UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
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LODGING FUND REIT III, INC.
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LODGING FUND REIT III, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | ||||
2022 | 2021 | |||||
Assets |
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Investment in hotel properties, net of accumulated depreciation of $ | $ | | $ | | ||
Cash and cash equivalents |
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Restricted cash |
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Accounts receivable, net |
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Franchise fees, net |
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Prepaid expenses and other assets |
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Total Assets | $ | | $ | | ||
Liabilities and Equity |
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Debt, net | $ | | $ | | ||
Finance lease liability | | — | ||||
Accounts payable |
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Accrued expenses |
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Distributions payable | | | ||||
Due to related parties |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (See Note 10) |
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Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders' equity | |
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Non-controlling interest - Series B LP Units |
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Non-controlling interest - Series GO LP Units | | | ||||
Non-controlling interest - Series T LP Units | | | ||||
Non-controlling interest - Common LP Units | | | ||||
Total equity |
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Total Liabilities and Equity | $ | | $ | |
See accompanying notes to consolidated financial statements.
2
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, | ||||||
| 2022 |
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Revenues |
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Room revenue | $ | | $ | | ||
Other revenue |
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Total revenue |
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Expenses |
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Property operations |
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General and administrative |
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Sales and marketing |
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Franchise fees |
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Management fees |
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Acquisition expense |
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Depreciation and amortization |
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Total expenses |
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Other Income (Expense) |
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Other income (expense), net |
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Interest expense |
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Total other income (expense) |
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Net Loss Before Income Taxes |
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Income tax benefit (expense) |
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Net Loss |
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Net loss attributable to non-controlling interest - Series B LP Units |
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Net loss attributable to non-controlling interest - Series GO LP Units | ( | ( | ||||
Net loss attributable to non-controlling interest - Common LP Units | ( | — | ||||
Net Loss Attributable to Common Stockholders | $ | ( | $ | ( | ||
Basic and Diluted Net Loss Per Share of Common Stock | ( | ( | ||||
Weighted-average Shares of Common Stock Outstanding, Basic and Diluted |
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See accompanying notes to consolidated financial statements.
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LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Common Stock | Non-Controlling Interest | ||||||||||||||||||||||||||||
Additional | Total | ||||||||||||||||||||||||||||
Par | Paid-In | Accumulated | Stockholders' | Series B | Series GO | Series T | Common | Total | |||||||||||||||||||||
| Shares |
| Value |
| Capital |
| Deficit |
| Equity |
| LP Units | LP Units | LP Units | LP Units |
| Equity | |||||||||||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | — | $ | — | $ | | |||||||||
Issuance of common stock | | | | — |
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Issuance of GO Units | — | — | — | — | — | — | | — | — | | |||||||||||||||||||
Issuance of T Units | — | — | — | — | — | — | — | | — | | |||||||||||||||||||
Offering costs | — | — | — | ( |
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Distributions declared ($ | — | — | — | ( |
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| ( | — | — | — |
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Distributions reinvested | | | | — | | — | — | — | — | | |||||||||||||||||||
Redemptions | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Net loss | — | — | — | ( |
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Balance at March 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | — | $ | | ||||||||||
Balance at December 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||||||
Issuance of common stock | | | | — |
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Issuance of GO Units | — | — | — | — | — | — | | — | — | | |||||||||||||||||||
Issuance of T Units | — | — | — | — | — | — | — | | — | | |||||||||||||||||||
Issuance of Common LP Units | — | — | — | — | — | — | — | — | | | |||||||||||||||||||
Offering costs | — | — | — | ( |
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Distributions declared ($ | — | — | — | ( |
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| ( | — | — | ( |
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Distributions reinvested | | | | — | | — | — | — | — | | |||||||||||||||||||
Redemptions | ( | ( | ( | — | ( | — | — | — | — | ( | |||||||||||||||||||
Net loss | — | — | — | ( |
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Balance at March 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | |
See accompanying notes to consolidated financial statements.
4
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash Flows from Operating Activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash used in operating activities: |
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Depreciation |
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Stock-based compensation expense | | — | ||||
Amortization |
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Gain on PPP loan forgiveness | — | ( | ||||
Loss on disposal of fixed assets | ( | — | ||||
Deferred tax assets, net | ( | — | ||||
Change in operating assets and liabilities: |
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Accounts receivable |
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Franchise fees |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued expenses |
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Due to related parties |
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Other liabilities |
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Net cash used in operating activities |
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Cash Flows from Investing Activities: |
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Acquisitions of hotel properties |
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Improvements and additions to hotel properties |
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Net cash used in investing activities |
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Cash Flows from Financing Activities: |
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Proceeds from mortgage debt |
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Proceeds from lines of credit | | | ||||
Proceeds from PPP loans | — | | ||||
Principal payments on mortgage debt |
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Principal payments on lines of credit | ( | ( | ||||
Payments of deferred financing costs |
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Increase in finance lease liability | | — | ||||
Proceeds from issuance of common stock |
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Proceeds from issuance of GO Units | | | ||||
Payments of offering costs |
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Distributions paid |
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Net cash provided by financing activities |
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Net change in cash, cash equivalents, and restricted cash |
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Beginning Cash, Cash Equivalents, and Restricted Cash |
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Ending Cash, Cash Equivalents, and Restricted Cash | $ | | $ | |
See accompanying notes to consolidated financial statements.
5
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Three Months Ended March 31, | ||||||
2022 |
| 2021 | ||||
Supplemental Disclosure of Cash Flow Information: |
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Interest paid, net of amounts capitalized | $ | | $ | | ||
Income taxes paid | $ | — | $ | | ||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
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Issuance of T Units for Aurora property | $ | — | $ | | ||
Issuance of T Units for Fargo property | $ | | $ | — | ||
Issuance of T Units for Lakewood property | $ | | $ | — | ||
Issuance of Common LP Units for El Paso Airport property | $ | | $ | |||
Debt issued for acquisition of Aurora property | $ | — | $ | | ||
Debt assumed for acquisition of Fargo property | $ | | $ | — | ||
Debt issued for acquisition of El Paso Airport property | $ | | $ | — | ||
Debt issued for acquisition of Lakewood property | $ | | $ | — | ||
Offering costs included in accounts payable | $ | | $ | | ||
Offering costs included in due to related parties | $ | | $ | | ||
Offering costs included in accrued expenses | $ | — | $ | ( | ||
Distributions included in due to related parties | $ | | $ | | ||
Redemptions included in other liabilities | $ | | $ | — | ||
Reinvested distributions | $ | | $ | | ||
Initial ASC 842 adoption of right-of-use asset | $ | | $ | — | ||
Reconciliation of Cash, Cash Equivalents, and Restricted Cash: | ||||||
Cash and cash equivalents, beginning of period | $ | | $ | | ||
Restricted cash, beginning of period | | | ||||
Cash, cash equivalents, and restricted cash, beginning of period | $ | | $ | | ||
Cash and cash equivalents, end of period | $ | | $ | | ||
Restricted cash, end of period | | | ||||
Cash, cash equivalents, and restricted cash, end of period | $ | | $ | |
See accompanying notes to consolidated financial statements.
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LODGING FUND REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
Lodging Fund REIT III, Inc. (“LF REIT III”), was formed on April 9, 2018 as a Maryland corporation. LF REIT III, together with its subsidiaries (the “Company”), was formed for the principal purpose of acquiring, through purchase or contribution, direct or indirect ownership interests in a diverse portfolio of limited-service, select-service, full-service and extended-stay hotel properties located primarily in “America’s Heartland,” which the Company defines as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. LF REIT III has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2018. The Company’s business activities are directed and managed by Legendary Capital REIT III, LLC (the “Advisor”) and its affiliates, which are related parties through common management, pursuant to the Amended and Restated Advisory Agreement (the “Advisory Agreement”), dated June 1, 2018. The Company has no foreign operations or assets and its operating structure includes only
Substantially all of the Company’s assets and liabilities are held by, and substantially all of its operations are conducted through, Lodging Fund REIT III OP, LP (the “Operating Partnership,” or “OP”), a subsidiary of LF REIT III. The OP has
On June 1, 2018, the Company commenced a private offering of shares of common stock, $
On April 29, 2020, the Company classified and designated
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $
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Company’s board of directors terminated the GO Unit Offering as of February 14, 2022. As of March 31, 2022, the Operating Partnership had issued and sold
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2022, the Operating Partnership had issued and sold
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation—The accompanying consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the SEC applicable to annual financial information. The consolidated financial statements include the accounts of LF REIT III, the OP and its wholly-owned subsidiaries. For the controlled subsidiaries that are not wholly-owned, the interests owned by an entity other than the Company represent a noncontrolling interest, which is presented separately in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of the Company’s consolidated financial statements and the accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During the first quarter of 2020, the global outbreak of COVID-19 was identified and has since spread to nearly every country and territory, including every state in the United States. The COVID-19 pandemic and the related governmental restrictions instituted to slow the spread of the virus continues to adversely impact many industries, with the travel and hospitality industries being particularly adversely affected. Although our hotel properties have remained open through the pandemic, our occupancy levels have been lower than historical levels. The outbreak could have a continued adverse impact on economic and market conditions and could trigger a continued slowdown in leisure and business travel, which is adversely impacting the travel and hospitality industries. Further, increasing labor costs and shortages, supply chain disruptions and related commodity and other price inflation resulting from the COVID-19 pandemic may cause an increase in renovation, construction and operating costs, may limit our access to critical operating supplies, and may continue to adversely affect our hotel operations and financial results. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the
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information available as of March 31, 2022, however uncertainty over the ultimate impact COVID-19, including the continued emergence of new strains of COVID-19, such as the Delta and Omicron variant, will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19.
The Company has taken significant measures to mitigate the negative financial and operational impacts of COVID-19 on the Company. The Company has made changes to our business and investment strategies that are expected to enhance the Company’s liquidity and reduce costs, including payment of distributions in stock, in part or in whole, pursuant to the DRIP, deferring most non-essential capital projects, obtaining waivers under and amendments to the Company’s credit agreements.
Revenue Recognition—Revenues consist of amounts derived from hotel operations, including room sales and other hotel revenues, and are presented on a disaggregated basis in the Company’s consolidated statements of operations. These revenues are recorded net of any sales and occupancy taxes collected from the hotel guests. All revenues are recorded on an accrual basis as they are earned. Any cash received prior to a guest’s arrival is recorded as an advance deposit from the guest and recognized as revenue at the time of the guest’s occupancy at the hotel property.
Investment in Hotel Properties—The Company evaluates whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of the Company’s acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions are capitalized and transaction costs associated with business combinations would be expensed as incurred.
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, the Company allocates the purchase price among the assets acquired and the liabilities assumed on a relative fair value basis at the date of acquisition. The Company determines the fair value of assets acquired and liabilities assumed with the assistance of third-party valuation specialists, using cash flow analysis as well as available market and cost data. The determination of fair value includes making numerous estimates and assumptions.
The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed debt liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of
The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the property to the estimated future undiscounted cash flows of the property, which take into account current market conditions, including the impact of COVID-19, and the Company’s intent with respect to holding or disposing of the hotel properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the industry and the economy in general and the Company’s expected use of the underlying hotel
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properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and the Company’s ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.
Advertising Costs—The Company expenses advertising costs as incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and expenses that are directly attributable to advertising and promotion. Advertising expense was $
Non-controlling Interest—Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the Company. Non-controlling interests are reported in the consolidated balance sheets within equity, separate from stockholders’ equity. Revenue and expenses attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations, with net income or loss attributable to non-controlling interests reported separately from net income or loss attributable to the Company.
Cash and Cash Equivalents—Cash and cash equivalents include cash in bank accounts as well as highly liquid investments with an original maturity of three months or less. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed federally insured levels.
Restricted Cash—Restricted cash primarily consists of earnest money deposits related to hotel property acquisitions, as well as certain funds maintained in escrow accounts to fund future payments for insurance, property tax obligations, and reserves for future capital expenditures, as required by our debt agreements.
Accounts Receivable—Accounts receivable consist primarily of receivables due from hotel guests for room stays and meeting and banquet room rentals, which are uncollateralized customer obligations. Management determines the likelihood of collectability of receivables on an individual customer basis, based on the amount of time the balance has been outstanding, likelihood of collecting, and the customer’s current economic status. The carrying amount of the accounts receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.
Deferred Financing Costs—Deferred financing costs represent origination fees, legal fees, and other costs associated with obtaining financing. Deferred financing costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The Company expenses unamortized deferred financing costs when the associated financing agreement is refinanced or repaid before maturity unless certain criteria are met that would allow for the carryover of such costs to the refinanced agreement. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed.
Offering Costs—The Company has incurred certain costs related directly to the Company’s private offerings consisting of, among other costs, commissions, legal, due diligence costs, printing, marketing, filing fees, postage, data processing fees, and other offering related costs. These costs are capitalized and recorded as a reduction of equity proceeds on the accompanying consolidated balance sheets.
