UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
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Large accelerated filer |
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Smaller reporting company |
| Emerging growth company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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As of June 2, 2025, there were
LODGING FUND REIT III, INC.
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LODGING FUND REIT III, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | ||||
2025 | 2024 | |||||
(unaudited) | (audited) | |||||
Assets |
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Investment in hotel properties, net of accumulated depreciation and amortization of $ | $ | | $ | | ||
Cash and cash equivalents |
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Restricted cash |
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Accounts receivable, net |
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Franchise fees, net |
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Prepaid expenses and other assets |
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Assets held for sale | | | ||||
Total Assets (variable interest entities - $ | $ | | $ | | ||
Liabilities and Equity |
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Debt, net | $ | | $ | | ||
Finance lease liabilities | | | ||||
Accounts payable |
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Accrued expenses |
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Distributions payable | | | ||||
Due to related parties |
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Other liabilities | | | ||||
Mandatorily redeemable Series P preferred units, net | | | ||||
Liabilities related to assets held for sale |
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Total liabilities (variable interest entities - $ |
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Commitments and contingencies (See Note 10) | ||||||
Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders' deficit | ( |
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Non-controlling interest – Series B LP Units |
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Non-controlling interest – Series GO LP Units | | | ||||
Non-controlling interest – Series GO II LP Units | | | ||||
Non-controlling interest – Series T LP Units | | | ||||
Non-controlling interest – Series Pref A Units | | | ||||
Non-controlling interest – Common LP Units | | | ||||
Total equity |
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Total Liabilities and Equity | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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LODGING FUND REIT III, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, | ||||||
| 2025 |
| 2024 | |||
Revenues |
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Room revenue | $ | | $ | | ||
Other revenue |
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Total revenue |
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Expenses |
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Property operations |
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General and administrative |
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Sales and marketing |
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Franchise fees |
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Management fees |
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Acquisition expense |
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Depreciation and amortization |
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Total expenses |
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Other Income (Expense) |
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Other (expense) income, net | ( | ( | ||||
Interest expense |
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Total other expense |
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Net Loss Before Income Taxes |
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Income tax benefit |
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Net Loss |
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Net loss attributable to non-controlling interest - Series B LP Units |
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Net loss attributable to non-controlling interest - Series GO LP Units | ( | ( | ||||
Net loss attributable to non-controlling interest - Series GO II LP Units | ( | ( | ||||
Net loss attributable to non-controlling interest - Common LP Units | ( | ( | ||||
Net Loss Attributable to Common Stockholders | $ | ( | $ | ( | ||
Basic and Diluted Net Loss Per Share of Common Stock | $ | ( | $ | ( | ||
Weighted-average Shares of Common Stock Outstanding, Basic and Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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LODGING FUND REIT III, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock | Non-Controlling Interest | ||||||||||||||||||||||||||||||||||
Additional | Total | ||||||||||||||||||||||||||||||||||
Par | Paid-In | Accumulated | Stockholders' | Series B | Series GO | Series GO 2 | Series T | Series Pref | Common | Total | |||||||||||||||||||||||||
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| LP Units | LP Units | LP Units | LP Units | A Units | LP Units |
| Equity | |||||||||||||||||
Balance at December 31, 2023 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||||||||
Issuance of common stock | | | | — | | — | — | — | — | — | — | | |||||||||||||||||||||||
Issuance of stock-based compensation | | | | — | | — | — | — | — | — | — | | |||||||||||||||||||||||
Issuance of GO II Units | — | — | — | — | — | — | — | | — | — | — | | |||||||||||||||||||||||
Offering costs | — | — | — | ( | ( | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||
Distributions declared ($ | — | — | — | ( | ( | ( | ( | — | — | — | ( | ( | |||||||||||||||||||||||
Distributions reinvested | | | | — | | — | — | — | — | — | — | | |||||||||||||||||||||||
Net loss | — | — | — | ( | ( | ( | ( | ( | — | — | ( | ( | |||||||||||||||||||||||
Balance at March 31, 2024 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||||||||
Balance at December 31, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Issuance of common stock | | | | — | | — | — | — | — | — | — | | |||||||||||||||||||||||
Issuance of stock-based compensation | | | | — | | — | — | — | — | — | — | | |||||||||||||||||||||||
Issuance of GO II Units | — | — | — | — | — | — | — | | — | — | — | | |||||||||||||||||||||||
Offering costs | — | — | — | ( | ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||
Net loss | — | — | — | ( | ( | ( | ( | ( | — | — | ( | ( | |||||||||||||||||||||||
Balance at March 31, 2025 | | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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LODGING FUND REIT III, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, | ||||||
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| 2024 | |||
Cash Flows from Operating Activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Stock-based compensation | | | ||||
Amortization of franchise fees | | | ||||
Amortization of deferred financing costs and debt premiums |
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Loss on disposal of fixed assets | | | ||||
Deferred tax expense | ( | ( | ||||
Change in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other assets |
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Decrease in finance lease liability | ( | ( | ||||
Accounts payable |
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Accrued expenses |
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Due to related parties |
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Other liabilities |
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Net cash provided (used in) by operating activities |
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Cash Flows from Investing Activities: |
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Improvements and additions to hotel properties |
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Net cash used in investing activities |
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Cash Flows from Financing Activities: |
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Proceeds from mortgage debt |
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Proceeds from lines of credit | | | ||||
Principal payments on mortgage debt |
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Principal payments on lines of credit | ( | ( | ||||
Payments of deferred financing costs |
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Proceeds from issuance of common stock |
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Proceeds from issuance of GO II Units | | | ||||
Payments of offering costs related to Series P Preferred Units | ( | — | ||||
Payments of offering costs |
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Distributions paid |
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Net cash (used in) provided by financing activities |
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Net change in cash, cash equivalents, and restricted cash |
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Beginning Cash, Cash Equivalents, and Restricted Cash |
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Ending Cash, Cash Equivalents, and Restricted Cash | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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LODGING FUND REIT III, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Three Months Ended March 31, | ||||||
2025 |
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Supplemental Disclosure of Cash Flow Information: |
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Interest paid | $ | | $ | | ||
Income taxes paid | $ | — | $ | — | ||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
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Debt issued for refinance of Lakewood Property | $ | — | $ | | ||
Offering costs included in accounts payable | $ | | $ | | ||
Offering costs included in due to related parties | $ | | $ | ( | ||
Distributions included in due to related parties | $ | — | $ | | ||
Reinvested distributions | $ | — | $ | | ||
Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | ||||||
Cash and cash equivalents, end of period | $ | | $ | | ||
Restricted cash, end of period | | | ||||
Cash, cash equivalents, and restricted cash, end of period | $ | | $ | | ||
Cash and cash equivalents, end of period included in assets held for sale | | — | ||||
Restricted cash, end of period included in assets held for sale | — | — | ||||
Cash, cash equivalents, and restricted cash, end of period (including cash, cash equivalents and restricted cash held for sale) | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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LODGING FUND REIT III, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Lodging Fund REIT III, Inc. (“LF REIT III”), was formed on April 9, 2018 as a Maryland corporation. LF REIT III, together with its subsidiaries (the “Company”), was formed for the principal purpose of acquiring, through purchase or contribution, direct or indirect ownership interests in a diverse portfolio of limited-service, select-service, full-service and extended stay hotel properties located primarily in “America’s Heartland,” which the Company defines as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. LF REIT III has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2018. The Company’s business activities are directed and managed by Legendary Capital REIT III, LLC (the “Advisor”) and its affiliates, which are related parties through common management, pursuant to the Amended and Restated Advisory Agreement (the “Advisory Agreement”), dated June 1, 2018. The Company has no foreign operations or assets, and operates its business as
Substantially all of the Company’s assets and liabilities are held by, and substantially all of its operations are conducted through, Lodging Fund REIT III OP, LP (the “Operating Partnership,” or “OP”), a subsidiary of LF REIT III. As of March 31, 2025, the OP has
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC applicable to interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2024. Results of operations for the three months ended March 31, 2025 are not necessarily indicative of the operating results to be attained in the entire fiscal year or for any subsequent period.
The unaudited condensed consolidated financial statements include the accounts of LF REIT III, the OP, its wholly-owned subsidiaries and entities in which the Company has a controlling financial interest, including variable interest entities (“VIEs”) where the Company is the primary beneficiary. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of the rights held by other interests. If the entity is considered to be a VIE, the Company determines whether the Company is the primary beneficiary, and then consolidates those VIEs for which the Company has determined that the Company is the primary beneficiary. If the entity in which the Company holds an interest does not meet the definition of a VIE, the Company evaluates whether the Company has a controlling financial interest through the Company’s voting interest in the entity. The Company consolidates entities when the Company owns more than 50 percent of the voting shares of a company or otherwise has a controlling financial interest. References in these financial statements to the net loss attributable to stockholders do not include non-controlling interests, which represent the outside ownership interests of the Company’s consolidated, non-wholly owned entities and are presented separately in the unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
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Use of Estimates—The preparation of the Company’s unaudited condensed consolidated financial statements and the accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition—Revenues consist of amounts derived from hotel operations, including room sales and other hotel revenues, and are presented on a disaggregated basis in the Company’s condensed consolidated statements of operations. These revenues are recorded net of any sales and occupancy taxes collected from the hotel guests. All revenues are recorded on an accrual basis as they are earned. Any cash received prior to a guest’s arrival is recorded as an advance deposit from the guest and recognized as revenue at the time of the guest’s occupancy at the hotel property.
Investment in Hotel Properties—The Company evaluates whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of the Company’s acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions are capitalized and transaction costs associated with business combinations would be expensed as incurred.
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, the Company allocates the purchase price among the assets acquired and the liabilities assumed on a relative fair value basis at the date of acquisition. The Company determines the fair value of assets acquired and liabilities assumed with the assistance of third-party valuation specialists, using cash flow analysis as well as available market and cost data. The determination of fair value includes making numerous estimates and assumptions.
The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed debt liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For the three months ended March 31, 2025 and March 31, 2024, there were
The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of
for land improvements, for buildings and building improvements and to for FF&E. Maintenance and repair costs are expensed in the period incurred and major renewals or improvements to the hotel properties are capitalized.The Company evaluates its hotel properties for indicators of impairment. If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal. Other than the Pineville HGI Property and the Charlotte Property (see Note 3), there were no indicators of impairment to the hotel properties and
Assets Held for Sale— The Company classifies assets as held for sale when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, no significant contingencies exist which could prevent the transaction from being completed in a timely manner, and the sale is expected to close within one year. If these criteria are met, the Company will cease recording depreciation and amortization and will record an impairment charge if the fair value less costs to sell is less than the carrying amount of the disposal group. The Company will generally classify the impairment charge, together with the related operating results, as continuing operations in the Company’s consolidated statements of operations and classify the assets and related liabilities as held for sale in the
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Company’s consolidated balance sheets. If the Company’s plan of sale changes and the Company subsequently decides not to sell a property that is classified as held for sale, the property will be reclassified as held and used in the period the change occurs. As of March 31, 2025 and December 31, 2024, the Company had
Advertising Costs—The Company expenses advertising costs as incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and expenses that are directly attributable to advertising and promotion. Advertising expense was $
Non-controlling Interest—Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the Company. Non-controlling interests are reported in the condensed consolidated balance sheets within equity, separate from stockholders’ equity. Revenue and expenses attributable to both the Company and the non-controlling interests are reported in the condensed consolidated statements of operations, with net income or loss attributable to non-controlling interests reported separately from net income or loss attributable to the Company.
Cash and Cash Equivalents—Cash and cash equivalents include cash in bank accounts as well as highly liquid investments with an original maturity of three months or less. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed FDIC insured levels.
Restricted Cash—Restricted cash primarily consists of earnest money deposits related to hotel property acquisitions, as well as certain funds maintained in escrow accounts to fund future payments for insurance, property tax obligations, and reserves for future capital expenditures, as required by our debt agreements.
