10-Q 1 soho-10q_20160331.htm 10-Q soho-10q_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended March 31, 2016

 

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

 

 

MARYLAND

001-32379

20-1531029

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

 

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

001-36091

20-1965427

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

 

410 West Francis Street

Williamsburg, Virginia 23185

(757) 229-5648

(Address and Telephone Number of Principal Executive Offices)

 

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

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

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

Sotherly Hotels Inc.

 

Large Accelerated Filer

¨

 

 

Accelerated Filer

¨

 

 

 

 

 

 

Non-accelerated Filer

¨

 

 

Smaller Reporting Company

x

 

Sotherly Hotels LP

 

Large Accelerated Filer

¨

 

 

Accelerated Filer

¨

 

 

 

 

 

 

Non-accelerated Filer

x

 

 

Smaller Reporting Company

¨

 

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

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

As of May 10, 2016, there were 14,949,651 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.  

 

 


EXPLANATORY NOTE

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

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

This report combines the Quarterly Reports on Form 10-Q for the period ended March 31, 2016 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

 

·

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

 

·

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

 

·

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

 

·

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

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

 

·

Consolidated Financial Statements;

 

·

the following Notes to Consolidated Financial Statements:

 

·

Note 6 – Equity; and

 

·

Note 12 – Income Per Share and Per Unit;

 

·

Item 4 - Controls and Procedures; and

 

·

Item 6 - Certifications of CEO and CFO Pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.

 

 

2


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I

Item 1.

 

Consolidated Financial Statements

 

4

 

 

Sotherly Hotels Inc.

 

4

 

 

Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015

 

4

 

 

Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

5

 

 

Consolidated Statement of Changes in Equity (unaudited) for the Three Months Ended March 31, 2016

 

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

7

 

 

Sotherly Hotels LP

 

8

 

 

Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015

 

8

 

 

Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

9

 

 

Consolidated Statement of Changes in Partners’ Capital (unaudited) for the Three Months Ended March 31, 2016

 

10

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015

 

11

 

 

Notes to Consolidated Financial Statements

 

12

Item 2.

 

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

 

26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4

 

Controls and Procedures

 

38

 

 

 

 

 

PART II

Item 1.

 

Legal Proceedings

 

40

Item 1A.

 

Risk Factors

 

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 3.

 

Defaults Upon Senior Securities

 

40

Item 4.

 

Mine Safety Disclosures

 

40

Item 5.

 

Other Information

 

40

Item 6.

 

Exhibits

 

41

 

3


PART I

 

 

Item 1.

Consolidated Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Investment in hotel properties, net

$

356,277,837

 

 

$

354,963,242

 

Cash and cash equivalents

 

14,985,925

 

 

 

11,493,914

 

Restricted cash

 

3,630,274

 

 

 

5,793,840

 

Accounts receivable, net

 

3,848,461

 

 

 

4,071,175

 

Accounts receivable-affiliate

 

208,726

 

 

 

226,552

 

Loan proceeds receivable

 

 

 

 

2,600,711

 

Prepaid expenses, inventory and other assets

 

4,704,666

 

 

 

4,432,432

 

Deferred income taxes

 

5,877,844

 

 

 

5,390,374

 

TOTAL ASSETS

$

389,533,733

 

 

$

388,972,240

 

LIABILITIES

 

 

 

 

 

 

 

Mortgage loans, net

$

266,473,174

 

 

$

267,891,830

 

Unsecured notes

 

52,900,000

 

 

 

52,900,000

 

Accounts payable and accrued expenses

 

14,234,813

 

 

 

12,334,879

 

Advance deposits

 

2,321,530

 

 

 

1,651,840

 

Dividends and distributions payable

 

1,421,862

 

 

 

1,335,323

 

TOTAL LIABILITIES

$

337,351,379

 

 

$

336,113,872

 

Commitments and contingencies (See Note 5)

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

Sotherly Hotels Inc. stockholders’ equity

 

 

 

 

 

 

 

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

   and outstanding

 

 

 

 

 

