UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 15, 2018
PROCACCIANTI HOTEL REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 333-217578 | 81-3661609 | ||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
1140 Reservoir Avenue
Cranston, Rhode Island 02920-6320
(Address of principal executive offices)
(401) 946-4600
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | x |
Item 2.01 Completion of Acquisition or Disposition of Assets.
On August 21, 2018, Procaccianti Hotel REIT, Inc. (the “Company”) filed a Current Report on Form 8-K with the Securities and Exchange Commission (the "SEC"), dated August 15, 2018, regarding the completion by a wholly-owned subsidiary of Procaccianti Hotel REIT, L.P., the Company’s operating partnership, of the acquisition of the fee simple interest in a 107-room, approximately 36,411 square foot select-service hotel property located in Traverse City, Michigan (the “Hotel”). With the filing of this Current Report on Form 8-K/A, the Company hereby amends the Current Report on Form 8-K filed with the SEC on August 21, 2018, to provide the financial statements and pro forma financial information required by Item 9.01 related to the acquisition of the Hotel.
Item 9.01 Financial Statements and Exhibits.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Procaccianti Hotel REIT, Inc. | ||
Dated: October 31, 2018 | By: | /s/ Gregory Vickowski |
Name: | Gregory Vickowski | |
Title: | Chief Financial Officer |
The Members
Grand Traverse Hotel Properties, LLC
d/b/a Hotel Indigo
Cranston, Rhode Island
We have audited the accompanying financial statements of Grand Traverse Hotel Properties, LLC d/b/a Hotel Indigo, which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, members’ capital and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
F-1
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Grand Traverse Hotel Properties, LLC d/b/a Hotel Indigo as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Blum, Shapiro & Company, P.C.
Cranston, Rhode Island
June 27, 2018
F-2
GRAND TRAVERSE HOTEL PROPERTIES, LLC
D/B/A HOTEL INDIGO
BALANCE SHEETS |
DECEMBER 31, 2017 AND 2016 |
2017 | 2016 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 878,025 | $ | 117,280 | ||||
Restricted cash - tax | 266,628 | - | ||||||
Accounts receivable, net | 103,853 | 47,207 | ||||||
Inventory | 40,670 | 1,798 | ||||||
Prepaid expenses | 221,546 | 118,209 | ||||||
Total current assets | 1,510,722 | 284,494 | ||||||
Property and Equipment, Net | 16,599,077 | 17,851,708 | ||||||
Total Assets | $ | 18,109,799 | $ | 18,136,202 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Current Liabilities | ||||||||
Current portion of long-term debt | $ | 213,618 | $ | 115,712 | ||||
Accounts payable | 135,164 | 334,161 | ||||||
Accrued payroll and benefits | 58,256 | 52,575 | ||||||
Accrued expenses | 48,039 | 303,799 | ||||||
Related party note payable | 60,000 | - | ||||||
Total current liabilities | 515,077 | 806,247 | ||||||
Long-Term Liabilities | ||||||||
Long-term debt, net | 8,839,810 | 9,084,288 | ||||||
Six Continents contingency | 374,667 | 390,667 | ||||||
Total liabilities | 9,729,554 | 10,281,202 | ||||||
Commitments and Contingencies | ||||||||
Members’ Capital | 8,380,245 | 7,855,000 | ||||||
Total Liabilities and Members’ Capital | $ | 18,109,799 | $ | 18,136,202 |
The accompanying notes are an integral part of the financial statements
F-3
GRAND TRAVERSE HOTEL PROPERTIES, LLC
D/B/A HOTEL INDIGO
STATEMENTS OF INCOME |
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 |
2017 | 2016 | |||||||
Revenues | ||||||||
Rooms | $ | 4,979,783 | $ | 3,175,942 | ||||
Food and beverage | 1,555,972 | 1,021,720 | ||||||
Other operated departments | 263,196 | 176,434 | ||||||
Total revenues | 6,798,951 | 4,374,096 | ||||||
Departmental Expenses | ||||||||
Rooms | 1,033,427 | 608,239 | ||||||
Food and beverage | 1,087,109 | 1,000,709 | ||||||
Other | 105,759 | 66,018 | ||||||
Total departmental expenses | 2,226,295 | 1,674,966 | ||||||
Total Departmental Profit | 4,572,656 | 2,699,130 | ||||||
Undistributed Operating Expenses | ||||||||
Administrative and general | 570,415 | 391,995 | ||||||
Management fees | 272,887 | 206,543 | ||||||
Franchise fees | 250,926 | 158,967 | ||||||
Sales and marketing | 254,164 | 171,275 | ||||||
Utilities | 169,671 | 114,445 | ||||||
Property operation and maintenance | 154,463 | 98,212 | ||||||
Total undistributed operating expenses | 1,672,526 | 1,141,437 | ||||||
Income from Operations | 2,900,130 | 1,557,693 | ||||||
Nonoperating Expenses | ||||||||
Insurance | 51,659 | 23,457 | ||||||
Property taxes | 345,950 | 144,286 | ||||||
Other expenses, net | 382,828 | 130,317 | ||||||
Total nonoperating expenses | 780,437 | 298,060 | ||||||
Income Before Interest and Depreciation | 2,119,693 | 1,259,633 | ||||||
Interest and Depreciation | ||||||||
Interest expense | 490,752 | 393,051 | ||||||
Depreciation | 1,300,802 | 756,962 | ||||||
Total interest and depreciation | 1,791,554 | 1,150,013 | ||||||
Net Income | $ | 328,139 | $ | 109,620 |
The accompanying notes are an integral part of the financial statements
F-4
GRAND TRAVERSE HOTEL PROPERTIES, LLC
D/B/A HOTEL INDIGO
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL |
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 |
2017 | 2016 | |||||||
Members’ Capital - Beginning of Year | $ | 7,855,000 | $ | 6,793,337 | ||||
Net Income | 328,139 | 109,620 | ||||||
Members’ Capital Contributions | 197,106 | 1,150,000 | ||||||
Members’ Capital Distributions | - | (197,957 | ) | |||||
Members’ Capital - End of Year | $ | 8,380,245 | $ | 7,855,000 |
The accompanying notes are an integral part of the financial statements
F-5
GRAND TRAVERSE HOTEL PROPERTIES, LLC
D/B/A HOTEL INDIGO
STATEMENTS OF CASH FLOWS |
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 |
2017 | 2016 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 328,139 | $ | 109,620 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,300,802 | 756,962 | ||||||
Amortization of deferred finance fees | 4,177 | - | ||||||
Accretion of Six Continents contingency | (16,000 | ) | (9,333 | ) | ||||
Increase in operating assets: | ||||||||
Accounts receivable | (56,646 | ) | (47,207 | ) | ||||
Inventory | (38,872 | ) | (1,798 | ) | ||||
Prepaid expenses | (103,337 | ) | (118,209 | ) | ||||
Restricted cash - tax | (266,628 | ) | - | |||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | (198,997 | ) | 334,161 | |||||
Accrued payroll and benefits | 5,681 | 52,575 | ||||||
Accrued expenses | (255,760 | ) | 303,799 | |||||
