UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents
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FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K 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.
For a discussion of some of the risks and uncertainties, although not all risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements, see the risks identified in “Summary Risk Factors” below and under the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. All forward-looking statements should be read in light of the risks identified in “Summary Risk Factors” below and in Part I, Item 1A of this Annual Report on Form 10-K. 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.
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 Annual Report on Form 10-K that could materially and adversely affect our business, financial condition, results of operations and cash flows. This summary highlights certain of the risks that are discussed further in this Annual Report but does not address all of the risks that we face. You should carefully review and consider the full discussion of our risk factors in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Risks Related to Our Business
| ● | Our business strategy depends significantly on achieving revenue and net income growth from anticipated increases in demand for hotel rooms, which will be adversely affected by weak economic conditions, high rates of inflation and travel-related concerns, and risks associated with the ongoing COVID-19 pandemic and other possible future pandemics and similar outbreaks. If demand does not increase or if demand weakens, our occupancy or revenues per available room may decline, making it more difficult for us to implement our business strategy and to meet any debt service obligations we have incurred and limiting our ability to pay distributions to our stockholders. |
| ● | Our advisor, Legendary Capital REIT III, LLC (the “Advisor”), its executive officers and other key personnel, the employees of Legendary Capital, LLC (the “Sponsor”), an affiliate of the Advisor as well as certain of our officers and directors, whose services are essential to the Company, may be involved in other business ventures, and will face a conflict in allocating their time and other resources between us and the other activities in which they are or may become involved. Failure of the Advisor, its executive officers and key personnel, the employees of the Sponsor, and our officers and directors to devote sufficient time or resources to our operations could result in reduced returns to our stockholders. |
| ● | We will pay certain prescribed fees and expenses to the Advisor and its affiliates regardless of the quality of services provided. These fees were not negotiated at arm’s length and therefore may be higher than fees payable to unaffiliated third parties for the same or similar services. Such fees may result in conflicts of interest between the Advisor and our stockholders due to the nature of the incentive fees and management fees. |
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| ● | We have paid distributions from proceeds from our ongoing private offering described below (the “Offering”) and, to the extent our board of directors declares future distributions, we may continue to fund distributions with Offering proceeds. We have not established a limit on the amount of proceeds from our Offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment and the overall return to our stockholders may be reduced. We may fund distributions from other sources such as borrowings, which may constitute a return of capital. |
| ● | If we are unable to raise substantial funds in our securities offerings, we may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to vary more widely with the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue. |
| ● | We may be unable to identify properties that meet our investment criteria in a timely manner or on acceptable terms, and may be unable to consummate investment opportunities that we identify, which could result in reduced returns or reduce the amount available for distributions to our stockholders. |
| ● | We intend to acquire only hotel properties. As a result, we will only have limited diversification as to the type of property we own. In the event of an economic recession affecting the economies of the areas in which the properties are located or a decline in values in general, our financial performance could be materially and adversely affected, which may limit our ability to pay distributions to our stockholders. |
Risks Related to the Lodging Industry and Real Estate Industry
| ● | We may be unable to dispose of our properties on advantageous terms or at all due to various factors, including weakness in our properties’ markets, unavailability of financing, changes in the financial condition of prospective purchasers or changes in general economic conditions, which could reduce our cash flow and limit our ability to make distributions to our stockholders. |
| ● | 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. |
| ● | Competition for guests, including with other hotels, resorts and vacation rental marketplaces, may reduce our hotels’ revenues and profitability. |
| ● | The hospitality industry is seasonal in nature. In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition. |
| ● | We rely on management companies to operate our hotel properties, giving us less control than if we were managing the hotels ourselves. 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 |
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| 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 have increased and may continue 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. |
PART I
Item 1. Business.
Overview
Lodging Fund REIT III, Inc. was formed on April 9, 2018, as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of limited-service, select-service, full-service and extended-stay hotel properties (the “Projects”) located primarily in “America’s Heartland,” which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. We have elected to be taxed as a real estate investment trust, or REIT, beginning with the taxable year ended December 31, 2018, and we intend to continue to operate in such a manner. Where applicable in this Form 10-K, “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 Legendary Capital REIT III, LLC, a Delaware limited liability company (the “Advisor”) pursuant to an advisory agreement, as amended, under which the Advisor performs advisory services regarding acquisition, financing and disposition of the Projects and origination of any loans, and is responsible for managing, operating and maintaining the Projects and day-to-day management of the Company. The Advisor may, in its sole discretion, perform these duties through one or more affiliates. The Operating Partnership has issued 1,000 Series B Limited Partnership Units (“Series B LP Units”) to the Advisor as part of its compensation. See Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Overview” for further details of the compensation to the Advisor.
Our Advisor is wholly-owned by Corey Maple and Norman Leslie. To facilitate our REIT structure, the Operating Partnership formed Lodging Fund REIT III TRS, Inc., a Delaware corporation (“Master TRS”), to act as the “master” taxable REIT subsidiary (“TRS”) entity. When we acquire a Project, the Master TRS forms a separate wholly-owned TRS to act as lessee of the Project (a “TRS Lessee”). That TRS Lessee will enter into a lease agreement with a wholly-owned subsidiary of the Operating Partnership to operate the Project. We have engaged National Hospitality Services (“NHS”) to manage eleven of the Projects acquired to date; however, we can engage and have engaged third party property management companies. 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.
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
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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, 2024, 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. From the inception of the Offering through December 31, 2022, except as otherwise provided in the offering memorandum for the Offering, the shares offered in the Offering for cash were 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. Our board of directors approved an estimated net asset value per share (“Share NAV”) of our assets as of December 31, 2022 and based on such Share NAV adjusted the offering price for our shares in the Offering to $10.57 per share, effective January 6, 2023, with shares issued pursuant to the DRIP being purchased at 95% of the new Share NAV, or $10.04 per share. As of December 31, 2022, the Company had issued and sold 9,894,987 shares of common stock, including 1,018,460 shares attributable to our DRIP, and received aggregate proceeds of $96.7 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 $83.9 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 December 31, 2022, we have repurchased 287,525 shares, which represents an original investment of $2,858,355 for $2,794,469. See Part II Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Share Repurchase Plan”.
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 was a maximum offering of $30,000,000, which could 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. Our board of directors allowed the Interval Share Offering to expire on March 31, 2022. We did not issue or sell any shares of Interval Common Stock in the Offering.
GO Unit Offering
On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series Growth & Opportunity Limited Partner Units (“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. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. As of December 31, 2022, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received aggregate proceeds of $21.5 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $19.4 million.
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Series T LP Units
The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan (“PIP”) and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of conversion. As of December 31, 2022, the Company had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions.
Common LP Units
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of December 31, 2022, the Operating Partnership had issued and sold 612,100 Common LP Units, with a value of $10.00 per unit, in connection with property contributions.
Independent Director Compensation
During 2022, we began compensating our independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and we recognize stock-based compensation expense based on the award’s fair value at the grant date. On March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022, we issued 500 shares of our common stock to each of our three independent directors and, for the year ended December 31, 2022, recognized stock-based compensation expense of $60,000. 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.
Our Investment Objectives and Operations
We have invested and intend to 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. Our overall strategy is to purchase a diverse portfolio of hotels that presents a strong opportunity for both cash flow generation and capital appreciation. We will attempt to diversify our investment portfolio by geography, brand and asset opportunity type. Our target markets are metropolitan statistical areas in America’s Heartland with populations exceeding 250,000 that exhibit well-diversified business and leisure demand generators. We intend to focus mainly on well-known and established hotel brands, such as Marriott Hotels®, Hilton®, IHG and Hyatt® and their affiliated “flags”, however, we may acquire lesser-known hotel brands where strategically appropriate. We will attempt to further diversify our investments based on three asset opportunity classes: “Stabilized” opportunities (steady historical performers), “Refresh” opportunities (needing capital expenditure or management upgrades) and “Value” opportunities (requiring significant upgrades and stabilization). We do not intend to add Value opportunities unless circumstances arise that would make it advantageous.
Our investment objectives are:
| ● | to preserve, protect and return investor capital contributions; |
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| ● | to pay regular cash distributions; and |
| ● | to realize appreciation in the value of our investments upon the ultimate sale of such investments. |
There is no assurance that we will attain these objectives or that there will be any return of capital to investors. Investment results may vary substantially over time and from period to period. Our board of directors may, from time to time, change our investment objectives if it determines it is advisable and in the best interest of our stockholders.
Our Investment Strategy
Real Estate Portfolio
We acquired our first real estate property on November 30, 2018. As of December 31, 2022, our real estate portfolio consisted of nineteen Projects located in the following cities: Cedar Rapids, Iowa; Pineville, North Carolina; Eagan, Minnesota; Prattville, Alabama; Lubbock, Texas; Southaven, Mississippi; Aurora, Colorado; El Paso, Texas; Houston, Texas; Northbrook, Illinois; Fargo, North Dakota; Lakewood, Colorado; Fort Collins, Colorado; Charlotte, North Carolina; and Wichita, Kansas, referred to in this Form 10-K as the “Cedar Rapids Property,” the “Pineville Property,” the “Eagan Property,” the “Prattville Property,” the “Lubbock Home2 Property,” the “Lubbock Fairfield Property,” the “Southaven Property,” the “Aurora Property,” the “El Paso HI Property,” the “Houston Property,” the “Northbrook Property”; the “Fargo Property”; the “El Paso Airport Property”; the “Lakewood Property”; the “Fort Collins Property”; the “El Paso University Property”; the “Charlotte Property”; the “Pineville HGI Property”; and the “Wichita Property” respectively. We own an equity and profits interest in the parent of the entity which holds a leasehold interest in the El Paso University Property. See Part I, Item 2 “Properties” for a more detailed description of our real estate portfolio.
Real Estate Investments
We believe there is a significant inventory of hotel properties in our target markets that are of quality construction, in good locations with well-known brands and historical track records that meet our diversified portfolio parameters. We plan to target markets that have been historically strong from a demand and growth perspective. We also plan to focus on hotel properties that we anticipate will require relatively modest necessary capital improvements in the short term. Our intention is to build a diversified portfolio of hotel properties, complete certain property improvements and operate the individual hotel properties with a final goal of selling the entire portfolio in a single transaction.
We expect that the majority of the hotel properties will be midscale hotels that do not provide full-service facilities to guests including the following types of franchised hotel properties:
| ● | Limited-Service Hotels. Limited-service hotels offer limited facilities and amenities, typically without a full-service restaurant. |
| ● | Select-Service Hotels. Select-service hotels offer the fundamentals of limited-service properties together with a selection of services and amenities characteristic of full-service hotels. Generally, the additional amenities are restaurants and banquet facilities but on a less elaborate scale than one would find at full-service hotels. |
| ● | Full-Service Hotels. Full-service hotels offer restaurants, lounge facilities and meeting space as well as minimum service levels often including room service. |
| ● | Extended-Stay Hotels. Extended-stay hotels typically focus on attracting guests for extended periods. These properties quote weekly rates and blend transient and long-term bookings. |
By concentrating on top-quality institutional franchisors like Marriott Hotels®, Hilton®, IHG and Hyatt® and their affiliated “flags”, we believe we can (i) command a Revenue Per Available Room, or “RevPAR”, premium over sub-market competitive sets, (ii) take advantage of the brands’ strong loyalty programs, (iii) utilize brand channels to deliver guests, (iv) enjoy the benefits of premier system standards, where the brands drive consistent quality, high service standards, innovative design and modern amenities across each respective flag, (v) benefit from effective brand segmentation where, through a wide range of hospitality choices within each brand family, each brand appeals to a broad range of travelers with
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differing levels of amenities and rates and (vi) utilize the brands’ institutional character to drive faster and stronger resale, financing flexibility and investor confidence. We will attempt to enter into minimum ten-year franchise agreements for each of our franchised hotel properties.
We generally will acquire a fee interest in hotel properties directly through special purpose entities which are generally wholly owned subsidiaries of our Operating Partnership. We may also make investments in certain hotel properties through joint ventures with third-party institutions, developers, operators, investors and other third parties as well as with affiliates of the Advisor. Such joint ventures may be leveraged with debt financing or unleveraged. We believe COVID-19 has created an environment favorable for acquisitions using a mechanism known as an Umbrella Partnership REIT (“UPREIT”), whereby the owner of the hotel property desires to exchange its hotel property for limited partnership interests in the Operating Partnership pursuant to an UPREIT contribution agreement. We anticipate that we will purchase hotel properties using the UPREIT model as they generally require less cash investment, while providing tax and other benefits to the property sellers, but we may also enter into purchase and sale agreements with the seller. As of the date of this filing, we acquired ten hotel properties pursuant to an UPREIT contribution agreement and have no properties under contract pursuant to an UPREIT contribution agreement. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Subsequent Events”.
We have financed and plan to continue to finance the purchase of hotel properties with proceeds from the Offering and loans obtained from third-party lenders and Legendary A-1 Bonds, LLC, an affiliate of the Advisor. We expect to use moderate leverage to enhance the total cash flow to our stockholders. We anticipate that the aggregate loan-to-value ratio for the Company will be between 35% and 65%. We will target a loan-to-value ratio for the hotel properties of between 35% and 70%, based on the purchase price of the hotel properties; however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual hotel property at the discretion of our board of directors. We will seek to obtain financing on the most favorable terms available. Loans are expected to be nonrecourse and will be secured by the applicable hotel property. In some cases, however, we have been, and in the future may be, required to enter into guarantees for the loans for certain non-recourse carve-outs.
We have obtained and may in the future obtain lines of credit or other financings, secured by one or more of the hotel properties, to provide financing for acquisitions, to fund property improvements and other capital expenditures, to make distributions, and for other purposes. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of December 31, 2022, we had a $5.0 million line of credit with Western Bank and a $10.0 million line of credit with Legendary A-1 Bonds, LLC to provide immediate capital to fund acquisitions of the hotel properties. As of December 31, 2021, we had a $5.0 million line of credit with Western Bank to provide immediate capital to fund acquisitions of the hotel properties. As of December 31, 2022, we had $12.4 million outstanding on the lines of credit. As of December 31, 2021, we had $0.6 million outstanding on the line of credit.
As of December 31, 2022 and 2021, we had $180.3 million and $103.9 million, respectively, in outstanding mortgage debt secured by nineteen and eleven hotel properties, respectively, with maturity dates ranging from May 2023 to April 2029 and fixed and variable interest rates ranging from 3.70% to 10.40%. As of December 31, 2022 and 2021, the weighted-average interest rate was 5.74% and 4.92%, respectively. See Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt” for additional details.
Our Disposition Strategy
We plan on holding and managing the hotel properties and our other investments for approximately five years following the termination of the Offering, although our board of directors has discretion to extend this holding period indefinitely. Our intention, however, is to dispose of our entire portfolio as soon as practicable when market conditions are favorable. Circumstances may arise, however, that make it more beneficial to sell one or more hotel properties on an individual basis. The Advisor will continually evaluate each hotel property’s performance based on economic and market conditions and our overall objectives to determine an appropriate time to sell the hotel properties in an effort to maximize total returns to our stockholders. The determination of when a particular hotel property should be sold or otherwise disposed of will be made by our board of directors, upon recommendation by our Advisor.
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Human Capital
Lodging Fund REIT III, Inc. has no direct employees. The employees of the Sponsor, as an affiliate of the Advisor, perform substantially all of the services related to our asset management, accounting, legal, investor relations, and other administrative activities. The hotel management companies we engage to operate our hotels are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not manage employees at our hotels, we are still subject to the many costs and risks generally associated with the labor at our hotels.
Competition
Our current hotel properties compete with numerous other hotels throughout the United States in addition to alternative lodging. During the COVID-19 pandemic and the anticipated recovery, we believe that the markets in which our hotels are located, the proximity of our hotels to main transportation routes, hotel categories, and brand level enhanced safety protocols will provide a competitive advantage over other hotels.
The hotel business is management and marketing intensive. Our current hotel properties compete with other hotels throughout the United States for high quality management and marketing personnel. We believe that franchisors’ marketing scale and ability to manage group business have improved our hotels’ competitive position. However, there can be no assurance that our hotel properties will be able to continue to attract and retain employees with the requisite managerial and marketing skills.
Additionally, as a REIT, we compete for investment opportunities in the hospitality industry. As we acquire hotel properties to build our portfolio, we are in competition with other potential buyers for the same hotel properties, which may result in an increase in the amount we must pay to acquire a project or may limit the number of projects we are able to acquire. Other potential buyers may include other listed and non-listed REITs or private investors. These potential buyers may have substantially greater financial resources and experience than we do and may be able to accept more risk than we can prudently manage.
At the time we elect to dispose of our Projects, we may be in competition with sellers of similar hotel properties to locate suitable purchasers. This may result in a decrease in the amount we receive on the sale of a Project or may require us to defer the sale and increase our hold period on all or certain Projects.
Economic Dependency
We depend on the Advisor and its affiliates, including the Sponsor, to provide certain services essential to the Company, including asset management services, supervision of the management of the hotel properties, asset acquisition and disposition services, as well as other administrative responsibilities for the Company, including accounting services, legal, investor communications and investor relations. As a result of these relationships, we are dependent upon our Advisor and its affiliates.
Governmental Regulation
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties we currently own, or on properties that may be acquired in the future.
Americans with Disabilities Act
Our hotel properties are subject to the Americans with Disabilities Act of 1990, as amended, and applicable regulations promulgated thereunder (the “ADA”). Under the ADA, “public accommodations” as defined by the ADA must meet
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certain federal requirements related to access and use by disabled persons. Although we believe our current hotel properties are in substantial compliance with the ADA, and we intend to acquire hotel properties that are substantially in compliance with the ADA, we may incur additional costs of complying with the ADA at the time of acquisition and from time to time in the future to remain in compliance. Also, non-compliance with the ADA may result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate.
Industry Segments
Our current business consists of acquiring, managing, investing in and disposing of real estate assets. We internally evaluate all of our real estate assets as one industry segment and, accordingly, we do not report segment information.
Seasonality
Depending on a hotel property’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, 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.
Internet Address
Our website address is http://www.legendarycap.com.
Item 1A. Risk Factors.
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our company and our business.
Risks Related to Owning Shares of Our Common Stock
The offering price for our shares of common stock in the Offering has been determined by us, and we cannot guarantee that it represents an accurate estimation of our enterprise value.
From inception of our Offering through December 31, 2022, the offering price for our shares of common stock in the Offering was $10.00 per share (ignoring purchase price discounts for certain purchasers), which was determined primarily by our board of directors and bore no relationship to any established criteria of value such as book value or earnings per share, or any combination thereof. Further, the price of our shares of common stock was not based on our past earnings, nor does that price necessarily reflect current market value for our assets. Our board of directors approved an estimated net asset value per share (“Share NAV”) of our assets as of December 31, 2022 and based on such Share NAV adjusted the offering price for our shares in the Offering to $10.57 per share, effective January 6, 2023. The Share NAV was determined by our board of directors taking into account appraisals of the Company’s real estate properties and other factors deemed relevant by the board of directors. The ordinary course of our business does not entail the valuation of businesses or securities, and therefore cannot guarantee that our estimation of the Share NAV will be an accurate estimation of our enterprise value.
Our shares of common stock have no public market, no public market is expected to develop, and consequently, it may be difficult for you to sell your shares.
There is no public trading market for our shares of common stock and we do not expect one to develop in the foreseeable future. The absence of a public market for our shares of common stock could impair your ability to sell your shares at a fair price or at all. In addition, the transfer of shares will be subject to additional limitations. Although our board of directors has adopted a share repurchase plan, there is no guarantee that such program will remain in place in its current form, and
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our board of directors may suspend, modify or terminate the share repurchase plan at any time. Consequently, you may have to hold your shares for an indefinite period of time because it may be difficult for you to sell your shares.
There are restrictions on transferring our shares of common stock, which may make your shares unattractive to prospective purchasers and may prevent you from selling them when you desire.
