles relating to the availability of remedies.
(xvi) Registration Rights. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, no person has the right to require the Operating Partnership or any of the Subsidiaries to register any securities for sale under the 1933 Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Securities.
(xvii) Absence of Violations, Defaults and Conflicts. Neither the Operating Partnership nor any of the Subsidiaries is (A) in violation of its certificate of limited partnership, agreement of limited partnership or other organizational document, (B) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, hotel management agreement,
franchise agreement or other agreement or instrument to which the Operating Partnership or any of the Subsidiaries is a party or by which it or any of them may be bound or to which any of the Properties or any other properties or assets of the Operating Partnership or any of the Subsidiaries is subject (collectively, Agreements and Instruments), except for such defaults that would not, singly or in the aggregate, result in a Material Adverse Effect, or (C) in violation of any law, statute, rule, regulation, judgment, order, writ or decree of any arbitrator, court, governmental body, regulatory body, administrative agency or other authority, body or agency having jurisdiction over the Operating Partnership or any of the Subsidiaries or the Properties or any of their respective other properties, assets or operations (each, a Governmental Entity), except for such violations that would not, singly or in the aggregate, result in a Material Adverse Effect.
(xviii) Issuance and Execution. The issuance and sale of the Securities, the execution, delivery and performance of this Agreement by the Operating Partnership, the execution, delivery and performance of the Indenture and the DTC Agreement by the Operating Partnership, and the consummation of the transactions contemplated hereby and thereby and in the Registration Statement, the General Disclosure Package and the Prospectus and compliance by the Operating Partnership with its obligations hereunder and thereunder have been duly authorized by all necessary limited partnership action, as applicable, and, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon the Properties or any of their respective subsidiaries pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not, singly or in the aggregate, result in a Material Adverse Effect), nor will such action result in any violation of (i) the provisions of the certificate of limited partnership, agreement of limited partnership or other organizational document, as applicable, of the Operating Partnership or any of the Subsidiaries or (ii) any applicable law, statute, rule, regulation, judgment, order, writ or decree of any Governmental Entity, except in the case of clause (ii) only, for any such violation that would not, singly or in the aggregate, result in a Material Adverse Effect. As used herein, a Repayment Event means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holders behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Operating Partnership or any of the Subsidiaries.
(xix) Absence of Event of Default. No event has occurred and is continuing that, had the Securities been issued, would (whether or not with the giving of notice and/or the passage of time and/or the fulfillment of any other requirement) constitute an Event of Default (as defined in the Indenture) under the Indenture.
(xx) Absence of Labor Dispute. No labor dispute with the employees of the Operating Partnership or any of the Subsidiaries exists or, to the knowledge of the Operating Partnership, is imminent, which, in any such case, would, singly or in the aggregate, result in a Material Adverse Effect.
(xxi) Absence of Proceedings. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no action, suit, proceeding, inquiry or investigation pending, or, to the knowledge of the Operating Partnership, threatened, against or affecting the Operating Partnership or any of the Subsidiaries, which is required to be disclosed in the Registration Statement or the Prospectus (other than as disclosed therein), or which would, singly or in the aggregate, result in a Material Adverse Effect, or which would materially and adversely affect the property or assets of the Operating Partnership and the Subsidiaries, taken as a whole, or the consummation of the transactions contemplated in this Agreement, the Indenture or the DTC Agreement, or the performance by the Operating Partnership of its obligations hereunder or thereunder. The aggregate of all pending legal or governmental proceedings to which the Operating Partnership or any of the Subsidiaries is a party or of which any of the Properties or assets is the subject which are not described in the Registration Statement, the General Disclosure Package and the Prospectus, including ordinary routine litigation incidental to the business, would not result in a Material Adverse Effect.
(xxii) Absence of other Violations. None of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Securities) will violate or result in a violation of Section 7 of the 1934 Act, or any regulation promulgated thereunder, including, without limitation, Regulations T, U, and X of the Board of Governors of the Federal Reserve System.
(xxiii) Accuracy of Exhibits. There are no contracts or documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that have not been so described or filed as required.
(xxiv) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity is necessary or required for the performance by the Operating Partnership of its obligations hereunder or in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement or the Indenture, except such as have been already obtained or as may be required under the 1933 Act, the 1933 Act Regulations, the Trust Indenture Act, the Trust Indenture Rules, the rules of the NASDAQ, the securities laws or real estate syndication laws of any applicable U.S. state or jurisdiction or the rules of the Financial Industry Regulatory Authority, Inc. (FINRA), will be made at or prior to the Closing Time.
(xxv) Possession of Licenses and Permits. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Operating Partnership and the Subsidiaries possess such permits, licenses, approvals,
consents and other authorizations (collectively, Governmental Licenses) issued by the appropriate Governmental Entities necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect. The Operating Partnership and the Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect. All of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Operating Partnership nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
(xxvi) Title to Property. (A) The Operating Partnership, any of the Subsidiaries or any joint venture in which the Operating Partnership or any of the Subsidiaries owns an interest (each such joint venture being referred to as a Related Entity), as the case may be, have good and marketable fee or leasehold title to the Properties, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind, other than those that (1) are described in the Registration Statement, the General Disclosure Package and the Prospectus or (2) do not, singly or in the aggregate, materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Operating Partnership, any of the Subsidiaries or any Related Entity; (B) except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Operating Partnership nor any of the Subsidiaries or any Related Entity owns any real property other than the Properties; (C) each of the ground leases, subleases and sub-subleases relating to a Property, if any, material to the business of the Operating Partnership and the Subsidiaries, considered as one enterprise, are in full force and effect, with such exceptions as do not materially interfere with the use made or proposed to be made of such Property by the Operating Partnership, any of the Subsidiaries or any Related Entity, and (1) no default or event of default has occurred under any ground lease, sublease or sub-sublease with respect to such Property and none of the Operating Partnership, any of the Subsidiaries or any Related Entity has received any notice of any event which, whether with or without the passage of time or the giving of notice, or both, would constitute a default under such ground lease, sublease or sub-sublease and (2) none of the Operating Partnership, any of the Subsidiaries or any Related Entity has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Operating Partnership, any of the Subsidiaries or any Related Entity under any of the ground leases, subleases or sub-subleases mentioned above, or affecting or questioning the rights of the Operating Partnership, any of the Subsidiaries or any Related Entity to the continued possession of the leased, subleased or sub-subleased premises under any such ground lease, sublease or sub-sublease;
(D) all liens, charges, encumbrances, claims or restrictions on any of the Properties and the assets of the Operating Partnership, any of the Subsidiaries or any Related Entity that are required to be disclosed in the Registration Statement or the Prospectus are disclosed therein; (E) no tenant under any of the leases at the Properties has a right of first refusal or an option to purchase the premises demised under such lease; (F) each of the Properties complies with all applicable codes, laws and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to the Properties), except if and to the extent disclosed in the Registration Statement, the General Disclosure Package or the Prospectus and except for such failures to comply that would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect; (G) the mortgages and deeds of trust that encumber certain of the Properties are not convertible into equity securities of the entity owning such Property and said mortgages and deeds of trust are not cross-defaulted or cross-collateralized with any property other than certain other Properties; and (H) none of the Operating Partnership, any of the Subsidiaries or any Related Entity or, to the knowledge of the Operating Partnership, any lessee of any of the Properties is in default under any of the leases governing the Properties and none of the Operating Partnership, any of the Subsidiaries or any Related Entity knows of any event which, whether with or without the passage of time or the giving of notice, or both, would constitute a default under any of such leases, except such defaults that would not, singly or in the aggregate, result in a Material Adverse Effect.
