lfr_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

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

For the transition period from to

Commission file number 000‑56082

LODGING FUND REIT III, INC.

(Exact Name of Registrant as Specified in Its Charter)


Maryland		83‑0556111
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1635 43rd Street South, Suite 205 Fargo, North Dakota		58103
(Address of Principal Executive Offices)		(Zip Code)

(701) 630‑6500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐	Non-accelerated filer	☒

Smaller reporting company	☒	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

As of May 14, 2020, there were 7,136,866 outstanding shares of common stock of Lodging Fund REIT III, Inc.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LODGING FUND REIT III, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31,		December 31,
	2020		2019
Assets
Investment in hotel properties, net of accumulated depreciation of $2,074,113 and $1,255,712	$	101,975,846	$	65,408,308
Cash and cash equivalents		7,934,605		10,898,556
Restricted cash		4,689,155		5,275,815
Accounts receivable, net		96,509		107,976
Franchise fees, net		1,005,718		721,690
Prepaid expenses and other assets		1,860,521		1,623,584
Total Assets	$	117,562,354	$	84,035,929

Liabilities and Equity
Debt, net	$	69,018,909	$	40,980,632
Accounts payable		683,677		543,669
Accrued expenses		1,435,884		925,265
Due to related parties		338,883		966,379
Other liabilities		301,765		434,974
Total liabilities		71,779,118		43,850,919

Commitments and contingencies (See Note 10)

Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; no shares issued and outstanding		—		—
Common stock, $0.01 par value, 900,000,000 shares authorized; 6,996,670 and 6,005,743 shares issued and outstanding		69,966		60,057
Additional paid-in capital		68,659,011		58,961,101
Accumulated deficit		(22,376,292)		(18,396,163)
Total stockholders' equity		46,352,685		40,624,995
Non-controlling interest		(569,449)		(439,985)
Total equity		45,783,236		40,185,010
Total Liabilities and Equity	$	117,562,354	$	84,035,929

See accompanying notes to consolidated financial statements.

LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended March 31,
	2020		2019
Revenues
Room revenue	$	3,777,730	$	601,289
Other revenue		54,776		3,201
Total revenue		3,832,506		604,490

Expenses
General and administrative		1,388,284		655,151
Sales and marketing		371,070		176,562
Property operations		1,650,313		250,698
Franchise fees		319,901		54,085
Property management fees		395,204		59,898
Acquisition expense		72,995		188,121
Depreciation		818,401		103,589
Total expenses		5,016,168		1,488,104

Other Income (Expense)
Other income (expense), net		(72,524)		(40,023)
Interest expense		(735,766)		(161,502)
Total other income (expense)		(808,290)		(201,525)

Net Loss Before Income Taxes		(1,991,952)		(1,085,139)

Income tax benefit		607,916		59,556

Net Loss		(1,384,036)		(1,025,583)

Net loss attributable to non-controlling interest		(69,156)		(50,563)

Net Loss Attributable to Common Stockholders	$	(1,314,880)	$	(975,020)

Basic and Diluted Net Loss Per Share of Common Stock	$	(0.20)	$	(0.65)
Weighted-average Shares of Common Stock Outstanding, Basic and Diluted		6,539,024		1,504,416

See accompanying notes to consolidated financial statements.

LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional				Total		Non-
		Par		Paid-In		Accumulated		Stockholders'		controlling		Total
	Shares	Value		Capital		Deficit		Equity		Interest		Equity
Balance at December 31, 2018	1,135,010	$	11,350	$	11,083,985	$	(4,041,428)	$	7,053,907	$	(69,217)	$	6,984,690
Issuance of common stock	789,455		7,895		7,814,616		—		7,822,511		—		7,822,511
Offering costs	—		—		—		(1,628,239)		(1,628,239)		—		(1,628,239)
Distributions declared ($0.175 per share)	—		—		—		(266,076)		(266,076)		(14,004)		(280,080)
Distributions reinvested	12,269		123		115,352		—		115,475		—		115,475
Net loss	—		—		—		(975,020)		(975,020)		(50,563)		(1,025,583)
Balance at March 31, 2019	1,936,734	$	19,368	$	19,013,953	$	(6,910,763)	$	12,122,558	$	(133,784)	$	11,988,774

Balance at December 31, 2019	6,005,743	$	60,057	$	58,961,101	$	(18,396,163)	$	40,624,995	$	(439,985)	$	40,185,010
Issuance of common stock	956,897		9,569		9,371,964		—		9,381,533		—		9,381,533
Offering costs	—		—		—		(1,520,647)		(1,520,647)		—		(1,520,647)
Distributions declared ($0.175 per share)	—		—		—		(1,144,602)		(1,144,602)		(60,308)		(1,204,910)
Distributions reinvested	44,030		440		417,846		—		418,286		—		418,286
Redemptions	(10,000)		(100)		(91,900)		—		(92,000)		—		(92,000)
Net loss	—		—		—		(1,314,880)		(1,314,880)		(69,156)		(1,384,036)
Balance at March 31, 2020	6,996,670	$	69,966	$	68,659,011	$	(22,376,292)	$	46,352,685	$	(569,449)	$	45,783,236

See accompanying notes to consolidated financial statements.

LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Three Months Ended March 31,
	2020		2019
Cash Flows from Operating Activities:
Net loss	$	(1,384,036)	$	(1,025,583)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		818,401		103,589
Amortization		58,352		29,231
Write-off of unamortized deferred financing costs		—		25,629
Change in operating assets and liabilities:
Accounts receivable		11,467		(21,844)
Franchise fees		(300,000)		(175,000)
Prepaid expenses and other assets		(236,937)		213,946
Accounts payable		147,028		87,316
Accrued expenses		496,689		(96,979)
Due to related parties		(623,882)		(365,516)
Other liabilities		(129,055)		10,211
Net cash used in operating activities		(1,141,973)		(1,215,000)
Cash Flows from Investing Activities:
Acquisitions of hotel properties		(27,190,749)		(4,276,945)
Improvements and additions to hotel properties		(196,753)		(157,518)
Net cash used in investing activities		(27,387,502)		(4,434,463)
Cash Flows from Financing Activities:
Proceeds from mortgage debt		13,597,819		5,278,868
Proceeds from lines of credit		6,200,000		500,000
Principal payments on mortgage debt		(170,941)		(13,466)
Principal payments on lines of credit		(1,000,000)		(5,229,000)
Payments of deferred financing costs		(633,572)		(301,960)
Proceeds from issuance of common stock		9,381,533		7,822,511
Payments of offering costs		(1,612,371)		(1,359,395)
Payments for shares redeemed		(92,000)		—
Distributions paid		(691,604)		(98,912)
Net cash provided by financing activities		24,978,864		6,598,646
Net change in cash, cash equivalents, and restricted cash		(3,550,611)		949,183
Beginning Cash, Cash Equivalents, and Restricted Cash		16,174,371		4,032,404
Ending Cash, Cash Equivalents, and Restricted Cash	$	12,623,760	$	4,981,587

See accompanying notes to consolidated financial statements.

LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


	For the Three Months Ended March 31,
	2020		2019
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	577,708	$	102,972

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Debt assumed in connection with hotel property acquisition	$	9,998,437	$	9,424,156
Offering costs included in accounts payable	$	(7,020)	$	170,845
Offering costs included in due to related parties	$	(63,922)	$	97,999
Offering costs included in accrued expenses	$	(20,782)	$	—
Distributions included in accrued expenses	$	34,712	$	60,119
Distributions included in due to related parties	$	60,308	$	5,574
Reinvested distributions	$	418,286	$	115,475

Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
Cash and cash equivalents, beginning of period	$	10,898,556	$	3,732,404
Restricted cash, beginning of period		5,275,815		300,000
Cash, cash equivalents, and restricted cash, beginning of period	$	16,174,371	$	4,032,404

Cash and cash equivalents, end of period	$	7,934,605	$	2,679,089
Restricted cash, end of period		4,689,155		2,302,498
Cash, cash equivalents, and restricted cash, end of period	$	12,623,760	$	4,981,587

See accompanying notes to consolidated financial statements.

LODGING FUND REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION

Lodging Fund REIT III, Inc. (“LF REIT III”), was formed on April 9, 2018 as a Maryland corporation. LF REIT III, together with its subsidiaries (the “Company”), was formed for the principal purpose of acquiring, through purchase or contribution, direct or indirect ownership interests in a diverse portfolio of limited-service, select-service and extended stay hotel properties located primarily in “America’s Heartland,” which the Company defines as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. LF REIT III has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2018. The Company’s business activities are directed and managed by Legendary Capital REIT III, LLC (the “Advisor”) and its affiliates, which are related parties through common management, pursuant to the Amended and Restated Advisory Agreement (the “Advisory Agreement”), dated June 1, 2018. The Company has no foreign operations or assets and its operating structure includes only one operating and reportable segment.

Substantially all of the Company’s assets and liabilities are held by, and substantially all of its operations are conducted through, Lodging Fund REIT III OP, LP (the “Operating Partnership,” or “OP”), a subsidiary of LF REIT III. The OP has two voting classes of partnership units, General Partnership Units and Common Limited Partnership Units, and one class of non-voting partnership units, Series B Limited Partnership Units. LF REIT III was the sole general partner of the OP, as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, there were no outstanding Common Partnership Units, and there were 1,000 outstanding Series B Limited Partnership Units, all of which were owned by the Advisor.

On June 1, 2018, the Company commenced a private offering of shares of common stock, $0.01 par value per share, with a maximum offering of $100,000,000 (the “Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. In addition to sales of common shares for cash, the Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company. As of March 31, 2020, the Company had issued and sold 6,996,670 shares of common stock, including 133,331 shares attributable to the DRIP, and received aggregate proceeds of $68.7 million.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation—The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC applicable to interim financial information. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, and which, in the opinion of management, are necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The consolidated financial statements include the accounts of LF REIT III, the OP and its wholly-owned subsidiaries. For the controlled subsidiaries that are not wholly-owned, the interests owned by an entity other than the Company represent a noncontrolling interest, which is presented separately in the consolidated financial statements. The Company has no foreign operations or assets and its operating structure includes only one reportable Segment. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates—The preparation of the Company’s consolidated financial statements and the accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

During the first quarter of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The impact of the outbreak on the U.S. and world economies has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, there have been international mandates, and mandates in the United States from federal, state and local authorities, instituting quarantines and stay-at-home orders, closing schools, and instituting restrictions on travel and/or limiting operations of non-essential offices and retail centers. Such actions are adversely impacting many industries, with the travel and hospitality industries being particularly adversely affected. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2020, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.

Revenue Recognition—Revenues consist of amounts derived from hotel operations, including room sales and other hotel revenues, and are presented on a disaggregated basis in the Company’s consolidated statements of operations. These revenues are recorded net of any sales and occupancy taxes collected from the hotel guests. All revenues are recorded on an accrual basis as they are earned. Any cash received prior to a guest’s arrival is recorded as an advance deposit from the guest and recognized as revenue at the time of the guest’s occupancy at the hotel property.