Net cash provided by operating activities | 702,559 | 1,380,570 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | (48,171 | ) | (1,685,960 | ) | ||||
Net cash used in investing activities | (48,171 | ) | (1,685,960 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from long-term debt | - | 210,067 | ||||||
Repayments of long-term debt | (115,712 | ) | - | |||||
Proceeds from franchisor | - | 400,000 | ||||||
Proceeds from related party note payable | 60,000 | - | ||||||
Deferred finance fees paid | (35,037 | ) | - | |||||
Members’ contributions | 197,106 | - | ||||||
Members’ distributions | - | (197,957 | ) | |||||
Net cash provided by financing activities | 106,357 | 412,110 | ||||||
Net Increase in Cash | 760,745 | 106,720 | ||||||
Cash - Beginning of Year | 117,280 | 10,560 | ||||||
Cash - End of Year | $ | 878,025 | $ | 117,280 |
The accompanying notes are an integral part of the financial statements
F-6
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS |
NOTE 1 - NATURE OF BUSINESS
Grand Traverse Hotel Properties, LLC (the Company) was organized as a Michigan limited liability company on June 16, 2010, for the purpose of constructing and operating the Hotel Indigo, a 107-room hotel with a restaurant, lounge and meeting space located in Traverse City, Michigan. Construction of the hotel was completed in May 2016, and the hotel formally commenced operations on May 22, 2016.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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.
Revenue Recognition
Revenue is generally recognized as services are performed. Hotel revenue represents primarily guest room rental, conference room rental, catering, and food and beverage sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at various federally insured financial institutions. The Company’s credit risk with respect to such balances is all amounts on deposit in excess of federally insured limits.
Accounts Receivable
The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on its history of past write offs, collections and current credit conditions. Accounts are written off based on management’s evaluation of the collectability of each account resulting from collection efforts. Management has determined that no allowance for doubtful accounts is necessary at December 31, 2017 and 2016.
Inventories
Inventories, consisting of food and beverage, are valued at the lower of cost and net realizable value, based on the FIFO (first-in first-out) method of accounting.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful lives of the assets.
F-7
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS |
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Deferred Finance Fees
Deferred finance fees are bank fees and other costs incurred in obtaining financing that are amortized on a straight-line basis over the term of the related debt. Deferred finance fees are presented as a direct deduction of the carrying amount of the debt. Amortization of deferred finance fees is included in interest expense.
Income Taxes
The Company is a flow-through entity and, therefore, is not subject to entity-level income taxes, except for certain federal, state and local taxes. The Company’s income is included in the members’ federal, state and local tax filings.
Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Company recognizes interest and penalties, if applicable, as a component of undistributed operating expenses.
Subsequent Events
Subsequent events have been evaluated through June 27, 2018, the date the financial statements are available to be issued.
NOTE 3 - RESTRICTED CASH
The Company maintains reserves for property taxes and capital improvements as required by the debt agreement (see Note 5). The franchise agreement also requires the Company to reserve an additional amount for capital improvements.
The tax reserve is $266,628 at December 31, 2017. The capital improvement reserve was funded after year end with the December 2017 mortgage payment.
F-8
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS |
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment - at cost, less accumulated depreciation at December 31, 2017 and 2016:
2017 | 2016 | |||||||
Buildings and improvements | $ | 15,501,394 | $ | 15,480,197 | ||||
Land and improvements | 572,897 | 572,897 | ||||||
Furniture and fixtures | 2,064,576 | 2,061,299 | ||||||
Machinery and equipment | 387,115 | 363,418 | ||||||
Computer equipment and software | 130,859 | 130,859 | ||||||
18,656,841 | 18,608,670 | |||||||
Less accumulated depreciation | 2,057,764 | 756,962 | ||||||
$ | 16,599,077 | $ | 17,851,708 |
Depreciation expense charged to operations was $1,300,802 and $756,962 for the years ended December 31, 2017 and 2016, respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of a note payable at December 31, 2017 and 2016, as follows:
2017 | 2016 | |||||||||||||||
Principal | Unamortized Deferred Finance Fees | Principal | Unamortized Deferred Finance Fees | |||||||||||||
First mortgage | $ | 9,084,288 | $ | 30,860 | $ | 9,200,000 | $ | - | ||||||||
Less current portion | 213,618 | 115,712 | ||||||||||||||
Long-term portion | 8,870,670 | 9,084,288 | ||||||||||||||
Less unamortized deferred finance fees | 30,860 | - | ||||||||||||||
Long-Term Debt, Net | $ | 8,839,810 | $ | 9,084,288 |
On October 16, 2014, the Company entered into a construction loan with a lender with maximum available borrowings of $9,200,000. The note required monthly payments of interest only at 2% plus the Wall Street Journal prime rate (with an interest floor of 5.25%) to be paid until November 1, 2015, at which time the entire unpaid principal balance was due. The Company signed an amendment to the loan agreement extending the loan through April 2017. The interest rate at December 31, 2016 was 5.5%. The note was collateralized by all property and equipment and was guaranteed by related parties.
F-9
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS |
On April 28, 2017, the Company refinanced its long-term debt with the lender. The new note had an original principal balance of $9,200,000, and bears interest at 4.5%. The mortgage requires monthly payments of principal and interest of $51,503 through May 2022, when the entire unpaid balance is due. The note is collateralized by all property and equipment and is guaranteed by the members. The note also contains financial covenants, including a debt service coverage ratio.
Interest incurred for the years ended December 31, 2017 and 2016, was $490,752 and $393,051, respectively.
Interest paid for the years ended December 31, 2017 and 2016, was $494,945 and $349,479, respectively.
