S
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarter ended
OR
For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
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Emerging growth company |
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PROCACCIANTI HOTEL REIT, INC.
INDEX
PART I - FINANCIAL INFORMATION | Page | |
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| Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 | 3 |
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| Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2023 and 2022 | 7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | |
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2
PROCACCIANTI HOTEL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, 2023 |
| December 31, 2022 | |||
ASSETS |
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Property and equipment, net | $ | | $ | | ||
Cash |
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Restricted cash |
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Accounts receivable, net |
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Due from related parties |
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Prepaid expenses and other assets, net |
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Total Assets | $ | | $ | | ||
LIABILITIES AND EQUITY |
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Liabilities |
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Mortgage notes payable, net | $ | | $ | | ||
Accounts payable, accrued expenses and other, net |
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Due to related parties |
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Total Liabilities |
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Commitments and Contingencies |
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Noncontrolling interest of the Operating Partnership | | | ||||
Stockholders’ Equity |
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Class K common stock, $ |
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Class K-I common stock, $ |
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Class K-T common stock, $ |
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Class A common stock, $ |
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Class B common stock, $ |
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Additional paid-in capital |
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Cumulative income |
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Cumulative distributions |
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Total Stockholders’ Equity |
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Noncontrolling interest |
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Total Equity |
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Total Liabilities and Stockholders’ Equity | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PROCACCIANTI HOTEL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2023 |
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Revenues |
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Rooms | $ | | $ | | $ | | $ | | |||||
Food and beverage |
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Other operating |
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Total revenues |
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Expenses |
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Rooms |
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Food and beverage | | | | | |||||||||
Other property expenses | | | | | |||||||||
Property management fees to affiliates |
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Corporate general and administrative | | | | | |||||||||
Other fees to affiliates |
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Depreciation and amortization |
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Total expenses |
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Operating income |
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Gain on loan extinguishment |
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Interest expense, net |
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Gain (loss) on interest rate cap |
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Net income (loss) before income taxes |
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Income tax benefit (expense) |
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Net income |
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Net income attributable to noncontrolling interest |
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Net income (loss) attributable to common stockholders | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) attributable to Class K common stockholders – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) per Class K common share – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Weighted average number of Class K common shares outstanding – basic and diluted |
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Net income (loss) attributable to Class K-I common stockholders – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) per Class K-I common share – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Weighted average number of Class K-I common shares outstanding – basic and diluted |
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Net income (loss) attributable to Class K-T common stockholders – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) per Class K-T common share – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Weighted average number of Class K-T common shares outstanding – basic and diluted |
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Net income (loss) attributable to Class A common stockholders – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Net income (loss) per Class A common share – basic and diluted | $ | | $ | | $ | ( | $ | | |||||
Weighted average number of Class A common shares outstanding – basic and diluted |
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Net income (loss) attributable to Class B common stockholders – basic and diluted | $ | ( | $ | | $ | ( | $ | ( | |||||
Net income (loss) per Class B common share – basic and diluted | $ | ( | $ | | $ | ( | $ | ( | |||||
Weighted average number of Class B common shares outstanding – basic and diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PROCACCIANTI HOTEL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
(unaudited)
Common Stock | Additional | Total Procaccianti |
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Class K | Class K-I | Class K-T | Class A | Class B | Paid-in | Cumulative | Cumulative | Hotel REIT, Inc. | Noncontrolling | Total | |||||||||||||||||||||||||||||||||
| Shares |
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| Shares |
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| Amount |
| Shares |
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| Shares |
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| Capital |
| Income (Loss) |
| Distributions |
| Stockholders' Equity |
| Interest |
| Equity | ||||||||||||
BALANCE, December 31, 2022 | | $ | |
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| | $ | | $ | | $ | | $ | ( |
| $ | | $ | | $ | | |||||||||||
Conversion of common stock | | | — | — | ( | ( | — | — | — | — | — | — | — |
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Issuance of common stock pursuant to distribution reinvestment plan | | | | | | | — | — | — | — | | — | — |
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Stockholder servicing fees | — | — | — | — | — | — | — | — | — | — | ( | — | — |
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Repurchase of common stock | ( | ( | — | — | — | — | — | — | — | — | ( | — | — |
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Net income (loss) | — | — | — | — | — | — | — | — | — | — | — | ( | — |
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Distributions paid | — | — | — | — | — | — | — | — | — | — | — | — | ( |
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BALANCE, March 31, 2023 | |
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Issuance of common stock pursuant to distribution reinvestment plan | | | | | | | — | — | — | — | | — | — | | — | | |||||||||||||||||||||||||||
Stockholder servicing fees | — | — | — | — | — | — | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||
Repurchase of common stock | ( | ( | ( | ( | — | — | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||
Noncontrolling interest valuation adjustment | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | — | — | | — | | | | |||||||||||||||||||||||||||
Distributions paid | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||
BALANCE, June 30, 2023 | | $ | |
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| | $ | | $ | | $ | | $ | ( |
| $ | | $ | | $ | |
5
Common Stock | Additional | Total Procaccianti | |||||||||||||||||||||||||||||||||||||||||
Class K | Class K-I | Class K-T | Class A | Class B | Paid-in | Cumulative | Cumulative | Hotel REIT, Inc. | Noncontrolling | Total | |||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
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| Shares |
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| Capital |
| Income (Loss) |
| Distributions |
| Stockholders' Equity |
| Interest |
| Equity | ||||||||||||
BALANCE, December 31, 2021 | | $ | |
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Conversion of common stock | |
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Issuance of common stock pursuant to distribution reinvestment plan | |
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Stockholder servicing fees | — |
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Repurchase of common stock | ( |
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Net income (loss) | — |
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Distributions paid | — |
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BALANCE March 31, 2022 | |
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Issuance of common stock pursuant to distribution reinvestment plan | | | | | | | — | — | — | — | | — | — | | — | | |||||||||||||||||||||||||||
Stockholder servicing fees | — | — | — | — | — | — | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||
Repurchase of common stock | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | — | — | — | — | | — | | | | |||||||||||||||||||||||||||
Distributions paid | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||||||||||
BALANCE June 30, 2022 | | $ | |
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| | $ | | $ | | $ | ( | $ | ( |
| $ | | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
PROCACCIANTI HOTEL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Cash Flows from Operating Activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs and debt discount as interest |
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Amortization of key money loans |
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Gain on loan extinguishment | | ( | ||||
(Gain) loss on interest rate cap |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Due from related parties |
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Prepaid expenses and other assets |
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Accounts payable, accrued expenses and other |
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Due to related parties |
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Net cash provided by operating activities |
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Cash Flow from Investing Activities: |
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Capital improvements |
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Cash used in investing activities |
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Cash Flows from Financing Activities: |
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Payment of stockholder servicing fees |
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Proceeds from mortgage note |
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Payments of mortgage notes principal |
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Payment of deferred financing costs |
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Distributions to stockholders |
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Distributions to noncontrolling interest |
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Repurchase of common stock |
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Net cash used in financing activities |
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Increase (decrease) in cash and cash equivalents and restricted cash |
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Cash and cash equivalents and restricted cash, beginning of period |
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Cash and cash equivalents and restricted cash, end of period | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Supplemental Disclosure of Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
Six Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Cash | $ | | $ | | ||
Restricted cash |
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Total cash and restricted cash shown on the condensed consolidated statements of cash flows | $ | | $ | |
The Company paid the following amounts for interest and income taxes:
Six Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Cash paid for interest | $ | | $ | | ||
Cash paid for income taxes | $ | | $ | |
Supplemental Disclosure of Noncash Transactions
Six Months Ended June 30, | ||||||
| 2023 |
| 2022 | |||
Common stock issued pursuant to distribution reinvestment plan | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Note 1 - Organization and Description of Business
Procaccianti Hotel REIT, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on August 24, 2016. The Company used the proceeds from its Private Offering (defined below) and its Public Offering (defined below), which terminated on August 13, 2021, to acquire a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States (the “U.S.”). The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2018. Substantially all of the Company’s business is conducted through Procaccianti Hotel REIT, L.P., a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company is externally managed by Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an Advisory Agreement by and among the Company, its Operating Partnership and PHA. PHA is an affiliate of Procaccianti Companies, Inc., the Company’s sponsor (the “Sponsor”).
As of June 30, 2023, the Company owned interests in
The Company raised the equity capital for its real estate investments through a private offering (the “Private Offering”) and a public offering (the “Public Offering”, together with the Private Offering, the “Offerings”) from September 2016 through August 2021, and has offered shares through its distribution reinvestment plan (“DRIP”) pursuant to a Registration Statement on Form S-3 (the “DRIP Offering”) since August 2021.
The Company terminated the Private Offering prior to the commencement of the Public Offering, and, as of such termination, received approximately $
Since the commencement of the Public Offering and through June 30, 2023, the Company received approximately $
On February 27, 2020, through a separate private placement and as partial consideration for the Company’s acquisition of the Hilton Garden Inn hotel property located in Providence, Rhode Island (“Hilton Garden Inn Providence”), the Operating Partnership issued
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The accompanying condensed consolidated financial statements of the Company are unaudited. Certain information and disclosures required by U.S.
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generally accepted accounting principles (“GAAP”) for complete financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair and consistent presentation, have been included in these condensed consolidated financial statements. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.
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 VIE’s performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant. At June 30, 2023, the assets of the Company’s VIEs were $
The Company has no foreign operations or assets, and its operating structure includes only
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 condensed consolidated balance sheets include the following financial instruments: cash, restricted cash, accounts receivable, accounts payable and mortgage notes payable.
The Company considers the carrying value of cash, restricted cash, accounts receivable and accounts payable 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 June 30, 2023, the estimated fair value of the mortgage notes payable was $
10
Revenue Recognition
Revenue is generally recognized as services are performed. Revenue primarily represents room rental fees, 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 expenses. Included in other operating revenues for the three and six months ended June 30, 2022, is $
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, capital improvements and insurance as required by its debt agreements. At June 30, 2023 and 2022, reserves for property taxes were $
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
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
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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 June 30, 2023, the Company had
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 2019 through 2022 remaining subject to examination by federal and various state tax jurisdictions.
Noncontrolling Interest
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 condensed 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 condensed consolidated statement of operations.