Investment in Hotel Properties—The Company evaluates whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of the Company’s acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions are capitalized and transaction costs associated with business combinations would be expensed as incurred.

The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, the Company allocates the purchase price among the assets acquired and the liabilities assumed on a relative fair value basis at the date of acquisition. The Company determines the fair value of assets acquired and liabilities assumed with the assistance of third-party valuation specialists, using cash flow analysis as well as available market and cost data. The determination of fair value includes making numerous estimates and assumptions.

The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed debt liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to seven years for FF&E. Maintenance and repair costs are expensed in the period incurred and

major renewals or improvements to the hotel properties are capitalized. Interest incurred in connection with the financing of real estate under development or renovation is capitalized as an additional cost of development. The Company discontinues the capitalization of interest once the real estate development or renovation project is substantially complete.

The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the property to the estimated future undiscounted cash flows of the property, which take into account current market conditions and the Company’s intent with respect to holding or disposing of the hotel properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the industry and the economy in general and the Company’s expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and the Company’s ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.

Non-controlling Interest—Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the Company. Non-controlling interests are reported in the consolidated balance sheets within equity, separate from stockholders’ equity. Revenue and expenses attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations, with net income or loss attributable to non-controlling interests reported separately from net income or loss attributable to the Company.

Cash and Cash Equivalents—Cash and cash equivalents include cash in bank accounts as well as highly liquid investments with an original maturity of three months or less. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed federally insured levels.

Restricted Cash—Restricted cash consists of earnest money deposits related to hotel property acquisitions, as well as certain funds maintained in escrow accounts to fund future payments for insurance, property tax obligations, and reserves for future capital expenditures, as required by our debt agreements. As of March 31, 2020 and December 31, 2019, restricted cash on the accompanying consolidated balance sheets included $1.7 million and $2.6 million, respective, of earnest money deposits.

Accounts Receivable—Accounts receivable consist primarily of receivables due from hotel guests for room stays and meeting and banquet room rentals, which are uncollateralized customer obligations. Management determines the likelihood of collectability of receivables on an individual customer basis, based on the amount of time the balance has been outstanding, likelihood of collecting, and the customer’s current economic status. The carrying amount of the accounts receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.

Deferred Financing Costs—Deferred financing costs represent commitment fees, origination fees, legal fees, and other costs associated with obtaining financing. Deferred financing costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The Company expenses unamortized deferred financing costs when the associated financing agreement is refinanced or repaid before maturity unless certain criteria are met that would

allow for the carryover of such costs to the refinanced agreement. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed.

Offering Costs—The Company has incurred certain costs related directly to the Company’s private offering consisting of, among other costs, commissions, legal, due diligence costs, printing, marketing, filing fees, postage, data processing fees, and other offering related costs. These costs are capitalized and recorded as a reduction of equity proceeds on the accompanying consolidated balance sheets.

Property Operations Expenses—Property operations expenses consist of expenses related to room rental, food and beverage sales, telephone usage, and other miscellaneous service costs, as well as all costs of operating the Company’s hotel properties such as building repairs, maintenance, property taxes, utilities, and other related costs.

Property Management Fees—Property management fees include expenses incurred for management services provided for the day-to-day operations of our hotel properties, which are generally charged at a rate of 4% of gross revenues. Property management fees also include asset management fees, which may be charged at an annual rate of up to 0.75% of gross assets and are paid to the Advisor. For the three months ended March 31, 2020 and 2019, asset management fees were charged only on the value of investments in hotel properties.

Franchise Fees—The Company pays initial fees related to hotel franchise rights prior to acquiring a hotel property. The fees are included in prepaid expenses and other assets until the time the related hotel property is acquired. Initial franchise fees related to hotel properties that are acquired are amortized on a straight-line basis over the life of the agreement. Initial franchise fees related to hotel properties that are not acquired are refunded to the Company, net of any associated fees, and any fees are expensed as incurred. Franchise fees on the accompanying consolidated statements of operations include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, and reservation fees and other related costs.

Acquisition Costs—The Company incurs costs during the review of potential hotel property acquisitions including legal fees, environmental reviews, market studies, financial advisory services, and other professional service fees. If the Company does complete a property acquisition, an acquisition fee of up to 1.4% is charged by the Advisor, based on the purchase price of the property plus any estimated property improvement plan (“PIP”) costs. For transactions determined to be asset acquisitions, these costs are capitalized as part of the overall cost of the project if the property is ultimately acquired. For transactions determined to be business combinations, these costs would be expensed in the period incurred. Acquisition-related and acquisition due diligence costs that relate to a property that is not acquired, are expensed and included in acquisition costs on the accompanying consolidated statements of operations. Prior to the ultimate determination of whether a property will be acquired or not, acquisition-related and acquisition due diligence costs are recorded as, and included in, prepaid expenses and other assets on the accompanying consolidated balance sheets.

Net Loss Per Share of Common Stock—Basic net loss per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net loss per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net loss per common share were the same for the periods presented.

Income Taxes—The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.

As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates and it may not be able to qualify

as a REIT for four subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to U.S. federal income and excise taxes on undistributed taxable income. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”) is subject to U.S. federal, state, and local income taxes at the applicable rates.

The TRS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company performs periodic reviews for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements.

Fair Value Measurement—The Company establishes fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs such as quoted prices in active markets.

Level 2—Directly or indirectly observable inputs, other than quoted prices in active markets.

Level 3—Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.

The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

Recent Accounting Pronouncements—The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer the adoption of new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606). The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014‑09 is effective for fiscal years beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company adopted ASU 2014‑09 as of January 1, 2019 and has applied it on a modified retrospective basis. Based on the Company’s completed assessment of this updated accounting guidance, it does not materially affect the amount or timing of revenue recognition for the Company and the Company did not recognize any cumulative-effect adjustment as a result of adoption.

In February 2016, the FASB issued ASU No. 2016‑02, “Leases” (“ASU No. 2016‑02”) (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016‑02 requires lessees to apply a dual approach, classifying leases as either

finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016‑02 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. We plan to adopt ASU 2016‑02 for the year ending December 31, 2021. We do not anticipate any reclassifications or significant impacts on our consolidated financial statements as a result of this adoption.

3. INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties as of March 31, 2020 and December 31, 2019 consisted of the following:


	March 31,		December 31,
	2020		2019
Land and land improvements	$	10,314,661	$	7,738,495
Building and building improvements		84,575,847		53,238,276
Furniture, fixtures, and equipment		8,708,360		5,687,249
Construction in progress		451,091		—
Investment in hotel properties, at cost		104,049,959		66,664,020
Less: accumulated depreciation		(2,074,113)		(1,255,712)
Investment in hotel properties, net	$	101,975,846	$	65,408,308

As of March 31, 2020, the Company owned seven hotel properties with an aggregate of 706 rooms located in six states.

Acquisitions of Hotel Properties

The Company acquired two properties during the three months ended March 31, 2020 and four properties during the year ended December 31, 2019. Each of the Company’s hotel acquisitions to date have been determined to be asset acquisitions. The table below outlines the details of the properties acquired during the three months ended March 31, 2020.


2020 Acquisitions

				Number
			Date	of Guest	Purchase		Transaction				%
Hotel	Property Type	Location	Acquired	Rooms	Price		Costs		Total		Interest
Fairfield Inn & Suites (the "Lubbock Fairfield Inn Property")	Limited Service	Lubbock, TX	January 8, 2020	101	$	15,150,000	$	496,431	$	15,646,431	100	%
Homewood Suites (the "Southaven Property")	Extended Stay	Southaven, MS	February 21, 2020	99		20,500,000		445,090		20,945,090	100	%
				200	$	35,650,000	$	941,521	$	36,591,521

The table below outlines the details of the properties acquired during the year ended December 31, 2019.


2019 Acquisitions

				Number
			Date	of Guest	Purchase		Transaction				%
Hotel	Property Type	Location	Acquired	Rooms	Price		Costs		Total		Interest
Hampton Inn & Suites (the "Pineville Property")	Limited Service	Pineville, NC	March 19, 2019	111	$	13,897,358	$	303,744	$	14,201,102	100	%
Hampton Inn (the "Eagan Property")	Limited Service	Eagan, MN	June 19, 2019	122		13,950,000		278,333		14,228,333	100	%
Home2 Suites (the "Prattville Property")	Extended Stay	Prattville, AL	July 11, 2019	90		14,750,000		356,014		15,106,014	100	%
Home2 Suites (the “Lubbock Home2 Property”)	Extended Stay	Lubbock, TX	December 30, 2019	100		14,150,000		284,776		14,434,776	100	%
				423	$	56,747,358	$	1,222,867	$	57,970,225

Each of the hotel properties listed above, except one, is subject to a property management agreement with NHS, LLC dba National Hospitality Services (“NHS”) with an initial term expiring on December 31st of the fifth full calendar year following the effective date of the agreement, which will automatically renew for successive 5‑year periods unless terminated earlier in accordance with its terms. The Pineville Property is currently being managed on a day-to-day basis by Beacon IMG, Inc. (“Beacon”), an affiliate of the seller of the Pineville Property, pursuant to a sub-management agreement. The Southaven Property is currently being managed on a day-to-day basis by Vista Host, Inc. pursuant to a property management agreement with an initial term expiring on February 21, 2025, which will automatically renew for two successive 5-year periods unless terminated earlier in accordance with its terms.

The seller of the Pineville Property, an affiliate of Beacon, may be entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income (“NOI”) for a selected 12‑month period of time. At any time during the period beginning April 1, 2021 through the date of the final NOI determination (on or about April 30, 2023), the seller of the property may make a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, is based on the excess of the property’s actual NOI over a base NOI for the applicable 12‑month calculation period divided by the stated cap rate for such calculation period. Further, if the Company sells the Pineville Property or terminates the Beacon sub-management agreement without cause prior to March 31, 2021, the Company will be required to pay liquidated damages of at least $1.0 million unless the seller elects to receive the additional consideration described above. As of March 31, 2020, no amounts were paid to the seller of the Pineville Property, and no election to receive the additional consideration had been made.

The aggregate purchase price for the hotel properties acquired during the three months ended March 31, 2020 and the year ended December 31, 2019 were allocated as follows:


	March 31,		December 31,
	2020		2019
Land and land improvements	$	2,576,166	$	6,201,529
Building and building improvements		31,605,174		47,412,115
Furniture, fixtures, and equipment		3,007,846		4,772,707
Total assets acquired		37,189,186		58,386,351

Premium on assumed debt		(597,665)		(416,126)
Total liabilities assumed		(597,665)		(416,126)
Total purchase price(1)		36,591,521		57,970,225

Assumed mortgage debt		9,400,772		17,283,415

Net purchase price	$	27,190,749	$	40,686,810

(1)

Total purchase price includes purchase price plus all transaction costs.