Common stock, par value $0.01, 49,000,000 shares authorized, 14,949,651

   shares and 14,490,714 shares issued and outstanding at March 31, 2016

   and December 31, 2015, respectively

 

149,496

 

 

 

144,907

 

Additional paid in capital

 

83,788,906

 

 

 

82,749,058

 

Distributions in excess of retained earnings

 

(34,675,230

)

 

 

(33,890,834

)

Total Sotherly Hotels Inc. stockholders’ equity

 

49,263,172

 

 

 

49,003,131

 

Noncontrolling interest

 

2,919,182

 

 

 

3,855,237

 

TOTAL EQUITY

 

52,182,354

 

 

 

52,858,368

 

TOTAL LIABILITIES AND OWNERS' EQUITY

$

389,533,733

 

 

$

388,972,240

 

 

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

 

 

4


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

REVENUE

 

 

 

 

 

 

 

Rooms department

$

27,322,413

 

 

$

21,336,414

 

Food and beverage department

 

8,249,679

 

 

 

7,726,807

 

Other operating departments

 

2,238,052

 

 

 

1,912,409

 

Total revenue

 

37,810,144

 

 

 

30,975,630

 

EXPENSES

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

Rooms department

 

7,080,633

 

 

 

5,842,940

 

Food and beverage department

 

5,939,861

 

 

 

5,405,385

 

Other operating departments

 

593,969

 

 

 

338,179

 

Indirect

 

14,135,595

 

 

 

11,468,343

 

Total hotel operating expenses

 

27,750,058

 

 

 

23,054,847

 

Depreciation and amortization

 

3,668,638

 

 

 

2,904,391

 

Corporate general and administrative

 

1,607,294

 

 

 

1,451,224

 

Total operating expenses

 

33,025,990

 

 

 

27,410,462

 

NET OPERATING INCOME

 

4,784,154

 

 

 

3,565,168

 

Other income (expense)

 

 

 

 

 

 

 

Interest expense

 

(4,632,632

)

 

 

(3,774,535

)

Interest income

 

8,830

 

 

 

10,102

 

Equity income in joint venture

 

 

 

 

474,349

 

Unrealized loss on hedging activities

 

(50,557

)

 

 

 

Net income before income taxes

 

109,795

 

 

 

275,084

 

Income tax benefit

 

436,079

 

 

 

438,775

 

Net income

 

545,874

 

 

 

713,859

 

Less: Net (income) attributable to the noncontrolling interest

 

(62,779

)

 

 

(138,523

)

Net income attributable to the Company

$

483,095

 

 

$

575,336

 

Net income per share attributable to the Company

 

 

 

 

 

 

 

Basic and diluted

$

0.03

 

 

$

0.05

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

Basic and diluted

 

14,792,911

 

 

 

10,595,801

 

 

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

 

 

5


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-

 

 

in Excess of

 

 

Noncontrolling

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

In Capital

 

 

Retained Earnings

 

 

Interest

 

 

Total

 

Balances at December 31, 2015

 

14,490,714

 

 

$

144,907

 

 

$

82,749,058

 

 

$

(33,890,834

)

 

$

3,855,237

 

 

$

52,858,368

 

Net income

 

 

 

 

 

 

 

 

 

 

483,095

 

 

 

62,779

 

 

 

545,874

 

Issuance of unrestricted common stock

   awards

 

24,250

 

 

 

242

 

 

 

128,040

 

 

 

 

 

 

 

 

 

128,282

 

Issuance of restricted common stock awards

 

12,000

 

 

 

120

 

 

 

63,360

 

 

 

 

 

 

 

 

 

63,480

 

Conversion of Operating Partnership units

   into shares of common stock

 

422,687

 

 

 

4,227

 

 

 

843,468

 

 

 

 

 

 

(847,695

)

 

 

-

 

Amortization of restricted stock award

 

 

 

 

 

 

 

4,980

 

 

 

 

 

 

 

 

 

4,980

 

Dividends and distributions declared

 

 

 

 

 

 

 

 

 

 

(1,267,491

)

 

 

(151,139

)

 

 

(1,418,630

)