(xxvii) Joint Venture Agreements. Each of the partnership agreements, limited liability company agreements or other joint venture agreements (each, a Joint Venture Agreement) to which the Operating Partnership or any of the Subsidiaries is a party, and which relates to one or more of the Properties, has been duly authorized, executed and delivered by the Operating Partnership or the Subsidiaries, as applicable, and constitutes the legal, valid and binding agreement thereof, enforceable in accordance with its terms, except, in each case, to the extent that enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting creditors rights or remedies generally or by general equitable principles, and, with respect to equitable relief, the discretion of the court before which any proceeding therefor may be brought (regardless of whether enforcement is sought in a proceeding at law or in equity), and with respect to any indemnification provisions contained therein, except as rights under those provisions may be limited by applicable law or policies underlying such law.
(xxviii) Possession of Intellectual Property. The Operating Partnership and the Subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, Intellectual Property) reasonably necessary, if any, to conduct the business now operated by them, and neither the Operating Partnership nor any of the Subsidiaries has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Operating Partnership or any of the Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in a Material Adverse Effect.
(xxix) Environmental Laws. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus and except as would not, singly or in the aggregate, be reasonably expected to result in a Material Adverse Effect, (A) none of the Operating Partnership, any of the Subsidiaries, any Related Entity nor any of the Properties is in violation of any Environmental Laws (as defined below), (B) the Operating Partnership, the Subsidiaries, the Related Entities and the Properties have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no now pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law or Hazardous Material (as defined below) against the Operating Partnership, any of the Subsidiaries or any Related Entity or otherwise with regard to the Properties, (D) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Properties, the Operating Partnership, any of the Subsidiaries or any Related Entity relating to Hazardous Materials or any Environmental Laws, and (E) none of the Properties is included or proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as defined below) by the United States Environmental Protection Agency or on any similar list or inventory issued by any other federal, state or local governmental authority having or claiming jurisdiction over such properties pursuant to any other Environmental Laws. As used herein, Hazardous Material shall mean any flammable explosives, radioactive materials, chemicals, pollutants, contaminants, wastes, hazardous wastes, toxic substances, mold, and any hazardous material as defined by or regulated under any Environmental Law, including, without limitation, petroleum or petroleum products, and asbestos-containing materials. As used herein, Environmental Law shall mean any applicable foreign, federal, state or local law (including statute or common law), ordinance, rule, regulation or judicial or administrative order, consent decree or judgment relating to the protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Secs. 9601-9675 (CERCLA), the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Secs. 5101-5127, the Solid Waste Disposal Act, as amended, 42 U.S.C. Secs. 6901-6992k, the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Secs. 11001-11050, the Toxic Substances Control Act, 15 U.S.C. Secs. 2601-2692, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Secs. 136-136y, the Clean Air Act, 42 U.S.C. Secs. 7401-7671q, the Clean Water Act (Federal Water Pollution
Control Act), 33 U.S.C. Secs. 1251-1387, and the Safe Drinking Water Act, 42 U.S.C. Secs. 300f-300j-26, as any of the above statutes may be amended from time to time, and the regulations promulgated pursuant to any of the foregoing.
(xxx) Utilities and Access. To the knowledge of the Operating Partnership, water, stormwater, sanitary sewer, electricity, and telephone service are all available at the property lines of each Property over duly dedicated streets or perpetual easements of record benefiting the applicable Property. To the knowledge of the Operating Partnership, each of the Properties has legal access to public roads and all other roads necessary for the use of each of the Properties.
(xxxi) No Condemnation. The Operating Partnership has no knowledge of any pending or threatened condemnation proceedings, zoning change or other proceeding or action that will materially affect the use or value of any of the Properties.
(xxxii) Accounting Controls and Disclosure Controls. The Operating Partnership and the Subsidiaries (i) have taken all necessary actions to ensure that, within the time period required, the Operating Partnership and the Subsidiaries will maintain effective internal control over financial reporting (as defined under Rules 13a-15 and 15d-15 of the rules and regulations of the Commission under the 1934 Act (the 1934 Act Regulations)) and (ii) currently maintain a system of internal accounting controls (or operate under the Companys system of internal accounting controls) sufficient to provide reasonable assurances that: (A) transactions are executed in accordance with managements general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with managements general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, the General Disclosure Package and the Prospectus, since the inception of the Operating Partnership, there has been (1) no material weakness in the Operating Partnerships internal control over financial reporting (whether or not remediated) and (2) no change in the Operating Partnerships internal control over financial reporting that has adversely affected, or is reasonably likely to adversely affect, the Operating Partnerships internal control over financial reporting. The auditors of the Company and the Audit Committee of the Board of Directors of the Company, have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that have adversely affected, or are reasonably likely to adversely affect, the ability of the Operating Partnership and the Subsidiaries to record, process, summarize and report financial information; and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal control over financial reporting of the Operating Partnership and the Subsidiaries. The Operating Partnership and the Subsidiaries have established a system of disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the 1934 Act Regulations) that are designed to ensure that
information required to be disclosed by the Operating Partnership in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms, and is accumulated and communicated to the Companys management, including its principal executive officer or officers and principal financial officer or officers, as appropriate, to allow timely decisions regarding disclosure.
(xxxiii) Compliance with the Sarbanes-Oxley Act. The Operating Partnership has taken all necessary actions to ensure that it will be in compliance with all applicable provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof (the Sarbanes-Oxley Act) that are then in effect and with which the Operating Partnership is required to comply as of the initial filing or effectiveness, as the case may be, of the Registration Statement and is actively taking steps to ensure that they will be in compliance in all material respects with other provisions of the Sarbanes-Oxley Act not currently in effect, upon the effectiveness of such provisions.
(xxxiv) Payment of Taxes. All United States federal income tax returns of the Operating Partnership and the Subsidiaries required by law to be filed have been filed, and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The Operating Partnership and the Subsidiaries have filed all other tax returns that are required to have been filed by them pursuant to applicable foreign, state, local or other law except insofar as the failure to file such returns would not, singly or in the aggregate, result in a Material Adverse Effect, and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Operating Partnership and the Subsidiaries in respect of any tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional tax for any years not finally determined, except to the extent of any inadequacy that would not, singly or in the aggregate, result in a Material Adverse Effect.
