Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2025

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

The Company consolidates variable interest entities (“VIEs”) as defined under the Consolidation Topic (“Topic 810”) of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) when it has the power to direct the activities that most significantly impact the VIEs’ performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant. At December 31, 2025, the assets of our VIEs were $59,969,134, and consist primarily of land, building, furniture, fixtures, and equipment and are available to satisfy our VIEs’ obligations. The liabilities of our VIEs were $44,865,776 at December 31, 2025 and consist primarily of long-term debt. The Company has guaranteed certain obligations of its VIEs.

The Company has no foreign operations or assets and its operating structure includes only one segment.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assumptions and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment in Real Estate

Investment in real estate is stated at cost, less accumulated depreciation. Major improvements that extend the life of an asset are capitalized and depreciated over a period equal to the shorter of the life of the improvement or the remaining useful life of the asset. The cost of ordinary repairs and maintenance are charged to expense when incurred.

Depreciation expense is computed using the straight-line and accelerated methods based upon the following estimated useful lives:

Building	39 years
Improvements	7-15 years
Furniture, fixtures and equipment	3-7 years

Real Estate Purchase Price Allocation

Upon the acquisition of hotel properties, the Company evaluates whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions the Company allocates the purchase price of properties to acquired tangible assets and any assumed debt based on their fair

value. For asset acquisitions, the Company capitalizes transaction costs and allocates the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, the Company expenses transaction costs associated as incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability.

The tangible assets acquired consist of land, buildings, improvements, furniture, fixtures and equipment. The Company utilizes independent appraisals, as well as hotel construction costs and other available market data, to assist in the determination of the fair values of the tangible assets of an acquired property.

The Company determines the fair value of any assumed debt by calculating the net present value of the scheduled mortgage payments using methods similar to those used by independent appraisers, including using a discounted cash flow analysis that uses appropriate discount or capitalization rates and available market information where applicable. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan as interest expense.

In allocating the purchase price of each of the Company’s properties, the Company makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets and discount rates used to determine present values. Many of these estimates are obtained from independent third-party appraisals. However, the Company is responsible for the source and use of these estimates. These estimates are based on judgment and subject to being imprecise; accordingly, if different estimates and assumptions were derived, the valuation of the various categories of the Company’s hotel properties or related intangibles could in turn result in a difference in the depreciation or amortization expense recorded in the Company’s consolidated financial statements. These variances could be material to the Company’s results of operations and financial condition.

Impairment of Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles, including franchise agreements with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers current and anticipated operating performance, market pricing, third party appraisals as applicable, and its expected hold period, among other factors, in its evaluation of indicators of impairment for its investments in hotel properties. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Fair Value of Financial Instruments

Under GAAP, the Company is required to disclose the fair value of certain financial instruments on a recurring basis. The accompanying consolidated balance sheets include the following financial instruments: cash, restricted cash, accounts receivable, accounts payable, mortgage notes payable and other debt.

The Company considers the carrying value of cash, restricted cash, accounts receivable, accounts payable and other debt to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

● Level 1:   unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

● Level 2:   quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

● Level 3:   prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

As of December 31, 2025, the estimated fair value of the mortgage notes payable was $66,646,448 compared to the carrying value of $67,314,649. The mortgage notes payable are valued using Level 3 inputs through a discounted cash flow analysis of the contractual cash flows discounted at a market rate for similar borrowings.

Revenue Recognition

Revenue is generally recognized as services are performed. Revenue represents primarily rooms, food and beverage sales, and other fees. The Company collects sales tax from all nonexempt customers and remits the entire amount to the appropriate states upon collection from the customer. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenue and expense.

Cash and Cash Equivalents

Cash and cash equivalents represent cash on hand or held in banks and highly liquid investments with original maturities of three months or less.

Restricted Cash

The Company maintains reserves for property taxes and capital improvements as required by the debt agreements. At December 31, 2025 and 2024, reserves for property taxes were $602,295 and $394,917 respectively, reserves for capital improvements were $2,863,002 and $2,389,259, respectively, and reserves for insurance were $75,368 and $142,170, respectively. The Company also included $110,200 and $176,160 of guest advance deposits as restricted cash at December 31, 2025 and 2024, respectively.

Accounts Receivable

The Company records its accounts receivable at cost. The Company provides an allowance for doubtful accounts, when deemed necessary, based on expected losses. The allowance for doubtful accounts was $24,445 and $4,357 at December 31, 2025 and December 31, 2024, respectively.

Prepaid Expenses and Other Assets

Prepaid expenses include prepaid insurance and prepaid hotel operating expenses. Other assets include inventories at the hotel properties, consisting of food and beverage, are valued at the lower of cost and net realizable value, using the FIFO (first-in first-out) method of accounting. Other assets also include the Company’s deferred income tax asset.

Deferred Franchise Fees

Franchise fee represents the initial franchise fee paid by the Company. The initial franchise fees of the agreements are recorded at cost and amortized on a straight-line basis over the term of the franchise agreements. Deferred franchise fees are included in other assets on the consolidated balance sheet.

