10-K 1 d844945d10k.htm FORM 10-K FORM 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

For the fiscal year ended December 31, 2014

OR

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

For the transition period from                 to                

 

 

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   001-32379   20-1531029

(State or Other Jurisdiction of

Incorporation or Organization)

  (Commission File Number)  

(I.R.S. Employer

Identification No.)

 

 

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   001-36091   20-1965427

(State or Other Jurisdiction of

Incorporation or Organization)

  (Commission File Number)  

(I.R.S. Employer

Identification No.)

410 West Francis Street

Williamsburg, Virginia 23185

(Address of Principal Executive Officers) (Zip Code)

757-229-5648

(Registrant’s telephone number, including area code)

 

 

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

 

Registrant

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Sotherly Hotels Inc.   Common Stock, $0.01 par value   The NASDAQ Stock Market LLC
Sotherly Hotels LP   8.0% Senior Unsecured Notes due 2018   The NASDAQ Stock Market LLC
Sotherly Hotels LP   7.0% Senior Unsecured Notes due 2019   The NASDAQ Stock Market LLC

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

(Title of Class)

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934).

Sotherly Hotels Inc.

 

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

Sotherly Hotels LP

 

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

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

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

The aggregate market value of common stock held by non-affiliates of Sotherly Hotels Inc. as of June 30, 2014, the last business day of Sotherly Hotels Inc.’s most recently completed second fiscal quarter, was approximately $71,027,018 based on the closing price quoted on the NASDAQ® Stock Market.

As of April 14, 2015, there were 10,707,032 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain portions of Sotherly Hotels Inc.’s proxy statement for its 2015 annual meeting of stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.

 

 

 


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

 

         Page  
 

PART I

  
Item 1.  

Business

     5   
Item 1A.  

Risk Factors

     17   
Item 1B.  

Unresolved Staff Comments

     40   
Item 2.  

Properties

     40   
Item 3.  

Legal Proceedings

     40   
Item 4.  

Mine Safety Disclosure

     40   
 

PART II

  
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     41   
Item 6.  

Selected Financial Data

     44   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     66   
Item 8.  

Financial Statements and Supplementary Data

     67   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     67   
Item 9A.  

Controls and Procedures

     67   
Item 9B.  

Other Information

     69   
 

PART III

  
Item 10.  

Directors, Executive Officers and Corporate Governance

     70   
Item 11.  

Executive Compensation

     70   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     70   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     71   
Item 14.  

Principal Accountant Fees and Services

     71   
 

PART IV

  
Item 15.  

Exhibits and Financial Statement Schedules

     72   

 

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EXPLANATORY NOTE

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

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

This report combines the Annual Reports on Form 10-K for the period ended December 31, 2014 of the Company and the Operating Partnership. We believe combining the annual reports into this single report results in the following benefits:

 

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

 

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

 

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

 

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

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

 

    Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – selected portions;

 

    Item 9A – Controls and Procedures;

 

    Consolidated Financial Statements;

 

    the following Notes to Consolidated Financial Statements:

 

    Note 8 – Equity; and

 

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

 

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

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

 

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

 

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

 

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

 

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

 

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

 

    management and performance of our hotels;

 

    risks associated with remediating and maintaining our system of internal controls;

 

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

 

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

 

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

 

    risks associated with our ability to maintain our franchise agreements with our third party franchisors;

 

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

 

    our ability to successfully expand into new markets;

 

    legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);

 

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

 

    our ability to maintain adequate insurance coverage.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the Section titled “Risk Factors” in Item 1A of this report.

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

 

4


PART I

Item 1. Business

Organization

Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust, or REIT, that was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in primary markets in the mid-Atlantic and southern United States. On December 21, 2004, the Company successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. The Company conducts its business through Sotherly Hotels LP, its operating partnership (the “Operating Partnership”), of which the Company is the general partner. The Company owns approximately 80.6% of the partnership units in the Operating Partnership. Limited partners (including certain of the Company’s officers and directors) own the remaining Operating Partnership units.

As of February 28, 2015, our portfolio consists of twelve full-service, primarily upscale and upper-upscale hotels located in eight states with an aggregate of 3,009 rooms and approximately 160,928 square feet of meeting space. Eleven of these hotels are wholly-owned by subsidiaries of the Operating Partnership, ten operate under the HiltonTM, Crowne PlazaTM, DoubleTreeTM, SheratonTM and Holiday InnTM brands, one is an independent hotel, and all are managed on a day to day basis by MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”). We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture with The Carlyle Group (“Carlyle”).

In order for the Company to qualify as a REIT, it cannot directly manage or operate our wholly-owned hotels. Therefore, we lease our wholly-owned hotel properties to entities that we refer to as our TRS Lessees, which in turn have engaged Chesapeake Hospitality, an eligible independent management company, to manage our hotels. Our TRS Lessees are wholly-owned subsidiaries of MHI Hospitality TRS Holding, Inc. (“MHI Holding”, and collectively, “MHI TRS”). MHI TRS is a taxable REIT subsidiary for federal income tax purposes.

Our corporate office is located at 410 West Francis Street, Williamsburg, Virginia 23185. Our telephone number is (757) 229-5648.

Our Properties

In connection with the Company’s initial public offering, the Company acquired six hotel properties for aggregate consideration of approximately $15.0 million in cash, 3,817,036 units of interest in our Operating Partnership and the assumption of approximately $50.8 million in debt. The six initial hotel properties, the Hilton Philadelphia Airport, the Holiday Inn Brownstone, the Holiday Inn Downtown Williamsburg, the Hilton Wilmington Riverside, the Hilton Savannah DeSoto and the Holiday Inn Laurel West (formerly the Best Western Maryland Inn), are located in Pennsylvania, North Carolina, Virginia, North Carolina, Georgia, and Maryland, respectively.

On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront) located in Jacksonville, Florida, for $22.0 million.

During 2006, we sold the Holiday Inn Downtown Williamsburg for $4.75 million. We also purchased the Louisville Ramada Riverfront Inn located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs and, after extensive renovations, re-opened the property in May 2008 as the Sheraton Louisville Riverside.

During 2007, through our joint venture with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P., and Carlyle, we acquired a 25.0% indirect, noncontrolling interest in the Crowne Plaza

 

5


Hollywood Beach Resort, a 311-room hotel in Hollywood, Florida for approximately $75.8 million including transfer costs. We also purchased a hotel formerly known as the Tampa Clarion Hotel in Tampa, Florida for approximately $13.8 million including transfer costs, which, after extensive renovations, re-opened in March 2009 as the Crowne Plaza Tampa Westshore.

During 2008, we acquired the Hampton Marina Hotel located in Hampton, Virginia for approximately $7.8 million, including transfer costs. In October 2008, the hotel was re-branded and renamed the Crowne Plaza Hampton Marina.

During 2013 we acquired the Crowne Plaza Houston Downtown located in Houston, Texas at an aggregate value of approximately $30.9 million, including certain closing costs.

During 2014, we acquired the Georgian Terrace located in Atlanta, Georgia at an aggregate value of approximately $61.1 million, including certain closing costs.

In connection with the Company’s initial public offering, the Company also acquired two leasehold interests in the Shell Island Resort, a 160-unit condominium resort property in Wrightsville Beach, North Carolina, which were purchased for $3.5 million. Our Operating Partnership entered into sublease arrangements to sublease our entire leasehold interests in the property at Shell Island to affiliates of Chesapeake Hospitality. Through December 2011, the management company operated the property as a hotel and managed a rental program for the benefit of the condominium unit owners. Our Operating Partnership received fixed annual rent and incurred annual lease expenses in connection with the subleases of such property. Consequent to the cancellation of the management company’s contract to manage the condominium rental program and expiration of the underlying leases in December 2011, our Operating Partnership continued to receive a reduced set of minimum payments through December 2014.

See Item 2 of this Form 10-K for additional detail on our properties.

Our Strategy and Investment Criteria

Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the Southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe that we will be able to source significant external growth opportunities through our management team’s extensive network of industry, corporate and institutional relationships.

Our investment criteria are further detailed below:

 

    Geographic Growth Markets: We are focusing our growth strategy on the major markets in the Southern region of the United States. Our management team remains confident in the long-term growth potential associated with this part of the United States. We believe these markets have, during the Company’s and our predecessors’ existence, been characterized by population growth, economic expansion, growth in new businesses and growth in the resort, recreation and leisure segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for acquisitions only if we believe these new markets will provide similar long-term growth prospects.

 

    Full-Service Hotels: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall primarily under the upscale to upper-upscale categories and include such brands as Hilton, Doubletree by Hilton, Sheraton and Crowne Plaza. We do not own economy branded hotels. We believe that full-service hotels, with upscale to upper-upscale brands, will outperform the broader U.S. hotel industry, and thus offer the highest returns on invested capital.

 

   

Significant Barriers to Entry: We intend to execute a strategy that entails the acquisition of hotels in prime locations with significant barriers to entry. We seek to acquire properties that will benefit from

 

6


 

the licensing of brands that are not otherwise present in the market and provide us with geographic exclusivity, which helps to protect the value of our investment.

 

    Proximity to Demand Generators: We seek to acquire hotel properties located in central business districts near multiple demand generators for both leisure and business travelers within the respective markets, including large state universities, airports, convention centers, corporate headquarters, sports venues and office parks.

We typically define underperforming hotels as those that are poorly managed, suffer from significant deferred maintenance and capital improvement and that are not properly positioned in their respective markets. In pursuing these opportunities, we hope to improve revenue and cash flow and increase the long-term value of the underperforming hotels we acquire. Our ultimate goal is to achieve a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing hotel. In analyzing a potential investment in an underperforming hotel property, we typically characterize the investment opportunity as one of the following:

 

    Up-branding Opportunity: The acquisition of properties that can be upgraded physically and enhanced operationally to qualify for what we view as higher quality franchise brands, including Hilton, Doubletree by Hilton, Crowne Plaza and Sheraton.

 

    Shallow-Turn Opportunity: The acquisition of an underperforming but structurally sound hotel that requires moderate renovation to re-establish the hotel in its market.

 

    Deep-Turn Opportunity: The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of both the business components of the operations as well as the physical plant of the hotel, including extensive renovation of the building, furniture, fixtures and equipment.

Typically, in our experience, a deep turn opportunity takes a total of approximately four years from the initial acquisition of a property to achieving full post-renovation stabilization. Therefore, when evaluating future opportunities in underperforming hotels, we intend to focus on up-branding and shallow-turn opportunities, and to pursue deep-turn opportunities on a more limited basis and in joint venture partnerships if possible.

Investment Vehicles. In pursuit of our investment strategy, we may employ various traditional and non-traditional investment vehicles:

 

    Direct Purchase Opportunity: Our traditional investment strategy is to acquire direct ownership interests via our Operating Partnership in properties that meet our investment criteria, including opportunities that involve full-service, upscale and upper-upscale properties in identified geographic growth markets that have significant barriers to entry for new product delivery. Such properties, or portfolio of properties, may or may not be acquired subject to a mortgage by the seller or third-party.

 

    Distressed Debt Opportunities: In sourcing acquisitions for our core growth strategy, we may pursue investments in debt instruments that are collateralized by hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to the Company’s stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures.

 

    Joint Venture/Mezzanine Lending Opportunities: We may, from time to time, undertake a significant renovation and rehabilitation project that we characterize as a deep-turn opportunity. In such cases, we may acquire a functionally obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income commonly referred to as the “negative carry” associated with such extensive renovation programs. We will not pursue joint venture or mezzanine programs in which we would become a “de facto” lender to the real estate community.

 

7


Portfolio and Asset Management Strategy

We intend to ensure that the management of our hotel properties maximizes market share, as evidenced by revenue per available room (“RevPAR”) penetration indices, and that our market share yields the optimum level of revenues for our hotels in their respective markets. Our strategy is designed to actively manage our hotels’ operating expenses in an effort to maximize hotel earnings before interest, taxes, depreciation and amortization (“Hotel EBITDA”).

Over our long history in the lodging industry we have refined many portfolio and asset management techniques that we believe provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market trends, one-time or exceptional revenue opportunities, and/or changes in the regulatory climate that may impact costs. We review daily revenue results and revenue management strategies at the hotels, and we focus on Chesapeake Hospitality’s ability to produce high quality revenues that translate to higher marginal profitability. We look for alternative forms of revenues, such as leasing roof-top space for cellular towers and other communication devices and also look to lease space to third parties in our hotels, which may include, but are not limited to, gift shops or restaurants. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal property taxes. We generally appeal tax increases in an effort to secure lower tax payments and routinely pursue strategies that allow for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.

We also require detailed and refined reporting data from Chesapeake Hospitality, which includes detailed accounts of revenues, revenue segments, expenses and forecasts based on current and historic booking patterns. We also believe we optimize and successfully manage capital costs at our hotels while ensuring that adequate product standards are maintained to provide guest satisfaction and compliance with franchise brand standards.

None of our hotels is managed by a major national or global hotel franchise company. Through our long history in the lodging industry, we have found that management of our hotels by management companies other than franchisors is preferable to and more profitable than management derived from the major franchise companies, specifically with respect to optimization of operating expenses and the delivery of guest services.

Our portfolio management strategy includes our effort to optimize labor costs. The labor force in our hotels is predominately non-unionized, with only one property, the Jacksonville Crowne Plaza, having a total of approximately six employees electing to participate under a collective bargaining arrangement. Further, the labor force at our hotels is eligible to receive health and other insurance coverage through Chesapeake Hospitality, which self-insures. Self-insuring has, in our opinion, provided significant cash savings over traditional insurance company sponsored plans.

Asset Disposition Strategy. When a property no longer fits with our investment objectives, we will pursue a direct sale of the property for cash so that our investment capital can be redeployed according to the investment strategies outlined above. Where possible, we will seek to subsequently purchase a hotel in connection with the requirements of a tax-free exchange. Such a strategy may be deployed in order to mitigate the tax consequence that a direct sale may cause.

Our Principal Agreements

Strategic Alliance Agreement

Chesapeake Hospitality is currently the management company for each of our hotels.

On December 21, 2004, we entered into a now terminated ten-year strategic alliance agreement (the “SA Agreement”) with Chesapeake Hospitality pursuant to which (i) Chesapeake Hospitality agreed to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to Chesapeake Hospitality, and (ii) unless a majority of the Company’s independent directors in good faith concluded for valid business reasons that another management company should manage a hotel owned by us, we agreed to offer Chesapeake Hospitality or its subsidiaries the right to manage hotel properties that we acquired in the United States.

 

8


Pursuant to the SA Agreement, the Crowne Plaza Jacksonville Riverfront, acquired in July 2005, the Crowne Plaza Hampton Marina, acquired in April 2008, and the Crowne Plaza Tampa Westshore, opened in March 2009, have been managed by Chesapeake Hospitality since their respective acquisitions.

In addition, during the term of the SA Agreement, which would have expired in December 2014, Chesapeake Hospitality had the right to nominate one (1) person for election to the Company’s board of directors at the Company’s annual meeting of stockholders, subject to the approval of such nominee by the Company’s Nominating, Corporate Governance and Compensation Committee (the “NCGC Committee”) for so long as certain of the Company’s officers and directors, Andrew M. Sims, Kim E. Sims, and Christopher L. Sims, a former director of the Company, and their families and affiliates, held, in the aggregate, not less than 1.5 million units of the Operating Partnership or shares of the Company’s common stock. The SA Agreement was terminated effective as of December 15, 2014, pursuant to the terms of the Master Agreement (the “Master Agreement”) entered into on December 15, 2014 by the Company, the Operating Partnership, and MHI Hospitality TRS, LLC on the one hand and Chesapeake Hospitality on the other hand, as described in the section labeled “Current Management Agreements” below.

Lease Agreements

In order for the Company to maintain qualification as a REIT, neither the Company nor the Operating Partnership or its subsidiaries can operate our hotels directly. Our wholly-owned hotels are leased to our TRS Lessees, which have engaged Chesapeake Hospitality to manage the hotels. Each lease for the wholly-owned hotels has a non-cancelable term of three to ten years, subject to earlier termination upon the occurrence of certain contingencies described in the lease.

During the term of each lease, our TRS Lessees are obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent accrues and is paid monthly. Percentage rent is calculated by multiplying fixed percentages by gross room revenues, in excess of certain threshold amounts and is paid monthly or quarterly, according to the terms of the agreement.

Terminated Management Agreements

Pursuant to the terms of a now terminated master management agreement (the “MMA”), we engaged Chesapeake Hospitality as the property manager for eight (8) of our wholly-owned hotels. Certain of our executive officers and certain of our directors are also directors of Chesapeake Hospitality.

The MMA had a term of ten (10) years for our six (6) initial hotels and a term of ten (10) years for each subsequently acquired hotel that became subject to the MMA, including the Crowne Plaza Jacksonville Riverfront and the Crowne Plaza Hampton Marina. During the third quarter of 2006, we sold the Holiday Inn Downtown Williamsburg and purchased the former Louisville Ramada Riverfront Inn, now the Sheraton Louisville Riverside, substituting the Louisville property for the Williamsburg property pursuant to the terms of the MMA. Pursuant to the Master Agreement and a series of individual hotel management agreements (each a “Hotel Management Agreement” and, together, the “Hotel Management Agreements”) entered into in connection with the Master Agreement, the term of the MMA with respect to each of our six initial hotels was extended until December 31, 2014, at which time the MMA was terminated. The Master Agreement and Hotel Management Agreements are described in the section labeled “Current Management Agreements” below. During the term of the MMA, Chesapeake Hospitality benefited from the payment of management fees by us pursuant to the MMA. Chesapeake Hospitality received a base management fee equal to a percentage of each hotel’s revenues (2.0% for the first year, 2.5% for the second year and 3.0% thereafter). Pursuant to the MMA, Chesapeake Hospitality received an incentive fee equal to 10% of the amount by which gross operating profit of the hotels on an aggregate basis for a given year exceeded gross operating profits for the same hotels, on an aggregate basis, for a prior year, subject to a maximum amount of 0.25% of the aggregate gross revenue of the hotels.

 

9


In January 2008, the MMA was amended to revise certain provisions relating to payment by MHI Hospitality TRS, LLC to Chesapeake Hospitality of a project management fee equal to five percent (5%) of the total project costs associated with the management, coordination, planning and execution of a major repositioning or product improvement plan for a Company hotel, subject to certain conditions.

In January 2009, we entered into a now terminated management agreement with Chesapeake Hospitality solely for the management of the Crowne Plaza Tampa Westshore (the (“Tampa Agreement”). The Audit Committee reviewed and approved the Tampa Agreement in January 2009. The Tampa Agreement changed certain provisions from those contained in the MMA. Specifically, the Tampa Agreement provided that if, during its term, we terminated the agreement for convenience, we would have been required to pay Chesapeake Hospitality base and incentive management fees through the end of the initial year of the agreement or ninety (90) days, whichever was greater, as opposed to terms of the MMA which provided that Chesapeake Hospitality would have been paid the base and incentive fees for the remainder of the initial or renewal term. The provisions of the Tampa Agreement related to base management and incentive management fees were the same as those contained in the MMA, except that the incentive fee was calculated on a stand-alone basis for the Crowne Plaza Tampa Westshore, and not on an aggregate basis with the eight (8) properties covered by the MMA. In addition, provisions relating to the submission and approval of the operating budgets were amended. The Tampa Agreement was terminated on December 31, 2014, pursuant to the Master Agreement and the Hotel Management Agreement for the Crowne Plaza Tampa Westshore, as described in the section labeled “Current Management Agreements” below.

In November 2013, in connection with the acquisition of the Crowne Plaza Houston Downtown, we assumed the then-existing management agreement with Chesapeake Hospitality solely for the management of the Crowne Plaza Houston Downtown (the “Houston Agreement”). The Audit Committee reviewed and approved the assumption of the Houston Agreement in July 2013. Certain provisions of the Houston Agreement differed from those contained in the MMA. Specifically, Chesapeake Hospitality received a base management fee equal to 2% of the Crowne Plaza Houston Downtown’s revenues, and there was no incentive management fee. The Houston Agreement was terminated on December 31, 2014, pursuant to the Master Agreement and the Hotel Management Agreement for the Crowne Plaza Houston Downtown, as described in the section labeled “Current Management Agreements” below.

In March 2014, in connection with the acquisition of the Georgian Terrace, Chesapeake Hospitality commenced management of the operations of the Georgian Terrace. The independent directors reviewed and approved the now terminated management agreement for the Georgian Terrace (the “Atlanta Agreement”) in February 2014. Certain provisions of the Atlanta Agreement differed from those contained in the MMA. Specifically, Chesapeake Hospitality received a base management fee equal to 2% of the Georgian Terrace’s revenues, and we could terminate the agreement for convenience upon 30 days notice with no termination fee. The Atlanta Agreement was terminated on December 31, 2014, pursuant to the Master Agreement and the Hotel Management Agreement for the Georgian Terrace, as described in the section labeled “Current Management Agreements” below.

Any amendment, supplement or modification of the MMA, the Tampa Agreement, the Houston Agreement, and the Atlanta Agreement made during the term of each such agreement would have been required to be in writing signed by all parties and approved by a majority of our independent directors. If the MMA had been terminated as to all of the hotels covered in connection with a default under the MMA, the SA Agreement would also have been terminated.