Accounts Receivable—Accounts receivable consist primarily of receivables due from hotel guests for room stays and meeting and banquet room rentals, which are uncollateralized customer obligations. Management determines the likelihood of collectability of receivables on an individual customer basis, based on the amount of time the balance has been outstanding, likelihood of collecting, and the customer’s current economic status. The carrying amount of the accounts receivables is reduced by an allowance for credit losses that reflects management’s best estimate of the amounts that will not be collected. As of March 31, 2025 and December 31, 2024, there was
Deferred Financing Costs—Deferred financing costs represent origination fees, legal fees, and other costs associated with obtaining financing. Deferred financing costs are presented on the condensed consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The Company expenses unamortized deferred financing costs when the associated financing agreement is refinanced or repaid before maturity unless certain criteria are met that would allow for the carryover of such costs to the refinanced agreement. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed.
Offering Costs—The Company has incurred certain costs related directly to the Company’s private offerings consisting of, among other costs, commissions, legal, due diligence costs, printing, marketing, filing fees, postage, data processing fees, and other offering related costs. These costs are capitalized and recorded as a reduction of equity proceeds on the accompanying condensed consolidated balance sheets.
Property Operations Expenses—Property operations expenses consist of expenses related to room rental, food and beverage sales, telephone usage, and other miscellaneous service costs, as well as all costs of operating the Company’s hotel properties such as building repairs, maintenance, property taxes, utilities, and other related costs.
Property Management Fees—Property management fees include expenses incurred for management services provided for the day-to-day operations of our hotel properties, which are generally charged at a rate of
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Property management fees also include asset management fees, which may be charged at an annual rate of up to
Franchise Fees—The Company pays initial fees related to hotel franchise rights prior to acquiring a hotel property. The fees are included in prepaid expenses and other assets until the time the related hotel property is acquired. Initial franchise fees related to hotel properties that are acquired are amortized on a straight-line basis over the life of the agreement. Initial franchise fees related to hotel properties that are not acquired are refunded to the Company, net of any associated fees, and any fees are expensed as incurred. Franchise fees on the accompanying condensed consolidated statements of operations include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, and reservation fees and other related costs.
Acquisition Costs—The Company incurs costs during the review of potential hotel property acquisitions including legal fees, environmental reviews, market studies, financial advisory services, and other professional service fees. If the Company does complete a property acquisition, an acquisition fee of up to
Stock-Based Compensation—The Company compensates its independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and the Company recognizes stock-based compensation expense in the quarter they are issued based on the award’s fair value at the grant date. Compensation expense related to stock awards is determined on the grant date based on the offering price of our common stock and is charged to earnings when issued. Stock-based compensation expense was $
Net Loss Per Share of Common Stock—Basic net loss per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net loss per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net loss per common share were the same for the periods presented.
Preferred Stock—The Company has
The Company accounts for both the Series P Preferred Units and Series A Preferred Units pursuant to the guidance within ASC 480 – Distinguishing Liabilities from Equity. The Series P Preferred Units are classified as a liability (see Note 8); the Series A Preferred Units are classified as permanent equity (See Note 9).
Income Taxes—The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.
As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates and it may not be able to qualify as a REIT for
subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to U.S. federal income and excise taxes on undistributed taxable income. Taxable income from non-REIT10
activities managed through the Company’s taxable REIT subsidiary (“TRS”) is subject to U.S. federal, state, and local income taxes at the applicable rates.
The TRS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company performs periodic reviews for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the unaudited condensed consolidated financial statements.
Fair Value Measurement—The Company establishes fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs such as quoted prices in active markets.
Level 2—Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3—Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
The Company’s financial instruments as of March 31, 2025 and December 31, 2024 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, lines of credit, and mortgage debt. With the exception of the Company’s mortgage debt, the carrying amounts of the financial instruments presented in the condensed consolidated financial statements approximate their fair value as of March 31, 2025.
The Company records its mandatorily redeemable Series P Preferred Units at fair value based on the present value of the amount to be paid at redemption date, less unamortized offering costs. Since these units are not actively traded and the fair value is based on observable inputs, the Series P preferred units are classified as Level 2 within the fair value hierarchy.
Recent Accounting Pronouncements—In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on income tax disclosures around effective tax rates and cash income taxes paid. This update requires disclosure, on an annual basis, of a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments in this ASU may be applied prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or the amendments may be applied retrospectively by providing the revised disclosures for all periods presented. The adoption of this ASU is expected to only impact the notes to the Company’s condensed consolidated financial statements by requiring additional disclosure but will have no impact on the Company’s condensed consolidated financial statements.
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In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses, which provides for enhanced disclosures for public business entities on certain income statement items by: i) presenting the following within tabular format - a) purchases of inventory, b) employee compensation, c) depreciation, d) intangible asset amortization, e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities - ii) providing a qualitative description of amounts remaining in relevant expense captions that are not separately disaggregated quantitatively and iii) disclosing the definition of selling expenses in addition to disclosing the total amount of selling expenses. The new standard is effective for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. The Company is evaluating the impact the adoption this ASU will have on the Company’s consolidated financial statements.
Reclassifications—Certain amounts included in the March 31, 2024 condensed consolidated financial statements have been reclassified to conform to the March 31, 2025 presentation.
3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of March 31, 2025 and December 31, 2024 consisted of the following:
| March 31, | December 31, | ||||
2025 | 2024 | |||||
Land and land improvements | $ | | $ | | ||
Building and building improvements |
| |
| | ||
Furniture, fixtures, and equipment |
| |
| | ||
Right-of-use asset - ground lease | | | ||||
Construction in progress | | | ||||
Investment in hotel properties, at cost | |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
Investment in hotel properties, net | $ | | $ | |
As of March 31, 2025, the Company consolidated
Property Improvement Plan
Throughout the duration of the Company's investment in hotels, the Company would undergo a Property Improvement Plan (PIP) every
Properties Under Contract
On April 15, 2024, the Operating Partnership and Stow Hotel Associates, LLC (the “Stow Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreements (the “Hampton Stow Contribution Agreement” and “Staybridge Stow Contribution Agreement”) for the acquisition of
The Company terminated the Hampton Stow Contribution Agreement and the Staybridge Stow Contribution Agreement on March 1, 2025. The earnest money deposits were fully refunded to the Operating Partnership.
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Variable Interest Entity
On August 10, 2022, the Company acquired an equity and profits interest in an entity that owns
| March 31, | December 31, | ||||
2025 | 2024 | |||||
Assets |
|
|
|
| ||
Investment in hotel properties, net of accumulated depreciation of $ | $ | | $ | | ||
Cash and cash equivalents |
| |
| | ||
Restricted cash |
| |
| | ||
Accounts receivable, net |
| |
| | ||
Prepaid expenses and other assets |
| |
| | ||
Total Assets | $ | | $ | | ||
Liabilities |
|
|
|
| ||
Debt, net | $ | | $ | | ||
Finance lease liability | | | ||||
Accounts payable |
| |
| | ||
Accrued expenses |
| |
| | ||
Other liabilities |
| |
| ( | ||
Total liabilities | $ | | $ | |
Ground Leases
The Company has ground leases on
a) | Sheraton Northbrook - matures in 2067 and has a yearly base rent that increases |
b) | El Paso University - matures in 2054 and has annual rentals comprised of a base rent due at the beginning of the year plus, if applicable, a percent of revenue in excess of the base rent. The annual base rent of the El Paso ground lease is adjusted every |
For the three months ended March 31, 2025 and 2024, the Company recognized aggregate interest expense of $
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The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the finance lease liability included in the Company’s condensed consolidated balance sheet as of March 31, 2025.
2025 (9 months) |
| $ | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
2029 |
| | |
Thereafter |
| | |
Total finance lease payments | | ||
Interest | ( | ||
Present value of finance lease liabilities | $ | |
Assets Held for Sale
On December 2, 2024, the Company entered into
The major classes of assets and liabilities related to assets held for sale included in the consolidated balance sheet at March 31, 2025 and December 31, 2024 were as follows:
March 31, | December 31, | |||||
| 2025 |
| 2024 | |||
Assets |
|
| ||||
Investments in hotel properties | $ | | $ | | ||
Cash and cash equivalents |
| |
| | ||
Accounts receivable, net | | | ||||
Franchise fees, net | | | ||||
Prepaid expenses and other assets | | | ||||
Assets held for sale | $ | | $ | | ||
Liabilities |
|
|
|
| ||
Debt, net | $ | | $ | | ||
Accounts payable |
| |
| | ||
Accrued expenses |
| |
| | ||
Other liabilities |
| |
| | ||
Liabilities related to assets held for sale | $ | | $ | |
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4. DEBT
At March 31, 2025 and December 31, 2024, all forms of debt consists of the following:
| Interest | Outstanding | Outstanding | |||||||
Rate as of | Balance as of | Balance as of | ||||||||
March 31, | Maturity | March 31, | December 31, | |||||||
2025 | Date | 2025 | 2024 | |||||||
Holiday Inn Express - Cedar Rapids(1) |
| 3/31/2025 | $ | | $ | | ||||
Hampton Inn - Eagan(1) |
| 3/31/2025 |
| |
| | ||||
Home2 Suites - Prattville(2) |
| 11/4/2029 |
| |
| | ||||
Home2 Suites - Lubbock | 10/6/2026 | | | |||||||
Fairfield Inn & Suites - Lubbock | 4/6/2029 | | | |||||||
Homewood Suites - Southaven | 12/6/2029 | | | |||||||
Courtyard by Marriott - Aurora(3)(4) | 2/5/2025 | | | |||||||
Holiday Inn - El Paso(4) | 5/31/2025 | | | |||||||
Hilton Garden Inn - Houston | 9/2/2026 | | | |||||||
Hampton Inn - Fargo | 3/1/2027 | | | |||||||
Hampton Inn - Fargo - 2nd Mortgage | 2/1/2026 | | — | |||||||
Courtyard by Marriott - El Paso | 5/13/2027 | | | |||||||
Fairfield Inn & Suites - Lakewood(4)(5) | 10/5/2025 | | | |||||||
Fairfield Inn & Suites - Lakewood - A-1(4) | 3/27/2026 | | | |||||||
Residence Inn - Fort Collins(6) | 5/4/2025 | | | |||||||
Residence Inn - Fort Collins - CapEx(7) | 5/4/2025 | | | |||||||
Residence Inn - Fort Collins - A-1(4) | 8/2/2028 | | | |||||||
Hilton Garden Inn - El Paso | 8/6/2025 | | | |||||||
Holiday Inn Express - Wichita | 12/21/2027 | | | |||||||
Total Mortgage Debt |
| |
| | ||||||
Premium on assumed debt, net |
| |
| | ||||||
Deferred financing costs, net | ( | ( | ||||||||
Net Mortgage | | | ||||||||
$ | 6/15/2024 | | | |||||||
$ | 12/31/2027 | | | |||||||
$ | 9/30/2025 | | | |||||||
Total Lines of Credit | | | ||||||||
Debt, net | $ | | $ | |
(1) | The Company and the lender are working to finalize an extension of these loans as of the date of this filing. |
(2) | Variable interest rate equal to SOFR Index plus |
(3) | Variable interest rate equal to 30-day LIBOR plus |
(4) | Loan is interest-only until maturity. |
(5) | Variable interest rate equal to SOFR Index plus |
(6) | Variable interest rate equal to SOFR Index plus |
(7) | Variable interest rate equal to SOFR Index plus |
(8) | Variable interest rate equal to U.S. Prime plus |
Mortgage Debt
The fair value of the Company’s mortgage debt was estimated by discounting each loan’s future cash flows over the remaining term of the mortgage using current borrowing rates for debt instruments with similar terms and maturities, which are Level 3 inputs in the fair value hierarchy. As of March 31, 2025, the estimated fair value of the Company’s mortgage debt was $
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estimated fair value of the Company’s mortgage debt was $
Western Line of Credit Amendments
The Company and Western State Bank are working to finalize an extension of the Western Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
Mortgage Loan Modifications
From time to time, the Company may amend or refinance its existing mortgages. The Company follows guidance prescribed by FASB ASC 470, Debt, in order to determine whether a change in terms or an amendment would be accounted for as a modification or an extinguishment of debt. Under modification accounting,
Contribution Agreement – Sheraton Northbrook, Residence Inn - Fort Collins and Courtyard by Marriot - Aurora
On December 24, 2024, the Company entered into a Contribution Agreement (the “Contribution Agreement”), Contribution Agreement to restructure
With respect to the Fort Collins Loans and the Courtyard Aurora Loan, the Company is required to refinance each such loan within
El Paso HI Property
On January 16, 2025, the Company modified the mortgage loan secured by the El Paso Holiday Inn, which increased the interest to
Cedar Rapids Property and Eagan Property
On February 26, 2025, the Company entered into a Change in Terms Agreement with Western State Bank to amend the existing loans secured by the Cedar Rapids Property and the Eagan Property to extend the maturity date of each loan to March 31, 2025 and to increase the interest rate of each loan to a
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The Company and Western State Bank are working to finalize an extension of the loans secured by the Cedar Rapids Property and the Eagan property as of the date of this filing, however there can be no assurance that an extension will be granted.