Noncontrolling Interest of the Operating Partnership
Noncontrolling interest of the Operating Partnership represents the value of the
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. As of June 30, 2023,
12
The Company’s calculated earnings per share for the three and six months ended June 30, 2023 and 2022, were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net income (loss) attributable to common stockholders | $ | | $ | | $ | ( | $ | | ||||
Less: Class K Common Stock dividends declared and accumulated |
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Less: Class K-I Common Stock dividends declared and accumulated |
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Less: Class K-T Common Stock dividends declared and accumulated |
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Less: Class A Common Stock dividends declared and accumulated |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Class K Common Stock: |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Class K Common Stock dividends declared and accumulated |
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| | ||||
Net income (loss) | $ | | $ | | $ | ( | $ | | ||||
Net income (loss) per common share, basic and diluted | $ | | $ | | $ | ( | $ | | ||||
Weighted average number of common shares outstanding, basic and diluted |
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Class K-I Common Stock: |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Class K-I Common Stock dividends declared and accumulated |
| |
| |
| |
| | ||||
Net income (loss) | $ | | $ | | $ | ( | $ | | ||||
Net income (loss) per common share, basic and diluted | $ | | $ | | $ | ( | $ | | ||||
Weighted average number of common shares outstanding, basic and diluted |
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Class K-T Common Stock: |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Class K-T Common Stock dividends declared and accumulated |
| |
| |
| |
| | ||||
Net income (loss) | $ | | $ | | $ | ( | $ | | ||||
Net income (loss) per common share, basic and diluted | $ | | $ | | $ | ( | $ | | ||||
Weighted average number of common shares outstanding, basic and diluted |
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Class A Common Stock: |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Class A Common Stock dividends declared and accumulated |
| |
| |
| |
| | ||||
Net income (loss) | $ | | $ | | $ | ( | $ | | ||||
Net income (loss) per common share, basic and diluted | $ | | $ | | $ | ( | $ | | ||||
Weighted average number of common shares outstanding, basic and diluted |
| |
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Class B Common Stock: |
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Undistributed net income (loss) | $ | ( | $ | | $ | ( | $ | ( | ||||
Net income (loss) per common share, basic and diluted | $ | ( | $ | | $ | ( | $ | ( | ||||
Weighted average number of common shares outstanding, basic and diluted |
| |
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Note 3 – Investments in Hotels
The following table sets forth summary information regarding the Company’s investments in hotel properties as of June 30, 2023:
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| Contract |
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| Mortgage |
| |||||||
Ownership | Purchase | Debt |
| ||||||||||||
Property Name | Date Acquired | Location | Interest | Price(1)(2) | Rooms | Outstanding |
| ||||||||
Springhill Suites Wilmington |
| (1) |
| $ | |
| | $ | | ||||||
Staybridge Suites St. Petersburg |
| (1) |
| $ | |
| | $ | | ||||||
Hotel Indigo Traverse City |
|
|
| $ | |
| | $ | | ||||||
Hilton Garden Inn Providence | $ | | | $ | |
| |||||||||
Cherry Tree Inn | $ | | | $ | |
|
1) | Represents the date and contract purchase price of PCF’s acquisition of the Springhill Suites Wilmington (the “Springhill Suites Wilmington”) and the Staybridge Suites St. Petersburg (the “Staybridge Suites St. Petersburg”). The Company exercised its option under an option agreement to purchase a |
2) | Contract purchase price excludes acquisition fees and costs. |
13
Investments in hotel properties consisted of the following as of June 30, 2023 and December 31, 2022:
| June 30, |
| December 31, | |||
2023 | 2022 | |||||
Land | $ | | $ | | ||
Building and improvements |
| |
| | ||
Furniture, fixtures, and equipment |
| |
| | ||
Total cost |
| |
| | ||
Accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | |
Depreciation expense for the three months ended June 30, 2023 and 2022 was $
Note 4 – Mortgage Notes Payable
Included in mortgage notes payable at June 30, 2023, is a $
The St. Petersburg Note required
The Wilmington Note required monthly interest payments at
The TCI Note bears interest at the Secured Overnight Financing Rate (“SOFR”) plus a SOFR rate margin of
The HGI Note required
The CTI Note requires monthly interest payments at a fixed rate of
14
believe the Operating Partnership and its subsidiary for the Cherry Tree Inn was compliant with its loan obligations, including applicable covenants and all required payments have been made as agreed. No further borrowings on the CTI Note are anticipated.
The Company’s operations have been and are expected to continue to be impacted by economic and market conditions. Persistent market and economic challenges, such as increases in interest rates, labor shortages, supply chain disruptions and inflation, could, among other things, affect (i) the value and performance of the Company’s investments, (ii) the Company’s ability to pay future distributions, (iii) the availability or terms of financings, (iv) the Company’s ability to make scheduled principal and interest payments, and (v) the Company’s ability to refinance any outstanding debt when contractually due.
Interest expense on mortgage notes payable for the three months ended June 30, 2023 and 2022 was $
Also included in mortgage notes payable as of June 30, 2023 is $
Note 5 – Other Debt
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was adopted by the Federal Government, which, among other things, provided emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. The CARES Act also included the establishment of the Paycheck Protection Program (“PPP”), a U.S. Small Business Administration (the “SBA”) loan to businesses with fewer than 500 employees that may be fully or partially forgivable. The loans’ principal and accrued interest are forgivable to the extent that the proceeds are used for eligible purposes, subject to limitations and ongoing rulemaking by the SBA, and that the Company maintains its payroll levels over a twenty-four week period following the loan date. During 2020 and 2021, the Company received PPP loans in the aggregate amount of $
On August 15, 2018, the Operating Partnership entered into a loan with Citizens Bank, National Association (“Citizens Bank”) in the principal amount of $
On June 12, 2023, the Operating Partnership, through its subsidiary, modified the swap derivative contract with Citizens Bank that fixes the interest rate on the outstanding balance of the Citizens Loan (the “Modification to Swap Derivative Contract”) so that the fixed interest rate will be
On June 15, 2023, the Operating Partnership’s subsidiary, as borrower under the Citizens Loan, received notification that it qualified for the third extended term under the Citizens Loan, which extended the maturity date of the Citizens Loan to August 15, 2024.
Note 6 – Related Party Transactions
On August 2, 2018, the Company entered into the Amended and Restated Advisory Agreement with PHA and the Operating Partnership (as amended and renewed, the “Advisory Agreement”). The Advisory Agreement has a
15
entered into the Second Amendment to the Advisory Agreement (the “Advisory Agreement Amendment”) in order to revise certain terms regarding the accrual of interest on deferred acquisition, disposition and asset management fees, as well as the deferral of asset management fees paid to PHA. On June 27, 2023, the board of directors of the Company, including all independent directors of the Company, after review of PHA’s performance during the last year, authorized the Company to execute a mutual consent to renew the Advisory Agreement, by and among the Company, the Operating Partnership and PHA for an additional one-year term effective on August 2, 2023.
Pursuant to the Advisory Agreement, PHA oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, and other administrative services. PHA also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which include maintaining required financial records and preparing reports to stockholders and filings with the SEC. In addition, PHA assists an independent valuation firm and the Company’s board of directors in calculating and determining the Company’s NAV, and assists the Company in overseeing the preparation and filing of tax returns, payment of expenses and for the performance of administrative and professional services rendered to the Company by others. The Company reimburses PHA for certain expenses and pays PHA certain fees pertaining to services provided.
Administrative Expenses
PHA is required to allocate the cost of administrative services to the Company based on objective factors such as total assets, revenues and/or time allocations. At least annually, the Company’s board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. During the three months ended June 30, 2023 and 2022, the Sponsor requested reimbursement for $
Acquisition Fee
The Company will pay PHA acquisition fees as described below:
Acquisition Fee: Fee for providing services including selecting, evaluating and acquiring potential investments (the “acquisition fee”). The total acquisition fee payable to PHA shall equal
16
Asset Management Fee
The Company will pay PHA asset management fees as described below:
Asset Management Fee: Quarterly fee equal to one-fourth of
For the three months ended June 30, 2023 and 2022, the Company incurred $
Disposition Fee
The Company will pay PHA disposition fees as described below:
Disposition Fee: Fee for providing a substantial amount of services in connection with the sale of a property or real estate-related assets, as determined by a majority of the Company’s independent directors (the “disposition fee”). The disposition fee will equal one-half of the brokerage commissions paid on the sale of an investment. In no event will the disposition fee exceed
There were
Acquisition Expenses
The Company will reimburse PHA for acquisition expenses actually incurred (excluding personnel costs) related to selecting, evaluating, and making investments on the Company’s behalf. All acquisition expenses as of June 30, 2023 and 2022 were paid directly by the Company and there have been no reimbursements to PHA.
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Organization and Offering Costs
O&O Costs include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, as well as 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. For more information regarding selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, see Note 7 – “Stockholders’ Equity”.
Certain O&O Costs have been incurred by PHA on behalf of the Company. At the termination of the Public Offering on August 13, 2021, the total amount of O&O Costs, exclusive of selling commissions, dealer manager fees and stockholder servicing fees, incurred by PHA and its affiliates related to the Private Offering and the Public Offering was $
The Company recorded O&O Costs as charges against additional paid in capital on the condensed consolidated balance sheets as the Company raised proceeds in its continuous Public Offering for amounts incurred up to
Property Management Fee and Reimbursement
Wholly owned subsidiaries of PCF and the Operating Partnership entered into hotel management agreements with affiliates of the Company for the management of each of the Company's hotels. Under the terms of the management agreements, the manager operates and manages each hotel, including making all human resource decisions. The employees of the hotels are employed by the managers, however, pursuant to the management agreements, all compensation of hotel personnel is recorded as a direct operating expense of the hotel. The manager of each hotel is paid a base management fee equal to
The terms of the in-place management agreements for the Staybridge Suites St. Petersburg and the Springhill Suites Wilmington expire March 28, 2024, with
Aggregate property management fees incurred were $
The CARES Act provided an employee retention tax credit, which was a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers and equal to 50% of qualified wages paid per
18
quarter through December 31, 2020 and up to $10,000 per employee and equal to 70% of qualified wages paid per quarter through September 30, 2021. An affiliate of the Company’s hotel property managers qualified for the employee retention tax credit. As of June 30, 2022, the Company had a $
Construction Management Fee
The Company pays its property managers or third parties selected by PHA, after requesting bids from such parties, a construction management fee (which may include expense reimbursements) based on market rates for such services in the markets in which the hotel properties are located and will take into account the nature of the services to be performed, which generally will constitute the supervision or coordination of any construction, improvements, refurbishments, renovations, or restorations of the Company’s hotel properties. If PHA selects the property manager or another affiliate of the Sponsor to perform such services, any resulting agreement must be approved by a majority of the Company’s board of directors, including a majority of its independent directors. The Company reimbursed TPG Construction, LLC, an affiliate of the Sponsor (“TPG Construction”), $
Additional Service Fees
If the Company requests that PHA or its affiliates perform other services, including but not limited to, renovation evaluations, the compensation terms for those services must be approved by a majority of the Company’s board of directors, including a majority of the independent directors.
Payment Upon Listing of Shares
If the Company lists any of its shares of capital stock on a national securities exchange (which automatically results in a termination of the Advisory Agreement), the Company will be obligated to pay PHA the amount PHA would be entitled to receive on account of deferred asset management fees, acquisition fees, and disposition fees (and any accrued interest thereon) as if the Company liquidated and received liquidation proceeds equal to the market value of the Company, which is limited to the excess of market value over the liquidation preference on K Shares, K-I Shares and K-T Shares.
Payment Upon a Merger or Acquisition Transaction
If the Company terminates the Advisory Agreement in connection with or in contemplation of a transaction involving a merger or acquisition, the Company would be obligated to pay PHA the amount PHA would be entitled to receive as if the Company liquidated and received net liquidation proceeds equal to the consideration paid to the stockholders in such transaction.
Payment Upon Other Advisory Agreement Termination
The Company may elect not to renew the Advisory Agreement. The Company has the right to terminate the Advisory Agreement without cause, or other than in connection with a listing of the Company’s shares or a transaction involving a merger or acquisition or other than for cause (“Non-cause Advisory Agreement Termination”). If a Non-cause Advisory Agreement Termination were to occur, the Company would be obligated to make a cash payment to PHA in the amount of any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued
19
thereon, regardless of the value of the Company’s assets or net assets. The Company would be obligated to repurchase its A Shares for an amount equal to the greater of: (1) any accrued common ordinary distributions on the A Shares plus the stated value of the outstanding A Shares ($
Payment Upon Advisory Agreement Termination for Cause
If the Company terminates the Advisory Agreement for cause, the Company would not have a current obligation to make any payments to PHA or to S2K Servicing LLC, an affiliate of S2K Financial LLC (the “Dealer Manager”). However, any A Shares and B Shares held by them or their affiliates would remain outstanding. In addition, any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus any interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued thereon, would remain outstanding obligations, and the deferred fees would continue to accrue interest at a non-compounded annual rate of
Amended and Restated Operating Partnership Agreement
In connection with the Hilton Garden Inn Providence acquisition, effective February 27, 2020, the Company, as general partner of the Operating Partnership, Procaccianti Hotel REIT, LP, LLC and certain principals and affiliates of the Sponsor were issued Class K OP Units and entered into an Amended and Restated Operating Partnership Agreement.
Loans from Affiliates
The Company has combined subordinated promissory notes of $
Note 7 - Stockholders’ Equity
Under the Company’s charter, the total number of shares of capital stock authorized for issuance is
The Company’s K Shares,
20
declares and pays out of net sales proceeds from the sale or disposition of assets to the extent such distributions are not used to pay accumulated, accrued, and unpaid dividends on such K Shares, K-I Shares, and K-T Shares.