Deferred Financing Costs

Deferred finance fees are bank fees and other costs incurred in obtaining financing that are amortized on a straight-line basis over the term of the related debt. Deferred finance fees are presented as a direct reduction of the carrying amount of the mortgage notes payable on the consolidated balance sheet. Amortization of deferred finances fees is included in interest expense.

Organization and Offering Costs

Organization and offering costs (“O&O Costs”) include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and meals. The Company charged O&O Costs against additional paid in capital on the consolidated balance sheet as it raised proceeds in its Public Offering, which was terminated on August 13, 2021.

Income Taxes

The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as a REIT, commencing with the taxable year ended December 31, 2018. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be

subject to U.S. federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year following the year it initially elects to be taxed as a REIT, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to its stockholders.

Because the Company is prohibited from operating hotel properties pursuant to certain tax laws relating to its qualification as a REIT, the entities through which the Company owns hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays U.S. federal income tax at regular corporate rates on its taxable income.

The Company accounts for income taxes of its TRSs 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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period prior to when the new rates become effective. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized.

The Company has reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. At December 31, 2025, the Company had no material uncertain tax positions.

The preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company will account for interest and penalties relating to uncertain tax positions in the current period results of operations, if necessary. The Company has tax years 2022 through 2025 remaining subject to examination by federal and various state tax jurisdictions.

Noncontrolling Interests

Noncontrolling interest represents the portion of equity of Procaccianti Convertible Fund, LLC (“PCF”) held by owners other than the Company. Noncontrolling interest is reported in the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest are reported in the consolidated statement of operations.

Noncontrolling Interest of the Operating Partnership

Noncontrolling interest of the Operating Partnership represents the value of the 128,124 Class K OP Units that were issued to affiliate sellers in connection with the acquisition of the Hilton Garden Inn Providence. Noncontrolling interest of the Operating Partnership is reported in the mezzanine section of the consolidated balance sheet, as the units are redeemable at the request of the holder for cash equal to the fair market value of a K Share as defined in the Amended and Restated Agreement of Limited Partnership of Procaccianti Hotel REIT, L.P. (the “Amended and Restated Operating Partnership Agreement”). The Company may elect to acquire any such unit presented for redemption for one K Share or cash. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest of the Operating Partnership are reported in the consolidated statement of operations.

Recently issued accounting pronouncements

In November 2024, the FASB issued ASU 2024-03, Income Statement: Disaggregation of Income Statement Expenses (“ASU 2024-03”), which requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. This guidance is effective for the Company annual reporting periods beginning after December 15, 2026, with early adoption permitted. The Company is currently evaluating the impact of the guidance on its consolidated financial statements.

Per Share Data

The Company calculates its basic and diluted earnings per common share (“EPS”) utilizing the two-class method. Under the two-class method both basic and diluted EPS are calculated for each class of common stock considering distributions declared and accumulated, and the rights of common shares and participating securities in any undistributed earnings. Undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. Included in the calculation of basic EPS are 2,250 non-vested restricted K Shares held by the Company’s independent directors as of December 31, 2025 because such shares have been issued and participate in distributions.

The Company’s calculated earnings per share for the year ended December 31, 2025 and 2024, were as follows:

	Year Ended December 31,
	2025		2024
Net income attributable to common stockholders	$	1,537,203	$	1,540,403
Less: Class K Common Stock dividends declared and accumulated		2,710,194		2,729,491
Less: Class K-I Common Stock dividends declared and accumulated		994,071		968,225
Less: Class K-T Common Stock dividends declared and accumulated		—		875
Less: Class A Common Stock dividends declared and accumulated		406,987		406,987
Undistributed net loss	$	(2,574,049)	$	(2,565,175)
Class K Common Stock:
Undistributed net loss	$	(1,661,442)	$	(1,669,815)
Class K Common Stock dividends declared and accumulated		2,710,194		2,729,491
Net income	$	1,048,752	$	1,059,676
Net income per common share, basic and diluted	$	0.27	$	0.27
Weighted average number of common shares outstanding, basic and diluted		3,871,433		3,899,295
Class K-I Common Stock:
Undistributed net loss	$	(609,447)	$	(592,315)
Class K-I Common Stock dividends declared and accumulated		994,071		968,225
Net income	$	384,624	$	375,910
Net income per common share, basic and diluted	$	0.27	$	0.27
Weighted average number of common shares outstanding, basic and diluted		1,420,109		1,383,153
Class K-T Common Stock:
Undistributed net loss	$	—	$	(536)
Class K-T Common Stock dividends declared and accumulated		—		875
Net income	$	—	$	339
Net income per common share, basic and diluted	$	—	$	0.27
Weighted average number of common shares outstanding, basic and diluted		—		1,251
Class A Common Stock:
Undistributed net loss	$	(249,515)	$	(248,980)
Class A Common Stock dividends declared and accumulated		406,987		406,987
Net income	$	157,472	$	158,007
Net income per common share, basic and diluted	$	0.27	$	0.27
Weighted average number of common shares outstanding, basic and diluted		581,410		581,410
Class B Common Stock:
Undistributed net loss	$	(53,645)	$	(53,529)
Net loss per common share, basic and diluted	$	(0.43)	$	(0.43)
Weighted average number of common shares outstanding, basic and diluted		125,000		125,000