Property Operations Expenses—Property operations expenses consist of expenses related to room rental, food and beverage sales, telephone usage, and other miscellaneous service costs, as well as all costs of operating the Company’s hotel properties such as building repairs, maintenance, property taxes, utilities, and other related costs.
Property Management Fees—Property management fees include expenses incurred for management services provided for the day-to-day operations of our hotel properties, which are generally charged at a rate of
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Property management fees also include asset management fees, which may be charged at an annual rate of up to
Franchise Fees—The Company pays initial fees related to hotel franchise rights prior to acquiring a hotel property. The fees are included in prepaid expenses and other assets until the time the related hotel property is acquired. Initial franchise fees related to hotel properties that are acquired are amortized on a straight-line basis over the life of the agreement. Initial franchise fees related to hotel properties that are not acquired are refunded to the Company, net of any associated fees, and any fees are expensed as incurred. Franchise fees on the accompanying consolidated statements of operations include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, and reservation fees and other related costs.
Acquisition Costs—The Company incurs costs during the review of potential hotel property acquisitions including legal fees, environmental reviews, market studies, financial advisory services, and other professional service fees. If the Company does complete a property acquisition, an acquisition fee of up to
Stock-Based Compensation—During 2022, the Company began compensating its independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and we recognize stock-based compensation expense based on the award’s fair value at the grant date. Compensation expense related to stock awards is determined on the grant date based on the offering price of our common stock and is charged to earnings when issued. Stock-based compensation expense was $
Net Loss Per Share of Common Stock—Basic net loss per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net loss per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net loss per common share were the same for the periods presented.
Income Taxes—The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.
As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates and it may not be able to qualify as a REIT for four subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to U.S. federal income and excise taxes on undistributed taxable income. Taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiary (“TRS”) is subject to U.S. federal, state, and local income taxes at the applicable rates.
The TRS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income
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tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company performs periodic reviews for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements.
Fair Value Measurement—The Company establishes fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs such as quoted prices in active markets.
Level 2—Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3—Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
The Company’s estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
Accounting Standards Recently Adopted—The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer the adoption of new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (“ASU No. 2016-02”) (Topic 842), which replaces Leases (Topic 840), and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance under Leases (Topic 840), for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The Company adopted this standard effective January 1, 2022, electing to recognize and measure its leases prospectively at the beginning of the period of adoption, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company’s historical accounting policy.
At adoption of the new standard, the Company recorded a right-of-use asset and lease liability for its Sheraton Northbrook, Illinois hotel property (the "Northbrook Property") ground lease measured at the estimated present value of the remaining minimum lease payments under the lease. The Company’s ground lease is classified as a financing lease under Topic 842. For this finance lease, effective January 1, 2022, the Company began recognizing depreciation and amortization expense and interest expense in the Company’s consolidated statements of operations instead of ground lease rent expense. While the total expense recognized over the life of a lease is unchanged, the timing of expense recognition for finance leases results in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. In addition to recording operating and financing right-of-use assets and lease liabilities, the Company also reclassified at adoption its intangible liability for its above market ground lease to the beginning right-of-use asset. See Note 3 for more information regarding the Company’s lease assets and liabilities.
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3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of March 31, 2022 and December 31, 2021 consisted of the following:
| March 31, | December 31, | ||||
2022 | 2021 | |||||
Land and land improvements | $ | | $ | | ||
Building and building improvements |
| |
| | ||
Furniture, fixtures, and equipment |
| |
| | ||
Finance ground lease assets | | — | ||||
Construction in progress | | | ||||
Investment in hotel properties, at cost | |
| | |||
Less: accumulated depreciation |
| ( |
| ( | ||
Investment in hotel properties, net | $ | | $ | |
As of March 31, 2022, the Company owned
Acquisitions of Hotel Properties
The Company acquired
2022 Acquisitions | ||||||||||||||||||||
|
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| Number |
|
|
|
|
| |||||||||||
Date | of Guest | Purchase | Transaction | % |
| |||||||||||||||
Hotel | Property Type | Location | Acquired | Rooms | Price | Costs | Total | Interest |
| |||||||||||
Hampton Inn & Suites | Limited-Service | Fargo, ND | January 18, 2022 | | | (1) | | | | % | ||||||||||
Courtyard by Marriott | Select-Service | El Paso, TX | February 8, 2022 | | | (2) | | | | % | ||||||||||
Fairfield Inn & Suites | Limited-Service | Lakewood, CO | March 29, 2022 | | | (3) | | | | % | ||||||||||
| | $ | | $ | | $ | |
(1) | Includes the issuance of $ |
(2) | Includes the issuance of $ |
(3) | Includes the issuance of $ |
The table below outlines the details of the properties acquired during the year ended December 31, 2021.
2021 Acquisitions | ||||||||||||||||||||
|
|
|
| Number |
|
|
|
|
| |||||||||||
Date | of Guest | Purchase | Transaction | % |
| |||||||||||||||
Hotel | Property Type | Location | Acquired | Rooms | Price | Costs | Total | Interest |
| |||||||||||
Courtyard by Marriott |
| Select-Service |
| Aurora, CO | February 4, 2021 | | $ | | (1) | $ | | $ | | | % | |||||
Holiday Inn | Select-Service | El Paso, TX | May 12, 2021 | | | (2) | | | | % | ||||||||||
Hilton Garden Inn | Select-Service | Houston, TX | August 3, 2021 | | | (3) | | | | % | ||||||||||
Sheraton Hotel | Full-Service | Northbrook, IL | December 3, 2021 | | | (4) | | | | % | ||||||||||
| | $ | | $ | | $ | |
(1) | Includes the issuance of $ |
(2) | Includes the issuance of $ |
(3) | Includes the issuance of $ |
(4) | Includes the issuance of $ |
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Q1 2022 Property Acquisitions
Hampton Inn & Suites Fargo Medical Center – Fargo, North Dakota
On January 18, 2022, the Operating Partnership acquired a Hampton Inn & Suites hotel property in Fargo, North Dakota (the “Fargo Property”) pursuant to an Amended and Restated Contribution Agreement (the “Fargo Amended Contribution Agreement”), dated as of the same date. The aggregate consideration under the Fargo Amended Contribution Agreement was $
The assumed loan had a fixed interest rate of
The New Loan Agreement requires the maintenance of covenants concerning an annual debt service coverage ratio beginning for each fiscal year beginning December 31, 2023, the maintenance of a replacement reserve account beginning 30 days after loan origination and the monthly escrow for property taxes as further described in the New Loan Agreement. The New Loan Agreement contains customary events of default, including payment defaults, as further described therein. If an event of default occurs under the New Loan Agreement, the New Lender may accelerate the repayment of amounts
14
outstanding under the New Loan Agreement and exercise other remedies subject, in certain instances, to the expiration of applicable cure periods.
Pursuant to the New Loan Agreement, the Operating Partnership entered into a Guaranty (the “OP Guaranty”) with the New Lender to guarantee payment when due of the loan amount and the performance of the agreements of Borrower contained in the loan documents, as further described in the OP Guaranty. Further, Corey Maple, a director and executive officer of the Company, entered into a Guaranty (the “Maple Guaranty”) with the New Lender to guarantee payment, when due, of the loan amount and any additional amounts due by the Borrower under the loan documents at that time, as further described in the Maple Guaranty.
In connection with the acquisition, the Company entered into a Management Agreement with KAJ Hospitality Inc. (“KAJ”) (the “KAJ Management Agreement”) to provide property management and hotel operations management services for the Fargo Property. The KAJ Management Agreement has an initial term of
The Company funded the acquisition of the Fargo Property with proceeds from its ongoing private offerings, Series T LP Units issued to the Contributor as described above, and an assumed loan secured by the Fargo Property. The Fargo Property is a
Courtyard El Paso Airport – El Paso, Texas
On February 8, 2022, the Operating Partnership acquired a Courtyard by Marriott hotel property in El Paso, Texas (the “El Paso Airport Property”) pursuant to an Amended and Restated Contribution Agreement (the “El Paso Airport Amended Contribution Agreement”), dated as of the same date. The aggregate consideration under the El Paso Airport Amended Contribution Agreement was $
In connection with the acquisition, the Company entered into a Management Agreement with Aimbridge Hospitality, LLC (“Aimbridge”) (the “Aimbridge Management Agreement”) to provide property management and hotel operations management services for the El Paso Airport Property. The Aimbridge Management Agreement has an initial term of
15
reimburses Aimbridge for certain costs of operating the property incurred on behalf of the Company. All reimbursements are paid to Aimbridge at cost. The Aimbridge Management Agreement may be terminated upon the occurrence of an Event of Default (as defined in the Aimbridge Management Agreement), subject in certain cases to applicable notice and cure periods as described in the Aimbridge Management Agreement. The Company may terminate the Aimbridge Management Agreement in connection with the sale of the El Paso Airport Property upon at least ninety days’ written notice to Aimbridge and the payment of a termination fee, the amount of which varies depending on the timing of such termination.
The Company funded the acquisition of the El Paso Airport Property with proceeds from its ongoing private offerings, Common Limited Units issued to the Contributor as described above, and a new loan secured by the El Paso Airport Property. The El Paso Airport Property is a
Fairfield Inn & Suites Denver Southwest Lakewood – Lakewood, Colorado
On March 29, 2022, the Operating Partnership acquired a Fairfield Inn & Suites hotel property in Lakewood, Colorado (the “Lakewood Property”) pursuant to an Amended Contribution Agreement (the “Lakewood Amended Contribution Agreement”), dated as of March 22, 2022. The aggregate consideration under the Lakewood Amended Contribution Agreement was $
The new loan has a fixed interest rate of
In addition to the $
In connection with the acquisition, the Company entered into a Management Agreement with NHS, LLC dba National Hospitality Services (“NHS”), an affiliate of the Advisor which is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor, to provide property management and hotel operations management services for the Lakewood Property. The agreement has an initial term expiring on December 31, 2027, which automatically renews for a period of
16
the property incurred on behalf of the Company. All reimbursements are paid to NHS at cost, and the agreement can be terminated at any time without liquidated damages.
The Company funded the acquisition of the Lakewood Property with proceeds from its ongoing private offerings, Series T LP Units issued to the Contributor as described above, and a new loan secured by the Lakewood Property. The Lakewood Property is a
The aggregate purchase price for the hotel properties acquired during the three months ended March 31, 2022 and the year ended December 31, 2021 were allocated as follows:
March 31, | December 31, | |||||
| 2022 | 2021 | ||||
Land and land improvements | $ | | $ | | ||
Building and building improvements |
| |
| | ||
Furniture, fixtures, and equipment |
| |
| | ||
Total assets acquired |
| |
| | ||
Above market ground lease(1) |
| — |
| ( | ||
Total liabilities assumed | — | ( | ||||
Total purchase price(2) | $ | | $ | |
(1) | The above market ground lease is recognized on the consolidated balance sheet within Other Liabilities as of December 31, 2021. See Above Market Ground Lease discussion below. |
(2) | Total purchase price includes purchase price plus all transaction costs. |
Above Market Ground Lease
On December 3, 2021, in connection with the purchase of the Northbrook Property, the Company recognized an above market ground lease liability of $
Upon adoption of ASU No. 2016-02 on January 1, 2022, the Company derecognized the above market ground lease liability by reclassifying it as a partial offset to the beginning right-of-use asset related to this financing lease. At adoption of the new standard, the Company recognized a lease liability of $
The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the finance lease liability included in the Company’s consolidated balance sheet as of March 31, 2022.
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total finance lease payments | | ||
Interest | ( | ||
Present value of finance lease liabilities | $ | |
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4. DEBT
Lines of Credit
On February 10, 2020, the Company entered into a $
Mortgage Debt
As of March 31, 2022, the Company had $
As of March 31, 2022, the Company was not in compliance with the required financial covenants under the terms of its promissory note secured by the Pineville Property and related loan documents (the “Pineville Loan”), which constitutes an event that puts the Company into a trigger period pursuant to the loan documents. The Company has requested but not yet received a waiver of the financial covenants for period ending March 31, 2022. Except as described above for the Pineville Loan, the Company was in compliance with all debt covenants as of March 31, 2022.