The incentive management fee under the MMA, if any, was due annually in arrears within 90 days of the end of the fiscal year and was equal to 10.0% of the amount by which the gross operating profit of all our hotels, with the exception of the Tampa and Houston properties, on an aggregate basis for a given year exceeded the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive fee was capped at 0.25% of the aggregate gross revenue of all of the hotels included in the incentive fee calculation for the year

 

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in which the incentive fee was earned. The calculation of the incentive fee did not include results of hotels for the fiscal year in which they were initially leased, or for the fiscal year in which they were sold, and newly acquired or leased hotels were to be included in the calculation beginning in the second full calendar year such hotel was managed. The management agreement for the management of the Tampa property included a similar provision for payment of an incentive management fee on a stand-alone basis. The management agreement for the Houston property did not include a provision for payment of an incentive management fee.

Early Termination. The MMA was terminable with respect to one or more of the hotels earlier than the stated term, if certain events occurred, including:

 

    a sale of a hotel or the substitution of a newly acquired hotel for an existing hotel;

 

    the failure of Chesapeake Hospitality to satisfy certain performance standards with respect to any of the future hotels or with respect to the six initial hotels after the expiration of the initial 10-year term;

 

    in the event of a casualty to, condemnation of, or force majeure involving a hotel; or

 

    upon a default by Chesapeake Hospitality or us that is not cured prior to the expiration of any applicable cure periods.

The management agreement for the Crowne Plaza Tampa Westshore was terminable for convenience with ninety days notice to Chesapeake Hospitality.

The management agreement for the Crowne Plaza Houston Downtown was terminable if certain events occurred, including:

 

    a sale of the hotel;

 

    gross negligence in the performance of its duties as the manager;

 

    if the operating profit of the hotel is less than the annual amount of the original permanent debt service.

Termination Fees. In certain cases of early termination of the management agreement for the Crowne Plaza Houston Downtown or the MMA with respect to one or more of the hotels covered under that agreement, we would have been required to pay Chesapeake Hospitality a termination fee, plus any amounts otherwise due to Chesapeake Hospitality pursuant to the terms of that management agreement. We would have been obligated to pay termination fees in such circumstances provided that Chesapeake Hospitality was not then in default, subject to certain cure and grace periods.

The prior management agreement for the Crowne Plaza Tampa Westshore provided for the payment of certain termination fees if we had terminated the management agreement for convenience during the initial year of management. As the initial year of management has been completed, there was no termination fee for the termination of the management agreement for our Tampa property.

New Acquisitions; Strategic Alliance Agreement. Pursuant to the SA Agreement with Chesapeake Hospitality, we agreed to engage Chesapeake Hospitality for the management of any hotels acquired in the future unless a majority of the Company’s independent directors in good faith concluded, for valid business reasons, that another management company should manage any newly acquired hotels. If the management agreement terminated as to all of the hotels covered in connection with a default under the management agreement, the SA Agreement would have also terminated.

Current Management Agreements

The Master Agreement and Hotel Management Agreements were entered into to address the scheduled expiration of the MMA and the SA Agreement on December 15, 2014 and to provide for ongoing management of each of the Company’s hotels pursuant to a negotiated form of single facility management agreement, excluding the Company’s joint venture hotel in Hollywood, Florida which is managed pursuant to a separate agreement.

 

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The Master Agreement:

 

    expires on December 31, 2019, or earlier if all of the Hotel Management Agreements expire or are terminated prior to that date. The Master Agreement will be extended beyond 2019 for such additional periods as a Hotel Management Agreement remains in effect;

 

    terminates the SA Agreement as of December 15, 2014;

 

    extended the term of the MMA until December 31, 2014 and provided that the MMA, the Tampa Agreement, the Houston Agreement, and the Atlanta Agreement terminate as of such date and coincident with such termination the Hotel Management Agreements came into effect;

 

    requires Chesapeake Hospitality to provide dedicated executive level support for our managed hotels pursuant to certain criteria;

 

    provides a mechanism and established conditions on which the Company will offer Chesapeake Hospitality the opportunity to manage hotels acquired by the Company in the future, however the Company will not be required to offer the management of future hotels to Chesapeake Hospitality; and

 

    sets an incentive management fee for each of the hotels to be managed by Chesapeake Hospitality equal to 10% of the amount by which gross operating profit, as defined in the Hotel Management Agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.

Each of the Hotel Management Agreements has a term of five years commencing January 1, 2015 and may be extended for up to two additional periods of five years subject to the approval of both parties with respect to any such extension. The agreements provide that Chesapeake Hospitality will be the sole and exclusive manager of the hotels as the agent of the lessee and at the sole cost and expense of the lessee and subject to certain operating standards. Each agreement may be terminated in connection with a sale of the related hotel. In connection with a termination upon the sale of the hotel, Chesapeake Hospitality will be entitled to receive a termination fee equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees paid for that number of months prior to the closing date of the hotel sale equal to the number of months remaining on the current term of the Hotel Management Agreement. No sale termination fee will be payable in the event the Company elects to provide Chesapeake Hospitality with the opportunity to manage another comparable hotel and Chesapeake Hospitality is not precluded from accepting such opportunity. Chesapeake Hospitality is required to qualify as an eligible independent contractor in order to permit the Company to continue to operate as a real estate investment trust.

Amounts Payable under the Management Agreements. Chesapeake Hospitality receives a base management fee, and, if the hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.

 

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The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be a percentage of the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our wholly-owned hotels is as follows(1):

 

     2018 &
2019
    2017     2016     2015     2014     2013     2012     2011  

Crowne Plaza Hampton Marina

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

Crowne Plaza Houston Downtown(2)

     2.50     2.50     2.25     2.00     2.00     2.00     N/A        N/A   

Crowne Plaza Tampa Westshore(3)

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     2.50

Crowne Plaza Jacksonville Riverfront

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

DoubleTree by Hilton Brownstone – University

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

DoubleTree by Hilton Philadelphia Airport

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

The Georgian Terrace(4)

     2.50     2.50     2.25     2.00     2.00     N/A        N/A        N/A   

Hilton Savannah DeSoto

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

Hilton Wilmington Riverside

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

Holiday Inn Laurel West

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

Sheraton Louisville Riverside(5)

     2.50     2.65     2.65     2.65     3.00     3.00     3.00     3.00

 

(1) The fees for 2011-2014 were set by the MMA, the Tampa Agreement, the Houston Agreement, and the Atlanta Agreement. The fees for 2015-2019 are set by the Master Agreement and Hotel Management Agreements.
(2) In November 2013, we assumed the existing management agreement with Chesapeake Hospitality for the management of the Crowne Plaza Houston Downtown. The terms of the agreement provided for a base management fee of 2.0% and no incentive management fee.
(3) In January 2009, we entered a separate management agreement with Chesapeake Hospitality for the management of the Crowne Plaza Tampa Westshore. The provisions of the new agreement related to base management fee were the same as those contained in the MMA. The provisions of the agreement related to the incentive management fee were the same as those contained in the MMA except that it was calculated separately and not aggregated with the other properties covered by the MMA.
(4) In March 2014, we entered into a separate agreement with Chesapeake Hospitality for the management of the Georgian Terrace. The terms of the agreement provided for a base management fee of 2.0% and no incentive management fee.
(5) Pursuant to the MMA, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was 10 years. The management company agreed to substitute the Sheraton Louisville Riverside for the Holiday Inn Downtown Williamsburg for remainder of the term of the agreement.

The base management fee for a hotel acquired in the future which is first leased by our TRS Lessees, other than on the first day of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full year such hotel is managed. There is no fee cap on the base management fee.

Subsequently Acquired Hotel Properties

 

First year

     2.00

Second year

     2.25

Third year and thereafter

     2.50

Franchise Agreements

As of December 31, 2014, most of our hotels operate under franchise licenses from national hotel companies. On March 27, 2014 we purchased an independent full-service hotel in Atlanta, Georgia, that does not operate under a franchise license.

 

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Our TRS Lessees hold the franchise licenses for our wholly-owned hotels. Chesapeake Hospitality must operate each of our hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.

The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must comply with the franchisors’ standards and requirements with respect to:

 

    training of operational personnel;

 

    safety;

 

    maintaining specified insurance;

 

    the types of services and products ancillary to guest room services that may be provided;

 

    display of signage;

 

    marketing techniques including print media, billboards, and promotions standards; and

 

    the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.

Additionally, as the franchisee, our TRS Lessees are required to pay the franchise fees described below.

The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:

 

     Franchise Fee(1)     Marketing/
Reservation
Fee(1)
    Expiration
Date
 

Crowne Plaza Hampton Marina

     5.0     3.5     10/06/2018   

Crowne Plaza Houston Downtown

     5.0     3.5     04/12/2016   

Crowne Plaza Jacksonville Riverfront(2)

     5.0     3.5     09/01/2015   

Crowne Plaza Tampa Westshore

     5.0     3.5     03/06/2019   

DoubleTree by Hilton Brownstone – University

     5.0     4.0     11/30/2021   

DoubleTree by Hilton Philadelphia – Airport

     5.0     3.5     10/31/2024   

Hilton Savannah DeSoto

     5.0     4.0     07/31/2017   

Hilton Wilmington Riverside

     5.0     4.0     03/31/2018   

Holiday Inn Laurel West

     5.0     2.5     10/05/2015   

Sheraton Louisville Riverside

     5.0     3.5     04/25/2023   

 

(1) Percentage of room revenues payable to the franchisor.
(2) The Crowne Plaza Jacksonville Riverfront franchise licensor has been given notice of termination set for September 1, 2015. We anticipate rebranding the hotel as the DoubleTree by Hilton Jacksonville Riverfront in September 2015.

Tax Status

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2004. In order to maintain its qualification as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute, as “qualifying distributions,” at least 90.0% of its taxable income (determined without regard to the deduction for dividends paid and by excluding its net capital

 

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gains and reduced by certain non-cash items) to its stockholders. The Company has adhered to these requirements each taxable year since its formation in 2004 and intends to continue to adhere to these requirements and maintain its qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its taxable income (including its net capital gain) that is distributed to its stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, and no relief provision applies, it will be subject to federal income taxes at regular corporate rates (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the fifth taxable year after the year in which it failed to qualify as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.

While the Operating Partnership is generally not subject to federal and state income taxes, the unit holders of the Operating Partnership, including the Company, are subject to tax on their respective allocable shares of the Operating Partnership’s taxable income.

The Company has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership. MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss, through December 31, 2014, of $7.2 million and in addition had deferred timing differences of approximately $0.7 million attributable to start-up expenses related to the opening of several of its hotels, which was not deductible when incurred and is being amortized over 15 years and deferred timing differences of approximately $1.1 million attributable to accrued, but not deductible, vacation and sick pay amounts. The Company has not incurred federal income taxes since its formation. The cumulative taxable loss and combined timing differences result in a net deferred tax asset of approximately $3.5 million for these cumulative deferred tax loss carryforwards.

Environmental Matters

In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.

We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel properties.

Employees

As of March 31, 2015, we employed thirteen full-time persons, all of whom work at our corporate office in Williamsburg, Virginia. All persons employed in the day-to-day operations of the hotels are employees of Chesapeake Hospitality, the management company engaged by our TRS Lessees to operate such hotels.

 

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Subsequent Events

On January 9, 2015, we paid a quarterly dividend (distribution) of $0.065 per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record on December 15, 2014.

On January 12, 2015, we entered into a new employment agreement, effective as of January 1, 2015, between the Company and Andrew M. Sims, to serve as Chief Executive Officer and Chairman of the board of directors for the Company.

On January 28, 2015, we authorized payment of a quarterly dividend (distribution) of $0.07 per common share (and unit) to the stockholders (and unitholders of the Operating Partnership) of record as of March 13, 2015. The dividend (distribution) is to be paid on April 10, 2015.

On April 1, 2015, one holder of units in the Operating Partnership redeemed 100,000 units for an equivalent number of shares of the Company’s common stock.

Available Information

We maintain an Internet site, http://www.sotherlyhotels.com, which contains additional information concerning Sotherly Hotels Inc. We make available free of charge through our Internet site all our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements and other reports filed with the Securities and Exchange Commission as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We have also posted on this website the Company’s Code of Business Conduct and the charters of the Company’s Audit and NCGC Committees of the Company’s board of directors. We intend to disclose on our website any changes to, or waivers from, the Company’s Code of Business Conduct. Information on the Company’s Internet site is neither part of nor incorporated into this Form 10-K.

 

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Item 1A. Risk Factors

The following are the material risks that may affect us. Any of the risks discussed herein can materially adversely affect our business, liquidity, operations, industry or financial position or our future financial performance.

Risks Related to Our Debt

We have substantial financial leverage.

As of December 31, 2014, we had consolidated debt of approximately $258.2 million, which is comprised of approximately $205.3 million secured debt, approximately $27.6 million unsecured debt related to 8.0% senior unsecured notes due September 30, 2018, (the “8% Notes”) and $25.3 million unsecured debt related to the 7.0% senior unsecured notes due November 20, 2019 (the “7% Notes”), and together with the 8% Notes, the “Notes”). Historically, we have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding programs. Limitations upon our access to additional debt could adversely affect our ability to fund these programs or acquire hotels in the future.

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

 

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

 

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

 

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

 

    limit our ability to refinance existing debt;

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

 

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

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

We have some mortgage debt obligations maturing in 2015 and 2016, and if we are not successful in extending the term of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our overall financial condition could be materially and adversely affected.

We will be required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all.

On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2016. Under the terms of the extension, we made a principal payment of approximately $0.8 million to reduce the principal balance on the loan to $5.0 million. In July 2015, the mortgage on our Crowne Plaza Jacksonville Riverfront matures, but we may extend such mortgage until July 2016 pursuant to certain terms and conditions. In April 2016, the mortgage on our Crowne Plaza Houston Downtown matures, but we may extend such mortgage until November 2018 pursuant to certain terms and conditions.

The total aggregate amount of our debt obligations maturing in 2015 is approximately $16.4 million, which represents approximately 6.3% of our total debt obligations.

We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. If we are unable to extend these loans, we may be required to repay the outstanding principal amount at maturity or a portion of such indebtedness upon refinance. If we do not have sufficient funds to repay any portion of the indebtedness, it may be necessary to raise capital through debt financing, private or public offerings of debt securities or equity financings. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available to meet our financial obligations. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies or we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses and potentially reducing cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be reinvested in equally profitable real property investments. Moreover, the terms of any additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the extent we cannot repay our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.

For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder the Company’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial guarantees to lenders of

 

18


mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity.

Our borrowing costs are sensitive to fluctuations in interest rates.

Higher interest rates could increase our debt service requirements and interest expense. Currently, our floating rate debt is limited to the mortgage on the Georgian Terrace, the DoubleTree by Hilton Philadelphia Airport, and the mortgage on the Crowne Plaza Jacksonville Riverfront. Each of these mortgages bears interest at rates tied to the 30-day London Interbank Offered Rate (“LIBOR”) and provide for minimum rates of interest. To the extent that increases in the LIBOR rate of interest cause the interest on the mortgages to exceed the minimum rates of interest, we are exposed to rising interest rates.

Should we obtain new debt financing or refinance existing indebtedness, we may increase the amount of floating rate debt that currently exists. In addition, adverse economic conditions could also cause the terms on which we borrow to be unfavorable.

Risks Related to Our Business and Properties

If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance and financial results may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.

The performance of the lodging industry and the general economy historically have been closely linked. In an economic downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels, which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating revenues, which will lower our cash flow and may affect our ability to make distributions to stockholders and to maintain compliance with our loan obligations. We had net loss attributable to the Company of approximately $0.6 million for the 2014 fiscal year. A renewed economic downturn may reduce our income or produce losses. A weakening of the economy may adversely and materially affect our industry, business and results of operations and we cannot predict the likelihood, severity or duration of any such downturn. Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term business strategy.

We own a limited number of hotels and significant adverse changes at one hotel could have a material adverse effect on our financial performance and may limit our ability to make distributions to stockholders.

As of December 31, 2014, our portfolio consisted of eleven wholly-owned properties and one joint venture property with a total of 3,009 rooms. Significant adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly, on our ability to make distributions to stockholders.

We are subject to risks of increased hotel operating expenses and decreased hotel revenues.

Our leases with our TRS Lessees provide for the payment of rent based in part on gross revenues from our hotels. Our TRS Lessees are subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but not limited to the following:

 

    wage and benefit costs;

 

    repair and maintenance expenses;

 

    energy costs;

 

19


    property taxes;

 

    insurance costs; and

 

    other operating expenses.

Any increases in these operating expenses can have a significant adverse impact on our TRS Lessees’ ability to pay rent and other operating expenses and, consequently, our earnings and cash flow.

In keeping with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.

We have in the past, and may in the future, develop or acquire hotels in geographic areas in which our management may have little or no operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient demand at new hotel properties, therefore, could adversely affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.

We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our returns are dependent on the management of our hotels by Chesapeake Hospitality.

Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or manage our hotels. Instead, we lease all of our hotels to subsidiaries of our TRS Lessees, and our TRS Lessees retain third-party managers to operate our hotels pursuant to management agreements.

Under the terms of our management agreements with Chesapeake Hospitality and the REIT qualification rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on Chesapeake Hospitality to operate our hotels as provided in the management agreements. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel. Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR, and average daily rates (“ADR”), we may not be able to force Chesapeake Hospitality to change its method of operating our hotels. Additionally, in the event that we need to replace Chesapeake Hospitality or any other management companies in the future, we may be required by the terms of the applicable management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.

Our ability to make distributions to the Company’s stockholders is subject to fluctuations in our financial performance, operating results and capital improvement requirements.

As a REIT, the Company is required to distribute, as “qualifying distributions,” at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items), each year to the Company’s stockholders. However, several factors may make us unable to declare or pay distributions to the Company’s stockholders, including poor operating results and financial performance or unanticipated capital improvements to our hotels, including capital improvements that may be required by our franchisors.

 

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We lease all of our hotels to our TRS Lessees. Our TRS Lessees are subject to hotel operating risks, including risks of sustaining operating losses after payment of hotel operating expenses, including management fees. Among the factors which could cause our TRS Lessees to fail to make required rent payments are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among the factors that could reduce the net operating profits of our TRS Lessees are decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates at our hotels.

The amount of any dividend distributions to holders of the Company’s common stock is in the sole discretion of the Company’s board of directors, which will consider, among other factors, our financial performance, debt service obligations, debt covenants and capital expenditure requirements. We cannot assure you that we will continue to generate sufficient cash to fund distributions.

Geographic concentration of our hotels makes our business vulnerable to economic downturns in the mid-Atlantic and southern United States.

Our hotels are located in the mid-Atlantic and southern United States. As a result, economic conditions in the mid-Atlantic and southern United States significantly affect our revenues and the value of our hotels to a greater extent than if we had a more geographically diversified portfolio. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any resulting oversupply or reduced demand for hotels in the mid-Atlantic and southern United States and in our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.

A substantial number of our hotels operate under a brand owned by IHG, Starwood or Hilton; therefore, we are subject to risks associated with concentrating our portfolio in three brands.

In our portfolio, the majority of the hotels that we owned as of December 31, 2014 utilize brands owned by IHG, Starwood or Hilton. As a result, our success is dependent in part on the continued success of IHG, Starwood or Hilton and their respective brands. If market recognition or the positive perception of IHG, Starwood and/or Hilton is reduced or compromised, the goodwill associated with the IHG-, Starwood- and Hilton-branded hotels in our portfolio may be adversely affected, which may have a material adverse effect our business, financial condition, results of operations and our ability to make distributions to our stockholders.

Hedging against interest rate exposure may adversely affect us and our hedges may fail to protect us from the losses that the hedges were designed to offset.

Subject to maintaining the Company’s qualification as a REIT, we may elect to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:

 

    interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

 

    available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

 

    the financial instruments we select may not have the effect of reducing our interest rate risk;

 

    the duration of the hedge may not match the duration of the related liability;

 

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    the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

 

    the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, may fail to protect us from the losses that the hedges were designed to offset and could have a material adverse effect on us.

Our investment opportunities and growth prospects may be affected by competition for acquisitions.

We compete for investment opportunities with other entities, some of which have substantially greater financial resources than we do. This competition may generally limit the number of suitable investment opportunities offered to us, which may limit our ability to grow. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms, or at all.

We have identified a material weakness related to our internal control over financial reporting and concluded that our internal control over financial reporting and disclosure controls and procedures were ineffective as of December 31, 2014. These material weaknesses remain unremedied, which could continue to impact our ability to report results of operations and financial condition accurately and in a timely manner. As a result, the Company’s stockholders could lose confidence in our financial results, which could harm our business and the value of the Company’s common shares.

Our management assessed the effectiveness of our internal control over financial reporting and disclosure controls and procedures as at December 31, 2014 pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related SEC rules and concluded that our internal control over financial reporting and disclosure controls and procedures were ineffective.

In connection with our preparation of this annual report, management identified a material weakness in our internal control over financial reporting, as set forth in Item 9A. Although we intend to remediate such material weakness as set out in Item 9A, we have not yet been able to address this material weakness and it may continue to remain unremedied for some time, which could adversely impact the accuracy and timeliness of future reports and filings we make to the SEC and could have a material adverse effect on our business, results of operations, financial condition and liquidity, in addition to the diversion of management’s attention and resources. In addition, ineffective internal control over financial reporting and disclosure controls and procedures could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among others, the SEC.

We may in the future discover additional areas of our internal controls that need improvement. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective.

We are subject to cyber-security risks related to breaches of security pertaining to sensitive company, customer, employee and vendor information as well as breaches in the technology that manages operations and other business processes.

Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation, updating and independent third party verification, our information technology systems, and those of our third party providers, could become subject to cyber attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to interruption to systems availability, denial of access to

 

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and misuse of applications required by our customers. Access to internal applications required to plan our operations could be denied or misused. Inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result in lost sales, business delays, negative publicity and could have a material effect on our business.

Risks Related to Conflicts of Interest of Our Officers and Directors

Conflicts of interest could result in our executive officers and certain of our directors acting in a manner other than in the Company’s stockholders’ best interest.

Conflicts of interest relating to Chesapeake Hospitality, the entity that manages the properties, and the terms of its management agreements may lead to management decisions that are not in the stockholders’ best interest.

Conflicts of interest relating to Chesapeake Hospitality may lead to management decisions that are not in the stockholders’ best interest. Certain of our officers and directors including Andrew M. Sims, our chairman and chief executive officer and Kim E. Sims, who currently serves on our board of directors, together own a substantial interest in Chesapeake Hospitality which manages our hotel properties. In addition, until December 2014, unless a majority of independent directors concludes otherwise, Chesapeake Hospitality had a right of first offer to manage hotels we acquire in the future, subject to certain exceptions, and received substantial management fees based on the revenues and operating profit of our hotels. Our management agreements with Chesapeake Hospitality, including the financial terms thereof, were not negotiated on an arm’s-length basis and may have been less favorable to us than we could have obtained from third parties. Under the Master Agreement executed in December 2014, Chesapeake Hospitality no longer has a right of first offer to manage hotels acquired in the future.

Our management agreements establish the terms of Chesapeake Hospitality’s management of our hotels. The new Master Agreement provides that in the event the agreement is terminated in connection with the sale of a hotel, and Chesapeake Hospitality accepts an offer to manage another hotel which is reasonable comparable to the hotel that was sold, we will not be liable for any termination fee. If we do not offer Chesapeake Hospitality such opportunity or Chesapeake Hospitality declines such opportunity, then a termination fee equivalent to the lesser of the management fees paid for the prior twelve-month period or the management fees for the period prior to the sale that is equal to the number of months remaining under the term of the agreement. If we terminate the agreement at the end of any renewable five-year term, Chesapeake Hospitality is due a termination fee equivalent to one month’s management fees, as determined under the agreement.

As significant owners of Chesapeake Hospitality, which would receive any management and management termination fees payable by us under the management agreement, Andrew M. Sims and Kim E. Sims may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best interests of the Company’s stockholders to do so. In addition, Andrew M. Sims will have conflicts of interest with respect to decisions to enforce provisions of the management agreement, including any termination thereof.

There can be no assurance that provisions in our bylaws will always be successful in mitigating conflicts of interest.

Under our bylaws, a committee consisting of only independent directors must approve any transaction between us and Chesapeake Hospitality or its affiliates or any interested director. However, there can be no assurance that these policies always will be successful in mitigating such conflicts, and decisions could be made that might not fully reflect the interests of all of the Company’s stockholders.

 

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Certain of our officers and directors hold units in our Operating Partnership and may seek to avoid adverse tax consequences, which could result from transactions that would otherwise benefit the Company’s stockholders.

Holders of units in our Operating Partnership, including members of our management team, may suffer adverse tax consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including Andrew M. Sims, Kim E. Sims, Edward S. Stein, and a trust controlled by Andrew M. Sims, Kim E. Sims and a former member of our board of directors, may have different objectives than holders of the Company’s common stock regarding the appropriate pricing and timing of a property’s sale, or the timing and amount of a property’s refinancing. These individuals, together with their affiliates, owned as of December 31, 2014, in the aggregate, approximately 7.6% of the outstanding units in our Operating Partnership. These individuals may influence us not to sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to the Company’s stockholders, or they may influence us to enter into tax-deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

Our agreements with Chesapeake Hospitality and its affiliates, including the contribution agreements and the partnership agreement of our Operating Partnership, were not negotiated on an arms’ length basis and may be less favorable to us than we could have obtained from third parties.

In connection with the Company’s initial public offering, we entered into various agreements with Chesapeake Hospitality and its affiliates, including contribution agreements, a master management agreement, a strategic alliance agreement, subleases, the partnership agreement of our Operating Partnership and employment agreements – of which only the contribution agreements and the partnership agreement of our Operating Partnership have not expired. In addition, we entered into various separate management agreements with Chesapeake Hospitality which have all been superseded by the new master management agreement and new individual hotel agreements executed in December 2014. The terms of all of these agreements were determined by our management team, who had conflicts of interest as described above and ownership interests in Chesapeake Hospitality and its affiliates. The terms of all of these agreements may be less favorable to us than we could have obtained from third parties.

Risks Related to the Lodging Industry

Our ability to comply with the terms of the indentures, our ability to make distributions to the Company’s stockholders and the value of our hotels in general, may be adversely affected by factors in the lodging industry.

Operating Risks

Our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:

 

    competition from other hotel properties in our markets;

 

    over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels;

 

    dependence on business and commercial travelers and tourism;

 

    increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;

 

    increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by increased room rates;

 

    changes in interest rates and in the availability, cost and terms of debt financing;

 

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

 

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    adverse effects of international, national, regional and local economic and market conditions;

 

    adverse effects of a downturn in the lodging industry; and

 

    risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.

These factors could reduce the net income of our TRS Lessees, which in turn could adversely affect the value of our hotels and our ability to comply with the terms of the indenture and to make distributions to the Company’s stockholders.

Competition for Acquisitions

We may compete for investment opportunities with entities that may have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.

Seasonality of the Hotel Business

The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to the Company’s stockholders.

Investment Concentration in Particular Segments of a Single Industry

Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the full-service, upscale and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our financial condition and the extent to which cash may be available for distribution to the Company’s stockholders.

Capital Expenditures

Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts for capital improvements to the secured properties on a monthly basis. For the years ended December 31, 2014 and 2013, we spent approximately $9.8 million and approximately $4.9 million, respectively, on capital improvements to our hotels. Capital improvements and renovation projects may give rise to the following risks:

 

    possible environmental problems;

 

    construction cost overruns and delays;

 

    a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; and

 

    uncertainties as to market demand or a loss of market demand after capital improvements have begun.

The costs of all these capital improvements as well as future capital improvements could adversely affect our financial condition and amounts available for distribution to the Company’s stockholders.

 

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Operating our hotels under franchise agreements could increase our operating costs and lower our net income.

Most of our hotels operate under franchise agreements which subject us to risks in the event of negative publicity related to one of our franchisors.

The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that we, our TRS Lessees, and the management company follow their standards. Failure by us, our TRS Lessees or the management company to maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel. As a condition of continuing a franchise license, a franchisor may require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.

If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license or to operate the hotel without a franchise license. The loss of a franchise license could significantly decrease the revenues at the hotel and reduce the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations, our ability to comply with the terms of the indentures and reduce our cash available for distribution to stockholders.

Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or refinance our hotels, which could have a material adverse effect on us.

Franchise agreements typically contain covenants that may affect our ability to sell or refinance a hotel, including requirements to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisor’s consent is not forthcoming, the terms of a sale or refinancing may be less favorable to us than would otherwise be the case. Some of our franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the transferee agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels, we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less favorable to us, which could have a material adverse effect on our financial condition and the execution of our strategies.

Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to make distributions to stockholders.

We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general economic conditions, and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks, including risks associated with:

 

    construction delays or cost overruns that may increase project costs;

 

    receipt of zoning, occupancy and other required governmental permits and authorizations;

 

    development costs incurred for projects that are not pursued to completion;

 

    acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

 

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    financing; and

 

    governmental restrictions on the nature or size of a project.

We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a project on time or within budget would increase our operating costs and reduce our net income.

The hotel business is capital intensive and our inability to obtain financing could limit our growth.

Our hotel properties will require periodic capital expenditures and renovation to remain competitive. Acquisitions or development of additional hotel properties will require significant capital expenditures. In addition, several of our mortgage lenders require that we set aside annual amounts for capital improvements to the secured property. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we must distribute at least 90.0% of our REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status. As a result, our ability to fund significant capital expenditures, acquisitions or hotel development through retained earnings is very limited. Consequently, we rely upon the availability of debt or equity capital to fund any significant investments or capital improvements, but due to the recent recession and disruption of capital markets, these sources of funds may not yet be available to us on reasonable terms and conditions. Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing which will depend on market conditions. Neither our charter nor our bylaws limit the amount of debt that we can incur. However, we cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to the Company’s stockholders.

We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist activities, such as those on September 11, 2001, or losses from domestic terrorist activities, such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage in conjunction with the Terrorism Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured losses resulting from acts of terrorism.

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

Noncompliance with governmental regulations could adversely affect our operating results.

Environmental Matters

Our hotels may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

 

    our knowledge of the contamination;

 

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    the timing of the contamination;

 

    the cause of the contamination; or

 

    the party responsible for the contamination of the property.

There may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to comply with our covenants and to pay distributions to stockholders.

Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to comply with the terms of the indentures and to make distributions to the Company’s stockholders could be adversely affected.

Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.

The hotel properties that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might include:

 

    liabilities for environmental conditions;

 

    losses in excess of our insured coverage;

 

    accrued but unpaid liabilities incurred in the ordinary course of business;

 

    tax, legal and regulatory liabilities;

 

    claims of customers, vendors or other persons dealing with the Company’s predecessors prior to our formation or acquisition transactions that had not been asserted or were unknown prior to the Company’s formation or acquisition transactions; and

 

    claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of our properties.

In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations and our ability to make distributions to the Company’s stockholders.

 

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Future terrorist activities may adversely affect, and create uncertainty in, our business.

Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years. Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and/or our results of operations and financial condition, as a whole.

We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for our hotels.

Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the outbreaks of SARS and avian flu in 2003 had a severe impact on the travel industry, and the outbreaks of H1N1 flu in 2009 threatened to have a similar impact. A prolonged recurrence of SARS, avian flu, H1N1 flu, Ebola virus or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for our hotels and adversely affect our financial conditions and results of operations.

General Risks Related to the Real Estate Industry

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions is limited.

The real estate market is affected by many factors that are beyond our control, including:

 

    adverse changes in international, national, regional and local economic and market conditions;

 

    changes in interest rates and in the cost and terms of debt financing;

 

    absence of liquidity in credit markets which limits the availability and amount of debt financing;

 

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

 

    the ongoing need for capital improvements, particularly in older structures;

 

    changes in operating expenses; and

 

    civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, which may result in uninsured losses, and acts of war or terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001.

We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.

We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt

 

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that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to comply with the terms of the indentures and to pay distributions to stockholders.

Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder dilution.

Our business strategy may not ultimately be successful and may not provide positive returns on our investments. Acquisitions may cause disruptions in our operations and divert management’s attention away from day-to-day operations. The issuance of equity securities in connection with any acquisition could be substantially dilutive to the Company’s stockholders.

Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, the presence of significant mold could expose us to liability from our guests, employees or the management company and others if property damage or health concerns arise and could harm our reputation.

Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to make distributions to the Company’s stockholders.

Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to make distributions to the Company’s stockholders could be materially and adversely affected and the market price of the Company’s common shares could decline.

Risks Related to Our Organization and Structure

Our ability to effect a merger or other business combination transaction may be restricted by our Operating Partnership agreement.

In the event of a change of control of the Company, the limited partners of our Operating Partnership will have the right, for a period of 30 days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the partnership agreement. This cash redemption right may make it more unlikely or difficult for a third party to propose or consummate a change of control transaction, even if such transaction were in the best interests of the Company’s stockholders.

Provisions of the Company’s charter may limit the ability of a third party to acquire control of the Company.

Aggregate Share and Common Share Ownership Limits

The Company’s charter provides that no person may directly or indirectly own more than 9.9% of the value of the Company’s outstanding shares of capital stock or more than 9.9% of the number of the Company’s outstanding shares of common stock. These ownership limitations may prevent an acquisition of control of the

 

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Company by a third party without the Company’s board of directors’ approval, even if the Company’s stockholders believe the change of control is in their interest. The Company’s board of directors has discretion to waive that ownership limit if, including other considerations, the board receives evidence that ownership in excess of the limit will not jeopardize the Company’s REIT status.

Authority to Issue Stock

The Company’s amended and restated charter authorizes our board of directors to issue up to 49,000,000 shares of common stock and up to 1,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of the Company, including transactions at a premium over the market price of the Company’s stock, even if stockholders believe that a change of control is in their interest. The Company will be able to issue additional shares of common or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company’s securities may be listed or traded.

Provisions of Maryland law may limit the ability of a third party to acquire control of the Company.

Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of the Company’s common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10.0% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of the Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by the Company’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

The Company has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the Company’s board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in the Company’s bylaws. However, the Company’s board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and the Company may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. The Company’s board of directors has the exclusive power to amend the Company’s bylaws.

Additionally, Title 8, Subtitle 3 of the MGCL permits the Company’s board of directors, without stockholder approval and regardless of what is currently provided in the Company’s charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) the Company does not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for the Company or of delaying, deferring or preventing a change in control of the Company under the circumstances that otherwise could provide the holders of the Company’s common stock with the opportunity to realize a premium over the then current market price.

 

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Provisions in the Company’s executive officers’ employment agreements may make a change of control of the Company more costly or difficult.

The Company’s employment agreements with Andrew M. Sims, its chief executive officer, David R. Folsom, its president and chief operating officer, and Anthony E. Domalski, its chief financial officer, contain provisions providing for substantial payments to these officers in the event of a change of control of the Company. Specifically, if the Company terminates these executive’s employment without cause or the executive resigns with good reason, which includes a failure to nominate Andrew M. Sims to the Company’s board of directors or his involuntary removal from the Company’s board of directors, unless for cause or by vote of the stockholders, or if there is a change of control, each of these executives is entitled to the following:

 

    any accrued but unpaid salary and bonuses;

 

    vesting of any previously issued stock options and restricted stock;

 

    payment of the executive’s life, health and disability insurance coverage for a period of five years following termination;

 

    any unreimbursed expenses; and

 

    a severance payment equal to three times for Andrew M. Sims’, David R. Folsom’s and Anthony E. Domalski’s respective combined salary and actual bonus compensation for the preceding fiscal year.

In addition, these executives will receive additional payments to compensate them for the additional taxes, if any, imposed on them under Section 4999 of the Code by reason of receipt of excess parachute payments. We will not be able to deduct any of the above amounts paid to the executives for tax purposes.

These provisions may make a change of control of the Company, even if it is in the best interests of the Company’s stockholders, more costly and difficult and may reduce the amounts the Company’s stockholders would receive in a change of control transaction.

Our ownership limitations may restrict or prevent you from engaging in certain transfers of the Company’s common stock.

In order to maintain the Company’s REIT qualification, it cannot be closely held (i.e., more than 50.0% in value of our outstanding stock cannot be owned, directly or indirectly, by five or fewer individuals during the last half of any taxable year (other than the first year for which a REIT election is made)). To preserve the Company’s REIT qualification, the Company’s charter contains a 9.9% aggregate share ownership limit and a 9.9% common share ownership limit. Generally, any shares of the Company’s stock owned by affiliated persons will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.

If anyone transfers shares in a way that would violate the aggregate share ownership limit or the common share ownership limit, or prevent the Company from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or fails to preserve the Company’s continued qualification as a REIT, then the Company will consider the initial intended transfer to be null and void from the outset. The intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires shares in violation of the aggregate share ownership limit, the common share ownership limit or the other restrictions on transfer in the Company’s charter bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of the Company’s stock falls between the date of purchase and the date of redemption or sale.

 

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The board of directors’ revocation of the Company’s REIT status without stockholder approval may decrease the Company’s stockholders’ total return.

The Company’s charter provides that the Company’s board of directors may revoke or otherwise terminate the Company’s REIT election, without the approval of the Company’s stockholders, if the Company’s board of directors determines that it is no longer in the Company’s best interest to continue to qualify as a REIT. If the Company ceases to be a REIT, it would become subject to federal income tax on its taxable income and would no longer be required to distribute most of its taxable income to the Company’s stockholders, which may have adverse consequences on our total return to the Company’s stockholders.

The ability of the Company’s board of directors to change the Company’s major corporate policies may not be in your best interest.

The Company’s board of directors determines the Company’s major corporate policies, including its acquisition, financing, growth, operations and distribution policies. The Company’s board of directors may amend or revise these and other policies from time to time without the vote or consent of the Company’s stockholders.

We do not have the ability to control the sale of any hotel properties acquired through our joint venture program with Carlyle.

We own, through our joint venture program with Carlyle, a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort. Carlyle controls all major decisions relating to this investment, including, but not limited to, the sale of the property. We will not be able to control the timing and terms and conditions of sale of our interest in the Crowne Plaza Hollywood Beach Resort.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a joint venture partners’ financial condition and disputes between our joint venture partners and us.

In August 2007, we purchased a 25.0% indirect, noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. Carlyle owns a 75.0% controlling interest in the joint venture and is in a position to exercise sole decision-making authority regarding the property including, but not limited to, the method and timing of disposition of the property.

We may co-invest in the future with Carlyle or other third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Partners or joint venture partners may have economic or other business interests or goals, which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale or refinance of existing indebtedness, because neither we, nor the partner or joint venture partner, would have full control over the partnership or joint venture. Disputes between us and partners or joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or joint venture partners might result in subjecting properties owned by the partnership or joint venture to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners or joint venture partners. For example, we may be required to guarantee indebtedness incurred by a partnership, joint venture or other entity for the purchase or renovation of a hotel property. Such a

 

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guarantee may be on a joint and several basis with our partner or joint venture partner in which case we may be liable in the event such party defaults on its guaranty obligation.

Our success depends on key personnel whose continued service is not guaranteed.

We depend on the efforts and expertise of our chairman and chief executive officer, Andrew M. Sims; our president and chief operating officer, David R. Folsom; and our chief financial officer, Anthony E. Domalski, to manage our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations.

Federal Income Tax Risks Related to the Company’s Status as a REIT

The federal income tax laws governing REITs are complex.

The Company intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. The Company has not requested or obtained a ruling from the Internal Revenue Service, or the IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that the Company will be successful in operating in a manner that will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of the Company’s qualification as a REIT. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. The Company and its stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect the Company’s ability to qualify as a REIT.

Failure to make distributions could subject the Company to tax.

In order to maintain its qualification as a REIT, each year the Company must pay out to its stockholders in distributions, as “qualifying distributions,” at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid and excluding net capital gains and reduced by certain non-cash items. To the extent that the Company satisfies this distribution requirement, but distributes less than 100.0% of its taxable income (including its net capital gain), it will be subject to federal corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a 4.0% nondeductible excise tax if the actual amount that it pays out to its stockholders as a “qualifying distribution” for a calendar year is less than the sum of: (A) 85% of our ordinary income for such calendar year, plus (B) 95% of our capital gain net income for such calendar year. The Company’s only recurring source of funds to make these distributions comes from rent received from its TRS Lessees whose only recurring source of funds with which to make these payments and distributions is the net cash flow (after payment of operating and other costs and expenses and management fees) from hotel operations, and any dividend and other distributions that we may receive from MHI Holding. Accordingly, the Company may be required to borrow money or sell assets to make distributions sufficient to enable it to pay out enough of its taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4.0% nondeductible excise tax in a particular year.

Failure to qualify as a REIT would subject the Company to federal income tax.

If the Company fails to qualify as a REIT in any taxable year, it will be required to pay federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause the Company to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results in order to pay any such tax. Unless it is entitled to relief under

 

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certain statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost its qualification. If the Company lost its REIT status, its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, the Company would no longer be required to make distributions to its stockholders, and it would not be able to deduct any stockholder distributions in computing its taxable income. This would substantially reduce the Company’s earnings, cash available to pay distributions, and the value of common stock.

Failure to qualify as a REIT may cause the Company to reduce or eliminate distributions to its stockholders, and the Company may face increased difficulty in raising capital or obtaining financing.

If the Company fails to remain qualified as a REIT, it may have to reduce or eliminate any distributions to its stockholders in order to satisfy its income tax liabilities. Any distributions that the Company does make to its stockholders would be treated as taxable dividends to the extent of its current and accumulated earnings and profits. This may result in negative investor and market perception regarding the market value of the Company’s common stock, and the value of its common stock may be reduced. In addition, the Company and the Operating Partnership may face increased difficulty in raising capital or obtaining financing if the Company fails to qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of its market valuation.

MHI Holding increases our overall tax liability.

Our TRS Lessees are single-member limited liability companies that are wholly-owned by MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessees are disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes, such that the assets, liabilities, income, gains, losses, credits and deductions of our TRS Lessees are treated as the assets, liabilities, income, gains, losses, credits and deductions of MHI Holding for U.S. federal income tax purposes. MHI Holding is subject to federal and state income tax on its taxable income, which will consist of the revenues from the hotels leased by the Company’s TRS Lessees, net of the operating expenses for such hotels and rent payments. Accordingly, although the Company’s ownership of MHI Holding and the TRS Lessees will allow it to participate in the operating income from its hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any, will be available for distribution to the Company.

The Company will incur a 100.0% excise tax on its transactions with MHI Holding and the TRS Lessees that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by the TRS Lessees exceeds an arm’s-length rental amount, such amount potentially will be subject to this excise tax. The Company intends that all transactions among itself, MHI Holding and the TRS Lessees will be conducted on an arm’s-length basis and, therefore, that the rent paid by the TRS Lessees will not be subject to this excise tax.

Even if the Company remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.