Transfer of your shares is restricted by applicable federal and state securities laws as well as the charter. The offering of our shares in the Offering has not been registered under federal securities laws or the securities laws of any other state. Each investor who purchases shares must represent that it is acquiring our shares of common stock for investment and not with a view to distribution or resale and that it understands our shares of common stock are not freely transferable. You may not sell, offer for sale, or transfer your shares in the absence of either an effective registration statement under the Securities Act and under applicable state securities laws, or an opinion of counsel satisfactory to our legal counsel that such transaction is exempt from registration under the Securities Act and under applicable state securities laws. These restrictions may make your shares unattractive to prospective purchasers and may reduce the price prospective investors are willing to pay for your shares, even if transfer of these shares is allowed by state and federal securities laws. Consequently, an investment in our shares of common stock should be considered only as a long-term investment for persons of adequate financial means who do not need liquidity.
There is no specified or guaranteed liquidation date for our shares of common stock.
There is no specified or guaranteed liquidity event or liquidation date for our shares of common stock. Accordingly, shares must be considered solely as long-term investments.
The actual value of shares that we repurchase under our share repurchase plan may be substantially less than what we pay.
Under our share repurchase plan, shares currently may be repurchased at varying prices depending on the number of years our shares of common stock have been held and whether the repurchases are sought upon a stockholder’s death. The repurchase price is based on the NAV on the date of repurchase and is not based on the price at which a stockholder initially purchased its shares. Stockholders may receive less than the price that they paid for their shares upon repurchase by us pursuant to the stock repurchase plan. The maximum price that may be paid under our program was $10.00 per share through December 31, 2022 and is currently $10.57 per share, which is the current Offering price of our shares of common stock in the Offering (ignoring purchase price discounts for certain purchasers). This repurchase price is likely to differ from the price at which a stockholder could resell its shares. Thus, when we repurchase shares at $10.57 per share, the actual value of our shares of common stock that we repurchase may be less, and the repurchase will be dilutive to our remaining stockholders. Even at lower repurchase prices, the actual value of our shares of common stock may be substantially less than what we pay and the repurchase may be dilutive to our remaining stockholders.
Our stockholders have limited redemption rights.
Our share repurchase plan includes numerous restrictions that severely limit our stockholders’ ability to redeem their shares for cash should they require liquidity. See “Part II. Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Share Repurchase Plan” for more information about the plan.
Our shares of common stock are being offered in reliance upon a private offering exemption under the Securities Act. If we should fail to comply with the requirements of such exemption, our stockholders would have the right to rescind their purchase of shares.
Our shares of common stock are being offered and will be sold to investors in reliance upon a private offering exemption from registration provided in the Securities Act. If we should fail to comply with the requirements of such exemption, our stockholders would have the right to rescind their purchase of their shares if they so desired. It is possible that one or more stockholders seeking rescission would succeed. This might also occur under applicable state securities laws and regulations in states where our shares of common stock will be offered without registration or qualification pursuant to a private offering or other exemption. If a number of stockholders were successful in seeking rescission, we would face severe
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financial demands that would adversely affect us as a whole and, consequently, the investment in our shares of common stock by the remaining stockholders.
Our board of directors may create additional classes of our securities.
Our board of directors has the authority under the charter to create and issue additional classes of securities and to designate the rights, preferences and privileges thereof, such as the Interval Common Stock. Our board of directors may in the future create one or more additional classes of securities having rights, preferences and privileges that are superior to and dilutive of our shares of common stock, including additional shares of common stock, preferred stock, warrants and options. This could reduce the amount of cash available for distribution from our operations and liquidation to our stockholders and increases the risk that our stockholders will not profit from their acquisition of shares or will lose their investment entirely. Our stockholders do not have any preemptive rights with respect to any equity which the Company may issue in the future. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our shares of common stock.
Risks Related to Our Business
Our business strategy depends significantly on achieving revenue and net income growth from anticipated increases in demand for hotel rooms, which will be adversely affected by weak economic conditions, high rates of inflation and travel-related concerns, and risks associated with the ongoing COVID-19 pandemic and other possible future pandemics and similar outbreaks.
Our business strategy depends significantly on achieving revenue and net income growth from anticipated improvement in demand for hotel rooms. We cannot, however, provide any assurances that demand for hotel rooms will increase from current levels, or the time or extent of any demand growth that we do experience. If demand does not increase in the near future, or if demand weakens, our operating results and growth prospects could be adversely affected. The lodging industry has historically been closely linked to the performance of the general economy and thus, is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions can result from various events that are beyond our control, including the COVID-19 pandemic, terrorist attacks, wars, including the current conflict between Russia and Ukraine, travel-related health concerns, travel-related accidents, and unusual weather patterns and natural disasters such as tornados, hurricanes, or earthquakes.
During the year ended December 31, 2022, inflation in the United States accelerated and is currently expected to continue at an elevated level in the near-term. Beginning in 2022, in an effort to combat inflation and restore price stability, the Federal Reserve significantly raised its benchmark federal funds rate, which led to increases in interest rates in the credit markets. The Federal Reserve may continue to raise the federal funds rate, which will likely lead to higher interest rates in the credit markets and the possibility of slowing economic growth and/or a recession. Additionally, U.S. government policies implemented to address inflation, including actions by the Federal Reserve to increase interest rates, could negatively impact consumer spending and adversely impact the broader economy, resulting in job losses for many of our residents.
Rising inflation could also have an adverse impact on our financing costs (either through near-term borrowings on our variable rate debt, including our credit facilities, or refinancing of existing debt at higher interest rates), and general and administrative expenses and property operating expenses, as these costs could increase at a rate higher than our rental and other revenue. To the extent our exposure to increases in interest rates is not eliminated through interest rate caps or other protection agreements, such increases may also result in higher debt service costs, which will adversely affect our cash flows. Historically, during periods of increasing interest rates, real estate valuations have generally decreased due to rising capitalization rates, which tend to move directionally with interest rates. Consequently, prolonged periods of higher interest rates may negatively impact the valuation of our real estate assets. Although the extent of any prolonged periods of higher interest rates remains unknown at this time, negative impacts to our cost of capital may adversely affect our future business plans and growth, at least in the near term. Increased inflation may also have an adverse effect on our operating expenses, including, but not limited to, labor, supplies, repairs and maintenance, as these costs could increase at a rate higher than
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our revenues. Inflation could also have an adverse effect on consumer spending, which could impact occupancy levels at our hotel properties and, in turn, our own results of operations.
Also, the market and economic challenges created by the COVID-19 pandemic have adversely affected, and may continue to adversely affect, our returns and profitability and, as a result, our ability to pay distributions to our stockholders or to realize appreciation in the value of our properties. During 2022 and 2023, some of these challenges have improved. However, we cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing. If the COVID-19 pandemic worsens, or if we experience another pandemic or epidemic in the future, any increases in unemployment, increasing labor costs and shortages, decreased capital spending, declines in consumer confidence, commodity and other price inflation, supply chain disruptions, or economic slowdowns or recessions that may result therefrom may cause sustained negative consumer or business sentiment and reduced demand for travel and lodging, and may cause an increase in renovation, construction and operating costs, and may limit our access to critical operating supplies, all of which would materially and adversely affect our business, financial performance and condition, operating results and cash flows.
Additionally, the management companies that operate our hotel properties may be limited in their ability to properly maintain the properties. Market fluctuations may affect our ability to obtain necessary funds for the operation of our hotels from current lenders or new borrowings. In addition, we may be unable to obtain financing for the acquisition of new hotels on satisfactory terms, or at all. Further, we have entered into agreements with lenders under our mortgage loans to provide for relief from certain obligations under the loan agreements, including deferral of payment obligations and covenant relief. If our financial condition and results of operation continue to be negatively affected beyond the terms of our existing lender accommodations, we may be unable to obtain further extensions of the payment obligations and covenant relief, and may be forced to make additional payments on the loans which could adversely affect our ability to pay distributions to our stockholders. Third-party reports relating to market studies or demographics we obtained prior to the COVID-19 virus outbreak for hotels we acquired or have identified for acquisition may no longer be accurate or complete. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our business, financial condition, results of operation and the overall value of our properties, and stockholders may lose all or a substantial portion of their investment in us.
We depend on the efforts and expertise of the Advisor and its officers and principals, whose continued service is not guaranteed.
We depend on the efforts and expertise of our officers, the Advisor and its principals to execute our business strategy. The loss of their services, and our inability to find suitable replacements, could have an adverse effect on our business and, in turn, any return to our stockholders.
Our Advisor, its executive officers and other key personnel, the Sponsor’s employees and certain of our officers and directors will not devote their time and energies exclusively to us.
Our Advisor, its executive officers and other key personnel, the employees of the Sponsor, an affiliate of the Advisor, as well as certain of our officers and directors, whose services are essential to the Company, are, and will continue to be, involved in other business ventures, and will devote only such portion of their time to our affairs as they believe is appropriate to manage our affairs effectively. They 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.
There is no assurance that we will satisfy our business objectives, which could limit our ability to make distributions and decrease the value of your investment.
There is no assurance that we will satisfy our business objectives. No assurance can be given that our stockholders will realize a substantial return, if any, on their purchase or that we will be able to make distributions to our stockholders. We may not be able to achieve our investment objectives, may make unwise decisions or may make decisions that are not in an investor’s best interests because of conflicts of interest. No assurance can be given that the Company will be able to acquire suitable investments or that the Company’s objectives will be achieved.
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We own only hotel properties, which will limit the diversification of our investments.
As of December 31, 2022, we owned a portfolio of nineteen hotel properties, including the equity and profits interest in the parent of the entity which holds a leasehold interest in the El Paso University Property. We have no plans to acquire assets other than hotel properties, which limits the diversification of the type of properties we own. If we do not raise substantial funds in our securities offerings, we will be limited in the number and type of investments we and the Operating Partnership may make, which will result in a less diversified portfolio. We may not be able to acquire a large portfolio of assets, which may cause the value of an investment in us to experience more volatility due to the performance of certain investments and cause our general and administrative expenses to constitute a greater percentage of our revenue. In such event, the likelihood of our profitability being affected by the poor performance of any single investment will increase, which may limit our ability to pay distributions to our stockholders. A limited number of hotel properties may place a substantial portion of the funds invested in the same geographical location with the same property-related risks. In that case, the decline in a particular real estate market could substantially and adversely impact us. In the event of an economic recession affecting the economies of the areas in which the hotel properties are located, a decline in real estate values in general or the occurrence of any one of many other adverse circumstances, our financial performance could be materially and adversely affected.
Our investment policies are subject to revision from time to time at our board of directors’ discretion, which could diminish stockholder returns below expectations.
Our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Such changes could result in investments that may not yield returns consistent with our stockholders’ expectations.
If we are unable to successfully manage our growth, our operating results and financial condition could be adversely affected.
Our ability to grow our business depends upon our agreements with the Operating Partnership and the Advisor, and the business acumen of the individuals managing each of these entities. If these agreements are terminated, we may not be able to hire and train sufficient personnel or develop management, information and operating systems suitable for our expected growth. If we are unable to manage any future growth effectively, our operating results and financial condition could be adversely affected.
Our future growth and success depends on obtaining financing, and if we cannot secure financing on acceptable terms or at all, our growth may be limited.
The success of our growth strategy depends on access to capital through the use of excess cash flow, borrowings or subsequent issuances of our common stock or other securities. We will require significant capital to acquire, renovate, rehabilitate, operate, and make periodic capital improvements at the hotel properties. We may not be able to fund acquisitions, renovations or capital improvements solely from cash provided from our operating activities. To the extent required funds are not available from operations, we will need to obtain new or additional borrowings on satisfactory terms, which will depend on capital markets conditions. There is no assurance that we will be able to obtain the required financing for our hotel properties on favorable terms, or at all.
We may be unable to raise substantial funds in our securities offerings or to invest the proceeds of our securities offerings in a timely manner or on acceptable terms.
We may be unable to raise substantial funds in our securities offerings, which could limit our ability to acquire a large portfolio of diverse assets. We may be unable to invest the Offering proceeds on acceptable terms, or at all, which could delay stockholders from receiving an appropriate return on their investment and reduce the amount available for distribution to our stockholders. We cannot assure you that we will be able to identify properties that meet our investment criteria, that we will successfully consummate any investment opportunities we identify or that investments we may make will generate income or cash flow. Our failure to find suitable hotel properties to acquire in a timely manner or on acceptable terms could result in returns that are substantially below expectations or result in losses.
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We have been delinquent in our SEC reporting obligations for over 12 months, and continue to be delinquent with respect to several Quarterly Reports on Form 10-Q. We cannot provide assurance that our business will not be materially adversely affected by our previous and potential future failures to file required periodic reports on a timely basis.
Despite the filing of this annual report on Form 10-K, we face a continuing risk that the SEC will initiate an administrative proceeding to suspend or revoke the registration of our common stock under the Exchange Act due to our previous failure to timely file our annual report on Form 10-K and our continuing delinquent quarterly reports on Form 10-Q. There may be continued concern on the part of investors and employees about our financial condition and extended filing delay status, which may result in the loss of business opportunities, limitations on our ability to raise capital, and general reputational harm. Any of the foregoing could materially adversely affect our business, results of operations and financial condition.
We must rely on management companies that are eligible independent contractors to operate the hotel properties in order to qualify as a REIT and, as a result, we have less control than if we were operating the hotel properties directly.
In order for us to qualify as a REIT, management companies that are eligible independent contractors must operate the hotel properties. Each of the hotel properties will be owned by a direct subsidiary of the Operating Partnership, which will lease the hotel properties to the TRS Lessees. The TRS Lessees, in turn, will enter into management agreements with a management company to operate the hotel properties. While we expect to have some input into operating decisions for the hotel properties leased by our TRS Lessees and operated under such management agreements, we have less control than if we were managing the hotels ourselves. Even if we believe that our hotels are not being operated efficiently, we may not be able to require an operator to change the way it operates our hotels. If this is the case, we may decide to terminate the management agreement and potentially incur costs associated with the termination. Additionally, NHS, which manages most of our existing hotel properties, is an affiliate of a principal of the Advisor. As a result, the Advisor may have an incentive to not terminate the management agreement with NHS, even if the Advisor believes other operators may provide superior or more cost-effective services.
Our management agreements could adversely affect the sale or financing of the hotel properties and, as a result, our operating results and ability to make distributions to our stockholders could suffer.
We have entered into, and may continue to enter into, or acquire hotels subject to, management agreements that contain restrictive covenants. For example, the terms of some management agreements may restrict our ability to sell a hotel property unless, among other conditions, the purchaser is not a competitor of the operator and assumes the related management agreement. Also, the provisions of a long-term management agreement encumbering a hotel property may reduce the value of such hotel property. If we enter into or acquire hotel properties subject to any such management agreements, we may be precluded from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense, which could adversely affect our operating results and our ability to make distributions to stockholders.
Our franchisors could cause us to expend additional funds on upgraded operating standards, which may reduce cash available for distribution to stockholders.
Our existing hotel properties are, and we expect future hotel properties will be, subject to franchise agreements, and we may become subject to the risks that result from concentrating the hotel properties in one or several hotel franchise brands. Our hotel operators will need to comply with operating standards and terms and conditions imposed by the franchisors of the hotel brands under which the hotel properties will operate. Pursuant to certain franchise agreements, certain upgrades are required every few years, and franchisors may also impose upgraded or new brand standards, which can add substantial expense for the affected hotel properties. The franchisors also may require us to make certain capital improvements to maintain the hotel properties in accordance with system standards, the cost of which can be substantial and may reduce cash available for distribution to our stockholders. Planned capital expenditures and upgrades may cost more and take longer to complete than expected as a result of increasing labor costs and shortages and other price inflation and shortages of materials due to supply chain challenges.
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Our franchisors may cancel or fail to renew our existing franchise licenses, which could adversely affect our operating results and our ability to make distributions to stockholders.
Franchisors periodically inspect hotels to confirm adherence to their operating standards. We will rely on our operators to conform to the franchisors’ operating standards. The failure of a hotel property to maintain standards could result in the loss or cancellation of a franchise license. In addition, when the term of a franchise expires, the franchisor has no obligation to issue a new franchise. The loss of a franchise could have a material adverse effect on the operations or the underlying value of the affected hotel property because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a franchise or adverse developments with respect to a franchise brand under which our hotels operate could also have a material adverse effect on our financial condition, results of operations and cash available for distribution to our stockholders.
Fluctuations in our financial performance, capital expenditure requirements and excess cash flow could adversely affect our ability to make and maintain distributions to our stockholders.
As a REIT, we are required to distribute at least 90% of our REIT taxable income each year to our stockholders (determined before the deduction for dividends paid and excluding any net capital gains). In the event of downturns in our operating results and financial performance or unanticipated capital improvements to the hotel properties (including capital improvements that may be required by franchisors), we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are at the sole discretion of our board of directors, which considers, among other factors, our financial performance, debt service obligations, applicable debt covenants (if any), and capital expenditure requirements. Among the factors which could adversely affect our results of operations and distributions to stockholders are reductions in hotel revenues, increases in operating expenses at the hotels leased to our TRS Lessees and capital expenditures at the hotels, including capital expenditures required by the franchisors. We cannot assure you we will generate sufficient cash in order to continue to fund distributions.
We have not paid, and may not in the future pay, distributions solely from our cash flow from operations. To the extent we pay distributions from sources other than our cash flow from operations, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.
We may not be able to pay distributions solely from our cash flow from operations, in which case distributions may be paid in whole or in part from other sources, including debt financing and proceeds from our Offering. There is no limit on the amount of distributions we may fund from sources other than from cash flow from operations. Distributions we paid through December 31, 2022 have been paid from proceeds from our Offering, and we expect that future distributions we may pay will not be made solely from our cash flow from operations. 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 and subsequent investors will experience dilution.
We have made, and may from time to time continue to make, distributions to our stockholders in the form of our common stock, which could result in stockholders incurring tax liability without receiving sufficient cash to pay such tax.
We have distributed, and we may in the future distribute, taxable dividends that are payable in cash or common stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.
We may be subject to various conflicts of interest due to the relationships among the Advisor, the Operating Partnership, NHS, One Rep Construction, LLC (“One Rep”), Legendary A-1 Bonds, LLC (“A-1 Bonds”) and their respective affiliates.
We 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.
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The Advisory Agreement may result in a conflict of interest between the Advisor and our stockholders due to the Advisor’s receipt of certain incentive and management fees related to operating the Company. For example, the Advisor may earn increased management fees if a hotel property is retained, but it may be advantageous for our stockholders for such hotel property to be sold and the proceeds distributed. In addition, certain incentive fees are payable to the Advisor upon the sale or acquisition of a hotel property. This could incentivize the Advisor to acquire or dispose of hotel properties in instances where such acquisitions or dispositions are not in the best interests of our stockholders. Furthermore, NHS, the management company which operates many of our hotel properties and provides certain due diligence services related to property acquisitions, is an affiliate of Norman H. Leslie who is an officer of the Company and the Advisor. In addition, One Rep, the construction management company which provides construction oversight, project management and other related services, is owned by Corey Maple, Norman H. Leslie and David Ekman. In addition, A-1 Bonds a lender under one of our lines of credit and several loans secured by certain of our hotel properties, is an affiliate of Norman H. Leslie and Corey Maple. These relationships may be determined to cause conflicts of interest among the affected parties.
Our current hotel properties include, and our future hotel properties will likely include certain amenities for hotel guests that could increase the potential liabilities at the hotel properties.
Our current hotel properties include, and our future hotel properties will likely include, one or more amenities, such as swimming pools, exercise rooms, laundry facilities, business centers and rentable event rooms. Certain claims could arise in the event that a personal injury, death or injury to property should occur in, on, or around any of these improvements. There can be no assurance that particular risks pertaining to these improvements that are insured will continue to be insurable on an economical basis or that current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in the affected hotel property. We may also be liable for uninsured or underinsured personal injury, death or property damage claims. Liability in such cases may be unlimited but stockholders will not be personally liable.