Paycheck Protection Program (“PPP”) Loans
In April 2020, the Company entered into
In January 2021, the Company entered into
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In February 2021, the Company, through its subsidiary LF3 Southaven TRS, LLC (“Southaven TRS”), entered into an unsecured promissory note under the PPP through Western State Bank. The amount of the PPP loan for Southaven TRS was $
In April 2021, the Company, through its subsidiary Southaven TRS, entered into an unsecured promissory note under the Second Draw PPP created by the CAA Act, through Western State Bank (the “Southaven TRS Second Draw PPP”). The term of the Southaven Second Draw PPP loan was
Under the terms of the CARES Act and the CAA Act, as applicable, PPP loan recipients and Second Draw PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of such loans. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs, the maintenance of employee and compensation levels and certain other approved expenses. In February 2021, the Company applied for and received
The following table sets forth the hotel properties securing each loan, the interest rate, maturity date, and the outstanding balance as of March 31, 2022 and December 31, 2021 for each of the Company’s mortgage debt obligations, respectively.
| Interest | Outstanding | Outstanding | |||||||
Rate as of | Balance as of | Balance as of | ||||||||
March 31, | Maturity | March 31, | December 31, | |||||||
2022 | Date | 2022 | 2021 | |||||||
Holiday Inn Express - Cedar Rapids(1) |
| 9/1/2024 | $ | | $ | | ||||
Hampton Inn & Suites - Pineville |
| 6/6/2024 |
| |
| | ||||
Hampton Inn - Eagan |
| 1/1/2025 |
| |
| | ||||
Home2 Suites - Prattville |
| 8/1/2024 |
| |
| | ||||
Home2 Suites - Lubbock | 10/6/2026 | | | |||||||
Fairfield Inn & Suites - Lubbock | 4/6/2029 | | | |||||||
Homewood Suites - Southaven | 3/3/2025 | | | |||||||
Courtyard by Marriott - Aurora(2)(3) | 2/5/2024 | | | |||||||
Holiday Inn - El Paso(3) | 5/15/2023 | | | |||||||
Hilton Garden Inn - Houston(4) | 9/2/2026 | | | |||||||
Sheraton - Northbrook(3)(5) | 12/5/2024 | | | |||||||
Hampton Inn - Fargo | 3/1/2027 | | — | |||||||
Courtyard by Marriott - El Paso(3)(6) | 2/8/2023 | | — | |||||||
Fairfield Inn & Suites - Lakewood(3) | 3/29/2023 | | — | |||||||
Total Mortgage Debt |
| |
| | ||||||
Premium on assumed debt, net |
| |
| | ||||||
Deferred financing costs, net | ( | ( | ||||||||
Net Mortgage | | | ||||||||
$ | 5/10/2022 | | | |||||||
Total Lines of Credit | | | ||||||||
PPP Loan(8) | - | 4/8/2026 | — | — | ||||||
Debt, net | $ | | $ | |
(1) | Loan is interest-only through April 30, 2022 and is at a fixed rate of interest. |
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(2) | Variable interest rate equal to 30-day LIBOR plus |
(3) | Loan is interest-only until maturity. |
(4) | Loan is interest-only for the first |
(5) | Variable interest rate equal to 30-day LIBOR or equivalent rate plus |
(6) | On May 13, 2022, the Company refinanced this loan (See Note 11). |
(7) | Variable interest rate equal to U.S. Prime Rate plus |
(8) | The Company received forgiveness on the full balance of all PPP loans during the year ended December 31, 2021. |
Future Minimum Payments
As of March 31, 2022, the future minimum principal payments on the Company’s debt were as follows:
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
| |||
Premium on assumed debt, net |
| | |
Deferred financing costs, net |
| ( | |
$ | |
The $
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments as of March 31, 2022 and December 31, 2021 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, lines of credit, and mortgage debt. With the exception of the Company’s mortgage debt, the carrying amounts of the financial instruments presented in the consolidated financial statements approximate their fair value as of March 31, 2022 and December 31, 2021. The fair value of the Company’s mortgage debt was estimated by discounting each loan’s future cash flows over the remaining term of the mortgage using current borrowing rates for debt instruments with similar terms and maturities, which are Level 3 inputs in the fair value hierarchy. As of , the estimated fair value of the Company’s mortgage debt and the gross carrying value were both $
6. INCOME TAXES
The Company’s earnings (losses), other than those generated by the Company’s TRS, are not generally subject to federal corporate and state income taxes due to the Company’s REIT election. The Company did
20
income taxes for the periods ended March 31, 2022 and 2021. The Company did not have any uncertain tax positions as of March 31, 2022 or December 31, 2021.
The Company’s TRS generated a net operating loss (“NOL”) for the three months ended March 31, 2022 and for the year ended December 31, 2021, which can be carried forward to offset future taxable income. As of March 31, 2022 and December 31, 2021, the Company had recorded net deferred tax assets of $
The CARES Act contains numerous income tax provisions, such as temporarily relaxing limitations on the deductibility of interest expense, accelerating depreciable lives of certain qualified building improvements, and allowing for NOL’s arising in tax years beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the preceding 5-year periods. In addition, for tax years beginning prior to 2021, the CARES Act removed the 80% absorption limitation previously enacted under the Tax Cuts and Jobs Act of 2017. The income tax aspects of the CARES Act are not expected to have a material impact on the Company’s financial statements.
7. RELATED PARTY TRANSACTIONS
Legendary Capital REIT III, LLC—Substantially all of the Company’s business is managed by the Advisor and its affiliates, pursuant to the Advisory Agreement. The Advisor is owned by Corey R. Maple and Norman H. Leslie. The Company has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services. The Company reimburses the Advisor and its affiliates, at cost, for certain expenses incurred on behalf of the Company, as described in more detail below. The Advisory Agreement has a term of
The Advisor earns a one-time acquisition fee of up to
Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements. In years other than the year of liquidation, after the Company’s common stockholders have received a
21
contributions plus a
The Advisor and its affiliates may be reimbursed by the Company for certain organization and offering expenses in connection with the Company’s securities offerings, including legal, printing, marketing and other offering-related costs and expenses. Following the termination of the Offering, the Advisor will reimburse the Company for any such amounts incurred by the Company in excess of
Fees and reimbursements earned and payable to the Advisor and its affiliates, for the three months ended March 31, 2022 and 2021, were as follows:
Incurred | ||||||
For the Three Months Ended March 31, | ||||||
2022 | 2021 | |||||
Fees: |
|
|
| |||
Acquisition fees | $ | | $ | | ||
Financing fees |
| |
| | ||
Asset management fees |
| |
| | ||
$ | | $ | | |||
Reimbursements: |
|
|
| |||
Offering costs | $ | | $ | | ||
General and administrative |
| |
| | ||
Sales and marketing |
| |
| | ||
Acquisition costs | | | ||||
$ | | $ | |
For the three months ended March 31, 2022 and 2021, the Operating Partnership recognized distributions payable to the Advisor in the amount of $
The members of the Advisor personally guaranty certain loans of the Company and may receive a guarantee fee of up to
22
As of March 31, 2022 and December 31, 2021, the Company had amounts due and payable to the Advisor and its affiliates of $
NHS, LLC dba National Hospitality Services—NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. NHS provides property management and hotel operations management services for the Company’s hotel properties, pursuant to individual management agreements. The agreements have an initial term expiring on December 31 of the fifth full calendar year following the effective date of the agreement, which automatically renews for a period of
NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties equal to
NHS also earns a flat fee of $
Fees and reimbursements earned by NHS for the three months ended March 31, 2022 and 2021, and fees and reimbursements payable to NHS for the three months ended March 31, 2022 and year ended December 31, 2021 were as follows:
Incurred | Payable as of | |||||||||||
For the Three Months Ended March 31, | March 31, | December 31 | ||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Fees: |
|
|
| |||||||||
Management fees | $ | | $ | | $ | | $ | | ||||
Administrative fees |
| |
| |
| |
| | ||||
Accounting fees |
| |
| |
| |
| | ||||
$ | | $ | | $ | | $ | | |||||
Reimbursements | $ | | $ | | $ | | $ | |
One Rep Construction, LLC (“One Rep”)—One Rep is a related party through common management and ownership, as Corey Maple, Norman , and David , each hold a
Legendary A-1 Bonds, LLC (“A-1 Bonds”) – A-1 Bonds is an affiliate of the Advisor which is owned by Mr. Leslie and Mr. Maple, each a director and executive officer of the Company and principal of the Advisor. During the three months ended March 31, 2022, A-1 Bonds made a loan in the amount of $
23
the El Paso Airport Property and a loan in the amount of $
8. FRANCHISE AGREEMENTS
As of March 31, 2022 and December 31, 2021, all of the Company’s hotel properties were operated under franchise agreements with initial terms of
9. STOCKHOLDERS’ EQUITY
The Company is authorized to issue
Common Stock
Initial Offering
On June 1, 2018, the Company commenced a private offering of shares of common stock, $
Dividend Reinvestment Plan
The Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company, purchasing shares of common stock at
24
Distributions
Distributions are determined by the board of directors based on the Company’s financial condition and other relevant factors.
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2022 | $ | | $ | | $ | | $ | | $ | | $ | ( | ||||||
$ | | $ | | $ | | $ | | $ | | $ | ( | |||||||
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2021 | $ | | $ | | $ | | $ | | $ | | $ | ( | ||||||
Second Quarter 2021 | | | | | | | ||||||||||||
Third Quarter 2021 | | | | | | | ||||||||||||
Fourth Quarter 2021 | | | | | | ( | ||||||||||||
$ | | $ | | $ | | $ | | $ | | $ | ( |
(1) | Distributions for the periods from January 1, 2021 through March 31, 2022 were based on daily record dates and were calculated based on stockholders of record each day during this period at a rate of $ |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) | Beginning the second quarter of 2020 through the second quarter of 2021, distributions were paid on a quarterly basis. Beginning in the third quarter of 2021, distributions were paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the tenth day of the following month. |
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable its stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The price at which the Company will repurchase shares is dependent on the amount of time the holder has owned the shares, and the then current value of the shares. There are several limitations on the Company’s ability to repurchase shares under the share repurchase plan, including, but not limited to, a limitation that during any calendar year, the maximum number of shares potentially eligible for repurchase can only be the number of shares that the Company could purchase with the amount of net proceeds from the sale of shares under the Company’s dividend reinvestment plan during the prior calendar year. The board of directors may, in its sole discretion, reject any request for repurchase and may, at any time and without stockholder approval, upon
25
Interval Common Stock
Distributions
Holders of shares of Interval Common Stock will be entitled to receive, when and as authorized by the board of directors of the Company and declared by the Company, distributions at a rate equal to
Repurchase Plan
The board of directors has adopted a repurchase plan for the Interval Common Stock (the “Repurchase Plan”). The Repurchase Plan is generally available to holders of Interval Common Stock who have held their shares of Interval Common Stock (“Interval Shares”) for at least
The Company will establish a reserve (the “Repurchase Reserve”) of liquid assets in an amount equal to
The board of directors may, upon
Interval Share Offering
The Company offered up to
Non-Controlling Interests
The Operating Partnership currently has 4 classes of Limited Partner Units which include the Common LP Units, the Series B LP Units, the Series T LP Units and the GO Limited Units. The Series B LP Units are issued to the Advisor and
26
entitle the Advisor to receive annual distributions and an incentive distribution based on the net proceeds received from the sale of the Projects.
Non-Controlling Interest – Series T LP Units
The Series T LP Units are expected to be issued to persons who contribute their property interests in certain Projects to the Partnership in exchange for Series T LP Units. The Series T LP Units will have allocations and distributions as determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units, and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning
Non-Controlling Interest – Series GO LP Units
Distributions
The holders of Series GO LP Units will not receive any distributions from the Operating Partnership until after they have held their Series GO LP Units for a period of
Upon the sale of all or substantially all of the GP Units held by LF REIT III or any sale, exchange or merger of LF REIT III or the Operating Partnership (each, a “Termination Event”), or with respect to proceeds received upon the sale or exchange of a property which are not reinvested in additional properties, distributions will be made between the Series GO LP Units and the other Participating Partnership Units as follows: (i) first, to the Participating Partnership Units in proportion to their Partnership Units until the GP Units (the Common LP Units and the Interval Units) have received
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $
27
Non-Controlling Interest – Series B LP Units
Distributions
Under the Operating Partnership Agreement, the Advisor, as the Series B Limited Partner, will receive from the Operating Partnership, distributions as follows: (a) for all years, an amount equal to
Series B LP Unit Offering
As of March 31, 2022, the Operating Partnership has issued
Non-Controlling Interest – Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2022, the Operating Partnership had issued and sold
28
10. COMMITMENTS AND CONTINGENCIES
Impact of COVID-19 — As further discussed in Note 2, the full extent of the impact of COVID-19 on the U.S. and world economies generally, and the Company’s business in particular, is uncertain. As of March 31, 2022, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.
Legal Matters— From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations, cash flows or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.
The SEC is conducting an investigation related to the Company’s reimbursement of and financial accounting for certain expenses incurred by the Advisor, as well as the adequacy of its disclosures related to those policies and practices. The Company is cooperating with the SEC and has produced documents and other information requested by the SEC. The Advisor has retained independent counsel and is also cooperating with the SEC inquiry. The Company remains committed to maintaining the highest standards for compliance with securities regulations and will continue to work with the SEC to address and resolve any questions or concerns that the SEC may raise. At this time, the Company is unable to estimate the cost of complying with the inquiry or its outcome.