Even if the Company remains qualified for taxation as a REIT, it may be subject to certain federal, state and local taxes on its income and assets. For example:

 

    it will be required to pay tax on undistributed REIT taxable income (including net capital gain);

 

    it may be required to pay “alternative minimum tax” on its items of tax preference;

 

    if it has net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it must pay tax on that income at the highest corporate rate;

 

   

if it (or the Operating Partnership or any subsidiary of the Operating Partnership other than MHI Holding) sells a property in a “prohibited transaction,” its gain or its share of such gain, from the sale

 

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would be subject to a 100.0% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business;

 

    MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its taxable income; and

 

    it may experience increases in its state and/or local income tax burdens as states and localities continue to look to modify their tax laws in order to raise revenues, including by (among other things) changing from a net taxable income-based regime to a gross receipts-based regime, suspending and/or limiting the use of net operating losses, increasing tax rates and fees, imposing surcharges and subjecting partnerships to an entity-level tax, and limiting or disallowing certain U.S. federal deductions such as the dividends-paid deduction.

Complying with REIT requirements may cause the Company to forgo attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.

To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its stock.

In general, when applying these tests, the Company is treated as owning its proportionate share of the Operating Partnership’s assets (which share is determined in accordance with the Company’s capital interest in the Operating Partnership) and as being entitled to the Operating Partnership’s income attributable to such share. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for its stockholders.

Complying with REIT requirements may force the Company to liquidate otherwise attractive investments, which could result in an overall loss on its investments.

To maintain qualification as a REIT, the Company must ensure that at the end of each calendar quarter at least 75.0% of the value of its assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of the Company’s assets (other than securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of the Company’s assets (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0% of the value of the Company’s total assets can be represented by securities of one or more taxable REIT subsidiaries.

When applying these asset tests, the Company is treated as owning its proportionate share of the Operating Partnership’s assets (which is determined in accordance with the Company’s capital interest in the Operating Partnership). If the Company fails to comply with these requirements at the end of any calendar quarter, it must correct such failure within 30 days after the end of the calendar quarter to avoid losing its REIT status and suffering adverse tax consequences. If the Company fails to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, the Company may be able to preserve its REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, we will be required to dispose of the assets causing the failure within six months after the last day of the quarter in which the failure occurred, and it will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets.

As a result, we may be required to liquidate otherwise attractive investments.

 

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Taxation of dividend income could make the Company’s common stock less attractive to investors and reduce the market price of its common stock.

The federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended at any time. Any new laws or interpretations may take effect retroactively and could adversely affect the Company or could adversely affect its stockholders. Under recently-enacted legislation, “qualified dividends,” which include dividends from domestic C corporations that are paid to non-corporate stockholders, are subject to a reduced maximum U.S. federal income tax rate of 20.0%. Because REITs generally do not pay corporate-level taxes as a result of the dividends-paid deduction to which they are entitled, dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from non-REIT corporations would be subject to lower tax rates.

If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, the Company could cease to qualify as a REIT and suffer other adverse consequences.

We believe that the Operating Partnership will continue to qualify to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including the Company, will be required to pay tax on its allocable share of the Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the Operating Partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for federal income tax purposes, the Company could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause the Company to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including the Company.

The Company’s failure to qualify as a REIT would have serious adverse consequences to its stockholders.

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ended December 31, 2004. The Company believes it has operated so as to qualify as a REIT under the Code and believes that its current organization and method of operation comply with the rules and regulations promulgated under the Code to enable the Company to continue to qualify as a REIT. However, it is possible that the Company has been organized or has operated in a manner that would not allow it to qualify as a REIT, or that its future operations could cause it to fail to qualify. Qualification as a REIT requires the Company to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex sections of the Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within its control. For example, in order to qualify as a REIT, the Company must satisfy a 75.0% gross income test pursuant to Code Section 856(c)(3) and a 95.0% gross income test pursuant to Code Section 856(c)(2) each taxable year. In addition, the Company must pay dividends, as “qualifying distributions,” to its stockholders aggregating annually at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding capital gains, and reduced by certain non-cash items) and must satisfy specified asset tests on a quarterly basis. While historically the Company has satisfied the distribution requirement discussed above by making cash distributions to its stockholders, the Company may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in the Company’s case because its holds its assets through the Operating Partnership.

 

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If MHI Holding does not qualify as a taxable REIT subsidiary, or if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to its shareholders.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. The Company currently leases substantially all of its hotels to the TRS Lessees, which are disregarded entities for U.S. federal income tax purposes and are wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects to continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a “related party tenant” with respect to the Company’s properties that are managed by an independent hotel management company that qualifies as an “eligible independent contractor.” The Company believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary for federal income tax purposes, but there can be no assurance that the IRS will not challenge this status or that a court would not sustain such a challenge. If the IRS were successful in such challenge, it is possible that the Company would fail to meet the asset tests applicable to REITs and substantially all of its income would fail to be qualifying income for purposes of the two gross income tests. If the Company failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax purposes.

Additionally, if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail to qualify as a REIT. Each hotel manager that enters into a management contract with the TRS Lessees must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid by the TRS Lessees to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, a hotel manager must not own, directly or through its shareholders, more than 35.0% of the Company’s outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although the Company intends to monitor ownership of its shares by its hotel manager and their owners, there can be no assurance that these ownership levels will not be exceeded.

Foreign investors may be subject to U.S. tax on the disposition of the Company’s stock if the Company does not qualify as a “domestically controlled” REIT.

A foreign person disposing of a “U.S. real property interest,” which includes stock of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to U.S. federal income tax under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) on the gain recognized on the disposition. Additionally, the transferee will be required to withhold 10% on the amount realized on the disposition. This 10% is creditable against the U.S. federal income tax liability of the foreign transferor in connection with such transferor’s disposition of the Company’s stock. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled” (i.e., less than 50% of the REIT’s capital stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence). We cannot be sure that the Company will qualify as a “domestically controlled” REIT. If the Company does not so qualify, gain realized by foreign investors on a sale of the Company’s stock would be subject to U.S. income and withholding tax under FIRPTA, unless the Company’s stock were traded on an established securities market and a foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of the Company’s outstanding stock.

Investors may be subject to a 3.8% Medicare tax in connection with an investment in the Company’s common stock or the Notes.

The U.S. tax laws impose a 3.8% “Medicare tax” on the “net investment income” (i.e., interest, dividends, capital gains, annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately), and of estates and trusts. Interest on the Notes and gains from the disposition of the Notes may be subject to the

 

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Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the Medicare tax to an investment in the Notes in light of such investors’ particular circumstances.

Investors may be subject to U.S. withholding tax under the “Foreign Account Tax Compliance Act.”

On March 18, 2010, the Hiring Incentives to Restore Employment Act, or the HIRE Act, was enacted in the United States. The HIRE Act includes provisions known as the Foreign Account Tax Compliance Act, or FATCA, that generally impose a 30% U.S. withholding tax on “withholdable payments,” which consist of (i) U.S.-source dividends, interest, rents and other “fixed or determinable annual or periodical income” paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2016 to (a) “foreign financial institutions” unless (x) they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners or (y) they comply with the terms of any FATCA intergovernmental agreement executed between the authorities in their jurisdiction and the U.S., and (b) “non-financial foreign entities” (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct and indirect U.S. owners. Final regulations under FATCA were issued by the IRS on January 17, 2013, which were supplemented by additional regulations and guidance. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.

A foreign investor that receives dividends on the Company’s common stock or gross proceeds from a disposition of shares of the Company’s common stock may be subject to FATCA withholding tax with respect to such dividends or gross proceeds.

Foreign investors will be subject to U.S. withholding tax on the receipt of ordinary dividends on the Company’s stock.

The portion of dividends received by a foreign investor payable out of the Company’s current and accumulated earnings and profits which are not attributable to capital gains and which are not effectively connected with a U.S. trade or business of the foreign investor will generally be treated as ordinary income and will be subject to U.S. withholding tax at the rate of 30%. This 30% withholding tax may be reduced by an applicable income tax treaty. The FATCA and nonresident withholding regulations are complex. The IRS recently issued additional temporary and final FATCA regulations that are complex and considerable in length. Even if the 30% withholding is reduced or eliminated by treaty for payments made to a foreign investor, FATCA withholding of 30% could apply depending upon the foreign investor’s FATCA status. Foreign investors should consult with their independent advisors as to the U.S. withholding tax consequences to such investors with respect to their investment in the Company’s stock in light of their particular circumstances, as well as determining the appropriate documentation required to reduce or eliminate U.S. withholding tax.

Foreign investors will be subject to U.S. income tax on the receipt of capital gain dividends on the Company’s stock.

Under FIRPTA, distributions that we make to a foreign investor that are attributable to gains from our dispositions of U.S. real property interests (“capital gain dividends”) will be treated as income that is effectively connected with a U.S. trade or business in the hands of the foreign investor. A foreign investor will be subject to U.S. federal income tax (at the rates applicable to U.S. investors) on any capital gain dividends, and will also be required to file U.S. federal income tax returns to report such capital gain dividends. Furthermore, capital gain dividends are subject to an additional 30% “branch profits tax” (which may be reduced by an applicable income tax treaty) in the hands of a foreign corporate investor.

Legislative or regulatory action could adversely affect you.

Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could adversely affect our investors. You are strongly encouraged to consult with your own tax

 

39


advisor with respect to the status of any legislative, regulatory or administrative developments, announcements and proposals and their potential impact on your investment in the Company’s stock.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

As of February 28, 2015, our portfolio consisted of the following properties (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics, for definitions of Occupancy, ADR, and RevPAR):

 

Wholly-Owned Properties

Number of
Rooms
  Occupancy
2014
  ADR
2014
  RevPAR
2014
  Occupancy
2013
  ADR
2013
  RevPAR
2013
  Occupancy
2012
  ADR
2012
  RevPAR
2012
 

Crowne Plaza Hampton Marina, Hampton, Virginia

    173        50.8   $ 93.17      $ 48.27        50.1   $ 95.27      $ 47.72        56.1   $ 90.50      $ 50.82   

Crowne Plaza Houston Downtown, Houston, Texas(1)

    259        76.1     138.93        105.66        74.6     133.51        99.64        68.7     124.16        85.34   

Crowne Plaza Jacksonville Riverfront, Jacksonville, Florida

    292        65.8     99.20        65.24        58.5     97.51        57.05        61.9     95.72        59.25   

Crowne Plaza Tampa Westshore, Tampa, Florida

    222        72.5     104.90        76.09        67.1     99.12        66.46        70.8     100.77        71.33   

DoubleTree by Hilton Philadelphia Airport, Philadelphia, Pennsylvania

    331        75.9     133.78        101.58        78.2     134.40        105.13        77.0     134.21        103.38   

DoubleTree by Hilton Brownstone – University, Raleigh, North Carolina

    190        73.4     122.60        90.04        69.9     111.56        78.03        67.9     104.12        70.73   

Georgian Terrace, Atlanta, Georgia(2)

    326        76.2     137.65        104.88        71.2     135.33        96.39        69.4     134.25        93.17   

Hilton Savannah DeSoto, Savannah, Georgia

    246        75.7     146.75        111.14        73.7     137.77        101.61        74.2     132.59        98.32   

Hilton Wilmington Riverside, Wilmington, North Carolina

    272        69.7     139.09        96.90        73.3     140.44        102.91        74.0     129.48        95.82   

Holiday Inn Laurel West, Laurel, Maryland

    207        60.8     89.08        54.19        61.5     87.68        53.90        66.9     88.66        59.34   

Sheraton Louisville Riverside, Jeffersonville, Indiana

    180        66.8     150.20        100.31        67.9     133.19        90.42        63.2     123.73        78.15   
 

 

 

                   

Subtotal

    2,698                     

Joint Venture Property

                                                           

Crowne Plaza Hollywood Beach Resort, Hollywood, Florida

    311        83.6   $ 162.15      $ 135.55        82.2   $ 157.87      $ 129.79        79.2   $ 147.37      $ 116.66   
 

 

 

                   

Total

    3,009                     
 

 

 

                   

 

(1) The operating statistics for the Crowne Plaza Houston Downtown rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of the hotel.
(2) The operating statistics for the Georgian Terrace rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of the hotel.

Item 3. Legal Proceedings

We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.

Item 4. Mine Safety Disclosure

Not applicable.

 

40


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Sotherly Hotels Inc.

Market Information

Prior to March 11, 2008, the Company’s common stock traded on the American Stock Exchange, or AMEX, under the symbol “MDH”. On March 11, 2008, we terminated our listing on the AMEX and listed the Company’s common stock on the NASDAQ® Global Market also under the symbol “MDH”. Upon completion of its name change, the Company changed its symbol to “SOHO”. The following table sets forth, for the indicated period, the high and low sales prices for the common stock, as reported on NASDAQ:

 

     Price Range  
         High              Low      

Year Ended December 31, 2014

     

First Quarter

   $     6.39       $     5.55   

Second Quarter

   $ 8.03       $ 6.47   

Third Quarter

   $ 8.20       $ 7.46   

Fourth Quarter

   $ 7.87       $ 7.07   

Year Ended December 31, 2013

     

First Quarter

   $ 4.35       $ 3.19   

Second Quarter

   $ 4.81       $ 3.29   

Third Quarter

   $ 4.80       $ 4.11   

Fourth Quarter

   $ 5.95       $ 4.46   

The closing price of the Company’s common stock on the NASDAQ Global Market on February 28, 2015 was $7.60 per share.

Stockholder Information

As of February 28, 2015, there were 79 holders of record of the Company’s common stock and as of February 28, 2015, there were 2,760 beneficial owners of the Company’s common stock.

In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s charter, subject to certain exceptions, limits the number of common shares that may be owned by any single person or affiliated group to 9.9% of the outstanding common shares.

Recent Sales of Unregistered Securities

On April 1, 2014, Kim E. Sims, a director of the Company, through the KES Family Limited Partnership, LLP, a holder of units in the Operating Partnership, redeemed 50,000 units in the Operating Partnership for an equivalent number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

On April 1, 2014, a holder of units in the Operating Partnership, redeemed 60,000 units in the Operating Partnership for an equivalent number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

41


On October 1, 2014, a holder of units in the Operating Partnership redeemed 200,000 units for an equivalent number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

On November 1, 2014, a holder of units in the Operating Partnership redeemed 3,300 units held by a trust for common shares, controlled by two members of the Board of Directors, and then sold the common shares for a total of $25,621, pursuant to the terms of the partnership agreement. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

On April 1, 2015, Kim E. Sims, a director of the Company, through the KES Family Limited Partnership, LLP, a holder of units in the Operating Partnership, redeemed 100,000 units in the Operating Partnership for an equivalent number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

Use of Proceeds from Registered Securities

During August and September 2014, the Company offered the sale of its stock in an “At-The-Market” offering. We sold a total of 17,255 shares generating net proceeds of $124,911, which were used to pay a portion of the costs of the offering.

Sotherly Hotels LP

Market Information

There is no established trading market for partnership units of the Operating Partnership. The Operating Partnership does not currently propose to offer partnership units to the public, and does not currently expect that a public market for those units will develop.

Partnership Unitholder Information

As of February 28, 2015, there were 12 holders of the Operating Partnership’s partnership units, including Sotherly Hotels Inc.

Recent Sales of Unregistered Securities

From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.

There were no sales of unregistered securities in the Operating Partnership during 2014.

Use of Proceeds from Registered Securities

On November 12, 2014, the Operating Partnership’s Registration Statement on Form S-3 (SEC File Nos. 333-199256 and 333-199256-01) was declared effective by the Securities and Exchange Commission, pursuant to which the Operating Partnership sold 7.00% senior unsecured notes due 2019 in the aggregate amount of $25.3 million at a price of $25 per note.

On November 24, 2014, the Operating Partnership used approximately $19.9 million of the net proceeds from the Note offering towards the early extinguishment of the $19.0 million secured loan (the “Bridge Loan”) with Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC, the proceeds of which had been used to acquire the Georgian Terrace.

 

42


Sotherly Hotels Inc. and Sotherly Hotels LP

Dividend and Distribution Information

The Company elected to be taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain qualification as a REIT, we are required to make annual distributions to the Company’s stockholders of at least 90.0% of our REIT taxable income, excluding net capital gain, which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles. Our ability to pay distributions to the Company’s stockholders will depend, in part, upon our receipt of distributions from our Operating Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, our TRS Lessees may retain any after-tax earnings.

The following table sets forth the Company’s common stock dividend payments to the Company’s stockholders for fiscal year 2013 to present. The same table sets forth the Operating Partnership’s distributions per common partnership unit for fiscal year 2013 to present:

 

Dividend (Distribution) Payments

 

Date Declared

  

For the Quarter Ended

  

Date Paid

   Amount per Share and Unit  

January 2013

   March 31, 2013    April 11, 2013    $     0.035   

April 2013

   June 30, 2013    July 11, 2013    $ 0.035   

July 2013

   September 30, 2013    October 11, 2013    $ 0.040   

October 2013

   December 31, 2013    January 10, 2014    $ 0.045   

January 2014

   March 31, 2014    April 11, 2014    $ 0.045   

April 2014

   June 30, 2014    July 11, 2014    $ 0.050   

July 2014

   September 30, 2014    October 15, 2014    $ 0.065   

October 2014

   December 31, 2014    January 9, 2015    $ 0.065   

January 2015

   March 31, 2015    April 10, 2015    $ 0.070   

In December 2008, in the interest of capital preservation and based on the expectation that the U.S. economy, and in particular the lodging industry, would continue to face declining operating trends through 2010, the Company amended its dividend policy and reduced the level of its cash dividend payments. Reducing and suspending the Company’s dividend during 2009 and 2010 did not jeopardize the Company’s REIT status as our 2009 distributions exceeded the minimum annual distribution requirement and operating losses in 2010 eliminated any distribution requirement for 2010. In July 2011, in part due to improving operating trends, we reevaluated our quarterly dividend policy and reinstated our quarterly common stock dividend (distribution), as outlined in the above table.

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

 

43


Item 6. Selected Financial Data

The following table sets forth selected historical financial data for Sotherly Hotels Inc. and Sotherly Hotels LP for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. The financial results for the Crowne Plaza Hollywood Beach Resort, in which we have a 25.0% indirect interest, are not consolidated as we account for our investment under the equity method of accounting. The following selected historical financial data was derived from audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K and in prior filings. The Company’s financial statements for the year ended December 31, 2014, have been audited by Grant Thornton LLP and for the years ended December 31, 2013 and 2012 have been audited by PBMares, LLP (formerly Witt Mares, PLC, which audited the Company’s financial statements for the years ended December 31, 2011 and 2010, our independent registered public accounting firms for such periods. The audited historical financial statements include reclassifications and all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and the results of operations as of those dates and for those periods under accounting principles generally accepted in the United States of America.

Certain revisions have been made to the prior period balances to correct immaterial errors. These immaterial corrections include adjustments to unreimbursed diesel spill clean-up costs, accrual of prior period bonuses and franchise fees, and classification of impairment charges, among others. Please refer to the Consolidated Financial Statements and Note 2 to the Consolidated Financial Statements for additional detail. In addition, as a result, these reclassifications as well as a recently discovered impairment of one of our hotel properties have resulted in changes to information previously disclosed in the Company’s earnings release for the fiscal year 2014.

The information presented below is only a summary and does not provide all of the information contained in our consolidated financial statements, including notes thereto, and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 

44


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

SELECTED HISTORICAL FINANCIAL DATA

 

    Year Ended
December 31,
2014
    Year Ended
December 31,
2013 
(Restated)
    Year Ended
December 31,
2012
(Restated)
    Year Ended
December 31,
2011
    Year Ended
December 31,
2010
 

Statement of Operations

         

Total Revenues

  $ 122,939,919      $ 89,374,527      $ 87,343,220      $ 81,172,504      $ 77,382,344   

Total Operating Expenses excluding Depreciation, Amortization and Impairment of Investments in Hotel Properties, net

    (95,290,304     (69,888,820     (68,519,401     (65,807,786     (62,451,362

Depreciation, Amortization and Impairment of Investments in Hotel Properties, net

    (15,144,284     (9,078,228     (8,661,769     (8,702,880     (8,506,802

Net Operating Income

    12,505,331        10,407,479        10,162,050        6,661,838        6,424,180   

Interest Income

    19,865        17,914        16,158        14,808        22,305   

Interest Expense

    (14,636,870     (9,606,479     (10,399,962     (10,821,815     (10,030,517

Other Income (Expense) – Net

    (354,558     (3,796,410     (3,941,594     (1,424,620     546,115   

Income Tax Benefit (Provision)

    1,727,723        (1,496,096     (1,246,397     (905,455     (214,344

Net Loss

    (738,509     (4,473,592     (5,409,745     (6,475,243     (3,252,261

Net Loss Attributable to Noncontrolling Interest

    153,838        989,623        1,241,868        1,630,797        869,317   

Net Loss Attributable to the Company

  $ (584,671   $ (3,483,969   $ (4,167,877   $ (4,844,446   $ (2,382,944

Statement of Cash Flows

         

Cash from Operations – net

  $ 14,851,255      $ 9,594,751      $ 9,011,957      $ 7,550,142      $ 4,728,270   

Cash used in Investing – net

    (71,096,578     (29,527,589     (3,156,121     (6,130,273     (3,469,608

Cash from (used in) Financing – net

    63,503,194        22,133,750        (3,090,079     (2,798     (1,756,261

Net Increase (Decrease) in Cash and Cash Equivalents

  $ 7,257,871      $ 2,200,912      $ 2,765,757      $ 1,417,071      $ (497,599

Balance Sheet

         

Investments in Hotel Properties – net

  $ 260,192,153      $ 202,645,633      $ 176,427,904      $ 181,469,432      $ 183,898,660   

Total Assets(1)

    299,820,043        228,169,081        204,223,0274        209,299,446        209,583,431   

Line of Credit

    —          —          —          25,537,290        75,197,858   

Mortgage Loans

    205,291,657        160,363,549        135,674,432        94,157,825        72,192,253   

Unsecured Notes

    52,900,000        27,600,000        —          —          —     

Redeemable Preferred Stock

    —          —          14,227,650        25,353,698        —     

Total Liabilities

    272,310,186        197,314,286        167,179,121        165,416,203        158,775,128   

Noncontrolling Interest(1)

    4,132,662        5,669,386        7,322,314        8,947,405        11,867,096   

Total Sotherly Hotels Inc. Stockholders’ Equity(1)

    23,377,195        25,185,409        29,731,639        34,935,838        38,941,207   

Operating Data

         

Average Number of Available Rooms

    2,622        2,148        2,113        2,111        2,110   

Total Number of Available Room Nights

    957,060        783,936        773,358        770,334        770,150   

Occupancy Percentage(2)

    70.3     67.4     68.9     66.2     66.0

Average Daily Rate (ADR)(2)

  $ 125.77      $ 118.91      $ 114.22      $ 110.24      $ 104.42   

RevPAR(2)

  $ 88.42      $ 80.16      $ 78.65      $ 72.94      $ 68.93   

Additional Financial Data

         

FFO(3)

  $ 14,765,677      $ 5,150,303      $ 3,842,699      $ 2,923,539      $ 5,971,900   

Adjusted FFO(3)

    14,142,080        10,766,147        9,218,032        5,577,805        5,315,321   

Hotel EBITDA(4)

    32,254,108        23,220,515        22,296,938        18,708,019        17,639,548   

Loss Per Basic Share

  $ (0.06   $ (0.34   $ (0.42   $ (0.50   $ (0.25

 

(1) As of the period end.