4. DEBT

Lines of Credit

On August 22, 2018, the Company entered into a $3.0 million revolving line of credit, collateralized by 300,000 partnership units of Lodging Fund REIT III OP, LP. The line of credit has a variable interest rate equal to the U.S. Prime Rate, plus 1.00%, with a minimum rate of 5.00%. As of March 31, 2020, and December 31, 2019, the interest rate was 5.00% and 5.75%, respectively. As of March 31, 2020, there was an outstanding balance of $2.0 million. There was no outstanding balance on the line of credit as of December 31, 2019. The line of credit requires monthly payments of interest only, with all principal due at maturity. In November 2019, the line of credit was amended to extend the maturity date from November 22, 2019 to November 22, 2020, and lower the minimum interest rate from 6.00% to 5.00% per annum. The amendment also revised the guarantee of the line of credit to include a partial guarantee by each of Corey Maple and Norman Leslie, as the members of the Advisor, each in the amount of $1.2 million.

On February 10, 2020, the Company entered into a $5.0 million revolving line of credit loan agreement. The line of credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. The line of credit has a variable interest rate equal to the U.S. Prime Rate, plus 0.50%, resulting in an effective rate of 3.75% per annum as of March 31, 2020. The line of credit is secured by the Company’s Cedar Rapids Property and Eagan Property, which are also subject to term loans with the same lender, and 100,000 limited partnership units of the Operating Partnership. The line of credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property and the Eagan Property, as well as future loan agreements that the Company may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The line of credit, including all cross-collateralized debt, is guaranteed by Corey Maple, the Company’s Chief Executive Officer. As of March 31, 2020, the outstanding balance on the line of credit was $3.2 million.

On November 15, 2018, the Company entered into a $25.0 million revolving line of credit to provide immediate funds to acquire hotel properties. The facility had a variable interest rate equal to 30‑day LIBOR, plus 3.25% and had an initial term of 12 months. Each advance made under the facility was secured by a hotel property, required monthly payments of interest for the first three months following the advance, and monthly payments of principal and interest thereafter. The Company drew $5.2 million on the line of credit in connection with the

purchase of the Cedar Rapids Property, which was repaid in full in March 2019 when the Cedar Rapids property was refinanced. The line of credit was closed in September 2019.

Mortgage Debt

As of March 31, 2020, the Company had $64.5 million in outstanding mortgage debt secured by seven properties, with maturity dates ranging from June 2024 to April 2029, with fixed interest rates ranging from 3.70% to 5.33%, and a weighted-average interest rate of 4.54%. The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period up to 12 months following origination, and generally require a balloon payment due at maturity. As of March 31, 2020 and December 31, 2019, certain mortgage debt was guaranteed by the members of the Advisor. The Company was in compliance with all debt covenants as of March 31, 2020 and December 31, 2019. The following table sets forth the hotel properties securing each loan, the interest rate, maturity date, and the outstanding balance as of March 31, 2020 and December 31, 2019 for each of the Company’s mortgage debt obligations, respectively.


	Interest		Outstanding		Outstanding
	Rate as of		Balance as of		Balance as of
	March 31,	Maturity	March 31,		December 31,
Hotel Property	2020	Date	2020		2019
Holiday Inn Express - Cedar Rapids(1)(2)	5.33%	09/01/2024	$	5,665,211	$	5,527,392
Hampton Inn & Suites - Pineville	5.13%	06/06/2024		9,109,397		9,154,289
Hampton Inn - Eagan(2)	4.60%	01/01/2025		9,317,590		9,369,276
Home2 Suites - Prattville(1)(2)	4.13%	08/01/2024		9,620,000		9,620,000
Home2 Suites - Lubbock	4.69%	10/06/2026		7,950,051		8,000,430
Fairfield - Lubbock	4.93%	04/06/2029		9,376,788		—
Homewood Suites - Southaven(1)(2)	3.70%	03/03/2025		13,460,000		—
Total Mortgage Debt				64,499,037		41,671,387

$3.0 million line of credit	5.00%(3)			2,000,000		—
$5.0 million line of credit	3.75%(4)			3,200,000		—
Total Lines of Credit				5,200,000		—

Premium on assumed debt, net				953,944		389,285
Deferred financing costs, net				(1,634,072)		(1,080,040)

Debt, net			$	69,018,909	$	40,980,632

⁽¹⁾

Loan is interest-only for the first 12 months after origination, then monthly principal and interest payments, with a balloon payment at maturity.

⁽²⁾

See note 11. “Subsequent Events” for a description of certain amendments and forbearance agreements entered into in connection with these loans.

⁽³⁾

Variable interest rate equal to U.S. Prime Rate plus 1.00% with a minimum rate of 5.00%.

⁽⁴⁾

Variable interest rate equal to U.S. Prime Rate plus 0.50%.

Future Minimum Payments

As of March 31, 2020, the future minimum principal payments on the Company’s debt were as follows:


2020 (April 1, 2020 to December 31, 2020)	$	2,630,308
2021		4,557,344
2022		1,505,990
2023		1,576,254
2024		23,479,447
Thereafter		35,949,694
		69,699,037

Premium on assumed debt, net		953,944
Deferred financing costs, net		(1,634,072)

	$	69,018,909

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments as of March 31, 2020 and December 31, 2019 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, lines of credit, and mortgage debt. With the exception of the Company’s mortgage debt, the carrying amounts of the financial instruments presented in the consolidated financial statements approximate their fair value as of March 31, 2020. The fair value of the Company’s mortgage debt was estimated by discounting each loan’s future cash flows over the remaining term of the mortgage using current borrowing rates for debt instruments with similar terms and maturities, which are Level 3 inputs in the fair value hierarchy. As of March 31, 2020, the estimated fair value of the Company’s mortgage debt was $65.7 million, compared to the gross carrying value $64.5 million. As of December 31, 2019, the estimated fair value of the Company’s mortgage debt was $42.7 million, compared to the gross carrying value $41.7 million.

6. INCOME TAXES

The Company’s earnings (losses), other than those generated by the Company’s TRS, are not generally subject to federal corporate and state income taxes due to the Company’s REIT election. The Company did not pay any federal and state income taxes for the periods ended March 31, 2020 and 2019. The Company did not have any uncertain tax positions as of March 31, 2020 or December 31, 2019.

The Company’s TRS generated a net operating loss (“NOL”) for the three months ended March 31, 2020 and the year ended December 31, 2019, which can be carried forward to offset future taxable income. As of March 31, 2020 and December 31, 2019, the Company had a recorded deferred tax asset of $813,724 and $205,808, respectively, primarily attributable to its NOLs generated in the current period and prior periods, net of temporary differences primarily related to depreciation. The Company’s NOLs will expire in 2038‑2039 for state tax purposes and will not expire for federal tax purposes. As of March 31, 2020, the tax years 2018 and 2019 remain subject to examination by the U.S. Internal Revenue Service (“IRS”) and various state tax jurisdictions.

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), passed in March 2020, allows for NOL’s arising in tax years beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the preceding 5-year periods. In addition, the CARES Act removed the 80% absorption limitation previously enacted under the Tax Cuts and Jobs Act of 2017. Generally unused NOL’s generated prior to 2018 will expire 20 years following the year in which the NOL was created.

7. RELATED PARTY TRANSACTIONS

Legendary Capital REIT III, LLC—Substantially all of the Company’s business is managed by the Advisor and its affiliates, pursuant to the Advisory Agreement. The Company has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, investor relations, and all other administrative services. The Company reimburses the Advisor and its affiliates, at cost, for certain expenses incurred on behalf of the Company. The Advisory Agreement has a term of 10 years.

The Advisor earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor will also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing, and a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, and real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty amount, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B Limited Partnership Unit (“Series B LP Unit”) holders) have received a 6% cumulative, but not compounded, return per annum.

Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements. In years other than the year of liquidation, after the Company’s common stockholders have received a 6% cumulative but not compounded return on their original capital contributions, the Advisor receives distributions equal to 5% of the total distributions made. In the year of liquidation, termination, merger or other cessation of the general partner, or the liquidation of the Operating Partnership, holders of the Series B LP Units shall be distributed an amount equal to 5% of the limited partners’ capital contributions after the common stockholders and the limited partners have received a return of their original capital contributions plus a 6% cumulative but not compounded return. In the year of liquidation, termination, merger or other cessation of the general partner, or the liquidation of the Operating Partnership holders of the Series B LP Units shall also be distributed an amount equal to 20% of the net proceeds from the sale of the properties, after the common stockholders and the limited partners have received a return of their original capital contributions plus a 6% cumulative but not compounded return from all distributions.

The Advisor and its affiliates may be reimbursed by the Company for certain organization and offering expenses in connection with the Offering, including legal, printing, marketing and other Offering related costs and expenses. Following the termination of the Offering, the Advisor will reimburse the Company for any such amounts incurred by the Company in excess of 15% of the gross proceeds of the Offering. In addition, the Company may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to the Company, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.

Fees and reimbursements incurred and payable to the Advisor and its affiliates, for the three months ended March 31, 2020 and 2019, and amounts outstanding and payable as of March 31, 2020 and December 31, 2019, were as follows:


	Incurred				Payable as of
	For the Three Months Ended March 31,				March 31,		December 31,
	2020		2019		2020		2019
Fees:
Acquisition fees	$	501,949	$	200,324	$	—	$	213,402
Financing fees		501,949		200,324		—		213,402
Asset management fees		197,165		25,784		74,464		81,389
Performance fees		—		—		—		68,534
	$	1,201,063	$	426,432	$	74,464	$	576,727

Reimbursements:
Offering costs	$	583,926	$	611,135	$	21,179	$	122,833
General and administrative		813,575		523,066		26,549		120,386
Sales and marketing		76,153		91,342		9,647		3,333
Acquisition costs		64,847		58,951		15,956		31,966
Other		282		—		7,477		—
	$	1,538,783	$	1,284,494	$	80,808	$	278,518

For the three months ended March 31, 2020 and 2019, the Operating Partnership recognized distributions payable to the Advisor in the amount of $60,308 and $14,004, respectively, in connection with the Advisor’s ownership of Series B LP Units. As of March 31, 2020 and December 31, 2019, the Company had distributions payable to the Advisor $123,925 and $63,617, respectively. For the three months ended March 31, 2020 and 2019, the Company paid distributions in the amount of $9,409 and $9,409, respectively, to Corey Maple and Norman Leslie in connection with their ownership of 53,763 shares each, of the Company’s common stock.

The members of the Advisor personally guaranty certain loans of the Company and may receive a guarantee fee of up to 1.0% per annum of the guaranty amount. Mr. Maple, our Chief Executive Officer and Chairman of the Board, is a guarantor of the Company’s loans secured by the hotel properties located in Prattville, Alabama and Southaven, Mississippi, which had original loan amounts of $9.6 million and $13.5 million, respectively, and is a guarantor of the Company’s $5.0 million line of credit which is secured by the hotel properties located in Cedar Rapids, Iowa and Eagan, Minnesota, and 100,000 limited partnership units of Lodging Fund REIT III OP, LP. Mr. Leslie, our President, Chief Investment Officer and Director, is a guarantor of the Company’s loan secured by the Company’s hotel property in Pineville, North Carolina, which had an original loan amount of $9.3 million. Mr. Maple and Mr. Leslie are also guarantors of the Company’s $3.0 million line of credit, each in the amount of $1.2 million. For the three months ended March 31, 2020, the Company incurred $69,334 of loan guarantee fees, and as of March 31, 2020, there were $63,334 of loan guarantee fees outstanding and payable. No guarantee fees were assessed for three months ended March 31, 2019, and no guarantee fees were outstanding and payable at December 31, 2019.