Risks Related to the Lodging Industry
The lodging industry has experienced significant declines and failure of the lodging industry to exhibit improvement may adversely affect our ability to execute our business strategy.
The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. GDP. It is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, including the effects of COVID-19, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenues and profitability of the hotel properties and therefore, the net operating profits of our TRS Lessees. A substantial part of our business strategy is based on the anticipation that the lodging markets will experience improving economic fundamentals in the future. We cannot predict the extent to which the lodging industry will improve. In the event conditions in the industry do not improve, or if they deteriorate, our ability to execute our business strategy would be adversely affected, which could adversely affect our financial condition, results of operations and our ability to make distributions to our stockholders.
Competition for acquisitions may reduce the number of properties we can acquire.
We compete for hotel investment opportunities with competitors that may have a different tolerance for risk or have substantially greater financial resources than are available to us. This competition may generally limit the number of hotel properties that we are able to acquire and may also increase the bargaining power of hotel owners seeking to sell, making it more difficult for us to acquire hotel properties on attractive terms, or at all.
Competition for guests may lower our hotels’ revenues and profitability.
The limited-service, select-service, full-service and extended-stay segments of the hotel business are competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation and reservation systems, among many other factors. Many competitors have substantially greater marketing and financial resources than our operators or us. New hotels create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available for distribution to stockholders.
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The seasonality of the hotel industry may cause fluctuations in our quarterly revenues which may require us to borrow money to fund distributions to stockholders.
Some hotel properties have business that is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in revenues. Quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in order to offset these fluctuations in revenue and to make distributions to our stockholders.
The cyclical nature of the lodging industry may cause the return on our investments to be substantially less than we expect.
The lodging industry is cyclical in nature. Fluctuations in lodging demand and therefore, operating performance, are caused largely by general economic and local market conditions, which subsequently affects levels of business and leisure travel. Any increases in inflation may adversely affect consumer confidence, which could reduce consumer purchasing power and dampen consumer demand for lodging, and which may also increase or operating and renovation costs. In addition to general economic conditions, new hotel room supply can significantly affect the lodging industry’s performance and overbuilding has the potential to further exacerbate the negative impact. Room rates and occupancy tend to increase when demand growth exceeds supply growth. Decline in lodging demand, or a continued growth in lodging supply, could result in returns that are substantially below expectations or result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
The ongoing need for capital expenditures at our hotel properties may adversely affect our financial condition and limit our ability to make distributions to our stockholders.
Hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require periodic capital improvements as a condition of keeping the franchise licenses. These capital improvements may give rise to the following risks:
| ● | Possible environmental problems; |
| ● | Construction cost overruns and delays, particularly in light of supply chain disruption; |
| ● | Revenues may be reduced temporarily while rooms are out of service during construction; |
| ● | Possible shortage of available cash to fund capital improvements; |
| ● | Capital improvement financing may not be available on attractive terms; |
| ● | Market demand uncertainties or a loss of market demand after capital improvements have begun; and |
| ● | Disputes with franchisors/managers regarding compliance with relevant management/franchise agreements. |
We have established, and intend to continue to establish, capital reserves in amounts we believe are necessary for the hotel properties. If we have insufficient capital reserves, we will be required to obtain financing from other sources to fund our capital expenditure requirements. There can be no assurance that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Additional borrowing for capital needs and capital improvements will also increase our interest expense. The costs and expenses of all these capital improvements could adversely affect our financial condition and amounts available for distribution to our stockholders.
The increasing use of Internet travel intermediaries by consumers may adversely affect our profitability.
Some of our hotel rooms are booked through Internet travel intermediaries, including, but not limited to, Travelocity.com, Expedia.com and Priceline.com. As Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us and our management companies. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These intermediaries hope that consumers will eventually develop brand loyalties to their reservations system rather than to the hotel brands under which our properties are franchised. Although most of the business for our
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hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
We and our hotel managers and franchisors rely on information technology in our operations, and any material failure, inadequacy, interruption, cyber-attack or security failure of that technology could harm our business.
We and our hotel managers and franchisors 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, personal identifying information, reservations, billing and operating data. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as personally identifiable information, including information relating to financial accounts. Although we have taken steps, and plan to continue to take steps, to protect the security of our information systems and the data maintained in those systems, 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. Cyber-attacks are expected to accelerate on a global basis in both frequency and magnitude as threat actors are becoming increasingly sophisticated in using techniques that circumvent controls, evade detection, and remove or obfuscate forensic evidence, which means that we and our third-party providers may be unable to detect, investigate, contain or recover from future attacks or incidents in a timely or effective manner. 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. In addition, cybersecurity risk has increased as a result of global remote working dynamics for our customers, employees and third-party providers that present additional opportunities for threat actors to engage in social engineering and to exploit vulnerabilities in non-corporate networks. Many of the information systems and networks used to operate our lodging properties are managed by our third-party property managers or franchisors and are not under our control. Any failure to maintain proper function, security and availability of our information systems or the information networks managed by our third-party property managers or franchisors could interrupt our operations, result in delayed sales or bookings or lost guest reservations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.
Labor shortages and increased costs for labor could adversely affect our business and financial results.
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, with such supply issues increasing to historical levels in 2022. The inability to recruit and retain these individuals may adversely impact hotel operations and guest satisfaction, which could harm our business. Additionally, competition for qualified employees has required us to pay meaningfully higher wages to attract employees, and continued tightness in labor markets could result in continued escalation of labor costs.
Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.
Recent world events including increased terrorist activities and the political and military responses of the targeted countries have created an air of uncertainty concerning security and the stability of the United States economy. Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries over the past several years, often disproportionately to the effect on the overall economy. The impact that terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be determined but any such attacks or the threat of such attacks could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and our results of operations and financial condition.
Competition, including with vacation rental online marketplaces, may reduce our hotels’ revenues and profitability.
In addition to competing with other hotels, our hotel businesses compete with resorts, motels, inns and vacation rentals in their geographic markets or customer segments, including facilities owned by local interests, individuals, national and international chains, institutions, investment and pension funds and real estate investment trusts (“REITs”). Competition in this industry generally is based on the attractiveness of the facility, location, level of service, quality of accommodations,
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amenities, food and beverage options, public spaces and other guest services, consistency of service, room rate, brand reputation and the ability to earn and redeem loyalty program points. Our principal competitors include other branded and independent hotel operating companies, national and international hotel brands and ownership companies, and independently owned vacation rentals, such as those listed on vacation rental online marketplaces. Increased demand for vacation rental online marketplaces and reduced demand for hotels could result in lower revenue and reduced cash availability for distribution to stockholders.
Adverse developments affecting the financial services industry may adversely affect our business, financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank (now a division of First Citizens Bank) was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver, which has been followed by the collapse of Signature Bank, Silvergate Capital Corp. and First Republic Bank. Other than one account at Signature Bank for one of our hotel properties, we do not currently have direct exposure to these financial institutions. If a depository institution in which we deposit funds is adversely impacted from conditions in the financial or credit markets or otherwise, it could impact access to our cash or cash equivalents and could adversely impact our financial condition. Our cash and cash equivalents balance exceeded federally insurable limits as of December 31, 2022. In addition, if any parties with whom we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties' ability to pay their obligations to us or to enter into new commercial arrangements requiring additional payments to us could be adversely affected. Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry.
General Risks Related to the Real Estate Industry
The hotel properties are subject to various risks associated with an investment in real estate.
The economic success of an investment in the Company will depend upon the results of the operations of the hotel properties, which are subject to those risks typically associated with an investment in real estate. Fluctuations in land values, occupancy levels, revenue and operating expenses can adversely affect operating results or render the sale or refinancing of the hotel properties difficult or unattractive. No assurance can be given that certain assumptions as to the future levels of occupancy of the hotel properties or future costs of operating the hotel properties will be accurate because such matters will depend on events and factors beyond our control. Such factors include, among others, occupancy levels, revenue and sales levels in the local areas where the hotel properties are located, adverse changes in local population trends, market conditions, neighborhood values, local economic and social conditions, supply and demand for property such as the hotel properties, competition from similar projects, interest rates, real estate tax rates, governmental rules, regulations and fiscal policies, including the effects of inflation and enactment of unfavorable real estate, environmental or zoning laws, hazardous material laws, uninsured losses and other risks.
Illiquidity of real estate investments could significantly impede our ability to liquidate our portfolio on advantageous terms.
Because real estate investments are relatively illiquid and difficult to sell quickly, we have limited ability to vary our portfolio in response changes in economic and other conditions. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinance of the underlying hotel property. We may be unable to realize our investment objectives by sale, other disposition or refinance at attractive prices within any given period of time or may
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otherwise be unable to complete any exit strategy. In particular, these risks could arise from weakness in or even the lack of an established market for a hotel property, availability of financing, capitalization rates, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the hotel property is located. Further, we may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In addition, we may agree to lock-out provisions when acquiring a hotel property that materially restrict us from selling that hotel property for a period of time or impose other restrictions. Our inability to sell the hotel properties at the time and on the terms we desire could reduce our cash flow and limit our ability to make distributions to our stockholders.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.
We maintain comprehensive insurance on each of our current hotel properties, and anticipate maintaining comprehensive insurance on future hotel properties, including liability, terrorism, fire and extended coverage, of the type and amount customarily obtained for or by hotel property owners. There can be no assurance that such coverage will continue to be available at reasonable rates, or at all. Various types of catastrophic losses, like earthquakes and floods and losses from toxic mold, terrorist activities and pandemic outbreaks may not be insurable or may not be insurable on reasonable economic terms. Lenders may require such insurance and failure to obtain such insurance could constitute a default under the loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could have a material adverse effect on our results of operations and ability to obtain future financing.
In the event of a substantial loss, insurance coverage may not be sufficient to cover the full current market value or replacement cost of the hotel property. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we invested in a hotel property, as well as the anticipated future revenue from that particular hotel property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace, rehabilitate or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel property.
Noncompliance with environmental laws and governmental regulations could adversely affect our operating results and our ability to make distributions to stockholders.
Federal, state and local laws impose liability on a landowner for the release or the otherwise improper presence on the premises of hazardous materials or hazardous substances. This liability is without regard to fault for, or knowledge of, the presence of such materials or substances, subject to certain defenses. A landowner may be held liable for hazardous materials or substances brought onto the property before it acquired title and for hazardous materials or substances that are not discovered until after it sells the property. In addition, a landowner may be held liable for hazardous materials or substances that migrate from the property onto or beneath adjacent sites, as well as hazardous materials or substances from unknown or unidentified sources that may migrate from adjacent sites onto or beneath the property. Similar liability may occur under applicable state law. If any hazardous materials or substances are found within the real property underlying any of the hotel properties at any time, we could be held liable for cleanup costs, fines, penalties and other costs, and we may have little or no recourse against the sellers of the hotel properties. Furthermore, various court decisions have established that third parties may recover damages for injury caused by release of hazardous substances and for property contamination. Although we will attempt to obtain current environmental site assessments for the hotel properties prior to acquisition, we may not obtain such information. If losses arise from hazardous substance contamination that cannot be recovered from responsible parties, the financial viability of the hotel properties may be materially and adversely affected.
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Compliance with the Americans with Disabilities Act of 1990, as amended, and applicable regulations promulgated thereunder (“ADA”) and other changes in governmental rules and regulations could substantially increase our cost of doing business and adversely affect our operating results and our ability to make distributions to our stockholders.
Our hotel properties are subject to the ADA. Under the ADA, “public accommodations” as defined by the ADA must meet certain federal requirements related to access and use by disabled persons. Although we believe our current hotel properties are in substantial compliance with the ADA, and we intend to acquire future hotel properties that are substantially in compliance with the ADA, we may incur additional costs of complying with the ADA at the time of acquisition and from time-to-time in the future to remain in compliance. A number of additional federal, state and local laws exist that also may require modifications to the hotel properties or restrict certain renovations with respect to access by disabled persons. A violation of the ADA could result in the imposition of fines by the federal government or an award of damages to private litigants, and attorneys’ fees may be awarded to a plaintiff claiming ADA violations. State and federal laws in this area are constantly evolving and could place a greater cost or burden on us. If we were required to expend unbudgeted funds to comply with the ADA or other applicable rules and regulations, our financial condition, results of operations, the market price of our shares of common stock and our ability to make distributions to our stockholders could be adversely affected. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate.
The hotel properties are subject to property taxes that may increase in the future, which could adversely affect our ability to make distributions to our stockholders.
The hotel properties are subject to real and personal property taxes. These taxes may increase as tax rates change and as the hotel properties are assessed or reassessed by taxing authorities, including upon acquisition. If property taxes increase, our financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely affected. As the owner of the hotel properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the hotel property, and the hotel property could become subject to a tax sale.
The hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
Litigation and concern about indoor exposure to certain types of toxic molds have been increasing as the public becomes aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions and respiratory problems. Toxic molds can be found almost anywhere; they can grow on virtually any organic substance, as long as moisture and oxygen are present. There are molds that can grow on wood, paper, carpet, foods and insulation. When excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture problem remains undiscovered or unaddressed. It is impossible to eliminate all molds and mold spores in the indoor environment. In warm or humid climates, the likelihood of toxic mold can be exacerbated by the necessity of indoor air conditioning year-round. The difficulty in discovering indoor toxic mold growth could lead to an increased risk of lawsuits by affected persons, and the risk that the cost to remediate toxic mold will exceed the value of the property. Because of attempts to exclude investigations, abatement and damage costs caused by toxic mold growth from certain liability provisions in insurance policies, there is no guarantee that insurance coverage for toxic mold will be available now or in the future.
Future changes in laws and regulations may adversely affect the resale value of real estate.
Future changes in land use and environmental laws and regulations, whether federal, state or local, may impose new restrictions on the development or use, and therefore the value, of real estate. The resale of real estate by us may be adversely affected by such regulations. In addition, cities and other municipalities may have different rules and regulations which may change from time to time, including retrofit ordinances, which may affect the capital needs of the hotel properties. Any such changes would need to be addressed by us, which would reduce our net income and the amount of cash available for distributions to our stockholders.
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Certain sellers of hotel properties have made, and future sellers may only make, limited or no representations and warranties regarding the condition of the properties.
We have acquired, and may in the future acquire real estate from sellers who make only limited or no representations and warranties regarding the condition of such real estate, the presence of hazardous materials or hazardous substances within such real estate, the status of governmental approvals and entitlements for such real estate or other matters adversely affecting such real estate. We may not be able to pursue a claim for damages against such sellers except in limited circumstances. The extent of damages that we may incur as a result of such matters cannot be predicted but potentially could result in a significant adverse effect on the value of such real estate.
We may acquire hotel properties from affiliates of the Advisor.
We may acquire hotel properties from affiliates of the Advisor. Accordingly, notwithstanding that the purchase price will be based on a third-party appraisal, the purchase agreements for such hotel properties will not be negotiated on a third-party arm’s length basis. Some of the terms of the purchase agreements with affiliates of the Advisor may not be on market terms. The stockholders will not have approval rights with respect to the acquisition of hotel properties from affiliates.
We may not obtain audited results of operations for the hotel properties prior to acquiring the hotel properties.
We may not obtain audited operating statements regarding the prior operations of the hotel properties prior to acquiring the hotel properties. We may rely on unaudited financial information provided by the sellers of the hotel properties. Thus, it is possible that information we relied on with respect to the acquisition of the hotel properties may not be accurate.
We may not obtain independent third-party appraisals or valuations of a hotel property before acquiring it and our valuation may not be accurate.
We have obtained independent third-party appraisals or valuations or other reports for some, but not all, of our current hotel properties before purchasing them and may not obtain independent third-party appraisals or valuations of a future hotel property, or other reports with respect to a future hotel property, before we invest in such hotel property. If we do not obtain such third-party appraisals or valuations, there can be no assurance that our valuation of a hotel property will be accurate or that a hotel property’s value will exceed its cost to us or that any sale or other disposition of such hotel property will result in a profit for us. Third-party appraisals and other reports may be prepared for lenders, in which case we typically will try to obtain a copy of such appraisals and reports for review, as well as reliance letters from the third-party preparers to allow us to rely on such appraisals and reports. To the extent we do not obtain such other reports or reliance letters before investing in a hotel property, the risk of investing in such hotel property may be increased.
If capitalization rates increase, the value of our assets may decrease and we may not be able to sell our assets at anticipated prices.
The value of commercial real estate is generally based on capitalization rates. Capitalization rates generally trend with interest rates. Consequently, if interest rates go up, so do capitalization rates. Interest rates and capitalization rates increased significantly during 2022 and 2023 but have decreased from these highs recently. If interest rates continue to rise in the future, it is likely that capitalization rates will also rise and, as a result, the value of real estate will decrease. If capitalization rates continue to increase, the hotel properties will likely achieve lower sales prices than anticipated, resulting in reduced returns.
Certain of the hotel properties in our current portfolio are, and future hotel properties may be, located in areas with increased risk of tornados, floods and other natural disasters and face risks associated with the direct and indirect physical effects of climate change, and we do not intend to obtain insurance to cover these natural disasters unless required by a lender.
Some of the hotel properties in our current portfolio are, and future hotel properties may be, located in areas in the United States that have increased risk of tornados, floods, earthquakes, hurricanes, high winds or wildfires. A tornado, flood, earthquake, hurricane, high winds or wildfire could cause structural damage to or destroy a hotel property. Over time, our hotels located in coastal markets and other areas that may be impacted by climate change are expected to experience
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increases in storm intensity and rising sea-levels, which may cause damage to our hotel properties. As a result, we could become subject to significant losses and/or repair costs. Other markets may experience prolonged variations in temperature or precipitation that may limit access to the water needed to operate our hotel properties or significantly increase energy costs, which may subject those properties to additional regulatory burdens, such as limitations on water usage or stricter energy efficiency standards. We do not intend to obtain wind, flood or earthquake insurance for the hotel properties unless required by a lender. We have obtained flood insurance for one of our hotels. It is possible that any such insurance, if obtained, will not be sufficient to pay for damage to any hotel property. Further, to the extent we do obtain insurance for such hotels, weather events and climate change may increase the cost of, or make unavailable, such property insurance, on terms we find acceptable in areas most vulnerable to such events.
We may not have control of hotel properties we acquire through joint ventures.
We may make some of our investments through joint ventures between the Company and both affiliated and non-affiliated parties. It is anticipated that, with respect to any such investment, we and the joint venture partner will have joint control over the management and operation of the hotel property. Thus, we will be dependent on the decisions made by our joint venture partner. Such joint venture partner may have objectives which are different than those of the Company.
The presence of construction defects in newly or recently constructed hotel properties could adversely affect the financial performance of a hotel property.
Some of our current hotel properties are, and future hotel properties may be, newly or recently constructed. Newly constructed properties are sometimes subject to construction defects that only reveal themselves over time. If any of the hotel properties should become subject to any construction defect issues, we may have remedies under state law as well as under any warranties from the contractors for the construction work, provided that the warranties were assigned to such owner. If the warranties do not cover all the expenses associated with any construction defects that may arise, we could be liable for the expenses associated with correcting the construction defect. If work is required to cure any construction defects, reserves may not be sufficient to pay for such work. Accordingly, the presence of construction defects could adversely affect the financial performance of the hotel properties, we may be required to pay for all or part of the repair of such construction defects, which will reduce the cash flow from the hotel properties, and the return to our stockholders may be reduced.
Construction and rehabilitation at the hotel properties entails risks that are beyond our and any general contractor’s control, and the costs may exceed the funds available to us.