(xxxv) ERISA. The Operating Partnership is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (ERISA). No reportable event (as defined in ERISA) has occurred with respect to any pension plan (as defined in ERISA) for which the Operating Partnership would have any liability. The Operating Partnership has not incurred nor expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any pension plan or (ii) Sections 412, 403, 431, 432 or 4971 of the Internal Revenue Code of 1986, as amended (the Code). Each pension plan for which the Operating Partnership would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred thereunder, whether by action or by failure to act, which would cause the loss of such qualification, except where the failure to be so qualified would not, singly or in the aggregate, result in a Material Adverse Effect.
(xxxvi) Business Insurance. The Operating Partnership and the Subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. The Operating Partnership has no reason to believe that it or any of the Subsidiaries will not be able to (A) renew, if desired, its existing insurance coverage as and when such policies expire or (B) obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not, singly or in the aggregate, result in a Material Adverse Effect. Neither the Operating Partnership nor any of the Subsidiaries has been denied any insurance coverage which it has sought or for which it has applied.
(xxxvii) Title Insurance. The Operating Partnership and the Subsidiaries and each Related Entity carries or is entitled to the benefits of title insurance on the fee interests and/or leasehold interests (in the case of a ground lease interest) with respect to each Property with financially sound and reputable insurers, in an amount not less than such entitys cost for the real property comprising such Property, insuring that such party is vested with good and insurable fee or leasehold title, as the case may be, to each such Property.
(xxxviii) Investment Company Act. The Operating Partnership is not required, nor upon the issuance and sale of the Securities as contemplated herein or in the Indenture and the application of the net proceeds therefrom as described in the Registration Statement, the General Disclosure Package and the Prospectus will be required, to register as an investment company under the Investment Company Act of 1940, as amended (the 1940 Act).
(xxxix) Absence of Manipulation. Neither the Operating Partnership nor any of the Subsidiaries or other affiliates has taken or will take, directly or indirectly, any action which is designed, or would reasonably be expected, to cause or result in, or which constitutes, the stabilization or manipulation of the price of any security of the Operating Partnership to facilitate the sale or resale of the Securities.
(xl) Foreign Corrupt Practices Act. Neither the Operating Partnership nor any of the Subsidiaries or, to the knowledge of the Operating Partnership, any director, officer, agent, employee, affiliate or other person acting on behalf of the Operating Partnership or any of the Subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the FCPA), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any foreign
official (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA. Each of the Operating Partnership and the Subsidiaries and, to the knowledge of the Operating Partnership, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
(xli) Money Laundering Laws. The operations of each of Operating Partnership and the Subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any Governmental Entity (collectively, the Money Laundering Laws). No action, suit or proceeding or, to the knowledge of the Operating Partnership, inquiry or investigation by or before any Governmental Entity involving the Operating Partnership, its affiliates or any of the Subsidiaries with respect to the Money Laundering Laws is pending and, to the knowledge of the Operating Partnership, no such action, suit, proceeding, inquiry or investigation is threatened.
(xlii) OFAC. Neither the Operating Partnership nor any of the Subsidiaries nor, to the knowledge of the Operating Partnership, any director, officer, agent, employee, affiliate or other person acting on behalf of the Operating Partnership or any of the Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (OFAC). The Operating Partnership will not directly or indirectly use the proceeds of the sale of the Securities, or lend, contribute or otherwise make available such proceeds to any of the Subsidiaries, joint venture partners or other persons, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(xliii) Statistical and Market-Related Data. Any statistical and market-related data included in the Registration Statement, the General Disclosure Package or the Prospectus are based on or derived from sources that the Operating Partnership believes to be reliable and accurate in all material respects and, to the extent required, the Operating Partnership has obtained the written consent to the use of such data from such sources.
(xliv) Approval of Listing. The Securities have been approved for listing on the NASDAQ, subject to official notice of issuance.
(xlv) Distributions. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Operating Partnership nor any subsidiary thereof is prohibited, directly or indirectly, from making any distributions to the Company, from making any other distribution on any of its equity interests or from repaying any loans or advances made by the Company, the Operating Partnership or any of the Subsidiaries.
(xlvi) Finders Fees. Except as disclosed in the Registration Statement, the General Disclosure Package, and the Prospectus, the Operating Partnership has not incurred any liability for any finders fees or similar payments in connection with the transactions contemplated in this Agreement, except as may otherwise exist with respect to the Underwriters pursuant to this Agreement.
(xlvii) Certain Relationships. No relationship, direct or indirect, exists between or among the Operating Partnership, on the one hand, and the directors, officers, stockholders, partners, customers, or suppliers of the Operating Partnership or the Company, on the other hand, which is required to be described in the Registration Statement, the General Disclosure Package, or the Prospectus which is not so described.
(xlviii) No Ratings. No securities issued by or loans to the Operating Partnership or any of the Subsidiaries are rated by any nationally recognized statistical rating organization (as defined for purposes of Rule 436(g) under the 1933 Act).
(b) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, the Applicable Time, the Closing Time, and each Date of Delivery (as defined below), if any, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure. The information regarding the Company in the Registration Statement, the General Disclosure Package and the Prospectus is true and correct in all material respects.
(ii) Good Standing of the Company. The Company has been duly organized and is validly existing as corporation in good standing under the laws of the State of Maryland, has all corporate power and corporate authority to own, lease and operate its properties, conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and enter into and perform its obligations under this Agreement to which it is a party, and is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not, singly or in the aggregate, result in a Material Adverse Effect.
(iii) Capitalization. The Company owns all of its outstanding partnership interests in the Operating Partnership free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, except as described in the Registration Statement, the General Disclosure Package and the Prospectus.
(iv) Authorization and Description of Agreement. The Agreement has been duly authorized, executed and delivered by the Company and, when duly
executed and delivered in accordance with its terms by the other parties thereto, constitutes, as the case may be, a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms.
(v) Absence of Proceedings. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no action, suit, proceeding, inquiry or investigation now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, which is required to be disclosed in the Registration Statement or the Prospectus (other than as disclosed therein), or which would, singly or in the aggregate, result in a Material Adverse Effect, or which would materially and adversely affect the property or assets of the Company and its subsidiaries, taken as a whole, or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a party or of which any of the Properties or assets is the subject which are not described in the Registration Statement, the General Disclosure Package and the Prospectus, including ordinary routine litigation incidental to the business, would not result in a Material Adverse Effect.
(vi) Accounting Controls and Disclosure Controls. The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the 1934 Act Regulations) that comply with the requirements of the 1934 Act; such disclosure controls and procedures (i) are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys principal executive officer and principal financial officer by others within those entities; (ii) have been evaluated for effectiveness as of the end of the period covered by the Companys most recent quarterly report filed with the Commission; and (iii) were functioning effectively in all material respects as of the end of such period to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported accurately and within the time periods specified in the Commissions rules and forms. The Company maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the 1934 Act Regulations) that has been designed by, or under the supervision of, its principal executive and financial officer, to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(vii) Compliance with the Sarbanes-Oxley Act. The Company and each of its directors and executive officers, in their capacities as such, is in compliance with all applicable provisions of the Sarbanes-Oxley Act, including Section 402 related to loans and Sections 302 and 906 related to certifications.