NHS, LLC dba National Hospitality Services—NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. NHS provides property management and hotel operations management services for the Company’s hotel properties, pursuant to individual management agreements. The agreements have an initial term expiring on December 31st of the fifth full calendar year following the effective date of the agreement, which automatically renews for a period of five years on each successive five-year period, unless terminated in accordance with its terms.

administrative and other services. The Company reimburses NHS for certain costs of operating the properties incurred on behalf of the Company. All reimbursements are paid to NHS at cost.

Fees and reimbursements incurred and payable to, NHS for the three months ended March 31, 2020 and 2019, and amounts outstanding and payable as of March 31, 2020 and December 31, 2019, were as follows:


	Incurred				Payable as of
	For the Three Months Ended March 31,				March 31,		December 31,
	2020		2019		2020		2019
Fees:
Management fees	$	116,089	$	24,207	$	36,182	$	30,024
Administrative fees		17,863		9,202		5,821		4,617
Accounting fees		20,820		5,040		7,968		4,303
	$	154,772	$	38,449	$	49,971	$	38,944

Reimbursements	$	80,576	$	16,790	$	9,715	$	8,572

8. FRANCHISE AGREEMENTS

As of March 31, 2020, all of the Company’s hotel properties were operated under franchise agreements with initial terms of 10 to 18 years. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee of 5% to 6% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs. Certain hotels are also charged a program fee of generally between 3% and 4% of room revenue. The Company paid an initial fee of $50,000 to $175,000 at the time of entering into each franchise agreement which is being amortized over the term of each agreement.

9. STOCKHOLDERS’ EQUITY

The Company is authorized to issue 900,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each share of common stock entitles the holder to one vote per share for on all matters upon which stockholders are entitled to vote and to receive distributions as authorized by the Company’s board of directors. The rights of the holders of shares of preferred stock may be defined at such time any series of preferred shares are issued.

Initial Offering

On June 1, 2018, the Company commenced a private offering of shares of common stock, $0.01 par value per share, at a price of $10.00 per share, with a maximum offering of $100,000,000, to accredited investors only pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended.

Dividend Reinvestment Plan

The Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company, purchasing shares of common stock at 95% of the then-current share net asset value (“NAV”).

Distributions

Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors. Effective the first day of each fiscal quarter since inception, the board of directors declared a cash

distribution at a daily rate of $0.00191781 per share of common stock to the stockholders of record on the last day of each calendar month within the respective quarter, up to, and including the period ended March 31, 2020.

Share Repurchase Plan

The board of directors has adopted a share repurchase plan that may enable its stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The price at which the Company will repurchase shares is dependent on the amount of time the holder has owned the shares, and the then current value of the shares. There are several limitations on the Company’s ability to repurchase shares under the share repurchase plan, including, but not limited to, a limitation that during any calendar year, the maximum number of shares potentially eligible for repurchase can only be the number of shares that the Company could purchase with the amount of net proceeds from the sale of shares under the Company’s dividend reinvestment plan during the prior calendar year. The board of directors may, in its sole discretion, reject any request for repurchase and may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate its share repurchase plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan. At March 31, 2020 and December 31, 2019, the Company had $707,133 and $49,530, respectively, available for eligible repurchases.

10. COMMITMENTS AND CONTINGENCIES

Impact of COVID-19 — As further discussed in Note 2, the full extent of the impact of COVID-19 on the U.S. and world economies generally, and the Company’s business in particular, is uncertain. As of March 31, 2020, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.

Legal Matters—From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations, cash flows or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

11. SUBSEQUENT EVENTS

COVID-19 Pandemic

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. As described below, the Company obtained loans under the Paycheck Protection Program and entered into the forbearance agreements and amendments to loan agreements in April 2020, which measures were intended to help maintain financial flexibility given the significant impact on U.S. and world economies as a result of the COVID-19 pandemic. As a result of the COVID-19 pandemic and measures taken to limit the pandemic and its impact, the Company experienced decreases in hotel occupancy and revenues during the month of April 2020. The extent to which the COVID-19 pandemic continues to impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Paycheck Protection Program (the “PPP”) Loans

In April 2020, the Company entered into six unsecured promissory notes under the Paycheck Protection Program (the “PPP”), totaling $763,100. The PPP was established under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business

Administration (the “SBA”). The term of each PPP loan is two years. The interest rate on each PPP loan is 1.0% per annum, which shall be deferred for the first six months of the term of the loan. After the initial six-month deferral period, each loan requires monthly payments of principal and interest until maturity with respect to any portion of such PPP loan which is not forgiven as described below. The Company is permitted to prepay each PPP loan at any time with no prepayment penalties. Under the terms of the CARES Act, PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. No assurance is provided that the Company will obtain forgiveness of the PPP loans in whole or in part.

Forbearance Agreements and Loan Amendments

On April 17, 2020, the Company entered into a Change In Terms Agreement (the “Cedar Rapids Amendment”), amending the terms of the its original Promissory Note (the “Cedar Rapids Note”), dated March 5, 2019 in the original principal amount of $5.86 million. Pursuant to the Cedar Rapids Amendment, the maturity date of the Cedar Rapids Note was extended from March 1, 2024, to September 1, 2024, the requirement to make any replacement reserve deposits was waived until March 1, 2021, and the requirement to make any payments of principal and interest were deferred until October 1, 2020.

On April 17, 2020, the Company entered into a Change In Terms Agreement (the “Eagan Amendment”), amending the terms of the its original Promissory Note (the “Eagan Note”), dated June 19, 2019 in the original principal amount of $9.44 million. Pursuant to the Eagan Amendment, the maturity date of the Eagan Note was extended from July 1, 2024, to January 1, 2025, the requirement to make any replacement reserve deposits was waived until June 1, 2021, and the requirement to make any payments of principal and interest were deferred until October 1, 2020.

On April 22, 2020, the Company entered into a Forbearance Agreement (the “Prattville Forbearance Agreement”), to be effective May 1, 2020, amending the terms of its original loan agreement (the “Prattville Loan”), dated July 11, 2019, in the original principal amount of $9.6 million. Pursuant to the Prattville Forbearance Agreement, the Company will not make interest payments that will become due and payable during the Prattville Forbearance Period (as defined below) which constitute Events of Default under the terms of the Prattville Loan (collectively, the “Prattville Projected Events of Default”). However, during the Prattville Forbearance Period, the lender agreed to forbear from exercising any available rights and remedies under the Prattville Loan and other Loan Documents (as defined in the Prattville Loan) to the extent such rights and remedies arise as a result of the Prattville Projected Events of Default. The forbearance period (the “Prattville Forbearance Period”) shall be the period beginning May 1, 2020 through and including July 31, 2020, subject to earlier termination pursuant to the terms of the Prattville Forbearance Agreement.

On April 22, 2020, the Company entered into a Forbearance Agreement (the “Southaven Forbearance Agreement”), to be effective May 1, 2020, amending the terms of its original loan agreement (the “Southaven Loan”), dated February 21, 2020, in the original principal amount of $13.5 million. Pursuant to the Southaven Forbearance Agreement, the Company will not make interest payments that will become due and payable during the Southaven Forbearance Period (as defined below) which constitute Events of Default under the terms of the Southaven Loan (collectively, the “Southaven Projected Events of Default”). However, during the Southaven Forbearance Period, the lender agreed to forbear from exercising any available rights and remedies under the Southaven Loan and other Loan Documents (as defined in the Southaven Loan) to the extent such rights and remedies arise as a result of the Southaven Projected Events of Default. The forbearance period (the “Southaven Forbearance Period”) shall be the period beginning May 1, 2020 through and including July 31, 2020, subject to earlier termination pursuant to the terms of the Southaven Forbearance Agreement.

Interval Common Stock

Articles Supplementary

On April 29, 2020, the Company filed with the Maryland State Department of Assessments and Taxation articles supplementary (the “Articles Supplementary”) to the Company’s charter, to classify and designate 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, of the Company, as non-voting shares of Interval Common Stock (“Interval Common Stock”) and to set the terms of the Interval Common Stock. Holders of shares of Interval Common Stock will be entitled to receive, when and as authorized by the board of directors of the Company and declared by the Company, dividends at a rate equal to 86% of the dividend rate for the Company’s common stock as authorized by the board of directors and declared by the Company. Dividends on the Interval Shares may be paid in cash, capital stock of the Company or a combination of cash and capital stock of the Company as determined by the board of directors, and will be paid at such times as dividends are paid to the holders of common stock.

Repurchase Plan

The board of directors has adopted a repurchase plan for the Interval Common Stock (the “Repurchase Plan”). The Repurchase Plan is generally available to holders of Interval Common Stock who have held their shares of Interval Common Stock (“Interval Shares”) for at least 1 year. The Repurchase Plan provides that so long as the Repurchase Reserve (defined below) exists, the Company will repurchase up to the lesser of (i) 5% of the aggregate value of the Interval Shares (“Interval Shares Value”) on the last day of the same calendar quarter of the preceding year and (ii) 5% of the Interval Shares Value on the last day of the preceding calendar quarter. After the Repurchase Reserve has been exhausted, the Company will limit repurchases of Interval Shares to repurchases that can be made with the net proceeds from the dividend reinvestment plan for the Interval Shares received in the prior calendar year up to the lesser of (i) 1.25% per calendar quarter and (ii) 5% per calendar year of the Interval Shares Value. The limitations described in this paragraph are referred to as the “Repurchase Limitations.”

The Company will establish a reserve (the “Repurchase Reserve”) of liquid assets in an amount equal to 20% of the aggregate gross proceeds from the Company’s private offering of Interval Shares, which will be comprised of cash and cash-like instruments, government securities, publicly traded REIT shares and other publicly traded securities (the “Reserve Assets”), but which is expected to primarily include publicly traded REIT shares. The Repurchase Reserve will be used solely to repurchase the Interval Shares. The board of directors may, but has no obligation to, increase the amount of the Repurchase Reserve at any time. The Company will have no obligation to restore any amounts resulting from a decline in value of the Reserve Assets. After the Repurchase Reserve has been exhausted, subject to the Repurchase Limitations, the Company will use only the net proceeds from the dividend reinvestment plan received in the prior calendar year to repurchase the Interval Shares. Subject to the Repurchase Limitations, on the applicable repurchase date, the Company will repurchase the Interval Shares timely submitted for repurchase for a price equal to the NAV per share of the Company’s common stock on such repurchase date as determined by the board of directors.