At December 31, 2017, long-term debt maturities for each year through the maturity date of the note are as follows:
Year Ending December 31, | Amount | |||
2018 | $ | 213,618 | ||
2019 | 223,432 | |||
2020 | 233,696 | |||
2021 | 244,432 | |||
2022 | 8,169,110 | |||
$ | 9,084,288 |
NOTE 6 - SIX CONTINENTS CONTINGENCY
In connection with the Company’s construction of the hotel, the Company entered into a note with Six Continents Hotel, Inc., on March 14, 2016 in the amount of $400,000 to be used for the construction. The agreement provides for a credit to be earned equal to $1,333 for each month the hotel remains in operation as Hotel Indigo in accordance with the related franchise agreement. If the franchise agreement is terminated prior to March 2041, the end of the franchise agreement, or if the hotel changes ownership, the $400,000, net of credits earned, will be payable to Six Continents Hotel, Inc. The accretion of the Six Continents contingency, which is included in other income, net, was $16,000 and $9,333 for the years ended December 31, 2017 and 2016, respectively.
NOTE 7 - Related Party Loan
In May 2017, the Company entered into a loan agreement with a member. The loan bears interest at 7% and is due on demand. The principal balance was $60,000 at December 31, 2017.
F-10
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS |
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company entered into a management agreement with GCH Global Management, LLC, to operate and manage the hotel. GCH Global Management, LLC, is related to Grand Traverse Hotel Properties, LLC, through common ownership. The term of the agreement is 10 years beginning with the opening of the hotel, in May 2016. GCH Global Management, LLC, was paid a base management fee equal to 4% of the hotel’s gross revenues. On May 15, 2017 the Company signed a new management agreement with GCH Global Management, LLC, that reduced the management fee to 3% and extended the term to May 2027. Management fees to GCH Global Management, LLC, for the years ended December 31, 2017 and 2016, were $204,126 and $172,883, respectively.
In addition, the Company entered into an asset management agreement with Hadidi Capital, LLC. Hadidi Capital, LLC, is related to Grand Traverse Hotel Properties, LLC, through common ownership. The agreement has no set term and is automatically renewed unless written notice is received with 30 days notice. Hadidi Capital, LLC, was paid a base asset management fee equal to 1% of the hotel’s gross revenues. Management fees to Hadidi Capital, LLC, for the years ended December 31, 2017 and 2016, were $68,761 and $33,660, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company has entered into a franchise agreement with Holiday Hospitality Franchising, Inc., ending March 2041. In accordance with the terms of the agreement, the Company is required to pay franchise fees monthly based on 5% of gross room sales. The Company shall also pay 3.5% of gross room sales for marketing fees. Gross room sales are defined as all sales and receipts of every kind from guest room rentals (not including sales taxes). In addition, the Company is required to pay certain fees for marketing, software support and other support as specified in the agreement.
The Company has entered into a management agreement with GCH Global Management, LLC, to manage the hotel (see Note 8), and an asset management agreement with Hadidi Capital, LLC, to manage the assets of the hotel (see Note 8).
The Company periodically is a defendant in litigation arising in the normal course of business. Management does not believe the outcome of any such litigation will have a material adverse effect on the financial position or results of operations of the Company.
The Company is regularly the subject of state and local sales and use tax audits. Management does not believe the outcome of any such audits will have a material adverse effect on the financial position or results of operations of the Company.
NOTE 10 - SUPPLEMENTAL DISCLOSURES TO STATEMENT OF CASH FLOWS
Noncash investing and financing activities during the year ended December 31, 2016 included capital contributions for construction management services rendered of $1,150,000.
NOTE 11 - Subsequent Event
On March 8, 2018, the Company entered into a purchase and sale agreement with a third party to sell the property and operations of Hotel Indigo for $26,050,000.
F-11
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
D/B/A HOTEL INDIGO |
BALANCE SHEETS (unaudited) |
JUNE 30, 2018 AND 2017 |
2018 | 2017 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 681,041 | $ | 494,682 | ||||
Restricted cash - tax | 447,564 | 310,578 | ||||||
Accounts receivable, net | 112,130 | 146,289 | ||||||
Inventory | 79,538 | 47,522 | ||||||
Prepaid expenses | 76,179 | - | ||||||
Total current assets | 1,396,452 | 999,071 | ||||||
Property and Equipment, Net | 15,947,803 | 17,250,352 | ||||||
Total Assets | $ | 17,344,255 | $ | 18,249,423 | ||||
LIABILITIES AND MEMBERS’ CAPITAL | ||||||||
Current Liabilities | ||||||||
Current portion of long-term debt | $ | 218,470 | $ | 208,874 | ||||
Accounts payable | 397,243 | 531,099 | ||||||
Accrued payroll and benefits | 98,815 | 85,185 | ||||||
Accrued expenses | 50,513 | 376,634 | ||||||
Related party note payable | - | 180,000 | ||||||
Total current liabilities | 765,041 | 1,381,792 | ||||||
Long-Term Liabilities | ||||||||
Long-term debt, net | 8,718,444 | 8,924,341 | ||||||
Six Continents contingency | 366,667 | 382,667 | ||||||
Total liabilities | 9,850,152 | 10,688,800 | ||||||
Commitments and Contingencies | ||||||||
Members’ Capital | 7,494,103 | 7,560,623 | ||||||
Total Liabilities and Members’ Capital | $ | 17,344,255 | $ | 18,249,423 |
The accompanying notes are an integral part of the financial statements
F-12
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
D/B/A HOTEL INDIGO |
STATEMENTS OF OPERATIONS (unaudited) |
FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017 |
2018 | 2017 | |||||||
Revenues | ||||||||
Rooms | $ | 2,035,707 | $ | 1,714,167 | ||||
Food and beverage | 793,986 | 548,467 | ||||||
Other operated departments | 145,908 | 109,829 | ||||||
Total revenues | 2,975,601 | 2,372,463 | ||||||
Departmental Expenses | ||||||||
Rooms | 622,955 | 529,897 | ||||||
Food and beverage | 590,696 | 473,554 | ||||||
Other | 37,981 | 51,662 | ||||||
Total departmental expenses | 1,251,632 | 1,055,113 | ||||||
Total Departmental Profit | 1,723,969 | 1,317,350 | ||||||
Undistributed Operating Expenses | ||||||||
Administrative and general | 249,656 | 248,050 | ||||||
Management fees | 157,038 | 95,953 | ||||||
Franchise fees | 101,398 | 87,533 | ||||||
Sales and marketing | 145,193 | 66,501 | ||||||
Utilities | 102,228 | 89,040 | ||||||
Property operation and maintenance | 80,634 | 79,600 | ||||||
Total undistributed operating expenses | 836,147 | 666,677 | ||||||
Income from Operations | 887,822 | 650,673 | ||||||
Nonoperating Expenses | ||||||||