 

45


(2) Occupancy Percent is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available. ADR, is calculated by dividing the total daily room revenue by the total daily number of rooms sold. RevPAR is calculated by dividing the total daily room revenue by the total daily number of rooms available.
(3) Industry analysts and investors use Funds from Operations (“FFO”) as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with generally accepted accounting principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures.

 

   Adjusted FFO accounts for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment charges, investment in hotel property impairment, losses on early extinguishment of debt, change in the deferred income taxes, aborted offering costs, costs associated with the departure of executive officers and acquisition transaction costs.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.

 

  Year Ended
December 31,
2014
  Year Ended
December 31,
2013 
(Restated)
  Year Ended
December 31,
2012 
(Restated)
  Year Ended
December 31,
2011
  Year Ended
December 31,
2010
 

Net Loss

$ (738,509 $ (4,473,592 $ (5,409,745 $ (6,475,243 $ (3,252,261

Depreciation and Amortization

  11,969,284      8,467,228      8,661,769      8,702,880      8,506,802   

Equity in Depreciation on Joint Venture

  529,053      545,667      590,675      567,803      546,055   

Impairment of Investment in Hotel Properties, Net

  3,175,000     611,000      —        —        —     

Gain on Involuntary Conversion of Asset

  (169,151 )   —        —        —        —     

(Gain)/ Loss on Asset Disposal

  —        —        —        128,099      171,304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds From Operations

$ 14,765,677    $ 5,150,303    $ 3,842,699    $ 2,923,539    $ 5,971,900   

Realized and Unrealized (Gain)/Loss on Hedging Activities(A)

  —        (89,998   13,752      77,152      (830,614

Realized and Unrealized Loss on Warrant Derivative

  —        2,205,248      2,026,677      1,309,075      —     

(Increase)/Decrease in Deferred Income Taxes

  (1,961,663   1,370,189      1,241,848      685,189      174,035   

Impairment of Note Receivable

  —        —        110,871      —        —     

Aborted Offering Costs

  —        —        —        582,850      —     

Franchise Termination Fee

  351,800      —        —        —        —     

Acquisition Costs

  155,187      89,743      —        —        —     

Loss on Early Extinguishment of Debt(A)(B)

  831,079      2,040,662      1,982,184      —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted FFO

$ 14,142,080    $ 10,766,147    $ 9,218,032    $ 5,577,805    $ 5,315,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (A) Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture.
  (B) Except for the portion representing equity in loss on early extinguishment of debt of joint ventures, amounts are reflected in interest expense for the periods presented above.

 

(4) Hotel EBITDA represents the portion of net operating income before depreciation and amortization and corporate general and administrative expenses that related to our wholly-owned properties.

 

46


The following is a reconciliation of net income/(loss) to Hotel EBITDA for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.

 

  Year Ended
December 31,
2014
  Year Ended
December 31,
2013 
(Restated)
  Year Ended
December 31,
2012 
(Restated)
  Year Ended
December 31,
2011
  Year Ended
December 31,
2010
 

Net Loss

$ (738,509 $ (4,473,592 $ (5,409,745 $ (6,475,243 $ (3,252,261

Interest Expense

  14,636,870      9,606,479      10,399,962      10,821,815      10,030,517   

Interest Income

  (19,865   (17,914   (16,158   (14,808   (22,305

Income Tax Provision (Benefit)

  (1,727,723   1,496,096      1,246,397      905,455      214,344   

Depreciation and Amortization

  11,969,284      8,467,228      8,661,769      8,702,880      8,506,802   

Equity in (Earnings)/Loss of Joint Venture

  (307,370   (449,500   (178,138   60,094      (16,931

(Gain)/ Loss on Asset Disposal

  —        —        —        128,099      171,304   

Realized and Unrealized (Gain)/Loss on Hedging Activities

  —        —        —        (72,649   (700,488

Realized and Unrealized Loss on Warrant Derivative

  —        2,205,248      2,026,677      1,309,075      —     

Loss on Debt Extinguishment

  831,079     2,040,662      1,982,184      —        —     

Impairment of Investment in Hotel Properties, Net

  3,175,000     611,000      —        —        —     

Impairment of Note Receivable

  —        —        110,871      —        —     

Corporate General and Administrative Expenses

  5,085,949      4,360,582      4,078,826      4,025,794      3,389,764   

Net Lease Rental Income

  (350,000   (350,000   (350,000   (447,000   (443,000

Other Fee Income

  (300,607   (275,774   (255,707   (235,493   (238,198
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Hotel EBITDA

$ 32,254,108    $ 23,220,515    $ 22,296,938    $ 18,708,019    $ 17,639,548   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern United States. We commenced operations in December 2004 when the Company completed its initial public offering and thereafter consummated the acquisition of six initial hotel properties. Since the Company’s initial public offering, we have engaged in the following acquisitions and dispositions:

 

    On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront).

 

    On August 10, 2006, we sold the Holiday Inn Downtown Williamsburg.

 

    On September 20, 2006, we acquired the Louisville Ramada Riverfront Inn, which went through an extensive renovation and re-opened in May 2008 as the Sheraton Riverside Louisville.

 

    On August 8, 2007, through our joint venture with Carlyle, we acquired a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida.

 

    On October 29, 2007, we acquired a hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, which went through an extensive renovation and re-opened in March 2009 as the Crowne Plaza Tampa Westshore.

 

    On April 24, 2008, we acquired the Hampton Marina Hotel in Hampton, Virginia, which has been renovated and was converted to the Crowne Plaza Hampton Marina in October 2008.

 

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    On November 13, 2013, we acquired the Crowne Plaza Houston Downtown in Houston, Texas.

 

    On March 27, 2014, we acquired the Georgian Terrace in Atlanta, Georgia.

Our hotel portfolio currently consists of twelve full-service, primarily upscale and upper-upscale hotels with 3,009 rooms, ten of which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn, and one independent hotel. Eleven of these hotels, totaling 2,698 rooms, are 100% owned by subsidiaries of the Operating Partnership. We also own a 25.0% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. As of December 31, 2014, we owned the following hotel properties:

 

Property

   Number
of Rooms
    

Location

  

Date of Acquisition

   Chain Designation

Wholly-owned

           

Crowne Plaza Hampton Marina

     173       Hampton, VA    April 24, 2008    Upscale

Crowne Plaza Houston Downtown

     259       Houston, TX    November 13, 2013    Upscale

Crowne Plaza Jacksonville Riverfront

     292       Jacksonville, FL    July 22, 2005    Upscale

Crowne Plaza Tampa Westshore

     222       Tampa, FL    October 29, 2007    Upscale

DoubleTree by Hilton Brownstone-University

     190       Raleigh, NC    December 21, 2004    Upscale

DoubleTree by Hilton Philadelphia Airport

     331       Philadelphia, PA    December 21, 2004    Upscale

Georgian Terrace

     326       Atlanta, GA    March 27, 2014    Independent(1)

Hilton Savannah DeSoto

     246       Savannah, GA    December 21, 2004    Upper Upscale

Hilton Wilmington Riverside

     272       Wilmington, NC    December 21, 2004    Upper Upscale

Holiday Inn Laurel West

     207       Laurel, MD    December 21, 2004    Upper Mid-Scale

Sheraton Louisville Riverside

     180       Jeffersonville, IN    September 20, 2006    Upper Upscale
  

 

 

          
  2,698   

Joint Venture Property

Crowne Plaza Hollywood Beach Resort

  311    Hollywood, FL August 9, 2007 Upscale
  

 

 

          

Total

  3,009   
  

 

 

          

 

(1) We believe that the Georgian Terrace would carry a chain scale designation of upper upscale if it were a branded hotel.

We conduct substantially all our business through the Operating Partnership, Sotherly Hotels LP. The Company is the sole general partner of the Operating Partnership and owns an approximate 80.6% interest in the Operating Partnership, with the remaining interest being held by limited partners who were contributors of our initial hotel properties and related assets.

To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessees that are wholly-owned subsidiaries of the Operating Partnership, which then engage a hotel management company to operate the hotels under a management agreement. Our TRS Lessees have engaged Chesapeake Hospitality to manage our hotels. Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Key Operating Metrics

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

 

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

 

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

 

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

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all the additional variable operating costs associated with higher occupancy.

We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures”.

Results of Operations

Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013

The following table illustrates the key operating metrics for the years ended December 31, 2014 and 2013 for our wholly-owned properties during each respective reporting period (“actual” properties) as well as the key operating metrics for the nine wholly-owned properties that were under our control during all of 2013 (“same-store” properties). Accordingly, the same-store data does not reflect the performance of the Crowne Plaza Houston Downtown, which was acquired in November 2013, or the Georgian Terrace, which was acquired in March 2014. Each table excludes performance data for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we have a 25.0% indirect interest.

 

     Year Ended December 31, 2014     Year Ended December 31, 2013  
       Actual         Same-Store         Actual         Same-Store    

Occupancy %

     70.3     68.9     67.4     67.6

ADR

   $ 125.77      $ 122.29      $ 118.91      $ 118.82   

RevPAR

   $ 88.42      $ 84.23      $ 80.16      $ 80.32   

Revenue. Total revenue for the year ended December 31, 2014 was approximately $122.9 million, an increase of approximately $33.6 million, or 37.6%, from total revenue for the year ended December 31, 2013 of approximately $89.4 million. Approximately $31.0 million of the increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace. Within the remainder of the portfolio, revenue increases were strongest at our Hilton Savannah DeSoto, the DoubleTree by Hilton Brownstone – University, the Crowne Plaza Jacksonville Riverfront, the Crowne Plaza Tampa Westshore and the Sheraton Louisville Riverside properties. These increases offset revenue decreases at our properties in Wilmington, North Carolina and Philadelphia, Pennsylvania.

Room revenues at our properties for the year ended December 31, 2014 increased approximately $21.8 million, or 34.7%, to approximately $84.6 million compared to room revenues for the year ended December 31, 2013 of approximately $62.8 million. Approximately $19.7 million of the increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace. Within the remainder of the portfolio, room revenue increases were strongest at our Hilton Savannah DeSoto, the DoubleTree by Hilton Brownstone – University, the Crowne Plaza Jacksonville Riverfront, the Crowne Plaza Tampa Westshore and the Sheraton Louisville Riverside properties. These increases offset revenue decreases at our properties in Wilmington, North Carolina and Philadelphia, Pennsylvania. We continue to expect occupancy and ADR to increase as demand continues to strengthen as the overall economy continues to improve.

Food and beverage revenues at our properties for the year ended December 31, 2014 increased approximately $9.3 million, or 42.6%, to approximately $31.4 million compared to food and beverage revenue of

 

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approximately $22.1 million for the year ended December 31, 2013. A significant increase in food and beverage revenue at the Hilton Savannah DeSoto, the Crowne Plaza Jacksonville Riverfront, the Crowne Plaza Tampa Westshore, the Holiday Inn Laurel West and the Crowne Plaza Hampton Marina, as well as food and beverage revenue increase of approximately $8.6 million associated with our acquisition of the Crowne Plaza Houston Downtown and the Georgian Terrace, offset decreases at several other properties in our portfolio.

Other operating revenues for the year ended December 31, 2014 increased approximately $2.4 million, or 53.4%, to approximately $6.9 million compared to other operating revenues for the year ended December 31, 2013 of approximately $4.5 million. Most of the revenue increase of approximately $2.2 million was associated with our acquisition of the Crowne Plaza Houston Downtown and the Georgian Terrace.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $24.7 million, or 37.7%, for the year ended December 31, 2014 to approximately $90.2 million compared to hotel operating expenses for the year ended December 31, 2013 of approximately $65.5 million. The entire increase is attributable to our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace.

Rooms expense at our properties for the year ended December 31, 2014 increased approximately $5.7 million, or 33.1%, to approximately $22.9 million compared to rooms expense of approximately $17.2 million for the year ended December 31, 2013. The increase in rooms expense was directly related to the $3.5 million increase in rooms expense of our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace and increases in our other hotel properties similar to the increases in room revenue.

Food and beverage expenses at our properties for the year ended December 31, 2014 increased approximately $7.0 million, or 49.7%, to approximately $21.0 million compared to food and beverage expense of approximately $14.0 million for the year ended December 31, 2013. The increase in food and beverage expense was directly related to the $6.3 million increase in food and beverage expense of our acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace and increases in our other hotel properties similar to the increases in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2014 increased approximately $11.3 million, or 33.5%, to approximately $45.1 million compared to indirect expenses of approximately $33.8 million for the year ended December 31, 2013. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. Approximately $9.5 million of the increase was attributable to the acquisitions of the Crowne Plaza Houston Downtown and the Georgian Terrace. Increases in administrative and general costs, management fees, sales and marketing, franchise fees (including the franchise termination fee for Crowne Plaza Jacksonville Riverfront), repairs and maintenance, energy costs and personal property taxes are the other main increases in other indirect costs for the remaining properties.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2014 increased approximately $3.5 million, or 41.4%, to approximately $12.0 million compared to depreciation and amortization expense of approximately $8.5 million for the year ended December 31, 2013. Approximately $1.0 million of the increase was attributable to the acquisitions and capital expenditures during the year of the Crowne Plaza Houston Downtown and the Georgian Terrace. The remaining increase relates to the capital expenditures during the year at the Crowne Plaza Jacksonville Riverfront and the DoubleTree by Hilton Philadelphia Airport.

Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended December 31, 2014 and 2013 was approximately $3.2 million and $0.6 million, respectively. Our

 

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review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment to fair market value by an amount of approximately $3.2 million, as of December 31, 2014.

Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2014 increased approximately $0.7 million, or 16.6%, to approximately $5.1 million compared to corporate general and administrative expenses of approximately $4.4 million for the year ended December 31, 2013. The increase in corporate and administrative costs is attributable to acquisition charges related to the Georgian Terrace, along with increases in employee compensation, accounting, legal and professional fees.

Interest Expense. Interest expense for the year ended December 31, 2014 increased approximately $5.0 million, or 52.4%, to approximately $14.6 million compared to approximately $9.6 million of interest expense for the year ended December 31, 2013. Increases in interest expense are mainly attributable to the periodic interest, interest on the Georgian Terrace acquisition mortgage, a full year of interest on the mortgage on the Crowne Plaza Houston Downtown and interest on the 7.0% unsecured notes issued in November 2014.

Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture decreased approximately $0.1 million, or 35.7%, to approximately $0.3 million for the year ended December 31, 2014 compared to equity in the income of the joint venture of approximately $0.4 million for the year ended December 31, 2013 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the year ended December 31, 2014, the Crowne Plaza Hollywood Beach Resort reported occupancy of 83.6%, ADR of $162.15 and RevPAR of $135.55. This compares with results reported by the hotel for the year ended December 31, 2013 of occupancy of 82.2%, ADR of $157.87 and RevPAR of $129.79.

Realized and Unrealized Loss on Warrant Derivative. There was no realized or unrealized loss on the warrant derivative for the year ended December 31, 2014, an increase of approximately $2.2 million, or 100.0%, to approximately $0.0 million compared to the unrealized loss of approximately $2.2 million for the year ended December 31, 2013. With the redemption of the warrants in the fourth quarter 2013, there were not any further charges.

Loss on Debt Extinguishment. The loss on debt extinguishment for the year ended December 31, 2014 decreased approximately $1.2 million, or 59.3%, to approximately $0.8 million compared to a loss on debt extinguishment of approximately $2.0 million for the year ended December 31, 2013. Pre-payment of the Bridge Loan during the year had us realize a pre-payment penalty associated with the Bridge Loan and the remaining unamortized loan costs associated with the Bridge Loan in the amount of approximately $0.8 million.

Gain on Involuntary Conversion of Asset. During the year we had a one-time involuntary conversion of equipment at our Hilton Wilmington Riverside property for replacement of a water chiller in the amount of approximately $0.2 million.

Income Tax Benefit. The income tax benefit for the year ended December 31, 2014 increased approximately $3.2 million, or 215.5%, to approximately $1.7 million compared to an income tax provision of approximately $1.5 million for the year ended December 31, 2013. The income tax benefit was primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized greater operating loss for the year ended December 31, 2014 compared to the year ended December 31, 2013.

Net Loss. Net loss for the year ended December 31, 2014 decreased approximately $3.8 million, or 83.5%, to approximately $0.7 million compared to net loss of approximately $4.5 million for the year ended December 31, 2013 as a result of the operating results discussed above.

 

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Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

The following table illustrates the key operating metrics for the years ended December 31, 2013 and 2012 for our 10 wholly-owned properties (“actual” properties) as well as the nine wholly-owned properties that were under our control during all of 2013 and 2012 (“same-store” properties). Accordingly, actual data does not include the performance of the Georgian Terrace, and same-store data does not reflect the performance of the Crowne Plaza Houston Downtown or the Georgian Terrace, which were acquired in November 2013 and March 2014, respectively. Each table excludes performance data for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we have a 25.0% indirect interest.

 

     Year Ended December 31, 2013     Year Ended December 31, 2012  
       Actual         Same-Store         Actual         Same-Store    

Occupancy %

     67.4     67.6     68.9     68.9

ADR

   $ 118.91      $ 118.82      $ 114.22      $ 114.22   

RevPAR

   $ 80.16      $ 80.32      $ 78.65      $ 78.65   

Revenue. Total revenue for the year ended December 31, 2013 was approximately $89.4 million, an increase of approximately $2.1 million, or 2.3%, from total revenue for the year ended December 31, 2012 of approximately $87.3 million. Approximately $1.4 million of the increase is attributable to our acquisition of the Crowne Plaza Houston Downtown. Within the remainder of the portfolio, revenue increases were strongest at our DoubleTree by Hilton Brownstone – University and the Sheraton Louisville Riverfront properties. These increases offset revenue decreases at our properties in Hampton, Virginia; Jacksonville, Florida; Laurel, Maryland and Tampa, Florida.

Room revenues at our properties for the year ended December 31, 2013 increased approximately $2.0 million, or 3.3%, to approximately $62.8 million compared to room revenues for the year ended December 31, 2012 of approximately $60.8 million. Approximately $0.9 million of the increase is attributable to our acquisition of the Crowne Plaza Houston Downtown. Within the remainder of the portfolio, room revenue increases were strongest at our DoubleTree by Hilton Brownstone – University; Hilton Wilmington Riverside and the Sheraton Louisville Riverfront properties. These increases offset revenue decreases at our properties in Hampton, Virginia; Jacksonville, Florida; Laurel, Maryland and Tampa, Florida.

Food and beverage revenues at our properties for the year ended December 31, 2013 increased approximately $0.1 million, or 0.4%, to approximately $22.1 million compared to food and beverage revenue of approximately $22.0 million for the year ended December 31, 2012. A significant increase in food and beverage revenue at the DoubleTree by Hilton Brownstone – University in Raleigh, North Carolina as well as food and beverage revenue of approximately $0.4 million associated with our acquisition of the Crowne Plaza Houston Downtown offset decreases at several other properties in our portfolio.

Other operating revenues for the year ended December 31, 2013 decreased approximately $0.1 million, or 1.6%, to approximately $4.5 million compared to other operating revenues for the year ended December 31, 2012 of approximately $4.6 million. Most of the decrease was associated with lower guaranteed no-show fees.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $1.1 million, or 1.7%, for the year ended December 31, 2013 to approximately $65.5 million compared to hotel operating expenses for the year ended December 31, 2012 of approximately $64.4 million. The entire increase is attributable to the acquisition of the Crowne Plaza Houston Downtown.