The board of directors may, upon 10 days’ written notice to the holders of Interval Shares, amend, suspend or terminate the Repurchase Plan at any time, and such amendment, suspension or termination may be implemented immediately. Notwithstanding the foregoing, the Repurchase Plan may not be terminated prior to the date the Repurchase Reserve is exhausted.

Private Offering

The Company is offering up to 3,000,000 shares of Interval Common Stock in the Company’s ongoing private offering, which amount may be increased to up to 6,000,000 Interval Shares in the sole discretion of the board of directors. Except as otherwise provided in the offering memorandum, the initial purchase price for the Interval Shares is $10.00 per Interval Share, with Interval Shares purchased in the Company’s dividend reinvestment plan at an initial price of $9.50 per Interval Share.

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

As used herein, the terms “we,” “our,” “us” and “the Company” refer to Lodging Fund REIT III, Inc., a Maryland corporation, Lodging Fund REIT III OP, LP a Delaware limited partnership, which we refer to as the “Operating Partnership,” Lodging Fund REIT III TRS, Inc., a Delaware corporation, which we refer to as the “Master TRS” and their subsidiaries, except where the context otherwise requires. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of the Company and the notes thereto.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10‑Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “should,” “expect,” “could,” “intend,” “anticipate,” “plan,” “estimate,” “believe,” “potential,” “continue,” “seek” or similar expressions. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth and availability of funds, and are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

The COVID-19 pandemic and the measures taken by government authorities to contain the COVID-19 outbreak or to treat its impact, including restrictions on travel and imposition of quarantines, have had a negative impact on the U.S. and world economies and business activities. The extent to which the COVID-19 pandemic adversely affects our results of operations, returns and profitability, as well as our ability to pay distributions to our stockholders or to realize appreciation in the value of our properties, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the severity and duration of the pandemic, actions taken to contain the COVID-19 outbreak or to mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others;

Adverse economic, business or real estate developments in our markets may adversely affect our financial performance and the value of our properties and may limit our ability to pay distributions to our stockholders;

We intend to acquire only hotel properties. As a result, we will only have limited diversification as to the type of property we own. In the event of an economic recession affecting the economies of the areas in which the properties are located or a decline in values in general, our financial performance could be materially and adversely affected, which may limit our ability to pay distributions to our stockholders;

If we are unable to raise substantial funds in our Offering, we may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to vary more widely with the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue;

We may incur significant debt in certain circumstances. Our use of leverage increases the risk of an investment in us. Loans we obtain may be collateralized by some or all of our investments, which will put those investments at risk of forfeiture if we are unable to pay our debts. Principal and interest payments on these loans reduce the amount of money that would otherwise be available for distribution to our stockholders;

Our ability to acquire, rehabilitate, renovate and manage our properties may be limited if we cannot obtain satisfactory financing, which will depend on debt and capital markets conditions. In addition, if any of the loans we obtain have variable interest rates, volatility in these markets could negatively impact such loans. There can be no assurance that we will be able to obtain financing on favorable terms, or at all;

Demand for our properties may be affected by various factors, including an over-supply or over-building of hotel properties in our properties’ markets and general economic conditions. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders;

We have a limited operating history and may not be successful at operating a real estate investment trust, or REIT, which may adversely affect our ability to make distributions to our stockholders;

Our advisor, Legendary Capital REIT III, LLC (the “Advisor”), its executive officers and other key personnel, the employees of Legendary Capital, LLC, an affiliate of the Advisor (the “Sponsor”) as well as certain of our officers and directors, whose services are essential to the Company, may be involved in other business ventures, and will face a conflict in allocating their time and other resources between us and the other activities in which they are or may become involved. Failure of the Advisor, its executive officers and key personnel, the employees of the Sponsor, and our officers and directors to devote sufficient time or resources to our operations could result in reduced returns to our stockholders;

We will pay certain prescribed fees and expenses to the Advisor and its affiliates regardless of the quality of services provided. These fees were not negotiated at arm’s length and therefore may be higher than fees payable to unaffiliated third parties;

We have paid distributions from proceeds from our ongoing private offering described below (the “Offering”). To the extent the Board declares future distributions, we may continue to fund such distributions with Offering proceeds. We have not established a limit on the amount of proceeds from our Offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment and the overall return to our stockholders may be reduced. We may fund distributions from other sources such as borrowings, which may constitute a return of capital; and

Failure to qualify as a REIT would reduce our net earnings available for investment or distribution to our stockholders.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”), and the risks identified in Part II, Item 1A herein.

Overview

We were formed on April 9, 2018 as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of hotel properties (the “Projects”) located primarily in America’s Heartland, which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. On an infrequent and opportunistic basis, we may also originate or acquire high-yield loans secured directly or indirectly by real estate-related assets, which loans will be made to certain qualified third-party borrowers and/or affiliates of our advisor (the “Loans”). We have elected to be taxed as a real estate investment trust, or REIT, beginning with the taxable year ending December 31, 2019. We conduct substantially all of our business and own substantially all real estate investments through the Operating Partnership. We are the sole general partner of the Operating Partnership. We and the Operating Partnership are advised by the Advisor pursuant to an agreement (the “Advisory Agreement”) under which the Advisor performs advisory services regarding acquisition, financing and disposition of the Projects and origination of the Loans, is responsible for managing, operating and maintaining the Projects and day-to-day management of the Company. The

Advisor may, in its sole discretion, perform these duties through one or more affiliates. We have engaged NHS, LLC dba National Hospitality Services (‘‘NHS’’) to manage the Projects acquired to date; however, we can and may engage third party property management companies. The Pineville Property is currently being managed on a day-to-day basis by Beacon, an affiliate of the seller of the Pineville Property, pursuant to a sub-management agreement. NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. The Advisor has no direct employees. The employees of the Sponsor, an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, investor relations, and all other administrative services.

On June 1, 2018, we commenced an offering (the “Offering”) of up to 10,000,000 shares of our common stock under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) June 1, 2020, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. As of March 31, 2020, we had issued and sold 6,996,670 shares of common stock, including 133,331 shares attributable to the DRIP, and received aggregate proceeds of $68.7 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $57.3 million. The net offering proceeds have been used to fund property acquisitions. No public market exists for the shares of our common stock and none is expected to develop.

Market Outlook

The hospitality industry is closely related to the U.S. general economic cycle because business and leisure travelers are directly affected by economic conditions that drive demand. During the first quarter of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, there have been international mandates and mandates in the United States from federal, state and local authorities instituting quarantines and stay-at-home orders, closing schools, and instituting restrictions on travel and/or limiting operations of non-essential offices and retail centers. Such actions are increasing rates of unemployment and adversely impacting many industries, with the travel and hospitality industries being particularly adversely affected. The hospitality industry is experiencing a sharp decline in travel demand due to the impact of the COVID-19 pandemic and the related governmental restrictions instituted to slow the spread of the virus. Though certain states are beginning to loosen certain aspects of these restrictions, all of the markets in which our properties are located are subject to some form of restrictions on business operations. As a result of these mandatory restrictions as well as voluntary shutdowns, self-quarantines or actual viral health issues, we initially experienced a substantial number of cancellations, and have experienced and continue to experience a reduction in bookings for hotel rooms. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.

The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments. The full extent of the impact and effects of COVID-19 will depend on future developments which are highly uncertain and cannot be predicted with confidence, including, among other factors, the duration, severity and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown. In addition, if in the future there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and our properties may be subject to similar risks and uncertainties as posed by COVID-19. For additional discussion with respect to the

potential impact of the COVID-19 pandemic on our liquidity and capital resources and results of operations, see “Liquidity and Capital Resources—Outlook” and “Results of Operations-Outlook” below.

Liquidity and Capital Resources

Overview

We are dependent upon the net proceeds from our Offering to conduct our proposed operations. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) June 1, 2020, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. We intend to obtain the capital required to make real estate and real estate-related investments and conduct our operations from the proceeds of our Offering, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of March 31, 2020, we had raised approximately $68.7 million in gross offering proceeds from the sale of shares of our common stock in the Offering. If we are unable to raise substantial funds in the Offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate more significantly with the performance of the specific assets we acquire. There may be a delay between the sale of shares of our common stock and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Further, we will have certain fixed operating expenses regardless of whether we are able to raise substantial funds in the Offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and cash flow and limiting our ability to make distributions to our stockholders.

As of March 31, 2020, we owned seven properties. We acquired these investments with the proceeds from the sale of our common stock in the Offering and debt financing. Operating cash needs during the three months ended March 31, 2020 were met through cash flow generated by these real estate investments and with proceeds from our Offering.

Our investments in real estate generate cash flow in the form of hotel room rentals and guest expenditures, which are reduced by operating expenditures, debt service payments and corporate general and administrative expenses. Each of our current properties is owned and future properties will be owned by a direct special purpose entity subsidiary of the Operating Partnership, which leases the properties to direct special purpose entity subsidiaries of the Master TRS, referred to as “TRS Lessees.” The TRS Lessees are or will be required to make rent payments to the owners of the properties pursuant to the lease agreements relating to each property. Such TRS Lessees’ ability to make rent payments to the owner subsidiaries and our liquidity, including our ability to make distributions to our stockholders, are dependent upon the TRS Lessees ability to generate cash flow from the operations of the hotel properties. The TRS Lessees are dependent upon the management companies with whom they have entered or will enter into management agreements with to operate the hotel properties.

Cash flow from operations from real estate investments will be primarily dependent upon the occupancy level and average daily rate, or “ADR”, of our portfolio, and how well we manage our expenditures.

We anticipate that the aggregate loan-to-value ratio for the Company will be between 35% and 65%. We will target a loan-to-value ratio for the Projects of between 35% and 70%, based on the purchase price of the Projects, however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual Project at the discretion of the board of directors. Though this is our estimated leverage, our charter does not limit us from incurring debt in excess of this amount. As of March 31, 2020, our aggregate loan-to-value ratio, based on the aggregate purchase price of the Projects, was approximately 62%.

In addition to making investments in accordance with our investment objectives, we expect to use capital resources to make certain payments to the Advisor and its affiliates and NHS. These payments include the various fees and expenses to be paid to the Advisor and its affiliates in connection with the selection, acquisition and management of Projects, as well as reimbursement of certain organization and other offering expenses described below. The Advisor

earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any property improvement plan (“PIP”) at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor will also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing, and a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, and real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B Limited Partnership Unit (“Series B LP Unit”) holders) have received a 6% cumulative, but not compounded, return per annum. Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements.

The Advisor and its affiliates may be reimbursed by us for certain organization and offering expenses in connection with the Offering, including legal, printing, marketing and other Offering costs and expenses. Following the termination of the Offering, the Advisor will reimburse us for any such amounts incurred by us in excess of 15% of the gross proceeds of the Offering. In addition, we may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to the Company, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.

NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties equal to 4% of gross revenue. NHS also earns an accounting fee of $14.00 per room for accounting services, payable monthly, and an administrative fee equal to 0.60% of gross revenues for administrative and other services. The Company reimburses NHS for certain costs of operating the properties incurred on behalf of the Company. All reimbursements are paid to NHS at cost.