We have rehabilitated, renovated and made capital improvement at some of the hotel properties in our current portfolio, and expect to do so with future hotel properties. Hotel properties have an ongoing need for capital improvements and the franchisors of our hotels also require periodic capital improvements as a condition of keeping the franchise licenses. The construction of commercial real property is cyclical and is significantly affected by changes in national and local economic and other conditions, such as employment levels, availability of financing, interest rates and demand for commercial properties. Such uncertainties could adversely affect our performance. In addition, construction entails risks that are beyond our or any general contractor’s control. Completion of new construction, rehabilitation or redevelopment may be delayed or prevented, and costs of such capital improvements may be increased, by factors such as adverse weather, strikes or energy shortages, shortages or increased costs of labor and material for construction, delays in construction schedules, cost overruns, inflation, environmental, zoning, title or other legal matters and unknown contingencies, including any such factors caused by supply chain disruptions. Changes in construction plans and specifications, delays due to compliance with governmental requirements, increases in real estate taxes and other local government fees or imposition of fees not yet levied, or other delays could cause construction costs to exceed the amounts available from the Offering proceeds and any loans. In the event that construction costs exceed funds available, our ability to complete the work to be done on a development hotel property will depend upon our ability to supply additional funds. There can be no assurance that we will have adequate funds available for that purpose. Any delays in construction may have an adverse impact on our cash flow and long-term success.
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We will be required to obtain the approval of various governmental authorities when rehabilitating and improving the hotel properties, which may result in delays and increased costs.
In rehabilitating and improving the hotel properties, we will be required to obtain the approval of various government authorities regulating such matters as permitted land uses and levels of density and the installation of utility services such as water and waste disposal. Governmental authorities have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas and the amount of these fees has increased significantly during recent years. Many state laws require the use of specific construction materials which reduce the need for energy consuming heating and cooling systems. Local governments also, at times, declare moratoriums on the issuance of building permits and impose other restrictions in areas where sewage treatment facilities and other public facilities do not reach minimum standards. We will also be subject to a variety of federal, state and local statutes, ordinances, rules and regulations concerning protection of health and the environment. Such governmental regulation may result in delays, cause us to incur substantial compliance and other costs and prohibit or severely restrict development in certain regions or areas, which could have an adverse effect on our business and results of operations.
We may not discover defects in the hotel properties prior to acquisition.
Although we intend to perform due diligence on the hotel properties before we acquire them, there can be no assurance that all defects (including physical defects, title issues and financial issues) will be discovered prior to acquisition. In the event that a significant issue is not discovered with respect to a particular hotel property, our performance may be negatively impacted.
The hotel properties could become subject to condemnation actions.
The hotel properties or a portion of the hotel properties could become subject to an eminent domain or inverse condemnation action. Any such action could have a material adverse effect on the marketability of a hotel property or the amount of return on investment for our stockholders.
We may sustain losses resulting from litigation that is not completely covered by insurance.
We anticipate that litigation will occur in the ordinary course of our business. We intend to maintain adequate general liability insurance to cover such potential litigation which stems from the ordinary course of owning and operating the hotel properties; however, there can be no assurance that all losses will be covered. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment.
Risks Related to Debt Financing
We have obtained, and in the future likely will obtain, mortgage indebtedness and other borrowings, which increases our risk of loss due to potential foreclosures.
We have obtained, and expect in the future to obtain, loans to acquire the hotel properties and thus, the hotel properties will be leveraged. We may also obtain mortgage debt on hotel properties that we already own in order to obtain funds to acquire additional hotel properties, to fund property improvements and other capital expenditures, to make distributions and for other purposes. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain) to our stockholders. We anticipate that the aggregate loan-to-value ratio for the Company will be between 35% and 65%. We will target a loan-to-value ratio for the hotel properties of between 35% and 70%, based on the purchase price of the hotel properties, however, we may obtain financing that is less than or higher than such loan-to-value ratio for an individual hotel property at the discretion of our board of directors. As of December 31, 2022, our aggregate loan-to-value ratio, based on the aggregate purchase price of the hotel properties, was approximately 62%. No assurance can be given that future cash flow will be sufficient to make the debt service payments on any loans and to cover all operating expenses. If the hotel properties’ revenues are insufficient to pay debt service and operating costs, we may be required to seek additional working capital. There can be no assurance that such additional funds will be available. In the event
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additional funds are not available, the lenders may foreclose on the hotel properties and our stockholders could lose their investment. In addition, the degree to which we are leveraged could have an adverse impact on us, including (i) increased vulnerability to adverse general economic and market conditions, (ii) impaired ability to expand and to respond to increased competition, (iii) impaired ability to obtain additional financing for future working capital, capital expenditures, general corporate or other purposes and (iv) requiring that a significant portion of cash provided by operating activities be used for the payment of debt obligations, thereby reducing funds available for distributions, operations and future business opportunities.
Restrictions on the availability of real estate financing, high interest rates and the cost of loans may make it difficult for us to finance or refinance the hotel properties.
Market fluctuations in real estate loans may affect the availability and cost of loans needed to acquire or refinance the hotel properties. There is no assurance that we will be able to obtain the required financing to acquire or refinance the hotel properties. Restrictions on the availability of real estate financing or high interest rates on real estate loans may also adversely affect our ability to sell the hotel properties. Interest rates have increased and may continue to rise, though the timing and amount of any such future interest rate increases are uncertain. As a result, the interest rates available for future real estate loans and refinancings may be higher than the current interest rates for such loans, which may have a material and adverse impact on the hotel properties and us.
Some of our financing arrangements involve interest only loans and balloon payment obligations and an inability to prepay until shortly before maturity. These may, in the future, adversely affect our ability to make distributions.
Debt on some of our existing hotel properties require us, and debt on future hotel properties may also require us, to make interest only payments with a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or to sell the hotel property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the hotel property at a price sufficient to make the balloon payment. Several of the loans obtained to acquire our existing hotel properties do not allow for prepayment until shortly before maturity and provide that any prepayment may require the payment of a prepayment fee. Consequently, we may not be able to take advantage of favorable changes in interest rates. The effect of a refinancing or sale could affect the rate of return to our stockholders and the projected time of disposition of the hotel properties. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT and/or avoid federal income tax.
Increases in interest rates could increase our interest costs and reduce our cash flows.
As of the date of this filing, we had a total of $18.8 million of variable rate notes payable, including our existing line of credit with Western State Bank, and it is anticipated that the loans we obtain in the future may have variable interest rates. Any increase in interest rates would increase our interest costs, which would reduce our cash flows and our ability to make distributions to our stockholders. An increase in interest rates could also affect our ability to refinance or extend existing financing on favorable terms, or at all. Beginning in 2022, in an effort to combat inflation and restore price stability, the Federal Reserve significantly raised its benchmark federal funds rate, which led to increases in interest rates in the credit markets. Interest rates may continue to rise, though the timing and amount of any such future interest rate increases are uncertain. In the event that the interest rate on any loan increases significantly, we may not have sufficient funds to pay the required interest payments. In such event, the continued ownership of the applicable hotel property may be threatened. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times or on terms that may not permit realization of the maximum return on such investments. Increases in interest rates may cause our operations to suffer and the amount of distributions our stockholders receive and their overall return on investment may decline.
We have incurred, and may in the future incur, recourse debt or be liable for nonrecourse carve-outs and springing recourse events under the loans for the hotel properties, which may permit the lenders to proceed against our assets.
Although we attempt to obtain loans for the hotel properties that will be nonrecourse as to principal and interest, we have obtained and may in the future obtain recourse debt to finance our acquisitions. Further, lenders have required and may in the future require us to be personally liable for certain carve-outs and springing recourse events. In circumstances where
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personal liability attaches, the lender could proceed against our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to our stockholders will be reduced and our stockholders may lose part of their investment.
If we violate any restrictions on transfer imposed by lenders, the lender could have the right to declare the entire amount of the loan to be immediately due and payable.
Loans on our existing hotel properties restrict, and we anticipate that loans on future hotel properties will, restrict our ability to sell our interests in the hotel properties. The lenders may also impose restrictions on the transferability of our shares of common stock. Upon violation of the restrictions on transfer or encumbrance, a lender will have the right to declare the entire amount of the loan, including principal, interest, prepayment premiums and other charges, to be immediately due and payable. If the lender declares the loan to be immediately due and payable, we will have the obligation to immediately pay the loan in full, including applicable prepayment charges. If replacement financing is not found or the loan is not immediately paid in full, the lender may invoke its other remedies under the loan, which may include proceeding with a foreclosure that would cause us to lose our entire interest in the applicable hotel property.
If we default on a loan, it could result in foreclosure of the hotel property, which could result the loss of all or a substantial portion of the investment we made in the hotel property.
Loans on our existing hotel properties include, and we anticipate that future loans will include, various actions by us that will cause an event of default under such loans, including, among others, the failure to pay required payments under the loan, the failure to pay taxes, the failure to maintain insurance, the assignment by an owner of a hotel property of an interest in such hotel property to a creditor, the bankruptcy of an owner of a hotel property, the filing of an action for partition or the transfer of an interest in a hotel property without lender’s consent. Additional events of default may be applicable to some or all of the loans. If we default under a loan for any reason, the lender may declare a default under the applicable loan, which could result in foreclosure by the lender on the applicable hotel property and the loss of all or a substantial portion of the investment we made in such hotel property.
The derivative financial instruments we use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on our stockholders’ investment.
We are exposed to the effects of interest rate changes as a result of borrowings we use to maintain liquidity and to fund the acquisition, expansion and refinancing of the hotel properties and our operations. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. We may choose to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. We may utilize a variety of derivative financial instruments, including interest rate caps, floors and swap agreements, in order to hedge exposures and limit the effects of changes in interest rates on our operations, but no hedging strategy can protect us completely. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that counterparties may fail to honor their obligations under these arrangements, these arrangements may not be effective in reducing our exposure to interest rate changes, and losses on a hedge position will reduce the funds available for the payment of distributions to our stockholders, and the losses may exceed the amount we invested in the instruments. These hedging agreements involve risks. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that its hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT gross income tests.
Certain of the hotel properties and our other assets are cross-collateralized.
We have obtained a line of credit, and may obtain other debt financing, which require that our assets be cross-collateralized. No assurance can be given that future cash flow will be sufficient to make the debt service payments on our loans and to cover all operating expenses.
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Risks Related to Our Organization and Structure
Our TRS Lessee structure subjects us to the risk of increased hotel operating expenses that could adversely affect our operating results and our ability to make distributions to our stockholders.
Our leases with our TRS Lessees require our TRS Lessees to pay the owners of the hotel properties (which are wholly-owned subsidiaries of the Operating Partnership) rent based, in part, on revenues from the hotel properties. Our operating risks include decreases in hotel property revenues and increases in operating expenses, which would adversely affect our TRS Lessees’ ability to pay rent due under the leases, including, but not limited to, increases in wage and benefit costs, repair and maintenance expenses, energy costs, property taxes, insurance costs and other operating expenses. As these rent payments will be a primary source of our revenue, any inability of our TRS Lessees to make such rent payments would likely have a significant adverse impact on our financial condition, results of operations and our ability to make distributions to our stockholders.
Our TRS structure increases our overall tax liability.
Our TRS Lessees are subject to federal, state and local income tax on their taxable income, which consists of the revenues from the hotel properties, net of the operating expenses for the hotel properties and rent payments to the Operating Partnership. Accordingly, although ownership of our TRS Lessees allows us to participate in the operating income from the hotel properties in addition to receiving rent, that operating income is fully subject to corporate income tax. The after-tax net income of our TRS Lessees will be available for distribution to us.
Our ownership of our TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotels that are operated by eligible independent contractors pursuant to management agreements. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s gross assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Our TRS entities are subject to federal, state and local income tax on their taxable income, and their after-tax net income is available for distribution, but is not required to be distributed to us. There can be no assurance that we will be able to comply with the 20% limitation or to avoid application of the 100% excise tax.
If our leases with our TRS Lessees are not respected as true leases for federal income tax purposes, we would not qualify as a REIT.
To qualify as a REIT, we are required to satisfy two gross income tests pursuant to which specified percentages of our gross income must be passive income, such as rent. For the rent paid pursuant to the leases with our TRS Lessees, which should constitute substantially all of our gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. We plan to structure our leases so that they will be respected as true leases for federal income tax purposes, but there can be no assurance that the Internal Revenue Service (“IRS”) will agree with this characterization or will not challenge this treatment, or that a court would not sustain such a challenge. If the leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests applicable to REITs and likely would fail to qualify for REIT status.
If our hotel operators do not qualify as “eligible independent contractors,” we would not qualify as a REIT.
Rent paid by a lessee that is a “related party tenant” of a REIT will not be qualifying income for purposes of the two gross income tests applicable to REITs. We will lease all of the hotel properties to our TRS Lessees. A TRS Lessee will not be
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treated as a “related party tenant,” and will not be treated as directly operating the hotel properties to the extent the hotel properties are operated by an “eligible independent contractor.” If our hotel property operators do not qualify as “eligible independent contractors,” we would not qualify as a REIT. Each of the management companies that enters into a management agreement with our TRS Lessees must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS Lessees to be qualifying income for our REIT income test requirements. In order to qualify as an eligible independent contractor, an operator must not own more than 35% of our outstanding shares (by value). In addition, if the operator is a corporation, not more than 35% of the total combined voting power of whose stock (or 35% of the total shares of all classes of whose stock), or, if the operator is not a corporation, not more than 35% of the interest in whose assets or net profits is owned, directly or indirectly, by one or more persons owning 35% or more of our shares of common stock. Complex ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to monitor ownership of our shares of common stock by our hotel property operators and their owners, there can be no assurance that these ownership levels will not be exceeded.
The lease of the hotel properties to a TRS is subject to special requirements.
We may lease certain “qualified lodging facilities” to a TRS (or a limited liability company of which a TRS is a member). The TRS in turn will contract with a management company to operate the lodging facility operations at the hotels. The rents paid by a TRS in this structure would be treated as qualifying rents from real property for purposes of the REIT requirements only if (i) they are paid pursuant to an arm’s-length lease of a qualified lodging facility property and (ii) the operator qualifies as an “eligible independent contractor” with respect to the property. An operator will qualify as an eligible independent contractor if it meets certain ownership tests with respect to us, and if, at the time the operator enters into the management agreement, the operator is actively engaged in the trade or business of operating qualified lodging facility properties for any person who is not a related person to us or our TRSs. If any of the above conditions are not satisfied, then the rents will not be considered income from a qualifying source for purposes of the REIT rules, which could cause us to incur penalty taxes or to fail to qualify as a REIT.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.
The ability of our board of directors to change our major policies may not be in your best interest.
Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders and our continued qualification as a REIT. Our board of directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations, the market price of our shares of common stock and our ability to make distributions to our stockholders.
We have not established a minimum distribution payment level and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.
We are generally required to distribute to our stockholders at least 90% of our REIT taxable income each year for us to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), which requirement we currently intend to satisfy. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by the risk factors described herein. Subject to satisfying the requirements for REIT qualification, in general, we intend over time to make regular monthly distributions to our stockholders. Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to our stockholders. Our board of directors makes determinations regarding distributions based upon factors that it deems relevant.
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Among the factors that could impair our ability to make distributions to our stockholders are:
| ● | our inability to realize attractive returns on our investments; |
| ● | unanticipated expenses that reduce our cash flow or non-cash earnings; |
| ● | decreases in the value of the underlying assets; and |
| ● | the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates. |
As a result, no assurance can be given that we will be able to continue to make distributions to our stockholders or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time. Distributions could be dilutive to our financial results and may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its shares.
If we are deemed to be an investment company under the Investment Company Act of 1940, our stockholders’ investment return may be reduced.
The Investment Company Act of 1940, as amended (the “Investment Company Act”) requires that any issuer that is beneficially owned by 100 or more persons and that owns certain securities be registered as required under the Investment Company Act. Pursuant to the Operating Partnership Agreement, we are solely responsible for the management and operation of the Operating Partnership and, as a result, our interest in the Operating Partnership has significant incidents of a true general partnership interest and does not fall within the definition of a “security” for purposes of the Investment Company Act. If our interest in the Operating Partnership is deemed to be a security or if the Operating Partnership fails to qualify for an exemption or exclusions from the Investment Company Act, we will be required to register under the Investment Company Act. In the event we are required to register under the Investment Company Act, the returns to our stockholders will likely be significantly reduced.
We will be subject to certain risks relating to the Operating Partnership’s acceptance of contributed property in exchange for limited partnership interests.
We intend to own all of our assets through the Operating Partnership. The Operating Partnership has accepted, and may in the future accept, contributions of property from certain persons in exchange for limited partnership interests in the Operating Partnership. The acceptance of persons as limited partners in the Operating Partnership involves certain risks including (i) entering into certain indemnification agreements with the contributing limited partners that would cause us to indemnify such persons for tax liability that may be incurred by the contributing limited partners related to the sale of the contributed property, (ii) the fact that the contributing limited partners will have certain voting rights with respect to the Operating Partnership and (iii) the need for the Operating Partnership to allocate debt to contributing limited partners.
We may need to modify our investment portfolio in the future in order to qualify as a REIT, which may adversely affect our performance.
If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to qualify as a REIT or maintain our exclusion from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we intend to own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
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Under Maryland law, our directors have limited liability if they perform their duties in good faith, in a manner he or she reasonably believes to be in our best interests, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. We are required to indemnify our directors and officers to the maximum extent permitted under Maryland law.
Maryland law provides that a director will not have any liability in that capacity so long as he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that to the maximum extent permitted by Maryland law, none of our present or former officers or directors will be liable to us or our stockholders for money damages. In addition, the charter and the bylaws require us to indemnify (including advancement of expenses) our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist under common law.
Maryland law prohibits business combinations with certain interested stockholder and their affiliates unless otherwise approved by our board of directors, which could inhibit a change in control.
Certain provisions of the Maryland General Corporation Law applicable to us prohibit business combinations with (i) any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock, which is referred to as an “interested stockholder,” (ii) an affiliate or associate of the Company who, at any time within the two-year period prior to the date in question, beneficially owned, directly or indirectly, 10% or more of the voting power of our then outstanding stock, which is also referred to as an interested stockholder or (iii) an affiliate of an interested stockholder. These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding voting stock and two-thirds of the votes entitled to be cast by holders of shares of our voting stock other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder.
Provisions contained in Maryland law that are reflected in our charter and bylaws may have anti-takeover effects, potentially preventing investors from receiving a “control premium” for their shares.
Provisions contained in our charter and bylaws, as well as Maryland corporate law, may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent our stockholder from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their shares over then-prevailing market prices. These provisions include the following:
| ● | Ownership limit. The ownership limit in our charter limits related investors including, among other things, any voting group, from acquiring no more than 9.8% of the value or number of the aggregate, whichever is more restrictive, of our then outstanding shares of common stock, and no more than 9.8% of the value of our then outstanding capital stock (which includes all of our common stock and preferred stock), without the consent of our board of directors. |
| ● | Preferred stock. Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. |
| ● | Maryland control share acquisition statute. Maryland law limits the voting rights of “control shares” of a corporation in the event of a “control share acquisition.” |
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Federal Income Tax Risks
If we sell a built-in gain asset within five years of the effective date of our REIT election, we may be subject to corporate-level tax on the built-in gain component.
Upon our conversion from an entity taxable as a corporation to a REIT, each asset held directly, or indirectly through a partnership, that had a fair market value in excess of its adjusted basis generally will be considered a “built-in gain asset.” This built-in gain component will be fixed as of the date of conversion to REIT status. If we sell a built-in gain asset within five years of the effective date of our REIT election, we will (subject to certain exceptions) be subject to a corporate-level tax on the built-in gain component. To the extent that we are required to pay federal, state and local taxes, we will have less cash available for distributions.
Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.
Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our gross income (an annual test) and assets (tested as of the end of each calendar quarter) and other tests imposed by the Code. If we fail to qualify as a REIT for any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distributions to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Generally, ordinary dividends payable by REITs do not qualify for reduced U.S. federal income tax rates.