Balances at March 31, 2016 (unaudited)

 

14,949,651

 

 

$

149,496

 

 

$

83,788,906

 

 

$

(34,675,230

)

 

$

2,919,182

 

 

$

52,182,354

 

 

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

 

 

6


SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

545,874

 

 

$

713,859

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

3,668,638

 

 

 

2,904,391

 

Equity income in joint venture

 

 

 

 

(474,349

)

Amortization of deferred financing costs

 

313,410

 

 

 

350,396

 

Amortization of mortgage premium

 

(6,479

)

 

 

 

Unrealized loss on derivative instrument

 

50,557

 

 

 

 

Charges related to equity-based compensation

 

196,742

 

 

 

271,036

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

(120,693

)

 

 

(223,492

)

Accounts receivable

 

222,714

 

 

 

(1,808,004

)

Prepaid expenses, inventory and other assets

 

(342,455

)

 

 

(835,566

)

Deferred income taxes

 

(487,469

)

 

 

(496,454

)

Accounts payable and other accrued liabilities

 

1,892,725

 

 

 

2,428,633

 

Advance deposits

 

669,690

 

 

 

551,491

 

Accounts receivable - affiliate

 

17,826

 

 

 

(44,540

)

Net cash provided by operating activities

 

6,621,080

 

 

 

3,337,401

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements and additions to hotel properties

 

(4,956,359

)

 

 

(4,485,857

)

Distributions from joint venture

 

 

 

 

600,000

 

Funding of restricted cash reserves

 

(1,674,236

)

 

 

(777,597

)

Proceeds of restricted cash reserves

 

3,958,496

 

 

 

3,404,730

 

Net cash used in investing activities

 

(2,672,099

)

 

 

(1,258,724

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from mortgage loan receivable

 

2,600,711

 

 

 

 

Payments on mortgage debt and loans

 

(1,446,688

)

 

 

(1,159,671

)

Payment of deferred financing costs

 

(278,899

)

 

 

(617,500

)

Dividends and distributions paid

 

(1,332,094

)

 

 

(852,914

)

Net cash used in financing activities

 

(456,970

)

 

 

(2,630,085

)

Net (decrease) increase in cash and cash equivalents

 

3,492,011

 

 

 

(551,408

)

Cash and cash equivalents at the beginning of the period

 

11,493,914

 

 

 

16,634,499

 

Cash and cash equivalents at the end of the period

$

14,985,925

 

 

$

16,083,091

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

$

3,606,752

 

 

$

3,223,308

 

Cash paid during the period for income taxes

$

9,165

 

 

$

200

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Change in amount of deferred financing and deferred offering cost in accounts

   payable and accrued liabilities

$

 

 

$

(624,117

)

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

   liabilities

$

(7,209

)

 

$

(664,159

)

 

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

 

 

7


SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Investment in hotel properties, net

$

356,277,837

 

 

$

354,963,242

 

Cash and cash equivalents

 

14,985,925

 

 

 

11,493,914

 

Restricted cash

 

3,630,274

 

 

 

5,793,840

 

Accounts receivable, net

 

3,848,461

 

 

 

4,071,175

 

Accounts receivable-affiliate

 

208,726

 

 

 

226,552

 

Loan proceeds receivable

 

 

 

 

2,600,711

 

Prepaid expenses, inventory and other assets

 

4,704,666

 

 

 

4,432,432

 

Deferred income taxes

 

5,877,844

 

 

 

5,390,374

 

TOTAL ASSETS

$

389,533,733

 

 

$

388,972,240

 

LIABILITIES

 

 

 

 

 

 

 

Mortgage loans, net

$

266,473,174

 

 

$

267,891,830

 

Unsecured notes

 

52,900,000

 

 

 

52,900,000

 

Accounts payable and other accrued liabilities

 

14,234,813

 

 

 

12,334,879

 

Advance deposits

 

2,321,530

 

 

 

1,651,840

 

Dividends and distributions payable

 

1,421,862

 

 

 

1,335,323

 

TOTAL LIABILITIES

$

337,351,379

 