Debt

Lines of Credit

On August 22, 2018, the Company entered into a $3.0 million revolving line of credit, collateralized by 300,000 partnership units of Lodging Fund REIT III OP, LP. The line of credit has a variable interest rate equal to the U.S. Prime Rate, plus 1.00%, with a minimum rate of 5.00%. As of March 31, 2020, the interest rate was 5.00%. The line of credit requires monthly payments of interest only, with all principal due at maturity. In November 2019, the line of credit was amended to extend the maturity date from November 22, 2019 to November 22, 2020, and lower the minimum interest rate from 6.0% to 5.0% per annum. The amendment also revised the guarantee of the line of credit to include a partial guarantee by each of Corey Maple and Norman Leslie, as the members of the Advisor, each in the amount of $1.2 million. As of March 31, 2020, there was an outstanding balance of $2.0 million.

On February 10, 2020, the Company entered into a $5.0 million revolving line of credit loan agreement. The line of credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. The line of credit has a variable interest rate equal to the U.S. Prime Rate, plus 0.50%, resulting in an effective rate of 3.75% per annum as of March 31, 2020. The line of credit is secured by our Cedar Rapids Property and our Eagan Property, which are also subject to term loans with the same lender, and 100,000 limited partnership units of the Operating Partnership. The line of credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property and the Eagan Property, as well as future loan agreements that the Company may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The line of credit, including all cross-collateralized debt, is guaranteed by Corey

Maple, the Company’s Chief Executive Officer. As of March 31, 2020, the outstanding balance on the line of credit was $3.2 million.

Mortgage Loans

As of March 31, 2020, we had $64.5 million in outstanding mortgage debt secured by seven properties, with maturity dates ranging from March 2024 to April 2029, with fixed interest rates ranging from 3.70% to 5.33%, and a weighted-average interest rate of 4.54%. The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period up to 12 months following origination, and generally require a balloon payment due at maturity.

Properties Under Contract

As of the date of this filing, we had four hotel properties under contract for an aggregate contract purchase price of approximately $60.0 million. We are still conducting our diligence review with respect to each property. Each of these pending acquisitions is subject to our completion of satisfactory due diligence and other closing conditions. There can be no assurance that we will complete any of these pending acquisitions on the contemplated terms, or at all.

Outlook

We are closely monitoring the impact of the COVID-19 pandemic on our business and continue to assess the situation at our properties and operations on a daily basis. Each of our hotels remains open for business. However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we continue to experience a reduction in bookings for hotel rooms which have negatively affected our occupancy levels and could materially and adversely affect the financial performance and value of our hotels. All of the markets in which our properties are located are subject to some level of restrictions on business operations. For the month of April, hotel occupancy, ADR and RevPAR were approximately 24.29%, $90.78 and $22.04, respectively, which represents a decrease of approximately 60%, 15% and 66%, from hotel occupancy, ADR and RevPAR, respectively, for the three months ended March 31, 2020. We expect that the reduction in hotel demand as a result of the COVID-19 pandemic will continue to put pressure on our occupancy levels, ADR and RevPAR, which will negatively impact cash flows from operations. Our second quarter of 2020 financial results are expected to be negatively impacted by such reduced demand. However, April hotel occupancy, ADR and RevPAR may not be indicative of such measures in any future period, and the impact of the COVID-19 pandemic on our cash flows from operations and room revenues for the second quarter of 2020 and thereafter cannot be determined with certainty at the present time. Even after travel advisories and restrictions are modified or lifted, demand for hotels may remain weak for a significant length of time, which may be a function of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses. We cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing.

We have taken several measures intended to help maintain financial flexibility. During the three-month period ended March 31, 2020, we entered into a new $5.0 million line of credit, and drew a total of $5.2 million on our two lines of credit. Subsequent to March 31, 2020, we obtained loans totaling $0.8 million under the Paycheck Protection Program (the “PPP”) to help pay for payroll costs, mortgage interest, rent or utility costs related to six of our hotel properties. In addition, we amended the mortgage loans secured by two of our hotel properties to extend the maturity date of such loans by six months and to defer the requirement to pay principal and interest until October 1, 2020. We

also entered into forbearance agreements in connection with mortgage loans secured by two of our hotel properties, pursuant to which the lenders agreed to forbear from exercising any available rights and remedies under such loans arising from the failure to make interest payments during the period beginning May 1, 2020 through and including July 31, 2020. See “—Subsequent Events” below for a discussion of each of these agreements.

To maintain cash reserves, we have determined that it is in the best interests of the Company to declare distributions quarterly, if at all, beginning in the second quarter of 2020, rather than monthly as previously had been declared. The Company has implemented expense reduction efforts at all properties and reduced or deferred planned maintenance or capital expenditures as deemed appropriate.

Based on information currently available and our current projected operating cash flow needs and interest and debt repayments, we believe we have adequate cash for at least the next twelve months to fund our business operations, meet all of our financial commitments, and other obligations. However, we cannot predict whether future developments related to the COVID-19 pandemic will adversely affect our liquidity position.

Cash Flows

The following table provides a breakdown of the net change in our cash, cash equivalents, and restricted cash:


	For the Three Months Ended March 31,
	2020		2019
Net cash used in operating activities	$	(1,141,973)	$	(1,215,000)
Net cash used in investing activities		(27,387,502)		(4,434,463)
Net cash provided by financing activities		24,978,864		6,598,646
Net increase in cash, cash equivalents and restricted cash	$	(3,550,611)	$	949,183

Cash Flows From Operating Activities

As of March 31, 2020, we owned seven hotel properties. During the three months ended March 31, 2020 and 2019, net cash used in operating activities was $1.1 million and $1.2 million, respectively. Our cash flows used in operating activities generally consist of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes. See “— Liquidity and Capital Resources–Outlook” for a discussion of the current and expected impact of the outbreak of COVID-19 on our business. See "- Results of Operations" for further discussion of our operating results for the three months ended March 31, 2020 and 2019.

Cash Flows From Investing Activities

Net cash used in investing activities was $27.4 million for the three months ended March 31, 2020 and primarily consisted of $27.2 million for the acquisition of two hotel properties. Net cash used in investing activities was $4.4 million for the three months ended March 31, 2019 and primarily consisted of $4.3 million for the acquisition of one hotel property.

Cash Flows From Financing Activities

During the three months ended March 31, 2020, net cash provided by financing activities was $25.0 million and consisted primarily of the following:

$7.8 million of net cash provided by offering proceeds related to our Offering, net of payments of commissions and other offering costs of $1.6 million;

$18.0 million of net cash provided by debt financing as a result of proceeds from debt financing of $19.8 million, partially offset by principal payments on debt of $1.2 million and payments of financing costs of $0.6 million;

$0.7 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $0.4 million;

and $0.1 million paid for share redemptions.

During the three months ended March 31, 2019, net cash provided by financing activities was $6.6 million and consisted primarily of the following:

$6.4 million of net cash provided by offering proceeds related to our Offering, net of payments of commissions and other offering costs of $1.4 million;

$0.3 million of net cash provided by debt financing as a result of proceeds from debt financing of $5.8 million, partially offset by principal payments on debt of $5.2 million and payments of financing costs of $0.3 million;

and $0.1 million of net cash distributions.

Distributions

During our Offering, when we may raise capital more quickly than we acquire income-producing assets, and from time to time after the Offering, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from proceeds from the Offering or debt financing. Distributions declared, distributions paid, and net cash flow used in operations were as follows for the first quarter of 2020 and during each quarter of 2019:


			Distribution								Net Cash
	Distributions		Declared Per		Distributions Paid (3)						Flows Used in
Period	Declared (1)		Share (1) (2)		Cash		Reinvested		Total		Operations
First Quarter 2020	$	1,084,605	$	0.175	$	691,604	$	418,286	$	1,109,890	$	(1,141,973)

			Distribution								Net Cash
	Distributions		Declared Per		Distributions Paid (3)						Flows Used in
Period	Declared (1)		Share (1) (2)		Cash		Reinvested		Total		Operations
First Quarter 2019	$	280,080	$	0.175	$	98,912	$	115,475	$	214,387	$	(1,215,000)
Second Quarter 2019		505,418		0.175		256,191		191,395		447,586		(316,321)
Third Quarter 2019		745,048		0.175		422,533		266,527		689,060		(222,112)
Fourth Quarter 2019		994,364		0.175		718,930		225,736		944,666		(1,914,370)
	$	2,524,910	$	0.700	$	1,496,566	$	799,133	$	2,295,699	$	(3,667,803)

⁽¹⁾

Distributions for the periods from January 1, 2019 through March 31, 2020 were based on daily record dates and were calculated based on stockholders of record each day during this period at a rate of $0.00191781 per share per day.

⁽²⁾

Assumes share was issued and outstanding each day that was a record date for distributions during the period presented.

⁽³⁾

Distributions for the period from January 1, 2019 through February 29, 2020 were paid on a monthly basis, generally on or about the tenth day of the month following the record date of a given month.

For the three months ended March 31, 2020, we paid aggregate distributions of $1.1 million, including $0.7 million of distributions paid in cash and $0.4 million of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2020 was $2.0 million. Net cash flow used in operations for the three months ended March 31, 2020 was $1.1 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.

For the year ended December 31, 2019, we paid aggregate distributions of $2.3 million, including $1.5 million of distributions paid in cash and $0.8 million of distributions reinvested through our dividend reinvestment plan. Our net loss for the year ended December 31, 2019 was $4.9 million. Net cash flows used in operations for the year ended December 31, 2019 was $3.7 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.

To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

Going forward, our board of directors has determined that, due to the effects of the COVID-19 pandemic, it is in the best interests of the Company to transition from declaring and paying distributions to stockholders on a monthly basis to doing so, if at all, on a quarterly basis, beginning in the second quarter of 2020. Cash distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. Our board of directors has not pre-established a percentage rate of return for cash distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

Results of Operations

Outlook

Our results of operations for the three months ended March 31, 2020 and 2019 are not indicative of those expected in future periods, as we were actively raising capital through our Offering and acquiring hotel properties during both of these periods, and as of March 31, 2020, had only owned two properties for a full 12 month operating cycle.

In evaluating financial condition and operating performance, important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and RevPAR, and expenses, such as property operations expenses, general and administrative expenses and other expenses described below. Occupancy is the total number of rooms occupied for the period divided by the total number of available rooms for the period. ADR is equal to the total gross room revenue divided by the total number of rooms rented for the period. RevPAR is equal to the total gross room revenue divided by the total number of available rooms for the period.

The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our hotels remains open for business. However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of cancellations, and have experienced and continue to experience a reduction in bookings for hotel rooms compared to historical periods. Furthermore, while operating expenses at such hotels are likely to decrease, we expect that many of our hotel properties will generate substantially reduced operating cash flow, have greatly diminished RevPAR, and may operate at a loss. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations. See “—Recent Developments” and “—Liquidity and Capital Resources – Outlook” above for further discussion of the COVID-19 pandemic.