Currently, the maximum tax rate applicable to qualified dividend income payable to certain non-corporate U.S. stockholders, is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. REIT dividends that are not designated as qualified dividend income or capital gain dividends are taxable as ordinary income. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividend income could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends. Commencing with taxable years beginning on or after January 1, 2018 and continuing through 2025, non-corporate U.S. taxpayers may be entitled to claim a deduction in determining their taxable income of up to 20% of qualified REIT dividends (dividends other than capital gain dividends and dividends attributable to certain qualified dividend income received by us). In addition, Treasury Regulations impose a minimum holding period for the 20% deduction that was not set forth in the Code. Under the Treasury Regulations, in order for a REIT dividend with respect to a share of REIT stock to be treated as a qualified REIT dividend, the U.S. stockholder (i) must have held the share for more than 45 days during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend and (ii) cannot have been under an obligation to make related payments with respect to positions in substantially similar or related property, e.g., pursuant to a short sale. Prospective investors are urged to consult with their tax advisors regarding the effect of this change on their effective tax rate with respect to REIT dividends.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.
Even if we qualify as a REIT for federal income tax purposes, we may still be subject to some federal, state and local taxes on our income or property. For example:
| ● | In order to qualify as a REIT, we must distribute annually at least 90% of our taxable income to our stockholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code. |
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| ● | We will be subject to a 4.0% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. |
| ● | If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate. |
| ● | If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries or we qualified for a “safe harbor” under the Code. |
| ● | If we hold or acquire assets when we are taxable as a corporation prior to our qualification as a REIT, such assets when held by us as a REIT may be subject to tax if sold in the five-year period following the acquisition of such assets. |
The ownership limits that apply to REITs, as prescribed by the Code and by the charter, may inhibit market activity in our shares of common stock and restrict our business combination opportunities.
In order for us to qualify as a REIT, not more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after the first year for which we elect to qualify as a REIT. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed as a REIT). The charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. The charter also provides that, unless exempted by the Board, no person may own more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding capital stock. Our board of directors may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, prospectively or retroactively, waive the ownership limit or establish a different limit on ownership, or excepted holder limit, for a particular stockholder if the stockholder’s ownership in excess of the ownership limit would not result in our being “closely held” under Code Section 856(h) or otherwise failing to qualify as a REIT. These ownership limits could delay or prevent a transaction or a change in control of the Company that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
REIT distribution requirements could adversely affect our ability to execute our business plan.
To qualify as a REIT, we must distribute to our stockholders each year 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain). Further, we must distribute 100% of our REIT taxable income in order to avoid a corporate level tax. From time to time, we may generate taxable income greater than our income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to our stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4.0% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our shares of common stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance. In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our gross assets consists of cash, cash items,
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government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities that constitute qualified real estate assets and securities of our TRSs) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our gross assets (other than government securities, securities that constitute qualified real estate assets and securities of our TRSs) can consist of the securities of any one issuer, and no more than 20% of the value of our total gross assets can be represented by the securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets, other than foreclosure property, deemed held primarily for sale to customers in the ordinary course of business (subject to a safe harbor under the Code for certain sales). It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through taxable REIT subsidiaries. However, to the extent that we engage in such activities through taxable REIT subsidiaries, the income associated with such activities may be subject to full corporate income tax.
Non-United States investors may be subject to FIRPTA on the sale of its shares if we are unable to qualify as a “domestically controlled qualified investment entity.”
A non-United States person disposing of a United States real property interest, including shares of a United States corporation whose assets consist principally of United States real property interests, is generally subject to a tax under the Foreign Investment in Real Property Tax Act, known as FIRPTA, on the gain recognized on the disposition of such interest. Note that “qualified foreign pension funds” and certain other qualified foreign stockholders may be generally exempt from FIRPTA. In addition, FIRPTA does not apply, however, to the disposition of shares in a REIT if the REIT is a “domestically controlled qualified investment entity.” A REIT is a domestically controlled qualified investment entity if, at all times during a specified testing period (the continuous five-year period ending on the date of disposition or, if shorter, the entire period of the REIT’s existence), less than 50% in value of its shares is held directly or indirectly by non-United States holders. We cannot assure you that we will qualify as a domestically controlled qualified investment entity. If we were to fail to so qualify, and if a separate exemption did not apply, gain realized by a non-United States investor on a sale of its shares would be subject to FIRPTA unless our shares of common stock were traded on an established securities market and the non-United States investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
Complying with the REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks, including gain from the disposition of certain hedging transactions, will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate, (ii) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests or (iii) risks associated with the extinguishment of certain indebtedness or the disposition of certain property related to prior hedging transactions described in (i) or (ii) above and each such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
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If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. For so long as we are not a publicly offered REIT (defined below), in order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is generally not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in the REIT’s organizational documents. There is no de minimis exception with respect to preferential dividends. However, the preferential dividend rules do not apply to a “publicly offered REIT.” A publicly offered REIT is defined as a REIT that is required to file annual and periodic reports with the SEC under the Securities and Exchange Act of 1934. We are required to file annual and periodic reports with the SEC.
Changes made to the U.S. tax laws could have a negative impact on our business.
Retirement Plan Risks
If the fiduciary of an employee benefit plan fails to meet the fiduciary requirements and other standards under ERISA and the Code as a result of investment in our shares of common stock, the fiduciary could be subject to criminal and civil penalties.
| ● | whether the investment is in accordance with the documents and instruments governing such plan; |
| ● | the definition of “plan assets” under ERISA and the impact thereof on the plan’s investment in the Company; |
| ● | whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA (or other applicable law); |
| ● | whether, under Section 404(a)(1)(B) of ERISA (or other applicable law), the investment is prudent, considering the nature of an investment in the Company and our compensation structure and the fact that there is not expected to be a market created in which our shares of common stock can be sold or otherwise disposed of; |
| ● | that we have a limited history of operations; |
| ● | whether we or any of our affiliates are a “party-in-interest” (within the meaning of Section 3(14) of ERISA) or “disqualified person” (within the meaning of Code Section 4975) with respect to the plan; |
| ● | the need to annually value our shares of common stock; and |
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| ● | whether an investment in the Company will cause the plan to recognize unrelated business taxable income. |
With respect to the annual valuation requirements described above, we will provide an estimated value for our shares of common stock annually beginning after the Initial Valuation Date. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Code. The Department of Labor or the IRS may determine that a plan fiduciary is required to take further steps to determine the value of our shares of common stock. In the absence of an appropriate determination of value, a plan fiduciary may be subject to damages, penalties or other sanctions.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of criminal and civil penalties and could subject the fiduciary to claims for damages or for equitable remedies. In addition, if an investment in our shares of common stock constitutes a prohibited transaction under ERISA or the Code, the fiduciary who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In the case of a prohibited transaction involving an IRA owner, the IRA may loss its tax-exempt status and thus, the entire value of the IRA would be considered to be distributed and taxable to the IRA sponsor. Plan fiduciaries should consult with their own legal advisors before making an investment in our shares of common stock.
Item 1B. Unresolved Staff Comments.
None
Item 2. Properties
Our principal executive offices are located at 1635 43rd Street South, Suite 205, Fargo, North Dakota 58103. Our telephone number is (701) 630-6500. We lease our offices from an unrelated third party.
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Hotel Properties
As of December 31, 2022, we consolidated nineteen hotel properties, consisting of eighteen hotels properties owned by us and an equity and profits interest in the parent of the entity which holds as leasehold interest in one hotel property. The following table provides summary information regarding the hotel properties owned by us as of December 31, 2022:
|
|
|
| Number |
|
|
|
|
| |||||||||||
Date | of Guest | Purchase | Transaction | % |
| |||||||||||||||
Hotel | Property Type | Location | Purchased | Rooms | Price | Costs | Total | Interest |
| |||||||||||
Holiday Inn Express |
| Limited-Service |
| Cedar Rapids, IA |
| November 30, 2018 |
| 83 |
| $ | 7,700,000 |
| $ | 158,333 |
| $ | 7,858,333 |
| 100 | % |
Hampton Inn & Suites |
| Limited-Service |
| Pineville, NC |
| March 19, 2019 |
| 111 |
| 13,897,358 | (1) | 303,744 |
| 14,201,102 | 100 | % | ||||
Hampton Inn |
| Limited-Service |
| Eagan, MN |
| June 19, 2019 |
| 122 |
|
| 13,950,000 |
|
| 278,333 |
|
| 14,228,333 |
| 100 | % |
Home2 Suites |
| Extended-Stay |
| Prattville, AL |
| July 11, 2019 |
| 90 |
|
| 14,750,000 |
|
| 356,014 |
|
| 15,106,014 |
| 100 | % |
Home2 Suites |
| Extended-Stay |
| Lubbock, TX | December 30, 2019 | 100 | 14,150,000 | 284,776 |
|
| 14,434,776 |
| 100 | % | ||||||
Fairfield Inn & Suites | Limited-Service |
| Lubbock, TX | January 8, 2020 | 101 | 15,150,000 | 496,431 | 15,646,431 | 100 | % | ||||||||||
Homewood Suites | Extended-Stay | Southaven, MS | February 21, 2020 |
| 99 | 20,500,000 |
| 445,090 |
| 20,945,090 | 100 | % | ||||||||
Courtyard by Marriott | Select-Service | Aurora, CO | February 4, 2021 | 141 | 23,610,000 | 458,129 | 24,068,129 | 100 | % | |||||||||||
Holiday Inn | Select-Service | El Paso, TX | May 12, 2021 | 175 | 10,300,000 | 361,019 | 10,661,019 | 100 | % | |||||||||||
Hilton Garden Inn | Select-Service | Houston, TX | August 3, 2021 | 182 | 19,910,000 | 918,353 | 20,828,353 | 100 | % | |||||||||||
Sheraton Hotel | Full-Service | Northbrook, IL | December 3, 2021 | 160 | 11,400,000 | 340,005 | 11,740,005 | 100 | % | |||||||||||
Hampton Inn & Suites | Limited-Service | Fargo, ND | January 18, 2022 | 90 | 11,440,000 | 302,222 | 11,742,222 | 100 | % | |||||||||||
Courtyard by Marriott | Select-Service | El Paso, TX | February 8, 2022 | 90 | 15,120,000 | 333,234 | 15,453,234 | 100 | % | |||||||||||
Fairfield Inn & Suites | Limited-Service | Lakewood, CO | March 29, 2022 | 142 | 18,800,000 | 862,117 | 19,662,117 | 100 | % | |||||||||||
Residence Inn | Extended-Stay | Fort Collins, CO | August 3, 2022 | 113 | 15,800,000 | 546,009 | 16,346,009 | 100 | % | |||||||||||
Hilton Garden Inn | Select-Service | Pineville, NC | August 25, 2022 | 113 | 10,930,000 | 347,149 | 11,277,149 | 100 | % | |||||||||||
Hilton Garden Inn | Select-Service | Charlotte, NC | August 25, 2022 | 112 | 15,440,000 | 416,387 | 15,856,387 | 100 | % | |||||||||||
Holiday Inn Express | Limited-Service | Wichita, KS | December 22, 2022 | 84 | 7,400,000 | 234,310 | 7,634,310 | 100 | % | |||||||||||
2,108 | $ | 260,247,358 | $ | 7,441,655 | $ | 267,689,013 | ||||||||||||||
| (1) | The seller of the Pineville Property was entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income ("NOI") for one of the 12-month periods ending March 31, 2021, March 31, 2022, or March 31, 2023, as elected by the seller. The period to elect to receive additional compensation has passed with no election being made, as the seller did not elect the 12-month period ending March 31, 2021, March 31, 2022 or March 31, 2023. |
In addition, on August 10, 2022, we acquired a 24.9% equity and profits interest in High Desert Garden Holdings, LLC, which is the parent of the entity which holds a leasehold interest in the Hilton Garden Inn, located in El Paso, Texas (the “El Paso University Property”) in exchange for a capital contribution of $3.2 million. The El Paso University Property is a select-service hotel with 153 guest rooms. See Note 3 “Investment In Hotel Properties” of the notes to the consolidated financial statements included as part of this Annual Report on Form 10-K for additional information regarding this transaction.
For a description of the debt associated with each of these hotel properties, see Part II. Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”
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Management Agreements
NHS Agreement
As of December 31, 2022, eleven of our hotel properties were subject to management agreements with NHS with an initial term expiring on December 31 of the fifth full calendar year following the effective date of the agreement. The agreement will automatically renew for successive five-year periods unless terminated earlier in accordance with its terms. The day-to-day operations of the Pineville Property was managed by Beacon IMG, Inc. (“Beacon”), an affiliate of the seller of the Pineville Property, pursuant to a sub-management agreement between NHS and Beacon until January 31, 2023, with HP Hotel Management taking over the day-to-day operations as of February 1, 2023.
Vista Host Agreement
As of December 31, 2022, our Southaven Property was subject to a management agreement with Vista Host Inc. (“Vista”) with an initial term expiring on February 21 of the fifth full calendar year following the effective date of the agreement. The agreement will automatically renew for two (2) successive five-year periods unless terminated earlier in accordance with its terms.
Aimbridge Agreement
As of December 31, 2022, each of our Houston Property, El Paso Airport Property and El Paso University Property was subject to a management agreement with Interstate Management Company, LLC (“Aimbridge”). The Aimbridge agreement for the Houston Property has an initial term expiring on August 3 of the third full calendar year following the effective date of the agreement. The agreement will automatically renew for additional successive terms of one year each unless terminated earlier in accordance with its terms. The Aimbridge agreement for the El Paso Airport Property and the El Paso University Property each has an initial five (5) year term and will automatically renew for one (1) year periods unless terminated earlier in accordance with its terms.
KAJ Agreement
As of December 31, 2022, each of the Fargo Property and the Wichita Property was subject to a management agreement with KAJ Hospitality Inc. (“KAJ”). Each KAJ agreement has an initial term of five years after its effective date, which automatically renews for successive one-year periods, unless terminated in accordance with its terms.
HP Agreement
As of December 31, 2022, the Charlotte Property and the Pineville HGI Property were each subject to a management agreement with HP Hotel Management, Inc. (“HP”). Each HP agreement has an initial term expiring three years after its effective date, which automatically renews for successive three-year periods, unless terminated in accordance with its terms. On February 1, 2023, HP assumed the management of the Pineville Property.
Franchise Agreements
As of December 31, 2022, all of our hotel properties were operated under franchise agreements with initial terms of 10 to 18 years. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, we pay a royalty fee of 5% to 6% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs. Certain hotels are also charged a program fee of generally between 3% and 4% of room revenue. We paid an initial fee of $50,000 to $175,000 at the time of entering into each franchise agreement which is being amortized over the term of each agreement.
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Item 3. Legal Proceedings.
We may from time to time be a party to legal proceedings which arise in the ordinary course of our business. See Note 12 “Commitments and Contingencies” of the notes to the consolidated financial statements included as part of this Annual Report on Form 10-K 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 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
No public market currently exists for our shares of common stock, and we currently have no plans to list our shares on a national securities exchange.
Share Valuation
We are not required to establish an updated net asset value of the Company (“Company NAV”) or an estimated net asset value per share (“Share NAV”) in accordance with FINRA Rules 5110 and 2231 as we are not conducting any public offering of our shares. The initial Share NAV was $10.00, the price at which we offered our shares in the Offering from the inception of the Offering through December 31, 2022, which was determined by our board of directors and bears no relationship to any established criteria of value such as book value or earnings per share, is not based on our past earnings, and does not reflect current market value for our assets. Our board of directors approved a revised Company NAV as of December 31, 2022, and a Share NAV of $10.57 per share effective January 6, 2023, determined by dividing the Company NAV by the number of then-outstanding shares of the Company’s common stock. The Company NAV and Share NAV were determined by our board of directors taking into account appraisals of the Company’s real estate properties and other factors deemed relevant to our board of directors. The Advisor administers our valuation policy and is responsible for the oversight of the valuation process, including the review and approval of the valuation and appraisal processes and methodologies used to determine our Company NAV and Share NAV, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices, and the reasonableness of the assumptions used in the valuations and appraisals.
At any time that a new Company NAV is calculated as provided above prior to the termination of the Offering, we intend to adjust the Offering price of the shares in an amount equal to the Company NAV divided by the number of outstanding shares. Our board of directors will determine a new Share NAV at such times and in conjunction with our determination of the Company NAV, and we will report the new Share NAV to our stockholders.
Equity Compensation Plans
Our board of directors has approved the adoption of a phantom stock plan (the “Phantom Stock Plan”) for the Company. However, the specific terms of the Phantom Stock Plan have not yet been determined and approved by our board. We intend for the shares designated pursuant to the Phantom Stock Plan (the “Phantom Shares”) to be allocated to the Advisor, the TRS subsidiaries and NHS for distribution of the proceeds to their respective employees and service providers in accordance with their compensation plans, however, Corey Maple, Norman Leslie and Samuel Montgomery will not receive any Phantom Shares pursuant to the Phantom Stock Plan.
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Stockholder Information
As of March 27, 2024, we had 9,966,585 shares of our common stock outstanding, held by a total of 1,359 stockholders.
Distribution Information
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 during 2022 and 2021, aggregated by quarter, are as follows:
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) | ||||||
Second Quarter 2022 | 1,540,200 | 0.175 | 1,203,791 | 526,159 | 1,729,950 | 20,841 | ||||||||||||
Third Quarter 2022 | 1,821,829 | 0.175 | 1,094,353 | 452,923 | 1,547,276 | 2,268,982 | ||||||||||||
Fourth Quarter 2022 | 1,762,398 | 0.175 | 1,234,969 | 433,293 | 1,668,262 | (326,742) | ||||||||||||
$ | 6,680,735 | $ | 0.700 | $ | 4,466,577 | $ | 1,979,615 | $ | 6,446,192 | $ | (1,330,100) | |||||||
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 years ended December 31, 2022 and 2021 were based on daily record dates and were calculated based on stockholders of record each day during the 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 December 31, 2022 were payable to each stockholder as 100% in cash on a monthly basis. |
| (2) | Assumes each 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 year ended December 31, 2022, we paid aggregate distributions of $6.4 million, including $4.5 million of distributions paid in cash and $2.0 million of distributions reinvested through our dividend reinvestment plan. 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 years ended December 31, 2022 and 2021, was $18.9 million and $5.3 million, respectively. Net cash flows used in operations for the years ended December 31, 2022 and 2021, were $1.3 million and $1.0 million, respectively. 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 flows 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.
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Going forward we expect our board of directors to continue to authorize and declare distributions, if at all, based on daily record dates. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant, and may be paid in cash or in shares pursuant to the DRIP. Our board of directors has not pre-established a percentage rate of return for cash distributions or stock distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
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. From inception of the Offering through December 31, 2022, except as otherwise provided in the offering memorandum, the shares were being offered 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. Our board of directors approved an estimated Share NAV as of December 31, 2022 and based on such Share NAV adjusted the offering price for our shares in the Offering to $10.57 per share, effective January 6, 2023, with shares issued pursuant to the DRIP being purchased at 95% of the new Share NAV, or $10.04 per share. During the year ended December 31, 2022, we sold 1,186,019 shares of common stock in the private offering, resulting in gross offering proceeds of approximately $13.5 million, including 208,380 shares issued pursuant to our dividend reinvestment plan. During the year ended December 31, 2022, aggregate selling commissions of $0.6 million and marketing and diligence allowances and other wholesale selling costs and expenses of $1.5 million were paid in connection with the private offering. During the year ended December 31, 2021, we sold 407,478 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. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. 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 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
40
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 year ended December 31, 2022, we sold and issued 910,329 Series GO LP Units in the GO Unit Offering, resulting in gross proceeds of $6.3 million. During the year ended December 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 year ended December 31, 2022, the Operating Partnership issued an aggregate of 2,559,737 Series T LP Units in connection with contributions of hotel properties on January 18, 2022, March 24, 2022, August 3, 2022, August 25, 2022 and December 22, 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 24 or 36 months, or longer in some instances, 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).