(viii) Payment of Taxes. All United States federal income tax returns of the Company required by law to be filed have been filed, and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The Company and its subsidiaries have filed all other tax returns that are required to have been filed by them pursuant to applicable foreign, state, local or other law except insofar as the failure to file such returns would not, singly or in the aggregate, result in a Material Adverse Effect, and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company and its subsidiaries in respect of any tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional tax for any years not finally determined, except to the extent of any inadequacy that would not, singly or in the aggregate, result in a Material Adverse Effect.
(ix) Real Estate Investment Trust. Starting from its taxable year ending December 31, 2004, the Company has been organized in conformity with the requirements for qualification and taxation as a real estate investment trust (a REIT) under Sections 856 through 860 of the Code and has elected to be taxed as a REIT under the Code since its taxable year ending December 31, 2004. All statements regarding the Companys qualification and taxation as a REIT and descriptions of the Companys organization and proposed method of operation (inasmuch as they relate to the Companys qualification and taxation as a REIT) set forth in the Registration Statement, the General Disclosure Package and the Prospectus are accurate and fair summaries of the legal or tax matters described therein in all material respects.
(c) Officers Certificates. Any certificate signed by any officer or other representative of either the Operating Partnership or the Company delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Operating Partnership or the Company, as applicable, to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Operating Partnership agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Operating Partnership, the respective principal amounts of Securities set forth in Schedule I hereto opposite its name at a purchase price of []% of the principal amount of the Securities (the Purchase Price), plus any additional aggregate principal amount of Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Operating Partnership hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional $[] aggregate principal amount of Securities at the Purchase Price (without giving effect to any accrued interest from the Closing Date to the relevant Date of Delivery, as those terms are defined herein). Said option may be exercised only to cover over-allotments in the sale of the Initial Securities by the Underwriters. Said option may be exercised in whole or in part at any time and from time to time on or before the 30th day after the date of the Prospectus upon notice by the Representative to the Operating Partnership setting forth the amount of Option Securities as to which the several Underwriters are exercising the option and the settlement time and date. The amount of Option Securities to be purchased by each Underwriter shall be the same percentage of the total amount of Option Securities to be purchased by the several Underwriters as such Underwriter is purchasing of the Initial Securities, plus any additional amount of Option Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, subject to such adjustments as the Operating Partnership in its sole and absolute discretion shall make to eliminate any amounts. Any such time and date of delivery (a Date of Delivery) shall be determined by the Operating Partnership, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time.
(c) Payment. The Securities to be purchased by each Underwriter hereunder will be represented by one or more definitive global Securities in book-entry form which will be deposited by or on behalf of the Operating Partnership with DTC or its designated custodian. The Operating Partnership will deliver the Securities to the Representative, for the account of each Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same day) funds to the account specified by the Operating Partnership to the Representative at least forty-eight hours in advance, by causing DTC to credit the Securities to the account of the Representative at DTC. The Operating Partnership will cause the certificates representing the Securities to be made available to the Representative for checking at least twenty-four hours prior to the Closing Time at the offices of Baker & McKenzie LLP, 815 Connecticut Ave., N.W., Washington, D.C. 20006 (the Closing Location), or at such other place as shall be agreed upon by the Representative and the Operating Partnership, at 9:00 A.M. (New York City time) on the third (fourth, if the pricing occurs after 4:30 P.M. (New York City time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10 hereof), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Operating Partnership (such time and date of payment and delivery being hereinafter called the Closing Time).
In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for or book-entry credits representing, such Option Securities shall be made in the manner described above at the Closing Location, or at such other place as shall be agreed upon by the Representative and the Operating Partnership, on each Date of Delivery as specified in the notice from the Representative to the Operating Partnership.
It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. The Representative, individually and not as a representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. The Initial Securities and the Option Securities, if any, shall be transferred electronically at the Closing Time or the relevant Date of Delivery, as the case may be, in such denominations and registered in such names as the Representative may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Operating Partnership and the Company.
(a) The Operating Partnership covenants with each Underwriter as follows:
(i) Compliance with Securities Regulations and Commission Requests. The Operating Partnership, subject to Section 3(a)(iii) hereof, will comply with the requirements of Rule 430A, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Operating Partnership becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Operating Partnership will effect all filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Operating Partnership will make reasonable efforts to prevent the issuance of any stop, prevention or suspension order and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
(ii) Preparation of Final Term Sheet. The Operating Partnership will prepare a final term sheet (the Final Term Sheet) reflecting the final terms of the
Securities, in form and substance satisfactory to the Representative and substantially in the form of Schedule II hereto, and shall file such Final Term Sheet as an issuer free writing prospectus pursuant to Rule 433; provided, that the Operating Partnership shall furnish the Representative with copies of any such Final Term Sheet a reasonable amount of time prior to such proposed filing and will not use or file any such document to which the Representative or counsel to the Underwriters shall reasonably object. Any such Final Term Sheet is an Issuer Free Writing Prospectus and a Permitted Free Writing Prospectus (defined below) for purposes of this Agreement.
(iii) Continued Compliance with Securities Laws. The Operating Partnership will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the General Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172 of the 1933 Act Regulations (Rule 172), would be) required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Operating Partnership, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) amend or supplement the General Disclosure Package or the Prospectus in order that the General Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the 1933 Act, the 1933 Act Regulations, the Indenture Act or the Indenture Act Rules, the Operating Partnership will promptly (A) give the Representative notice of such event, (B) prepare, as applicable, any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the General Disclosure Package or the Prospectus comply with such requirements and furnish the Representative with copies of any such amendment or supplement a reasonable amount of time prior to its proposed filing or use, and (C) file with the Commission any such amendment or supplement; provided, however, that the Operating Partnership shall not file or use any such amendment or supplement to which the Representative or counsel for the Underwriters shall reasonably object. The Operating Partnership will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Operating Partnership will give the Representative notice of its intention to make any filings pursuant to the 1934 Act or the 1934 Act Regulations from the Applicable Time to the Closing Time and will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object.
(iv) Delivery of Registration Statements. The Operating Partnership has furnished or will deliver to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver, upon request, to the Representative, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be substantially identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(v) Delivery of Prospectuses. The Operating Partnership has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Operating Partnership hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Operating Partnership will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(vi) Blue Sky Qualifications. The Operating Partnership will use its reasonable best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other U.S. jurisdictions as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Securities; provided, however, that the Operating Partnership shall not be obligated (i) to file any general consent to service of process, (ii) to qualify as a foreign partnership, corporation or other entity or as a dealer in securities in any jurisdiction in which it is not so qualified; or (iii) to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
(vii) Rule 158. The Operating Partnership will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to their securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(viii) Use of Proceeds. The Operating Partnership will use the net proceeds received by it from the sale of the Securities in the manner specified in the Registration Statement, the General Disclosure Package, and the Prospectus under Use of Proceeds.