K Shares, K-I Shares and K-T Shares will rank, on a pro rata basis, senior to all other classes of stock with respect to distribution rights and rights upon the Company’s liquidation. In certain situations (other than upon liquidation), the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of K Shares,
A Shares entitle the holders to
B Shares will have
At the termination of the Private Offering on August 13, 2021, the Company had issued
On February 27, 2020, as partial consideration for the Company’s acquisition of the Hilton Garden Inn Providence, the Operating Partnership issued
As of June 30, 2023, the Company had issued
21
During the six months ended June 30, 2023, pursuant to Section 5.2.7 of the Company’s charter,
PHA was obligated to purchase sufficient A Shares to fund payment of O&O Costs associated with the Private Offering and was obligated to purchase sufficient A Shares to fund payment of O&O Costs related to the Public Offering and also to account for the difference between the applicable NAV per K-I Share and the applicable offering price per K-I Share and any amount equal to any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares (excluding volume discounts). PHA’s obligation can be fulfilled by its affiliates, including the Sponsor or entities affiliated with the Sponsor.
The Company paid the Dealer Manager, as dealer manager of the Private Offering, selling commissions of up to
The Company paid the Dealer Manager selling commissions of up to
The Company also pays the Dealer Manager with respect to each K-T Share sold in the primary portion of the Public Offering, a stockholder servicing fee equal to
If the Company’s board of directors determines, in any year, that the Company has excess cash, the Company’s board of directors will declare a special distribution entitling (a) the holders of K Shares,
22
Non-cause Advisory Agreement Termination, in which case the excess cash otherwise apportioned to the A Shares would be distributed to the holders of the K Shares, K-I Shares and K-T Shares as noted above).
Upon a liquidation event, any remaining liquidation cash will be paid as a special distribution (a) to the holders of K Shares, K-I Shares and K-T Shares, pro rata in accordance with the number of K Shares,
The Company established a long-term incentive plan pursuant to which the Company’s board of directors (including independent directors), officers and employees, PHA and its affiliates and their respective employees, employees of entities that provide services to the Company, managers of the Company’s advisor or directors or managers of entities that provide services to the Company and their respective employees, certain of the Company’s consultants and certain consultants to PHA and its affiliates or entities that provide services to the Company and their respective employees may be granted incentive awards in the form of restricted stock, options, and other equity-based awards.
In accordance with the Company’s long-term incentive plan, each new independent director that joins the Company’s board of directors is awarded
Share Repurchase Program and Redeemable Common Stock
The Company’s share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to the Company, subject to restrictions and applicable law. The Company is not required to repurchase shares. The share repurchase program is only intended to provide interim liquidity to stockholders until a liquidity event occurs, such as the commencement of execution on a plan of liquidation, the listing of the K Shares, K-I Shares or K-T Shares (or successor security) on a national securities exchange, or the Company’s merger with a listed company. The Company cannot guarantee that a liquidity event will occur.
On October 26, 2018, the Company’s board of directors approved and adopted the Amended and Restated Share Repurchase Program (the “A&R SRP”). The A&R SRP provides that the Company will not repurchase in excess of
23
to meet the minimum balance, less any applicable repurchase discount. Minimum account repurchases will apply even in the event that the failure to meet the minimum balance is caused solely by a decline in the Company’s estimated NAV per share.
In addition, the Company’s repurchase of any shares will be limited to the extent that the Company does not have, as determined in the Company’s board of directors’ discretion, sufficient funds available to fund any such repurchase. Most of the Company’s assets will consist of properties which cannot be readily liquidated without affecting the Company’s ability to realize full value upon their disposition. Therefore, the Company may not have sufficient liquid resources to satisfy all repurchase requests. In addition, the Company’s board of directors
amend, suspend (in whole or in part) or terminate the A&R SRP at any time upon ’ notice to stockholders. Further, the Company’s board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.In the event the Company cannot repurchase all shares presented for repurchase in any fiscal quarter, based upon insufficient cash available and/or the limit on the number of shares it may repurchase, the Company would give first priority to the repurchase of deceased stockholders’ shares. The Company would next give priority to (i) requests of stockholders with “qualifying disabilities” (as defined in the A&R SRP), and in the discretion of the Company’s board of directors, stockholders with another involuntary exigent circumstance, such as bankruptcy, and (ii) next, to requests for full repurchases of accounts with a balance of
Repurchases of K Shares,
No shares can be repurchased under the Company’s A&R SRP until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within
The per share repurchase price will depend on the length of time the stockholder has held such shares as follows:
Share Purchase Anniversary |
| Repurchase Price on Repurchase Date |
Less than 1 year |
| |
1 year |
| |
2 years |
| |
3 years |
| |
4 years |
| |
In the event of a stockholder’s death or disability |
|
Notwithstanding the foregoing, pursuant to securities laws and regulations, at any time the Company is engaged in an offering, the repurchase amount shall never be more than the current offering price of such shares. Shares repurchased in connection with a stockholder’s bankruptcy or other exigent circumstance, in the sole discretion of the
24
Company’s board of directors, within one year from the purchase date will be repurchased at a price per share equal to the price per share the Company would pay had the stockholder held the shares for one year from the purchase date.
The purchase price for repurchased shares will be adjusted for any stock dividends, combinations, splits, recapitalizations, or similar corporate actions with respect to the Company’s common stock. If the Company has sold any properties and have made one or more special distributions to stockholders of all or a portion of the net proceeds from such sales, the per share repurchase price will be reduced by the net sale proceeds per share distributed to stockholders prior to the Repurchase Date to the extent such distributions are not used to pay accumulated, accrued and unpaid distributions on such K Shares, K-I Shares and K-T Shares. The Company’s board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While the Company’s board of directors does not have specific criteria for determining a special distribution, the Company expects that a special distribution will occur only upon the sale of a property and the subsequent distribution of net sale proceeds.
The Company generally repurchases shares approximately
The Company’s board of directors approved outstanding repurchase requests received during the three months ended December 31, 2022, and on January 12, 2023, the Company repurchased
Distributions
During the six months ended June 30, 2023, the Company’s board of directors authorized the payment of distributions as follows:
Shares | Amount |
|
|
|
|
| ||||||||
Date | Outstanding | Date | Record | Per Share | Distributions | |||||||||
Paid | Date | Authorized | Date | Per Day | K Share | K-I Share | K-T Share | OP Unit | Total | |||||
$ | $ | | $ | | $ | | $ | | $ | | ||||
$ | | | | | $ | | ||||||||
$ | | $ | | $ | | $ | | $ | |
During the six months ended June 30, 2022, the Company’s board of directors authorized the payment of distributions as follows:
Shares | Amount |
|
|
|
|
| ||||||||
Date | Outstanding | Date | Record | Per Share | Distributions | |||||||||
Paid | Date | Authorized | Date | Per Day | K Share | K-I Share | K-T Share | OP Unit | Total | |||||
$ | $ | | $ | | $ | | $ | | $ | | ||||
$ | | | | — | $ | | ||||||||
$ | - | — | — | | $ | | ||||||||
$ | | $ | | $ | | $ | | $ | |
The Company's board of directors will make determinations as to the payment of future distributions on a quarter-by-quarter basis; however, distributions will continue to accumulate pursuant to the Company's charter.
On August 4, 2023, the Company’s board of directors authorized the payment of distributions, with respect to the K Shares, K-I Shares and K-T Shares outstanding as of June 30, 2023, to the holders of record of K Shares, K-I Shares and K-T shares as of the close of business on August 7, 2023. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of June 30, 2023, the cumulative amount of distributions that had accumulated on a daily basis with respect to the K Shares, K-I Shares and K-T Shares since March 31, 2023 was $
25
Share per day, $
On August 4, 2023, the Company’s board of directors authorized the payment of distributions with respect to the Class K OP Units outstanding as of June 30, 2023, to the holders of record of Class K OP Units as of the close of business on August 7, 2023. With respect to the Class K OP Units outstanding as of June 30, 2023, the cumulative amount of distributions that had accumulated on a daily basis with respect to the Class K OP Units since March 31, 2023 was $
Note 8 - Income Taxes
The Company recognized a consolidated income tax benefit of $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. The MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.
As used herein, the terms “we,” “our” and “us” refer to Procaccianti Hotel REIT, Inc., a Maryland corporation and, as required by context, Procaccianti Hotel REIT, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their respective subsidiaries.
The following discussions and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”). The following discussion should also be read in conjunction with our audited consolidated financial statements, the notes thereto, and the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 24, 2023 (“Annual Report”).
Forward-Looking Statements
Certain statements included in this Quarterly Report that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business
26
decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements.
Factors that could have a material adverse effect on our operations and future prospectus include, but are not limited to:
● | the impact of supply chain disruptions on our ability to comply with brand standards and guest expectations and the ability of our third-party managers to source supplies and other items required for operations; |
● | our ability to successfully negotiate amendments and covenant waivers under our secured and unsecured indebtedness; |
● | our ability to comply with contractual covenants; |
● | business, financial and operating risks inherent to real estate investments and the hospitality industry; |
● | seasonal and cyclical volatility relating to the hospitality industry; |
● | adverse changes in specialized industries, such as the energy, technology and/or tourism industries, that result in a sustained downturn of related business and corporate spending that may negatively impact our revenues and results of operations; |
● | macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms; |
● | domestic and global political risks and uncertainties, including the war in Ukraine, tensions between China and the United States, other economic disruptions and U.S. and global recession concerns, on our financial condition and results of operations; |
● | inflation which increases labor and other costs of providing services to guests and meeting hotel brand standards, as well as costs related to construction and other capital expenditures, property and other taxes, and insurance, which could result in reduced operating profit margins; |
● | events beyond our control, such as war, terrorist or cyber-attacks, mass casualty events, government shutdowns and closures, travel-related health concerns and natural disasters; |
● | cyber incidents and information technology failures, including unauthorized access to our computer systems and/or our vendor’s computer systems, and our third-party management companies’ or franchisors’ computer systems and/or their vendors’ computer systems; |
● | changes in economic conditions generally and the real estate and debt markets specifically; |
● | our ability to obtain financing on acceptable terms; |
● | our levels of debt and the terms and limitations imposed on us by our debt agreements; |
● | our ability to successfully identify and acquire properties on terms that are favorable to us; |
● | risks inherent in the real estate business, including potential liability relating to environmental matters and the lack of liquidity of real estate investments; |
27
● | changes in demand for rooms at our hotel properties; |
● | the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s-length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us; |
● | our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor; |
● | legislative or regulatory changes (including changes to the laws governing the taxation of REITs (as defined below)); |
● | the availability of capital; |
● | changes in interest rates; and |
● | changes to U.S. generally accepted accounting principles (“GAAP”). |
Other risks include those described under the section entitled Item 1A. “Risk Factors” of Part I our Annual Report and subsequent quarterly reports. Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
Overview
Procaccianti Hotel REIT, Inc. was formed on August 24, 2016, under the laws of Maryland to acquire and own a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay and compact full-service hotel properties throughout the United States. As of June 30, 2023, we owned an interest in five select-service hotel properties. We elected to be taxed as, and currently operate as, a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2018.
Substantially all of our business is conducted through the Operating Partnership. We are the sole general partner of the Operating Partnership. We are externally managed by our advisor, Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an advisory agreement by and among us, our Operating Partnership and PHA, dated August 2, 2018 (as amended, the “Advisory Agreement”). PHA is an affiliate of our sponsor, Procaccianti Companies, Inc. (“Sponsor”).
Subscription proceeds from Class K common stock (“K Shares”), Class K-I common stock (“K-I Shares”) and Class K-T common stock (“K-T Shares”) in our Private Offering and our Public Offering, which terminated in August 2021, as discussed below, have been applied to investments in hotel properties or real estate-related investments relating to hotel properties.
We intend to make reserve allocations as necessary to aid our objective of preserving capital for investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties. There is no assurance that such funds will be available or, if available, that the terms will be acceptable to us.
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We raised the equity capital for our real estate investments through a private offering (the “Private Offering”) and a public offering (the “Public Offering”, together with the Private Offering, the “Offerings”) from September 2016 through August 2021, and we have offered shares through our distribution reinvestment plan (“DRIP”) pursuant to a Registration Statement on Form S-3 (the “DRIP Offering”) since August 2021.