 

$

336,113,872

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

PARTNERS’ CAPITAL

 

 

 

 

 

 

 

General Partner: 167,278 and 166,915 units issued and outstanding as of

   March 31, 2016 and December 31, 2015, respectively

 

767,535

 

 

 

774,295

 

Limited Partners: 16,560,513 and 16,524,626 units issued and outstanding as

   of March 31, 2016 and December 31, 2015, respectively

 

51,414,819

 

 

 

52,084,073

 

TOTAL PARTNERS’ CAPITAL

 

52,182,354

 

 

 

52,858,368

 

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

$

389,533,733

 

 

$

388,972,240

 

 

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

 

 

8


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

REVENUE

 

 

 

 

 

 

 

Rooms department

$

27,322,413

 

 

$

21,336,414

 

Food and beverage department

 

8,249,679

 

 

 

7,726,807

 

Other operating departments

 

2,238,052

 

 

 

1,912,409

 

Total revenue

 

37,810,144

 

 

 

30,975,630

 

EXPENSES

 

 

 

 

 

 

 

Hotel operating expenses

 

 

 

 

 

 

 

Rooms department

 

7,080,633

 

 

 

5,842,940

 

Food and beverage department

 

5,939,861

 

 

 

5,405,385

 

Other operating departments

 

593,969

 

 

 

338,179

 

Indirect

 

14,135,595

 

 

 

11,468,343

 

Total hotel operating expenses

 

27,750,058

 

 

 

23,054,847

 

Depreciation and amortization

 

3,668,638

 

 

 

2,904,391

 

Corporate general and administrative

 

1,607,294

 

 

 

1,451,224

 

Total operating expenses

 

33,025,990

 

 

 

27,410,462

 

NET OPERATING INCOME

 

4,784,154

 

 

 

3,565,168

 

Other income (expense)

 

 

 

 

 

 

 

Interest expense

 

(4,632,632

)

 

 

(3,774,535

)

Interest income

 

8,830

 

 

 

10,102

 

Equity income in joint venture

 

 

 

 

474,349

 

Unrealized loss on hedging activities

 

(50,557

)

 

 

 

Net income before income taxes

 

109,795

 

 

 

275,084

 

Income tax benefit

 

436,079

 

 

 

438,775

 

Net income

$

545,874

 

 

$

713,859

 

Net income per unit

 

 

 

 

 

 

 

Basic and diluted

$

0.03

 

 

$

0.05

 

 

 

 

 

 

 

 

 

Weighted average number of units outstanding

 

 

 

 

 

 

 

Basic and diluted

 

16,715,044

 

 

 

13,146,628

 

 

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

 

 

9


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL

 

 

General Partner

 

 

Limited Partner

 

 

 

 

 

 

Units

 

 

Amount

 

 

Units

 

 

Amounts

 

 

Total

 

Balances at December 31, 2015

 

166,915

 

 

$

774,295

 

 

 

16,524,626

 

 

$

52,084,073

 

 

$

52,858,368

 

Issuance of partnership units

 

363

 

 

 

1,918

 

 

 

35,887

 

 

 

189,844

 

 

 

191,762

 

Amortization of restricted units award

 

 

 

 

50

 

 

 

 

 

 

4,930

 

 

 

4,980

 

Distributions declared

 

 

 

 

(14,187

)

 

 

 

 

 

(1,404,443

)

 

 

(1,418,630

)

Net income

 

 

 

 

5,459

 

 

 

 

 

 

540,415

 

 

 

545,874

 

Balances at March 31, 2016 (unaudited)

 

167,278

 

 

$

767,535

 

 

 

16,560,513

 

 

$

51,414,819

 

 

$

52,182,354

 

 

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

 

 

10


SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2016

 

 

March 31, 2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

545,874

 

 

$

713,859

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

3,668,638

 

 

 

2,904,391

 

Equity income in joint venture

 

 

 

 

(474,349

)

Amortization of deferred financing costs

 

313,410

 

 

 

350,396

 

Amortization of mortgage premium

 

(6,479

)

 

 