(ix) Listing. The Operating Partnership will use its reasonable best efforts to effect and maintain the listing of the Securities on the NASDAQ.
(x) Reporting Requirements. The Operating Partnership, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. Additionally, the Operating Partnership shall report the use of proceeds from the issuance of the Securities as may be required under Rule 463 under the 1933 Act.
(xi) Issuer Free Writing Prospectuses. The Operating Partnership agrees that, unless it obtains the prior written consent of the Representative, it will not make any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a free writing prospectus, or a portion thereof, required to be filed by the Operating Partnership with the Commission or retained by the Operating Partnership under Rule 433; provided, that the Representative will be deemed to have consented to the Issuer Free Writing Prospectuses listed on Schedule III hereto and any road show that is a written communication within the meaning of Rule 433(d)(8)(i) that has been reviewed and approved by the Representative. Any such free writing prospectus consented to by the Representative is hereinafter referred to as a Permitted Free Writing Prospectus. The Operating Partnership represents that it has treated or agrees that it will treat each such Permitted Free Writing Prospectus as an issuer free writing prospectus, as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following the issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, the Prospectus or any preliminary prospectus, or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Operating Partnership will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission; provided, that, this sentence shall not apply to any statements in or omissions from any such Issuer Free Writing Prospectus based upon and in conformity with the Underwriter Information.
(xii) Absence of Manipulation. Except as contemplated in the Registration Statement, the General Disclosure Package and the Prospectus, the Operating Partnership will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, stabilization or manipulation of the price of the Securities to facilitate the sale or resale of the Securities.
(xiii) Compliance with the Sarbanes-Oxley Act. The Operating Partnership will comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act that are in effect.
(xiv) Clear Market. During the period from the date hereof through and including the Closing Date, the Operating Partnership will not, without the prior written consent of the Representative, offer, sell, contract to sell or otherwise dispose of any debt securities issued or guaranteed by the Operating Partnership and having a tenor of more than one year.
(b) The Company covenants with each Underwriter as follows:
(i) REIT Qualification. The Company will use its best efforts to maintain its qualification and election as a REIT for its taxable year ending December 31, 2013 and the Company will use its best efforts to continue to meet the requirements to qualify as a REIT under the Code until the Board of Directors of the Company determines that it is no longer in the best interests of the Company and its stockholders to qualify as a REIT.
(ii) Absence of Manipulation. Except as contemplated in the Registration Statement, the General Disclosure Package and the Prospectus, the Company will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, stabilization or manipulation of the price of the Securities to facilitate the sale or resale of the Securities.
(iii) Compliance with the Sarbanes-Oxley Act. The Company will comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act that are in effect.
SECTION 4. Payment of Expenses.
(a) Expenses. The Operating Partnership agrees to pay all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits thereto) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any share or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of counsel to the Operating Partnership and the Company, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters relating to such qualification, (vi) the preparation, printing and delivery to the Underwriters of copies of each preliminary prospectus, each Issuer Free Writing Prospectus and the Prospectus and any amendments or supplements thereto, the Indenture, closing documents and any costs associated with electronic
delivery of any of the foregoing by the Underwriters to investors, (vii) the fees and expenses of the Trustee and any paying agent (including related fees and disbursements of any counsel to such parties) in connection with the Indenture and the Securities, (viii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the Securities, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging expenses of the officers and other representatives of the Operating Partnership and the Company and any such consultants, and one-half of the cost of any aircraft chartered in connection with the road show, (ix) the filing fees incident to the review by FINRA of the terms of the sale of the Securities, (x) the fees and expenses incurred in connection with the listing of the Securities on the NASDAQ, (xi) the costs and expenses (including, without limitation, any damages or other amounts payable in connection with legal or contractual liability) associated with the reforming of any contracts for sale of the Securities made by the Underwriters caused by a breach of the representation contained in the third sentence of Section 1(a)(ii) hereof, and (xii) all out-of-pocket costs and expenses incurred by the Underwriters, including the reasonable fees and disbursements of counsel to the Underwriters in connection with the offering of the Securities, provided, however, that in no event shall the Operating Partnership or the Company be responsible for reimbursing the Underwriters for out-of-pocket expenses, including, but not limited to, any expenses described in Sections 4(a)(viii) or (xii) hereof, in an amount greater than one hundred thousand dollars (U.S. $100,000) in the aggregate (excluding the fees described in Section 4(a)(v) hereof); provided further that, the foregoing shall not limit or otherwise impair the Underwriters rights to indemnification or contribution pursuant to Section 6 and Section 7 of this Agreement, respectively. Except as explicitly provided in this Section 4(a), Section 4(b), Section 6 and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel and other advisors.
(b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5, Sections 9(a)(i) or (iii) or Section 10 hereof, the Operating Partnership shall reimburse the Underwriters (or, in the case of Section 10, solely the non-defaulting Underwriters), for all of their reasonable out-of-pocket expenses incurred in connection with the offering of the Securities, including the reasonable fees and disbursements of counsel for the Underwriters; provided, however, that such reimbursement obligation shall relate only to the out-of-pocket expenses referenced in Section 4(a) hereof and shall be subject to the limitations in Section 4(a) hereof.
SECTION 5. Conditions of Underwriters Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Operating Partnership and the Company contained in Sections 1(a) and 1(b), respectively, hereof or in certificates or letters of any officer of either of the Operating Partnership or the Company or any of the Subsidiaries or the Property Manager (as defined below) delivered pursuant to the provisions hereof, to the performance by the Operating Partnership and the Company of their respective covenants and other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at the Closing Time no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto shall have been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the knowledge of the Operating Partnership, contemplated; and the Operating Partnership has complied with each request, if any, from or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) without reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
(b) Opinions of Counsel for the Operating Partnership and the Company. At the Closing Time, the Representative shall have received the favorable corporate opinion, tax opinion and negative assurance letter, each dated the Closing Time, of Baker & McKenzie LLP, counsel for the Operating Partnership and the Company, each in form and substance reasonably satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letters for each of the other Underwriters substantially to the effect set forth in Exhibits A-1, A-2 and A-3 hereto and to such further effect as counsel to the Underwriters may reasonably request; provided, however, other counsel for the Company, reasonably acceptable to the Representative, may deliver certain opinions set forth in Exhibit A-2.
(c) Opinion of Counsel for Underwriters. At the Closing Time, the Representative shall have received the favorable opinion, dated the Closing Time, of Bass, Berry & Sims PLC, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to such matters as the Representative shall reasonably request. In giving such opinion such counsel may rely upon the opinion of Baker & McKenzie LLP as to all matters governed by the laws of the State of Delaware, and, to the extent necessary (including as to all matters governed by the laws of the State of Maryland), such other counsel for the Company referred to in Section 5(b) hereof. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates and letters of officers and other representatives of the Operating Partnership and the Company and their respective subsidiaries and the Property Manager (as defined below) and certificates of public officials.