Insurance | 18,498 | 33,161 | ||||||
Property taxes | 201,602 | 145,717 | ||||||
Other (income) expenses, net | (308,629 | ) | 18,078 | |||||
Total nonoperating (income) expenses | (88,529 | ) | 196,956 | |||||
Income Before Interest and Depreciation | 976,351 | 453,717 | ||||||
Interest and Depreciation | ||||||||
Interest expense | 244,010 | 295,673 | ||||||
Depreciation | 651,274 | 649,527 | ||||||
Total interest and depreciation | 895,284 | 945,200 | ||||||
Net Income (Loss) | $ | 81,067 | $ | (491,483 | ) |
The accompanying notes are an integral part of the financial statements
F-13
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
D/B/A HOTEL INDIGO |
STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (unaudited) |
FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017 |
2018 | 2017 | |||||||
Members’ Capital - Beginning of Year | $ | 8,380,245 | $ | 7,855,000 | ||||
Net Income (Loss) | 81,067 | (491,483 | ) | |||||
Members’ Capital Contributions | 60,000 | 197,106 | ||||||
Members’ Capital Distributions | (1,027,209 | ) | - | |||||
Members’ Capital - End of Year | $ | 7,494,103 | $ | 7,560,623 |
The accompanying notes are an integral part of the financial statements
F-14
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
D/B/A HOTEL INDIGO |
STATEMENTS OF CASH FLOWS (unaudited) |
FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017 |
2018 | 2017 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income (loss) | $ | 81,067 | $ | (491,483 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation | 651,274 | 649,527 | ||||||
Amortization of deferred finance fees | 3,504 | 1,168 | ||||||
Accretion of Six Continents contingency | (8,000 | ) | (8,000 | ) | ||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | (8,277 | ) | (99,082 | ) | ||||
Inventory | (38,868 | ) | (45,724 | ) | ||||
Prepaid expenses | 145,367 | 118,209 | ||||||
Restricted cash - tax | (180,936 | ) | (310,578 | ) | ||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | 262,079 | 196,938 | ||||||
Accrued payroll and benefits | 40,559 | 32,610 | ||||||
Accrued expenses | 2,474 | 72,835 | ||||||
Net cash provided by operating activities | 950,243 | 116,420 | ||||||
Cash Flows from Investing Activities | ||||||||
Capital expenditures | - | (48,171 | ) | |||||
Net cash used in investing activities | - | (48,171 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Repayments of long-term debt | (120,018 | ) | (32,916 | ) | ||||
Proceeds from related party note payable | - | 180,000 | ||||||
Repayments of related party note payable | (60,000 | ) | - | |||||
Deferred finance fees paid | - | (35,037 | ) | |||||
Members’ contributions | 60,000 | 197,106 | ||||||
Members’ distributions | (1,027,209 | ) | - | |||||
Net cash provided by (used by) financing activities | (1,147,227 | ) | 309,153 | |||||
Net Increase (Decrease) in Cash | (196,984 | ) | 377,402 | |||||
Cash - Beginning of Period | 878,025 | 117,280 | ||||||
Cash - End of Period | $ | 681,041 | $ | 494,682 |
The accompanying notes are an integral part of the financial statements
F-15
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS (unaudited) |
NOTE 1 - NATURE OF BUSINESS
Grand Traverse Hotel Properties, LLC (the Company) was organized as a Michigan limited liability company on June 16, 2010, for the purpose of constructing and operating the Hotel Indigo, a 107-room hotel with a restaurant, lounge and meeting space located in Traverse City, Michigan. Construction of the hotel was completed in May 2016, and the hotel formally commenced operations on May 22, 2016.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of 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.
Revenue Recognition
Revenue is generally recognized as services are performed. Hotel revenue represents primarily guest room rental, conference room rental, catering, and food and beverage sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at various federally insured financial institutions. The Company’s credit risk with respect to such balances is all amounts on deposit in excess of federally insured limits.
Accounts Receivable
The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on its history of past write offs, collections and current credit conditions. Accounts are written off based on management’s evaluation of the collectability of each account resulting from collection efforts. Management has determined that no allowance for doubtful accounts is necessary at June 30, 2018 and 2017.
Inventories
Inventories, consisting of food and beverage, are valued at the lower of cost and net realizable value, based on the FIFO (first-in first-out) method of accounting.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful lives of the assets.
F-16
GRAND TRAVERSE HOTEL PROPERTIES, LLC |
d/b/a HOTEL INDIGO |
NOTES TO FINANCIAL STATEMENTS (unaudited) |
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Deferred Finance Fees
Deferred finance fees are bank fees and other costs incurred in obtaining financing that are amortized on a straight-line basis over the term of the related debt. Deferred finance fees are presented as a direct deduction of the carrying amount of the debt. Amortization of deferred finance fees is included in interest expense.
Income Taxes
The Company is a flow-through entity and, therefore, is not subject to entity-level income taxes, except for certain federal, state and local taxes. The Company’s income is included in the members’ federal, state and local tax filings.
Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Company recognizes interest and penalties, if applicable, as a component of undistributed operating expenses.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company periodically is a defendant in litigation arising in the normal course of business. Management does not believe the outcome of any such litigation will have a material adverse effect on the financial position or results of operations of the Company.
The Company is regularly the subject of state and local sales and use tax audits. Management does not believe the outcome of any such audits will have a material adverse effect on the financial position or results of operations of the Company.
NOTE 4 - Subsequent Event
On August 15, 2018, the Company sold the property and operations of Hotel Indigo. The proceeds of the sale were utilized to repay the note payable. The sale price of the hotel was $26,050,000.
F-17
Procaccianti Hotel REIT, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements represent the pro forma effects of multiple transactions, each of which is described in the following paragraphs. This pro forma information should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations and the financial statements and notes of the Company included in the Company’s Registration Statement on Form S-11 for the fiscal year ended December 31, 2017 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, as filed with the SEC on September 25, 2018.