Houston Property and Wichita Property
On March 27, 2025, the Company entered into a Forbearance Agreement with Choice Financial Group for the Houston Property and the Wichita Property whereby the Company is required to make payments in the amount aggregating approximately $
El Paso Courtyard Property, Charlotte Property and Pineville HGI Property Mortgage Loan Modifications
On March 27, 2025, the mortgage loans secured by the El Paso Airport Property, the Charlotte Property and the Pineville HGI Property (collectively, the “Western Alliance Loans”) were sold to a new lender. From January 2025 through the date of this filing, the Company was not in compliance with the payment obligations under the Western Alliance Loans. However, as discussed above, the sales of the properties are anticipated to close in the near future, and the proceeds are expected to be utilized toward various corporate purposes, including the repayment of these loans. The Company plans to engage in discussions with the new lender to defer the payment of principal and interest, similar to the terms previously discussed with the old lender. However, there can be no assurance that the new lender will approve these new payment terms, which could have a material adverse impact on the Company’s financial condition and liquidity.
Future Minimum Payments
As of March 31, 2025, the future minimum principal payments on the Company’s debt were as follows:
2025 (9 months) |
| $ | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
2029 |
| | |
Thereafter |
| | |
| |||
Premium on assumed debt, net |
| | |
Deferred financing costs, net |
| ( | |
$ | |
The $
5. INCOME TAXES
The Company’s earnings (losses), other than those generated by the Company’s TRS, are not generally subject to federal corporate and state income taxes due to the Company’s REIT election. The Company did
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6. RELATED PARTY TRANSACTIONS
Legendary Capital REIT III, LLC— Substantially all of the Company’s business is managed by the Advisor and its affiliates, pursuant to the Advisory Agreement. The Advisor is owned by Corey R. Maple and Norman H. Leslie. The Company has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services. The Company reimburses the Advisor and its affiliates, at cost, for certain expenses incurred on behalf of the Company, as described in more detail below. The Advisory Agreement has a term of
The Advisor earns a one-time acquisition fee of up to
Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying unaudited condensed consolidated financial statements. In years other than the year of liquidation, after the Company’s common stockholders have received a
The Advisor and its affiliates may be reimbursed by the Company for certain organization and offering expenses in connection with the Company’s securities offerings, including legal, printing, marketing and other offering related costs and expenses. Following the termination of the Offering, the Advisor will reimburse the Company for any such amounts incurred by the Company in excess of
18
Fees and reimbursements incurred and payable to the Advisor and its affiliates, for the three months ended March 31, 2025 and 2024, were as follows:
Incurred | ||||||
For the Three Months Ended March 31, | ||||||
2025 | 2024 | |||||
Fees: |
|
|
| |||
Financing fees | $ | — | $ | | ||
Asset management fees |
| |
| | ||
$ | | $ | | |||
Reimbursements: |
|
|
| |||
Offering costs | $ | | $ | | ||
General and administrative |
| |
| | ||
Sales and marketing |
| |
| | ||
Acquisition costs | | | ||||
$ | | $ | |
For the three months ended March 31, 2025, the Operating Partnership recorded no distributions payable to the Advisor in connection with the Advisor’s ownership of Series B LP Units. For the three months ended March 31, 2024, the Operating Partnership recorded distributions payable to the Advisor in the amount of $
The members of the Advisor personally guaranty certain loans of the Company and may receive a guarantee fee of up to
As of March 31, 2025 and December 31, 2024, the Company had amounts due and payable to the Advisor and its affiliates of $
NHS, LLC dba National Hospitality Services — NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor.
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Property Management Services
NHS provides property management and hotel operations management services for the Company’s hotel properties, pursuant to individual management agreements. The agreements have an initial term expiring on December 31st of the fifth full calendar year following the effective date of the agreement, which automatically renews for a period of
Prior to its termination, NHS earned the following:
● | a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties, equal to up to |
● | an accounting fee of $ |
● | an administrative fee equal to |
● | a flat fee of $ |
Loan Agreement
The Company has a $
Fees and reimbursements incurred and payable to NHS for the three months ended March 31, 2025 and 2024, and fees and reimbursements payable to NHS as of March 31, 2025 and December 31, 2024, were as follows:
Incurred | Payable as of | |||||||||||
For the Three Months Ended March 31, | March 31, | December 31, | ||||||||||
2025 | 2024 | 2025 | 2024 | |||||||||
Fees: |
|
|
| |||||||||
Management fees | $ | — | $ | | $ | | $ | | ||||
Administrative fees |
| — |
| |
| |
| | ||||
Accounting fees |
| — |
| |
| |
| | ||||
$ | — | $ | | $ | | $ | | |||||
Reimbursements | $ | | $ | | $ | | $ | |
One Rep Construction, LLC (“One Rep”) — One Rep is a related party through common management and ownership, as Corey Maple, , and , each hold a
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Legendary A-1 Bonds, LLC (“A-1 Bonds”) — A-1 Bonds is an affiliate of the Advisor which is owned by Mr. Leslie a director and executive officer of the Company and principal of the Advisor and Mr. Maple a director of the Company and principal of the Advisor. As of March 31, 2025, the Company has an outstanding balance on its line of credit (the “A-1 Revolving Line of Credit”) amounting to $
7. FRANCHISE AGREEMENTS
As of March 31, 2025 and December 31, 2024, all of the Company’s hotel properties were operated under franchise agreements with initial terms of
8. MANDATORILY REDEEMABLE SERIES P PREFERRED UNITS
On December 24, 2024, the Company commenced a private offering of limited partnership units in the OP, designated as Series P Preferred Units, with a maximum offering of $
The Company has classified the Series P Preferred Units as a liability in accordance with ASC 480 due to the mandatory redemption feature. The accretion of the Series P Preferred Units is recorded as interest expense in the consolidated statement of operations. From the inception of the offering through March 31, 2025, the Company issued
9. STOCKHOLDERS’ EQUITY
The Company is authorized to issue
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Company had issued and sold
Common Stock
Initial Offering
The Company has a private offering of shares of common stock, $
Dividend Reinvestment Plan
The Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company, purchasing shares of common stock at
Distributions
Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors.
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2025 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | ||||||
$ | — | $ | — | $ | — | $ | — | $ | — | $ | | |||||||
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2024 | $ | | $ | | $ | | $ | | $ | | $ | ( | ||||||
$ | | $ | | $ | | $ | | $ | | $ | ( |
(1) |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) |
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable its stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The price at which the Company will repurchase shares is dependent on the amount of time the holder has owned the shares, and the then current value of the shares. There are several limitations on the Company’s ability to repurchase shares under the share repurchase plan, including, but not limited to, a limitation that during any calendar year, the maximum number of shares potentially eligible for repurchase can only be the number of shares that the Company could purchase with the amount of net proceeds from the sale of shares under the Company’s dividend reinvestment plan during the prior calendar year. The board of directors may, in its sole discretion, reject any request for repurchase and may, at any time and without stockholder approval, upon
22
Offering Price and Share NAV
The price per share of the Company's common stock, $
Non-Controlling Interests
As of March 31, 2025, the Operating Partnership had
Non-Controlling Interest – Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2025, the Operating Partnership had issued and sold
Non-Controlling Interest – Series B LP Units
Under the Operating Partnership Agreement, the Advisor, as the Series B Limited Partner, will receive from the Operating Partnership, distributions as follows: (a) for all years, an amount equal to
As of March 31, 2025, the Operating Partnership has issued
Non-Controlling Interest – Series T LP Units
The Series T LP Units are expected to be issued to persons who contribute their property interests in certain Projects to the Operating Partnership in exchange for Series T LP Units. The Series T LP Units will have allocations and distributions as determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units, and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning
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to the Series T LP Units in connection with such property contributions. During the three months ended March 31, 2025 and 2024, the Company declared distributions of $
Non-Controlling Interest – Series GO LP Units
The holders of Series GO LP Units will not receive any distributions from the Operating Partnership until after they have held their Series GO LP Units for a period of
. Thereafter, the Series GO Limited Partners will receive the same distributions payable to the holders of the Common LP Units and GP Units (together with the Series GO LP Units and Interval Units, the “Participating Partnership Units”), other than with respect to proceeds received upon the sale or exchange of a property which are not reinvested in additional properties.Upon the sale of all or substantially all of the GP Units held by LF REIT III or any sale, exchange or merger of LF REIT III or the Operating Partnership (each, a “Termination Event”), or with respect to proceeds received upon the sale or exchange of a property which are not reinvested in additional properties, distributions will be made between the Series GO LP Units and the other Participating Partnership Units as follows: (i) first, to the Participating Partnership Units in proportion to their Partnership Units until the GP Units (the Common LP Units and the Interval Units) have received
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $
Non-Controlling Interest – Series GO II LP Units
The holders of Series GO II LP Units will not receive any distributions from the Operating Partnership until after they have held their Series GO II LP Units for a period of
Upon the sale of all or substantially all of the GP Units held by LF REIT III or any sale, exchange or merger of LF REIT III or the Operating Partnership (each, a “Termination Event”), or with respect to proceeds received upon the sale or
24
exchange of a property which are not reinvested in additional properties, distributions will be made between the Series GO LP Units and the other Participating Partnership Units (including the Series GO II LP Units) as follows: (i) first, to the Participating Partnership Units in proportion to their Partnership Units until the GP Units (the Common LP Units and the Interval Units) have received
On April 7, 2023, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO II LP Units, with a maximum offering of $
Non-Controlling Interest – Series A Units
On December 24, 2024, the Company created a series of limited partnership units the OP designated as Series A Preferred Units, and may issue up to
The Company has classified the Series A Preferred Units as permanent equity in accordance with ASC 480 since there are several conditions, all within the Company’s control, that could cause the Company to require mandatory redemption of the Series A Preferred Units.
In connection with the establishment of both the Series P Preferred Units and the Series A Preferred Units, there are special provisions added to the Partnership Agreement with regard to the Series P Preferred Units:
25
a) the first $
b) remaining proceeds between $
c) remaining proceeds between $
d) remaining proceeds greater than $
Concurrently, the Company entered into the Contribution Agreement to restructure
10. COMMITMENTS AND CONTINGENCIES
Legal Matters —From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. After consulting with legal counsel, management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations, cash flows or financial condition, which would require accrual or disclosure of the contingency and possible range of loss, other than the matter described below.