Property Acquisitions
The seller of the Pineville Property, may be entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income (“NOI”) for a selected 12-month period of time. At any time during the period beginning April 1, 2021 through the date of the final NOI determination (on or about April 30, 2023), the seller of the property may make a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, is based on the excess of the property’s actual NOI over a base NOI for the applicable 12-month calculation period divided by the stated cap rate for such calculation period. As of March 31, 2022, no additional consideration had paid to the seller of the Pineville Property, and no election to receive the additional consideration had been made.
In November 2019, the Company entered into a purchase agreement, to acquire
Contribution Agreements Entered into During Three Months Ended March 31, 2022
On February 1, 2022, the Operating Partnership and RLC V RIFC, LLC (the “RI Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “RI Contribution Agreement”), pursuant to which the RI Contributor agreed to contribute the
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Partnership of existing debt secured by the RI Hotel Property. The remaining consideration consists of the issuance by the Operating Partnership of Series T LP Units of the Operating Partnership. As required by the RI Contribution Agreement, the Operating Partnership deposited $
On February 1, 2022, the Operating Partnership and RLC-IV CYFC, LLC (the “CY Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “CY Contribution Agreement”), pursuant to which the CY Contributor agreed to contribute the
On March 21, 2022, the Operating Partnership and Smith/Curry Hotel Group HH-Harris, LLC (the “Charlotte HGI Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Charlotte HGI Contribution Agreement”), pursuant to which the Charlotte HGI Contributor agreed to contribute the
On March 21, 2022, the Operating Partnership and Smith/Curry Hotel Group Pineville II, LLC (the “Pineville HGI Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Pineville HGI Contribution Agreement”), pursuant to which the Pineville HGI Contributor agreed to contribute the
The Company is still conducting its diligence review with respect to each of these properties. These pending acquisitions are subject to its completion of satisfactory due diligence and other closing conditions. There can be no assurance the Company will complete any or all of these pending property contributions on the contemplated terms, or at all.
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11. SUBSEQUENT EVENTS
Distributions Declared or Paid
On April 7, 2022, the Company declared cash distributions totaling $
On May 4, 2022, the Company declared cash distributions totaling $
Properties Under Contract
On May 9, 2022, Lodging Fund REIT III OP, LP (the “Operating Partnership”), the operating partnership subsidiary of Lodging Fund REIT III, Inc. (the “Company”) and W&K Hotels, LLC (the “Manhattan FP Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Manhattan FP Contribution Agreement”), pursuant to which the Manhattan FP Contributor agreed to contribute the
On May 9, 2022, Lodging Fund REIT III OP, LP (the “Operating Partnership”), the operating partnership subsidiary of Lodging Fund REIT III, Inc. (the “Company”) and W&K Hotels, LLC (the “Lawrence DT Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Lawrence DT Contribution Agreement”), pursuant to which the Lawrence DT Contributor agreed to contribute the
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Amendment of Revolving Line of Credit
On May 5, 2022, the Company amended its $
Refinancing of El Paso Courtyard
On May 13, 2022, the Company entered into a new $
Share Repurchases
On April 21, 2022, the Company paid the outstanding redemption proceeds related to the March 2022 redemption of
Status of the Offering
The Company’s board of directors extended the term of the Offering to May 31, 2023. As of May 16, 2022, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold
Status of the GO Unit Offering
The Company’s board of directors terminated the GO Unit Offering as of February 14, 2022. From the inception of the offering through termination, the Company had issued and sold
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein, the terms “we,” “our,” “us” and “the Company” refer to Lodging Fund REIT III, Inc., a Maryland corporation, Lodging Fund REIT III OP, LP a Delaware limited partnership, which we refer to as the “Operating Partnership,” Lodging Fund REIT III TRS, Inc., a Delaware corporation, which we refer to as the “Master TRS” and their subsidiaries, except where the context otherwise requires. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of the Company and the notes thereto.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “should,” “expect,” “could,” “intend,” “anticipate,” “plan,” “estimate,” “believe,” “potential,” “continue,” “seek” or similar expressions. These statements include our plans and objectives for future operations, including plans and objectives relating to future growth and availability of funds, and are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to accurately predict and many of which are beyond our control. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
Summary Risk Factors
Our business faces significant risks and uncertainties. Set forth below is a summary list of the principal risk factors as of the date of the filing of this Quarterly Report on Form 10-Q that could materially and adversely affect our business, financial condition, results of operations and cash flows. This summary highlights certain of the risks and uncertainties but does not address all of the risks that we face which could cause our actual results to differ materially from those presented in our forward-looking statements. You should interpret many of the risks identified in this summary and in our Annual Report on Form 10-K as being heightened as a result of the ongoing and numerous adverse impacts of the novel coronavirus (“COVID-19”) pandemic.
Risks Related to Our Business
● | The COVID-19 pandemic has had a negative impact on the U.S. and world economies and business activities. The extent to which the COVID-19 pandemic adversely affects our results of operations, returns and profitability, as well as our ability to pay distributions to our stockholders or to realize appreciation in the value of our properties, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the severity and duration of the pandemic, the distribution and efficacy of vaccines, continued emergence of new strains of COVID-19, actions taken to contain the COVID-19 outbreak or to mitigate its impact and the direct and indirect economic effects of the COVID pandemic. These trends, together with increasing labor costs and shortages, supply chain disruptions and related commodity and other price inflation resulting from the COVID-19 pandemic, may cause an increase in renovation, construction and operating costs, may limit our access to critical operating supplies and may continue to adversely affect our hotel operations and financial results. In addition, if in the future there is an outbreak of another highly infectious or contagious disease or other health concern, our company and our properties may be subject to similar risks as posed by COVID-19. |
● | We have a limited operating history and may not be successful at operating a real estate investment trust, or REIT, which may adversely affect our ability to make distributions to our stockholders. |
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● | Our advisor, Legendary Capital REIT III, LLC (the “Advisor”), its executive officers and other key personnel, the employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor as well as certain of our officers and directors, whose services are essential to the Company, may be involved in other business ventures, and will face a conflict in allocating their time and other resources between us and the other activities in which they are or may become involved. Failure of the Advisor, its executive officers and key personnel, the employees of the Sponsor, and our officers and directors to devote sufficient time or resources to our operations could result in reduced returns to our stockholders. |
● | We will pay certain prescribed fees and expenses to the Advisor and its affiliates regardless of the quality of services provided. These fees were not negotiated at arm’s length and therefore may be higher than fees payable to unaffiliated third parties for the same or similar services. Such fees may result in conflicts of interest between the Advisor and our stockholders due to the nature of the incentive fees and management fees. |
● | We have paid distributions from proceeds from our ongoing private offering described below (the “Offering”) and, to the extent our board of directors declares future distributions, we may continue to fund distributions with Offering proceeds. We have not established a limit on the amount of proceeds from our Offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment and the overall return to our stockholders may be reduced. We may fund distributions from other sources such as borrowings, which may constitute a return of capital. |
● | If we are unable to raise substantial funds in our securities offerings, we may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to vary more widely with the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue. |
● | We may be unable to identify properties that meet our investment criteria in a timely manner or on acceptable terms, and may be unable to consummate investment opportunities that we identify, which could result in reduced returns or reduce the amount available for distributions to our stockholders. |
● | We intend to acquire only hotel properties. As a result, we will only have limited diversification as to the type of property we own. In the event of an economic recession affecting the economies of the areas in which the properties are located or a decline in values in general, our financial performance could be materially and adversely affected, which may limit our ability to pay distributions to our stockholders. |
● | We face risks related to the timing and outcome of an ongoing regulatory inquiry. |
● | We and our hotel managers rely on information technology networks and systems, including the internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personally identifiable information, reservations, billing and operating data. It is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information, which may subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. |
Risks Related to the Lodging Industry and Real Estate Industry
● | Demand for our properties may be affected by various factors, including an over-supply or over-building of hotel properties in our properties’ markets and general economic conditions. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
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● | We may be unable to dispose of our properties on advantageous terms or at all due to various factors, including weakness in our properties’ markets, unavailability of financing, changes in the financial condition of prospective purchasers or changes in general economic conditions, which could reduce our cash flow and limit our ability to make distributions to our stockholders. |
● | Adverse economic, business or real estate developments in our markets, as well as low consumer confidence, declines in corporate budgets, high rates of inflation, and decreases in personal discretionary spending levels, may adversely affect our financial performance and the value of our properties and may limited our ability to pay distributions to our stockholders. |
● | The hospitality industry is seasonal in nature. In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition. |
● | We rely on management companies to operate our hotel properties, giving us less control than if we were managing the hotels ourselves. Further, NHS, LLC dba National Hospitality Services (“NHS”), the management company currently directly or indirectly managing nine of our existing hotel properties on a day-to-day basis, is an affiliate of Norman H. Leslie, a director and officer of the Company and a principal of the Advisor. This relationship may cause conflicts of interest between the Advisor and our stockholders. |
● | Our success depends in part upon our management companies’ ability to attract, motivate and retain a sufficient number of qualified employees. Qualified individuals needed to fill these positions are in increasingly short supply in some areas. The inability to recruit and retain these individuals may adversely impact hotel operations and guest satisfaction, which could harm our business |
Risks Related to Debt Financing
● | We have incurred significant debt in connection with our property acquisitions. Our use of leverage increases the risk of an investment in us. Our mortgage loans are collateralized by our hotel properties, which will put those investments at risk of forfeiture if we are unable to repay such debts. Principal and interest payments on these loans reduce the amount of money that would otherwise be available for distribution to our stockholders. |
● | Our ability to acquire, rehabilitate, renovate and manage our properties may be limited if we cannot obtain satisfactory financing, refinance or extend existing financing, which will depend on debt and capital markets conditions. In addition, we have loans with variable interest rates, and may incur additional variable rate debt in the future. Volatility in these markets could negatively impact such loans. Interest rates are expected to rise, though the timing and amount of any such future interest rate increases are uncertain. There can be no assurance that we will be able to obtain financing or refinance or extend existing financing on favorable terms, or at all. |
Federal Income Tax Risks
● | Failure to qualify as a REIT would reduce our net earnings available for investment or distribution to our stockholders. |
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”).
Overview
Lodging Fund REIT III, Inc. was formed on April 9, 2018, as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of limited-service, select-service, full-service and extended-stay hotel properties (the “Projects”) located primarily in “America’s Heartland,” which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. We have elected to be taxed as a real estate investment trust, or REIT, beginning with the taxable year ended December 31, 2018, and we intend to continue to operate in such a manner. Where
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applicable in this Form 10-Q, “we,” “our,” “us,” and “the Company” refers to Lodging Fund REIT III, Inc., Lodging Fund REIT III OP, LP, a Delaware limited partnership and our operating partnership (the “Operating Partnership”), and its subsidiaries except where the context otherwise requires.
We conduct substantially all our business and own substantially all real estate investments through the Operating Partnership. We are the sole general partner (the “General Partner”) of the Operating Partnership. We and the Operating Partnership are advised by the Advisor pursuant to an advisory agreement, as amended, under which the Advisor performs advisory services regarding acquisition, financing and disposition of the Projects and origination of any loans, and is responsible for managing, operating and maintaining the Projects and day-to-day management of the Company. The Advisor may, in its sole discretion, perform these duties through one or more affiliates. The Operating Partnership has issued 1,000 Series B Limited Partnership Units (“Series B LP Units”) to the Advisor as part of its compensation.
We have engaged NHS to manage the majority of the Projects acquired to date; however, we can engage third party property management companies and have done so in connection with several of our Projects acquired to date. NHS is wholly-owned by Norman Leslie, a director and executive officer of the Company and a principal of the Advisor. The Advisor has no direct employees. The employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor, provide services to the Company related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services.
We have invested and continue to invest primarily in 80 to 200 room limited service, select service, full service and extended stay hotel properties with strong mid-market brands in America’s Heartland. As of March 31, 2022, we owned 14 hotel properties with an aggregate of 1,686 rooms located in nine states.
We have raised capital through several private offerings conducted by the Company and the Operating Partnership described below.
Initial Offering
We are currently conducting an offering (the “Offering”) in shares of our common stock under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act of 1933, as amended (the “Securities Act”). The Offering commenced on June 1, 2018 in an amount of up to $100,000,000 in shares of our common stock, which amount was increased to $150,000,000 in shares of our common stock in December 2021. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2023, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. In addition to sales of common stock for cash, the Company has adopted a dividend reinvestment plan (“DRIP”), which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum for Offering, the shares offered in the Offering for cash are being offered at an initial price of $10.00 per share, with shares issued pursuant to the DRIP being purchased at an initial price of $9.50 per share. As of March 31, 2022, the Company had issued and sold 8,837,175 shares of common stock, including 869,789 shares attributable to our DRIP, and received aggregate proceeds of $86.4 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, we received net offering proceeds of approximately $75.3 million. The net offering proceeds have been used principally to fund property acquisitions and pay distributions and debt service obligations. No public market exists for the shares of our common stock and none is expected to develop.