The PCF Acquisition
On March 29, 2018, Procaccianti Hotel REIT, Inc. (the “Company”) acquired a 51% membership interest in the Procaccianti Convertible Fund, LLC and its predecessor company, Bayboro Hoteliers, LLC (together, “PCF”). The Company acquired its investment in PCF for total cash consideration of $8,029,519 and $427,358 of transaction costs, on March 29, 2018. The Company financed the acquisition of PCF with proceeds from the sale of shares of Class K and Class A common stock in the Company’s private offering exempt from registration pursuant to Regulation D promulgated under the Securities Act (the “Private Offering”). Hereinafter, this transaction is referred to as the “PCF Acquisition”. The unaudited pro forma condensed combined financial information is based on the historical financial information of PCF.
PCF was formed on April 21, 2017 to acquire, own and operate two hotels. PCF acquired the Staybridge Suites St. Petersburg Downtown located in St. Petersburg, FL (“St. Pete Hotel”) from Bayboro Hoteliers, LLC on June 29, 2017 for $20,500,000. PCF acquired the Springhill Suites Wilmington Mayfaire located in Wilmington, NC (“Wilmington Hotel”) on May 24, 2017 for $18,000,000. PCF financed the hotel property acquisitions through equity and aggregate mortgage debt of $24,593,000.
The TCI Acquisition
On August 15, 2018, the Company, through a wholly owned subsidiary of the Company’s operating partnership, acquired a 107-room, select-service hotel property, Hotel Indigo, located in Traverse City, Michigan (“TCI”) for a purchase price of $26,050,000, exclusive of closing costs and typical hotel closing date adjustments. The acquisition was funded with a combination of equity proceeds and aggregate mortgage debt. Hereinafter, this transaction is referred to as the “TCI Acquisition”. The unaudited pro forma condensed combined financial information is based on the historical financial information of Grand Traverse Hotel Properties, LLC (“GTHP”).
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and six months ended June 30, 2018 give effect to the acquisition of PCF by the Company, PCF’s acquisition and financing transactions and the acquisition of TCI and related financing transactions as if all of these transactions had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the acquisition of TCI and related financing transactions as if they had occurred on June 30, 2018.
The unaudited pro forma condensed combined financial statements contained herein are based upon the respective historical consolidated financial statements of the Company, PCF and GTHP, and should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements included in this filing.
F-18
Procaccianti Hotel REIT, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of June 30, 2018
Pro Forma | ||||||||||||||||||
Adjustments | ||||||||||||||||||
GTHP | for TCI | |||||||||||||||||
Company | Historical | Acquisition | Pro Forma | |||||||||||||||
Historical | Note 2 | Note 4 | Combined | |||||||||||||||
Assets | ||||||||||||||||||
Property and equipment, net | $ | 39,091,558 | $ | 15,947,803 | $ | 10,295,638 | 4(a) | $ | 65,334,999 | |||||||||
Cash | 2,900,046 | 681,041 | (2,123,643 | ) | 4(b) | 1,457,444 | ||||||||||||
Restricted cash | 806,190 | 447,564 | 540,858 | 4(c) | 1,794,612 | |||||||||||||
Accounts receivable | 350,790 | 112,130 | (112,130 | ) | 4(d) | 350,790 | ||||||||||||
Due from related parties | 287,687 | - | - | 287,687 | ||||||||||||||
Prepaid expenses and other assets, net | 356,689 | 155,717 | (24,058 | ) | 4(e) | 488,348 | ||||||||||||
Total assets | 43,792,960 | 17,344,255 | 8,576,665 | 69,713,880 | ||||||||||||||
Liabilities and Equity | ||||||||||||||||||
Long term debt | 24,420,105 | 9,303,581 | 15,273,339 | 4(f) | 48,997,025 | |||||||||||||
Accounts payable, accrued expenses and other | 1,103,523 | 546,571 | 100,871 | 4(g) | 1,750,965 | |||||||||||||
Due to related parties | 261,621 | - | - | 261,621 | ||||||||||||||
Total liabilities | 25,785,249 | 9,850,152 | 15,374,210 | 51,009,611 | ||||||||||||||
Commitments and Contingencies | ||||||||||||||||||
Redeemable common stock | 50,305 | - | - | 50,305 | ||||||||||||||
Equity | ||||||||||||||||||
Stockholders' equity | 10,409,826 | 7,494,103 | (6,797,545 | ) | 4(h) | 11,106,384 | ||||||||||||
Noncontrolling interests in consolidated subsidiaries | 7,547,580 | - | - | 7,547,580 | ||||||||||||||
Total equity | 17,957,406 | 7,494,103 | (6,797,545 | ) | 18,653,964 | |||||||||||||
Total liabilities and equity | $ | 43,792,960 | $ | 17,344,255 | $ | 8,576,665 | $ | 69,713,880 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
F-19
Procaccianti Hotel REIT, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2017
Pro Forma | Pro Forma | |||||||||||||||||||||||||||||||||||
PCF | Adjustments | Adjustments | ||||||||||||||||||||||||||||||||||
Company | PCF | Predecessor | PCF | for PCF | GTHP | for TCI | ||||||||||||||||||||||||||||||
Historical | Historical | Historical | Acquisition | Acquisition | Historical | Acquisition | Pro Forma | |||||||||||||||||||||||||||||
Note 1 | Note 2 | Note 2 | Note 2 | Note 3 | Note 2 | Note 4 | Combined | |||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||
Rooms | $ | - | $ | 4,603,801 | $ | 2,636,821 | $ | 1,286,580 | $ | - | $ | 4,979,783 | $ | - | $ | 13,506,985 | ||||||||||||||||||||
Other | - | $ | 218,445 | $ | 144,084 | 53,939 | - | 1,819,168 | - | 2,235,636 | ||||||||||||||||||||||||||
Total revenues | - | 4,822,246 | 2,780,905 | 1,340,519 | - | 6,798,951 | - | 15,742,621 | ||||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||||||
Expenses: | - | |||||||||||||||||||||||||||||||||||
Rooms and other property expenses | - | 2,189,953 | 1,145,580 | 583,399 | - | 3,147,305 | - | 7,066,237 | ||||||||||||||||||||||||||||
General and administrative expenses | 614,829 | 1,347,536 | 439,631 | 284,562 | - | 1,259,066 | - | 3,945,624 | ||||||||||||||||||||||||||||
Management fees to affiliates | - | 144,651 | 139,045 | 51,593 | 80,268 | 3(a),(b) | 272,887 | 128,065 | 4(i) | 816,509 | ||||||||||||||||||||||||||