(d) Officers Certificate. At the Closing Time, there shall not have been, since the date hereof, since the Applicable Time or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Operating Partnership and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business and the Representative shall have received a certificate of the Executive Chairman or the Chief Operating Officer and President of the Company (for itself and as general partner of the Operating Partnership) and of the Chief Financial Officer of the Company (for itself and as general partner of the Operating
Partnership), dated the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Operating Partnership and the Company in Sections 1(a) and 1(b), respectively, hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, (iii) the Operating Partnership and the Company have complied in all material respects with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement under the 1933 Act has been issued, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to their knowledge, contemplated by any Governmental Entity.
(e) Chief Financial Officers Certificates. The Representative shall have received two certificates from the Chief Financial Officer of the Company (for itself and as general partner of the Operating Partnership), at the time of execution of this Agreement and at the Closing Time, to the effect that (i) MHI Hotels Services, LLC (the Property Manager) manages each of the Companys and the Operating Partnerships Properties as disclosed in the Prospectus and (ii) there is no reason to believe that (x) there is any material misstatement or omission in the specified information provided by Vice President of Finance and Accounting of the Property Manager in the letter of representations from the Property Manager (as described below) and (y) such information is not true, accurate and complete in all material respects and that such information provided by the Vice President of Finance and Accounting of the Property Manager is materially misleading.
(f) Letters of Representations from the Property Manager. The Representative shall have received two letters of representations from the Vice President of Finance and Accounting of the Property Manager, at the time of execution of this Agreement and at the Closing Time, to the effect that (i) the Property Manager is responsible for managing the Properties, as disclosed in the Prospectus and (ii) the amounts and other information marked on copies of certain pages of the Prospectus and included as an exhibit to such letters of representations represent certain information and financial data regarding the Properties as computed and prepared by the Property Manager and that such information is true, accurate and complete in all material respects and does not contain any omissions that would cause the information provided by the Property Manager to be materially misleading.
(g) Accountants Comfort Letters. At the time of the execution of this Agreement, the Representative shall have received from PBMares LLP a letter, dated such date, in form and substance reasonably satisfactory to the Representative, together with signed or reproduced copies of such letters for each of the other Underwriters containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(h) Bring-down Comfort Letters. At the Closing Time, the Representative shall have received from PBMares LLP a letter, dated the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 5(g) hereof, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time.
(i) Approval of Listing. At the Closing Time, the Securities shall have been approved for listing on the NASDAQ, subject only to official notice of issuance.
(j) No Objection. FINRA has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering of the Securities.
(k) Corporate and Partnership Proceedings. All corporate and partnership proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Indenture, the Securities, the General Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and the transactions contemplated hereby and thereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Operating Partnership and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters.
(l) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Operating Partnership and the Company contained herein and the statements in any certificates and letters furnished by the Operating Partnership and the Company or any of the Subsidiaries or the Property Manager hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representative shall have received:
(i) Officers Certificate. A certificate, dated such Date of Delivery, of the Executive Chairman or the Chief Operating Officer and President of the Company (for itself and as general partner of the Operating Partnership), and of the Chief Financial Officer of the Company (for itself and as general partner of the Operating Partnership), confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) Chief Financial Officers Certificate. A certificate, dated such Date of Delivery, of the Chief Financial Officer of the Company (for itself and as general partner of the Operating Partnership), confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery.
(iii) Letter of Representations from the Property Manager. A letter of representations, dated such Date of Delivery, of the Vice President of Finance and Accounting of the Property Manager, confirming that the letter delivered at the Closing Time pursuant to Section 5(f) hereof remains true and correct as of such Date of Delivery.
(iv) Opinions of Counsel for the Operating Partnership and the Company. The favorable corporate opinion, tax opinion and negative assurance letter of Baker & McKenzie LLP, counsel for the Operating Partnership and the Company, in form and substance reasonably satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the corporate opinion, tax opinion and negative assurance letter required by Section 5(b) hereof; provided, however, such other counsel for the Operating Partnership and the Company referred to in Section 5(b) hereof may deliver certain opinions to the same effect as the applicable opinions described in Section 5(b) hereof.
(v) Opinion of Counsel for Underwriters. The favorable opinion of Bass, Berry & Sims PLC, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof.
(vi) Bring-down Comfort Letters. A letter from PBMares LLP in form and substance satisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as the letters furnished to the Representative pursuant to Section 5(h) hereof, except that the specified date in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery.
(m) Additional Documents. At the Closing Time and at each Date of Delivery, if any, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Operating Partnership in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters.
(n) Termination of Agreement. If any condition specified in this Section 5 shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representative by notice to the Operating Partnership or the Company at any time at or prior to the Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 hereof and except that Sections 1, 6, 7, 8, 11, 14 and 15 hereof shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Operating Partnership agrees to indemnify and hold harmless each Underwriter, its affiliates (as such term is defined in Rule 501(b) under the 1933 Act (each, an Affiliate)), its selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever, in each case based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided, that (subject to Section 6(d) hereof) any such settlement is effected with the written consent of the Operating Partnership; and
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of one counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with the Underwriter Information.
(b) Indemnification of the Operating Partnership, the Company, Directors, and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Operating Partnership and the Company, their respective directors, officers and partners, as the case may be, who signed the Registration Statement, and each person, if any, who controls either the Operating Partnership or the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with the Underwriter Information.
(c) Actions Against Parties; Notification. Each indemnified party shall give written notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. If any such claim is brought against an indemnified party, and the indemnified party notifies the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party (which shall not, except with the consent of the indemnified party, also be counsel to the indemnifying party). After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representative shall have the right to employ one counsel (in addition to local counsel) to represent jointly the Representative and those other Underwriters and their respective directors, officers and controlling persons who may be subject to liability arising out of any claim or action in respect of which indemnity may be sought by the Underwriter against the Operating Partnership or the Company under this Section 6, and the Operating Partnership and the Company shall not be permitted to assume the defense of such claim or action, if (i) the Operating Partnership, the Company and the Underwriters shall have so mutually agreed; (ii) the Operating Partnership and the Company have failed within a reasonable time to retain counsel reasonably satisfactory to the Underwriters; (iii) the Underwriters and their respective directors, officers and controlling persons shall have reasonably concluded, after consultation with counsel, that there are or may be legal defenses available to them that are different from or in addition to those available to the Operating Partnership and the Company; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Underwriters or their respective directors, officers or controlling persons, on the one hand, and the Operating Partnership and the Company, on the other hand, and representation of both sets of parties by the same counsel would present actual or potential differing interests between them, and in any such event the fees and expenses of such separate counsel shall be paid by the Operating Partnership and the Company. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement Without Consent if Failure to Reimburse. The indemnifying party shall not be liable for any settlement of any proceeding effected without its prior written consent, except that, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without the indemnifying partys prior written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request (other than those fees and expenses being contested in good faith) prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Operating Partnership, on the one hand, and the Underwriters, on the other hand, from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Operating Partnership, on the one hand, and of the Underwriters, on the other hand, in connection with the statements or omissions, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Operating Partnership, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Operating Partnership, on the one hand, and the total underwriting discount received by the Underwriters, on the other hand, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on the cover of the Prospectus.