 

Unrealized loss on derivative instrument

 

50,557

 

 

 

 

Charges related to equity-based compensation

 

196,742

 

 

 

271,036

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

(120,693

)

 

 

(223,492

)

Accounts receivable

 

222,714

 

 

 

(1,808,004

)

Prepaid expenses, inventory and other assets

 

(342,455

)

 

 

(835,566

)

Deferred income taxes

 

(487,469

)

 

 

(496,454

)

Accounts payable and other accrued liabilities

 

1,892,725

 

 

 

2,428,633

 

Advance deposits

 

669,690

 

 

 

551,491

 

Accounts receivable - affiliate

 

17,826

 

 

 

(44,540

)

Net cash provided by operating activities

 

6,621,080

 

 

 

3,337,401

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Improvements and additions to hotel properties

 

(4,956,359

)

 

 

(4,485,857

)

Distributions from joint venture

 

 

 

 

600,000

 

Funding of restricted cash reserves

 

(1,674,236

)

 

 

(777,597

)

Proceeds of restricted cash reserves

 

3,958,496

 

 

 

3,404,730

 

Net cash used in investing activities

 

(2,672,099

)

 

 

(1,258,724

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from mortgage loan receivable

 

2,600,711

 

 

 

 

Payments on mortgage debt and loans

 

(1,446,688

)

 

 

(1,159,671

)

Payment of deferred financing costs

 

(278,899

)

 

 

(617,500

)

Distributions paid

 

(1,332,094

)

 

 

(852,914

)

Net cash used in financing activities

 

(456,970

)

 

 

(2,630,085

)

Net (decrease) increase in cash and cash equivalents

 

3,492,011

 

 

 

(551,408

)

Cash and cash equivalents at the beginning of the period

 

11,493,914

 

 

 

16,634,499

 

Cash and cash equivalents at the end of the period

$

14,985,925

 

 

$

16,083,091

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

$

3,606,752

 

 

$

3,223,308

 

Cash paid during the period for income taxes

$

9,165

 

 

$

200

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

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

   and accrued liabilities

$

 

 

$

(624,117

)

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

   liabilities

$

(7,209

)

 

$

(664,159

)

 

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

 

 

 

11


SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

1. Organization and Description of Business

Sotherly Hotels Inc., formerly MHI Hospitality Corporation (the “Company”), is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States.  Currently, the Company is focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States.  The Company’s portfolio consists of investments in twelve hotel properties, comprising 3,011 rooms.  All of the Company’s hotels, except for the Georgian Terrace and The Whitehall, operate under the Hilton, Crowne Plaza, DoubleTree, and Sheraton brands.

The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six hotel properties (the “initial properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P. (the “Operating Partnership”).  The Company and the Operating Partnership through July 30, 2015, also owned a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”).  As of July 31, 2015, we own 100% of the entities that own the Crowne Plaza Hollywood Beach Resort.

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership.  The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership.  Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at March 31, 2016, was approximately 89.4% owned by the Company, and its subsidiaries, lease the hotels to a subsidiary of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in this report to “we”, “us” and “our” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

Significant transactions occurring during the current and prior fiscal year include the following:

 

On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America N.A. on the Georgian Terrace in Atlanta, Georgia.  The mortgage bears interest at a fixed rate of 4.42% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule.  The maturity date is June 1, 2025.  The Company used the proceeds of the mortgage to repay the existing first mortgage and to pay closing costs, and will use the balance of the proceeds to partially fund ongoing renovations at the Georgian Terrace and for general corporate purposes.

During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it contributed to the Operating Partnership for an equivalent number of units.

On July 1, 2015, the Company sold 3,000,000 shares of common stock for net proceeds of approximately $19.8 million, which it contributed to the Operating Partnership for an equivalent number of units.  