Rooms expense at our properties for the year ended December 31, 2013 increased approximately $0.6 million, or 3.4%, to approximately $17.2 million compared to rooms expense of approximately $16.6 million for the year ended December 31, 2012. The increase in rooms expense was directly related to the 3.3% increase in room revenue.

 

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Food and beverage expenses at our properties for the year ended December 31, 2013 decreased approximately $0.3 million, or 1.7%, to approximately $14.0 million compared to food and beverage expense of approximately $14.3 million for the year ended December 31, 2012. The decrease in food and beverage expense was generally attributable to operating efficiencies which produced higher profit margins on very little change in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2013 increased approximately $0.8 million, or 2.2%, to approximately $33.8 million compared to indirect expenses of approximately $33.0 million for the year ended December 31, 2012. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. Approximately $0.6 million of the increase was attributable to the acquisition of the Crowne Plaza Houston Downtown. Decreases in energy costs, real estate taxes and incentive management fees offset increases in other indirect costs.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2013 decreased approximately $0.2 million, or 2.2%, to approximately $8.5 million compared to depreciation and amortization expense of approximately $8.7 million for the year ended December 31, 2012.

Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended December 31, 2013 and 2012 was approximately $0.6 million and $0, respectively. Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a change in re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment to fair market value by an amount of approximately $0.6 million, as of December 31, 2013.

Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2013 increased approximately $0.3 million, or 6.9%, to approximately $4.4 million compared to corporate general and administrative expenses of approximately $4.1 million for the year ended December 31, 2012. The increase in corporate and administrative costs is attributable to acquisition charges related to the Crowne Plaza Houston Downtown, costs associated with the Company’s name change as well as higher staff costs.

Interest Expense. Interest expense for the year ended December 31, 2013 decreased approximately $0.8 million, or 0.1%, to approximately $9.6 million compared to approximately $10.4 million of interest expense for the year ended December 31, 2012. If not for the premiums paid to redeem shares of Preferred Stock in June 2012, March 2013, August 2013 and September 2013, we would have experienced a reduction in interest expense of approximately $1.4 million due mostly to a lower effective average interest rate on our debt.

Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture increased approximately $0.3 million, or 163.5%, to approximately $0.5 million for the year ended December 31, 2013 compared to equity in the income of the joint venture of approximately $0.2 million for the year ended December 31, 2012 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. A 45.1% increase in net operating income contributed significantly to the increase in net income. For the year ended December 31, 2013, the Crowne Plaza Hollywood Beach Resort reported occupancy of 82.2%, ADR of $157.87 and RevPAR of $129.79. This compares with results reported by the hotel for the year ended December 31, 2012 of occupancy of 79.2%, ADR of $147.37 and RevPAR of $116.66.

Realized and Unrealized Loss on Warrant Derivative. The realized and unrealized loss on the Warrant derivative for the year ended December 31, 2013 increased approximately $0.2 million, or 8.8%, to approximately $2.2 million compared to the unrealized loss of approximately $2.0 million for the year ended

 

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December 31, 2012. The losses are predominantly attributable to the increase in market price of the underlying common stock.

Loss on Debt Extinguishment. The loss on debt extinguishment for the year ended December 31, 2013 increased approximately $0.1 million, or 2.9%, to approximately $2.1 million compared to a loss on debt extinguishment of approximately $2.0 million for the year ended December 31, 2013. The loss on debt extinguishment was realized due to the pre-payment of the credit facility in March 2013 and the refinance of the mortgage on the DoubleTree by Hilton Raleigh Brownestone – University in August 2013 and the associated write-off of unamortized issue costs as well as the write-off of unamortized loan costs associated with the extinguishment.

Income Tax Provision. The income tax provision for the year ended December 31, 2013 increased approximately $0.3 million, or 20.0%, to approximately $1.5 million compared to an income tax provision of approximately $1.2 million for the year ended December 31, 2012. The income tax provision is primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized greater operating income for the year ended December 31, 2013 compared to the year ended December 31, 2012.

Net Loss. Net loss for the year ended December 31, 2013 decreased approximately $0.9 million, or 17.3%, to approximately $4.5 million compared to net loss of approximately $5.4 million for the year ended December 31, 2012 as a result of the operating results discussed above.

Sources and Uses of Cash

The following narrative discusses our sources and uses of cash for the year ended December 31, 2014.

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders of the Operating Partnership and stockholders of the Company as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2014 was approximately $14.9 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund our operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the stockholders of the Company (the unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).

Investing Activities. In March 2014, we spent approximately $61.1 million to acquire the Georgian Terrace. We also spent approximately $9.8 million during 2014 on capital expenditures, of which, approximately $1.0 million related to the routine replacement of furniture, fixtures and equipment; approximately $2.0 million related to the renovation of our property in Philadelphia, Pennsylvania in anticipation of its franchise license renewal in October 2014 (on October 27, 2014, our hotel in Philadelphia, Pennsylvania was rebranded as the DoubleTree by Hilton Philadelphia Airport, pursuant to a new 10-year franchise agreement with Hilton Worldwide); approximately $2.2 million related to renovation activities at our property in Jacksonville, Florida in anticipation of a new franchise license commencing in September 2015; approximately $3.3 million related to guest room renovations at the Georgian Terrace and approximately $1.3 million related to renovations at our property in Houston, Texas.

We also contributed approximately $3.7 million during 2014 into reserves required by the lenders for seven of our hotels according to the provisions of their respective loan agreements. During 2014, we received reimbursements from those reserves of approximately $2.6 million for capital expenditures related to those properties for periods ending on or before December 31, 2014.

 

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Financing Activities. On March 26, 2014, we borrowed $19.0 million from Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC and used the net proceeds to fund a portion of the acquisition of the Georgian Terrace.

On March 27, 2014, we borrowed $41.5 million in conjunction with the purchase of the Georgian Terrace, of which $1.5 million was contributed to a restricted reserve.

On March 31, 2014, we entered into a First Amendment and other amended loan documents to secure additional proceeds in conjunction with a $5.6 million expansion of the existing mortgage on the DoubleTree by Hilton Philadelphia Airport.

On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2016. Pursuant to those terms, we reduced the mortgage balance by $0.8 million.

On November 21, 2014, we closed on a 7% unsecured note offering for approximately $25.3 million. The net proceeds of approximately $23.7 million were used to repay the $19.0 million Bridge Loan, with the remainder to be used for general corporate purposes.

On November 24, 2014, we repaid the $19.0 million Bridge Loan.

On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the Crowne Plaza Jacksonville Riverfront property as part of an earn-out pursuant to the terms of the previously disclosed loan agreement.

The following narrative discusses our sources and uses of cash for the year ended December 31, 2013.

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders of the Operating Partnership and stockholders of the Company as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2013 was approximately $9.6 million. Cash on hand and the net cash provided by operations was adequate to fund our operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the stockholders of the Company (the unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions”, to the Company’s stockholders of at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).

Investing Activities. In November 2013, we spent approximately $30.7 million to purchase the Crowne Plaza Houston Downtown. During 2013, we spent approximately $4.9 million on capital expenditures at our properties, of which approximately $2.4 million related to the routine replacement of furniture, fixtures and equipment, and approximately $2.5 million related to renovations of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $2.2 million in reserves required by the lenders of the Crowne Plaza Hampton Marina, DoubleTree by Hilton Raleigh Brownestone – University, Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport and Sheraton Louisville Riverside according to the provisions of the loan agreements. We also received reimbursement from those reserves of approximately $1.7 million for capital expenditures related to those properties.

On December 27, 2013, the joint venture entity that owns the Crowne Plaza Hollywood Beach entered into a credit and security agreement and other loan documents with Bank of America, N.A. to refinance the mortgage on that property. Subsequent to the refinance, we received a distribution of approximately $5.6 million, bringing the total distributions from the joint venture to approximately $6.6 million for the year ended December 31, 2013.

 

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Financing Activities. On March 26, 2013, the Company used the net proceeds of the mortgage on the DoubleTree by Hilton Raleigh Brownstone-University to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million.

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

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

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

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

On October 23, 2013 and December 23, 2013, we redeemed the Essex Warrant, in two separate transactions, corresponding to an aggregate of 1,900,000 Issuable Warrant Shares for an aggregate cash redemption price of approximately $7.2 million. Concurrently with the redemptions on October 23, 2013 and December 23, 2013, the Operating Partnership redeemed an aggregate of 1,900,000 Issuable Warrant Units, as defined in the Warrant to Purchase Partnership Units agreement, for an aggregate cash redemption price of $7.2 million.

On November 13, 2013, we borrowed $21.5 million in conjunction with the purchase of the Crowne Plaza Houston Downtown.

On December 30, 2013, we paid approximately $3.5 million and extinguished the balance of the loan with the Carlyle Affiliate Lender.

Capital Expenditures

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry. Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In addition, during 2015 we expect capital expenditures of $2.2 million related to the rebranding of the Crowne Plaza Jacksonville as the DoubleTree by Hilton Jacksonville Riverfront in September 2015. We also anticipate capital expenditures during 2015 of approximately $1.6 million in 2015, at our property in Houston, Texas other than for the recurring replacement of furniture, fixtures and equipment. We anticipate capital expenditures during 2015 of approximately $2.9 million for the Georgian Terrace other than for the recurring replacement of furniture, fixtures and equipment related to a guestroom renovation. Lastly, we anticipate additional capital expenditures during 2015 of approximately $4.5 million related to the rebranding of the Holiday Inn Laurel as the DoubleTree by Hilton Laurel in October 2015.

 

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Given our desire to proceed with the renovation activities at our properties in Jacksonville, Florida; Houston, Texas; Atlanta, Georgia, and Laurel, Maryland, we aim to restrict all other capital expenditures to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 4.00% of gross revenues in 2015.

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

Liquidity and Capital Resources

As of December 31, 2014, we had cash and cash equivalents of approximately $23.3 million, of which approximately $6.6 million was in restricted reserve accounts for capital improvements, real estate tax and insurance escrows. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).

On March 26, 2014, we borrowed $19.0 million from Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC and used the net proceeds to fund a portion of the acquisition of the Georgian Terrace.

On March 27, 2014, we borrowed $41.5 million in conjunction with the purchase of the Georgian Terrace, of which $1.5 million was contributed to a restricted reserve.

On March 31, 2014, we entered into a First Amendment and other amended loan documents to extend the maturity date and secure additional proceeds on the original $30.0 million mortgage on the DoubleTree by Hilton Philadelphia Airport with its existing lender, TD Bank, N.A. Pursuant to the First Amendment and other amended loan documents, the principal balance of the mortgage was increased by $5.6 million to approximately $34.1 million and the maturity extended to April 1, 2019, with no prepayment penalty.

On June 27, 2014, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2016. Pursuant to those terms, we reduced the mortgage balance by $0.8 million.

On November 21, 2014, we closed on a 7.00% unsecured note offering for approximately $23.7 million, net of closing costs. The proceeds of which were being used to repay the $19.0 million Bridge Loan, with the remainder to be used for general corporate purposes.

On November 24, 2014, we repaid the $19.0 million loan from Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC.

On December 19, 2014, we secured $3.0 million additional proceeds on our mortgage loan on the Crowne Plaza Jacksonville Riverfront property.

 

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

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

Beyond the funding of any required principal reduction on our existing indebtedness or acquisitions, our medium and long-term capital needs will generally include the repayment of the Notes (which are callable after September 30, 2016, with respect to the 8% Notes and November 15, 2017, with respect to the 7% Notes) and the retirement of maturing mortgage debt. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of some or all the following:

 

    The issuance of additional shares of preferred stock;

 

    The issuance of additional shares of our common stock;

 

    The issuance of senior, unsecured debt;

 

    The issuance of additional units in the Operating Partnership;

 

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

 

    The selective disposition of core or non-core assets;

 

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

 

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

Financial Covenants

Mortgage Loans

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

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

 

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of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.

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

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

At December 31, 2014, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.

Unsecured Notes

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

 

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These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were or would have been applicable at December 31, 2014 and December 31, 2013, respectively.

 

     December 31,
2014
    December 31,
2013
 

Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense

    

Net loss

   $ (738,509   $ (4,473,592

Interest expense

     14,636,870        9,606,479   

Loss on debt extinguishment

     831,079        2,040,662   

(Benefit)/provision for taxes

     (1,727,723     1,496,096   

Equity in (income) loss of joint venture

     (307,370     (449,500

Realized and unrealized loss on warrant derivative

     —         2,205,248   

Impairment of investment in hotel properties, net

     3,175,000       611,000   

Depreciation and amortization

     11,969,284        8,467,228   

Corporate general and administrative expenses

     5,085,949        4,360,583   
  

 

 

   

 

 

 

Consolidated Income Available for Debt Service

  32,924,580      23,864,204   

Less: Income of Non-Stabilized Assets(1)

  (8,961,209   (153,323
  

 

 

   

 

 

 

Stabilized Consolidated Income Available for Debt Service

$ 23,963,361    $ 23,710,881   
  

 

 

   

 

 

 

Interest expense

$ 14,636,870    $ 9,606,479   

Distributions on Preferred Interest(2)

  —       (2,230,806

Loss on debt extinguishment

  831,079      2,040,662   

Amortization of issuance costs(2)

  (1,428,674   (1,518,556
  

 

 

   

 

 

 

Consolidated Interest Expense

  14,039,275      7,897,779   

Less: Interest expense of Non-Stabilized Assets(1)

  (2,444,937   (131,410
  

 

 

   

 

 

 

Stabilized Consolidated Interest

$ 11,594,338    $ 7,766,369   
  

 

 

   

 

 

 

Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense

  2.07      3.05   

Threshold Ratio Minimum

  1.50      1.50   

Ratio of Debt to Adjusted Total Asset Value:

Mortgage loans

$ 205,291,657    $ 160,363,549   

Unsecured notes

  52,900,000      27,600,000   
  

 

 

   

 

 

 

Total debt

$ 258,191,657    $ 187,963,549   
  

 

 

   

 

 

 

Stabilized Consolidated Income Available for Debt Service

$ 23,963,361    $ 23,710,881   

Capitalization Rate

  7.5   7.5
  

 

 

   

 

 

 
  319,511,493      316,145,067   

Non-Stabilized Assets(1)

  146,440,000      35,000,000   

Cash and cash equivalents, total

  23,256,363      13,172,769   
  

 

 

   

 

 

 

Adjusted Total Asset Value

$ 489,207,856    $ 364,317,836   
  

 

 

   

 

 

 

Ratio of Debt to Adjusted Total Asset Value

  0.53      0.52   

Threshold Ratio Maximum

  0.65      0.65   

 

(1) As permitted by the indentures, in 2014 the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace are considered non-stabilized assets for purposes of the financial covenants. In 2013, the Crowne Plaza Houston Downtown was considered a non-stabilized asset for purposes of the financial covenants.
(2) Includes prepayment fee and write-off of unamortized issuance costs associated with the redemption of Preferred Stock and Preferred Interest redeemed during the period.

 

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Mortgage Debt

As of December 31, 2014, we had approximately $205.3 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

 

Property

  December 31,
2014
     Prepayment
Penalties
  Maturity
Date
    Amortization
Provisions
    Interest Rate  

Crowne Plaza Hampton Marina

  $ 4,509,500       None     06/30/2016      $ 83,000 (1)      5.00 %(2) 

Crowne Plaza Houston Downtown

    20,954,867       Yes(3)     04/12/2016 (4)      25 years        4.50

Crowne Plaza Jacksonville Riverfront

    16,358,706       None     07/10/2015 (5)      25 years        LIBOR plus 3.00

Crowne Plaza Tampa Westshore

    13,317,684       None     06/18/2017        25 years        5.60

DoubleTree by Hilton Brownstone – University

    15,274,284       (6)     08/01/2018        30 years        4.78

DoubleTree by Hilton Philadelphia Airport

    33,378,102       None     04/01/2019        25 years        LIBOR plus 3.00 %(7) 

Georgian Terrace

    41,500,000       None     03/27/2017 (8)      25 years        LIBOR plus 3.75 %(9) 

Hilton Savannah DeSoto

    21,050,093       Yes(10)     09/01/2017        25 years        6.06

Hilton Wilmington Riverside

    20,389,325       Yes(10)     04/01/2017        25 years        6.21

Holiday Inn Laurel West

    6,974,458       Yes(11)     08/05/2021        25 years        5.25 %(12) 

Sheraton Louisville Riverside

    11,584,638       (6)     01/06/2017        25 years        6.24
 

 

 

          

Total

$ 205,291,657   
 

 

 

          

 

 

(1) The Operating Partnership is required to make monthly principal payments of $83,000.
(2) The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014.
(3) The note is subject to a prepayment penalty if the loan is prepaid in full or in part prior to November 13, 2015.
(4) The note provides that the mortgage can be extended until November 2018 if certain conditions have been satisfied.
(5) The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.
(6) With limited exception, the note may not be prepaid until two months before maturity.
(7) The note bears a minimum interest rate of 3.50%.
(8) The note provides that the mortgage can be extended through the fourth and fifth anniversary of the commencement date of the loan, or March 27, 2018 and March 27, 2019, respectively, subject to certain conditions.
(9) The note bears a minimum interest rate of 4.00%.
(10) The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.
(11) Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.
(12) The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.

Contractual Obligations

The following table outlines our contractual obligations as of December 31, 2014, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).

 

     Payments due by period (in thousands)  

Contractual Obligations

   Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Mortgage loans, including interest

   $ 230,046       $ 30,952       $ 144,925       $ 47,611       $ 6,508   

Unsecured notes, including interest

     69,838         3,979         7,958         57,901         —     

Ground, building, office and equipment leases

     1,952         432         606         277         637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

$ 301,836    $ 35,363    $ 153,489    $ 105,789    $ 7,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that required us to indemnify the contributors of our initial properties against tax liabilities in the event we sold any of those properties in a taxable transaction during a 10-year period. The tax indemnity

 

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agreements expired on or about December 22, 2014. Our obligations under the contribution agreements may effectively preclude us from reducing our consolidated indebtedness below approximately $11.0 million.

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

On December 27, 2013, the joint venture secured a $57.0 million non-recourse mortgage with Bank of America, N.A. The mortgage requires monthly payments of interest at a rate of LIBOR plus additional interest of 3.95% and matures in January 2017, but may be extended up to two additional one year periods, pursuant to certain terms and conditions. The proceeds from the loan were used to repay the existing first mortgage, to extinguish the interest-rate swap, to pay closing costs, and to make a distribution to the joint venture partners. The Crowne Plaza Hollywood Beach Resort property secures the mortgage.

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

Distributions to Common Stockholders and Holders of Units in the Operating Partnership. The Company has elected to be taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain qualification as a REIT, the Company is required to make annual distributions to its stockholders of at least 90.0% of our REIT taxable income, (excluding net capital gain, which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). The Company’s ability to pay distributions to its stockholders will depend, in part, upon its receipt of distributions from the Operating Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a non-taxable return of capital. To the extent not inconsistent with maintaining the Company’s REIT status, our TRS Lessees may retain any after-tax earnings.

The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by the Company based upon a variety of factors deemed relevant by its directors, and no assurance can be given that the distribution policy will not change in the future.

Inflation

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

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

 

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Geographic Concentration and Seasonality

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

The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in markets, namely Florida and Texas, which experience significant room demand during this period.

Competition

The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel properties acquired in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided, and price, are the principal competitive factors affecting our hotels.

Critical Accounting Policies

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

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

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

Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which resulted in an impairment to fair market value by an approximate amount of $3.2 million and $0.6 million, as of December 31, 2014 and 2013, respectively. There were no charges for impairment of hotel properties recorded in 2012.

 

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

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

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessees, we have not recorded a valuation allowance to reduce our net deferred tax asset as of December 31, 2014. Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Recent Accounting Pronouncements

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

Non-GAAP Financial Measures

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

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

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

 

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

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2014, 2013 and 2012.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
(Restated)
     Year Ended
December 31,
2012
(Restated)
 

Net Loss

   $ (738,509    $ (4,473,592    $ (5,409,745

Depreciation and Amortization

     11,969,284         8,467,228         8,661,769   

Impairment of Investment in Hotel Properties, net

     3,175,000        611,000         —    

Equity in Depreciation on Joint Venture

     529,053         545,667         590,675   

Gain on Involuntary Conversion of Asset

     (169,151 )      —          —    
  

 

 

    

 

 

    

 

 

 

Funds From Operations

$ 14,765,677    $ 5,150,303    $ 3,842,699   

Realized and Unrealized (Gain)/Loss on Hedging Activities(A)

  —       (89,998   13,752   

Realized and Unrealized Loss on Warrant Derivative

  —       2,205,248      2,026,677   

(Increase)/Decrease in Deferred Income Taxes

  (1,961,663   1,370,189      1,241,848   

Impairment of Note Receivable

  —       —       110,871   

Aborted Offering Costs

  —       —       —    

Acquisition Costs

  155,187      89,743      —    

Franchise Termination Fee

  351,800      —       —    

Loss on Early Extinguishment of Debt(A)(B)

  831,079      2,040,662      1,982,184   
  

 

 

    

 

 

    

 

 

 

Adjusted FFO

$ 14,142,080    $ 10,766,147    $ 9,218,032   
  

 

 

    

 

 

    

 

 

 

 

(A) Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture.
(B) Except for the portion representing equity in loss on early extinguishment of debt of joint ventures, amounts are reflected in interest expense for the periods presented above.

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

 

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

The following is a reconciliation of net loss to Hotel EBITDA for the years ended December 31, 2014, 2013 and 2012.