11. REPORTABLE SEGMENTS
As of March 31, 2025, we have
House Profit, presented herein, is calculated as revenues generated through hotel operations (room revenue and food & beverage revenue) less total segment expenses in connection with operating the hotels, which includes all department expenses incurred in connection with supporting the operations (i.e. franchise fees, management fees, sales and marketing and certain general and administrative expenses). The Company believes House Profit is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). The Company further excludes the following items that are not reflective of its ongoing operating performance or incurred in the normal course of business, and thus not utilized in the CODM’s analysis to allocate resources and assess operating performance of the Company’s business:
● | gains or losses from sales of hotel properties |
● | real estate related impairments |
● | actual corporate-level expenses, which includes property taxes and insurance and other owner-level expenses and any acquisition expenses |
● | other corporate income, including interest income. |
The following table presents our reportable segment revenues reconciled to our consolidated amounts, reportable segment expenses and House Profit reconciled to net loss:
26
For the Three Months Ended March 31, | ||||||
| 2025 |
| 2024 | |||
Revenues |
|
| ||||
Room revenue | $ | | $ | | ||
Other revenue |
| |
| | ||
Total segment revenue |
| |
| | ||
Expenses |
|
|
|
| ||
Room Expense |
| |
| | ||
Other departmental and support expense |
| |
| | ||
Franchise fees |
| |
| | ||
Management fees |
| |
| | ||
Sales and marketing |
| |
| | ||
General and Administrative |
| |
| | ||
Total segment expenses |
| |
| | ||
House Profit |
| |
| | ||
Other (income) |
| ( |
| ( | ||
Property taxes and insurance | | | ||||
Corporate general and administrative expense | | | ||||
Corporate sales and marketing expense | | | ||||
Corporate asset management fees | | | ||||
Acquisition expense | | | ||||
Owner expense | | | ||||
Depreciation and amortization | | | ||||
Interest expense | | | ||||
Income tax expense (benefit) | ( | ( | ||||
Net Loss | $ | ( | $ | ( |
12. SUBSEQUENT EVENTS
Status of the Offering
As of the date of this filing, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold
GO II Unit Offering
The Operating Partnership has issued and sold
Sale of Pineville HGI and Charlotte Properties and Loans Repaid
On May 14, 2025, the Company sold the Pineville HGI Property and Charlotte Property to an unaffiliated purchaser for $
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the terms “we,” “our,” “us” and “the Company” refer to Lodging Fund REIT III, Inc., a Maryland corporation, Lodging Fund REIT III OP, LP a Delaware limited partnership, which we refer to as the “Operating Partnership,” Lodging Fund REIT III TRS, Inc., a Delaware corporation, which we refer to as the “Master TRS” and their subsidiaries, except where the context otherwise requires. The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements of the Company and the notes thereto.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “should,” “expect,” “could,” “intend,” “anticipate,” “plan,” “estimate,” “believe,” “potential,” “continue,” “seek” or similar expressions. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth and availability of funds, and are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
Summary Risk Factors
Our business faces significant risks and uncertainties. Set forth below is a summary list of the principal risk factors as of the date of the filing of this Quarterly Report on Form 10-Q that could materially and adversely affect our business, financial condition, results of operations and cash flows. This summary highlights certain of the risks and uncertainties but does not address all of the risks that we face which could cause our actual results to differ materially from those presented in our forward-looking statements.
Risks Related to Our Business
● | Our business strategy depends significantly on achieving revenue and net income growth from anticipated increases in demand for hotel rooms, which will be adversely affected by weak economic conditions and other economic events, elevated interest rates and travel-related concerns. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
● | Our advisor, Legendary Capital REIT III, LLC (the “Advisor”), its executive officers and other key personnel, the employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor as well as certain of our officers and directors, whose services are essential to the Company, may be involved in other business ventures, and will face a conflict in allocating their time and other resources between us and the other activities in which they are or may become involved. Failure of the Advisor, its executive officers and key personnel, the employees of the Sponsor, and our officers and directors to devote sufficient time or resources to our operations could result in reduced returns to our stockholders. |
● | We will pay certain prescribed fees and expenses to the Advisor and its affiliates regardless of the quality of services provided. These fees were not negotiated at arm’s length and therefore may be higher than fees payable to unaffiliated third parties for the same or similar services. Such fees may result in conflicts of interest between the Advisor and our stockholders due to the nature of the incentive fees and management fees. |
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● | We have paid distributions from proceeds from our ongoing private offering described below (the “Offering”) and, to the extent our board of directors declares future distributions, we may continue to fund distributions with Offering proceeds. We have not established a limit on the amount of proceeds from our Offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment and the overall return to our stockholders may be reduced. We may fund distributions from other sources such as borrowings, which may constitute a return of capital. |
● | If we are unable to raise substantial funds in our securities offerings, we may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to vary more widely with the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue. |
● | We may be unable to identify properties that meet our investment criteria in a timely manner or on acceptable terms, and may be unable to consummate investment opportunities that we identify, which could result in reduced returns or reduce the amount available for distributions to our stockholders. |
● | We intend to acquire only hotel properties. As a result, we will only have limited diversification as to the type of property we own. In the event of an economic recession affecting the economies of the areas in which the properties are located or a decline in values in general, our financial performance could be materially and adversely affected, which may limit our ability to pay distributions to our stockholders. |
● | We and our hotel managers rely on information technology networks and systems, including the internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personally identifiable information, reservations, billing and operating data. It is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information, which may subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. |
● | Although our board of directors has authorized management to pursue an exit strategy and position us for a sale or merger as early as 2025, there is no assurance that this process will result in the approval or completion of any specific transaction or outcome. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share. |
Risks Related to the Lodging Industry and Real Estate Industry
● | We may be unable to dispose of our properties on advantageous terms or at all due to various factors, including weakness in our properties’ markets, unavailability of financing, changes in the financial condition of prospective purchasers or changes in general economic conditions, which could reduce our cash flow and limit our ability to make distributions to our stockholders. |
● | Demand for our properties may be affected by various factors, including an over-supply or over-building of hotel properties in our properties’ markets and general economic conditions. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
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● | Adverse economic, business or real estate developments in our markets, as well as low consumer confidence, declines in corporate budgets, elevated rates of inflation, newly-enacted political policies, and decreases in personal discretionary spending levels, may adversely affect our financial performance and the value of our properties and may limited our ability to pay distributions to our stockholders. |
● | Competition for guests, including with other hotels, resorts and vacation rental marketplaces, make reduce our hotels’ revenues and profitability. |
● | The hospitality industry is seasonal in nature. In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition. |
● | We rely on management companies to operate our hotel properties, giving us less control than if we were managing the hotels ourselves. |
● | Our success depends in part upon our management companies’ ability to attract, motivate and retain a sufficient number of qualified employees. Qualified individuals needed to fill these positions are in increasingly short supply in some areas. The inability to recruit and retain these individuals may adversely impact hotel operations and guest satisfaction, which could harm our business. |
Risks Related to Debt Financing
● | We have incurred significant debt in connection with our property acquisitions. Our use of leverage increases the risk of an investment in us. Our mortgage loans are collateralized by our hotel properties, which will put those investments at risk of forfeiture if we are unable to repay such debts. Principal and interest payments on these loans reduce the amount of money that would otherwise be available for distribution to our stockholders. |
● | Our ability to acquire, rehabilitate, renovate and manage our properties may be limited if we cannot obtain satisfactory financing, refinance or extend existing financing, which will depend on debt and capital markets conditions. In addition, we have loans with variable interest rates and may incur additional variable rate debt in the future. Volatility in these markets could negatively impact such loans. Interest rates remain elevated, and higher interest rates required by lenders on loans that we have refinanced or extended recently have resulted in higher debt service costs. There can be no assurance that we will be able to obtain financing or refinance or extend existing financing on favorable terms, or at all. |
Federal Income Tax Risks
● | Failure to qualify as a REIT would reduce our net earnings available for investment or distribution to our stockholders. |
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the Securities and Exchange Commission (the “SEC”) on April 28, 2025, and in Part II, Item 1A herein.
Overview
Lodging Fund REIT III, Inc. was formed on April 9, 2018, as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of limited-service, select-service, full-service and extended-stay hotel properties (the “Projects”) located primarily in “America’s Heartland,” which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. We have elected to be taxed as a real estate investment trust, or REIT, beginning with the taxable year ended December 31, 2018, and we intend to continue to operate in such a manner. Where applicable in this Form 10-Q, “we,” “our,” “us,” and “the Company” refers to Lodging Fund REIT III, Inc., Lodging Fund REIT III OP, LP, a Delaware limited partnership and our operating partnership (the “Operating Partnership”), and its subsidiaries except where the context otherwise requires.
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We conduct substantially all our business and own substantially all real estate investments through the Operating Partnership. We are the sole general partner (the “General Partner”) of the Operating Partnership. We and the Operating Partnership are advised by Legendary Capital REIT III, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement, as amended, under which the Advisor performs advisory services regarding acquisition, financing and disposition of the Projects and origination of any loans, and is responsible for managing, operating and maintaining the Projects and day-to-day management of the Company. The Advisor may, in its sole discretion, perform these duties through one or more affiliates. The Operating Partnership has issued 1,000 Series B Limited Partnership Units (“Series B LP Units”) to the Advisor as part of its compensation. See Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Overview” for further details of the compensation to the Advisor.
Our Advisor is wholly-owned by Corey Maple and Norman Leslie. The Advisor has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services. To facilitate our REIT structure, the Operating Partnership formed Lodging Fund REIT III TRS, Inc., a Delaware corporation (“Master TRS”), to act as the “master” taxable REIT subsidiary (“TRS”) entity. When we acquire a Project, the Master TRS forms a separate wholly-owned TRS to act as lessee of the Project (a “TRS Lessee”). That TRS Lessee will enter into a lease agreement with a wholly-owned subsidiary of the Operating Partnership to operate the Project. Through February 2025, we engaged National Hospitality Services (“NHS”), an entity wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor, to manage nine of the Projects acquired; on February 10, 2025, we terminated the contract with NHS and entered into hotel management agreements with Hotel Equities Group, LLC, a third-party property management agency (“Hotel Equities”). We have engaged other third-party property management companies with the oversight and property management of the remaining properties within the portfolio.
We have invested and continue to invest primarily in 80 to 200 room limited-service, select-service, full-service and extended-stay hotel properties with strong mid-market brands in America’s Heartland. As of March 31, 2025, we owned seventeen hotel properties and owned an equity and profits interest in the parent of an entity which holds a leasehold interest in one additional hotel property with an aggregate of 2,150 rooms located in ten states.
We have raised capital through several private offerings conducted by the Company and the Operating Partnership described below.
Initial Offering
We are currently conducting an offering (the “Offering”) of up to $150,000,000 in shares of our common stock under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). The Offering commenced on June 1, 2018 and will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2025, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. On March 24, 2025, our board of directors extended the term of the Offering to May 31, 2026. In addition to sales of common stock for cash, the Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are currently offering the shares in the private offering at an initial price of $10.57 per share, with shares purchased in our dividend reinvestment plan at an initial price of $10.04 per share. See Note 9 “Stockholders’ Equity” of the notes to the unaudited condensed consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of the update to offering price and share NAV, effective as of January 6, 2023. As of March 31, 2025, we have issued and sold 10,300,567 shares of common stock, including 1,215,332 shares attributable to the DRIP, and received aggregate proceeds of $100.8 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, we received net offering proceeds of approximately $84.5 million. The net offering proceeds have been used principally to fund property acquisitions and pay distributions and debt service obligations. No public market exists for the shares of our common stock and none is expected to develop.
We have adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited
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circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. As of March 31, 2025, we have repurchased 287,525 shares, which represents an original investment of $2,858,355 for $2,794,469. As of March 31, 2025, all of the redemption proceeds have been paid.
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the Operating Partnership, designated as Series Growth & Opportunity Limited Partner Units (“Series GO LP Units”), which our board of directors terminated as of February 12, 2022. As of March 31, 2025, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received aggregate proceeds of $21.5 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $19.4 million.
GO II Unit Offering
On April 7, 2023, the Operating Partnership commenced a private offering of limited partnership units in the Operating Partnership, designated as Series GO II LP Units, with a maximum offering of $30,000,000, which could be increased to $60,000,000 in our sole discretion as the General Partner of the Operating Partnership, (the “GO II Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO II LP Units are being offered until the earlier of (i) the sale of $30,000,000 in Series GO LP Units (which could be increased to $60,000,000 in the Company’s sole discretion), (ii) March 31, 2024, which date may be extended for two 1-year extensions until March 31, 2026 in the sole discretion of the Operating Partnership or (iii) the Operating Partnership terminates the GO II Unit Offering at an earlier date in its sole discretion. On March 24, 2025, our board of directors extended the term of the GO II Unit Offering to March 31, 2026. As of March 31, 2025, the Operating Partnership had issued and sold 601,874 Series GO II LP Units and received gross aggregate proceeds of $4.5 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $4.4 million.