We terminated our Private Offering prior to the commencement of the Public Offering, and, as of such termination, received approximately $15,582,755 in gross proceeds from the sale of shares of Class K common stock (“K Shares”) and Class A common stock (“A Shares”, including Units (which were comprised of one K Share and one A Share), in the Private Offering. Of the $15,582,755 in gross proceeds received, $2,954,095 was from the sale of A Shares to TPG Hotel REIT Investor, LLC (“THR”), an affiliate of PHA, to fund organization and offering expenses associated with the K Shares and Units.
Since the commencement of the Public Offering and through June 30, 2023, we received approximately $40,879,889 in gross proceeds from the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, inclusive of proceeds from the sale of $1,224,803 of K Shares, $787,212 of K-I Shares and $67,711 of K-T Shares pursuant to the DRIP. Additionally, on October 26, 2018, June 10, 2019 and January 19, 2021, we received $1,500,000, $690,000 and $440,000, respectively, from the sale of A Shares to THR in private placements, the proceeds of which were used to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we allocated proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable estimated net asset value (“NAV”) per K-I Share and the applicable offering price of K-I Shares sold in our primary offering and (ii) any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.
On February 27, 2020, through a separate private placement and as partial consideration for our acquisition of the Hilton Garden Inn hotel property located in Providence, Rhode Island (“Hilton Garden Inn Providence”), the Operating Partnership issued 128,124 Class K units of limited partnership interests in the Operating Partnership ("Class K OP Units") at $10.00 per Class K OP Unit.
We intend to establish an estimated per share net asset value (“Estimated Per Share NAV”) on at least an annual basis. Each Estimated Per Share NAV is determined by our board of directors after consultation with our advisor and an independent third-party valuation firm. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. The following table outlines the established Estimated Per Share NAV as determined by our board of directors for the last five years as of each valuation date presented below (which were the Estimated Per Shares NAVs for the K Shares, K-I Shares and K-T Shares, unless otherwise indicated):
Valuation Date | Effective Date | Estimated Per Share NAV | |||
March 31, 2023 | June 27, 2023 | $11.53 | (1) | ||
March 31, 2022 | June 27, 2022 | $10.29 | (2) | ||
March 31, 2021 | June 9, 2021 | $9.85 | (3) | ||
March 31, 2020 | June 10, 2020 | $8.56 | (4) | ||
March 31, 2019 |
| May 23, 2019 | $10.00 | (5) |
(1) | The Estimated Per Share NAV per K-T Share was $11.96, the Estimated Per Share NAV per A Share was $22.76 and the Estimated Per Share NAV per share of Class B capital stock (“B Share”) was $14.77. |
(2) | The Estimated Per Share NAV per A Share was $13.34 and the Estimated Per Share NAV per B Share was $1.25. |
(3) | The Estimated Per Share NAV per K-I Share was $9.77, the Estimated Per Share NAV per A Share was $0.00 and the Estimated Per Share NAV per B Share was $0.00. |
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(4) | The Estimated Per Share NAV per K-I Share was $8.55, the Estimated Per Share NAV per A Share was $0.00 and the Estimated Per Share NAV per B Share was $0.00. |
(5) | The Estimated Per Share NAV per A Share was $3.97 and the Estimated Per Share NAV per B Share was $0.00. |
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Components of NAV | 3/31/2023 | |
Real Estate | $ | 143,980,000 |
Mortgage Notes Payable | (62,556,309) | |
Other Assets | 11,470,351 | |
Other Liabilities | (4,115,825) | |
Noncontrolling Interest | (11,021,078) | |
Net Asset Value | $ | 77,757,139 |
Components of NAV by Share Class | Class K | Class K-I | Class K-T | Class A | Class B | Total | ||||||
Accrued Unpaid Distributions | $ | 700,664 | $ | 235,746 | $ | 8,118 | $ | 1,880,058 | $ | - | $ | 2,824,586 |
Liquidation Preference | 40,675,457 | 13,539,366 | 135,940 | 5,814,095 | - | $ | 60,164,858 | |||||
Remaining Distribution Allocation | 5,525,982 | 1,839,397 | 18,468 | 5,537,886 | 1,845,962 | $ | 14,767,695 | |||||
Net Asset Value | $ | 46,902,103 | $ | 15,614,509 | $ | 162,526 | $ | 13,232,039 | $ | 1,845,962 | $ | 77,757,139 |
Shares Outstanding | 4,067,546 | 1,353,937 | 13,594 | 581,410 | 125,000 | |||||||
Estimated Per Share NAV | $11.53 | $11.53 | $11.96 | $22.76 | $14.77 |
The Estimated Per Share NAV of each of our classes of capital stock is calculated in accordance with our charter, as amended. Our NAV is, in accordance with our charter, allocated (i) first, to the liquidation preference on each of the K-I Shares, K Shares and K-T Shares equal to $10.00, plus all accumulated, accrued, and unpaid distributions on the K-I Shares, K Shares and K-T Shares, respectively, (ii) second, to the payment of any deferred and unpaid asset management fees, acquisition fees and disposition fees (including interest accrued on all such fees at a non-compounded rate of 6.0% per annum) to our advisor, (iii) third, to the liquidation preference on the A Shares equal to $10.00, plus all accumulated, accrued and unpaid distributions on the A Shares, and (iv) fourth, following the distribution and payment in full of all of the preceding obligations, (a) 50.0% of the remaining NAV is allocated to the holders of the K-I Shares, K Shares and K-T Shares (pro rata based on the number of K-I Shares, K Shares, and K-T Shares outstanding), (b) 12.5% of the remaining NAV is allocated to B Shares, and (c) 37.5% of remaining NAV is allocated to the A Shares.
S2K Financial LLC was the dealer manager for our Public Offering and was responsible for the distribution of our common stock in our Public Offering. PHA is our advisor and is an affiliate of our Sponsor. Subject to certain restrictions and limitations, PHA manages our day-to-day operations and our portfolio of properties and real estate-related assets. PHA sources and presents investment opportunities to our board of directors and provides investment management, marketing, investor relations and other administrative services on our behalf. We have no paid employees and rely on PHA to provide substantially all of our services. Pursuant to our Advisory Agreement with PHA, we will reimburse PHA for costs incurred in providing these administrative services. PHA will be required to allocate the cost of such services to us based on objective factors such as total assets, revenues and/or time allocations. At least annually, our board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. During the three months ended June 30, 2023 and 2022, the Sponsor requested reimbursement for $36,620 and $41,727, respectively, of such administrative service expenses. During the six months ended June 30, 2023 and 2022, the Sponsor requested reimbursement for $76,467 and $87,693, respectively, of such administrative service expenses. Of these amounts, $20,473 is included in due to related parties on the condensed consolidated balance sheet as of June 30, 2023.
In addition, pursuant to provisions contained in our charter and in the Advisory Agreement, our board of directors has the ongoing responsibility of limiting our total operating expenses (as defined in our charter) for the trailing four consecutive quarters to amounts that do not exceed the greater of 2% of our average invested assets (as defined in our charter) or 25% of our net income (as defined in our charter), calculated in the manner set forth in our charter, unless a majority of the directors (including a majority of the independent directors) has made a finding that, based on unusual and non-recurring factors that they deem sufficient, a higher level of expenses is justified. In the event that a majority of
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the directors (including a majority of the independent directors) does not determine that such excess expenses are justified, PHA must reimburse to us the amount of the excess expenses paid or incurred (the “Excess Amount”).
We incurred operating expenses of approximately $1,410,003 during the twelve months ended June 30, 2023, which was within the 2% of average invested assets and 25% of net income limitations (as defined in our charter).
Because we are prohibited from operating hotel properties pursuant to certain tax laws relating to our qualification as a REIT, the entities through which we own 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 federal income tax at regular corporate rates on its taxable income. The TRSs will enter into any franchise agreements to brand our hotels and will generally enter into property management agreements with one or more affiliated property management companies. These may include TPG Hotels & Resorts, Inc., an affiliate of our Sponsor and PHA, or TPG Hotels & Resorts, Inc.’s wholly owned subsidiaries, which we collectively refer to as TPG, or other affiliates or designees of TPG. We expect our property manager will operate and manage all or substantially all of our hotel properties.
We anticipate that we will acquire properties with property management agreements that can be terminated with little or no cost. In such cases, our TRSs will enter into property management agreements with one or more property management companies affiliated with our Sponsor. We expect our property manager will operate and manage all or substantially all of our hotel properties. We collectively refer to TPG and other property management companies affiliated with our Sponsor as our property manager.
PHA and affiliated property managers will be entitled to receive fees during the acquisition and operational stages of the Company, and PHA may be eligible to receive fees during the liquidation stage of the Company. S2K Financial LLC will receive fees for distribution and servicing of the DRIP Offering.
We elected to be taxed as, and currently qualify as, a REIT under the Code commencing with our taxable year ended December 31, 2018. As a REIT, we generally will not be subject to U.S. federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year following the year we initially elect to be taxed as a REIT, we will be subject to U.S. federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.
Recent Developments
Our operations have been and are expected to continue to be impacted by economic and market conditions. Persisting market and economic challenges, such as increases in interest rates, labor shortages, supply chain disruptions and high inflation, could affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
Market Outlook
Lingering impacts of the COVID-19 pandemic on the global and U.S. economy, and the travel industry in particular, continue to hinder a full recovery to pre-pandemic performance levels in certain property segments. While destination and leisure travel have rebounded and remain strong, business travel has been slower to recover. Newer headwinds triggered by the pandemic including historic rises in interest rates, inflation, supply chain issues and labor costs present additional challenges which we believe will continue to temper a recovery of business travel throughout 2023 and 2024.
The U.S. lodging industry has historically exhibited a strong correlation to U.S. GDP. GDP increased 2.1% in 2022, compared to an increase of 5.9% in 2021. However, CBRE (U.S. Hotels State of the Union Feb 2023) forecasts
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below average GDP increases throughout 2023 (.2%) and 2024 (1.3%). The increase in GDP in 2022 primarily reflected increases in consumer spending, exports, private inventory investment, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and federal government spending. The increase in GDP during the year ended December 31, 2021, reflected increases in all major subcomponents, led by personal consumption expenditures (“PCE”), nonresidential fixed investment, exports, residential fixed investment and private inventory investment.
Inflation remains elevated after reaching a 40-year high during 2022 and its impact on the U.S. economy and the impact of any measures that may be taken by government officials to curb inflation remain uncertain. Inflation may adversely affect financial condition and results of operations. An increase in inflation could have an adverse impact on floating rate mortgages, credit facilities, property operating expenses, and general and administrative expenses, as these costs could increase at a rate higher than revenue. Inflation could also have an adverse effect on consumer spending, which could impact our revenues.
The hospitality sector entered 2023 on comparably stronger footing, however the horizon is not free of challenges. Travel costs have been on the rise, led by generally higher airfares, fuel costs and hotel rates. While pent-up demand has somewhat compensated for high inflation, the potential for a recession-driven pullback in consumer spending remains a credible risk to industry momentum. Scenic destinations that have outperformed in recent years may begin to revert to traditional demand levels. Businesses have suggested they may boost business travel this year, which, combined with additional international visitation and a larger convention slate, is poised to drive recovery in many of the nation’s larger hospitality markets.
Our Sponsor’s principals and senior executives, and our highly experienced property level management teams employed by TPG Hotels & Resorts, our hospitality and property management affiliate, have over three decades of experience in the hospitality industry, and have weathered many market swings, including experience dealing with the impacts of previous disruptive events such as 9/11 and the significant recession of 2008.
Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at 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. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates was included in our Annual Report.
Income Taxes
We elected to be taxed as, and currently qualify as, a REIT under the Code and have operated as such commencing with our taxable year ended December 31, 2018. To qualify as a REIT for tax purposes, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our 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). We must also meet certain asset and income tests, as well as other requirements. As a REIT, we will not be subject to U.S. federal income tax to the extent we make distributions to our stockholders equal to or in excess of our taxable income. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following 2018, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate income tax rates and generally would 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 us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
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However, we are, and intend to continue to be, organized and operated in such a manner as to qualify for treatment as a REIT.