 

     Year Ended
December 31,
2014
     Year Ended
December 31,
2013
(Restated)
     Year Ended
December 31,
2012
(Restated)
 

Net Loss

   $ (738,509    $ (4,473,592    $ (5,409,745

Interest Expense

     14,636,870         9,606,479         10,399,962   

Interest Income

     (19,865      (17,914      (16,158

Income Tax Provision (Benefit)

     (1,727,723      1,496,096         1,246,397   

Depreciation and Amortization

     11,969,284         8,467,228         8,661,769   

Equity in (Earnings)/Loss of Joint Venture

     (307,370      (449,500      (178,138

Realized and Unrealized (Gain)/Loss on Warrant Derivative

     —          2,205,248         2,026,677   

Loss on Debt Extinguishment

     831,079        2,040,662         1,982,184   

Impairment of Investment in Hotel Properties, Net

     3,175,000        611,000         —    

Impairment of Note Receivable

     —          —          110,871   

Corporate General and Administrative Expenses

     5,085,949         4,360,583         4,078,826   

Net Lease Rental Income

     (350,000      (350,000      (350,000

Other Fee Income

     (300,607      (275,775      (255,707
  

 

 

    

 

 

    

 

 

 

Hotel EBITDA

$ 32,254,108    $ 23,220,515    $ 22,296,938   
  

 

 

    

 

 

    

 

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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

As of December 31, 2014, we had approximately $167.0 million of fixed-rate debt and approximately $91.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.14%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the DoubleTree by Hilton Philadelphia Airport and the Georgian Terrace, of 0.50% and 0.25%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on our mortgage on the Georgian Terrace, the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the Crowne Plaza Jacksonville Riverfront

 

66


remain at approximately $91.2 million, the balance at December 31, 2014, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $798,000.

As of December 31, 2013, we had approximately $139.6 million of fixed-rate debt and approximately $48.4 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.01%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the Crowne Plaza Hampton Marina and the DoubleTree by Hilton Philadelphia Airport of 0.45% and 0.50%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the Crowne Plaza Jacksonville Riverfront remain at approximately $48.4 million, the balance at December 31, 2014, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $372,000.

Item 8. Financial Statements and Supplementary Data

See Index to Financial Statements and Financial Statement Schedules on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Sotherly Hotels Inc.

Disclosure Controls and Procedures

The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of December 31, 2014.

As of the end of the fourth quarter of the period covered by this annual report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2014 due to the material weakness described below.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.

 

67


Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(e) under the Exchange Act). The Company’s management assessed the effectiveness over internal control over financial reporting as of December 31, 2014. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 1992 Internal Control-Integrated Framework. Management has determined that the Company’s internal control over financial reporting was not effective because a material weakness in its internal control over financial reporting as described below existed at December 31, 2014. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In preparation of the Company’s annual report, we identified deficiencies in internal control over financial reporting and disclosure controls and procedures related to insufficient financial accounting policies and procedures and resources, particularly as it relates to the evaluation and contemporaneous documentation of income tax and property impairment accounting conclusions and certain SEC disclosure requirements related to significant subsidiaries. We concluded that these deficiencies rise to the level of a material weakness. We are in the process of taking the following steps to remediate the material weakness: (i) increasing the staffing of our internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants.

Changes in Internal Control over Financial Reporting

Other than the changes noted above, there was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over financial reporting.

Sotherly Hotels LP

Disclosure Controls and Procedures

The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of December 31, 2014.

As of the end of the fourth quarter of the period covered by this annual report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2014 due to the material weakness described below.

The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels LP have been detected.

 

68


Management’s Report on Internal Control over Financial Reporting

The Operating Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management assessed the effectiveness over internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 1992 Internal Control-Integrated Framework. Management has determined that the Operating Partnership’s internal control over financial reporting was not effective because a material weakness in its internal control over financial reporting as described below existed at December 31, 2014. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

In preparation of the Operating Partnership’s annual report, we identified deficiencies in internal control over financial reporting and disclosure controls and procedures related to insufficient financial accounting policies and procedures and resources, particularly as it relates to the evaluation and contemporaneous documentation of income tax and property impairment accounting conclusions and certain SEC disclosure requirements related to significant subsidiaries. We concluded that these deficiencies rise to the level of a material weakness. We are in the process of taking the following steps to remediate the material weakness: (i) increasing the staffing of our internal accounting department, including the addition of an internal auditor, (ii) engaging outside independent consultants to assist in the analysis of complex accounting transactions, and (iii) implementing enhanced documentation policies and procedures to be followed by the accounting department and outside independent consultants.

Changes in Internal Control over Financial Reporting

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

Item 9B. Other Information

None.

 

69


PART III

The information required by Items 10-14 is incorporated by reference to the Company’s proxy statement for the 2015 annual meeting of stockholders (to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report).

Item 10. Directors, Executive Officers and Corporate Governance

The Company has adopted a code of business conduct and ethics, including a conflicts of interest policy that applies to its principal executive officer, principal financial officer, principal accounting officer or controller performing similar functions. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business. A copy of the Company’s Code of Business Conduct is posted on the Company’s external website at www.sotherlyhotels.com. The Company and the Operating Partnership intend to post to its website any amendments to or waivers of its code. The Operating Partnership is managed by the Company, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers.

Information on the Company’s directors is incorporated by reference to the sections captioned “Proposal I – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Company’s 2015 Proxy Statement.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the section captioned “Director and Executive Compensation” contained in the Company’s 2015 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the Company’s 2015 Proxy Statement.

(b) SECURITY OWNERSHIP OF MANAGEMENT

Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the Company’s 2015 Proxy Statement.

(c) CHANGES IN CONTROL

Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.

(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Set forth below is information as of December 31, 2014 with respect to compensation plans under which equity securities of the Company are authorized for issuance.

 

70


EQUITY COMPENSATION PLAN INFORMATION

 

     NUMBER OF SECURITIES
TO BE ISSUED UPON
EXERCISE OF
OUTSTANDING OPTIONS,
WARRANTS AND RIGHTS
     WEIGHTED-AVERAGE
EXERCISE PRICE OF
OUTSTANDING OPTIONS,
WARRANTS
AND RIGHTS
     NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
 

Equity compensation plans approved by security holders:

        

2013 Plan(1)

     N/A         N/A         713,250   

Equity compensation plans not approved by security holders:

        

None

     N/A         N/A         N/A   
  

 

 

    

 

 

    

 

 

 
Total   N/A      N/A      713,250   

 

(1) On February 14, 2014, we granted 10,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski and 8,000 shares of stock to David R. Folsom.

On February 14, 2014, we granted 12,000 shares (3,000 each) of restricted stock to certain of our independent directors that vested on December 31, 2014. Also on February 14, 2014, we granted 750 shares of restricted stock to former director J. Paul Carey that vested on April 21, 2014.

On January 29, 2015, we granted 10,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski and 8,000 shares of stock to David R. Folsom, and 2,350 shares of stock to other employees of the Company. These shares are included in the number of securities remaining available for future issuance at December 31, 2014.

On January 29, 2015, we granted 9,000 shares (3,000 each) of restricted stock to certain of our independent directors that will vest on December 31, 2015. Also on January 29, 2015, we granted 750 shares of restricted stock to director James P. O’Hanlon that will vest on April 27, 2015. These shares are included in the number of securities remaining available for future issuance at December 31, 2014.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the sections captioned “Certain Relationships and Related Transactions” and “Proposal I – Election of Directors” in the Company’s 2015 Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the section captioned “Proposal II –Ratification of Appointment of Accountants” in the Company’s 2015 Proxy Statement.

 

71


PART IV

Item 15. Exhibits and Financial Statement Schedules

 

1.   Financial Statements

  

      Index to Financial Statements and Financial Statement Schedules

     F-1   

Sotherly Hotels Inc.

  
  Report of Independent Registered Public Accounting Firm, Grant Thornton LLP      F-2   
  Report of Independent Registered Public Accounting Firm, PBMares, LLP      F-3   
  Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2014 and 2013      F-4   
  Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2014, 2013 and 2012      F-5   
  Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2014, 2013 and 2012      F-6   
  Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2014, 2013 and 2012      F-7   

Sotherly Hotels LP

  
  Report of Independent Registered Public Accounting Firm, Grant Thornton LLP      F-8   
  Report of Independent Registered Public Accounting Firm, PBMares, LLP      F-9   
  Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2014 and 2013      F-10   
  Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2014, 2013 and 2012      F-11   
  Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31, 2014, 2013 and 2012      F-12   
  Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2014, 2013 and 2012      F-13   

Notes to Consolidated Financial Statements

     F-14   

2.   Financial Statement Schedules

  

         Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2014

     F-41   

All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.

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

 

Exhibits

    
  3.1    Articles of Amendment and Restatement of Sotherly Hotels Inc.(1)
  3.3    Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP.(2)
  3.4    Articles Supplementary of Sotherly Hotels Inc.(3)
  3.5    Amended and Restated Bylaws of Sotherly Hotels Inc.(3)
  3.6    Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP.(3)
  3.7    Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013.(34)
  3.8    Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013.(34)
  3.9    Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP.(35)

 

72


Exhibits

    
  4.0    Form of Common Stock Certificate.(2)
  4.2    Warrant, dated as of April 18, 2011, by and between the Company, Essex Illiquid, LLC and Richmond Hill Capital Partners, LP(3)
  4.3    Amendment, dated December 21, 2011, to Warrant, dated as of April 18, 2011, by and among the Company, Essex Illiquid, LLC and Richmond Hill Capital Partners, LP(4)
  4.4    Amendment No. 2, dated July 10, 2012, to Warrant, dated as of April 18, 2011, by and among the Company, Essex Illiquid, LLC and Richmond Hill Capital Partners, LP(5)
  4.5    Amendment No. 3 to Warrant, dated October 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.(36)
  4.6    Senior Unsecured Note issued by Sotherly Hotels LP.(37)
  4.7    Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee.(37)
  4.8    Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014.(45)
  4.9    First Supplemental Indenture, by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014.(45)
  4.10    7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP.
10.1    Sotherly Hotels Inc. 2004 Long-Term Incentive Plan.(2)*
10.1A    Form of Restricted Stock Award Agreement between Sotherly Hotels Inc. and Participant.(6)*
10.2A    Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims.(7)*
10.2B    First Amendment, dated as of January 1, 2011, to Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims.(8)*
10.2C    Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated January 12, 2015. (47)*
10.2D    Executive Employment Agreement between Sotherly Hotels Inc. and Anthony E. Domalski.(33)*
10.3    Executive Employment Agreement between Sotherly Hotels Inc. and William J. Zaiser.(7)*
10.3A    Consulting Agreement between Sotherly Hotels Inc. and WJZ Consulting LLC.(33)*
10.4    Strategic Alliance Agreement between Sotherly Hotels Inc., Sotherly Hotels LP and MHI Hotels Services, LLC.(31)
10.5    Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.(31)
10.5A    Amendment Number 2, dated January 14, 2008 to the Master Management Agreement, dated December 21, 2004, as amended, by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.(9)
10.6    Contribution Agreement dated August 23, 2004 by and between the owners of Capitol Hotel Associates L.P., L.L.P. and Sotherly Hotels LP(10)
10.7    Contribution Agreement dated August 23, 2004 by and between the owners of Savannah Hotel Associates LLC and Sotherly Hotels LP(10)
10.8    Contribution Agreement dated August 23, 2004 by and between KDCA Partnership, MAVAS LLC, and Sotherly Hotels LP(2)

 

73


Exhibits

    
10.9    Contribution Agreement dated September 8, 2004 by and between Elpizo Limited Partnership, Phileo Land Corporation and Sotherly Hotels LP(2)
10.10    Asset Purchase Agreement dated August 19, 2004 by and between Accord LLC, West Laurel Corporation and MHI Hotels Services, LLC.(2)
10.11    Agreement to Assign and Sublease Common Space Lease and Form of Sublease by and between MHI Hospitality L.P. and MHI Hotels, LLC.(31)
10.12    Agreement to Assign and Sublease Commercial Space Lease and Form of Sublease by and between MHI Hospitality L.P. and MHI Hotels Two, Inc.(31)
10.13    Lease Agreement by and between Philadelphia Hotel Associates, LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K.(31)
10.14    Management Restructuring Agreement by and between MHI Hospitality TRS, LLC, MHI Hotels Services, LLC and Sotherly Hotels LP(11)
10.15    Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc.(31)
10.16    Loan Agreement dated as of July 22, 2005, by and between MHI Jacksonville LLC and Mercantile Safe Deposit and Trust Company.(12)
10.17    Promissory Note dated as of July 22, 2005, made by MHI Jacksonville LLC to Mercantile Safe Deposit and Trust Company.(12)
10.18    Purchase, Sale and Contribution Agreement by and between BIT Holdings Seventeen, Inc, Sotherly Hotels LP, and MHI Hotels, LLC.(13)
10.19    Purchase Agreement by and between MCZ/Centrum Florida VI and MHI Hollywood LLC.(14)
10.19A    Third Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC.(15)
10.19B    Fourth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC, dated September 1, 2006.(15)
10.19C    Fifth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC.(16)
10.20    Employment Agreement, dated as of January 1, 2011, between Sotherly Hotels Inc. and David R. Folsom.(8)*
10.21    Credit Agreement dated as of May 8, 2006, among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS Holding, Inc. as Borrowers and the Initial Guarantors Listed Herein and the Lenders Listed Herein: KeyBank National Association, as Syndication Agent, Regions Bank as Co Documentation Agent, Manufacturers and Traders Trust Company as Co Documentation Agent and Branch Banking and Trust Company.(17)
10.21A    First Amendment to Credit Agreement, dated August 1, 2007.(19)
10.21B    Second Amendment to Credit Agreement, dated April 15, 2008.(20)
10.21C    Third Amendment to Credit Agreement, dated February 18, 2009.(21)
10.21D    Fourth Amendment to Credit Agreement, dated May 18, 2009.(22)
10.21E    Fifth Amendment to Credit Agreement, dated June 4, 2010.(23)

 

74


Exhibits

    
10.21F    Sixth Amendment to Credit Agreement, dated April 18, 2011.(3)
10.22A    First Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of July 25, 2006.(24)
10.22B    Second Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of August 4, 2006.(24)
10.23    Purchase Agreement dated July 6, 2006, between Riverfront Inn, LLC and Sotherly Hotels Inc..(25)
10.24    Strategic Alliance Agreement dated September 8, 2006 by and among Sotherly Hotels LP, Sotherly Hotels Inc. and Coakley & Williams Hotel Management Company.(26)
10.25    Promissory Note dated March 29, 2007, made by Capitol Hotel Associates, L.P., L.L.P. and MONY Life Insurance Company.(27)
10.26A    Limited Liability Company Agreement of MHI/Carlyle Hotel Investment Program I, L.L.C. dated April 26, 2007.(28)
10.26B    Limited Liability Company Agreement of MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007.(28)
10.26C    Program Agreement for MHI/Carlyle Hotel Investment Program I, L.L.C. and MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007.(28)
10.27    Agreement to Purchase Hotel dated May 25, 2007 between MCZ/Centrum Florida VI Owner, L.L.C. and MHI Hollywood LLC.(16)
10.28    Purchase Agreement between Sotherly Hotels Inc. and VanTampa Plaza Hotel, Inc. dated July 16, 2007.(18)
10.29    Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company.(19)
10.30    Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and Hampton Redevelopment and Housing Authority dated April 24, 2008.(29)
10.31    Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated December 1, 1998.(29)
10.32    $7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project) Series 1998A.(29)
10.33    Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998.(29)
10.34    Promissory Note by MHI Hotel Investments Holdings, LLC, dated February 9, 2009.(30)
10.35    Guaranty by Sotherly Hotels Inc., dated February 9, 2009.(30)
10.36    Securities Purchase Agreement, dated as of April 18, 2011, by and between the Company, Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.(3)
10.37    Registration Rights Agreement, dated April 18, 2011, by and between the Company, Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.(3)
10.38    Note Agreement, dated as of April 18, 2011, by and between the Company and Essex High Income Joint Investment Vehicle, LLC.(3)
10.39    Amendment No. 1, dated December 21, 2011, to Note Agreement, dated April 18, 2011, by and among the Company and Essex Equity High Income Joint Investment Vehicle, LLC.(4)

 

75


Exhibits

    
10.40    Amendment No. 2, dated June 15, 2012, to Note Agreement, dated April 18, 2011, by and between the Company and Essex Equity High Income Joint Investment Vehicle, LLC. (32)
10.41    Agreement, Waiver and Consent by Preferred Stockholders, dated June 15, 2012, by and among the Company, Essex Illiquid, LLC, and Richmond Hill Capital Partners, LP. (32)
10.42    Sotherly Hotels Inc. 2013 Long-Term Incentive Plan.(38)*
10.43    Warrant Redemption Agreement, dated October 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC, and Richmond Hill Capital Partners, LP.(36)
10.44    General Partnership Interest Sale and Purchase Agreement between Boston Resources Limited and Sotherly-Houston GP LLC, dated as of November 13, 2013.(39)
10.45    Exchange Agreement between MHI Hotels, L.L.C. and Sotherly Hotels LP, dated as of November 13, 2013.(39)
10.46    Warrant Redemption Agreement, dated December 23, 2013, by and among Sotherly Hotels Inc., Essex Illiquid, LLC, and Richmond Hill Capital Partners, LP.(40)
10.47    Purchase Agreement between Sotherly Hotels Inc. and CSC Georgian Terrace Limited Partnership dated January 13, 2014.(41)
10.48    Note Agreement by and between Sotherly Hotels LP, Richmond Hill Capital Partners, LP and Essex Equity Joint Investment Vehicle, LLC dated March 26, 2014.(42)
10.49    Guaranty by Sotherly Hotels Inc. dated March 26, 2014.(42)
10.50    Pledge Agreement by Sotherly Hotels LP and MHI GP LLC, acknowledged by Philadelphia Hotel Associates LP, dated March 26, 2014.(42)
10.51    Sales Agency Agreement, dated July 9, 2014, among Sotherly Hotels Inc., Sotherly Hotels LP and Sandler O’Neill & Partners, L.P.(44)
10.52    Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC and MHI Hotels Services LLC.(46)
16.2    Letter from PBMares, LLP, dated April 14, 2014.(43)
21.1    List of Subsidiaries of Sotherly Hotels Inc.
21.2    List of Subsidiaries of Sotherly Hotels LP.
23.1    Consent of PBMares, LLP.
23.2    Consent of Grant Thornton LLP.
23.3    Consent of PBMares, LLP.
23.4    Consent of Grant Thornton LLP.
31.1    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.4    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

76


Exhibits

    
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
32.3    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
32.4    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873)
(2) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)
(3) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.
(4) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 22, 2011.
(5) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2012.
(6) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on March 25, 2009.
(7) The executive employment agreement for Andrew M. Sims is incorporated by reference to the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2010. The executive employment agreement for William J. Zaiser is incorporated by reference to the document previously filed as Exhibit 10.3A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2010
(8) The first amendment to executive employment agreement for Andrew M. Sims is incorporated by reference to the document previously filed as Exhibit 10.3A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 19, 2011. The executive employment agreement for David R. Folsom is incorporated by reference to the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 19, 2011.
(9) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2008.
(10) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 15, 2004. (333-118873)

 

77


(11) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Pre-Effective Amendment No. 3 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on November 15, 2004. (333-118873)
(12) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2005.
(13) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, filed with the Securities and Exchange Commission on August 11, 2005.
(14) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005.
(15) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006.
(16) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2007.
(17) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, filed with the Securities and Exchange Commission on May 11, 2006.
(18) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2007.
(19) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2007.
(20) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008.
(21) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 25, 2009.
(22) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 20, 2009.
(23) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2010.
(24) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the Securities and Exchange Commission on August 8, 2006.
(25) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2006.
(26) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 22, 2007.
(27) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007.
(28) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007.
(29) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities and Exchange Commission on May 7, 2008.
(30) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2009.
(31) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011.
(32) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2012

 

78


(33) The executive employment agreement for Anthony E. Domalski is incorporated by reference to the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2013. The consulting agreement with WJZ Consulting LLC is incorporated by reference to the document previously filed as Exhibit 10.3A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2013.
(34) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013.
(35) Incorporated by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013 (333-189821).
(36) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2013.
(37) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013.
(38) Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on March 20, 2013.
(39) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 14, 2013.
(40) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 27, 2013.
(41) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2014.
(42) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, filed with the Securities and Exchange Commission on May 14, 2014.
(43) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 14, 2014.
(44) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 9, 2014.
(45) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014.
(46) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014.
(47) Incorporated by reference to the document previously filed as Exhibit 10.2A to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2015.
* Denotes management contract and/or compensatory plan/arrangement.

 

79


SIGNATURES

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

Date: April 14, 2015

 

SOTHERLY HOTELS INC.
By:   /s/    ANDREW M. SIMS        
 

Andrew M. Sims

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    ANDREW M. SIMS

Andrew M. Sims

  

Chief Executive Officer and Chairman of the Board of Directors

  April 14, 2015

/s/    DAVID R. FOLSOM

David R. Folsom

  

President, Chief Operating Officer and Director

  April 14, 2015

/s/    ANTHONY E. DOMALSKI

Anthony E. Domalski

  

Chief Financial Officer

  April 14, 2015

/s/    JAMES. P. O’HANLON

James P. O’Hanlon

  

Director

  April 14, 2015

/s/    DAVID J. BEATTY

David J. Beatty

  

Director

  April 14, 2015

/s/    KIM E. SIMS

Kim E. Sims

  

Director

  April 14, 2015

/s/    EDWARD S. STEIN

Edward S. Stein

  

Director

  April 14, 2015

/s/    ANTHONY C. ZINNI

Anthony C. Zinni

  

Director

  April 14, 2015

 

80


SIGNATURES

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

Date: April 14, 2015

 

SOTHERLY HOTELS LP,

            by its General Partner,

            SOTHERLY HOTELS INC.