 

On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The $18.5 million mortgage was received in two parts. We received $18.0 million on July 7, 2015 and the remainder of $0.5 million on October 20, 2015.  The $0.5 million was included with the additional earn-out provision of $1.5 million, for a total of $2.0 million additional proceeds, as described below.  The mortgage term is four years maturing July 7, 2019 and may be extended for one additional period of one year, subject to certain criteria. The mortgage bears a floating interest rate of the 30-day LIBOR plus 3.5%, subject to a floor rate of 4.0%.  The mortgage amortizes on a 25-year schedule; and has a prepayment penalty if prepaid during the initial two years. The

12


Company used the proceeds from the mortgage to repay the existing first mortgage on the DoubleTree by Hilton Jacksonville Riverfront, to pay closing costs, to partially fund ongoing renovations at the DoubleTree by Hilton Jacksonville Riverfront and for general corporate purposes.

 

On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.8 million, which it contributed to the Operating Partnership for an equivalent number of units.

On July 31, 2015, we acquired the remaining 75% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort.  As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort.

On September 2, 2015, we closed on the sale of a 0.3 acre parcel of excess land adjacent to our Atlanta, Georgia property for $2.2 million.  The parcel was included in the acquisition of the Georgian Terrace in March 2014.  We used the proceeds of the sale for general corporate purposes.

On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood Beach Resort with Bank of America, N.A.  The mortgage term is ten years maturing October 1, 2025, subject to certain criteria. The mortgage bears a fixed interest rate of 4.913%.  The mortgage amortizes on a 30-year schedule. The Company used the proceeds from the mortgage to repay the existing first mortgage on the Crowne Plaza Hollywood Beach Resort and to pay closing costs, and will use the balance of the proceeds for general corporate purposes.

On October 20, 2015, we secured $2.0 million additional proceeds on the mortgage loan on the DoubleTree by Hilton Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.

On December 31, 2015, we entered into an amendment to the existing mortgage loan on the DoubleTree by Hilton Laurel which generated additional net proceeds of approximately $2.6 million and received the loan proceeds on January 4, 2016.

On March 21, 2016, we entered into an agreement with the existing lender to extend the maturity of the mortgage on The Whitehall until November 2017.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project which constitute additions or improvements that extend the life of the property are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel

13


property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

At December 31, 2015, our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a combination of a change in anticipated use and future branding of the property and a re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment of approximately $0.5 million.

Assets Held For Sale – The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.

Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.

Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.  

Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of March 31, 2016 and December 31, 2015 were $326,459 and $339,542, respectively. Amortization expense for the three month periods ended March 31, 2016 and 2015 totaled $15,131 and $14,459, respectively.

Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.

Amortization of deferred offering costs occurs when the equity offering is complete, whereby the costs are offset against the equity funds raised in the future and included in additional paid in capital on the consolidated balance sheets, or if the offering expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and administrative expenses in the consolidated statements of operations.

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we primarily are using an interest rate cap which acts as a cash flow hedge. We value our interest-rate cap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We also have used derivative instruments in the Company’s stock to

14


obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

Fair Value Measurements –

We classify the inputs used to measure fair value into the following hierarchy:

 

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2

Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset or liability.

 

Level 3

Unobservable inputs for the asset or liability.

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our investment in hotel property, net, interest rate cap, mortgage loans and unsecured notes measured at fair value and the basis for that measurement:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel property, net(1)

 

$

 

 

$

 

 

$

5,700,000

 

Interest Rate Cap(4)

 

$

 

 

$

70,981

 

 

$

 

Mortgage loans(2)

 

$

 

 

$

(272,933,327

)

 

$

 

Unsecured notes(3)

 

$

(54,238,600

)

 

$

 

 

$

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel property, net(1)

 

$

 

 

$

 

 

$

 

Interest Rate Cap(4)

 

$

 

 

$

20,424

 

 

$

 

Mortgage loans(2)

 

$

 

 

$

(271,175,967

)

 

$

 

Unsecured notes(3)

 

$

(54,212,840

)

 

$

 

 

$

 

 

(1)

A non-recurring fair value measurement was conducted in 2015 for our investment in hotel property, which resulted in impairment charges for the year ended December 31, 2015, which represent the amount by which the carrying value of the asset group exceeded its fair value.

(2)

Mortgage loans are reflected at outstanding principal balance net of deferred financing costs on our Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015.