We have adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. As of March 31, 2022, we have repurchased 216,584 shares, which represents an original investment of $2,165,845 for $2,085,324. As of March 31, 2022, $638,174 of the redemption proceeds had not yet been paid and was included in other liabilities on the accompanying consolidated balance sheets included as part of this Quarterly Report on Form 10-Q.
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Interval Share Offering
On April 29, 2020, we classified and designated 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, as shares of “Interval Common Stock,” to be part of the Offering. The offering of the Interval Common Stock, is a maximum offering of $30,000,000, which may be increased to $60,000,000 in the sole discretion of our board of directors, (the “Interval Share Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Interval Share Offering will continue until the earlier of (i) the date when $30,000,000 (or $60,000,000 if approved by our board of directors) is sold, (ii) March 31, 2022, or (iii) a decision by the Company to terminate the Interval Share Offering. Our board of directors intends to allow the Interval Share Offering to expire on March 31, 2022. For each share of Interval Common Stock purchased pursuant to the private offering, the Company, as the general partner of the Operating Partnership, will acquire one Interval Unit. Distributions made to holders of the Interval Units will be 86% of the distributions made to the other Participating Partnership Unit holders. Interval Unit holders have the same voting rights as the holders of Common Limited Units and Common General Units. As of March 31, 2022, the Company had not issued or sold any shares of Interval Common Stock. Our board of directors allowed the Interval Share Offering to expire on March 31, 2022.
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $20,000,000, which could be increased to $30,000,000 in our sole discretion as the General Partner of the Operating Partnership (the “GO Unit Offering”) to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. Our board of directors terminated the GO Unit Offering as of February 14, 2022. As of March 31, 2022, the Operating Partnership had issued and sold 3,104,979 Series GO LP Units and received aggregate proceeds of $21.4 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $19.3 million.
Series T LP Units
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning 36 months after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan (“PIP”) and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of conversion. As of March 31, 2022, we had recorded an aggregate value of $31.7 million to the Series T LP Units in connection with such property contributions.
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Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of March 31, 2022, the Operating Partnership had issued and sold 612,100 Common LP Units in connection with a property contribution.
Independent Director Compensation
On March 31, 2022, we issued 500 shares of our common stock to each of our three independent directors as part of the board of director’s recently approved updates to independent director compensation. These grants were made in reliance upon an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act as the grants did not involve any public offering.
Key Transactions During First Quarter 2022
During the three months ended March 31, 2022, we acquired three hotel properties with an aggregate of 322 rooms located in three states. Each of these hotel properties was acquired pursuant to a contribution agreement. The aggregate purchase price for these contribution agreements was $45.9 million, consisting of the issuance of Series T LP Units, Common LP Units, assumption or repayment of loans securities by the properties and payment of cash. The number of Common LP Units to be issued to each contributor based on the conversion of Series T LP Units may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price was determined to be the value assigned by a third party appraisal rather than the contractual purchase price, as the appraisal value was more reliably measured.
Key Indicators of Operating Performance
In evaluating financial condition and operating performance, important indicators on which we focus are revenue measurements, such as occupancy, ADR and RevPAR, and expenses, such as property operations expenses, general and administrative expenses and other expenses described below. Occupancy is the total number of rooms occupied for the period divided by the total number of available rooms for the period. ADR is equal to the total gross room revenue divided by the total number of rooms rented for the period. RevPAR is equal to the total gross room revenue divided by the total number of available rooms for the period.
Market Outlook
During the first quarter of 2020, the global outbreak of COVID-19 was identified and has since spread to nearly every country and territory, including every state in the United States. The COVID-19 pandemic and the related governmental restrictions instituted to slow the spread of the virus continues to have a material adverse impact on the hospitality industry. As the virus spread and governments implemented restrictions to contain it, occupancy and RevPAR fell sharply. COVID-19 continues to have a material impact on our business and industry. However, the recovery of demand in our hotels accelerated in the second, third and fourth quarters of 2021, led primarily by robust leisure demand. Business transient and group demand remains well below pre-pandemic levels in most markets, but such demand could pick up in 2022 if workers return to offices and corporate travel increases. On the other hand, the continued emergence of new strains of COVID-19, such as the Delta and Omicron variants, could slow the pace of recovery in some or all regions and may result in new or increased restrictions on business operations. If the spread of new strains of COVID-19 continues, it may negatively affect our occupancy levels and RevPAR and could materially and adversely affect the financial performance and value of our hotels. Further, increasing labor costs and shortages, supply chain disruptions and related commodity and other price inflation resulting from the COVID-19 pandemic may cause an increase in renovation, construction and operating costs, may limit our access to critical operating supplies, and may continue to adversely affect our hotel operations and financial results.
Demand continued to recover in the first quarter of 2022 as compared to the same quarter in 2021. For the seven hotel properties acquired prior to January 1, 2021, RevPAR in 2022 as compared to 2021 increased by 33% to $77.41 from $58.35. ADR and occupancy also increased by 18% and 12% from 2021 to 2022.
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The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments. The full extent of the impact and effects of COVID-19 will depend on future developments which are highly uncertain and cannot be predicted with confidence, including, among other factors, the duration, severity and spread of the outbreak and potential for its recurrence, continued emergence of new strains of COVID-19, such as the Delta and Omicron variants, which strains may be more contagious or more vaccine-resistant, the distribution and efficacy of vaccines, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the slowdown in leisure and business travel. Even after travel advisories and restrictions are modified or lifted, demand for hotels may remain weak for a significant length of time, which may be a function of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses. We cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing. In addition, if in the future there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and our properties may be subject to similar risks and uncertainties as posed by COVID-19. We are closely monitoring the impact of the COVID-19 pandemic on our business and continue to assess the situation at our properties and operations on a daily basis.
Liquidity and Capital Resources
Overview
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, including payments to our Advisor and property managers, capital expenditures directly associated with our hotels and distributions to our stockholders. Our earliest mortgage loan maturity dates are February 2023 (see “— Subsequent Events”) and March 2023. Based on information currently available and our current projected operating cash flow needs and interest and debt repayments, we believe we have adequate cash for at least the next twelve months to fund our business operations, meet all of our financial commitments and other obligations. However, we cannot predict whether future developments related to the COVID-19 pandemic will adversely affect our liquidity position.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, operating expenses, including payments to our Advisor and property managers, and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including OP units, and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us.
We are dependent upon the net proceeds from our Offering to conduct our proposed operations. The Offering will continue until the earlier of (i) the date when the maximum offering amount is sold, (ii) May 31, 2023, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. We had also used the net proceeds from the GO Unit Offering to conduct our operations. The Go Unit Offering was terminated effective February 14, 2022. We intend to obtain the capital required to make real estate and real estate-related investments and conduct our operations from the proceeds of our Offering and unused proceeds from the GO Unit Offering, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of March 31, 2022, we had raised approximately $84.3 million in gross offering proceeds from the sale of shares of our common stock in the Offering and approximately $21.4 million in gross offering proceeds from the sale of the Series GO LP Units in our GO Unit Offering. The pace of capital raised in our Offering has slowed over the past several months compared to historical amounts since inception of the Offering. However, the decrease in capital raise in our Offering has been partially
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offset by capital raised through our GO Unit Offering, which commenced in June 2020. If we are unable to raise substantial funds in the Offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate more significantly with the performance of the specific assets we acquire. There may be a delay between the sale of shares of our common stock and units and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Further, we will have certain fixed operating expenses regardless of whether we are able to raise substantial funds in the Offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and cash flow and limiting our ability to make distributions to our stockholders.
As of March 31, 2022, we owned fourteen properties. We acquired these investments with the proceeds from the sale of our common stock in the Offering, proceeds from the GO Unit Offering and debt financing and, for each of the properties acquired in 2022, the issuance of either Series T LP Units or Common LP Units to the contributor as part of the consideration. Operating cash needs during the year ended March 31, 2022 were met through cash flow generated by these real estate investments and with proceeds from our Offering and the GO Unit Offering.
Our investments in real estate generate cash flow in the form of hotel room rentals and guest expenditures, which are reduced by operating expenditures, debt service payments and corporate general and administrative expenses. Each of our current properties is owned and future properties will be owned by a direct special purpose entity subsidiary of the Operating Partnership, which leases the properties to direct special purpose entity subsidiaries of the Master TRS, referred to as “TRS Lessees.” The TRS Lessees are or will be required to make rent payments to the owners of the properties pursuant to the lease agreements relating to each property. Such TRS Lessees’ ability to make rent payments to the owner subsidiaries and our liquidity, including our ability to make distributions to our stockholders, are dependent upon the TRS Lessees ability to generate cash flow from the operations of the hotel properties. The TRS Lessees are dependent upon the management companies with whom they have entered or will enter into management agreements with to operate the hotel properties.
Cash flow from operations from real estate investments will be primarily dependent upon the occupancy level and average daily rate, or “ADR”, of our portfolio, and how well we manage our expenditures.
We anticipate that our aggregate loan-to-value ratio will be between 35% and 65%. We will target a loan-to-value ratio for the Projects of between 35% and 70%, based on the purchase price of the Projects, however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual Projects at the discretion of the board of directors. Though this is our estimated leverage, our charter does not limit us from incurring debt in excess of this amount. As of March 31, 2022, our aggregate loan-to-value ratio, based on the aggregate purchase price of the Projects, was approximately 59%.
In addition to making investments in accordance with our investment objectives, we expect to use capital resources to make certain payments to the Advisor and its affiliates and NHS. These payments include the various fees and expenses to be paid to the Advisor and its affiliates in connection with the selection, acquisition and management of Projects, as well as reimbursement of certain organization and other offering expenses described below. The Advisor earns a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any property improvement plan (“PIP”) at the time of each hotel property acquisition, a financing fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of closing the initial financing, and an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. The Advisor may also be paid a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing, a disposition fee equal to between 0.0% and 4.0% of the hotel sales price, payable at the closing of the disposition, and real estate commissions of up to 3.0% of the hotel purchase price in connection with the sale of a hotel property in which the Advisor or its affiliates provided substantial services, but in no event greater than one-half of the total commissions paid with respect to such property if a commission is paid to a third-party as well as the Advisor, and in no event will total commissions exceed 5.0% of the hotel sales price. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty amount, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may earn an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B LP Unit holders) have received
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a 6% cumulative, but not compounded, return per annum. Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with their ownership of non-voting Series B LP Units. The Advisor’s ownership of Series B LP Units is presented as non-controlling interest on the accompanying consolidated financial statements.
The Advisor and its affiliates may be reimbursed by us for certain organization and offering expenses in connection with the Offering and the GO Unit Offering, including legal, printing, marketing and other offering-related costs and expenses. Following the termination of the Offering, the Advisor will reimburse us for any such amounts incurred by us in excess of 15% of the gross proceeds of the Offering. In addition, we may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to us, including certain acquisition costs, financing costs, and sales and marketing costs, as well as an allocable share of general and administrative overhead costs. All reimbursements are paid to the Advisor and its affiliates at cost.
NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties for which it serves as the property manager, in an amount up to 4% of gross revenue. NHS may also earn a monthly accounting fee of $14.00 per room for accounting services, payable monthly, and an administrative fee equal to 0.60% of gross revenues for administrative and other services. We reimburse NHS for certain costs of operating the hotel properties incurred on our behalf. All reimbursements are paid to NHS at cost. NHS also earns a flat fee of $5,000 per hotel property for due diligence services, including analyzing, evaluating, and reporting on documentation and information received from sellers or contributors during the period of due diligence. Such fee is waived if, upon acquisition by us, NHS is selected as the management company for the hotel property. NHS is also reimbursed for actual out-of-pocket costs incurred in providing the due diligence services. The majority of our current hotel properties are managed by NHS.
Our other hotel properties are managed by Vista Host Inc., Interstate Management Company, LLC, Aimbridge Hospitality, LLC and KAJ Hospitality Inc. These management companies earn a base management fee in an amount between 2.5% and 3.0% of gross revenue, plus monthly accounting fees and in some cases a monthly fee for customized accounting services, revenue management and digital marketing. They also may earn an incentive management fee if certain performance metrics are achieved. We also reimburse the management companies for certain costs of operating the hotel properties on our behalf. All reimbursements are paid to such management companies at costs.
One Rep, a related party, provides construction oversight, project management, and other related services to the Company. For the services provided, One Rep is paid a construction management fee equal to 6% of the total project costs. The Company also reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost.
The franchise agreements for certain of our hotels require provide property improvement plans to cover, among other things, replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. As of March 31, 2022, we have set aside $3.2 million for capital projects in property improvement funds, which are included in restricted cash.