Comparison of the three months ended March 31, 2020 versus the three months ended March 31, 2019

Revenue

Room revenues totaled $3.8 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively. Other revenue, which consists of revenues from other hotel services, was $54,776 and $3,201 for the three months ended March 31, 2020 and 2019, respectively. Hotel occupancy, ADR, and RevPAR were 60.17%, $107.35, and $64.59, respectively, for the three months ended March 31, 2020. Hotel occupancy, ADR, and RevPAR were 61.68%, $108.03, and $66.63, respectively, for the three months ended March 31, 2019. See “— Liquidity and Capital Resources–Outlook” for a discussion of the current and expected impact of the outbreak of COVID-19 on our business.

evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer compliance with new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.

Investment in Hotel Properties

We evaluate whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of our acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions will be capitalized and transaction costs associated with business combinations will be expensed as incurred.

Our acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). We may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, we allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. For transactions determined to be business combination, we record the assets acquired and the liabilities assumed at their respective fair values at the date of acquisition. We determine the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions.

The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

Our investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to seven years for FF&E. Maintenance and repairs are expensed and major renewals or improvements to the hotel properties are capitalized. Interest used to finance the real estate under development is capitalized as an additional cost of development. We discontinue the capitalization of interest once the real estate development project is substantially complete.

We assess the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of the hotel properties. If our analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, we will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and the economy in general and our expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and our ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.

(the “SBA”). The term of each PPP loan is two years. The interest rate on each PPP loan is 1.0% per annum, which shall be deferred for the first six months of the term of the loan. After the initial six-month deferral period, each loan requires monthly payments of principal and interest until maturity with respect to any portion of such PPP loan which is not forgiven as described below. We are permitted to prepay each PPP loan at any time with no prepayment penalties. Under the terms of the CARES Act, PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. No assurance is provided that the Company will obtain forgiveness of the PPP loans in whole or in part.

Forbearance Agreements and Loan Amendments

On April 17, 2020, we entered into a Change In Terms Agreement (the “Cedar Rapids Amendment”), amending the terms of the its original Promissory Note (the “Cedar Rapids Note”), dated March 5, 2019 in the original principal amount of $5.86 million. Pursuant to the Cedar Rapids Amendment, the maturity date of the Cedar Rapids Note was extended from March 1, 2024, to September 1, 2024, the requirement to make any replacement reserve deposits was waived until March 1, 2021, and the requirement to make any payments of principal and interest were deferred until October 1, 2020.

On April 17, 2020, we entered into a Change In Terms Agreement (the “Eagan Amendment”), amending the terms of the its original Promissory Note (the “Eagan Note”), dated June 19, 2019 in the original principal amount of $9.44 million. Pursuant to the Eagan Amendment, the maturity date of the Eagan Note was extended from July 1, 2024, to January 1, 2025, the requirement to make any replacement reserve deposits was waived until June 1, 2021, and the requirement to make any payments of principal and interest were deferred until October 1, 2020.

On April 22, 2020, we entered into a Forbearance Agreement (the “Prattville Forbearance Agreement”), to be effective May 1, 2020, amending the terms of its original loan agreement (the “Prattville Loan”), dated July 11, 2019, in the original principal amount of $9.6 million. Pursuant to the Prattville Forbearance Agreement, the Company will not make interest payments that will become due and payable during the Prattville Forbearance Period (as defined below) which constitute Events of Default under the terms of the Prattville Loan (collectively, the “Prattville Projected Events of Default”). However, during the Prattville Forbearance Period, the lender agreed to forbear from exercising any available rights and remedies under the Prattville Loan and other Loan Documents (as defined in the Prattville Loan) to the extent such rights and remedies arise as a result of the Prattville Projected Events of Default. The forbearance period (the “Prattville Forbearance Period”) shall be the period beginning May 1, 2020 through and including July 31, 2020, subject to earlier termination pursuant to the terms of the Prattville Forbearance Agreement.

On April 22, 2020, we entered into a Forbearance Agreement (the “Southaven Forbearance Agreement”), to be effective May 1, 2020, amending the terms of its original loan agreement (the “Southaven Loan”), dated February 21, 2020, in the original principal amount of $13.5 million. Pursuant to the Southaven Forbearance Agreement, the Company will not make interest payments that will become due and payable during the Southaven Forbearance Period (as defined below) which constitute Events of Default under the terms of the Southaven Loan (collectively, the “Southaven Projected Events of Default”). However, during the Southaven Forbearance Period, the lender agreed to forbear from exercising any available rights and remedies under the Southaven Loan and other Loan Documents (as defined in the Southaven Loan) to the extent such rights and remedies arise as a result of the Southaven Projected Events of Default. The forbearance period (the “Southaven Forbearance Period”) shall be the period beginning May 1, 2020 through and including July 31, 2020, subject to earlier termination pursuant to the terms of the Southaven Forbearance Agreement.

Interval Common Stock

Articles Supplementary

On April 29, 2020, we filed with the Maryland State Department of Assessments and Taxation articles supplementary (the “Articles Supplementary”) to our charter, to classify and designate 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, of the Company, as non-voting shares of Interval Common Stock (“Interval Common Stock”) and to set the terms of the Interval Common Stock. Holders of shares of Interval Common Stock will be entitled to receive, when and as authorized by the board of directors and declared by the Company, dividends at a rate equal to 86% of the dividend rate for our common stock as authorized by the board of directors and declared by the Company. Dividends on the Interval Shares may be paid in cash, capital stock of the Company or a combination of cash and capital stock of the Company as determined by the board of directors, and will be paid at such times as dividends are paid to the holders of common stock.

Repurchase Plan

The board of directors has adopted a repurchase plan for the Interval Common Stock (the “Repurchase Plan”). The Repurchase Plan is generally available to holders of Interval Common Stock who have held their shares of Interval Common Stock (“Interval Shares”) for at least 1 year. The Repurchase Plan provides that so long as the Repurchase Reserve (defined below) exists, we will repurchase up to the lesser of (i) 5% of the aggregate value of the Interval Shares (“Interval Shares Value”) on the last day of the same calendar quarter of the preceding year and (ii) 5% of the Interval Shares Value on the last day of the preceding calendar quarter. After the Repurchase Reserve has been exhausted, we will limit repurchases of Interval Shares to repurchases that can be made with the net proceeds from the dividend reinvestment plan for the Interval Shares received in the prior calendar year up to the lesser of (i) 1.25% per calendar quarter and (ii) 5% per calendar year of the Interval Shares Value. The limitations described in this paragraph are referred to as the “Repurchase Limitations.”

We will establish a reserve (the “Repurchase Reserve”) of liquid assets in an amount equal to 20% of the aggregate gross proceeds from the Company’s private offering of Interval Shares, which will be comprised of cash and cash-like instruments, government securities, publicly traded REIT shares and other publicly traded securities (the “Reserve Assets”), but which is expected to primarily include publicly traded REIT shares. The Repurchase Reserve will be used solely to repurchase the Interval Shares. The board of directors may, but has no obligation to, increase the amount of the Repurchase Reserve at any time. The Company will have no obligation to restore any amounts resulting from a decline in value of the Reserve Assets. After the Repurchase Reserve has been exhausted, subject to the Repurchase Limitations, the Company will use only the net proceeds from the dividend reinvestment plan received in the prior calendar year to repurchase the Interval Shares. Subject to the Repurchase Limitations, on the applicable repurchase date, the Company will repurchase the Interval Shares timely submitted for repurchase for a price equal to the NAV per share of the Company’s common stock on such repurchase date as determined by the board of directors.

Private Offering

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2020, the Company is not subject to any material legal proceedings nor, to the Company’s knowledge, is any material legal proceeding threatened against the Company by any governmental authorities.

Item 1A. Risk Factors

The following risk factor reflects an addition to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or Annual Report. The below risk factor should be read in conjunction with the risk factors discussed in Part I, Item 1A. “Risk Factors” of our Annual Report.

The novel coronavirus (COVID-19) and other possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows.

The outbreak of the COVID-19 virus that has rapidly spread to a growing number of countries, including the United States, has created considerable instability and disruption in the U.S. and world economies. Substantial uncertainty still surrounds COVID-19 and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures and other restrictions on travel, congregation and business operations have already resulted in significant negative impacts in the United States and world economies and in relation to our business. The long-term impact of COVID-19 on the U.S. and world economies remains uncertain, but is likely to result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted. The extent to which our financial condition, results of operations and overall value will continue to be affected by the COVID-19 pandemic will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

As a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of cancellations, and have experienced and continue to experience a reduction in bookings for hotel rooms which have negatively affected our occupancy levels and could materially and adversely affect the financial performance and value of our hotels. All of the markets in which our properties are located are subject to some level of restrictions on business operations. Even after travel advisories and restrictions are modified or lifted, demand for hotels may remain weak for a significant length of time, which may be a function of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses. We cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing. The market and economic challenges created by the COVID-19 pandemic, and measures implemented to prevent its spread, have adversely affected, and may continue to adversely affect, our returns and profitability and, as a result, our ability to pay distributions to our stockholders or to realize appreciation in the value of our properties.

Additionally, the management companies that operate our hotel properties may be limited in their ability to properly maintain the properties. Market fluctuations may affect our ability to obtain necessary funds for the operation of our hotels from current lenders or new borrowings. In addition, we may be unable to obtain financing for the acquisition of new hotels on satisfactory terms, or at all. Third-party reports relating to market studies or demographics we obtained prior to the COVID-19 virus outbreak for hotels we acquired or have identified for acquisition may no longer be accurate or complete. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our business, financial condition, results of operation and the overall value of our properties, and stockholders may lose all or a substantial portion of their investment in us.

The global impact of the COVID-19 pandemic continues to evolve rapidly, and the extent of its effect on our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others. As a result, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial condition, results of operations and our ability to pay distributions to our stockholders. Moreover, many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic. In addition, if in the future there is an outbreak of another highly infectious or contagious disease or other health concern, our company and our properties may be subject to similar risks as posed by COVID-19.

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

Unregistered Sales of Equity Securities

On June 1, 2018, we commenced a private placement offering of up to $100,000,000 in shares of our common stock. We are offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. In addition to sales of common stock for cash, we have adopted a dividend reinvestment plan, which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are offering the shares in the private offering at an initial price of $10.00 per share, with shares purchased in our dividend reinvestment plan at an initial price of $9.50 per share. During the three months ended March 31, 2020, we sold 1,000,927 shares of common stock in the private offering, resulting in gross offering proceeds of approximately $9.8 million, including 44,030 shares issued pursuant to our dividend reinvestment plan. During the three months ended March 31, 2020, aggregate selling commissions of $1.0 million and marketing and diligence allowances and other wholesale selling costs and expenses of $0.5 million were paid in connection with the private offering.

Share Repurchase Plan

The board of directors has adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The following discussion summarizes the principal terms of our share repurchase plan.

Repurchase Price

Under certain circumstances and subject to the death repurchase described below, the prices at which we will repurchase shares under our repurchase plan are as follows:

For those shares held by the stockholder for at least one year, 92% of the current share NAV;

For those shares held by the stockholder for at least two years, 96% of the current share NAV; and

For those shares held by the stockholder for at least three years, 100% of the current share NAV.