Depreciation and amortization | - | 731,255 | 268,910 | 69,538 | 366,648 | 3(c) | 1,300,802 | (614,287 | ) | 4(j)(k) | 2,122,866 | |||||||||||||||||||||||||
Total operating expenses | 614,829 | 4,413,395 | 1,993,166 | 989,092 | 446,916 | 5,980,060 | (486,222 | ) | 13,951,236 | |||||||||||||||||||||||||||
Operating income (loss) before interest expense | (614,829 | ) | 408,851 | 787,739 | 351,427 | (446,916 | ) | 818,891 | 486,222 | 1,791,385 | ||||||||||||||||||||||||||
Interest income (expense) | 1,481 | (643,019 | ) | (172,423 | ) | (140,912 | ) | (156,845 | ) | 3(d),(e) | (490,752 | ) | (727,723 | ) | 4(l) | (2,330,193 | ) | |||||||||||||||||||
Income (loss) from continuing operations before noncontrolling interest and income taxes | (613,348 | ) | (234,168 | ) | 615,316 | 210,515 | (603,761 | ) | 328,139 | (241,501 | ) | (538,808 | ) | |||||||||||||||||||||||
Income attributable to noncontrolling interest | - | - | - | - | 129,991 | 3(f) | - | - | 129,991 | |||||||||||||||||||||||||||
Income (loss) available to common stockholders | $ | (613,348 | ) | $ | (234,168 | ) | $ | 615,316 | $ | 210,515 | $ | (733,752 | ) | $ | 328,139 | $ | (241,501 | ) | $ | (668,799 | ) | |||||||||||||||
Loss per share available to common stockholders – basic and diluted: | ||||||||||||||||||||||||||||||||||||
Class K common stock | $ | (1.22 | ) | $ | (0.35 | ) | ||||||||||||||||||||||||||||||
Class K-I common stock | $ | - | $ | (0.40 | ) | |||||||||||||||||||||||||||||||
Class K-T common stock | $ | - | $ | (0.40 | ) | |||||||||||||||||||||||||||||||
Class A common stock | $ | (1.22 | ) | $ | (0.35 | ) | ||||||||||||||||||||||||||||||
Class B common stock | $ | (1.82 | ) | $ | (0.95 | ) | ||||||||||||||||||||||||||||||
Weighted average common shares outstanding – basic and diluted: | ||||||||||||||||||||||||||||||||||||
Class K common stock | 156,250 | 686,037 | 3(g) | 395,331 | 4(m) | 1,237,618 | ||||||||||||||||||||||||||||||
Class K-I common stock | - | 10 | 3(g) | - | 4(m) | 10 | ||||||||||||||||||||||||||||||
Class K-T common stock | - | 10 | 3(g) | - | 4(m) | 10 | ||||||||||||||||||||||||||||||
Class A common stock | 160,219 | 146,191 | 3(g) | 8,000 | 4(m) | 314,410 | ||||||||||||||||||||||||||||||
Class B common stock | 125,000 | - | - | 125,000 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
F-20
Procaccianti Hotel REIT, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2018
Pro Forma | Pro Forma | |||||||||||||||||||||||||||
Adjustments | Adjustments | |||||||||||||||||||||||||||
Company | PCF | for PCF | GTHP | for TCI | ||||||||||||||||||||||||
Historical | Historical | Acquisition | Historical | Acquisition | Pro Forma | |||||||||||||||||||||||
Note 1 | Note 2 | Note 3 | Note 2 | Note 4 | Combined | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Rooms | $ | 2,527,373 | $ | 2,046,551 | $ | - | $ | 2,035,707 | $ | - | $ | 6,609,631 | ||||||||||||||||
Other | 128,660 | 121,084 | - | 939,894 | - | 1,189,638 | ||||||||||||||||||||||
Total revenues | 2,656,033 | 2,167,635 | - | 2,975,601 | - | 7,799,269 | ||||||||||||||||||||||
- | ||||||||||||||||||||||||||||
Expenses: | - | |||||||||||||||||||||||||||
Rooms and other property expenses | 1,094,918 | 960,103 | - | 1,737,494 | - | 3,792,515 | ||||||||||||||||||||||
General and administrative expenses | 827,634 | 319,500 | - | 104,718 | - | 1,251,852 | ||||||||||||||||||||||
Management fees to affiliates | 79,699 | 64,996 | - | 157,038 | - | 301,733 | ||||||||||||||||||||||
Other fees to affiliates | 163,607 | - | (89,376 | ) | 3(b)(h) | - | 68,657 | 4(i) | 142,888 | |||||||||||||||||||
Acquisition costs | 302,380 | - | (302,380 | ) | 3(h) | - | - | - | ||||||||||||||||||||
Depreciation and amortization | 349,364 | 329,843 | 24,447 | 3(c) | 651,274 | (297,660 | ) | 4(j)(k) | 1,057,268 | |||||||||||||||||||
Total operating expenses | 2,817,602 | 1,674,442 | (367,309 | ) | 2,650,524 | (229,003 | ) | 6,546,256 | ||||||||||||||||||||
Operating income (loss) before interest expense | (161,569 | ) | 493,193 | 367,309 | 325,077 | 229,003 | 1,253,013 | |||||||||||||||||||||
Interest expense | (294,409 | ) | (261,724 | ) | (7,240 | ) | 3(d) | (244,010 | ) | (365,228 | ) | 4(l) | (1,172,611 | ) | ||||||||||||||
Gain on acquisition | 42,026 | - | (42,026 | ) | 3(i) | - | - | - | ||||||||||||||||||||
Income (loss) from continuing operations before noncontrolling interest and income taxes | (413,952 | ) | 231,469 | 318,043 | 81,067 | (136,225 | ) | 80,402 | ||||||||||||||||||||
Income tax provision | (86,540 | ) | - | - | - | - | (86,540 | ) | ||||||||||||||||||||
Income attributable to noncontrolling interest | 215,642 | - | 113,420 | 3(f) | - | - | 329,062 | |||||||||||||||||||||
Income (loss) available to common stockholders | $ | (716,134 | ) | $ | 231,469 | $ | 204,623 | $ | 81,067 | $ | (136,225 | ) | $ | (335,200 | ) | |||||||||||||
Loss per share available to common stockholders – basic and diluted: | ||||||||||||||||||||||||||||
Class K common stock | $ | (0.54 | ) | $ | (0.16 | ) | ||||||||||||||||||||||
Class K-I common stock | $ | (0.54 | ) | $ | (0.24 | ) | ||||||||||||||||||||||
Class K-T common stock | $ | (0.54 | ) | $ | (0.24 | ) | ||||||||||||||||||||||
Class A common stock | $ | (0.54 | ) | $ | (0.24 | ) | ||||||||||||||||||||||
Class B common stock | $ | (0.84 | ) | $ | (0.54 | ) | ||||||||||||||||||||||
Weighted average common shares outstanding – basic and diluted: | ||||||||||||||||||||||||||||
Class K common stock | 841,106 | 1,181 | 3(g) | 395,331 | 4(m) | 1,237,618 | ||||||||||||||||||||||
Class K-I common stock | 7 | 3 | 3(g) | - | 4(m) | 10 | ||||||||||||||||||||||
Class K-T common stock | 7 | 3 | 3(g) | - | 4(m) | 10 | ||||||||||||||||||||||
Class A common stock | 287,796 | 18,614 | 3(g) | 8,000 | 4(m) | 314,410 | ||||||||||||||||||||||
Class B common stock | 125,000 | - | - | 125,000 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements
F-21
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. | Basis of presentation |
The unaudited pro forma condensed combined financial statements of the Company were prepared in accordance with Article 11 of SEC Regulation S-X. The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the acquisitions.