Series T LP Units
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan (“PIP”) and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of conversion. As of March 31, 2025, we had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions. During the year ended December 31, 2024, the Company declared distributions of $48,263 for the Series T LP Units. During the three months ended March 31, 2025 and 2024, the Company declared distributions of $0 and $0, respectively.
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Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2025, the Operating Partnership had issued and sold 612,100 Common LP Units, with a value of $10.00 per unit at the time of issuance, in connection with two property acquisitions.
Series P Preferred Units
On December 24, 2024, the Operating Partnership commenced a private offering for the purchase of up to $50,000,000 (which may be increased to $75,000,000 in the sole discretion of the Company) in Series P Preferred Units at a purchase price equal to $10,000 per Series P Preferred Unit. The first $1,250,000 of net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be retained by the Operating Partnership. If the Operating Partnership receives more than $1,250,000 of net proceeds from the sale of the Series P Preferred Units, the next $1,047,000 of net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to (i) pay accrued interest on the Fort Collins Loans and the Courtyard Aurora Loan through December 31, 2024 at or prior to the time of refinancing such loans or (ii) after the time of such refinancing, redeem outstanding Series A Preferred Units issued in exchange for the contribution of such loans. If the Operating Partnership receives more than $2,297,000 of net proceeds from the sale of the Series P Preferred Units, the next $7,550,000 of net proceeds received by the Operating Partnership from the sale of Series P Preferred Units shall be retained by the Operating Partnership. If the Operating Partnership receives more than $9,847,000 of net proceeds from the sale of the Series P Preferred Units, (A) until March 24, 2025, 50% of such additional net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to redeem the Series A Preferred Units and the remaining 50% shall be retained by the Operating Partnership, and (B) from and after March 24, 2025, 75% of such additional net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to redeem the Series A Preferred Units and the remaining 25% shall be retained by the Operating Partnership. As of March 31, 2025, the Operating Partnership has issued and sold 35 Series P Preferred Units, resulting in the receipt of gross offering proceeds of $0.4 million.
Series A Preferred Units
On December 24, 2024, the Operating Partnership entered into an amendment to the Amended and Restated Limited Partnership Agreement of the Operating Partnership to establish the terms of a new limited partner unit designated as Series A Preferred Units. Concurrently, we entered a loan contribution agreement (the “Contribution Agreement”) to restructure four of its loans with Access Point Financial, LLC (the “Access Point Lender”) – 1) the mortgage loan secured by the Sheraton – Northbrook (“Sheraton Northbrook Loan”) with unpaid principal balance of approximately $4.0 million, 2) the loans secured by the Residence Inn - Fort Collins Loan (“Fort Collins Loans”) with collective unpaid principal balance of approximately $13.0 million, 3) the mortgage loan secured by the Courtyard by Marriott – Aurora (“Courtyard Aurora Loan”) with unpaid principal balance of approximately $14.9 million. With respect to the Sheraton Northbrook Loan, the Access Point Lender received 4,067,659 Series A Preferred Units in exchange for all of the remaining unpaid principal and interest on the Sheraton Northbrook Loan. With respect to the Fort Collins Loans and the Courtyard Aurora Loan, we are required to refinance each such loan within 90 days of the date of the Contribution Agreement, and to the extent there is remaining unpaid principal and interest on such loans after such refinancing, the Operating Partnership is required to enter into a contribution agreement with the Access Point Lender through which the Access Point Lender will receive Series A Preferred Units in exchange for all of such remaining unpaid principal and interest. We have been in communication with the Access Point Lender as we work to finalize refinancing.
Exit Strategy
On May 7, 2024, our board of directors authorized management to pursue an exit strategy and position the Company for a sale or merger of the Company in 2025, provided that the economic environment is conducive to such a transaction, and to prepare the Company’s portfolio of hotel properties for a transaction through strategic acquisitions and dispositions with the objective of maximizing profitability at the hotel property level. There can be no assurances that we will achieve an exit strategy within the time period and in the manner anticipated. The process of exploring strategic alternatives and marketing our assets could be time consuming and disruptive to our business operations and could divert management’s attention from our business, and we could incur substantial expenses associated with identifying and evaluating potential
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transactions. Further, any potential transaction would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction with us and the availability of financing to potential buyers on favorable terms. There can be no assurance that we will successfully implement our strategy, or that any potential transaction or other strategic alternative will result in stockholder liquidity or provide a return to stockholders that equals or exceeds our estimated value per share.
Independent Director Compensation
During 2022, we began compensating our independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and we recognize stock-based compensation expense based on the award’s fair value at the grant date. On March 31, 2024, June 30, 2024, September 30, 2024 and December 31, 2024, and March 31, 2025. we issued 500 shares of our common stock to each of our two independent directors. For the three months ended March 31, 2025 and 2024, we recognized stock-based compensation expense of $10,570 and $10,570, respectively. These grants were made in reliance upon an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act as the grants did not involve any public offering.
Key Indicators of Operating Performance
In evaluating financial condition and operating performance, important indicators on which we focus are revenue measurements, such as occupancy, ADR and RevPAR, and expenses, such as property operations expenses, general and administrative expenses and other expenses described below. Occupancy is the total number of rooms occupied for the period divided by the total number of available rooms for the period. ADR is equal to the total gross room revenue divided by the total number of rooms rented for the period. RevPAR is equal to the total gross room revenue divided by the total number of available rooms for the period.
Market Outlook
The outlook for the lodging industry in 2025 remains cautiously optimistic, driven by strong leisure demand and a steady recovery in business travel. Upscale and Upper Midscale hotels are benefiting from cost-conscious travelers seeking value amid inflationary pressures. Industry trends include increased focus on sustainability, adoption of digital technologies, and enhanced guest experiences to compete with alternative accommodations like vacation rentals. While economic uncertainties and labor shortages pose challenges, the midscale segment is well-positioned to attract a broad customer base due to its affordability and evolving amenities. Challenges persisted in 2024 and will continue to persist through 2025, with inflation, interest rates, insurance premiums, supply chain disruptions, labor costs and labor shortages all contributing to the slow recovery.
While the government has taken steps to curb inflation, there is much uncertainty as to the impact these steps will have on the elevated inflation rates. This elevated inflation may impact financial conditions and results of operations. Any increase in inflation could have an adverse impact on expenses, which could potentially increase at a rate higher than revenue. Additionally, an increase in inflation could cause an increase in variable interest rates.
Evolving governmental policies may also adversely impact financial conditions and results of operations, specifically with the uncertainty surrounding tariffs and their material impact on business. A segment of our business comes from federal employees, and with governmental layoffs, there is uncertainty surrounding the potential impact on our results of operations.
Continued improvement in operating results will be dependent on continued strength in leisure travel and a recovery of business travel, as well as moderating inflation and interest rates. In addition, if in the future there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and our properties may be subject to similar risks and uncertainties as posed by COVID-19.
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Liquidity and Capital Resources
Overview
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, including payments to our Advisor and property managers, capital expenditures directly associated with our hotels, distributions to our stockholders and expenses related to implementing our exit strategy, to the extent market conditions are favorable to pursue such a strategy in the near-term. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, operating expenses, including payments to our Advisor and property managers, making distributions to our stockholders, and continued expenses related to implementing our exit strategy if such implementation is delayed. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including OP units, and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Lenders in connection with several recent refinancings and extensions of debt obligations have required increased interest rates, increasing our debt service obligations. Our interest expense could increase in the future as a result of these recent refinancings and extensions and as we continue to refinance our maturing debt. Our ability to raise capital through the issuance of additional equity is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. The distribution rate for distributions declared during 2023 was equal to an annualized rate of 7.00% per share based on our initial offering price of $10.00. In an effort to conserve cash, our board of directors reduced the distribution rates for distributions beginning in April 2024 to annualized rates ranging from 3.50% to 5.00% per share based on our initial offering price of $10.00. No distributions have been declared from September 2024 through the date of this filing. Our board of directors will determine whether to authorize and declare distributions in such amounts or if at all based on our financial conditions and such other factors as our board of directors deems relevant.
We are dependent upon the net proceeds from our Offering and offerings of our Operating Partnership to conduct our proposed operations. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2025, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. On March 24, 2025, our board of directors extended the term of the Offering to May 31, 2026. We had also used the net proceeds from the GO Unit Offering to conduct our operations. Our board of directors terminated the GO Unit Offering as of February 14, 2022. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. We intend to obtain the capital required to make real estate and real estate-related investments and conduct our operations from the proceeds of our Offering, GO II Unit Offering and Series P Preferred Unit Offering, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of September 30, 2024, we had raised approximately $100.7 million in gross offering proceeds from the sale of shares of our common stock in the Offering, approximately $21.5 million in gross offering proceeds from the sale of the Series GO LP Units in our GO Unit Offering and approximately $3.6 million in gross offering proceeds from the sale of the Series GO II LP Units in our GO II Unit Offering and approximately $0.4 million in gross offering proceeds from the sale of the Series P Preferred Units in our Series P Preferred Unit Offering. If we are unable to raise substantial funds in the Offering and the Operating Partnership offerings, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate more significantly with the performance of the specific assets we acquire. There may be a delay between the sale of shares of our common stock and units and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Further, we will have certain fixed operating expenses regardless of whether we are able to raise substantial funds in the Offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and cash flow and limiting our ability to make distributions to our stockholders.
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As of March 31, 2025, we consolidated eighteen hotel properties, consisting of seventeen hotel properties owned by us and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property. We acquired these investments with the proceeds from the sale of our common stock in the Offering, proceeds from the GO Unit Offering and debt financing and, for all but one of the properties acquired in 2022 and the equity and profits interest acquired in 2022, the issuance of Series T LP Units to the contributor as part of the consideration. Operating cash needs during the three months ended March 31, 2025 were met through cash flow generated by these real estate investments and with proceeds from our Offering, the GO II Unit Offering, and the Series P Preferred Unit Offering.
Our investments in real estate generate cash flow in the form of hotel room rentals and guest expenditures, which are reduced by operating expenditures, debt service payments and corporate general and administrative expenses. Each of our current properties is owned and future properties will be owned by a direct special purpose entity subsidiary of the Operating Partnership, which leases the properties to direct special purpose entity subsidiaries of the Master TRS, referred to as “TRS Lessees.” The TRS Lessees are or will be required to make rent payments to the owners of the properties pursuant to the lease agreements relating to each property. Such TRS Lessees’ ability to make rent payments to the owner subsidiaries and our liquidity, including our ability to make distributions to our stockholders, are dependent upon the TRS Lessees ability to generate cash flow from the operations of the hotel properties. The TRS Lessees are dependent upon the management companies with whom they have entered or will enter into management agreements with to operate the hotel properties.
Cash flow from operations from real estate investments will be primarily dependent upon the occupancy level and average daily rate, or “ADR”, of our portfolio, and how well we manage our expenditures.
We anticipate that our aggregate loan-to-value ratio will be between 35% and 65%, however, there can be no assurance that we will achieve this ratio. We target a loan-to-value ratio for the Projects of between 35% and 70%, based on the purchase price of the Projects, however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual Project at the discretion of the board of directors. Though this is our estimated leverage, our charter does not limit us from incurring debt in excess of this amount. As of March 31, 2025, our aggregate loan-to-value ratio, based on the aggregate purchase price of the Projects, was approximately 59%.
In addition to making investments in accordance with our investment objectives and potential expenditures in connection with the implementation of our exit strategy, we expect to use capital resources to make certain payments to the Advisor and its affiliates and NHS. These payments include the various fees and expenses to be paid to the Advisor and its affiliates in connection with the selection, acquisition and management of Projects, as well as reimbursement of certain organization and other offering expenses described below. The Advisor earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any property improvement plan (“PIP”) at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor may also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing. The Advisor may also be paid a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, which disposition fee in connection with a sale of all or substantially all of the Company’s assets, merger or similar transaction, shall be equal to between 0.0% and 4.0% of the gross consideration received (grossed up for liabilities of the Company), with the percentage dependent on the total return per share and timing of such transaction, payable at the closing of such sale, merger or transaction. The Advisor may also be paid real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty amount, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B LP Unit holders) have received a 6% cumulative, but not compounded, return per annum. Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying unaudited condensed consolidated financial statements.