We lease our hotel properties to our wholly owned TRSs that are subject to federal, state and local income taxes.
We account for income taxes of our 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. We record a valuation allowance for net deferred tax assets that are not expected to be realized.
We have 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. We had no material uncertain tax positions at June 30, 2023.
The preparation of our 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 our estimates may change is not expected to be material. We will account for interest and penalties relating to uncertain tax provisions in the current period’s results of operations, if necessary. We have not been assessed interest or penalties by any major tax jurisdictions. We have tax years 2019 through 2022 remaining subject to examination by various federal and state tax jurisdictions.
Distributions
Our board of directors may authorize distributions in excess of those required for us to maintain REIT status as it deems appropriate. Through the first quarter of 2020, we paid regular quarterly distributions to our stockholders. As a result of the impact of the COVID-19 pandemic on our business, our board of directors may reconsider our current distribution policy and may take further action with respect to distributions for our common stock, and could consider eliminating, suspending, or significantly reducing distributions in the future. The timing and amount of distributions will be determined by our board of directors, in its sole discretion, and may vary from time to time. Our board of directors’ discretion will be influenced in substantial part by its obligation to cause us to comply with the REIT requirements of the Code. We can provide no assurance that we will be able to pay distributions on our K Shares, K-I Shares or K-T Shares. However, distributions will continue to accumulate pursuant to our charter.
Our board of directors has adopted a policy to refrain from funding distributions with offering proceeds; instead, we plan to fund distributions from cash flows from operations and capital transactions (other than the Public Offering or other securities offerings but which may include the sale of one or more assets). However, our charter does not restrict us from paying distributions from any particular source, including proceeds from securities offerings, and our board of directors has the ability to change our policy regarding the source of distributions. However, in accordance with Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; or (2) cause our total assets to be less than the sum of our total liabilities plus, unless our charter provides otherwise, senior liquidation preferences. Our charter currently provides that amounts that would be needed, if we were to dissolve at the time of such distributions, to satisfy the preferential rights upon dissolution of holders of K Shares, K-I Shares and K-T Shares shall not be added to our total liabilities for these purposes. Subject to the preceding, our board of directors will determine the amount of distributions we will pay to our stockholders. We have not established a minimum distribution level.
For information on distributions paid during the three months ended June 30, 2023, refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report.
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We have funded distributions with operating cash flows from our hotel properties and from the issuance of common stock pursuant to the DRIP. To the extent we do not have sufficient earnings and profits, distributions paid will be considered a return of capital to stockholders.
The following table shows distributions paid during the six months ended June 30, 2023 and 2022:
| Six Months Ended June 30, |
| |||||||||
2023 |
| 2022 |
| ||||||||
Distributions paid in cash | $ | 1,497,707 |
|
| $ | 1,505,235 |
|
| |||
Distributions reinvested |
| 397,571 |
|
|
| 394,686 |
|
| |||
Total distributions | $ | 1,895,278 |
|
| $ | 1,899,921 |
|
| |||
Source of distributions: |
|
|
|
|
|
|
|
| |||
Cash flows provided by operations | $ | 1,497,707 |
| 79 | % | $ | 1,505,235 |
| 79 | % | |
Offering proceeds from issuance of common stock pursuant to the DRIP |
| 397,571 |
| 21 | % |
| 394,686 |
| 21 | % | |
Total sources | $ | 1,895,278 |
| 100 | % | $ | 1,899,921 |
| 100 | % |
Although a portion of the tax composition of such distributions may be a return of capital, distributions for the three months ended June 30, 2023 and 2022 were paid for with gross cash flow from operations. To the extent we do not have taxable income, distributions paid will be considered a return of capital to stockholders.
On March 3, 2020, our stockholders approved to amend our charter (1) to increase the rate at which cash distributions on K Shares, K-I Shares and K-T Shares automatically accumulate under our charter from 6% to 7% per annum of the K Share Distribution Base of such K Share, K-I Share Distribution Base of such K-I Share and K-T Share Distribution Base of such K-T Share, respectively, and (2) to increase the maximum rate at which distributions on A Shares may be authorized by our board of directors and declared by us from 6% to 7% of the stated value of an A Share ($10.00) from income and cash flow from ordinary operations on a cumulative basis. The changes pursuant to the Articles of Amendment to our charter became effective beginning with distributions that accumulated on March 31, 2020.
We paid quarterly distributions with respect to all four quarters of 2022 and the first quarter of 2023, funded from the operations of our hotel properties and proceeds received pursuant to the DRIP, consistent with prior distributions. Unpaid distributions will continue to accumulate pursuant to our charter. Our board of directors will make determinations as to the payment of future distributions on a quarter by quarter basis; however, distributions will continue to accumulate pursuant to our charter.
Results of Operations
The discussion that follows is based on our consolidated results of operations for the three and six months ended June 30, 2023 and 2022.
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Factors That May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and those risks listed in Part I, Item 1A “Risk Factors” of our Annual Report and in Part II, Item 1A. “Risk Factors” of this Quarterly Report, including but not limited to the COVID-19 pandemic, as discussed below, that may be reasonably expected to have a `material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Rooms revenues
We expect the majority of our revenues to be derived from the operation of our hotel properties. Rooms revenues are the product of the number of rooms sold and the average daily room rate. Rooms revenues increased to $7,164,330 for the three months ended June 30, 2023 from $6,792,295 for the three months ended June 30, 2022. The net increase of $372,035, or 5.5%, was largely due to increases in occupancy.
The following presents the hotel operating results for the three months ended June 30, 2023 for the full portfolio.
| Total Portfolio |
| ||||||||
April |
| May |
| June |
| |||||
Number of hotels |
| 5 |
| 5 |
| 5 | ||||
Number of rooms |
| 559 |
| 559 |
| 559 | ||||
Average Occupancy Percentage |
| 66.77 | % | 71.74 | % | 80.19 | % | |||
Average Daily Rate (“ADR”) | $ | 160.13 | $ | 194.68 | $ | 226.01 | ||||
Revenue Per Available Room (“RevPAR”) | $ | 107.44 | $ | 138.24 | $ | 180.88 |
The following presents the hotel operating results for the three months ended June 30, 2022 for the full portfolio.
| Total Portfolio |
| ||||||||
April |
| May |
| June |
| |||||
Number of hotels |
| 5 |
| 5 |
| 5 | ||||
Number of rooms |
| 559 |
| 559 |
| 559 | ||||
Average Occupancy Percentage |
| 64.08 | % | 65.69 | % | 75.23 | % | |||
ADR | $ | 165.91 | $ | 196.26 | $ | 219.39 | ||||
RevPAR | $ | 106.90 | $ | 128.40 | $ | 166.59 |
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A comparison of hotel rooms revenues for the three months ended June 30, 2023 and 2022 is as follows:
Three Months Ended June 30, | Increase | Increase | |||||||||||
2023 | 2022 | (Decrease) | (Decrease) % | ||||||||||
Springhill Suites Wilmington | $ | 1,292,130 | $ | 1,348,696 | $ | (56,566) | (4.19) | % | |||||
Staybridge Suites St. Petersburg | 1,494,061 | 1,395,536 | 98,525 | 7.06 | % | ||||||||
Hotel Indigo Traverse City | 1,753,684 | 1,719,227 | 34,457 | 2.00 | % | ||||||||
Hilton Garden Inn Providence | 1,633,423 | 1,494,053 | 139,370 | 9.33 | % | ||||||||
Cherry Tree Inn | 991,032 | 834,783 | 156,249 | 18.72 | % | ||||||||
$ | 7,164,330 | $ | 6,792,295 | $ | 372,035 | 5.48 | % |
The decrease in rooms revenues of $56,566, or 4.19%, at the Springhill Suites Wilmington is driven by decreases in both ADR and occupancy. Occupancy at the Springhill Suites Wilmington decreased from 77.74% for the three months ended June 30, 2022, to 75.33% for the three months ended June 30, 2023. The ADR at the Springhill Suites Wilmington decreased from $158.56 for the three months ended June 30, 2022, to $156.67 for the three months ended June 30, 2023, a decrease of 1.2%.
The increase in rooms revenues of $98,525, or 7.06%, at the Staybridge Suites St. Petersburg is primarily driven by an increase in occupancy compared to the prior year partially offset by a decrease in ADR. Occupancy at the Staybridge Suites St. Petersburg increased from 73.45% for the three months ended June 30, 2022, to 82.10% for the three months ended June 30, 2023. The ADR at the Staybridge Suites St. Petersburg decreased from $174.36 for the three months ended June 30, 2022, to $167.93 for the three months ended June 30, 2023, a decrease of 3.7%.
The increase in rooms revenues of $34,457 or 2.00%, at the Hotel Indigo Traverse City is primarily driven by a increase in occupancy compared to the prior year partially offset by a decrease in ADR. Occupancy at the Hotel Indigo Traverse City increased from 76.50% for the three months ended June 30, 2022 to 81.00% for the three months ended June 30, 2023. The ADR at the Hotel Indigo Traverse City decreased from $226.02 for the three months ended June 30, 2022 to $218.96 for the three months ended June 30, 2023, a decrease of 3.1%.
The increase in rooms revenues of $139,370, or 9.33%, at the Hilton Garden Inn Providence is primarily driven by an increase in occupancy offset by a decrease in ADR compared to the prior year. Occupancy at the Hilton Garden Inn Providence increased from 55.03% for the three months ended June 30, 2022 to 61.76% for the three months ended June 30, 2023. The ADR at the Hilton Garden Inn Providence decreased from $213.77 for the three months ended June 30, 2022 to $211.00 for the three months ended June 30, 2023, a decrease of 1.3%.
The increase in rooms revenues of $156,249, or 18.72%, at the Cherry Tree Inn is primarily driven by increases in both occupancy and ADR compared to the prior year. Occupancy at the Cherry Tree Inn increased from 58.94% for the three months ended June 30, 2022 to 64.31% for the three months ended June 30, 2023. The ADR at the Cherry Tree Inn increased from $196.57 for the three months ended June 30, 2022 to $213.47 for the three months ended June 30, 2023, an increase of 8.6%.
Food and beverage revenues
Food and beverage revenues increased to $739,770 for the three months ended June 30, 2023 from $713,750 for the three months ended June 30, 2022. These amounts are comprised of revenues realized in hotel food and beverage outlets as well as catering events. The $26,020 increase from the prior year period is in line with the increase in rooms revenues.
Other operating revenues
Other operating revenues decreased to $253,703 for the three months ended June 30, 2023, from $807,415 for the three months ended June 30, 2022. These amounts include ancillary hotel revenues and other items primarily driven by occupancy such as telephone/internet, parking, gift shops, and other guest services. The $553,712 decrease from the
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prior year period is primarily due to the receipt of a $381,168 Growing Michigan Business grant awarded to the Hotel Indigo Traverse City and a $250,000 grant received from the Rhode Island Rebounds program by the Hilton Garden Inn Providence during the three months ended June 30, 2022. The decrease from the prior year period was partially offset by increases in parking and resort fees.
Rooms expenses
Rooms expenses increased to $1,526,032 for the three months ended June 30, 2023 from $452,747 for the three months ended June 30, 2022. The $1,073,285 net increase in rooms expenses is primarily due to a $860,899 reduction in payroll costs during the three months ended June 30, 2022 due to a decrease in reimbursable payroll costs to an affiliate of the Company’s hotel managers who qualified for tax credits related to wages reimbursed by the Company, as well as increased staffing and wages. Rooms expenses are typically primarily driven by the corresponding revenue account and occupancy. Excluding the impact of the tax credits, rooms expenses of $1,526,032 and $1,313,646 represent 21.3% and 19.3% of rooms revenues for the three-month period ended June 30, 2023 and 2022, respectively. The percentage increase is primarily due to the rise in labor costs.