The PCF Acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations and ASC Topic 810, Consolidation. The TCI Acquisition was accounted for as an asset acquisition in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of the assets acquired and liabilities assumed from PCF and TCI and conformed the accounting policies of PCF and TCI to its own accounting policies.
The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the TCI Acquisition as if the transaction consummated on June 30, 2018. The PCF Acquisition is reflected in the Company’s balance sheet as of June 30, 2018 included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and for the six months ended June 30, 2018 give effect to the PCF Acquisition and TCI Acquisition as if the transactions took place as of January 1, 2017, and combine the historical results of the Company, PCF and TCI.
The pro forma condensed combined financial statements do not necessarily reflect what the combined Company’s results of operations would have been had the acquisitions occurred on the date indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined Company. The actual financial results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The pro forma condensed combined financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of PCF and TCI as a result of restructuring activities and other planned cost savings initiatives following the completion of the acquisitions.
2. | Description of the Transactions |
PCF Acquisition
On March 29, 2018, the Company acquired a 51% interest in the outstanding equity of PCF pursuant to the terms of the option agreement between the Company and PCF for total cash consideration of $8,029,519 and $427,358 in transaction costs. The Company financed the acquisition with proceeds from the Private Offering and cash on hand as of March 29, 2018. Subsequent to December 31, 2017 and through March 31, 2018, the Company received aggregate gross proceeds of $3,752,839 from the issuance of shares of common stock in the Private Offering, including 293,196 shares of Class K common stock for gross proceeds of $2,912,839, at a weighted average of $9.93 per share, and 84,000 shares of Class A common stock to investors for gross proceeds of $840,000, at a weighted average of $10.00 per share. Proceeds from the Private Offering equal to $3,002,839 were available to fund the PCF Acquisition.
F-22
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
PCF was formed on April 21, 2017 and, as of March 29, 2018, owned two hotels – the St. Pete Hotel and the Wilmington Hotel. Each hotel was acquired by PCF in 2017 and accounted for as an asset acquisition in accordance with ASU 2017-01, Clarifying the Definition of a Business and ASC Topic 805, Business Combinations. Therefore, the total purchase price, including transaction costs, was allocated to the assets acquired based on their relative fair values.
The PCF Historical operations for the year ended December 31, 2017 include the operations of the St. Pete Hotel and Wilmington Hotel from the date of PCF’s acquisition, or June 29, 2017 and May 24, 2017, respectively, through December 31, 2017.
PCF Predecessor Historical includes the historical operations of the St. Pete Hotel for the period January 1, 2017 through June 28, 2017.
PCF Acquisition includes the historical operations of the Wilmington Hotel for the period January 1, 2017 through May 23, 2017.
TCI Acquisition
On August 15, 2018, the Company acquired TCI pursuant to the purchase and sale agreement between the Company and GTHP for a purchase price of $26,050,000 adjusted for a $41,000 purchase price credit, $234,441 of capitalized acquisition costs and net liabilities assumed of $232,771. The acquisition was funded with a combination of (1) proceeds from a first mortgage loan on TCI in the principal amount of $17,836,000; (2) proceeds from a loan made to the Company on August 15, 2018, by Procaccianti Companies, Inc., an affiliate of the Company, in the principal amount of $6,600,000; and (3) cash on hand as of August 15, 2018 from operations and proceeds from the sale of shares of Class K and Class A common stock of the Company in the Private Offering. Subsequent to June 30, 2018 and through August 15, 2018, the Company received aggregate gross proceeds of $1,344,000 from the issuance of shares of common stock in the Private Offering, including 131,399 shares of Class K common stock for gross proceeds of $1,304,000, at a weighted average of $9.92 per share, and 4,000 shares of Class A common stock to investors for gross proceeds of $40,000, at a weighted average of $10.00 per share. Proceeds from the Private Offering equal to $3,395,900 were available to fund the TCI Acquisition.
3. | Pro forma adjustments (PCF Acquisition) |
The unaudited pro forma condensed combined financial statements include pro forma adjustments to give effect to the transactions as if the acquisition of PCF by the Company and PCF’s hotel property acquisitions and financing transactions had occurred on January 1, 2017.