For purposes of determining the time period a stockholder has held each share, the time period begins as of the date the stockholder acquired the share, provided that shares purchased by the stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial shares to which the dividend reinvestment plan shares relate. The board of directors may, in its sole discretion, reject any request for repurchase and may, upon notice to the stockholders, amend, suspend or terminate the repurchase program at any time.

Limitations on Repurchase

There are several limitations on our ability to repurchase shares under our share repurchase plan:

Unless the shares are being repurchased in connection with a stockholder’s death, we may not repurchase shares unless the stockholder has held the shares for at least one year.

During any calendar year, we will repurchase only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan upon 10 business days’ notice to our stockholders.

During any calendar year, we will limit the total shares repurchased to no more than 5.0% of the weighted-average number of shares outstanding as of December 31 of the prior calendar year.

We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

We will not repurchase shares if the board of directors determines, in its sole discretion, that the repurchase price determined in accordance with the terms of our share repurchase plan exceeds the then current fair market value of the shares to be repurchased.

Procedures for Repurchase

We will repurchase shares within 21 days following the end of a calendar quarter. We must receive a written request for repurchase at least two business days before the end of the calendar quarter in order for us to repurchase a stockholder’s shares on the repurchase date. If we cannot repurchase all shares presented for repurchase in any quarter, we will attempt to honor repurchase requests on a pro rata basis. The board of directors may, in its sole discretion, reject any request for repurchase.

If we did not completely satisfy a stockholder’s repurchase request on a repurchase date because we did not receive the request in time, because of the limitations on repurchases set forth in our share repurchase plan or because of a suspension of our share repurchase plan, we would treat the unsatisfied portion of the repurchase request as a request for repurchase at the next repurchase date at which funds are available for repurchase unless the stockholder withdraws its request. Any stockholder may withdraw a repurchase request upon written notice to the program administrator if such notice is received at least two business days before the repurchase date.

All shares to be repurchased must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares, we will not repurchase any such shares.

Neither we nor the board of directors will have any liability to any stockholder for any damages resulting from or related to the stockholder’s presentment of its shares. Further, stockholders will have complete responsibility for payment of all taxes, assessments and other applicable obligations and third-party costs resulting from or relating to our repurchase of shares. All repurchased shares shall be repurchased as treasury shares and may be made available for purchase to new or existing stockholders.

Special Repurchases—Death Repurchase

In the event of the death of a stockholder, the Company will, upon request and within six months from the date of the request, repurchase such stockholder’s shares regardless of the period the deceased stockholder has owned such shares at the following prices:

92% of the current share NAV if death occurs less than six months of the purchase;

96% of the current share NAV if death occurs from six months to one year of purchase; and

100% of the current share NAV if death occurs after one year of purchase.

We will not be obligated to repurchase a deceased stockholder’s shares if more than two years have elapsed from the date of death.

Amendment, Suspension or Termination of Program and Notice

The board of directors may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate our share repurchase plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan.

Shares Repurchased

During the three months ended March 31, 2020, we repurchased shares of our common stock in the following amounts, which represented all of the share repurchase requests received for the same period. During the three months ended March 31, 2020, we funded repurchases under our share repurchase plan with the net proceeds from our dividend reinvestment plan.


Month	Total Number of Shares Repurchased		Average Price Paid Per Share		Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program
January 2020		10,000	$	9.20		(1)
February 2020		—	$	—		(1)
March 2020		—	$	—		(1)
Total		10,000

(1)We limit the dollar value of shares that may be redeemed under the plan as described above. One of these limitations is that during each calendar year, our share repurchase plan limits the number of shares we may repurchase to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the redemption of shares upon ten business days’ notice to our stockholders. Based on the repurchase limits described above, as of March 31, 2020, there was $707,133 available for eligible purchasers for the remainder of 2020.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


3.1	*	Articles of Amendment and Restatement, dated as of June 1, 2018

3.2	*	Articles Supplementary for the Interval Common Stock

3.3		Bylaws, dated of as April 9, 2018, as amended by Amendment No. 1 dated as of November 12, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 12, 2019)

4.1		Dividend Reinvestment Plan (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10 filed August 8, 2019)


10.1.1		First Amendment to Purchase Agreement for the Southaven Homewood Suites, effective as of January 3, 2020 (incorporated by reference to Exhibit 10.53.2 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.1.2		Second Amendment to Purchase Agreement for the Southaven Homewood Suites, dated as of January 31, 2020 (incorporated by reference to Exhibit 10.53.3 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.1		Consent, Amendment and Assumption Agreement relating to the Lubbock Fairfield Inn loan, dated as of January 8, 2020 (incorporated by reference to Exhibit 10.55.1 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.2		Promissory Note relating to the Lubbock Fairfield Inn, dated as of April 4, 2019 (incorporated by reference to Exhibit 10.55.2 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.3		Loan Agreement relating to the Lubbock Fairfield Inn, dated as of April 4, 2019 (incorporated by reference to Exhibit 10.55.3 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.4		Assignment of Leases and Rents relating to the Lubbock Fairfield Inn, dated as of April 4, 2019 (incorporated by reference to Exhibit 10.55.4 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.5		Deed of Trust relating to the Lubbock Fairfield Inn, dated as of January 8, 2020 (incorporated by reference to Exhibit 10.55.5 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.6		Guaranty of Recourse Obligations relating to the Lubbock Fairfield Inn, dated as of January 8, 2020 (incorporated by reference to Exhibit 10.55.6 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.7		Environmental Indemnity Agreement relating to the Lubbock Fairfield Inn, dated as of January 8, 2020 (incorporated by reference to Exhibit 10.55.7 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.2.8		Acknowledgement of Property Manager and Borrower relating to the Lubbock Fairfield Inn, dated as of January 8, 2020 (incorporated by reference to Exhibit 10.55.8 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.1	*	Business Loan Agreement for Revolving Line of Credit with Western State Bank, dated February 10, 2020

10.3.2	*	Promissory Note issued to Western State Bank, dated February 10, 2020

10.3.3		Mortgage granted to Western State Bank relating to the Cedar Rapids Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.3 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.4		Mortgage granted to Western State Bank relating to the Eagan Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.4 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.5		Assignment of Rents granted to Western State Bank relating to the Cedar Rapids Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.5 to the Company’s Annual Report on Form 10-K filed March 25, 2020)


10.3.6		Assignment of Rents granted to Western State Bank relating to the Eagan Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.6 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.7		Commercial Security Agreement relating to the Cedar Rapids Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.7 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.8		Commercial Security Agreement relating to the Eagan Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.8 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.9		Commercial Guaranty by Corey R. Maple to Western State Bank, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.10 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.10		Commercial Guaranty by the Company to Western State Bank, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.11 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.3.11		Agreement to Provide Insurance relating to the Eagan Property, dated February 10, 2020 (incorporated by reference to Exhibit 10.56.13 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.4.1		First Amendment to Agreement of Purchase and Sale for Hampton Inn York, Home2 Suites York, Fairfield Inn & Suites Hershey, dated as of January 13, 2020 (incorporated by reference to Exhibit 10.57.2 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.4.2		Second Amendment to Agreement of Purchase and Sale for Hampton Inn York, Home2 Suites York, Fairfield Inn & Suites Hershey, dated as of January 31, 2020 (incorporated by reference to Exhibit 10.57.3 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.4.3		Third Amendment to Agreement of Purchase and Sale for Hampton Inn York, Home2 Suites York, Fairfield Inn & Suites Hershey, dated as of February 10, 2020 (incorporated by reference to Exhibit 10.57.4 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.4.4		Fourth Amendment to Agreement of Purchase and Sale for Hampton Inn York, Home2 Suites York, Fairfield Inn & Suites Hershey, dated as of February 17, 2020 (incorporated by reference to Exhibit 10.57.5 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.1		Loan Agreement with Wells Fargo Bank, National Association, relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.1 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.2		Term Loan Note issued to Wells Fargo Bank, National Association, relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.2 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.3		Security Agreement relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.3 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.4		Environmental Indemnity Agreement by the subsidiary borrowers and Corey R. Maple relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.4 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.5		Deed of Trust relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.5 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.5.6		Guaranty by Corey R. Maple relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.58.6 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.6		Hotel Management Agreement between LF Southaven TRS, LLC and Vista Host Inc. relating to the Southaven Homewood Suites, dated as of February 21, 2020 (incorporated by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K filed March 25, 2020)

10.7	*	Promissory Note issued to Western State Bank relating to the Lubbock Property, dated April 10, 2020

10.8	*	Promissory Note issued to Western State Bank relating to the Lubbock Home2 Property, dated April 10, 2020

10.9	*	Promissory Note issued to Western State Bank relating to the Cedar Rapids Property, dated April 17, 2020

10.10	*	Promissory Note issued to Western State Bank relating to the Pineville Property, dated April 17, 2020

10.11	*	Promissory Note issued to Western State Bank relating to the Eagan Property, dated April 17, 2020

10.12	*	Promissory Note issued to Western State Bank relating to the Prattville Property, dated April 17, 2020

10.13.1	*	Change in Terms Agreement with Western State Bank, dated April 17, 2020, relating to the loan dated March 5, 2019 related to the Cedar Rapids Property

10.13.2	*	Modification of Mortgage, dated April 17, 2020 relating to the mortgage dated March 5, 2019 related to the Cedar Rapids Property

10.14.1	*	Change in Terms Agreement with Western State Bank, dated April 17, 2020, relating to the loan dated June 19, 2019 related to the Eagan Property

10.14.2	*	Modification of Mortgage, dated April 17, 2020 relating to the mortgage dated June 19, 2019 related to the Eagan Property

10.15	*	Forbearance Agreement with Wells Fargo Bank, National Association, dated as of April 22, 2020 and effective as of May 1, 2020, relating to the loan dated July 11, 2019 related to the Prattville Property

10.16	*	Forbearance Agreement with Wells Fargo Bank, National Association, dated as of April 22, 2020 and effective as of May 1, 2020, relating to the loan dated February 21, 2020 related to the Southaven Property

10.17	*	First Amendment to Limited Partnership Agreement of the Operating Partnership

31.1	*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Share Repurchase Plan (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 10 filed August 8, 2019)

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

		LODGING FUND REIT III, INC.

Date:	May 14, 2020	By:	s/ Corey R. Maple
			Corey R. Maple
			Chairman of the Board, Chief Executive Officer and Secretary
			(principal executive officer)

Date:	May 14, 2020	By:	/s/ Katie Cox
			Katie Cox
			Chief Financial Officer
			(principal financial officer)



			Page
PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements (Unaudited)	2
		Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	2
		Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	3
		Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2020 and 2019	4
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	5
		Notes to the Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
	Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION		39
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults upon Senior Securities	42
	Item 4.	Mine Safety Disclosures	42
	Item 5.	Other Information	42
	Item 6.	Exhibits	42

SIGNATURES			47