The relative fault of the Operating Partnership, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Operating Partnership, on the one hand, or by the Underwriters, on the other hand, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Operating Partnership, on the one hand, and the Underwriters, on the other hand, agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions received by such Underwriter in connection with the Securities underwritten by it and distributed to the public.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriters Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls either the Operating Partnership or the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Operating Partnership. The Underwriters respective obligations to contribute pursuant to this Section 7 are several in proportion to the aggregate principal amount of Initial Securities set forth opposite their respective names in Schedule I hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates or letters of officers of either the Operating Partnership or the Company or any of their respective subsidiaries or the Property Manager submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors, or any person controlling either the Operating Partnership or the Company and (ii) delivery of and payment for the Securities.
SECTION 9. Termination of Agreement.
(a) Termination. The Representative may terminate this Agreement without liability to the Operating Partnership and the Company, by notice to the Operating Partnership or the Company, at any time at or prior to the Closing Time (i) if there has been, in the judgment of the Representative, since the time of execution of this Agreement or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, any material adverse change in or affecting the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, the Operating Partnership and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable or inadvisable
to proceed with the completion of the offering or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the NASDAQ, or (iv) if trading generally on the New York Stock Exchange or on the NASDAQ has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, FINRA or any other governmental authority, or (v) if a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (vi) if a banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section 9, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7, 8, 11, 14 and 15 hereof shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If, at the Closing Time or any Date of Delivery, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Securities that it has or they have agreed to purchase hereunder on such date (the Defaulted Securities), and the aggregate principal amount of Defaulted Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than 10% of the aggregate principal amount of the Securities to be purchased on such date, the non-defaulting Underwriters shall be obligated severally in the proportions that the aggregate principal amount of Initial Securities set forth opposite their respective names in Schedule I bears to the aggregate principal amount of Initial Securities set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as the Representative may specify, to purchase the Initial Securities which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the aggregate principal amount of Securities that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of 10% of such Securities without the written consent of such Underwriter. If, at the Closing Time, any Underwriter or Underwriters shall fail or refuse to purchase Initial Securities and the aggregate principal amount of Initial Securities with respect to which such default occurs is more than 10% of the aggregate principal amount of Initial Securities to be purchased on such date, and arrangements satisfactory to the Representative and the Operating Partnership for the purchase of such Initial Securities are not made within 48 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Operating Partnership, except that the Operating Partnership will continue to be liable for the payment of expenses to the extent set forth in Section 4 hereof. In any such case either the Representative or the Operating Partnership shall have the right to postpone the Closing Time, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, the General Disclosure Package, the Prospectus or in any other documents or arrangements may be effected. If, on any Date of Delivery, any Underwriter or Underwriters shall fail or refuse to purchase Option Securities and the aggregate principal amount of Option Securities with respect to which such default occurs is more than 10% of the aggregate principal amount of Option Securities to be purchased on such Date of Delivery, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Option Securities to be sold on such Date of Delivery or (ii) purchase not less than
the aggregate principal amount of Option Securities that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. As used herein, the term Underwriter includes any person substituted for an Underwriter under this Section 10.
No action taken pursuant to this Section 10 shall relieve any defaulting Underwriter from liability in respect of its default.
SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at: Sandler ONeill & Partners, L.P., 1251 Avenue of the Americas, 6th Floor, New York, New York 10112, attention Tom Howland, with a copy to Legal and Bass, Berry & Sims PLC, 100 Peabody Place, Memphis, Tennessee 38103, attention John Good, Esq.; notices to the Operating Partnership or the Company shall be directed to the Company at 410 West Francis Street, Williamsburg, Virginia 23185, attention Andrew M. Sims, with a copy to Baker & McKenzie LLP, 815 Connecticut Avenue, NW, Washington DC 20006, attention Thomas J. Egan, Jr., Esq.
SECTION 12. No Advisory or Fiduciary Relationship. Each of the Operating Partnership and the Company acknowledges and agrees that (a) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the initial public offering price of the Securities and any related discounts and commissions, is an arms-length commercial transaction among the Operating Partnership, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering of the Securities and the process leading thereto each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of either of the Operating Partnership, the Company or any of their respective subsidiaries or their respective stockholders, unitholders, creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Operating Partnership or the Company with respect to the offering of the Securities or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising either the Operating Partnership or the Company or any of their respective subsidiaries on other matters) and no Underwriter has any obligation to the Operating Partnership or the Company with respect to the offering of the Securities except the obligations expressly set forth in this Agreement, (d) the Underwriters and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of each of the Operating Partnership and the Company, and (e) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering of the Securities and each of the Operating Partnership and the Company has consulted its own respective legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.
SECTION 13. Parties. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Operating Partnership, the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Operating Partnership, the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 hereof and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the Underwriters, the Operating Partnership, the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. Trial by Jury. Each of the Operating Partnership and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders or unitholders, as applicable, and affiliates), and each of the Underwriters 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 Agreement or the transactions contemplated hereby.
SECTION 15. GOVERNING LAW. THIS AGREEMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CHOICE OF LAW PROVISIONS.
SECTION 16. TIME. TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 17. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 18. Counterparts. This Agreement may be executed in any number of counterparts (including by facsimile or other standard form of electronic transmission), each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement, and each such signature shall constitute an original signature for all purposes hereof.
SECTION 19. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof.
SECTION 20. Patriot Act. In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the Underwriters are required to obtain, verify and record information that identifies their respective clients, including the Operating Partnership and the Company, which information may include the name and address of their respective clients, as well as other information that will allow the Underwriters to properly identify their respective clients.
If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Operating Partnership a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, on the one hand, and the Operating Partnership and the Company, on the other hand, in accordance with its terms.
Very truly yours, | ||||
SOTHERLY HOTELS LP | ||||
By: | Sotherly Hotels Inc., | |||
its general partner | ||||
By: |
| |||
Name: | ||||
Title: | ||||
SOTHERLY HOTELS INC. | ||||
By: |
| |||
Name: | ||||
Title: |
CONFIRMED AND ACCEPTED, | ||
as of the date first above written: | ||
Sandler ONeill & Partners, L.P. | ||
By: |
| |
Authorized Signatory |
For itself and as Representative of the other Underwriters named in Schedule I hereto.
[Signature Page to Underwriting Agreement]
EXHIBIT 4.2
SOTHERLY HOTELS LP
as Issuer,
and
WILMINGTON TRUST, NATIONAL ASSOCIATION,
as Trustee
INDENTURE
Dated as of [ISSUE MONTH AND DAY], 2013
[]% 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 |
5 | |||
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 Trustees 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 Issuers 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 [ISSUE MONTH AND DAY], 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 []% 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 assets 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.
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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 REITs 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 Persons 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 Issuers 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 (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 Issuers consolidated balance sheet in accordance with GAAP; and also includes,
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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 [ISSUE MONTH AND DAY], 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 Issuers []% 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.