Food and beverage expenses
Food and beverage expenses were $486,719 and $461,833 for the three months ended June 30, 2023 and 2022, respectively. The $24,886 increase in food and beverage expenses is primarily due to current inflationary pressures. Food and beverage expenses are historically primarily driven by the corresponding revenue account and occupancy. Food and beverage expenses represent 65.8% and 64.7% of food and beverage revenues for the three-month period ended June 30, 2023 and 2022, respectively. The percentage increase is primarily due to the rise in labor and consumable costs.
Other property expenses
Other property expenses were $2,675,905 and $2,508,599, for the three months ended June 30, 2023 and 2022, respectively. These amounts include maintenance, utilities, sales and marketing, and general and administrative expenses of the hotel properties, as well as net franchise fees, property taxes and other taxes. The $167,306 increase in other property expenses is primarily driven by an increase in credit card commissions, sales and marketing expenses, accounting fees and bank charges.
Property management fees to affiliates
Property management fees to affiliates were $245,209 and $230,846 for the three months ended June 30, 2023 and 2022, respectively. Property management fees are property level expenses equal to 3% of the hotel properties’ gross revenues and we expect them to fluctuate accordingly.
Corporate general and administrative
Corporate general and administrative expenses were $351,690 and $384,938 for the three months ended June 30, 2023 and 2022, respectively. Corporate general and administrative expenses consist primarily of transfer agent fees, fees paid to the board of directors, audit and tax fees, and other professional services fees.
Other fees to affiliates
Other fees to affiliates were $215,805 and $218,701 for the three months ended June 30, 2023 and 2022, respectively. Other fees to affiliates include asset management fees due to PHA that are paid quarterly in arrears equal to one-fourth of 0.75% of the adjusted cost of our assets. Other fees to affiliates also includes certain administrative fees charged to us by our Sponsor. Such administrative fees were $36,620 and $41,728 during the three months ended June 30, 2023 and 2022, respectively.
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Depreciation and amortization
Depreciation and amortization expenses were $1,018,347 and $943,770 for the three months ended June 30, 2023 and 2022, respectively. These amounts include depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization of our franchise fees and certain intangibles.
Gain on loan extinguishment
Gain on loan extinguishment was $0 and $405,605 for the three months ended June 30, 2023 and 2022, respectively and related to forgiveness of PPP loans by the Small Business Administration (“SBA”).
Interest expense, net
Interest expense, net, was $724,906 and $679,784 for the three months ended June 30, 2023 and 2022, respectively. Interest expense includes monthly fixed rate payments on the outstanding mortgage notes payable balance, accrued interest on the outstanding asset management fees, acquisition fees and promissory notes from PHA and our Sponsor, and the amortization of deferred financing costs and debt discounts or premiums. For the three months ended June 30, 2023, we incurred $34,138 of interest expense relating to the amortization of deferred financing costs and debt discounts, offset by $33,079 relating to the amortization of the fair value of debt premium.
Interest income on interest-bearing cash accounts was $55,406 and $244 for three months ended June 30, 2023 and 2022, respectively. Interest income is presented as a reduction of the total interest expense on the consolidated income statement.
Gain (Loss) on interest rate cap
Unrealized loss on our interest rate cap was $55,589 for the three months ended June 30, 2023. Unrealized gain on our interest rate cap was $39,926 for the three months ended June 30, 2022. They related to the note secured by the Hotel Indigo Traverse City (the “ TCI Note”) interest rate cap which expires on August 15, 2023.
Income tax expense/benefit
Income tax benefit was $52,612 for the three months ended June 30, 2023. Income tax expense was $42,029 for the three months ended June 30, 2022. They related to taxable income at the TRSs.
Net income
For the three months ended June 30, 2023 and 2022, we had net income of $910,213 and $2,835,744, respectively. The decrease in net income of $1,925,531 is the result of the revenue and expense changes discussed above.
Net income attributable to noncontrolling interests
Net income relating to noncontrolling interests was $235,898 for the three months ended June 30, 2023 compared to net income relating to noncontrolling interests of $511,493 for the three months ended June 30, 2022. This amount includes net income or losses attributable to a third-party’s 49% ownership interest in PCF and will fluctuate accordingly with any increases or decreases to net income of PCF. This amount also includes net income or losses attributable to the noncontrolling Operating Partnership Class K OP Units issued as part of the Hilton Garden Inn Providence acquisition. The noncontrolling Class K OP Units are allocated net income or loss attributable to the Operating Partnership based on the total outstanding Class K OP Units as a percentage of all our outstanding common stock.
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Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Rooms revenues
We expect the majority of our revenues to be derived from the operation of our hotel properties. Rooms revenues are the product of the number of rooms sold and the average daily room rate. Rooms revenues increased to $11,915,947 for the six months ended June 30, 2023 from $11,264,726 for the six months ended June 30, 2022. The net increase of $651,221, or 5.8%, was largely due to increases in occupancy somewhat offset by decreases in ADR.
The following presents the hotel operating results for the two quarters ended June 30, 2023 for the full portfolio.
First | Second | ||||||
Quarter | Quarter | ||||||
2023 | 2023 | ||||||
Number of hotels | 5 | 5 | |||||
Number of rooms | 559 | 559 | |||||
Average Occupancy Percentage | 61.04 | % | 73.03 | % | |||
ADR | $ | 150.48 | $ | 192.03 | |||
RevPAR | $ | 94.50 | $ | 140.87 |
The following presents the hotel operating results for the two quarters ended June 30, 2022 for the full portfolio.
First | Second | ||||||
Quarter | Quarter | ||||||
2022 | 2022 | ||||||
Number of hotels | 5 | 5 | |||||
Number of rooms | 559 | 559 | |||||
Average Occupancy Percentage | 57.41 | % | 68.47 | % | |||
ADR | $ | 151.97 | $ | 193.53 | |||
RevPAR | $ | 88.90 | $ | 133.58 |
A comparison of hotel rooms revenues for the six months ended June 30, 2023 and 2022 is as follows:
Six Months Ended June 30, | Increase | Increase | |||||||||||
2023 | 2022 | (Decrease) | (Decrease) % | ||||||||||
Springhill Suites Wilmington | $ | 2,092,911 | $ | 2,143,789 | $ | (50,878) | (2.37) | % | |||||
Staybridge Suites St. Petersburg | 3,295,862 | 3,070,939 | 224,923 | 7.32 | % | ||||||||
Hotel Indigo Traverse City | 2,565,667 | 2,535,136 | 30,531 | 1.20 | % | ||||||||
Hilton Garden Inn Providence | 2,555,932 | 2,293,076 | 262,856 | 11.46 | % | ||||||||
Cherry Tree Inn | 1,405,575 | 1,221,786 | 183,789 | 15.04 | % | ||||||||
$ | 11,915,947 | $ | 11,264,726 | $ | 651,221 | 5.78 | % |
Food and beverage revenues
Food and beverage revenues increased to $1,034,095 for the six months ended June 30, 2023 from $997,293 for the six months ended June 30, 2022. These amounts are comprised of revenues realized in hotel food and beverage
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outlets as well as catering events. The $36,802 increase from the prior year period is in line with the increase in rooms revenues.
Other operating revenues
Other operating revenues decreased to $466,407 for the six months ended June 30, 2023, from $1,157,014 for the six months ended June 30, 2022. These amounts include ancillary hotel revenues and other items primarily driven by occupancy such as telephone/internet, parking, gift shops, and other guest services. The $690,607 decrease from the prior year period is primarily due to the receipt of a $215,660 Business Recovery Grant from the state of North Carolina by the Springhill Suites Wilmington, a $381,168 Growing Michigan Business grant awarded to the Hotel Indigo Traverse City and a $250,000 grant received from the Rhode Island Rebounds program by the Hilton Garden Inn Providence in the six months ended June 30, 2022. The decrease from the prior year period was offset by increases in resort fees and parking.
Rooms expenses
Rooms expenses increased to $2,742,919 for the six months ended June 30, 2023 from $1,506,159 for the six months ended June 30, 2022. The $1,236,760 net increase in rooms expenses is primarily due to a $860,899 reduction in payroll costs in the six months ended June 30, 2022 due to a decrease in reimbursable payroll costs to an affiliate of the Company’s hotel managers who qualified for tax credits related to wages reimbursed by the Company, as well as increased staffing and wages. Rooms expenses are typically primarily driven by the corresponding revenue account and occupancy. Excluding the impact of the tax credits, rooms expenses of $2,742,919 and $2,367,058 represent 23.0% and 21.0% of rooms revenues for the six-month period ended June 30, 2023 and 2022, respectively. The percentage increase is primarily due to the rise in labor costs.
Food and beverage expenses
Food and beverage expenses were $783,341 and $735,883 for the six months ended June 30, 2023 and 2022, respectively. The $47,458 increase in food and beverage expenses is primarily due to current inflationary pressures. Food and beverage expenses are historically primarily driven by the corresponding revenue account and occupancy. Food and beverage expenses represent 75.8% and 73.8% of food and beverage revenues for the six-month period ended June 30, 2023 and 2022, respectively. The percentage increase is primarily due to the rise in labor and consumable costs.
Other property expenses
Other property expenses were $4,878,340 and $4,641,640, for the six months ended June 30, 2023 and 2022, respectively. The $236,700 increase in other property expenses is primarily driven by an increase in credit card commissions, sales and marketing expenses and franchise fees. These amounts also include maintenance, utilities, sales and marketing, and general and administrative expenses of the hotel properties, as well as net franchise fees, property taxes and other taxes.
Property management fees to affiliates
Property management fees to affiliates were $403,239 and $377,720 for the six months ended June 30, 2023 and 2022, respectively. Property management fees are property level expenses equal to 3% of the hotel properties’ gross revenues and we expect them to fluctuate accordingly.
Corporate general and administrative
Corporate general and administrative expenses were $705,334 and $703,501 for the six months ended June 30, 2023 and 2022, respectively. Corporate general and administrative expenses consist primarily of transfer agent fees, fees paid to the board of directors, audit and tax fees, and other professional services fees.
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Other fees to affiliates
Other fees to affiliates were $434,483and $439,814 for the six months ended June 30, 2023 and 2022, respectively. Other fees to affiliates include asset management fees due to PHA that are paid quarterly in arrears equal to one-fourth of 0.75% of the adjusted cost of our assets. Asset management fees increased to $358,016 for the six months ended June 30, 2023 from $352,121 for the six months ended June 30, 2022. Other fees to affiliates also includes certain administrative fees charged to us by our Sponsor. Such administrative fees were $76,467 and $87,693 in the six months ended June 30, 2023 and 2022, respectively.
Depreciation and amortization
Depreciation and amortization expenses were $2,029,161 and $1,861,710 for the six months ended June 30, 2023 and 2022, respectively. These amounts include depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization of our franchise fees and certain intangibles.
Gain on loan extinguishment
Gain on loan extinguishment was $0 and $942,605 for the six months ended June 30, 2023 and 2022, respectively and related to forgiveness of PPP loans by the Small Business Administration (“SBA”).
Interest expense, net
Interest expense, net, was $1,415,761 and $1,310,376 for the six months ended June 30, 2023 and 2022, respectively. Interest expense includes monthly fixed rate payments on the outstanding mortgage notes payable balance, accrued interest on the outstanding asset management fees, acquisition fees and promissory notes from PHA and our Sponsor, and the amortization of deferred financing costs and debt discounts or premiums. For the six months ended June 30, 2023, we incurred $68,276 of interest expense relating to the amortization of deferred financing costs and debt discounts, offset by $66,158 relating to the amortization of the fair value of debt premium.
Interest income on interest-bearing cash accounts was $104,013 and $7,882 for six months ended June 30, 2023 and 2022, respectively. Interest income is presented as a reduction of the total interest expense on the consolidated income statement.
Gain on interest rate cap
Unrealized loss on our interest rate cap was $104,855 for the six months ended June 30, 2023. Unrealized gain on our interest rate cap was $85,109 for the six months ended June 30, 2022. They related to the note secured by the Hotel Indigo Traverse City (the “ TCI note”) interest rate cap which expires on August 15, 2023.