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The Advisor and its affiliates may be reimbursed by us for certain organization and offering expenses in connection with the Offering and the GO Unit Offering, including legal, printing, marketing and other offering-related costs and expenses. Following the termination of the Offering, the Advisor will reimburse us for any such amounts incurred by us in excess of 15% of the gross proceeds of the Offering. In addition, we may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to us, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.
Through February 10, 2025, NHS earned a monthly base management fee for property management services, including overseeing the day-to-day operations of the nine hotel properties for which it served as the property manager, in an amount up to 4% of gross revenue, plus additional fees and expense reimbursements. Effective as of February 10, 2025, all of the NHS management agreements have been terminated and Hotel Equities, LLC (“Hotel Equities”), a third-party management company, now manages those properties. The Company did not incur any material early termination penalties in connection with such terminations.
Pursuant to the Agreements, Hotel Equities will receive a management fee equal to 3.00% of gross revenues of the Properties. Hotel Equities will also receive an accounting services fee of $2,500 per month, a revenue management fee of $2,000 per month, and a technology fee of $1,000 per month for accounting, data intelligence and budget forecast system costs, each with annual escalations of 3% or as set forth in the hotel operating budget. Hotel Equities will also receive a quarterly incentive fee equal to 0.45% of gross revenues of each of the Properties to the extent certain key performance indicators are achieved with respect to such quarter for such Property. Hotel Equities will also be reimbursed for its out-of-pocket expenses incurred in accordance with the hotel operating budget that are directly related to the performance of the hotel management functions. Each Agreement has a five-year initial term, which will be automatically renewed for additional 3-year terms unless earlier terminated by the parties. Except for certain circumstances described in the Agreement or otherwise agreed to by the parties, if Hotel Equities is not retained by the new property owner after a sale of the Property, Hotel Equities is entitled to an off-boarding fee equal to the management fees paid during the 12-month period immediately preceding the date of sale, subject to a 10% reduction following each 12-month period following the effective date of the Agreement. Hotel Equities is also entitled to a termination fee if Hotel Equities terminates the Agreement due to the Company failing to cure certain defaults under the Agreement or if the Company terminates the Agreement other than for cause, which fee is equal to the trailing 12 months of management fees paid to Hotel Equities immediately preceding the date of termination. Further, the Company is required to pay Hotel Equities an annual portfolio incentive fee of 15% of the combined gross operating profit for the Properties which is in excess of the budgeted gross operating profit for such calendar year, provided that total annual management fees, quarterly incentive fees, and portfolio incentive fees shall not exceed 4.5% of the total gross revenue for the calendar year.
Other hotel properties are managed by Vista Host Inc., Interstate Management Company, LLC (“Aimbridge”), KAJ Hospitality Inc. and Raines Hospitality Inc. These management companies earn a base management fee in an amount between 2.0% and 3.0% of gross revenue, plus monthly accounting fees and in some cases a monthly fee for customized accounting services, revenue management and digital marketing. They also may earn an incentive management fee if certain performance metrics are achieved. We also reimburse the management companies for certain costs of operating the hotel properties on our behalf. All reimbursements are paid to such management companies at cost.
One Rep, a related party, provides construction oversight, project management, and other related services to the Company. For the services provided, One Rep is paid a construction management fee equal to 6% or 7% of the total project costs. The Company also reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost.
The franchise agreements for certain of our hotels require that we provide property improvement plans to cover, among other things, replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. As of March 31, 2025, we have set aside $5.3 million for capital projects in property improvement funds, which are included in restricted cash.
We spent approximately $1.7 million on capital improvements at our operating hotels during the three months ended March 31, 2024 and approximately $0.6 million on capital improvements at our operating hotels during the three months
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ended March 31, 2025.
Debt
Lines of Credit & Loans
Line of Credit - Western State Bank
On February 10, 2020, we entered into a $5.0 million line of credit with Western State Bank (the “Western Line of Credit”). The Western Line of Credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity.
The Company and Western State Bank are working to finalize an extension of the Western Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
The interest rate as of March 31, 2025 was 8.50% per annum. As of March 31, 2025, the Western Line of Credit was secured by our Cedar Rapids Property, Eagan Property, and Fargo Property which are also subject to term loans with the same lender, and 300,000 Common LP Units of the Operating Partnership. The Western Line of Credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property, the Eagan Property, and the Fargo Property as well as future loan agreements that we may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The Western Line of Credit, including all cross-collateralized debt, is guaranteed by Corey Maple. As of March 31, 2025, there was a $0.5 million balance outstanding on the Western Line of Credit.
As of the date of this filing, $0.4 million is outstanding under the Western Line of Credit.
Revolving Line of Credit – Legendary A-1 Bonds, LLC
The A-1 Line of Credit has been amended several times to increase the line of credit, to change the interest rate and to extend the maturity date. On December 20, 2024, the Operating Partnership, the Company and A-1 Bonds amended the A-1 Line of Credit to extend the maturity date of the A-1 Line of Credit to December 31, 2027, increase the interest rate to 17.5% per annum, increase the A-1 Line of Credit to $20.0 million, and increase the number of Common LP Units of the Operating Partnership securing the A-1 Line of Credit to 2,000,000 unissued Common LP Units. Pursuant to a prior amendment, the A-1 Lender will receive an exit fee equal to 1.5% of the full amount due under the Line of Credit upon the earlier of (a) full repayment (whether on the maturity date or prior thereto or any other date), and (b) the maturity date. As of March 31, 2025, there was a $13.6 million balance outstanding on the A-1 Revolving Line of Credit.
As of date of this filing, $13.8 million is outstanding under the A-1 Line of Credit.
NHS Loan
On March 6, 2023, we entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. As of March 31, 2024, the NHS Loan had a fixed interest rate of 7.0% per annum and a maturity date of September 30, 2025. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership. All accrued interest is due and payable on the maturity date with the full principal balance. As of March 31, 2026, there was a $600,000 balance outstanding on the NHS Loan.
As of the date of this filing, $600,000 is outstanding under the NHS Loan.
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Mortgage Debt
As of March 31, 2025, we had $161.5 million in outstanding mortgage debt secured by fifteen consolidated properties, with maturity dates ranging from March 2025 to December 2029. Interest rates on the mortgage debt are as follows:
- | Fourteen of the loans have fixed interest rates ranging from 3.85% to 14.50%. |
- | One loan is a variable interest loan at a rate of SOFR rate plus 3.00% resulting in an effective rate of 7.31% as of March 31, 2025. |
- | One loan is a variable interest loan at a rate of LIBOR plus 6.0% per annum, provided that LIBOR shall not be less than 1.0%, resulting in an effective rate of 10.43% as of March 31, 2025. |
- | One loan is a variable interest loan at a rate of SOFR rate plus 7.00% resulting in an effective rate of 11.32% as of March 31, 2025. |
- | One loan is a variable interest loan at a rate of SOFR rate plus 6.25% resulting in an effective rate of 10.58% as of March 31, 2025. |
- | One loan is a variable interest loan at a rate of SOFR rate plus 7.50% resulting in an effective rate of 11.83% as of March 31, 2025. |
- | Collectively, the weighted-average interest rate is 7.68%. |
The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period following origination, and generally require a balloon payment due at maturity. As of March 31, 2025 and December 31, 2024, certain mortgage debt was guaranteed by the members of the Advisor. See Note 6 “Related Party Transactions” of the notes to the condensed consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding debt that was guaranteed by members of the Advisor. As part of the consolidated outstanding mortgage debt above, the owner of the leasehold interest in the El Paso University Property is the borrower under a $14.4 million loan secured by the leasehold interest in the El Paso University Property.
On December 24, 2024, Company entered a loan contribution agreement (the “Contribution Agreement”) to restructure four of its loans with Access Point Financial, LLC (the “Access Point Lender”) – 1) the mortgage loan secured by the Sheraton – Northbrook (“Sheraton Northbrook Loan”) with unpaid principal balance of approximately $4.0 million, 2) the loans secured by the Residence Inn - Fort Collins Loan (“Fort Collins Loans”) with collective unpaid principal balance of approximately $13.0 million, 3) the mortgage loan secured by the Courtyard by Marriott – Aurora (“Courtyard Aurora Loan”) with unpaid principal balance of approximately $14.9 million. With respect to the Sheraton Northbrook Loan, the Access Point Lender received 4,067,659.13 Series A Preferred Units in exchange for all of the remaining unpaid principal and interest on the Sheraton Northbrook Loan. With respect to the Fort Collins Loans and the Courtyard Aurora Loan, the Company is required to refinance each such loan within 90 days of the date of the Contribution Agreement, and to the extent there is remaining unpaid principal and interest on such loans after such refinancing, the Operating Partnership is required to enter into a contribution agreement with the Access Point Lender through which the Access Point Lender will receive Series A Preferred Units in exchange for all of such remaining unpaid principal and interest. We and the Access Point Lender have been in communication as we work to finalize refinancing.
The fair value of our mortgage debt was estimated by discounting each loan’s future cash flows over the remaining term of the mortgage using current borrowing rates for debt instruments with similar terms and maturities. As of March 31, 2025, the estimated fair value of our mortgage debt was $159.4 million, compared to the gross carrying value $161.5 million. As of December 31, 2024, the estimated fair value of our mortgage debt was $158.6 million, compared to the gross carrying value $157.8 million.
The following refinancings and modifications occurred during the quarter ended March 31, 2025.
El Paso HI Property
On January 16, 2025, the Company modified the mortgage loan secured by the El Paso Holiday Inn, which increased the interest to 12.00% and extended the maturity date to May 31, 2025, provided certain conditions are met.
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Cedar Rapids Property and Eagan Property
On February 26, 2025, the Company entered into a Change in Terms Agreement with Western State Bank to amend the existing loans secured by the Cedar Rapids Property and the Eagan Property to extend the maturity date of each loan to March 31, 2025 and to increase the interest rate of each loan to a fixed rate of 9.50%.
The Company and Western State Bank are working to finalize an extension of the loans secured by the Cedar Rapids Property and the Eagan property as of the date of this filing, however there can be no assurance that an extension will be granted.
Houston Property and Wichita Property
On March 27, 2025, the Company entered into a Forbearance Agreement with Choice Financial Group for the Houston Property and the Wichita Property whereby the Company is required to make payments in the amount aggregating approximately $204,000, accrue interest on each loans secured by the Houston Property and the Wichita Property at a rate of Prine Rate plus 0.50%, and the assignment of sale proceeds from the completion of the pending sale of Pineville HGI in payment for various obligations on the Houston Property and Wichita Property. In addition, Corey Maple is required to guarantee 50% of each of the indebtedness of the Houston Property and the Wichita Property.
El Paso Courtyard Property, Charlotte Property and Pineville HGI Property Mortgage Loan Modifications
On March 27, 2025, the mortgage loans secured by the El Paso Airport Property, the Charlotte Property and the Pineville HGI Property (collectively, the “Western Alliance Loans”) were sold to a new lender. From January 2025 through the date of this filing, the Company was not in compliance with the payment obligations under the Western Alliance Loans. However, as discussed above, the sales of the properties are anticipated to close in the near future, and the proceeds are expected to be utilized toward various corporate purposes, including the repayment of these loans. The Company plans to engage in discussions with the new lender to defer the payment of principal and interest, similar to the terms previously discussed with the old lender. However, there can be no assurance that the new lender will approve these new payment terms, which could have a material adverse impact on the Company’s financial condition and liquidity.
Properties Under Contract
On April 15, 2024, the Operating Partnership and Stow Hotel Associates, LLC (the “Stow Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreements (the “Hampton Stow Contribution Agreement” and “Staybridge Stow Contribution Agreement”) for the acquisition of two hotels. As required by the Contribution Agreements, the Operating Partnership deposited $100,000 in aggregate ($50,000 for each hotel) into an escrow as earnest money pending the closing or termination of each Contribution Agreement.