We spent approximately $2.9 million on capital improvements at our operating hotels during the year ended December 31, 2021. Due to the COVID-19 pandemic, we canceled or deferred a significant portion of the planned capital improvements at our operating hotels. In 2022, we expect to spend approximately $6.8 million on necessary capital improvements.
The United States is experiencing both supply chain disruptions and significant price increases for certain construction materials. The supply chain disruptions are the result of, in part, substantial backlogs of container ships seeking to unload cargo at major ports, with delays caused or exacerbated by port and trucking labor shortages, railway logistics issues and a shortage of warehouse space in close proximity to the affected ports. We have not been significantly impacted by these backlogs to date; however, if not resolved, these backlogs and related logistics issues could result in material delays and increased costs for our planned capital improvements.
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Debt
Lines of Credit
On February 10, 2020, we entered into a $5.0 million revolving line of credit. The line of credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. On January 19, 2021, the line of credit was amended to extend the maturity date to May 10, 2021. The line of credit had a variable interest rate equal to the U.S. Prime Rate, plus 0.50%, resulting in an effective rate of 3.75% per annum as of March 31, 2021. On May 6, 2021, the line of credit was amended to extend the maturity date to May 10, 2022 and on May 5, 2022, the line of credit was amended to extend the maturity date to December 15, 2022. On May 6, 2021, the interest rate was also amended to incorporate an interest rate floor equal to 4.00%. The interest rate as of March 31, 2022 was 4.00%. The line of credit is secured by our Cedar Rapids Property and Eagan Property, which are also subject to term loans with the same lender, and 100,000 Common LP Units of the Operating Partnership. The line of credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property and the Eagan Property, as well as future loan agreements that we may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The line of credit, including all cross-collateralized debt, is guaranteed by Corey Maple, the Company’s Chief Executive Officer. As of March 31, 2022, there was a $1,350,000 balance outstanding on the line of credit.
Mortgage Debt
As of March 31, 2022, we had $134.1 million in outstanding mortgage debt secured by each of our fourteen hotel properties, with maturity dates ranging from February 2023 to April 2029. Twelve of the loans have fixed interest rates ranging from 3.70% to 7.00%. One loan is a variable interest loan at a rate of LIBOR plus 6.0% per annum, provided that LIBOR shall not be less than 1.0%, resulting in an effective rate of 7.00% as of March 31, 2022. Another loan is a variable interest loan at a rate of LIBOR or an equivalent rate plus 6.25%, provided that the variable rate shall not be less than 0.75%, resulting in an effective rate of 7.00% as of March 31, 2022. Collectively, the weighted-average interest rate is 5.23%. The loans generally require monthly payments of principal and interest on an amortized basis, with certain loans allowing for an interest-only period up to 12 months following origination, and generally require a balloon payment due at maturity. As of March 31, 2022 and December 31, 2021, certain mortgage debt was guaranteed by the members of the Advisor. See Note 7 “Related Party Transactions” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding debt that was guaranteed by members of the Advisor.
As of March 31, 2022, we were not in compliance with the required financial covenants under the terms of the promissory note secured by the Pineville Property and related loan documents (the “Pineville Loan”), which constitutes an event that puts us into a trigger period pursuant to the loan documents. We have requested but not yet received a waiver of the financial covenants for the period ending March 31, 2022. Except as described above for the Pineville Loan, we were in compliance with all debt covenants as of March 31, 2022.
See Note 4 “Debt” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for additional information regarding our mortgage debt and information regarding future minimum principal payments on our debt as of March 31, 2022.
Paycheck Protection Program (“PPP”) Loans
In April 2020, we entered into six unsecured promissory notes under the Paycheck Protection Program (the “PPP”), totaling $763,100 (the “Original PPP Loans”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was passed in March 2020, and is administered by the U.S. Small Business Administration (the “SBA”). The term of each Original PPP loan was two years, which could be extended to five years at the our election. The interest rate on each Original PPP loan was 1.0% per annum, which shall be deferred for a period of time. In February 2021, we applied for and received one hundred percent (100%) forgiveness of all six PPP Loans.
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In January 2021, we entered into six new unsecured promissory notes totaling $716,400, under the Second Draw Paycheck Protection Program (the “Second Draw PPP”) created by the Consolidated Appropriations Act, 2021 (the “CAA Act”), through Western State Bank. The term of each Second Draw PPP loan was five years. The interest rate on each Second Draw PPP loan was 1.0% per annum, which was deferred for the first sixteen months of the term of the loan.
In February 2021, we, through our subsidiary LF3 Southaven TRS, LLC (“Southaven TRS”), entered into an unsecured promissory note under the PPP through Western State Bank. The amount of the PPP loan for Southaven TRS is $85,400. The term of the PPP loan was five years. The interest rate on the PPP loan was 1.0% per annum, which was deferred for the first sixteen months of the term of the loan.
In April 2021, we, through Southaven TRS, entered into an unsecured promissory note under the Second Draw PPP created by the CAA Act, through Western State Bank (the “Southaven TRS Second Draw PPP”). The term of the Southaven Second Draw PPP loan was five years. The amount of the Southaven TRS Second Draw PPP loan was $119,500. The interest rate on the Southaven TRS Second Draw PPP loan was 1.0% per annum, which was deferred for the first sixteen months of the term of the loan.
Under the terms of the CARES Act and the CAA Act, as applicable, PPP loan recipients and Second Draw PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of such loans. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs, the maintenance of employee and compensation levels and certain other approved expenses. In February 2021, we applied for and received one hundred percent (100%) forgiveness of all six Original PPP Loans. In June 2021, we received forgiveness on the full balance of the Second Draw PPP and Southaven TRS PPP loans. In August 2021, we received forgiveness on the full balance of the Southaven TRS Second Draw PPP loan.
Employee Retention Credit (“ERC”)
Under the provisions of the CARES Act, and the subsequent extension of the CARES Act, the Company was eligible for a refundable Employee Retention Credit (“ERC”) subject to certain criteria. During 2021, the Company applied for and received a $0.4 million employee retention credit that is included in other income (expense) in the consolidated statements of operations. The Company has filed for additional refunds of the employee retention credits and subsequent to March 31, 2022 and as of the date of this Quarterly Report on Form 10-Q, cannot reasonably estimate when it will receive any or all of the remaining refunds.
Properties Under Contract
As of the date of this filing, we had five hotel properties under contract for an aggregate contract purchase price of approximately $76.0 million. We are still conducting our diligence review with respect to each property. Each of these pending acquisitions is subject to our completion of satisfactory due diligence and other closing conditions. There can be no assurance that we will complete any of these pending acquisitions on the contemplated terms, or at all.
Based on information currently available and our current projected operating cash flow needs and interest and debt repayments, we believe we have adequate cash for at least the next twelve months to fund our business operations, meet all of our financial commitments, and other obligations. However, we cannot predict whether future developments related to the COVID-19 pandemic will adversely affect our liquidity position.
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Cash Flows
The following table provides a breakdown of the net change in our cash, cash equivalents, and restricted cash:
| For the Three Months Ended March 31, | |||||
2022 |
| 2021 | ||||
Net cash used in operating activities | $ | (3,293,181) |
| $ | (1,292,235) | |
Net cash used in investing activities | (2,768,970) | (2,596,403) | ||||
Net cash provided by financing activities | 6,917,994 | 4,321,983 | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 855,843 | $ | 433,345 |
Cash Flows From Operating Activities
As of March 31, 2022, we owned fourteen hotel properties. During the three months ended March 31, 2022 and 2021, net cash used in operating activities was $3.3 million and $1.3 million, respectively. Our cash flows used in operating activities generally consist of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes. See “— Market Outlook” for a discussion of the current and expected impact of the outbreak of COVID-19 on our business. See "— Results of Operations" for further discussion of our operating results for the three months ended March 31, 2022 and 2021.
Cash Flows From Investing Activities
Net cash used in investing activities was $2.8 million for the three months ended March 31, 2022 and primarily consisted of $1.8 million for the improvements and additions to hotel properties. Net cash used in investing activities was $2.6 million for the three months ended March 31, 2021 and primarily consisted of $1.9 million for the acquisition of one hotel property.
Cash Flows From Financing Activities
During the three months ended March 31, 2022, net cash provided by financing activities was $6.9 million and consisted primarily of the following:
● | $7.7 million of net cash provided by offering proceeds related to our Offering and GO Unit Offering, net of payments of commissions and other offering costs of $1.1 million; |
● | $0.1 million of net cash provided by debt financing as a result of proceeds from mortgage debt of $7.4 million and proceeds from lines of credit of $1.3 million, partially offset by principal payments on debt of $7.5 million, principal payments on lines of credit of $0.5 million and payments of financing costs of $0.5 million; |
● | $0.9 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $0.6 million; |
During the three months ended March 31, 2021, net cash provided by financing activities was $4.3 million and consisted primarily of the following:
● | $4.3 million of net cash provided by offering proceeds related to our Offering and GO Unit Offering, net of payments of commissions and other offering costs of $0.7 million; |
● | $0.3 million of net cash provided by debt financing as a result of proceeds from debt financing of $1.0 million and from PPP loans totaling $0.8 million, partially offset by principal payments on debt of $1.2 million and payments of financing costs of $0.3 million; |
● | $0.2 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $1.1 million; |
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Distributions
During our Offering, when we may raise capital more quickly than we acquire income-producing assets, and from time to time after the Offering, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from proceeds from the Offering or debt financing. Distributions declared, distributions paid, and net cash flow used in operations were as follows for the first quarter of 2022 and during each quarter of 2021:
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2022 | $ | 1,556,308 | $ | 0.175 | $ | 933,464 | $ | 567,240 | $ | 1,500,704 | $ | (3,293,181) | ||||||
$ | 1,556,308 | $ | 0.175 | $ | 933,464 | $ | 567,240 | $ | 1,500,704 | $ | (3,293,181) | |||||||
Distribution | Net Cash | |||||||||||||||||
Distributions | Declared Per | Distributions Paid (3) | Flows Provided By | |||||||||||||||
Period |
| Declared (1) |
| Share (1) (2) |
| Cash |
| Reinvested |
| Total |
| (Used In) Operations | ||||||
First Quarter 2021 | $ | 1,430,216 | $ | 0.175 | $ | 246,084 | $ | 1,081,828 | $ | 1,327,912 | $ | (1,292,235) | ||||||
Second Quarter 2021 | 1,465,038 | 0.175 | 251,625 | 1,107,080 | 1,358,705 | 853,375 | ||||||||||||
Third Quarter 2021 | 1,500,023 | 0.175 | 1,114,951 | 1,223,741 | 2,338,692 | 122,840 | ||||||||||||
Fourth Quarter 2021 | 1,527,992 | 0.175 | 1,340,091 | 551,391 | 1,891,482 | (732,378) | ||||||||||||
$ | 5,923,269 | $ | 0.700 | $ | 2,952,751 | $ | 3,964,040 | $ | 6,916,791 | $ | (1,048,398) |
(1) | Distributions for the periods from January 1, 2021 through March 31, 2022 were based on daily record dates and were calculated based on stockholders of record each day during this period at a rate of $0.00191781 per share per day. Distributions for the periods from January 1, 2021 through March 31, 2021 were payable to each stockholder 30% in cash (or through the DRIP if then currently enrolled in the DRIP) and 70% in shares of common stock issued through the DRIP, or at the election of the stockholder, in shares of common stock valued at $10.00 per share. Distributions for the periods from April 1, 2021 through June 30, 2021 were payable to each stockholder 60% in cash (or through the DRIP if then currently enrolled in the DRIP) and 40% in shares of common stock issued through the DRIP, or at the election of the stockholder, in shares of common stock valued at $10.00 per share. Distributions for the period from July 1, 2021 through March 31, 2022 were payable to each stockholder as 100% in cash on a monthly basis of common stock valued at $10.00 per share. |
(2) | Assumes share was issued and outstanding each day that was a record date for distributions during the period presented. |
(3) | Beginning the second quarter of 2020 through the second quarter of 2021, distributions were paid on a quarterly basis. Beginning in the third quarter of 2021, distributions were paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the tenth day of the following month. |
For the three months ended March 31, 2022, we paid aggregate distributions of $1.5 million, including $0.9 million of distributions paid in cash and $0.6 million of distributions reinvested through our distribution reinvestment plan. Our net loss for the three months ended March 31, 2022 was $3.5 million. Net cash flow used in operations for the three months ended March 31, 2022 was $3.3 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.
For the year ended December 31, 2021, we paid aggregate distributions of $6.9 million, including $3.0 million of distributions paid in cash and $4.0 million of distributions reinvested through our dividend reinvestment plan. Our net loss for the year ended December 31, 2021 was $5.3 million. Net cash flows used in operations for the year ended December 31, 2021 was $1.0 million. We funded 100% of our distributions paid, which includes cash distributions and distributions reinvested by stockholders, with proceeds from the Offering.
To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.