            By:   /s/    ANDREW M. SIMS        
 

Andrew M. Sims

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    ANDREW M. SIMS

Andrew M. Sims

  

Chief Executive Officer and Chairman of the Board of Directors

  April 14, 2015

/s/    DAVID R. FOLSOM

David R. Folsom

  

President, Chief Operating Officer and Director

  April 14, 2015

/s/    ANTHONY E. DOMALSKI

Anthony E. Domalski

  

Chief Financial Officer

  April 14, 2015

/s/    JAMES. P. O’HANLON

James P. O’Hanlon

  

Director

  April 14, 2015

/s/    DAVID J. BEATTY

David J. Beatty

  

Director

  April 14, 2015

/s/    KIM E. SIMS

Kim E. Sims

  

Director

  April 14, 2015

/s/    EDWARD S. STEIN

Edward S. Stein

  

Director

  April 14, 2015

/s/    ANTHONY C. ZINNI

Anthony C. Zinni

  

Director

  April 14, 2015

 

81


INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

 

Sotherly Hotels Inc.

Report of Independent Registered Public Accounting Firm, Grant Thornton LLP

  F-2   

Report of Independent Registered Public Accounting Firm, PBMares, LLP

  F-3   

Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2014 and 2013

  F-4   

Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December  31, 2014, 2013 and 2012

  F-5   

Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December  31, 2014, 2013 and 2012

  F-6   

Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December  31, 2014, 2013 and 2012

  F-7   

Sotherly Hotels LP

Report of Independent Registered Public Accounting Firm, Grant Thornton LLP

  F-8   

Report of Independent Registered Public Accounting Firm, PBMares, LLP

  F-9   

Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2014 and 2013

  F-10   

Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December  31, 2014, 2013 and 2012

  F-11   

Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31, 2014, 2013 and 2012

  F-12   

Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December  31, 2014, 2013 and 2012

  F-13   

Notes to Consolidated Financial Statements

  F-14   

Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2014

  F-41   

 

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Sotherly Hotels Inc.:

We have audited the accompanying consolidated balance sheet of Sotherly Hotels Inc. and subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, changes in equity, and cash flows for the year ended December 31, 2014. Our audit of the basic consolidated financial statements included the financial statement schedule (as it relates to December 31, 2014 and for the year then ended), listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels Inc. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule (as it relates to December 31, 2014 and for the year then ended), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

McLean, Virginia

April 14, 2015

 

F-2


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Sotherly Hotels Inc. (formerly MHI Hospitality Corporation)

Williamsburg, Virginia 23185

We have audited the accompanying consolidated balance sheet of Sotherly Hotels Inc. (formerly MHI Hospitality Corporation) and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2013. Sotherly Hotels Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels Inc. (formerly MHI Hospitality Corporation) and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ PBMares, LLP

Norfolk, Virginia

March 25, 2014, except for Note 2, as to which the date is April 14, 2015

 

F-3


SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2014 AND 2013

 

     2014     2013  
           (Restated)  

ASSETS

    

Investment in hotel properties, net

   $ 260,192,153      $ 202,645,633   

Investment in joint venture

     1,982,107        2,424,737   

Cash and cash equivalents

     16,634,499        9,376,628   

Restricted cash

     6,621,864        3,796,141   

Accounts receivable, net

     1,908,762        1,812,026   

Accounts receivable-affiliate and joint venture

     197,674        209,947   

Prepaid expenses, inventory and other assets

     3,334,401        2,261,303   

Shell Island sublease, net

     —         240,196   

Deferred income taxes

     3,543,295        1,581,632   

Deferred financing costs, net

     5,405,288        3,820,838   
  

 

 

   

 

 

 

TOTAL ASSETS

$ 299,820,043    $ 228,169,081   
  

 

 

   

 

 

 

LIABILITIES

Mortgage loans

$ 205,291,657    $ 160,363,549   

Unsecured notes

  52,900,000      27,600,000   

Accounts payable and accrued liabilities

  12,044,886      8,095,782   

Advance deposits

  1,220,729      666,758   

Dividends and distributions payable

  852,914      588,197   
  

 

 

   

 

 

 

TOTAL LIABILITIES

  272,310,186      197,314,286   

Commitments and contingencies (see Note 7)

  —       —    

EQUITY

Sotherly Hotels Inc. stockholders’ equity

Preferred stock, par value $0.01, 972,350 shares authorized, 0 shares issued and outstanding

  —       —    

Common stock, par value $0.01, 49,000,000 shares authorized, 10,570,932 shares and 10,206,927 shares issued and outstanding at December 31, 2014 and 2013, respectively

  105,709      102,069   

Additional paid in capital

  58,659,799      57,534,113   

Distributions in excess of retained earnings

  (35,388,313   (32,450,773
  

 

 

   

 

 

 

Total Sotherly Hotels Inc. stockholders’ equity

  23,377,195      25,185,409   

Noncontrolling interest

  4,132,662      5,669,386   
  

 

 

   

 

 

 

TOTAL EQUITY

  27,509,857      30,854,795   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

$ 299,820,043    $ 228,169,081   
  

 

 

   

 

 

 

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

 

F-4


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

     2014     2013     2012  
           (Restated)     (Restated)  

REVENUE

      

Rooms department

   $ 84,618,889      $ 62,837,422      $ 60,824,016   

Food and beverage department

     31,444,984        22,054,209        21,961,328   

Other operating departments

     6,876,046        4,482,896        4,557,876   
  

 

 

   

 

 

   

 

 

 

Total revenue

  122,939,919      89,374,527      87,343,220   

EXPENSES

Hotel operating expenses

Rooms department

  22,913,479      17,212,549      16,638,574   

Food and beverage department

  21,026,202      14,048,924      14,287,874   

Other operating departments

  1,192,183      508,868      480,307   

Indirect

  45,072,491      33,757,896      33,033,820   
  

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

  90,204,355      65,528,237      64,440,575   

Depreciation and amortization

  11,969,284      8,467,228      8,661,769   

Impairment of investment in hotel properties, net

  3,175,000     611,000      —    

Corporate general and administrative

  5,085,949      4,360,583      4,078,826   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  110,434,588      78,967,048      77,181,170   
  

 

 

   

 

 

   

 

 

 

NET OPERATING INCOME

  12,505,331      10,407,479      10,162,050   

Other income (expense)

Interest expense

  (14,636,870   (9,606,479   (10,399,962

Interest income

  19,865      17,914      16,158   

Equity income in joint venture

  307,370      449,500      178,138   

Realized and unrealized loss on warrant derivative

  —       (2,205,248   (2,026,677

Loss on debt extinguishment

  (831,079   (2,040,662   (1,982,184

Gain on involuntary conversion of asset

  169,151      —       —    

Impairment of note receivable

  —       —       (110,871
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

  (2,466,232   (2,977,496   (4,163,348

Income tax (provision) benefit

  1,727,723      (1,496,096   (1,246,397
  

 

 

   

 

 

   

 

 

 

Net loss

  (738,509   (4,473,592   (5,409,745

Add: Net loss attributable to the noncontrolling interest

  153,838      989,623      1,241,868   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

$ (584,671 $ (3,483,969 $ (4,167,877
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to the Company

Basic and diluted

$ (0.06 $ (0.34 $ (0.42

Weighted average number of shares outstanding

Basic and diluted

  10,377,125      10,156,955      9,995,638   

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

 

F-5


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

  Common Stock   Additional
Paid-In
Capital
  Distributions in
Excess of
Retained
Earnings
  Noncontrolling
Interest
  Total  
  Shares   Par Value  

Balances at December 31, 2011 (Restated)

  9,953,786    $ 99,538    $ 56,911,039    $ (22,221,483 $ 8,898,006    $ 43,687,100   

Net loss

  —        —        —        (4,167,877   (1,241,868   (5,409,745

Redemption of units in Operating Partnership

  —        —        —        —        (36,180   (36,180

Issuance of restricted common stock awards

  46,000      460      109,940      —        —        110,400   

Dividends and distributions declared

  —        —        —        (999,978   (297,644   (1,297,622
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012 (Restated)

  9,999,786    $ 99,998    $ 57,020,979    $ (27,389,338 $ 7,322,314    $ 37,053,953   

Net loss

  —        —        —        (3,483,969   (989,623   (4,473,592

Conversion of units in Operating Partnership to shares of common stock

  131,641      1,316      337,449      —        (338,765   —     

Redemption of units in Operating Partnership

  —        —        —        —        (32,900   (32,900

Issuance of units for Houston purchase

  —        —        —        —        153,636      153,636   

Issuance of restricted and unrestricted common stock awards

  75,500      755      175,685      —        —        176,440   

Dividends and distributions declared

  —        —        —        (1,577,466   (445,276   (2,022,742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013 (Restated)

  10,206,927    $ 102,069    $ 57,534,113    $ (32,450,773 $ 5,669,386    $ 30,854,795   

Net loss

  —        —        —        (584,671   (153,838   (738,509

Conversion of units in Operating Partnership to shares of common stock

  310,000      3,100      755,750      —        (758,850   —     

Redemption of units in Operating Partnership

  —        —        —        —        (25,621   (25,621

Issuance of unrestricted common stock awards

  24,750      248      147,112      —        —        147,360   

Issuance of restricted common stock awards

  12,000      120      78,165      —        —        78,285   

Issuance of common stock through ATM offering, net

  17,255      172      124,739      —        —        124,911   

Amortization of restricted stock award

  —        —        19,920      —        —        19,920   

Dividends and distributions declared

  —        —        —        (2,352,869   (598,415   (2,951,284
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

  10,570,932    $ 105,709    $ 58,659,799    $ (35,388,313 $ 4,132,662    $ 27,509,857   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

F-6


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

  2014      2013      2012   
      (Restated)   (Restated)  

Cash flows from operating activities:

     

Net loss

  $ (738,509   $ (4,473,592   $ (5,409,745

Adjustments to reconcile net loss to net cash provided by operating activities:

     

Depreciation and amortization

    11,969,284        8,467,228        8,661,769   

Equity in income of joint venture

    (307,370     (449,500     (178,138

Impairment of investment in hotel properties, net

    3,175,000        611,000        —     

Impairment of note receivable

    —          —          110,871   

Realized and unrealized loss on warrant derivative

    —          2,205,248        2,026,677   

Amortization of deferred financing costs

    1,428,674        1,518,556        1,971,796   

Paid-in-kind interest

    —          186,293        387,554   

Charges related to equity-based compensation

    245,565        323,800        110,400   

Changes in assets and liabilities:

     

Restricted cash

    (92,439     (173,990     377,908   

Accounts receivable

    369,685        58,368        212,822   

Inventory, prepaid expenses and other assets

    (1,677,032     116,976        205,878   

Deferred income taxes

    (1,961,663     1,370,189        1,241,848   

Accounts payable and accrued liabilities

    2,338,688        (3,396     (896,650

Advance deposits

    89,099        (33,233     172,745   

Due from affiliates

    12,273        (129,196     16,222   
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    14,851,255        9,594,751        9,011,957   
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

     

Acquisition of hotel property

    (61,106,085     (30,725,959     —     

Improvements and additions to hotel properties

    (9,801,018     (4,906,000     (2,908,114

Distributions from joint venture

    750,000        6,646,627        500,000   

Funding of restricted cash reserves

    (3,692,045     (2,195,658     (1,983,383

Proceeds from restricted cash reserves

    2,583,419        1,653,401        1,215,972   

Proceeds from involuntary conversion of assets

    169,151        —          —     

Proceeds from sale of assets

    —          —          19,404   
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (71,096,578     (29,527,589     (3,156,121
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

     

Proceeds of unsecured notes

    25,300,000        27,600,000        —     

Proceeds of mortgage debt

    48,600,000        29,367,287        58,300,000   

Proceeds of loans

    19,000,000        —          —     

Proceeds from the sale of stock, net

    124,911        —          —     

Payments on line of credit

    —          —          (25,537,290

Payments on mortgage debt and loans

    (24,171,892     (8,703,390     (22,033,393

Payment of deferred financing costs

    (2,637,637     (2,684,581     (1,102,398

Dividends and distributions paid

    (2,686,567     (1,823,723     (1,167,216

Redemption of redeemable preferred stock

    —          (14,413,943     (11,513,602

Redemption of units in Operating Partnership

    (25,621     (32,900     (36,180

Redemption of warrants

    —          (7,175,000     —     
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    63,503,194        22,133,750        (3,090,079
 

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    7,257,871        2,200,912        2,765,757   

Cash and cash equivalents at the beginning of the year

    9,376,628        7,175,716        4,409,959   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the year

  $ 16,634,499      $ 9,376,628      $ 7,175,716   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

     

Cash paid during the year for interest

  $ 13,766,824      $ 10,423,150      $ 10,412,434   
 

 

 

   

 

 

   

 

 

 

Cash paid during the year for income taxes

  $ 263,621      $ 143,848      $ 117,447   
 

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activities:

     

Issuance of units in Operating Partnership for acquisition of hotel property

  $ —        $ 153,636      $ —     
 

 

 

   

 

 

   

 

 

 

Change in amount of hotel property improvements in accounts payable and accrued liabilities

  $ 1,108,182     $ 195,725      $ 210,737  
 

 

 

   

 

 

   

 

 

 

Change in amount of deferred financing and deferred offering cost in accounts payable and accrued liabilities

  $ 375,487      $ 248,630      $ —     
 

 

 

   

 

 

   

 

 

 

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

 

F-7


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of the General Partner of

Sotherly Hotels LP:

We have audited the accompanying consolidated balance sheet of Sotherly Hotels LP and subsidiaries (the “Partnership”) as of December 31, 2014, and the related consolidated statements of operations, changes in partners’ capital, and cash flows for the year ended December 31, 2014. Our audit of the basic consolidated financial statements included the financial statement schedule (as it relates to December 31, 2014 and for the year then ended), listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels LP and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule (as it relates to December 31, 2014 and for the year then ended), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

McLean, Virginia

April 14, 2015

 

F-8


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of the General Partner of

Sotherly Hotels LP (formerly MHI Hospitality, L.P.)

Williamsburg, Virginia 23185

We have audited the accompanying consolidated balance sheet of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries (the “Partnership”) as of December 31, 2013, and the related consolidated statements of operations, changes in partners’ capital, and cash flows for each of the years in the two-year period ended December 31, 2013. Sotherly Hotels LP’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ PBMares, LLP

Norfolk, Virginia

March 25, 2014, except for Note 2, as to

    which the date is April 14, 2015

 

F-9


SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2014 AND 2013

 

     2014      2013  
            (Restated)  

ASSETS

     

Investment in hotel properties, net

   $ 260,192,153       $ 202,645,633   

Investment in joint venture

     1,982,107         2,424,737   

Cash and cash equivalents

     16,634,499         9,376,628   

Restricted cash

     6,621,864         3,796,141   

Accounts receivable, net

     1,908,762         1,812,026   

Accounts receivable-affiliate and joint venture

     197,674         209,947   

Prepaid expenses, inventory and other assets

     3,334,401         2,261,303   

Shell Island sublease, net

     —          240,196   

Deferred income taxes

     3,543,295         1,581,632   

Deferred financing costs, net

     5,405,288         3,820,838   
  

 

 

    

 

 

 

TOTAL ASSETS

$ 299,820,043    $ 228,169,081   
  

 

 

    

 

 

 

LIABILITIES

Mortgage loans

$ 205,291,657    $ 160,363,549   

Unsecured notes

  52,900,000      27,600,000   

Accounts payable and accrued liabilities

  12,044,886      8,095,782   

Advance deposits

  1,220,729      666,758   

Distributions payable

  852,914      588,197   
  

 

 

    

 

 

 

TOTAL LIABILITIES

  272,310,186      197,314,286   

Commitments and contingencies (see Note 7)

PARTNERS’ CAPITAL

General Partner: 131,218 and 130,711 units issued and outstanding as of December 31, 2014 and 2013, respectively

  520,791      554,316   

Limited Partners: 12,990,541 and 12,940,343 units issued and outstanding as of December 31, 2014 and 2013, respectively

  26,989,066      30,300,479   
  

 

 

    

 

 

 

TOTAL PARTNERS’ CAPITAL

  27,509,857      30,854,795   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

$ 299,820,043    $ 228,169,081   
  

 

 

    

 

 

 

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

 

F-10


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

     2014     2013     2012  
           (Restated)     (Restated)  

REVENUE

      

Rooms department

   $ 84,618,889      $ 62,837,422      $ 60,824,016   

Food and beverage department

     31,444,984        22,054,209        21,961,328   

Other operating departments

     6,876,046        4,482,896        4,557,876   
  

 

 

   

 

 

   

 

 

 

Total revenue

  122,939,919      89,374,527      87,343,220   

EXPENSES

Hotel operating expenses

Rooms department

  22,913,479      17,212,549      16,638,574   

Food and beverage department

  21,026,202      14,048,924      14,287,874   

Other operating departments

  1,192,183      508,868      480,307   

Indirect

  45,072,491      33,757,896      33,033,820   
  

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

  90,204,355      65,528,237      64,440,575   

Depreciation and amortization

  11,969,284      8,467,228      8,661,769   

Impairment of investment in hotel properties, net

  3,175,000      611,000      —     

Corporate general and administrative

  5,085,949      4,360,583      4,078,826   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  110,434,588      78,967,048      77,181,170   
  

 

 

   

 

 

   

 

 

 

NET OPERATING INCOME

  12,505,331      10,407,479      10,162,050   

Other income (expense)

Interest expense

  (14,636,870   (9,606,479   (10,399,962

Interest income

  19,865      17,914      16,158   

Equity income in joint venture

  307,370      449,500      178,138   

Realized and unrealized loss on warrant derivative

  —        (2,205,248   (2,026,677

Loss on debt extinguishment

  (831,079   (2,040,662   (1,982,184

Gain on involuntary conversion of asset

  169,151      —        —     

Impairment of note receivable

  —        —        (110,871
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

  (2,466,232   (2,977,496      (4,163,348

Income tax (provision) benefit

  1,727,723      (1,496,096   (1,246,397
  

 

 

   

 

 

   

 

 

 

Net loss

$ (738,509 $ (4,473,592 $ (5,409,745
  

 

 

   

 

 

   

 

 

 

Net loss per unit

Basic and diluted

$ (0.06 $ (0.34 $ (0.42

Weighted average number of units outstanding

Basic and diluted

 
13,107,413
  
  13,042,020      12,973,953   

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

 

F-11


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

     General Partner     Limited Partners     Total  
     Units     Amount     Units     Amount    

Balances at December 31, 2011(Restated)

     129,387      $ 681,731        12,809,238      $ 43,005,369      $ 43,687,100   

Issuance of partnership units

     460        1,104        45,540        109,296        110,400   

Distributions declared

     —          (12,976     —          (1,284,646     (1,297,622

Redemption of limited partnership units

     (120     (633     (11,880     (35,547     (36,180

Net loss

     —          (54,096     —          (5,355,649     (5,409,745
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012 (Restated)

  129,727    $ 615,130      12,842,898    $ 36,438,823    $ 37,053,953   

Issuance of partnership units

  1,084      4,625      107,345      325,451      330,076   

Distributions declared

  —        (20,227   —        (2,002,515   (2,022,742

Redemption of limited partnership units

  (100   (476   (9,900   (32,424   (32,900

Net loss

  —        (44,736   —        (4,428,856   (4,473,592
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013(Restated)

  130,711    $ 554,316      12,940,343    $ 30,300,479    $ 30,854,795   

Issuance of partnership units

  540      3,534      53,465      347,022      350,556   

Amortization of restricted award

  —        199      —        19,721      19,920   

Distributions declared

  —        (29,644   —        (2,921,640   (2,951,284

Redemption of limited partnership units

  (33   (228   (3,267   (25,393   (25,621

Net loss

  —        (7,386   —        (731,123   (738,509
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

  131,218    $ 520,791      12,990,541    $ 26,989,066    $ 27,509,857   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

 

F-12


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

  2014   2013   2012  
           (Restated)     (Restated)  

Cash flows from operating activities:

      

Net loss

   $ (738,509   $ (4,473,592   $ (5,409,745

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     11,969,284        8,467,228        8,661,769   

Equity in income of joint venture

     (307,370     (449,500     (178,138

Impairment of investment in hotel properties, net

     3,175,000        611,000        —     

Impairment of note receivable

     —          —          110,871   

Realized and unrealized loss on warrant derivative

     —          2,205,248        2,026,677   

Amortization of deferred financing costs

     1,428,674        1,518,556        1,971,796   

Paid-in-kind interest

     —          186,293        387,554   

Charges related to equity-based compensation

     245,565        323,800        110,400   

Changes in assets and liabilities:

      

Restricted cash

     (92,439     (173,990     377,908   

Accounts receivable

     369,685        58,368        212,822   

Inventory, prepaid expenses and other assets

     (1,677,032     116,976        205,878   

Deferred income taxes

     (1,961,663     1,370,189        1,241,848   

Accounts payable and accrued liabilities

     2,338,688        (3,396     (896,650

Advance deposits

     89,099        (33,233     172,745   

Due from affiliates

     12,273        (129,196     16,222   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     14,851,255