The Company terminated the Hampton Stow Contribution Agreement and the Staybridge Stow Contribution Agreement on March 1, 2025. The earnest money deposits were fully refunded to the Operating Partnership.
Agreement to Sell Pineville HGI Property and Charlotte Property
On December 2, 2024, we entered into two purchase and sale agreements for the Pineville HGI Property and the Charlotte Property. The agreements are subject to closing conditions. We recorded impairment losses of approximately $4.0 million in connection with the pending sales of the Pineville HGI Property and the Charlotte Property. The sales of the Pineville HGI Property and the Charlotte Property closed on May 14, 2025.
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Cash Flows
The following table provides a breakdown of the net change in our cash, cash equivalents, and restricted cash:
| For the Three Months Ended March 31, | |||||
2025 |
| 2024 | ||||
Net cash provided by (used in) operating activities | $ | 395,865 |
| $ | (797,789) | |
Net cash used in investing activities | (634,806) | (1,709,100) | ||||
Net cash (used in) provided by financing activities | (525,787) | 2,616,465 | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | (764,728) | $ | 109,576 |
Cash Flows From Operating Activities
As of March 31, 2025, we owned seventeen hotel properties and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property. During the three months ended March 31, 2025, net cash provided by operating activities was $0.4 million and during the three months ended March 31, 2024, net cash used in operating activities was $0.8 million. Our cash flows provided by operating activities generally consist of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes. See "— Results of Operations" for further discussion of our operating results for the three months ended March 31, 2025 and 2024.
Cash Flows From Investing Activities
Net cash used in investing activities was $0.6 million for the three months ended March 31, 2025 and consisted of $0.6 million used for the improvements and additions to hotel properties. Net cash used in investing activities was $1.7 million for the three months ended March 31, 2024 and consisted of $1.7 million used for the improvements and additions to hotel properties.
Cash Flows From Financing Activities
During the three months ended March 31, 2025, net cash used in financing activities was $0.5 million and consisted primarily of the following:
● | $0.3 million of net cash provided by offering proceeds related to our Offerings, net of payments of commissions and other offering costs of $0.4 million; |
● | $0.8 million of net cash used in debt financing as a result of proceeds from mortgage debt of $4.0 million and lines of credit of $0.5 million, offset by principal payments on debt of $0.3 million, principal payments on lines of credit of $4.8 million and payments of financing costs of $0.2 million; and |
During the three months ended March 31, 2024, net cash provided by financing activities was $2.6 million and consisted primarily of the following:
● | $0.1 million of net cash used by offering proceeds related to our Offerings, net of payments of commissions and other offering costs of $0.8 million; |
● | $3.4 million of net cash provided by debt financing as a result of proceeds from mortgage debt of $16.9 million and lines of credit of $1.5 million, partially offset by principal payments on debt of $14.5 million, principal payments on lines of credit of $0.3 million and payments of financing costs of $0.1 million; and |
● | $0.7 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $0.1 million. |
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Distributions
During our Offering, when we may raise capital more quickly than we acquire income-producing assets, and from time to time after the Offering, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from proceeds from the Offering or debt financing. Distributions declared, distributions paid, and net cash flow used in operations were as follows for the first quarter of 2025 and 2024:
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2025 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 395,865 | ||||||
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 395,865 | |||||||
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2024 | $ | 306,065 | $ | 0.029 | $ | 903,061 | $ | 109,218 | $ | 1,012,279 | $ | (797,789) | ||||||
$ | 306,065 | $ | 0.029 | $ | 903,061 | $ | 109,218 | $ | 1,012,279 | $ | (797,789) |
(1) | No distributions were declared for the period of January 1, 2024 through February 29, 2024. Distributions for the period from March 1, 2024 through August 31, 2024 were payable to each stockholder as 100% in cash. No distributions were declared for the period of September 1, 2024 through March 31, 2025. |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) | No distributions were declared for the period of January 1, 2024 through February 29, 2024, but resumed for the period of March 1, 2024 through August 31 2024. No distributions were declared for the period of September 1, 2024 through December 31, 2024 |
For the three months ended March 31, 2025, we paid no distributions. Our net loss for the three months ended March 31, 2025 was $6.8 million. Net cash flow provided by operations for the three months ended March 31, 2025 was $0.4 million.
For the three months ended March 31, 2024, we paid aggregate distributions of $1.0 million, including $0.9 million of distributions paid in cash and $0.1 million of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2024 was $6.4 million. Net cash flow used in operations for the three months ended March 31, 2024 was $0.8 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.
To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.
Going forward we expect our board of directors to continue to authorize and declare distributions, if at all, based on daily record dates. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant, and may be paid in cash or in shares pursuant to the DRIP. Our board of directors has not pre-established a percentage rate of return for cash distributions or stock distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
Results of Operations
Outlook
We expect that revenue, operating expenses, maintenance costs, real estate taxes and insurance, interest expense and management fees will each increase in future periods as a result of owning our current hotel properties for a full annual operating cycle, as well as anticipated future acquisitions of real estate investments. Interest expenses are also expected to increase in future periods as a result of higher interest rates on recently refinanced or extended loans as well as future refinancings of maturing debt. However, future operating results could be impacted by changing market and industry factors, see “ – Market Outlook” above.
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Our results of operations for the three months ended March 31, 2025 and March 31, 2024 are not indicative of those expected in future periods, as we were actively raising capital through our Offering during both of these periods As of March 31, 2025 and 2024, we owned eighteen and nineteen properties, respectively, for a full 12-month operating cycle.
In evaluating financial condition and operating performance, we believe Revenue per Available Room (“RevPAR”), which we calculate by dividing total gross room revenue by the total number of available rooms for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for properties. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR which we calculate by dividing total gross room revenue by the total number of rooms rented for the period, measures average room price and is useful in assessing pricing levels.
Comparison of the three months ended March 31, 2025 versus the three months ended March 31, 2024
Revenue
Room revenues totaled $14.2 million and $14.9 million for the three months ended March 31, 2025 and 2024, respectively. Other revenue, which consists primarily of hotel food and beverage revenues as well as revenues from other hotel services, was $1.2 million and $1.1 million for the three months ended March 31, 2025 and 2024, respectively. These changes are a result of the impact from the sale of the Pineville Property in July 2024. Hotel occupancy, ADR, and RevPAR were 60.96%, $120.15, and $73.24, respectively, for the three months ended March 31, 2025. Hotel occupancy, ADR, and RevPAR were 61.14%, $118.39, and $72.39, respectively, for the three months ended March 31, 2024.
Property Operations Expenses
Property operations expenses were $8.3 million and $8.7 million for the three months ended March 31, 2025 and 2024, respectively. Property operations expenses consist primarily of hotel personnel costs, property taxes, insurance, repair and maintenance, and other costs of operating our hotel properties. The decrease of $0.8 million in property operations expenses was primarily due to the sale of the Pineville Property in July 2024 along with a continued effort to effectively reduce costs.
General and Administrative Expenses
General and administrative expenses were $2.6 million and $3.1 million for the three months ended March 31, 2025 and 2024, respectively. General and administrative expenses consist primarily of administrative personnel costs, rent, professional fees and the cost of office supplies and equipment. The decrease of $0.5 million in general and administrative expenses was primarily due to the sale of the Pineville Property in July 2024 along with a continued effort to effectively reduce costs.
Sales and Marketing Expenses
Sales and marketing expenses remained generally unchanged, amounting to $1.3 million and $1.2 million for the three months ended March 31, 2025 and 2024, respectively. Sales and marketing expenses consist primarily of sales and marketing personnel cost, hotel brand loyalty program costs, advertising and other marketing costs.
Franchise Fees
Franchise fees remained generally unchanged at $1.3 million and $1.4 million for the three months ended March 31, 2025 and 2024, respectively. Franchise fees include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, reservation fees and other related costs.
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Management Fees
Management fees remained generally unchanged at $1.1 million and $1.2 million for the three months ended March 31, 2025 and 2024, respectively. Management fees include asset management fees paid to the Advisor and management fees paid to property management service providers who manage the day-to-day operations of our hotel properties.
Acquisition Expenses
Acquisition expenses were $9,979 and $8,542 for the three months ended March 31, 2025 and 2024, respectively. Acquisition expenses include acquisition-related and due diligence costs that relate to a property that is not acquired, as well as costs related to hotel property acquisition activities that are not attributable to specific property acquisitions, along with any acquisition costs associated with the acquisition of a VIE.
Depreciation and Amortization
Depreciation and Amortization expenses remained flat at $2.5 million and $2.7 million for the three months ended March 31, 2025 and 2024, respectively.
Other Expense, net
Other expense, net was $0.4 million and $0.3 million for the three months ended March 31, 2025 and 2024, respectively.
Interest Expense
Interest expense was $4.9 million and $3.9 million for the three months ended March 31, 2025 and 2024, respectively. The $1.0 million increase in interest expense was primarily due to amendments in the debt structure and an overall increase in interest rates. We expect that in future periods our interest expense will vary based on the amount of our borrowings, which will depend on the cost of borrowings, higher interest rates on several of our recently refinanced and extended loans as well as future refinancings of maturing debt, the amount of proceeds we raise in our Offering and our ability to identify and acquire real estate and real estate-related assets that meet our investment objectives.
Critical Accounting Estimates
Below is a discussion of the accounting estimates that management believes are or will be critical to our operations. We consider these estimates critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer compliance with new or revised accounting standards. This allows us to adopt new or revised accounting standards as of the effective date for non-public business entities.
Acquisition of Hotel Properties
We evaluate whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of our acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions will be capitalized and transaction costs associated with business combinations will be expensed as incurred.
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Our acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). We may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, we allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. For transactions determined to be business combination, we record the assets acquired and the liabilities assumed at their respective fair values at the date of acquisition. We determine the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
Impairment of Hotel Properties
We assess the carrying value of our hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of the hotel properties. If our analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, we will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and the economy in general and our expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and our ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties. We recorded a no impairment charge for the three months ended March 31, 2025 and 2024.
Assessment of Variable Interest Entities
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a variable interest entity (“VIE”), we use judgment in determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.
Consolidations
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a variable interest entity (“VIE”), we use judgment in determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our unaudited condensed consolidated financial statements.
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Fair Value Measurement
We establish fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets.
Level 2 Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3 Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
Off-Balance Sheet Arrangements
As of March 31, 2025 and December 31, 2024, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Based on historic trends, for hotels located in non-resort markets, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, excluding any impact from the COVID-19 pandemic, we generally would expect to have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.
Subsequent Events
Western Line of Credit
We and Western State Bank are working to finalize an extension of the Western Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
Changes to Independent Registered Public Accounting Firm
On May 1, 2025, based on the approval of the Audit Committee of our Board of Directors (the “Audit Committee”), we dismissed Marcum LLP (“Marcum”) as our independent registered public accounting firm, effective immediately.
On May 1, 2025, based on the approval of the Audit Committee, we engaged RJI International CPAs (“RJI”), a nationally recognized accounting firm, as our new independent registered public accounting firm.
Status of the Offering
As of the date of this filing, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold 10,300,567 shares of common stock, including 1,215,332 shares issued pursuant to the DRIP, resulting in the receipt of gross offering proceeds of $100.8 million.
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GO II Unit Offering
The Operating Partnership has issued and sold 653,974 Series Go II LP Units, resulting in the receipt of gross offering proceeds of $4.9 million as of the date of this filing.
Sale of Pineville HGI and Charlotte Properties and Loans Repaid
On May 14, 2025, the Company sold the Pineville HGI Property and Charlotte Property to an unaffiliated purchaser for $22,775,000 in cash, subject to customary prorations and adjustments. The mortgage loans secured by the Pineville HGI Property and Charlotte Property were repaid in full at closing from sale proceeds. All guaranties in connection with such loans and collateral with respect to such loans have been terminated or released, and all commitments with respect to such loans have been terminated or released.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risks have been omitted as permitted under rules applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act of 1934 Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, March 31, 2025, our disclosure controls and procedures were effective (i) to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. See Note 10 “Commitments and Contingencies” of the notes to the unaudited condensed consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a discussion of ongoing legal proceedings and governmental authority inquiries. Other than such proceedings, management is not aware of any current or pending legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such legal proceedings contemplated by governmental authorities.