(3)

Unsecured notes are recorded at outstanding principal balance on our Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015.

(4)

Interest rate cap for our loan on DoubleTree by Hilton Jacksonville Riverfront, which caps the 1-month LIBOR rate at 2.5%.

Noncontrolling Interest in Operating Partnership – Certain hotel properties have been acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes.  We account for the lease income as revenue from other operating departments within the statement of operations pursuant to the terms of each lease.  Lease revenue was approximately $0.5 million and $0.5 million, for the three months ended March 31, 2016 and 2015, respectively.

15


A schedule of minimum future lease payments receivable for the remaining lease periods is as follows:

 

Remaining nine months ending December 31, 2016

 

$

1,059,658

 

December 31, 2017

 

 

935,715

 

December 31, 2018

 

 

428,617

 

December 31, 2019

 

 

317,339

 

December 31, 2020

 

 

278,450

 

December 31, 2021 and thereafter

 

 

1,227,684

 

Total

 

$

4,247,463

 

 

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. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of March 31, 2016 and December 31, 2015, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2016, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2010 through 2015. In addition, as of March 31, 2016, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally include 2004 through 2015.

The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.

Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options, restricted stock and performance share compensation awards to its employees for up to 350,000 and 750,000 shares of common stock, respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.

Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 12,000 shares issued to the Chief Financial Officer upon execution of his employment contract which will vest pro rata on each of the next three anniversaries of the effective date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested. The 2004 plan was terminated in 2013.

Under the 2013 Plan, the Company has made stock awards totaling 109,100 shares, including 72,350 non-restricted shares to certain executives and employees and 35,500 restricted shares issued to its independent directors.  All awards have vested except for 12,000 shares issued to the Company’s independent directors in January 2016, which will vest on December 31, 2016.  

Previously, under the 2004 Plan, and currently, under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of March 31, 2016, no performance-based stock awards have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2013 Plan for the three months ended March 31, 2016 and 2015 was $196,742 and $271,036, respectively. The 2004 Plan was terminated in April 2013.

Advertising – Advertising costs were $74,063 and $52,856 for the three months ended March 31, 2016 and 2015, respectively. Advertising costs are expensed as incurred.

Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.

Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership.

16


Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications – Certain reclassifications in the amount of $4.1 million, from deferred financing costs, net in total assets on the balance sheet, have been netted against mortgage loans on the December 31, 2015 balances to conform to the current period presentation. This presentation applies Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”

New Accounting Pronouncements – In April 2015, the FASB issued ASU 2015-03 related to “Simplifying the Presentation of Debt Issuance Costs,” as part of its simplification initiative. The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense.  The ASU specifies that “issue costs shall be reported in the balance sheet as a direct deduction from the face amount of the note” and that “amortization of debt issue costs shall also be reported as interest expense.” According to the ASU’s Basis for Conclusions, debt issuance costs incurred before the associated funding is received (i.e., the debt liability) should be reported on the balance sheet as deferred charges until that debt liability amount is recorded.  For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and is applicable for our interim periods within 2016. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted).  We adopted this ASU and it is being applied during our 2016 reporting.

In February 2015, the FASB issued ASU 2015-02 related to ASC Topic 810, Consolidation. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  This guidance will be effective for annual reporting periods beginning after December 15, 2015.  We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 related to ASC Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update.  As issued, this ASU is not effective until annual reporting periods beginning after December 15, 2016, however the FASB has deferred the effective date of ASU 2014-09 such that it would be effective for annual reporting periods beginning after December 15, 2017.  We do not expect this ASU to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

 

3. Investment in Hotel Properties, Net

Investment in hotel properties as of March 31, 2016 and December 31, 2015 consisted of the following:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Land and land improvements

 

$

59,941,097

 

 

$

59,910,212

 

Buildings and improvements

 

 

336,275,927

 

 

 

333,720,421

 

Furniture, fixtures and equipment

 

 

44,622,512

 

 

 

42,245,334

 

 

 

 

440,839,536

 

 

 

435,875,967