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 February 8, 2022, the Operating Partnership issued 460,000 Common LP Units to a contributor of real estate to the Operating Partnership. On
41
December 3, 2021, the Operating Partnership issued 152,100 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. |
| ● | 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
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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, we 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.
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 year ended December 31, 2022, we repurchased shares of our common stock in the amounts below. We fulfilled all repurchase requests received during the year ended December 31, 2022. During the year ended December 31, 2022, we funded repurchases under our share repurchase plan with the net proceeds from our dividend reinvestment plan.
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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 | ||||||||
April 2022 | 64,306 | $ | 9.92 | (1) | |||||
May 2022 | — | $ | — | (1) | |||||
June 2022 | — | $ | — | (1) | |||||
Total | 64,306 | ||||||||
July 2022 | 57,614 | $ | 10.00 | (1) | |||||
August 2022 | — | $ | — | (1) | |||||
September 2022 | — | $ | — | (1) | |||||
Total | 57,614 | ||||||||
October 2022 | 13,327 | $ | 10.00 | (1) | |||||
November 2022 | — | $ | — | (1) | |||||
December 2022 | — | $ | — | (1) | |||||
Total | 13,327 | ||||||||
Year Ended December 31, 2022 | 165,630 | ||||||||
(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 135,248 shares pursuant to repurchase requests received during the year ended December 31, 2022, which represents an original investment of $1,352,472, including $185,036 of DRIP shares, for $1,347,319. As of December 31, 2022, no redemption proceeds had not yet been paid and were included in other liabilities on the accompanying consolidated balance sheets included as part of this Annual Report on Form 10-K. During the year ended December 31, 2021 we repurchased 88,088 shares, which represents an original investment of $880,883, including $69,803 of DRIP shares, for $856,605. As of December 31, 2021, $299,286 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 Annual Report on Form 10-K. Based on the repurchase limits described above, as of December 31, 2022 we had $1,931,014 available for eligible repurchases during 2023.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
A discussion regarding our financial condition and results of operations for year-end 2021 compared to year-end 2020 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 31, 2022 (“2021 Form 10-K”)
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.
Overview
We were formed on April 9, 2018 as a Maryland corporation for the primary purpose of acquiring a diversified portfolio of 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 ending December 31, 2018. We conduct substantially all of our business and own substantially all real estate investments through the Operating Partnership. We are the sole 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. We have engaged NHS to manage the majority of the hotel properties acquired to date; however, we can engage third party property, and have done so in connection with several of our hotel properties 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 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 December 31, 2022, we consolidated 19 hotel properties, consisting of 18 hotel properties owned by us and an equity and profits interest in the parent of the entity which holds the leasehold interest in one hotel property, with an aggregate of 2,261 rooms located in 10 states. See Part I, Item 1, “Business” of this Annual Report on Form 10-K for more details on our investment objectives and strategy.
We have raised capital through several private offerings conducted by the Company and the Operating Partnership described below.
We are currently conducting an offering (the “Offering”) of 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, 2024, which may be extended by our board of directors in its sole discretion, or (iii) a decision by the Company to terminate the Offering. As of December 31, 2022, the Company had issued and sold 9,894,987 shares of common stock, including 1,018,460 shares attributable to our DRIP, and received aggregate proceeds of $96.7 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 $83.9 million. The net offering proceeds have been used principally to fund property acquisitions and pay distributions and debt service obligations. We repurchased 135,248 shares pursuant to repurchase requests received during the year ended December 31, 2022, which represents an original investment of $1,352,472 for $1,347,319. As of December 31, 2022, all redemption proceeds had been paid. No public market exists for the shares of our common stock, and none is expected to develop.
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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 was a maximum offering of $30,000,000, which could 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 was to 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 allowed the Interval Share Offering to expire on March 31, 2022. We did not issue or sell any shares of Interval Common Stock in the 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. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. As of December 31, 2022, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received aggregate proceeds of $21.5 million. After deductions for payments of selling commissions, marketing and diligence allowances, other wholesale selling costs and expenses, and other offering expenses, we received net offering proceeds of approximately $19.4 million.
The Operating Partnership may issue Series T LP Units or Common 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. The Series T LP Units are eligible for conversion into Common LP Units beginning 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon a Termination Event 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 Series T LP Units. As of December 31, 2022, the Company had issued an aggregate of 5,073,506 Series T LP Units and 612,100 Common LP Units in connection with such property contributions.
On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of December 31, 2022, the Operating Partnership had issued and sold 612,100 Common LP Units, with a value of $10.00 per unit, in connection with property contributions.
Key 2022 Transactions
During the fiscal year ended December 31, 2022, we acquired seven hotel properties pursuant to contribution agreements and an equity and profits interest in the parent of the entity which holds the leasehold interest in one hotel property, with an aggregate of 897 rooms located in five states. The aggregate purchase price for the contribution agreements and equity and profits interest was $98.2 million, consisting of the issuance of Series T LP Units, Common LP Units, assumption or repayment of loans secured by the properties and payments of cash. The number of Common LP Units to be issued to each
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contributor based on the conversion of the 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 measurable.
Key Indicators of Operating Performance
In evaluating financial condition and operating performance, important indicators on which we focus are revenue measurements, such as occupancy, ADR and RevPAR, and expenses, such as property operations expenses, general and administrative expenses and other expenses described below. Occupancy is the total number of rooms occupied for the period divided by the total number of available rooms for the period. ADR is equal to the total gross room revenue divided by the total number of rooms rented for the period. RevPAR is equal to the total gross room revenue divided by the total number of available rooms for the period.
Market Outlook
The hospitality industry has been significantly impacted by the COVID-19 pandemic, which began in early 2020. The pandemic caused a sharp decline in occupancy and RevPAR in 2020 and early 2021. However, the recovery of demand in our hotels accelerated in the second, third and fourth quarters of 2021, led primarily by robust leisure demand. Demand continued to recover in 2022. For the seven hotel properties acquired prior to January 1, 2021, RevPAR in 2022 compared to 2021 improved 13% to $86.53 from $76.58 while occupancy increased 1% and ADR increased 12%. Business transient and group demand remains well below pre-pandemic levels in most markets, but such demand could increase if corporate travel increases. During the year ended December 31, 2022, inflation in the United States accelerated and is expected to continue at an elevated level in the near-term. Beginning in 2022, in an effort to combat inflation and restore price stability, the Federal Reserve significantly raised its benchmark federal funds rate, which led to increases in interest rates in the credit markets. Higher interest rates could have an adverse impact on our financing costs as well as general and administrative expenses and property operating expenses. Further, increasing labor costs and shortages, supply chain disruptions and related commodity and other price inflation 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.
We cannot predict if and when the demand for our hotel properties will return to pre-outbreak levels of occupancy and pricing. Continued improvement in operating results will be dependent on continued strength in leisure travel and a recovery of business travel, as well as moderating inflation. 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.
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 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
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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, 2024, 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. Our board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. We intend to obtain the capital required to make real estate and real estate-related investments and conduct our operations from the proceeds of our Offering 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 December 31, 2022, we had raised approximately $96.7 million in gross offering proceeds from the sale of shares of our common stock in the Offering and approximately $21.5 million in gross offering proceeds from the sale of the Series GO LP Units in our GO Unit Offering. 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 December 31, 2022, we consolidated nineteen hotel properties, consisting of eighteen hotel properties owned by us and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property. We acquired these investments with the proceeds from the sale of our common stock in the Offering, proceeds from the GO Unit Offering and debt financing and, for all but one of the properties acquired in 2022 and the equity and profits interest acquired in 2022, the issuance of Series T LP Units to the contributor as part of the consideration, and for one of the properties acquired in 2021, the issuance of Common LP Units. Operating cash needs during the year ended December 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 Project at the discretion of the board of directors. Though this is our estimated leverage, our charter does not limit us from incurring debt in excess of this amount. As of December 31, 2022, our aggregate loan-to-value ratio, based on the aggregate purchase price of the Projects, was approximately 62%.
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
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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 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. As of December 31, 2022, NHS served as property manager for eleven of our hotel properties.
Our other hotel properties are managed by Vista Host Inc., Interstate Management Company, LLC (“Aimbridge”), KAJ Hospitality Inc. and HP Hotel Management Inc. These management companies earn a base management fee in an amount between 2.0% and 3.0% of gross revenue, plus monthly accounting fees and in some cases a monthly fee for customized accounting services, revenue management and digital marketing. They also may earn an incentive management fee if certain performance metrics are achieved. We also reimburse the management companies for certain costs of operating the hotel properties on our behalf. All reimbursements are paid to such management companies at cost.
One Rep, a related party, provides construction oversight, project management, and other related services to the Company. For the services provided, One Rep is paid a construction management fee equal to 6% or 7% of the total project costs. The Company also reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost.
The franchise agreements for certain of our hotels require 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 December 31, 2022, we set aside $4.6 million for capital projects in property improvement funds, which are included in restricted cash.
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We spent approximately $6.0 million on capital improvements at our operating hotels during the year ended December 31, 2022.
Debt
Lines of Credit
Revolving Line of Credit – Western State Bank
On February 10, 2020, we entered into a $5.0 million revolving line of credit with Western State Bank (“Western Line of Credit”). The Western Line of Credit requires monthly payments of interest only, with all outstanding principal amounts being due and payable at maturity on February 10, 2021. On January 19, 2021, the Western Line of Credit was amended to extend the maturity date to May 10, 2021. The Western 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 Western Line of Credit was amended to extend the maturity date to May 10, 2022. On that date, the interest rate was also amended to incorporate an interest rate floor equal to 4.00%. On May 5, 2022, the Western Line of Credit was amended to extend the maturity date to December 15, 2022. On December 15, 2022, the Western Line of Credit was amended to extend the maturity to April 15, 2023. Additionally, through the amendment on December 15, 2022, the Western Line of Credit is secured by the Company’s Hampton Inn hotel property in Eagan, Minnesota, the Company’s Holiday Inn Express hotel property in Cedar Rapids, Iowa, the Company’s Hampton Inn hotel property in Fargo, North Dakota and limited partnership units of the Operating Partnership. No other changes were made to the Western Line of Credit as a result of the Amendment.
The interest rate as of December 31, 2022 was 8.00%. The Western Line of Credit is secured by our Cedar Rapids Property, Eagan Property, and Fargo Property which are also subject to term loans with the same lender, and 300,000 Common LP Units of the Operating Partnership. The Western Line of Credit includes cross-collateralization and cross-default provisions such that the existing mortgage loan agreements with respect to the Cedar Rapids Property, the Eagan Property, and the Fargo Property as well as future loan agreements that we may enter into with this lender, are cross-defaulted and cross-collateralized with each other. The Western Line of Credit, including all cross-collateralized debt, is guaranteed by Corey Maple. As of December 31, 2022, there was a $5.0 million balance outstanding on the Western Line of Credit. See “– Subsequent Events” below for a description of amendments to the Western Line of Credit subsequent to December 31, 2022.
Revolving Line of Credit – Legendary A-1 Bonds, LLC
On August 10, 2022, the Operating Partnership entered into a $5.0 million revolving line of credit loan agreement (the “A-1 Line of Credit”) with Legendary A-1 Bonds, LLC (the “A-1 Lender”), which is an affiliate of the Advisor which is owned by Norman Leslie, a director and officer of the Company and principal of the Advisor and Corey Maple, a director of the Company and principal of the Advisor. The A-1 Line of Credit requires monthly payments of interest only beginning September 1, 2022, with all outstanding principal and interest amounts being due and payable at maturity on December 31, 2022. The A-1 Line of Credit has a fixed interest rate of 7.0% per annum. Outstanding amounts under the A-1 Line of Credit may be prepaid in whole or in part without penalty. The A-1 Line of Credit was initially secured by 500,000 unissued Common LP Units of the Operating Partnership. On December 22, 2022, the line of credit was amended to extend the maturity date to December 31, 2023 and to increase the line of credit to $7.5 million. Through the Amendment, the A-1 Line of Credit is secured by 750,000 unissued Common LP units of the Operating Partnership. As of December 31, 2022, there was a $7,380,156 balance outstanding on the A-1 Line of Credit. See “– Subsequent Events” below for a description of amendments to the A-1 Line of Credit subsequent to December 31, 2022.
Mortgage Debt
As of December 31, 2022, we had $180.3 million in outstanding mortgage debt secured by each of our nineteen hotel properties, with maturity dates ranging from May 2023 to April 2029. Seventeen of the loans have fixed interest rates ranging from 3.70% to 6.41%. One loan is a variable interest loan at a rate of LIBOR plus 6.0% per annum, provided that LIBOR shall not be less than 1.0%, resulting in an effective rate of 10.15% as of December 31, 2022. Another loan is a
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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 10.40% as of December 31, 2022. Collectively, the weighted-average interest rate is 5.74%. 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 December 31, 2022 and December 31, 2021, certain mortgage debt was guaranteed by the members of the Advisor. See Note 9 “Related Party Transactions” of the notes to the consolidated financial statements included as part of this Annual Report on Form 10-K for additional information regarding debt that was guaranteed by members of the Advisor. There were no mortgage loan amendments during the fiscal year ended December 31, 2022. See “– Subsequent Events” below for a description of changes to mortgage debt occurring subsequent to December 31, 2022.
As of December 31, 2022, we were not in compliance with the required financial covenants under the terms of its promissory notes secured by the Pineville Property, Cedar Rapids Property and Houston Property and related loan documents (the “Pineville Loan”), (the “Cedar Rapids Loan”) and (the “Houston Loan”), which constitutes an event that puts us into a trigger period pursuant to the loan documents. We have requested and received waivers of the financial covenants for the year ended December 31, 2022 for the Pineville Property, Cedar Rapids Property and Houston Property. Except as described above, we were in compliance with all debt covenants as of December 31, 2022.
Loan Guarantees
As of December 31, 2022, we have accrued a total of $941,758 in guarantee payments due to certain affiliates of the Advisor that have provided personal guarantees on some of our debt obligations, which is included in accrued expense on the accompanying consolidated balance sheets. As of December 31, 2021, we had accrued a total of $629,839 in guarantee payments due to certain affiliates of the Advisor that have provided personal guarantees on some of our debt obligations, which is included in accrued expense on the accompanying consolidated balance sheets.
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The following table sets forth the hotel properties securing each loan, the interest rate, maturity date, and the outstanding balance as of December 31, 2022 and 2021 for each of our mortgage debt obligations.
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|
|
|
| Outstanding | Outstanding | ||||
Balance as of | Balance as of | |||||||||
Interest | Maturity | December 31, | December 31, | |||||||
Hotel Property |
| Rate |
| Date |
| 2022 | 2021 | |||
Holiday Inn Express - Cedar Rapids(1) | 5.33% | 9/1/2024 | $ | 5,799,804 | $ | 5,858,134 | ||||
Hampton Inn & Suites - Pineville | 5.13% | 6/6/2024 | 8,580,586 |
| 8,782,284 | |||||
Hampton Inn - Eagan | 4.60% | 1/1/2025 | 9,063,528 |
| 9,277,193 | |||||
Home2 Suites - Prattville | 4.13% | 8/1/2024 | 9,199,041 |
| 9,425,085 | |||||
Home2 Suites - Lubbock | 4.69% | 10/6/2026 | 7,343,948 | 7,573,597 | ||||||
Fairfield Inn & Suites - Lubbock | 4.93% | 4/6/2029 | 8,971,430 | 9,125,908 | ||||||
Homewood Suites - Southaven | 3.70% | 3/3/2025 | 13,007,706 |
| 13,343,841 | |||||
Courtyard by Marriott - Aurora(2)(3) | 10.15% | 2/5/2024(4) | 15,000,000 | 15,000,000 | ||||||
Holiday Inn - El Paso(3) | 5.00% | 5/15/2023(5) | 7,900,000 | 7,900,000 | ||||||
Hilton Garden Inn - Houston(6) | 3.85% | 9/2/2026 | 13,947,217 |
| 13,947,218 | |||||
Sheraton - Northbrook(3)(7) | 10.40% | 12/5/2024 | 3,766,639 | 3,700,000 | ||||||
Hampton Inn - Fargo(8) | 4.00% | 3/1/2027 | 7,275,480 | — | ||||||
Courtyard by Marriott - El Paso(9)(10) | 6.01% | 5/13/2027 | 9,990,000 | — | ||||||
Fairfield Inn & Suites - Lakewood(3) | 7.00% | 3/29/2023(11) | 13,845,000 | — | ||||||
Residence Inn - Fort Collins(12)(13) | 7.00% | 8/3/2023 | 11,500,000 | — | ||||||
Hilton Garden Inn - El Paso | 4.94% | 8/6/2025 | 12,613,869 | — | ||||||
Hilton Garden Inn - Pineville(14) | 6.20% | 8/25/2027 | 7,020,000 | — | ||||||
Hilton Garden Inn - Charlotte(14) | 6.20% | 8/25/2027 | 9,805,000 | — | ||||||
Holiday Inn Express - Wichita(9) | 6.41% | 12/21/2027 | 5,642,000 | — | ||||||
Total Mortgage Debt | 180,271,248 | 103,933,260 | ||||||||
Premium on assumed debt, net | 221,082 |
| 722,905 | |||||||
Deferred financing costs, net | (3,193,939) | (2,129,281) | ||||||||
Net Mortgage | $ | 177,298,391 | $ | 102,526,884 | ||||||
| (1) | Loan is interest-only through April 30, 2022 and is at a fixed rate of interest. |
| (2) | Variable interest rate equal to 30-day LIBOR plus 6.00%, provided that LIBOR shall not be less than 1.00%. |
| (3) | Loan is interest-only until maturity. |
| (4) | The Company has notified the lender of its intention to exercise the option under the loan agreement to extend the maturity date to February 5, 2025. The parties are working to finalize the extension documents as of the date of this filing. |
| (5) | Maturity date extended to May 15, 2024. See “– Subsequent Events” below. |
| (6) | Loan is interest-only for the first 24 months after origination. |
| (7) | Variable interest rate equal to 30-day LIBOR or equivalent rate plus 6.25%, provided that LIBOR or equivalent rate shall not be less than 0.75%. |
| (8) | Proceeds of this loan were used to repay in full the original loan secured by the Fargo Property entered into on January 24, 2022 with A-1 Bonds. |
| (9) | Loan is interest-only for the first 18 months after origination. |
| (10) | Proceeds of this loan were used to repay in full the original loan secured by the El Paso Airport Property entered into on February 14, 2022 with A-1 Bonds. |
| (11) | Maturity date extended to March 28, 2024 per terms of the loan agreement. See “ – Subsequent Events” below. |
| (12) | Tranche 3’s maturity date is August 2, 2028. Tranche 1 is interest-only until maturity, beginning six months after the issuance of the loan. Tranche 3’s payments are deferred until a certain appraised value is attained in accordance with the terms of the loan. |
| (13) | On April 18, 2023, this loan was repaid in full and refinanced with a new loan secured by the Fort Collins Property. See “– Subsequent Events” below. |
| (14) | Loan is interest-only through February 25, 2024. |
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
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(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.
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 $0.8 million employee retention credit that is included in other income (expense) in the consolidated statements of operations. The Company received the funds from the ERC in April of 2023.
Properties Under Contract
As of the date of this filing, we had no hotel properties under contract.
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Cash Flows
The following table provides a breakdown of our net change in our cash, cash equivalents, and restricted cash:
| For the Years Ended December 31, | |||||
2022 |
| 2021 | ||||
Net cash used in operating activities | $ | (1,330,100) |
| $ | (1,048,398) | |
Net cash used in investing activities | (55,481,343) | (5,048,971) | ||||
Net cash provided by financing activities | 59,401,324 | 7,904,702 | ||||
Net increase in cash, cash equivalents and restricted cash | $ | 2,589,881 | $ | 1,807,333 | ||
Cash Flows From Operating Activities
As of December 31, 2022, we owned eighteen hotel properties and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property, and during the year ended December 31, 2022, net cash used in operating activities was $1.3 million. As of December 31, 2021, we owned eleven hotel properties and net cash used in operating activities was $1.0 million. 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, certain acquisition-related expenses, property management fees, and other working capital changes. See “– Results of Operations” below for further discussion of our operating results for the years ended December 31, 2022 and 2021.