Item 1A. Risk Factors
See the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on April 28, 2025.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Initial Offering
On June 1, 2018, we commenced an offering (the “Offering”) of up to $100,000,000 in shares of our common stock, which amount was increased to $150,000,000 in shares of our common stock in December 2021. We are offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. In addition to sales of common stock for cash, we have adopted a dividend reinvestment plan, which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are offering the shares in the private offering at an initial price of $10.57 per share, with shares purchased in our dividend reinvestment plan at an initial price of $10.04 per share. See Note 9 “Stockholders’ Equity” of the notes to the unaudited condensed consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a description of the update to offering price and share NAV. During the three months ended March 31, 2025 we sold 1,568 shares of common stock in the private offering, resulting in gross offering proceeds of $16,570. During the three months ended March 31, 2025, aggregate selling commissions of $7,964 and marketing and diligence allowances and other wholesale selling costs and expenses of $0.4 million were paid in connection with the private offering.
GO II Units Offering
On April 7, 2023, the Operating Partnership commenced a private placement offering of its Series GO II LP Units, with a maximum offering of $30,000,000, which could be increased to $60,000,000 in the sole discretion of LF REIT III as the General Partner of the Operating Partnership, (the “GO II Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO II LP Units are being offered until the earlier of (i) the sale of $30,000,000 in Series GO II LP Units (which could be increased to $60,000,000 in the Company’s sole discretion), (ii) March 31, 2024, which date may be extended for two 1-year extensions until March 31, 2026 in the sole discretion of the Operating Partnership or (iii) the Operating Partnership terminates the GO II Unit Offering at an earlier date in its sole discretion. On April 17, 2024, our board of directors extended the term of the GO II Unit Offering to March 31, 2025. On March 24, 2025, our board of directors extended the term of the GO II Unit Offering to March 31, 2026. The Operating Partnership is offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered
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and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Series GO II LP Units (a “Series GO II Limited Partner”) will have the right to exchange its Series GO II LP Units for, at the option of the Operating Partnership, an equivalent number of shares of common stock of the Company (“Common Shares”), or cash equal to the fair market value of the Common Shares (the “Cash Amount”) which would have otherwise been received pursuant to such exchange; provided, however, that until such time as the Series GO II LP Units have been allocated Net Income (including book-up income) such that their positive Capital Account balance is equal to the net asset value of the Company’s shares of common stock (the “Share NAV”), the exchange right will be limited and the Series GO II Limited Partners will only be entitled to receive a pro rata portion of a REIT Share equal to the positive Capital Account balance of the Series GO II LP Unit divided by the Share NAV. The exchange right is not available until all of the following have occurred (the “Exchange Date”): (i) the Common Shares are listed on a national securities exchange, the sale of all or substantially all of the GP Units and Interval Units held by the Company or any sale, exchange or merger of the Company or the Operating Partnership or, as determined in the sole discretion of the Company, the occurrence of a similar event; (ii) the Series GO II Limited Partner has held its Series GO II LP Units for at least one year; (iii) the Common Shares to be issued pursuant to the redemption have been registered with the SEC and the registration statement has been declared effective, or an exemption from registration is available; and (iv) the exchange does not result in a violation of the shareholder ownership limitations set forth in the Company’s articles of incorporation. Notwithstanding the above, the Company may waive any of the requirements above in its sole discretion other than (ii) or (iv). During the three months ended March 31, 2025, the Operating Partnership issued 94,540 Series GO II LP Units. During the three months ended March 31, 2025, aggregate selling commissions were $10,897 and marketing and diligence allowances and other wholesale selling costs and expenses of $2,922 were paid in connection with the GO II Unit Offering.
Series P Preferred Units
On December 24, 2024, the Operating Partnership commenced a private offering for the purchase of up to $50,000,000 (which may be increased to $75,000,000 in the sole discretion of the Company) in Series P Preferred Units at a purchase price equal to $10,000 per Series P Preferred Unit to accredited investors only, pursuant to a confidential private placement memorandum. The Operating Partnership is offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Rule 506(c) of Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, whose accredited investor status has been verified by us. Under Rule 506(c), general solicitation and advertisement of offerings is permitted, however, all purchasers in the offering must be accredited investors and the Operating Partnership must take reasonable steps to verify the accredited investor status of each purchaser, among other requirements. The first $1,250,000 of net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be retained by the Operating Partnership. If the Operating Partnership receives more than $1,250,000 of net proceeds from the sale of the Series P Preferred Units, the next $1,047,000 of net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to (i) pay accrued interest on the Fort Collins Loans and the Courtyard Aurora Loan through December 31, 2024 at or prior to the time of refinancing such loans or (ii) after the time of such refinancing, redeem outstanding Series A Preferred Units issued in exchange for the contribution of such loans. If the Operating Partnership receives more than $2,297,000 of net proceeds from the sale of the Series P Preferred Units, the next $7,550,000 of net proceeds received by the Operating Partnership from the sale of Series P Preferred Units shall be retained by the Operating Partnership. If the Operating Partnership receives more than $9,847,000 of net proceeds from the sale of the Series P Preferred Units, (A) until March 24, 2025, 50% of such additional net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to redeem the Series A Preferred Units and the remaining 50% shall be retained by the Operating Partnership, and (B) from and after March 24, 2025, 75% of such additional net proceeds received by the Operating Partnership from the sale of the Series P Preferred Units shall be used to redeem the Series A Preferred Units and the remaining 25% shall be retained by the Operating Partnership. As of March 31, 2025, the Operating Partnership has issued and sold 35 Series P Preferred Units, resulting in the receipt of gross offering proceeds of $0.4 million as of the date of this filing.
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Series A Preferred Units
On December 24, 2024, the Operating Partnership issued 4,067,659 Series A Preferred Units of the Operating Partnership to Access Point Financial, LLC in exchange for all of the remaining $4.6 million of unpaid principal and interest on the Sheraton Northbrook Loan as of December 24, 2024, pursuant to the terms of a loan contribution agreement between the Operating Partnership and the lender. The Series A Preferred Units were issued in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities were sold to an “accredited investor,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D.
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The following discussion summarizes the principal terms of our share repurchase plan.
Repurchase Price
Under certain circumstances and subject to the death repurchase described below, the prices at which we will repurchase shares under our repurchase plan are as follows:
● | For those shares held by the stockholder for at least one year, 92% of the current share NAV; |
● | For those shares held by the stockholder for at least two years, 96% of the current share NAV; and |
● | For those shares held by the stockholder for at least three years, 100% of the current share NAV. |
For purposes of determining the time period a stockholder has held each share, the time period begins as of the date the stockholder acquired the share, provided that shares purchased by the stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial shares to which the dividend reinvestment plan shares relate. The board of directors may, in its sole discretion, reject any request for repurchase and may, upon notice to the stockholders, amend, suspend or terminate the repurchase program at any time.
Limitations on Repurchase
There are several limitations on our ability to repurchase shares under our share repurchase plan:
● | Unless the shares are being repurchased in connection with a stockholder’s death, we may not repurchase shares unless the stockholder has held the shares for at least one year. |
● | During any calendar year, we will repurchase only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan upon 10 business days’ notice to our stockholders. |
● | During any calendar year, we will limit the total shares repurchased to no more than 5.0% of the weighted-average number of shares outstanding as of December 31 of the prior calendar year. |
● | We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
● | We will not repurchase shares if the board of directors determines, in its sole discretion, that the repurchase price determined in accordance with the terms of our share repurchase plan exceeds the then current fair market value of the shares to be repurchased. |
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Procedures for Repurchase
We will repurchase shares within 21 days following the end of a calendar quarter. We must receive a written request for repurchase at least two business days before the end of the calendar quarter in order for us to repurchase a stockholder’s shares on the repurchase date. If we cannot repurchase all shares presented for repurchase in any quarter, we will attempt to honor repurchase requests on a pro rata basis. The board of directors may, in its sole discretion, reject any request for repurchase.
If we did not completely satisfy a stockholder’s repurchase request on a repurchase date because we did not receive the request in time, because of the limitations on repurchases set forth in our share repurchase plan or because of a suspension of our share repurchase plan, we would treat the unsatisfied portion of the repurchase request as a request for repurchase at the next repurchase date at which funds are available for repurchase unless the stockholder withdraws its request. Any stockholder may withdraw a repurchase request upon written notice to the program administrator if such notice is received at least two business days before the repurchase date.
All shares to be repurchased must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares, we will not repurchase any such shares.
Neither we nor the board of directors will have any liability to any stockholder for any damages resulting from or related to the stockholder’s presentment of its shares. Further, stockholders will have complete responsibility for payment of all taxes, assessments and other applicable obligations and third-party costs resulting from or relating to our repurchase of shares. All repurchased shares shall be repurchased as treasury shares and may be made available for purchase to new or existing stockholders.
Special Repurchases—Death Repurchase
In the event of the death of a stockholder, the Company will, upon request and within six months from the date of the request, repurchase such stockholder’s shares regardless of the period the deceased stockholder has owned such shares at the following prices:
● | 92% of the current share NAV if death occurs less than six months of the purchase; |
● | 96% of the current share NAV if death occurs from six months to one year of purchase; and |
● | 100% of the current share NAV if death occurs after one year of purchase. |
We will not be obligated to repurchase a deceased stockholder’s shares if more than two years have elapsed from the date of death.
Amendment, Suspension or Termination of Program and Notice
The board of directors may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate our share repurchase plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan.
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Shares Repurchased
Pursuant to the terms of our Share Repurchase Plan and the discretion provided therein, we will repurchase shares within 21 days following the end of a calendar quarter. During the three months ended March 31, 2025, we repurchased no shares of our common stock. During the three months ended March 31, 2025, there were unfulfilled repurchase requests of $0.4 million.
Month | Total Number of Shares Repurchased | Average Price Paid Per Share | Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program | ||||||
January 2025 | — | $ | — | (1) | |||||
February 2025 | — | $ | — | (1) | |||||
March 2025 | — | $ | — | (1) | |||||
Total | — | ||||||||
Three Months Ended March 31, 2025 | — |
(1) | We limit the dollar value of shares that may be repurchased under the plan as described above. One of these limitations is that during each calendar year, our share repurchase plan limits the number of shares we may repurchase to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares upon ten business days’ notice to our stockholders. |
The above table is on a cash basis, but we record our shares repurchased on an accrual basis.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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Item 6. Exhibits
Exhibit No. |
| Description |
3.1 | Articles of Amendment and Restatement, dated as of June 1, 2018 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2020) | |
3.2 | Articles Supplementary for Interval Common Stock (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2020) | |
3.3 | Bylaws, dated of as April 9, 2018, as amended by Amendment No. 1 dated as of November 12, 2019 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 12, 2019) | |
4.1 | Dividend Reinvestment Plan of the Registrant (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10 filed August 8, 2019) | |
10.2 | Form of Management Agreement with Hotel Equities Group, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed April 29, 2025) | |
10.299* | ||
10.300* | ||
10.301* | ||
31.1 | * | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | * | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | ** | |
99.1 | Share Repurchase Plan of the Registrant (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 10 filed August 8, 2019) |
* Filed herewith.
** Furnished herewith.
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101.INS |
| Inline XBRL Instance Document |
101.SCH |
| Inline XBRL Taxonomy Extension Schema |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| LODGING FUND REIT III, INC. | |
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Date: | June 2, 2025 | By: | /s/ Norman H. Leslie |
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| Norman H. Leslie | |
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| President, Chief Executive Officer, Secretary, Chief Investment Officer, Treasurer and Director |
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| (principal executive officer) |
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Date: | June 2, 2025 | By: | /s/ Samuel C. Montgomery |
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| Samuel C. Montgomery |
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| Chief Financial Officer | |
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| (principal financial officer) |
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