Officers 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.
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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 Persons 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 [MONTH AND DAY OF SALE DATE], 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 officers 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.
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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 |
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.
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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 Trustees 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.
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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 Issuers ability to issue Additional Notes shall be subject to the Issuers 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 $[] (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 Officers 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.
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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 Registrars 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.
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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 Trustees and Issuers 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 pledgees 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
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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.
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(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
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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 Trustees and the Paying Agents 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 Trustees and the Paying Agents 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
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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 Issuers discretion, be subject to the completion of an Equity Offering. At the Issuers request, the Trustee shall forward the notice of redemption in the Issuers name and at the Issuers 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 Issuers 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 Officers 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.
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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 Officers 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 Officers 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
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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 Officers 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 Officers 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 Holders 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 []% 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 Officers 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
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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 Issuers 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 Commissions 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 Trustees receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Companys compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers 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.
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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 holders 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 Trustees or Agents 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 Officers 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 Issuers 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;
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(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.
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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 Officers 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.
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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.
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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 Officers 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.
(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).
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(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 Officers 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 Officers 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 Officers Certificate or Opinion of Counsel.
(c) Without limiting the Trustees (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 Officers 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.
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(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 Trustees 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 Issuers 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 Trustees 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).
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 Trustees 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,
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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 Trustees negligence, bad faith or willful misconduct. Such expenses shall include the reasonable fees and expenses of the Trustees 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 Trustees 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 Trustees 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 Issuers 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 Trustees 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.
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
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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 Issuers 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 Issuers 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
(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
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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 Officers 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 Issuers 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 Issuers 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 Issuers 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 Issuers 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 Issuers 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 Issuers 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 Issuers 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 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
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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 Issuers 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 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);
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(6) the Issuer shall have delivered to the Trustee an Officers 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 Officers Certificate and an Opinion of Counsel, each stating that the conditions provided for in, in the case of the Officers 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 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 Issuers 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 Issuers 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.
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;
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(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 Officers 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 Officers 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;
(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;
29
(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 Holders 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 Holders 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 Officers 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 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 Holders 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.
30
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 Issuers 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 Trustees 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 Officers 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:
Attention:
E-mail:
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
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
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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 Officers 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 Officers 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;
(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 Officers Certificate or certificates of public officials.
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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 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]
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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: |
| |
Name: | ||
Title: | ||
WILMINGTON TRUST, NATIONAL ASSOCIATION, as Trustee, | ||
By: |
| |
Name: | ||
Title: |
EXHIBIT A
[Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture]
SOTHERLY HOTELS LP
[]% Senior Unsecured Notes due 2018
CUSIP No.
ISIN
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]* a on [MONTH AND DAY OF MATURITY], 2018.
Interest Payment Dates: [Month, Day], [Month, Day], [Month, Day] and [Month, Day], commencing [Month, Day], 2013.
Record Dates: [Month, Day], [Month, Day], [Month, Day] and [Month, Day].
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: |
| |
Name: | ||
Title: |
* | This language should be included only if the Note is issued in global form. |
A-1
[FORM OF] TRUSTEES CERTIFICATE OF AUTHENTICATION
This is one of the []% Senior Unsecured Notes due 2018 described in the within-mentioned Indenture. Dated: [ISSUE MONTH AND DAY], 2013
WILMINGTON TRUST, NATIONAL ASSOCIATION, as Trustee, | ||
By: |
| |
Authorized Signatory |
A-2
(Reverse of Note)
[]% 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 []% per annum from [ISSUE MONTH AND DAY], 2013, until maturity. The Issuer will pay interest quarterly on [Month, Day], [Month, Day], [Month, Day] and [Month, Day] 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 [Month, Day], 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 [ISSUE MONTH AND DAY], 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 [Month, Day], [Month, Day], [Month, Day] or [Month, Day] 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 Issuers 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 [ISSUE MONTH AND DAY], 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 [ISSUE MONTH AND DAY], 2016, the Issuer will be entitled at its option to redeem all or any portion of the Notes at a redemption price equal to []% 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 []% 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
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Print or type name, address and zip code of assignee or transferee) |
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(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: | |
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(Sign exactly as name appears on the other side of this Note) | ||
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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: | |
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(Sign exactly as name appears on the other side of this Note) | ||
Signature Guarantee: |
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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 NOTESa
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 SUCCESSORS 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
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended June 30, 2013 |
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
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Earnings from continuing operations before fixed charges |
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Loss from continuing operations |
$ | (279,844 | ) | $ | (4,026,482 | ) | $ | (5,569,788 | ) | $ | (3,037,917 | ) | $ | (4,817,713 | ) | $ | (2,395,709 | ) | ||||||
Equity (income) loss from less than fifty percent owned affiliates |
(557,116 | ) | (172,172 | ) | 60,094 | (16,931 | ) | 249,367 | (48,496 | ) | ||||||||||||||
Fixed charges |
5,013,191 | 12,382,146 | 10,821,815 | 10,030,517 | 9,932,426 | 8,413,513 | ||||||||||||||||||
Amortization of capitalized interest |
38,900 | 77,799 | 77,799 | 77,799 | 71,836 | 24,509 | ||||||||||||||||||
Distributed income from less than fifty percent owned affiliates |
750,000 | 500,000 | 437,500 | 238,386 | 318,521 | 149,317 | ||||||||||||||||||
Capitalized interest |
| | | | (270,555 | ) | (1,602,053 | ) | ||||||||||||||||
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Earnings from continuing operations before fixed charges |
$ | 4,965,131 | $ | 8,761,291 | $ | 5,827,420 | $ | 7,291,851 | $ | 5,483,882 | $ | 4,541,081 | ||||||||||||
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Fixed charges |
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Interest expense |
$ | 5,013,191 | $ | 12,382,146 | $ | 10,821,815 | $ | 10,030,517 | $ | 9,661,871 | $ | 6,811,460 | ||||||||||||
Capitalized interest |
| | | | 270,555 | 1,602,053 | ||||||||||||||||||
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Fixed charges |
5,013,191 | 12,382,146 | 10,821,815 | 10,030,517 | 9,932,426 | 8,413,513 | ||||||||||||||||||
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Ratio of earnings to fixed charges |
0.99 | 0.71 | 0.54 | 0.73 | 0.55 | 0.54 | ||||||||||||||||||
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Deficiency |
$ | 48,060 | $ | 3,620,855 | $ | 4,994,395 | $ | 2,738,663 | $ | 4,448,544 | $ | 3,872,432 | ||||||||||||
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of the General Partner of
Sotherly Hotels LP (formerly MHI Hospitality, L.P.)
410 West Francis Street
Williamsburg, Virginia 23185
We consent to the use in this Registration Statement (No. 333-189821) on Form S-11 of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) of our report dated August 9, 2013, relating to our audits of the consolidated financial statements and financial statement schedule, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to our firm under the caption Experts in such Prospectus.
/s/ PBMares, LLP
Norfolk, Virginia
September 4, 2013
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