(a) | Represents a $66,995 reduction in management fees as the result of PCF entering into new management agreements upon completion of the hotel acquisitions. PCF signed new management agreements with affiliates of the Company to manage the hotels for a management fee of 3.0% of revenue of each hotel. Pre-acquisition management fees were 5.00% and 3.85% for the St. Pete Hotel and the Wilmington Hotel, respectively. |
(b) | Represents $147,263 and $35,602 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of annual asset management fees under the Company’s Advisory Agreement with Procaccianti Hotel Advisors, LLC (the “Advisor”) equal to 0.75% of asset cost. |
F-23
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(c) | Represents $366,648 and $24,447 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of additional depreciation for the hotels based on the allocation of the Company’s purchase price. |
(d) | Represents $28,961 and $7,240 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of amortization of intangible assets as the result of recording the mortgages acquired at fair value. |
(e) | Represents adjustment to reflect $127,884 increase of interest expense under the mortgages for the St. Pete Hotel and the Wilmington Hotel at PCF’s mortgage’s interest rates. |
(f) | Represents allocation of income of $129,991 and $113,420 to noncontrolling interests within the statement of operations, which is 49% of the pro forma PCF net income for the year ended December 31, 2017 and six months ended June 30, 2018, respectively. |
(g) | Represents adjustment to the weighted average shares outstanding based on the assumption that the financing transactions that occurred on various dates from inception to March 31, 2018 would have been completed on or prior to completion of the pro forma acquisition date of January 1, 2017, in order to fund the PCF Acquisition. |
Shares Issued and Outstanding | Pro-Forma Weighted Average Shares | |||||||||||
March 31, 2018 | Year ended December 31, 2017 | Six months ended June 30, 2018 | ||||||||||
Class K common shares | 842,287 | 842,287 | 842,287 | |||||||||
Class K-I common shares | 10 | 10 | 10 | |||||||||
Class K-T common shares | 10 | 10 | 10 | |||||||||
Class A common shares | 306,410 | 306,410 | 306,410 | |||||||||
Class B common shares | 125,000 | 125,000 | 125,000 |
(h) | Represents elimination of nonrecurring items. Transaction costs incurred during the six months ended June 30, 2018 were $427,358 and include $302,380 of third party costs and $124,978 of fees payable to affiliates. Transaction costs were expensed by the Company in accordance with ASC Topic 810, Consolidation, as the transaction was determined to be an asset acquisition under the variable interest entity (“VIE”) model. |
(i) | The gain on acquisition of $42,026 recorded by the Company as the result of the PCF acquisition representing an asset acquisition under the VIE model has been excluded as it is a nonrecurring item directly related to the transaction. |
F-24
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
4. | Pro forma adjustments (TCI Acquisition) |
The unaudited pro forma condensed combined statements of operations include pro forma adjustments to give effect to the transactions as if the acquisition of TCI by the Company had occurred on January 1, 2017 and the unaudited pro forma condensed combined balance sheet includes pro forma adjustments to give effect to the transaction as if the acquisition had occurred on June 30, 2018.
(a) | Represents allocation of purchase price of $10,295,638 to the acquired property and equipment. |
(b) | To reflect the purchase price, cash received for net liabilities assumed, elimination of TCI’s historical cash balance, cash reserved for property improvement plan and proceeds from new debt issuance and shares sold. |
Purchase price | $ | (26,050,000 | ) | |
Purchase price credit | 41,000 | |||
Acquisition costs | (234,441 | ) | ||
Purchase price consideration | (26,243,441 | ) | ||
Net liabilities assumed | 232,771 | |||
Elimination of TCI's historic cash balance | (681,041 | ) | ||
Reserve for property improvement plan | (988,422 | ) | ||
Issuance of new promissory note and mortgage, net of debt issuance costs of $223,510 | 24,212,490 | |||
Equity proceeds from the issuance of 131,399 shares of Class K common stock and 4,000 shares of Class A common stock | 1,344,000 | |||
Pro forma adjustment to cash and cash equivalents | $ | (2,123,643 | ) |
(c) | Represents net adjustment by the Company to record restricted cash of $988,422 reserved for the TCI property improvement plan. |
(d) | Represents elimination of TCI’s net accounts receivable of $112,130, which were not acquired. |
(e) | Represents the net adjustment by the Company to record $131,659 of prepayments for taxes and services. |
(f) | Reflects the new debt of $24,212,490, net of costs of $223,510, incurred to finance the TCI acquisition and the elimination of TCI historical debt of $9,303,581 not assumed as part of the acquisition. |
(g) | Represents the adjustment to eliminate TCI’s historical accounts payable and other liabilities not assumed in the acquisition and record nonrecurring acquisition costs and acquisition fee incurred that are directly related to the TCI Acquisition. |
F-25
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Elimination of TCI's historic accounts payable and other liabilities | $ | (546,571 | ) | |
Acquisition cost | 234,441 | |||
Acquisition fee | 413,001 | |||
Pro forma adjustment to accounts payable, accrued expenses and other | $ | 100,871 |
(h) | Represents the adjustment to eliminate TCI’s historical stockholders’ equity and record additional shares issued by the Company less nonrecurring transaction costs and acquisition fee incurred. |
Elimination of TCI's historical stockholders equity | $ | (7,494,103 | ) | |
Equity proceeds from the issuance of 131,399 shares of Class K common stock and 4,000 shares of Class A common stock | 1,344,000 | |||
Acquisition cost | (234,441 | ) | ||
Acquisition fee | (413,001 | ) | ||
Pro forma adjustment to stockholders' equity | $ | (6,797,545 | ) |
(i) | Represents increase in annual management fees of $128,065 and $68,657 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, under the Advisory Agreement with the Advisor equal to 0.75% of asset cost. Pre-acquisition asset management fees were 1.00% of gross revenues. |
(j) | Represents $612,510 and $295,356 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of decrease in depreciation for the hotels based on the allocation of the Company’s purchase price and assignment of useful lives. |
(k) | Represents $1,777 and $2,304 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of decrease in amortization of the franchise fee. |
(l) | Represents adjustments to reflect interest expense under debt issued by the Company to fund the TCI Acquisition. The LIBOR rate assumed for purposes of preparing this pro forma financial information is 2.06%, the one-month LIBOR rate as of August 15, 2018. |
(m) | Represents adjustment to the weighted average shares outstanding based on the assumption that the financing transactions that occurred on various dates from inception to August 15, 2018 would have been completed on or prior to completion of the pro forma acquisition date of January 1, 2017, in order to fund the TCI Acquisition. |
F-26
Procaccianti Hotel REIT, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Shares Issued and Outstanding | Pro-Forma Weighted Average Shares | |||||||||||
August 15, 2018 | Year ended December 31, 2017 | Six months ended June 30, 2018 | ||||||||||
Class K common shares | 1,237,618 | 1,237,618 | 1,237,618 | |||||||||
Class K-I common shares | 10 | 10 | 10 | |||||||||
Class K-T common shares | 10 | 10 | 10 | |||||||||
Class A common shares | 314,410 | 314,410 | 314,410 | |||||||||
Class B common shares | 125,000 | 125,000 | 125,000 |
F-27