Going forward we expect our board of directors to continue to authorize and declare distributions, if at all, based on daily record dates and to pay these distributions on a quarterly basis. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant, and may be paid in cash or in shares pursuant to the DRIP. Our board of directors has not pre-established a percentage rate of return for cash
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distributions or stock distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
Results of Operations
Outlook
Our results of operations for the three months ended March 31, 2022 and March 31, 2021 are not indicative of those expected in future periods, as we were actively raising capital through our Offering along with acquiring hotel properties during both of these periods. The COVID-19 pandemic has had a significant impact on our operating results for the three months ended March 31, 2022 and March 31, 2021. As of March 31, 2022 and 2021, we owned eight and seven properties, respectively, for a full 12-month operating cycle.
In evaluating financial condition and operating performance, we believe Revenue per Available Room (“RevPAR”), which we calculate by dividing total gross room revenue by the total number of available rooms for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for properties. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR which we calculate by dividing total gross room revenue by the total number of rooms rented for the period, measures average room price and is useful in assessing pricing levels.
Comparison of the three months ended March 31, 2022 versus the year ended March 31, 2021
Revenue
Room revenues totaled $8.8 million and $3.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Other revenue, which consists primarily of hotel food and beverage revenues as well as revenues from other hotel services, was $0.5 million and $64,370 for the three months ended March 31, 2022 and March 31, 2021, respectively. Hotel occupancy, ADR, and RevPAR were 61.7%, $106.61, and $65.82, respectively, for the three months ended March 31, 2022. Hotel occupancy, ADR, and RevPAR were 62.0%, $94.11, and $58.34, respectively, for the three months ended March 31, 2021. For the seven hotel properties acquired prior to January 1, 2021, hotel occupancy, ADR, and RevPAR were 69.6%, $111.17, and $77.41, respectively, for the three months ended March 31, 2022. The increases in hotel occupancy rates, ADR and RevPAR were primarily due to the ongoing recovery in lodging demand from the impacts of COVID-19 during 2022. Hotel properties acquired during 2022 contributed $0.9 million to the increase in room revenues and $45,541 to the increase in other revenue for the three months ended March 31, 2022. See “Market Outlook” for a discussion of the current and expected impact of the COVID-19 pandemic on our business.
Property Operations Expenses
Property operations expenses were $4.8 million and $1.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Property operations expenses consist primarily of hotel personnel costs, property taxes, insurance, repair and maintenance, and other costs of operating our hotel properties. The $3.1 million increase in property operations expenses was primarily due to increased hotel occupancy rates at our existing seven hotel properties acquired prior to January 1, 2021, and $2.2 million of property operations expenses resulting from the acquisitions of the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties. We expect property operating expenses will increase in future periods as a result of owning our current hotel properties for a full operating period, as well as anticipated future acquisitions of hotel properties.
General and Administrative Expenses
General and administrative expenses were $2.2 million and $1.3 million for the three months ended March 31, 2022 and March 31, 2021, respectively. General and administrative expenses consist primarily of administrative personnel costs, rent, professional fees and the cost of office supplies and equipment. The $0.9 million increase in general and
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administrative expenses was primarily due to a $0.3 million increase in payroll and professional fees and $0.5 million of expenses resulting from the addition of the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties. We expect general and administrative expenses will increase in future periods as a result of owning our current hotel properties for a full operating period, as well as anticipated future acquisitions of hotel properties.
Sales and Marketing Expenses
Sales and marketing expenses were $0.6 million and $0.3 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Sales and marketing expenses consist primarily of sales and marketing personnel costs, hotel brand loyalty program costs, advertising and other marketing costs. The $0.3 million increase in sales and marketing expenses was primarily due to the addition of the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties. We expect sales and marketing expenses will increase in future periods as a result of owning our current hotel properties for a full operating period, as well as anticipated future acquisitions of hotel properties.
Franchise Fees
Franchise fees were $0.8 million and $0.3 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Franchise fees include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, reservation fees and other related costs. The $0.5 million increase in franchise fees was primarily due to higher RevPAR due to the ongoing recovery in lodging demand from the impacts of COVID-19 and the addition of the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties. We expect franchise fees will increase in future periods as a result of owning our current hotel properties for a full operating period, as well as anticipated future acquisitions of hotel properties.
Management Fees
Management fees were $0.8 million and $0.4 million for the three months ended March 31, 2022 and March 31, 2021, respectively. Management fees include asset management fees paid to the Advisor and management fees paid to property management service providers who manage the day-to-day operations of our hotel properties. Asset management fees paid to the Advisor increased by $0.2 million. We experienced increased management fees across our portfolio primarily due to higher RevPAR resulting from the ongoing recovery in lodging demand from the impacts of COVID-19. We expect property management fees will increase in future periods as a result of owning our current hotel properties for a full operating period, as well as anticipated future acquisitions of hotel properties.
Acquisition Expenses
Acquisition expenses were $13,517 and $27,466 for the three months ended March 31, 2022 and March 31, 2021, respectively. Acquisition expenses include acquisition-related and due diligence costs that relate to a property that is not ultimately acquired, as well as costs related to hotel property acquisition activities that are not attributable to specific property acquisitions. The decrease in acquisition expenses is primarily related to acquisition-related and due diligence costs incurred in 2021 for properties that were not acquired.
Depreciation
Depreciation expense was $1.6 million and $1.0 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The $0.6 million increase in depreciation expense was primarily due to the addition of the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties.
Other Income (Expense), net
Other income (expense) was ($199,393) and $678,875 for the three months ended March 31, 2022 and March 31, 2021, respectively. The change was primarily due to the forgiveness of $0.8 million of Paycheck Protection Program loans in 2021.
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Interest Expense
Interest expense was $2.4 million and $0.9 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The $1.5 million increase in interest expense was primarily due to the increase in hotel mortgage debt used to acquire the El Paso, Houston, Northbrook, Fargo, El Paso Airport, and Lakewood hotel properties. We expect that in future periods our interest expense will vary based on the amount of our borrowings, which will depend on the cost of borrowings, the amount of proceeds we raise in our Offering and our ability to identify and acquire hotel properties and real estate-related assets that meet our investment objectives.
Critical Accounting Estimates
Below is a discussion of the accounting estimates that management believes are or will be critical to our operations. We consider these estimates critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer compliance with new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.
Investment in Hotel Properties
We evaluate whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of our acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions will be capitalized and transaction costs associated with business combinations will be expensed as incurred.
Our acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment (“FF&E”). We may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, we allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. For transactions determined to be business combination, we record the assets acquired and the liabilities assumed at their respective fair values at the date of acquisition. We determine the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
Our investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 years for land improvements, 40 years for buildings and building improvements and three to seven years for FF&E. Maintenance and repairs are expensed and major renewals or improvements to the hotel properties are capitalized.
We assess the carrying value of our hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or
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disposing of the hotel properties. If our analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, we will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and the economy in general and our expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and our ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.
Fair Value Measurement
We establish fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets.
Level 2 Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3 Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement
Off-Balance Sheet Arrangements
As of March 31, 2022 and December 31, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Based on historic trends, for hotels located in non-resort markets, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, excluding any impact from the COVID-19 pandemic, we generally would expect to have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.
Subsequent Events
Distributions Declared or Paid
On April 7, 2022, we declared cash distributions totaling $311,686, DRIP distributions totaling $189,851, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $11,131 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s current
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share net asset value of $10.00, for daily record dates March 1 through March 31 2022 to holders of record on each calendar day of such period. The distribution declared for March 2022 was paid on April 10, 2022.
On May 4, 2022, we declared cash distributions totaling $337,831, DRIP distributions totaling $172,456, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $18,992 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in the Company, equivalent to an annualized rate of seven percent (7.00%) per share based on the Company’s current share net asset value of $10.00, for daily record dates April 1 through April 30 2022 to holders of record on each calendar day of such period. The distribution declared for April 2022 was paid on May 10, 2022.
Properties Under Contract
On May 9, 2022, Lodging Fund REIT III OP, LP (the “Operating Partnership”), the operating partnership subsidiary of Lodging Fund REIT III, Inc. (the “Company”) and W&K Hotels, LLC (the “Manhattan FP Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Manhattan FP Contribution Agreement”), pursuant to which the Manhattan FP Contributor agreed to contribute the 197-room Four Points by Sheraton Manhattan hotel in Manhattan, Kansas (the “Manhattan FP Hotel Property”) to the Operating Partnership. The Manhattan FP Contributor is not affiliated with the Company or Legendary Capital REIT III, LLC, the Company’s external advisor. The aggregate consideration for the Manhattan FP Hotel Property under the Manhattan FP Contribution Agreement is $8,400,000 plus closing costs, subject to adjustment as provided in the Manhattan FP Contribution Agreement. The majority of the consideration consists of the assumption or refinancing by the Operating Partnership of existing debt secured by the Manhattan FP Hotel Property. The remaining consideration consists of the issuance by the Operating Partnership of Series T Limited Units of the Operating Partnership and cash at closing. As required by the Manhattan FP Contribution Agreement, the Operating Partnership will deposit $50,000 into escrow as earnest money pending the closing or termination of the Manhattan FP Contribution Agreement. Except in certain circumstances described in the Manhattan FP Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Manhattan FP Contribution Agreement, it will forfeit the earnest money.
On May 9, 2022, Lodging Fund REIT III OP, LP (the “Operating Partnership”), the operating partnership subsidiary of Lodging Fund REIT III, Inc. (the “Company”) and W&K Hotels, LLC (the “Lawrence DT Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Lawrence DT Contribution Agreement”), pursuant to which the Lawrence DT Contributor agreed to contribute the 192-room DoubleTree Hotel Lawrence hotel in Lawrence, Kansas (the “Lawrence DT Hotel Property”) to the Operating Partnership. The Lawrence DT Contributor is not affiliated with the Company or Legendary Capital REIT III, LLC, the Company’s external advisor. The aggregate consideration for the Lawrence DT Hotel Property under the Lawrence DT Contribution Agreement is $13,100,000 plus closing costs, subject to adjustment as provided in the Lawrence DT Contribution Agreement. The majority of the consideration consists of the assumption or refinancing by the Operating Partnership of existing debt secured by the Lawrence DT Hotel Property. The remaining consideration consists of the issuance by the Operating Partnership of Series T Limited Units of the Operating Partnership and cash at close. As required by the Lawrence DT Contribution Agreement, the Operating Partnership will deposit $50,000 into escrow as earnest money pending the closing or termination of the Lawrence DT Contribution Agreement. Except in certain circumstances described in the Lawrence DT Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Lawrence DT Contribution Agreement, it will forfeit the earnest money.
Amendment of Revolving Line of Credit
On May 5, 2022, we amended its $5.0 million revolving line of credit to extend the maturity date to December 15, 2022.
Refinancing of El Paso Courtyard
On May 13, 2022, we entered into a new $10.0 million loan with Western Alliance Bank, which is secured by the El Paso Airport Property (the “New El Paso Airport Loan”). The New El Paso Airport Loan has a fixed interest rate of 6.01% per annum. The New El Paso Airport Loan matures five years after the effective date and requires 18 monthly
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interest-only payments followed by monthly payments of principal and interest, with the outstanding principal and interest due at maturity.
Share Repurchases
On April 21, 2022, we paid the outstanding redemption proceeds related to the March 2022 redemption of 64,306 shares of common stock for $638,174 per the terms of the Share Repurchase Plan.
Status of the Offering
Our board of directors extended the term of the Offering to May 31, 2023. As of May 16, 2022, our private offering remained open for new investment, and since the inception of the offering we have issued and sold 9,080,817 shares of common stock, including 907,771 shares issued pursuant to the DRIP, resulting in the receipt of gross offering proceeds of $86.7 million.
Status of the GO Unit Offering
Our board of directors terminated the GO Unit Offering as of February 14, 2022. From the inception of the offering through termination, we have issued and sold 3,125,041 Series GO LP Units, resulting in the receipt of gross GO Unit Offering proceeds of $21.5 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risks have been omitted as permitted under rules applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act of 1934 Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2022 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
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. See Note 10 “Commitments and Contingencies” of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for a discussion of ongoing legal proceedings and governmental authority inquiries. Other than such proceedings, management is not aware of any current or pending legal proceedings to which we or any of our subsidiaries are a party or to which any of our property is subject, the outcome of which would, in management’s judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such legal proceedings contemplated by governmental authorities.