Income tax expense/benefit
Income tax benefit was $185,764 for the six months ended June 30, 2023. Income tax expense was $42,975 for the six months ended June 30, 2022. They related to taxable income at the TRSs.
Net income
For the six months ended June 30, 2023 and 2022, we had net income of $104,780 and $2,826,969 respectively. The decrease in net income of $2,722,189 is the result of the revenue and expense changes discussed above.
Net income attributable to noncontrolling interests
Net income relating to noncontrolling interests was $462,403 for the six months ended June 30, 2023 compared to net income relating to noncontrolling interests of $819,176 for the six months ended June 30, 2022. This amount includes net income or losses attributable to a third-party’s 49% ownership interest in PCF and will fluctuate accordingly
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with any increases or decreases to net income of PCF. This amount also includes net income or losses attributable to the noncontrolling Operating Partnership Class K OP Units issued as part of the Hilton Garden Inn Providence acquisition. The noncontrolling Class K OP Units are allocated net income or loss attributable to the Operating Partnership based on the total outstanding Class K OP Units as a percentage of all our outstanding common stock.
Liquidity and Capital Resources
The negative impact on room demand within our portfolio stemming from the COVID-19 pandemic was significant. We experienced an initial decline in hotel revenue that began in March 2020. However, with the increased spread of the COVID-19 pandemic across the globe, the impact accelerated rapidly, and we saw a much greater effect on occupancy and hotel revenue per available room throughout our hotel portfolio.
We utilized provisions from the Coronavirus Aid Relief, and Economic Security Act to provide additional liquidity from federally supported loan programs. As of December 31, 2020, we received $1,018,917 in first round PPP loans related to four hotel properties. As of December 31, 2022, we received $1,426,672 of second round PPP loans. As of December 31, 2022, the Company received formal written approval of forgiveness applications from the SBA for loans in the amount of $2,445,589. For more information, refer to Note 5 – “Other Debt” to our unaudited interim condensed consolidated financial statements.
We paid quarterly distributions with respect to the quarters ended March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022 and March 31, 2023, with operating cash flow, consistent with prior distributions. Our board of directors will make determinations as to the payment of future distributions on a quarter-by-quarter basis; however, distributions will continue to accumulate pursuant to our charter.
Our sources of funds are primarily funds equal to amounts reinvested in the DRIP, operating cash flows and borrowings. Our principal demands for funds will be for improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to and repurchases from our stockholders. Should we acquire additional assets, we intend to use cash and mortgage or other debt. PHA and its affiliates have agreed to purchase A Shares in a private placement in order to provide us with funds sufficient to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we will allocate proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable Estimated Per Share NAV per K-I Share and the applicable offering price of K-I Shares sold in our primary offering and (ii) any discount to the applicable offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.
In addition, in a normal operating environment, we expect to use debt financing as a source of capital. Our charter provides that the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in accordance with Statement of Policy Regarding Real Estate Investment Trusts revised and adopted by the North American Securities Administrators Association on May 7, 2007) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit and undistributed cash flow. Note that, currently, we have not identified any
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additional sources of financing and there is no assurance that such sources of financings will be available on favorable terms or at all.
We believe that cash and restricted cash on hand, cash from operations and borrowings from other sources, including advances from PHA and our Sponsor, if necessary, will be sufficient to fund our operating and administrative expenses and continuing debt service obligations over the next twelve months.
Sources and Uses of Cash
Proceeds from the sale of common stock in the Private Offering and Public Offering were partially used to fund our investments in hotel properties and the related costs associated with the transactions. The remaining proceeds are held in liquid cash accounts. Cash balances from our investments in hotel properties were consolidated during the six months ended June 30, 2023 and 2022.
Cash Flows Provided by Operating Activities
As of June 30, 2023, we owned an interest in five hotel properties. During the six months ended June 30, 2023, net cash provided by operating activities was $3,302,660 compared to the net cash provided by operating activities of $4,168,001 for the six months ended June 30, 2022. Our operating cash flows during the six months ended June 30, 2023, were the result of our net income, offset by adjustments for non-cash expenses, including depreciation and amortization, the change in fair value of the interest rate cap agreement and by adjustments for receivables, other assets, amounts due to and from related parties, and accounts payable and accrued liabilities. Our operating cash flows during the six months ended June 30, 2022, was the result of our net income offset by adjustments for non-cash expenses, including depreciation and amortization, and by adjustments for receivables, other assets, gain on loan extinguishment, amounts due to and from related parties, and accounts payable and accrued liabilities.
Cash Flows Used in Investing Activities
Cash used in investing activities will vary based on the funds raised by the issuance of shares of common stock pursuant to the DRIP and how quickly we invest those funds towards acquisitions of real estate and real-estate related investments. During the six months ended June 30, 2023, net cash used in investing activities was $441,882 and was the result of capital improvements at our hotel properties. During the six months ended June 30, 2022, net cash used in investing activities was $1,853,035 and was the result of capital improvements at our hotel properties.
Cash Flows Used in Financing Activities
During the six months ended June 30, 2023, net cash used in financing activities was $3,051,293. We paid stockholder servicing fees totaling $769. We received $135,495 of mortgage note proceeds related to capital improvements at the Cherry Tree Inn. We made principal payments on the note secured by the Springhill Suites Wilmington (the “Wilmington Note”), the note secured by the Staybridge Suites St. Petersburg (the “St. Petersburg Note”) and the note secured by the Hilton Garden Inn Providence (the “HGI Note”) totaling $333,886. We paid deferred financing costs of $38,534 related to extending the TCI Note. We paid cash distributions of $1,497,707 to stockholders with proceeds from operations. Cash flow from financing activities for the six months ended June 30, 2023, also includes $575,750 of distributions to noncontrolling interests. Additionally, we repurchased $740,142 of outstanding shares of common stock.
During the six months ended June 30, 2022, net cash used in financing activities was $1,710,565. We paid stockholder servicing fees totaling $2,869. We received $939,181 of mortgage note proceeds related to capital improvements at the Cherry Tree Inn. We made principal payments on the Wilmington Note and the St. Petersburg Note totaling $209,809. We paid cash distributions of $1,505,235 to stockholders with proceeds from operations. Cash flow from financing activities for the six months ended June 30, 2022, also includes $477,750 of distributions to noncontrolling interests. Additionally, we repurchased $454,083 of outstanding shares of common stock.
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Debt
We intend to maintain amounts outstanding under long-term debt arrangements or lines of credit so that we will have more funds available for investment in properties. However, the percentage of debt financing we utilize at any given time will be dependent upon various factors to be considered in the sole discretion of our board of directors, including, but not limited to, our ability to pay distributions, the availability of properties meeting our investment criteria, the availability of debt financing, and changes in the cost of debt financing. To help finance our initial acquisitions, we may utilize short-term borrowings. However, after our initial property acquisitions, as a general principle, we anticipate that the term of any debt financing we utilize will correspond to the anticipated holding period for the respective property.
We may repay borrowings under any future credit facility or under any future long-term mortgage debt with proceeds from the sale of properties, operating cash flow, long-term mortgage debt, proceeds from the Public Offering, proceeds from any future offerings, or proceeds from any other future securities offerings.
The TCI Note provides for interest only monthly payments until maturity. As of June 30, 2023, we believe the Operating Partnership and its subsidiary were compliant with their loan obligations, including applicable covenants, and all required payments have been made as agreed. The interest rate cap on the TCI Note, which expires on August 15, 2023, was replaced with an interest rate swap that effectively locks the interest rate on the $15,092,000 mortgage note at a fixed rate of 5.13% from its August 15, 2023 effective date through August 15, 2024.
The HGI Note requires monthly interest payments at a fixed rate of 4.25%. The HGI Note provides for interest only monthly payments for 36 months, with payments based on a 30-year amortization schedule thereafter. As of June 30, 2023, we believe the Operating Partnership and its subsidiary for the Hilton Garden Inn Providence were in compliance with their loan requirements, including applicable covenants, and all required payments have been made as agreed.
The St. Petersburg Note requires monthly interest and principal payments. As of June 30, 2023, we believe the Operating Partnership and its subsidiary for the Staybridge Suites St. Petersburg were in compliance with their loan requirements, including applicable covenants, and all required payments have been made as agreed.
The Wilmington Note requires monthly interest and principal payments. As of June 30, 2023, we believe the Operating Partnership and its subsidiary for the Springhill Suites Wilmington were in compliance with their loan requirements, including applicable covenants, and all required payments have been made as agreed.
The note secured by the Cherry Tree Inn requires monthly interest payments at a fixed rate of 3.91% through November 23, 2023 and subsequent to November 23, 2023, monthly principal and interest payments of $52,601 through November 23, 2026, the maturity date. As of June 30, 2023, we believe the Operating Partnership and its subsidiary for the Cherry Tree Inn were in compliance with their loan requirements, including applicable covenants, and all required payments have been made as agreed.
Contractual Obligations
We enter into contracts that contain a variety of indemnification provisions. Our maximum exposure under these arrangements is unknown; however, we have not had prior claims or losses pursuant to these contracts. Our management has reviewed our existing contracts and expects the risk of loss to us to be remote.
Our contractual obligations as of June 30, 2023 are as follows:
2023 | 2024-2025 | 2026-2027 | Thereafter | Total | |||||||||||
Outstanding debt obligations | $ | 338,431 | $ | 54,967,918 | $ | 9,405,721 | $ | — | $ | 64,712,070 | |||||
Interest payments on outstanding debt obligations |
| 1,383,744 |
| 2,838,498 |
| 329,476 |
| — |
| 4,551,718 | |||||
Total | $ | 1,722,175 | $ | 57,806,416 | $ | 9,735,197 | $ | — | $ | 69,263,788 |
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Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments and the corresponding expenses associated with that process are operational features of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts (“Nareit”), an industry trade group, has promulgated a measure known as funds from operations (“FFO”), which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, consistent with Nareit’s definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.
Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report its investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of its investment in real estate assets.
The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.
In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rooms revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rooms revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date.
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Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We used the proceeds from our offerings to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five to seven years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITs, the Institute for Portfolio Alternatives (“IPA”), an industry trade group, has standardized a measure known as modified FFO (“MFFO”), which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and distribution policy. MFFO is not equivalent to our net income (loss) as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (“Practice Guideline”), issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting; adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income (loss); and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our condensed consolidated statements of operations. Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us. Acquisition fees and expenses include payments to PHA or its affiliates and third parties. Such fees and expenses will not be reimbursed by PHA or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, PHA or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying condensed consolidated statements of operations, and acquisition expenses associated with transactions determined to be an asset purchase are capitalized.
All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.
In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations in accordance with GAAP.
We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and
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targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as the ADR and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and NAV is disclosed. MFFO is not a useful measure in evaluating NAV since impairment write-downs are taken into account in determining NAV but not in determining MFFO.
FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operation performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body.
Our calculation of FFO and MFFO is presented in the following table for the three months ended June 30, 2023 and 2022:
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Reconciliation of net income to MFFO: |
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|
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| ||||
Net income | $ | 910,213 | $ | 2,835,744 | $ | 104,780 | $ | 2,826,969 | ||||
Depreciation and amortization |
| 1,018,347 |
| 943,770 |
| 2,029,161 |
| 1,861,710 | ||||
FFO |
| 1,928,560 |
| 3,779,514 |
| 2,133,941 |
| 4,688,679 | ||||
Less noncontrolling interest: |
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|
|
|
|
|
|
| ||||
Net income attributable to noncontrolling interests |
| (235,898) |
| (511,493) |
| (462,403) |
| (819,176) | ||||
Depreciation and amortization attributable to noncontrolling interest |
| (175,309) |
| (173,924) |
| (349,518) |
| (345,411) | ||||
FFO attributable to common stockholders |
| 1,517,353 |
| 3,094,097 |
| 1,322,020 |
| 3,524,092 | ||||
Amortization of deferred financing costs and debt discounts and premiums as interest |
| 1,058 |
| (9,249) |
| 2,118 |
| (18,437) | ||||
Gain on loan extinguishment | — | (405,605) | — | (942,605) | ||||||||
Unrealized loss (gain) on interest rate cap |
| 55,589 |
| (39,926) |
| 104,855 |
| (85,109) | ||||
MFFO attributable to common stockholders | $ | 1,574,000 | $ | 2,639,317 | $ | 1,428,993 | $ | 2,477,941 |
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Related-Party Transactions and Agreements
We have entered into agreements with PHA and its affiliates whereby we pay or paid certain fees to, or reimburse certain expenses of, PHA or its affiliates for acquisition fees and expenses, asset management fees, disposition fees, property management fees, O&O Costs and reimbursement of certain operating costs. Refer to Note 6 – “Related Party Transactions” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we conducted an evaluation as of June 30, 2023, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of June 30, 2023, were effective at a reasonable assurance level.