Cash Flows From Investing Activities
Net cash used in investing activities was $55.5 million for the year ended December 31, 2022, and primarily consisted of $50.9 million used for the acquisitions of hotel properties, $6.0 million used for the improvements and additions to hotel properties and $1.3 million provided from the acquisition of the VIE. Net cash used in investing activities was $5.0 million for the year ended December 31, 2021, and primarily consisted of $2.2 million for the acquisition of four hotel properties, with an additional $2.9 million being used for capital improvements at certain of our hotel properties.
Cash Flows From Financing Activities
During the year ended December 31, 2022, net cash provided by financing activities was $59.4 million and consisted primarily of the following:
| ● | $14.0 million of net cash provided by offering proceeds related to our Offering, including $6.3 million net cash related to the Go Unit Offering, which was net of payments of commissions and other offering costs of $3.8 million, including $0.5 million related to the GO Unit Offering; |
| ● | $52.1 million of net cash provided by debt financing as a result of proceeds from debt financing of $63.8 million and $15.0 million in draws on our line of credit, offset by principal payments on debt financing of $21.0 million, with $7.2 million related to the Fargo Property and $10.0 million to the El Paso Airport Property, $3.3 million in payments on our line of credit and payments of financing costs of $2.5 million; |
| ● | $5.3 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $2.0 million; and |
| ● | $1.3 million of cash payments for share redemptions under our share repurchase plan. |
During the year ended December 31, 2021, net cash provided by financing activities was $7.9 million and consisted primarily of the following:
| ● | $11.6 million of net cash provided by offering proceeds related to our Offering, including $10.7 million net cash related to the Go Unit Offering, which was net of payments of commissions and other offering costs of $3.1 million, including $1.3 million related to the GO Unit Offering; |
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| ● | $0.1 million of net cash provided by debt financing as a result of proceeds from debt financing of $13.9 million related to the acquisition of our Houston Property, $2.0 million in draws on our line of credit, and $0.9 million in PPP loans, offset by principal payments on debt financing of $14.1 million, with $13.0 million related to the Houston Property and $1.1 million to other Properties, $1.4 million in payments on our line of credit and payments of financing costs of $1.3 million; |
| ● | $3.0 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $4.0 million; and |
| ● | $0.9 million of cash payments for share redemptions under our share repurchase plan. |
See Part II. Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Distribution Information” for details regarding our distribution history as well as sources used to pay our distributions.
Results of Operations
We expect that revenue, operating expenses, maintenance costs, real estate taxes and insurance, interest expense and management fees will each increase in future periods as a result of owning our current hotel properties for a full annual operating cycle, as well as anticipated future acquisitions of real estate investments. We also expect that revenue and operating expenses will increase in future periods as the industry recovers from the effects of COVID-19. However, future operating results could be impacted by changing market and industry factors, see “ – Market Outlook” above.
Our results of operations for the years ended December 31, 2022 and December 31, 2021 are not indicative of those expected in future periods, as we were actively raising capital through our Offering and Go Unit Offering along with acquiring hotel properties during both of these periods. As of December 31, 2022 and 2021, we owned eleven 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 year ended December 31, 2022 versus the year ended December 31, 2021
Revenue
Room revenues totaled $50.3 million and $26.1 million for the years ended December 31, 2022 and December 31, 2021, respectively. Other revenue, which consists primarily of hotel food and beverage revenues as well as revenues from other hotel services, was $2.8 million and $1.0 million for the years ended December 31, 2022 and December 31, 2021, respectively. Hotel occupancy, ADR, and RevPAR were 66.0%, $118.01, and $77.82, respectively, for the year ended December 31, 2022. Hotel occupancy, ADR, and RevPAR were 66.5%, $106.06, and $70.50, respectively, for the year ended December 31, 2021. For the seven hotel properties acquired prior to January 1, 2021, hotel occupancy, ADR, and RevPAR were 83.3%, $134.36, and $111.92, respectively, for the year ended December 31, 2022. While occupancy remained relatively flat, the increases in ADR and RevPAR were primarily due to the ongoing recovery in lodging demand from the impacts of COVID-19 coupled with rising prices due to inflation. Hotel properties acquired during 2022 contributed $12.0 million to the increase in room revenues and $0.9 million to the increase in other revenue for the year ended December 31, 2022.
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Property Operations Expenses
Property operations expenses were $26.0 million and $12.2 million for the years ended December 31, 2022 and December 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 $13.8 million increase in property operations expenses was primarily due to inflation, increases in property taxes, and the eight property acquisitions in 2022. $6.3 million of the $13.8 million increase is resulting from the acquisitions of the Fargo Medical Center in January, El Paso Airport in February, Lakewood property in March, Fort Collins, El Paso University (equity and profits interest), Charlotte North and Pineville HGI properties in August, and Wichita hotel property in December 2022. Property taxes for the 11 properties acquired before January 1, 2022 accounted for $2.5 million of the $13.8 million increase. 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 $10.6 million and $6.4 million for the years ended December 31, 2022 and December 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 $4.2 million increase in general and administrative expenses was primarily due to an increase in payroll and professional fees and $1.3 million of expenses resulting from the addition of the Fargo Medical Center, El Paso Airport, Lakewood, Fort Collins, El Paso University, Charlotte North, Pineville HGI, and Wichita 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 $3.3 million and $1.7 million for the years ended December 31, 2022 and December 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 $1.6 million increase in sales and marketing expenses was primarily due to the addition of the Fargo Medical Center, El Paso Airport, Lakewood, Fort Collins, El Paso University, Charlotte North, Pineville HGI, and Wichita 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 $4.8 million and $2.5 million for the years ended December 31, 2022 and December 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 $2.4 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 Fargo Medical Center, El Paso Airport, Lakewood, Fort Collins, El Paso University, Charlotte North, Pineville HGI, and Wichita 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 $4.2 million and $2.8 million for the years ended December 31, 2022 and December 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 $0.7 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.
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Acquisition Expenses
Acquisition expenses were $729,545 and $81,693 for the years ended December 31, 2022 and December 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, along with any acquisition costs associated with the acquisition of a VIE. The increase in acquisition expenses is primarily related to the acquisition of the VIE that holds the El Paso University Property
Depreciation
Depreciation expense was $8.0 million and $4.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. The $3.2 million increase in depreciation expense was primarily due to the addition of the Fargo Medical Center, El Paso Airport, Lakewood, Fort Collins, El Paso University, Charlotte North, Pineville HGI, and Wichita hotel properties.
Other Income, net
Other income was $2.5 million and $58,564 for the years ended December 31, 2022 and December 31, 2021, respectively. The change was primarily due to a gain recorded upon acquisition of the VIE.
PPP Loan Forgiveness
PPP loan forgiveness income was $0 and $1.7 million for the years ended December 31, 2022 and 2021, respectively. See “—Liquidity and Capital Resources – Debt – Paycheck Protection Program (“PPP”) Loans” above for a discussion of PPP loans and forgiveness.
Interest Expense
Interest expense was $11.0 million and $4.6 million for the years ended December 31, 2022 and December 31, 2021, respectively. The $6.4 million increase in interest expense was primarily due to the increase in hotel mortgage debt used to acquire the Fargo Medical Center, El Paso Airport, Lakewood, Fort Collins, El Paso University, Charlotte North, Pineville HGI, and Wichita hotel properties and increased amounts outstanding under our lines of credit.
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.
As an emerging growth company, we have elected to use the extended transition period which allows us to defer compliance with new or revised accounting standards. This allows us to adopt new or revised accounting standards as of the effective date for non-public business entities.
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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 3 to 7 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 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.
Consolidations
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a variable interest entity (“VIE”), we use judgment in determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.
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Fair Value Measurement
We establish fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets.
Level 2 Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3 Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
Off-Balance Sheet Arrangements
As of December 31, 2022 and 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
Update to Offering Price and Share NAV
Our board of directors approved a revised net asset value (“NAV”) of our assets as of December 31, 2022. As a result, the price per share of our common stock, $0.01 par value per share (each, a “Share”), in the Offering and the Share NAV were adjusted from $10.00 to $10.57 effective January 6, 2023. The issue price of the Common LP Unit and the Series T LP Unit of the Operating Partnership also increased to $10.57. The Offering price was determined by our board of directors taking into account appraisals of our real estate properties and other factors deemed relevant by our board of directors. We make no representations, whether express or implied, as to the value of the Shares offered in the Offering. In the event the Offering price per Share is increased or decreased, the number of Shares subject to the Offering will be adjusted to reflect such change and the maximum offering amount will remain unchanged.
A-1 Line of Credit Amendments
On January 12, 2023, we entered into a Change in Terms Amendment with the Operating Partnership and A-1 Bonds in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $10.0 million and increased the number of Common LP Units of the Operating Partnership securing the A-1 Line of Credit to 1,000,000 Common LP Units.
On April 18, 2023, we entered into a Change in Terms Amendment with the Operating Partnership and A-1 Bonds in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $13.3 million and increased the number of Common LP Units of the Operating Partnership securing the A-1 Line of Credit to 1,330,000 Common LP Units.
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As of March 27, 2024, $13.3 million is outstanding under the A-1 Line of Credit.
The Company and A-1 Bonds are working to finalize an extension of the A-1 Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
Western Line of Credit Amendments
On April 15, 2023, we entered into a Change in Terms Amendment with the Operating Partnership and Corey Maple in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 15, 2023 to June 15, 2023.
On July 31, 2023, we entered into a Change in Terms Agreement with the Operating Partnership, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from June 15, 2023 to September 15, 2023. This amendment also added an additional 200,000 limited partnership units of the Operating Partnership as collateral for the loan, for a total of 300,000 limited partnership units.
On October 9, 2023, we entered into a Change in Terms Agreement with the Operating Partnership, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC, effective as of October 4, 2023 in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from September 15, 2023 to November 15, 2023. This amendment also reduced the maximum credit to $4.67 million and required the Operating Partnership to pay Western State Bank a principal curtailment of $0.3 million.
On December 27, 2023, we entered into a Change in Terms Agreement with the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC, in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from November 15, 2023 to April 30, 2024.
As of March 27, 2024, $4.4 million is outstanding under the Western Line of Credit.
NHS Loan
On March 6, 2023, we entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. The NHS Loan requires the payment of monthly interest beginning on April 6, 2023, with all outstanding principal and interest amounts being due and payable at maturity on July 6, 2023. The NHS Loan has a fixed interest rate of 7.0% per annum. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership.
On December 28, 2023, we entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to January 31, 2024. This amendment also provided that in lieu of monthly interest payments, all accrued interest shall be due and payable on the maturity date with the full principal balance.
We and NHS are working to finalize an extension of the NHS loan as of the date of this filing, however there can be no assurance that an extension will be granted.
Fort Collins Loan Refinancing
On April 18, 2023, pursuant to the Loan Agreement, dated as of April 18, 2023 (the “New Fort Collins Loan Agreement”), LF3 RIFC, LLC and LF3 RIFC TRS LLC (collectively, the “Fort Collins Borrower”), subsidiaries of the Operating Partnership entered into a new $11.2 million loan with Access Point Financial, LLC (“Access Point”), which is secured by the Fort Collins Property (the “New Fort Collins Loan”). Access Point is not affiliated with us or the Advisor. The New Fort Collins Loan is evidenced by a promissory note and has a variable interest rate per annum equal to 30-day secured overnight financing rate plus 6.25%. The New Fort Collins Loan matures May 4, 2025, with the option for up to three one-year extensions if requirements are met, including certain required debt service coverage ratios and the payment of an extension fee. The New Fort Collins Loan requires monthly interest-only payments through May 4, 2025, followed by monthly payments of principal and interest through any extensions, with the outstanding principal and interest due at
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maturity. The Fort Collins Borrower has the right to prepay up to 10% of the outstanding principal amount of the New Fort Collins Loan on certain permitted prepayment dates with a 10-day notice. If prepaid during the first 25 months of the initial term, such a prepayment would include a prepayment fee equal to the sum of 24 months of interest payments that, but for the prepayment, would have been due and payable on the prepaid principal amount had a prepayment not occurred. When the Fort Collins Borrower pays the entire remaining principal balance, whether prepaid or on maturity, the Fort Collins Borrower will incur an exit fee of $112,000. The New Fort Collins Loan includes cross-default provisions such that a default under certain other agreements of the Fort Collins Borrower, the Guarantors described below and the property manager of the Fort Collins Property constitute a default under the New Fort Collins Loan. The Fort Collins Borrower used the proceeds of the New Fort Collins Loan to repay the original $11.5 million loan with A-1 Bonds which was secured by the Fort Collins Property, pursuant to a Loan Agreement, dated as of August 3, 2022. The original loan was evidenced by three promissory notes in the amounts of $10,298,535 (“Tranche 1”), $700,000 (“Tranche 2”) and $501,465 (“Tranche 3”) and had a fixed interest rate of 7.0% per annum. On April 18, 2023, the proceeds of the New Fort Collins Loan were used to refinance the original loan, and the outstanding obligations under Tranche 1 were repaid in full and under Tranche 2 were forgiven. A 1.75% exit fee was paid on Tranche 1, and no penalty was incurred on Tranche 1 or Tranche 2. Tranche 3 remains an ongoing obligation, no longer secured by the Fort Collins Property, under the terms of the original loan and Tranche 3 promissory note. All guaranties in connection and collateral with respect to the original loan and Tranche 1, Tranche 2 and Tranche 3 promissory notes have been terminated or released, and all commitments with respect to the original loan and Tranche 1 and Tranche 2 promissory notes have been terminated or released.
Pursuant to the New Fort Collins Loan Agreement, Corey Maple and Norman Leslie entered into a Guaranty with Access Point to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, and the performance of the agreements of the Fort Collins Borrower contained in the loan documents.
El Paso HI Loan Modification
LF3 El Paso, LLC and LF3 El Paso TRS LLC (collectively, the “El Paso HI Borrower”), subsidiaries of the Operating Partnership, entered into a $7.9 million loan (the “Holiday Inn El Paso Loan”) with EPH Development Fund LLC (“EPH”), secured by the El Paso HI Property, pursuant to a loan agreement, dated as of May 12, 2021. The Holiday Inn El Paso Loan had a maturity date of May 15, 2023.
On May 15, 2023, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a first loan modification agreement with EPH, which extended the maturity date to May 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay down $300,000 of the Holiday Inn El Paso Loan, modifying the principal outstanding balance to be $7.6 million. In addition, as a condition to the extension, the El Paso HI Borrower agreed to deposit $819,674 into an FF&E Reserve account held by EPH.
As an additional condition to the extension, the Operating Partnership and HD Sunland Park Property LLC (the “El Paso HI Contributor”) agreed to amend the Amended and Restated Contribution Agreement, dated as of May 12, 2021, to allow the Operating Partnership to offer the El Paso HI Contributor of the El Paso HI Property an adjustment in the conversion of Series T Limited Units to Common Limited Units or other financial adjustments if the Operating Partnership determines that the El Paso HI Contributor’s extension of the determination of the Series T value to 48 months after issuance to the El Paso HI Contributor may result in actual or possible financial or other loss or litigation.
Lakewood Loan Extended
As previously disclosed, the subsidiaries of the Operating Partnership and A-1 Bonds entered into a loan agreement in the amount of $12.6 million secured by the Lakewood Property. Per the terms of the agreement, the subsidiaries of the Operating Partnership executed the option to extend the maturity date of the loan to March 28, 2024.
SEC Settlement
As previously disclosed, the Advisor and Corey R. Maple received a “Wells notice” from the SEC stating that the SEC staff had made a preliminary determination to recommend to the SEC that it bring an enforcement action against the
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Advisor and Mr. Maple alleging violations of securities laws in connection with the SEC’s investigation of our 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 Wells notice was neither a formal charge of wrongdoing nor a final determination that the Advisor or Mr. Maple has violated any law.
On August 28, 2023, the Advisor and Mr. Maple, without admitting or denying the findings, agreed to an administrative cease-and-desist order relating to Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended. A copy of the order can be found on the SEC’s website at https://www.sec.gov/files/litigation/admin/2023/33-11227.pdf. As part of the settlement, the Advisor agreed to pay disgorgement of $463,900, prejudgment interest of $85,431.50 and a civil monetary penalty of $225,000 and Mr. Maple agreed to pay a civil monetary penalty of $100,000. Additionally, the Advisor has undertaken to (a) retain a qualified independent consultant acceptable to the SEC, at the Advisor’s expense, within 60 days of the date of entry of the order to review the Advisor’s policies, procedures and controls regarding the proper allocation of expenses between us and the Advisor as provided in the order, (b) require the consultant to submit a report to the Advisor and the SEC staff within 120 days of the entry of the order with its findings and any recommendations for changes or improvements, and (c) adopt, implement and maintain all policies, procedures and practices recommended by the consultant’s report within 120 days of receiving the report from the consultant.
Resolution of Litigation with PA Sellers
Effective November 20, 2023, the Operating Partnership and Central PA Equities 17, LLC, Central PA Equities 19, LLC, and Springwood – FHP LP (collectively, the “PA Seller”) enter into a settlement agreement and general release of all claims (the “Settlement Agreement”) regarding the asset purchase agreement dated November 22, 2019 (as amended, the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Operating Partnership agreed to acquire the 108-room Fairfield Inn & Suites by Marriott hotel in Hershey, Pennsylvania, the 107-room Home2 Suites by Hilton hotel in York, Pennsylvania, and the 100-room Hampton Inn & Suites by Hilton hotel in York, Pennsylvania (collectively, the “Hotel Properties”) from the PA Seller for $46.9 million plus closing costs, subject to adjustment as provided in the Purchase Agreement. As required by the Purchase Agreement, the Operating Partnership deposited a total of $1.5 million into escrow as earnest money pending the closing or termination of the Purchase Agreement (the “Earnest Money Deposit”).
Pursuant to the Settlement Agreement, the PA Seller received $700,000 of the Earnest Money Deposit, and the Operating Partnership received $800,000 of the Earnest Money Deposit. Accrued interest on the Deposit was split between the parties with 7/15 of the total amount being paid to the PA Seller and 8/15 of the total amount being paid to the Operating Partnership. Incurred fees of the Escrow Agent were paid by the Operating Partnership in accordance with the Settlement Agreement. The Operating Partnership and all related entities are released and forever discharged from all claims related to or arising from the Purchase Agreement.
Changes in Officers and Directors
Effective February 28, 2023, Brian Hagen retired from our board of directors. His decision to retire was not a result of a disagreement with us on any matter relating to our operations, policies or practices.
On May 19, 2023, Mr. Corey R. Maple tendered his resignation, effective May 19, 2023, as Chief Executive Officer and Secretary, but continues to serve as the Chairman of our board of directors. On May 19, 2023, our board of directors appointed Mr. Norman H. Leslie as our Chief Executive Officer and Secretary, effective May 19, 2023.
Change in Registered Public Accounting Firm
On October 24, 2023, based on the approval of the Audit Committee of our board of directors, we dismissed Deloitte & Touche LLP as our independent registered public accounting firm, and engaged Marcum LLP as our new independent registered public accounting firm, effective October 24, 2023.
Distributions Paid
On January 10, 2023, we paid cash distributions totaling $420,543 and DRIP distributions totaling $139,519, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling
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$83,099 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates December 1 through December 31, 2022 to holders of record on each calendar day of such period.