Item 1A. Risk Factors
There are no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Initial Offering
On June 1, 2018, we commenced an offering (the “Offering”) of up to $100,000,000 in shares of our common stock, which amount was increased to $150,000,000 in shares of our common stock in December 2021. We are offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. In addition to sales of common stock for cash, we have adopted a dividend reinvestment plan, which permits stockholders to reinvest their distributions back into the Company. Except as otherwise provided in the offering memorandum, we are offering the shares in the private offering at an initial price of $10.00 per share, with shares purchased in our dividend reinvestment plan at an initial price of $9.50 per share. During the three months ended March 31, 2022, we sold 336,587 shares of common stock in the private offering, resulting in gross offering proceeds of approximately $3.2 million, including 59,709 shares issued pursuant to our dividend reinvestment plan. During the three months ended March 31, 2022, aggregate selling commissions of $0.1 million and marketing and diligence allowances and other wholesale selling costs and expenses of $0.3 million were paid in connection with the private offering. During the year ended December 31, 2021, we sold 824,475 shares of common stock in the private offering, resulting in gross offering proceeds of approximately $7.9 million, including 417,267 shares issued pursuant to our dividend reinvestment plan. During the year ended December 31, 2021, aggregate selling commissions of $0.2 million and marketing and diligence allowances and other wholesale selling costs and expenses of $1.1 million were paid in connection with the private offering.
Go Unit Offering
On June 15, 2020, we commenced a private placement offering of limited partnership units in our Operating Partnership, designated as Series GO LP Units, with a maximum offering of $20,000,000, which could be increased to $30,000,000 in the sole discretion of the Company, as the General Partner of the Operating Partnership, (the “GO Unit Offering”). The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company’s sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. Our board of directors terminated the GO Unit Offering as of February 14, 2022. The Operating Partnership was offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities were being offered and sold only to purchasers who
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are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act, and without the use of general solicitation, as that concept is embodied in Regulation D. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Series GO LP Units (a “Series GO Limited Partner”) will have the right to exchange its Series GO LP Units for, at the option of the Operating Partnership, an equivalent number of shares of common stock of the Company (“Common Shares”), or cash equal to the fair market value of the Common Shares (the “Cash Amount”) which would have otherwise been received pursuant to such exchange. The exchange right is not available until all of the following have occurred (the “Exchange Date”): (i) the Common Shares are listed on a national securities exchange, the sale of all or substantially all of the GP Units and Interval Units held by the Company or any sale, exchange or merger of the Company or the Operating Partnership or, as determined in the sole discretion of the Company, the occurrence of a similar event; (ii) the Series GO Limited Partner has held its Series GO LP Units for at least one year; (iii) the Common Shares to be issued pursuant to the redemption have been registered with the SEC and the registration statement has been declared effective, or an exemption from registration is available; and (iv) the exchange does not result in a violation of the shareholder ownership limitations set forth in the Company’s articles of incorporation. Notwithstanding the above, the Company may waive any of the requirements above in its sole discretion other than (ii) or (iv). During the three months ended March 31, 2022, we sold and issued 894,568 Series GO LP Units in the GO Unit Offering, resulting in gross proceeds of $6.1 million. During the three months ended March 31, 2022, aggregate selling commissions of $0.4 million and marketing and diligence allowances and other wholesale selling costs and expenses of $0.1 million were paid in connection with the offering. During the year ended December 31, 2021, we sold and issued 1,555,543 Series GO LP Units in the GO Unit Offering, resulting in gross proceeds of $10.7 million. During the year ended December 31, 2021, aggregate selling commissions of $0.8 million and marketing and diligence allowances and other wholesale selling costs and expenses of $0.3 million were paid in connection with the offering.
Series T LP Units
On June 15, 2020, the Operating Partnership established the Series T LP Units as a new series of limited partnership units in the Operating Partnership. The Operating Partnership may issue the Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. During the three months ended March 31, 2022, the Operating Partnership issued an aggregate of 1,028,930 Serie T LP Units in connection with contributions of hotel properties on January 18, 2022 and March 29, 2022. During the year ended December 31, 2021, the Operating Partnership issued an aggregate of 2,513,769 Series T LP Units in connection with contributions of hotel properties on February 4, 2021, May 12, 2021, August 3, 2021 and December 3, 2021. These securities were issued in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities were offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act. Subject to the terms of the partnership agreement of the Operating Partnership, each holder of Series T LP Units (a “Series T Limited Partner”) will have its Series T LP Units be eligible for conversion into Common LP Units beginning 36 months after the issuance of the Series T LP Units, at which point the value will be calculated pursuant to the terms of the partnership agreement of the Operating Partnership and the formula set forth in the contribution agreement between the Operating Partnership and the Series T Limited Partner. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. The Series T LP Units will also automatically convert into Common LP Units upon other events as described in the partnership agreement of the Operating Partnership at a rate based on a mathematical formula. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Common LP Units will have the right to exchange its Common LP Units for, at the option of the Operating Partnership, an equivalent number of Common Shares or the Cash Amount which would have otherwise been received pursuant to such exchange. The exchange right is not available until the Exchange Date (as defined in the previous paragraph). Notwithstanding the above, the Company may waive any of the requirements of the Exchange Date described in the paragraph above in its sole discretion other than (ii) or (iv).
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Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. The Operating Partnership is offering these securities in reliance upon exemptions from the registration requirements provided by Section 4(2) of the Securities Act and Regulation D under the Securities Act relating to sales not involving any public offering. The securities are being offered and sold only to purchasers who are “accredited investors,” as defined in Rule 501 of Regulation D of the Securities Act. Subject to restrictions on ownership in order to comply with rules governing real estate investment trusts and the terms of the partnership agreement of the Operating Partnership, each holder of Common LP Units will have the right to exchange its Common LP Units for, at the option of the Operating Partnership, an equivalent number of Common Shares or the Cash Amount which would have otherwise been received pursuant to such exchange. The exchange right is not available until the Exchange Date (as defined above). Notwithstanding the above, the Company may waive any of the requirements described above in its sole discretion other than (ii) or (iv). On December 3, 2021, the Operating Partnership issued 152,100 Common LP Units to a contributor of real estate to the Operating Partnership. On February 8, 2022, the Operating Partnership issued 460,000 Common LP Units to a contributor of real estate to the Operating Partnership.
Share Repurchase Plan
The board of directors has adopted a share repurchase plan that may enable our stockholders to have their shares repurchased in limited circumstances. In its sole discretion, the board of directors could choose to terminate or suspend the plan or to amend its provisions without stockholder approval. The repurchase plan may be reviewed and modified by the board of directors as it deems necessary in its sole discretion. The following discussion summarizes the principal terms of our share repurchase plan.
Repurchase Price
Under certain circumstances and subject to the death repurchase described below, the prices at which we will repurchase shares under our repurchase plan are as follows:
● | For those shares held by the stockholder for at least one year, 92% of the current share NAV; |
● | For those shares held by the stockholder for at least two years, 96% of the current share NAV; and |
● | For those shares held by the stockholder for at least three years, 100% of the current share NAV. |
For purposes of determining the time period a stockholder has held each share, the time period begins as of the date the stockholder acquired the share, provided that shares purchased by the stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial shares to which the dividend reinvestment plan shares relate. The board of directors may, in its sole discretion, reject any request for repurchase and may, upon notice to the stockholders, amend, suspend or terminate the repurchase program at any time.
Limitations on Repurchase
There are several limitations on our ability to repurchase shares under our share repurchase plan:
● | Unless the shares are being repurchased in connection with a stockholder’s death, we may not repurchase shares unless the stockholder has held the shares for at least one year. |
● | During any calendar year, we will repurchase only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan upon 10 business days’ notice to our stockholders. |
● | During any calendar year, we will limit the total shares repurchased to no more than 5.0% of the weighted-average number of shares outstanding as of December 31 of the prior calendar year. |
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● | We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
● | We will not repurchase shares if the board of directors determines, in its sole discretion, that the repurchase price determined in accordance with the terms of our share repurchase plan exceeds the then current fair market value of the shares to be repurchased. |
Procedures for Repurchase
We will repurchase shares within 21 days following the end of a calendar quarter. We must receive a written request for repurchase at least two business days before the end of the calendar quarter in order for us to repurchase a stockholder’s shares on the repurchase date. If we cannot repurchase all shares presented for repurchase in any quarter, we will attempt to honor repurchase requests on a pro rata basis. The board of directors may, in its sole discretion, reject any request for repurchase.
If we did not completely satisfy a stockholder’s repurchase request on a repurchase date because we did not receive the request in time, because of the limitations on repurchases set forth in our share repurchase plan or because of a suspension of our share repurchase plan, we would treat the unsatisfied portion of the repurchase request as a request for repurchase at the next repurchase date at which funds are available for repurchase unless the stockholder withdraws its request. Any stockholder may withdraw a repurchase request upon written notice to the program administrator if such notice is received at least two business days before the repurchase date.
All shares to be repurchased must be (i) fully transferable and not be subject to any liens or other encumbrances and (ii) free from any restrictions on transfer. If we determine that a lien or other encumbrance or restriction exists against the shares, we will not repurchase any such shares.
Neither we nor the board of directors will have any liability to any stockholder for any damages resulting from or related to the stockholder’s presentment of its shares. Further, stockholders will have complete responsibility for payment of all taxes, assessments and other applicable obligations and third-party costs resulting from or relating to our repurchase of shares. All repurchased shares shall be repurchased as treasury shares and may be made available for purchase to new or existing stockholders.
Special Repurchases—Death Repurchase
In the event of the death of a stockholder, the Company will, upon request and within six months from the date of the request, repurchase such stockholder’s shares regardless of the period the deceased stockholder has owned such shares at the following prices:
● | 92% of the current share NAV if death occurs less than six months of the purchase; |
● | 96% of the current share NAV if death occurs from six months to one year of purchase; and |
● | 100% of the current share NAV if death occurs after one year of purchase. |
We will not be obligated to repurchase a deceased stockholder’s shares if more than two years have elapsed from the date of death.
Amendment, Suspension or Termination of Program and Notice
The board of directors may, at any time and without stockholder approval, upon 10 business days’ written notice to the stockholders (i) amend, suspend or terminate our share repurchase plan and (ii) increase or decrease the funding available for the repurchase of shares pursuant to our share repurchase plan.
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Shares Repurchased
Pursuant to the terms of our Share Repurchase Plan, we will repurchase shares within 21 days following the end of a calendar quarter. During the three months ended March 31, 2022, we repurchased shares of our common stock in the amounts below. In addition to these amounts, in March 2022, we received a request to repurchase 64,306 shares. The repurchase proceeds of $638,174 were paid on April 21, 2022 in accordance with the terms of our Share Repurchase Plan with an average price paid per share of $9.92. The $638,174 is included in other liabilities on the accompanying consolidated balance sheets as of March 31, 2022 included as part of this Quarterly Report on Form 10-Q. We fulfilled all repurchase requests received during the three months ended March 31, 2022, During the three months ended March 31, 2022, we funded repurchases under our share repurchase plan with the net proceeds from our dividend reinvestment plan.
Month | Total Number of Shares Repurchased | Average Price Paid Per Share | Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program | ||||||
January 2022 | 30,383 | $ | 9.85 | (1) | |||||
February 2022 | — | $ | — | (1) | |||||
March 2022 | — | $ | — | (1) | |||||
Total | 30,383 |
(1) | We limit the dollar value of shares that may be repurchased under the plan as described above. One of these limitations is that during each calendar year, our share repurchase plan limits the number of shares we may repurchase to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the repurchase of shares upon ten business days’ notice to our stockholders. |
The above table is on a cash basis, but we record our shares repurchased, as described below, on an accrual basis. We repurchased 64,306 shares pursuant to repurchase requests received during the three months ended March 31, 2022, which represents an original investment of $643,064 for $638,174. As of March 31, 2022, $643,064 of the redemption proceeds had not yet been paid and was included in other liabilities on the accompanying consolidated balance sheets included as part of this Quarterly Report on Form 10-Q. During the year ended December 31, 2021 we repurchased 88,088 shares, which represents an original investment of $880,883 for $856,605. Based on the repurchase limits described above, as of March 31, 2022 we have $2,432,158 available for eligible repurchases for the remainder of 2022 after accounting for the outstanding redemption proceeds not yet paid on March 31, 2022.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
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10.201* | ||||
10.202* | ||||
10.203* | ||||
10.204* | ||||
10.205* | ||||
10.206* | ||||
10.207* | ||||
10.208* | ||||
10.209* | ||||
10.210* | ||||
10.211* | ||||
10.212* | ||||
10.213* | ||||
10.214* | ||||
10.215* | ||||
31.1 | * | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | * | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
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32.1 | ** | |||
99.1 | Share Repurchase Plan of the Registrant (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 10 filed August 8, 2019) |
* Filed herewith.
** Furnished herewith.
101.INS |
| Inline XBRL Instance Document | ||
101.SCH |
| Inline XBRL Taxonomy Extension Schema | ||
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase | ||
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LODGING FUND REIT III, INC. | |||
Date: | May 16, 2022 | By: | s/ Corey R. Maple |
Corey R. Maple | |||
Chairman of the Board, Chief Executive Officer and Secretary | |||
(principal executive officer) | |||
Date: | May 16, 2022 | By: | /s/ Samuel C. Montgomery |
Samuel C. Montgomery | |||
Chief Financial Officer | |||
(principal financial officer) |
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