(b) Changes in internal control over financial reporting. There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against the Company. From time to time, we may be party to certain legal proceedings in the ordinary course of business. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings as of the time of this Quarterly Report will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in our Annual Report. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
On August 14, 2018, our Registration Statement on Form S-11 (File No. 333-217579), covering a public offering of up to $550,000,000 in shares of our common stock, was declared effective by the SEC under the Securities Act. We offered up to $550,000,000 in shares of our common stock, including $500,000,000 in shares of our common stock pursuant to our primary offering, consisting of the following three share classes: K Shares at an initial offering price of $10.00 per share (up to $125,000,000 in shares), K-I Shares at an offering price of $9.30 per share (up to $125,000,000 in shares), and K-T Shares at an initial offering price of $10.00 per share (up to $250,000,000 in shares), which reflect the Estimated Per Share NAV of each of the K Shares, K-I Shares, and K-T Shares as of February 28, 2018, and $50,000,000 in shares of our common stock pursuant to the DRIP at $9.50 per K Share (up to $12,500,000 in shares), $9.50 per K-I Share (up to $12,500,000 in shares) and $9.50 per K-T Share (up to $25,000,000 in shares).
On May 23, 2019, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of March 31, 2019, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $3.97 per A Share; and (v) $0.00 per B Share. On March 22, 2018, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of February 28, 2018, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. On April 7, 2020, in response to the COVID-19 pandemic, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. On June 10, 2020, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of March 31, 2020, as follows: (i) $8.56 per K-Share; (ii) $8.55 per K-I Share; (iii) $8.56 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. On June 9, 2021, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of March 31, 2021, as follows: (i) $9.85 per K Share, (ii) $9.77 per K-I Share, (iii) $9.85 per K-T Share, (iv) $0.00 per A Share, and (v) $0.00 per B Share and revised the public offering share prices. On June 27, 2022, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of March 31, 2022, as follows: (i) $10.29 per K Share, (ii) $10.29 per K-I Share, (iii) $10.29 per K-T Share, (iv) $13.34 per A Share, and (v) $1.25 per B Share and revised the DRIP share prices. On June 27, 2023, our board of directors determined an Estimated Per Share NAV of all classes of our capital stock, each calculated as of March 31, 2023, as follows: (i) $11.53 per K Share, (ii) $11.53 per K-I Share, (iii) $11.96 per K-T Share, (iv) $22.76 per A Share, and (v) $14.77 per B Share and revised the DRIP share prices.
From the commencement of the Public Offering through its termination, we sold 2,787,944 K Shares at a weighted average price of $9.66 per share for gross proceeds of $26,939,836, 1,287,644 K-I Shares at a weighted average price of $8.76 per share for gross proceeds of $11,274,927, 60,008 K-T Shares at a weighted average price of
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$9.76 per share for gross proceeds of $585,400, for total gross proceeds of $38,800,163 in the Public Offering. From the commencement of the Public Offering through June 30, 2023, pursuant to the DRIP, we issued 129,905 K Shares to investors at a weighted average of $9.43 per K Share for gross proceeds of $1,224,803, 83,251 K-I Shares at a weighted average of $9.46 per K-I Share for gross proceeds of $787,212, and 7,249 K-T Shares at a weighted average of $9.34 per K-T Share for gross proceeds of $67,711, for total gross DRIP proceeds of $2,079,726. Additionally, we received $2,630,000 from the sale of A Shares to THR from a private placement.
On June 24, 2021, we filed a Registration Statement on Form S-3 to register approximately $4,273,505 K Shares, K-I Shares or K-T Shares under the DRIP for a proposed maximum offering price of $40,000,000 in shares of common stock. We expect to continue to issue shares of common stock under the DRIP Offering until such time as we sell all of the shares registered for sale under the DRIP Offering, unless we file a new registration statement with the SEC, or the DRIP Offering is terminated by our board of directors.
From commencement of the Public Offering through the termination of the Public Offering, we had incurred $2,995,776 of selling commissions, dealer manager fees and stockholder servicing fees in connection with the Public Offering, which were paid with proceeds from the issuance of A Shares to THR.
From inception through June 30, 2023, we recognized selling commissions, dealer manager fees, and organization and other offering costs in the Private Offering as follows:
Type of Expense Amount |
| Amount |
| Estimated/Actual | |
Selling commissions and dealer manager fees | $ | 1,058,501 |
| Actual | |
Other organization and offering costs |
| 1,083,912 |
| Actual | |
Total | $ | 2,142,413 |
|
|
The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Private Offering.
From inception through June 30, 2023, we recognized selling commissions, dealer manager fees, stockholder servicing fees, and organization and other offering costs in the Public Offering as follows:
Type of Expense Amount |
| Amount |
| Estimated/Actual | |
Selling commissions, stockholder servicing fees and dealer manager fees | $ | 3,003,319 |
| Actual | |
Other organization and offering costs |
| 3,255,484 |
| Actual | |
Total | $ | 6,258,803 |
|
|
The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Public Offering.
As of June 30, 2023, the net offering proceeds to us from our Private Offering and our Public Offering, after deducting the total expenses incurred as described above, were approximately $50,699,171.
Subsequent to June 30, 2023 and through August 11, 2023, pursuant to the DRIP Offering, we sold approximately 10,242 K Shares at a weighted average price of $10.95 per share for gross proceeds of $112,152, approximately 7,625 K-I Shares at a weighted average price of $10.95 per share for gross proceeds of $83,497 and approximately 166 K-T Shares at a weighted average price of $11.36 per share for gross proceeds of $1,882, for total gross proceeds of $197,531 in the DRIP Offering.
We have used the net proceeds from our Public Offering, Private Offering and DRIP Offering to acquire a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States. As of June 30, 2023, we had an ownership interest in five hotel properties with an aggregate initial purchase price of $78,403,938, inclusive of acquisition and closing costs. These hotel property
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acquisitions were funded from net proceeds from our Private Offering, Public Offering, and borrowings. A portion of the net proceeds from our Public Offering, Private Offering and DRIP Offering was also used to fund capital expenditures at the hotel properties and operating expenses.
Share Repurchase Program
On October 26, 2018, our board of directors approved and adopted the Amended and Restated Share Repurchase Program (the “A&R SRP”) that may provide an opportunity for stockholders to have their shares of common stock repurchased by us, subject to certain restrictions and limitations. On March 20, 2020, our board of directors decided to temporarily suspend repurchases under the A&R SRP effective with repurchase requests that would have been processed in April 2020 due to the negative impact of the COVID-19 pandemic on our portfolio at the time; provided, however, we continued to process repurchases due to death in accordance with the terms of our share repurchase program. On June 10, 2020, the board of directors determined to fully reopen the A&R SRP to all repurchase requests commencing in July 2020. Shares will be repurchased subject to and upon the terms and conditions of the A&R SRP and repurchase prices will be based upon the Estimated Per Share NAVs in accordance with the terms of the A&R SRP. Any unprocessed requests will automatically roll over to be considered for repurchase unless a stockholder withdraws the request for repurchase five business days prior to the next repurchase date. Refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the details of the A&R SRP.
During the three months ended June 30, 2023, we fulfilled repurchase requests and repurchased K-Shares pursuant to the A&R SRP as follows:
|
| Total Numbers of |
|
| Approximate Dollar | ||||
Shares Purchased as | Value of Shares | ||||||||
Total Number of | Part of Publicly | Available that may yet | |||||||
Shares Requested to | Announced Plans and | Average Price | be Repurchased under | ||||||
Period | be Repurchased (1) | Programs |
| Paid per Share |
| the Program | |||
April 2023 |
| 7,905 | 51,753 |
| $ | 10.21 |
| (2) | |
May 2023 |
| 36,437 | — |
| $ | — |
| (2) | |
June 2023 |
| 20,836 | — |
| $ | — |
| (2) | |
| 65,178 | 51,753 |
|
(1) | We generally repurchase shares within the six weeks following the end of each fiscal quarter in which repurchase requests are received. The shares repurchased in April 2023 related to repurchase requests received during the prior quarter. As of June 30, 2023, there were thirteen outstanding and unfulfilled repurchase requests for 59,587 K Shares and 5,591 K-I Shares. |
(2) | The number of shares that may be redeemed pursuant to the A&R SRP during any calendar year is limited to 5.0% of the weighted average number of K Shares, K-I Shares, and K-T Shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which repurchases are being paid (provided, however, that while shares subject to a repurchase requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be repurchased, shares subject to a repurchase requested upon the death of a stockholder will not be subject to the percentage cap). We will also limit repurchases to the net proceeds received pursuant to the DRIP. |
Our board of directors approved four outstanding repurchase requests received during the three months ended December 31, 2022, and, on January 12, 2023, we repurchased 20,900 K Shares for $211,517, or $10.12 per K Share. Our board of directors approved eight outstanding repurchase requests received during the three months ended March 31, 2023, and, on April 27, 2023, we repurchased 43,151 K Shares for $440,108 or $10.20 per K Share and 8,602 K-I Share for $88,516 or $10.29 per K-I Share. We received requests to repurchase 59,587 K Shares and 5,591 K-I Shares during the three months ended June 30, 2023, which are outstanding as of the date of this filing.
Our board of directors approved three outstanding repurchase requests received during the three months ended December 31, 2021, and, on January 11, 2022, we repurchased 7,500 K Shares for $68,950, or $9.19 per K Share, and
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1,613 K-I Shares for $15,758, or $9.77 per K-I Share. Our board of directors approved three outstanding repurchase requests that were received during the three months ended March 31, 2022, and, on April 12, 2022, we repurchased 37,500 K Shares for $369,375, or $9.85 per K Share. Our board of directors approved seven outstanding repurchase requests that were received during the three months ended June 30, 2022, and, on August 5, 2022, we repurchased 37,302 K Shares for $380,036 or $10.19 per K Share, 657 K-I Shares for $6,590 or $10.03 per K-I Share and 1,000 K-T Shares for $10,290 or $10.29 per K-T Share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act).
Item 6. Exhibits
The following exhibits are filed as a part of this report or incorporated by reference.
Exhibit No. |
| Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1 |
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4.2 |
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4.3 |
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10.1 | ||
10.2 | ||
10.3 | ||
31.1* |
| Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
| Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** |
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99.1 |
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101.INS* |
| Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
| Inline XBRL Schema Document. |
101.CAL* | Inline XBRL Calculation Linkbase Document. | |
101.DEF* | Inline XBRL Definition Linkbase Document. | |
101.LAB* | Inline XBRL Label Linkbase Document. | |
101.PRE* | Inline XBRL Presentation Linkbase Document. | |
104* | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
*Filed herewith.
**Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
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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.
| PROCACCIANTI HOTEL REIT, INC. | |
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Date: August 11, 2023 | By: | /s/ James A. Procaccianti |
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| James A. Procaccianti |
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| Chief Executive Officer, President and |
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| Chairman of the Board of Directors |
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| (Principal Executive Officer) |
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Date: August 11, 2023 | By: | /s/ Gregory Vickowski |
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| Gregory Vickowski |
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| Chief Financial Officer, Treasurer |
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| and Director |
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| (Principal Accounting Officer and |
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| Principal Financial Officer) |
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