On February 7, 2023, we declared cash distributions totaling $434,653 and DRIP distributions totaling $126,842, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $86,988 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates January 1 through January 31, 2023 to holders of record on each calendar day of such period. The distribution declared for January 2023 was paid on February 10, 2023.
On March 7, 2023, we declared cash distributions totaling $434,351 and DRIP distributions totaling $129,458, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $90,200 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates February 1 through February 28, 2023 to holders of record on each calendar day of such period. The distribution declared for February 2023 was paid on March 10, 2023.
On April 4, 2023, we declared cash distributions totaling $432,563 and DRIP distributions totaling $132,987, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $93,696 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates March 1 through March 31, 2023 to holders of record on each calendar day of such period. The distribution declared for March 2023 was paid on April 10, 2023.
On May 9, 2023, we declared cash distributions totaling $441,332 and DRIP distributions totaling $125,684, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $102,500 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates April 1 through April 30, 2023 to holders of record on each calendar day of such period. The distribution declared for April 2023 was paid on May 10, 2023.
On June 12, 2023, we declared cash distributions totaling $441,771 and DRIP distributions totaling $126,101, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $113,949 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates May 1 through May 31, 2023 to holders of record on each calendar day of such period. The distribution declared for May 2023 was paid on June 15, 2023.
On July 10, 2023, we declared cash distributions totaling $442,403 and DRIP distributions totaling $127,081, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $125,067 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates June 1 through June 30, 2023 to holders of record on each calendar day of such period. The distribution declared for June 2023 was paid on July 14, 2023.
On August 8, 2023, we declared cash distributions totaling $443,331 and DRIP distributions totaling $130,236, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $138,225 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates July 1 through July 31, 2023 to holders of record on each calendar day of such period. The distribution declared for July 2023 was paid on August 11, 2023.
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On September 11, 2023, we declared cash distributions totaling $451,509 and DRIP distributions totaling $123,716, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $160,212 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates August 1 through August 31, 2023 to holders of record on each calendar day of such period. The distribution declared for August 2023 was paid on September 15, 2023.
On October 24, 2023, we declared cash distributions totaling $451,660 and DRIP distributions totaling $124,848, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $175,525 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates September 1 through September 30, 2023 to holders of record on each calendar day of such period. The distribution declared for September 2023 was paid on October 27, 2023.
On November 7, 2023, we declared cash distributions totaling $473,526 and DRIP distributions totaling $103,722, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $181,841 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates October 1 through October 31, 2023 to holders of record on each calendar day of such period. The distribution declared for October 2023 was paid on November 20, 2023.
On December 6, 2023, we declared cash distributions totaling $471,485 and DRIP distributions totaling $106,956, cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,164 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates November 1 through November 30, 2023 to holders of record on each calendar day of such period. The distribution declared for November 2023 was paid on December 29, 2023.
On January 16, 2024, we declared cash distributions totaling $471,271 and DRIP distributions totaling $108,117 cash distributions totaling $35,706 for Common Limited Units of the Operating Partnership and cash distributions totaling $182,262 for Series GO LP Units of the Operating Partnership, at a daily rate of $0.00191781 per share of Common Stock in our company, equivalent to an annualized rate of seven percent (7.00%) per share based on our initial offering price of $10.00, for daily record dates December 1 through December 31, 2023 to holders of record on each calendar day of such period. The distribution declared for December 2023 remained unpaid at the time of this filing.
Creation of Series GO II LP Units
On April 7, 2023, the Operating Partnership established the terms of a new series of limited partner units designated as Series Growth & Opportunity II Limited Partner Units (“Series GO II LP Units”) to be issued from time to time. The Operating Partnership commenced a separate offering for the purchase of the Series GO II LP Units at a purchase price equal to 75% of the Share NAV. The purchase price based on the current Share NAV is $7.93 per Series Go II LP Unit. The Series GO II LP Units will be specially allocated all Net Income (including book-up income) in proportion to the 25% issue price shortfall, until the positive Capital Account balance of each Series GO II LP Unit is equal to the Share NAV. As a result, the issuance of Series GO II LP Units will be dilutive to the General Partner Units and therefore, to the shares of common stock of our Company. See “—GO II Unit Offering” below for a status of the offering of the Series GO II LP Units.
Terminated Contracts
On January 31, 2023, the Operating Partnership and CS Real Estate Holding LLC (the “College Station Voco Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “College Station Voco Contribution Agreement”), pursuant to which the College Station Voco Contributor agreed to contribute the 166-room Aggieland Boutique Hotel in College Station, Texas to the Operating Partnership, which the Operating Partnership intended to convert into a Voco by IHG (the “College Station Voco Hotel Property”). The College Station Voco Contributor is not affiliated with us or Legendary Capital REIT III, LLC, our external advisor. The aggregate consideration
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for the College Station Voco Hotel Property under the College Station Voco Contribution Agreement was $18,500,000 plus closing costs, subject to adjustment as provided in the College Station Voco Contribution Agreement. The majority of the consideration consists of the assumption or refinancing by the Operating Partnership of existing debt secured by the College Station Voco 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 College Station Voco Contribution Agreement, the Operating Partnership deposited $50,000 into escrow as earnest money pending the closing or termination of the College Station Voco Contribution Agreement. The Operating Partnership terminated the College Station Voco Contribution Agreement on June 13, 2023. The earnest money deposit was fully refunded to the Operating Partnership.
On April 23, 2023, the Operating Partnership terminated the Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement entered into on August 16, 2022 in connection with the contribution of the 276-room Sheraton Hotel Albuquerque Airport in Albuquerque, New Mexico. Subsequent to December 31, 2022 and prior to termination, the Operating Partnership deposited an additional $150,000 into escrow as earnest money pending the closing or termination of the Sheraton Albuquerque Airport Contribution Agreement. Upon termination, $300,000 of the total earnest money deposit was returned to the Operating Partnership.
Status of the Offering
Our board of directors extended the term of our Offering to May 31, 2024. As of the date of this filing, our private offering remained open for new investment, and since the inception of the offering we had issued and sold 10,254,100 shares of common stock, including 1,178,323 shares issued pursuant to the DRIP, resulting in the receipt of gross offering proceeds of $100.3 million.
Series T LP Units
The Operating Partnership did not issue any Series T LP Units during the year ended December 31, 2023 to the date of this filing.
Common LP Units
The Operating Partnership did not issue any Common LP Units during the year ended December 31, 2023 to the date of this filing.
GO II Unit Offering
On April 7, 2023, the Operating Partnership commenced an offering of Series GO II LP Units. The Operating Partnership has issued and sold 197,606 Series Go II LP Units, resulting in the receipt of gross offering proceeds of $1.5 million as of the date of this filing.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
See the Index to Financial Statements at page F-1 of this report.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 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 not effective as of such date due to a material weakness in internal control over financial reporting, described below.
Management’s Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making that assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed, in connection with the review of the Company’s consolidated financial statements for the quarter ended September 30, 2022, we identified a material weakness in our control environment related to the accounting treatment of an acquisition in August of 2022 of a controlling interest in an entity which holds the leasehold interest in a hotel property. We believe that this material weakness was a result of the misapplication of the GAAP accounting guidance. The material weakness did not result in any misstatements, material or otherwise, to the financial statements issued for the year ended December 31, 2021, or the quarters ended March 31, 2022 or 2021, June 30, 2022 or 2021 or September 30, 2021. Soley due to this weakness, our management concluded that at December 31, 2022, the Company’s internal control over financial reporting was not effective.
Remediation
Subsequent to December 31, 2022, management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include consultation with external GAAP accounting experts on non-recurring, significant, or unusual transactions. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the application controls operate for a
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sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2024.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2022, except for the material weakness noted above, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The remediation plan described above was implemented subsequent to December 31, 2022.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
The following table sets forth certain information about our executive officers and directors as of March 27, 2024.
Name and |
| Position(s) |
| Age |
| Year First |
| Class |
|
Corey R. Maple | Chairman of the Board and Director | 58 | 2018 | Class I | |||||
Norman H. Leslie | President, Chief Executive Officer, Secretary, Chief Investment Officer, Treasurer, and Director | 57 | 2018 | Class II | |||||
Samuel C. Montgomery | Chief Financial Officer | 42 | n/a | n/a | |||||
Perry M. Rynders | Independent Director | 65 | 2019 | Class II | |||||
Jeffrey T. Leighton | Independent Director | 54 | 2018 | Class III | |||||
David G. Ekman | Director | 62 | 2018 | Class III |
| (1) | The address of each named executive officer and director is 1635 43rd Street South, Suite 205, Fargo, North Dakota 58103. |
Corey R. Maple
Corey R. Maple serves as Chairman of our board of directors and a director, positions he has held since April 2018. From April 2018 to May 2023, Mr. Maple served as the Company’s Chief Executive Officer and Secretary. He also served as the Chief Executive Officer and Secretary of the Advisor, positions he held from April 2018 to May 2023. Mr. Maple has also served as a Managing Member of the Sponsor since 2018. In 1992, Mr. Maple served as manager of a branch office of Maier Engineering in St. Paul, Minnesota. In 1993, Mr. Maple and three partners purchased Maier from its principal, Gordon Maier. In 1996, Mr. Maple founded MiniMax Software Corp. to build engineering applications for the electric utility market. Also in 1996, Mr. Maple acquired a 100% interest in Maier by buying out the interests of his other three partners in the company. In 2005, MiniMax merged with Powel, ASA, a privately held Norwegian company. In 2006, Mr. Maple helped lead a successful public offering of the combined entity on the Oslo Bourse. Mr. Maple served as the President of U.S. operations and member of the board of directors for the next two years until the company was purchased by a Scandinavian conglomerate. In 2008, Mr. Maple founded Cordonco.com, an online transaction processing service. Also in 2008, Mr. Maple served as a founder of Lodging Opportunity Fund, an investment fund sponsored by an affiliate of our Advisor that purchased distressed, limited-service hotels, and currently serves as a Chairman and Trustee of that entity. Mr. Maple also owns or has an interest in Seven Sisters Spirits, a large full-service liquor store near Detroit Lakes MN, and MapleTree LLC, an investment company. Mr. Maple holds a Bachelor of Science degree in Electrical Engineering from North Dakota State University. We believe that Mr. Maple’s experience as a founder of Lodging Opportunity Fund and his private board experience make him well qualified to serve as a member of our board of directors.
On August 28, 2023, Mr. Maple, the Advisor and an affiliated manager of another REIT sponsored by our Sponsor, Legacy Hospitality II, LLC (“Legacy”), agreed to an administrative cease-and-desist order filed by the Securities and Exchange Commission (the “SEC”) relating to matters previously discussed in our prior public filings and described more fully in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Subsequent Events – SEC Settlement” herein. A copy of the order can also be found on the SEC’s website at https://www.sec.gov/files/litigation/admin/2023/33-11227.pdf. The SEC’s order states that Mr. Maple, the Advisor and Legacy violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, through the improper reimbursement of and financial accounting for certain expenses incurred by the Advisor and Legacy as well as the adequacy of disclosures to investors related to those policies and practices. As part of the settlement, the Advisor agreed to pay disgorgement of $463,900, prejudgment interest of $85,431.50 and a civil monetary penalty of $225,000, Legacy agreed to disgorgement of $2,283,000, prejudgment interest of $4,359,012.67 and a civil monetary penalty of $1,150,000, and Mr. Maple agreed to pay a civil monetary penalty of $100,000. The Advisor, Legacy and Mr. Maple did not admit or
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deny the findings contained in the order, except that solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, the findings in the order are true and admitted by Mr. Maple.
Norman H. Leslie
Norman H. Leslie serves as Chief Executive Officer and Secretary of the Company, positions he has held since May 19, 2023. In addition, he serves as the President of the Company, a position he has held since August 2019, and Chief Investment Officer, Treasurer and director of the Company, positions he has held since April 2018. Mr. Leslie also serves as the President, Chief Investment Officer and Treasurer of the Advisor, positions he has held since April 2018. Mr. Leslie has also served as the Managing Member of the Sponsor since 2018. Mr. Leslie has 33 years of real estate experience and has worked extensively in the hotel industry, working from the ground up. Mr. Leslie organized NHS, LLC (dba National Hospitality Services) in 2001. Today, NHS manages 43 hotels across the United States and is recognized as a Top 200 management company in the United States by size. NHS operates hotels franchised through IHG®, Marriott®, Hilton®, Hyatt®, Radisson®, Choice Hotels® and Wyndham®. As co-founder of Bridge Hospitality LLC and other development companies, he was instrumental in the eight new-build IHG and Marriott hotels in the United States. Mr. Leslie has also led the development of commercial properties including Grade A offices and retail centers in North Dakota. He was also a co-founder of Heritage Homes, a premiere homebuilder in the Fargo-Moorhead market.
Mr. Leslie co-founded Lodging Opportunity Fund LLLP, Lodging Opportunity Fund Real Estate Investment Trust, the Company and their corresponding sponsor entities. These entities acquired over 40 hotels between 2011 and today. Mr. Leslie serves on the IHG Owners Association Global Board of Directors (2018-present) and was elected as Chair of the Board for 2022. He has served on the board of directors of the Fargo-Moorhead-West Fargo Chamber of Commerce, Ramada Inns National Association (RINA), and four Owner Association panels for IHG.
Mr. Leslie holds a Bachelor of Commerce Degree (Honors) from the University of Manitoba. We believe that Mr. Leslie’s significant experience in the real estate and hotel industry makes him well qualified to serve as a member of the Company’s board of directors.
Samuel C. Montgomery
Samuel C. Montgomery serves as Chief Financial Officer of the Company, a position he has held since October 2020. Mr. Montgomery also serves as Chief Operating Officer of our Sponsor, a position he has held since December 2016. Mr. Montgomery oversees every aspect of Legendary Capital’s operations. He is a certified public accountant in North Dakota, Florida and Tennessee and has more than a decade of experience serving asset managers in the REIT and private equity sectors. He spent the first six years of his career with Ernst & Young LLP, primarily with its Chicago, Illinois, financial services group. In this role, he served as a business advisor to several of the country’s largest REITs on tax consulting, mergers and acquisitions and public offerings. He also contributed to the growth of the company’s financial services practice with a rotation in Bangalore, India, to help develop Ernst & Young’s outsourced tax compliance functions for financial services clients. In 2011, Montgomery transferred to PricewaterhouseCoopers LLP, where he spent five years serving financial services clients primarily from the Tampa, Florida, office. As one of two individuals tasked with developing a financial services practice in western and central Florida, he helped broaden the footprint to cover the entire state. Upon relocating to Fargo, North Dakota in June 2016, Mr. Montgomery joined Eide Bailly LLP’s tax practice serving a variety of real estate clients. He holds a Bachelor’s degree in Business Administration-Accounting from the University of Miami and a Master’s degree in Taxation from Nova Southeastern University.
Perry M. Rynders
Perry M. Rynders is one of our independent directors and is the Chairman of the audit committee of our board of directors (the “Audit Committee”), positions he has held since April 2019. Mr. Rynders is also the Chairman of the Audit Committee of Lodging Opportunity Fund REIT, an affiliate of the Company. Mr. Rynders was the Chief Executive Officer and member of the Board of Governors of A’viands, LLC, a food services management company, from 2005 through September of 2014. In August of 2011, A’viands was sold to TrustHouse Services Group, LLC. In April of 2013, TrustHouse Services Group, LLC was sold to Elior, a publicly traded company out of France. Mr. Rynders continued as a consultant to A’viands, LLC through March of 2018. Mr. Rynders is a 50% owner, CEO and Chairman of the Board of
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Governors of Best Development Company, LLC. Best Development Company, LLC’s primary asset is approximately 80 acres of land in Dakota County, MN which is currently farmed. Mr. Rynders is a 50% owner, CEO and Chairman of the Board of Governors of Best Holding Company, LLC. Best Holding Company, LLC’s primary asset is a 30,000 square foot office building in Roseville, MN. Mr. Rynders is a 50% owner, CEO and Chairman of the Board of Governors of Best Investment Company II, LLC. Best Investment Company II, LLC’s primary asset is an investment in Tamarack Aerospace Group, Inc. Mr. Rynders is also an investor in Lodging Opportunity Fund REIT, an affiliate of the Company. Mr. Rynders is a Certified Public Accountant (Inactive). We believe that Mr. Rynders’ experience as Chairman of the Audit Committee of Lodging Opportunity Fund REIT and other business experience make him well qualified to serve as a member of our board of directors and the Chairman of our Audit Committee.
Jeffrey T. Leighton
Jeffrey T. Leighton is one of our independent directors, a position he has held since June 2018. Jeffrey T. Leighton currently is Vice President and a board member of Leighton Broadcasting, a second-generation radio broadcast company. Mr. Leighton has spent most his life in Central Minnesota. Beginning in 1992 he worked as a financial advisor for American Express and attained a Series 7, 63 and 65 license for investments. In 1996, Mr. Leighton joined Leighton Broadcasting as Sales Manager for their Detroit Lakes, Minnesota market and in 2003, he was promoted to Market Manager for this same market. Mr. Leighton has led the Company in its completion of two acquisitions within this market since 2010. Mr. Leighton served on the Essentia Health Foundation and was a driving force in its creation of the Business Relations committee. Mr. Leighton has also served in various positions with the Detroit Lakes Chamber of Commerce, Rotary and Health Resource Center. He holds a Bachelor of Arts degree in Finance and Marketing from The University of St. Thomas in St. Paul, Minnesota. We believe that Mr. Leighton’s finance and acquisitions experience makes him well qualified to serve as a member of our board of directors.
David G. Ekman
David G. Ekman is one of our directors, a position he has held since April 2018. He purchased a ComputerLand franchise in 1982 and later developed his own full-service computer company named Corporate Technologies in Fargo, North Dakota. In 1994, Mr. Ekman launched a regional Internet Service Provider (ISP) company, Corporate Communications, which was later sold. In 1999, Mr. Ekman merged his computer company with a voice and data company. The entity eventually became Multiband Subscriber Services, a field services company with over 3,000 U.S. employees, formerly listed on NASDAQ. Mr. Ekman ended his career as Multiband’s Chief Information Officer in January 2015 after the company’s sale. Mr. Ekman currently serves as President and founding partner of Bridge Hospitality, a company that performs hotel development and investment. Mr. Ekman is also a partner and President of One Rep Construction, an owners representative company for hotel construction and renovations. Additionally, he is co-owner of Travel Travel Fargo-Moorhead, Inc., a regional travel agency. Mr. Ekman has been involved with many associations and committees throughout his career including public company board of directors experience with Multiband. He currently serves on the Board of Trustees of the North Dakota State University Foundation, the College Advisory and Advancement board of directors at University of Minnesota Crookston, and the Audit Committee of LOF-REIT, a non-registered, non-traded REIT sponsored by an affiliate of our Advisor. Mr. Ekman holds an Associate’s degree in agricultural business from University of Minnesota Crookston. He then transferred to North Dakota State University, majoring in agricultural economics. We believe that Mr. Ekman’s significant experience with Multiband and the hospitality industry makes him well qualified to serve as a member of our board of directors.
Board Composition
We currently have five seats on our board of directors. Pursuant to our charter, our board of directors is currently divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. We did not hold an annual meeting of stockholders in 2023. As a result, all of our directors are
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continuing to serve because their successors have not yet been elected. We anticipate that we will hold an annual meeting during 2024 to elect directors. The board of directors is divided into three classes as follows:
| ● | Class I directors. The sole Class I director is Corey R. Maple, whose term expires at the annual meeting of stockholders to be held in 2025 or until his successor is elected and qualified; |
| ● | Class II directors. The Class II directors are Norman H. Leslie and Perry M. Rynders. The Class II directors’ terms were scheduled to expire at the annual meeting of stockholders in 2023, but since that meeting was not held, the Class II directors’ terms will expire at the annual meeting of stockholders to be held in 2024 or until their successors are elected and qualified; and |
| ● | Class III directors. The Class III directors are David G. Ekman and Jeffrey T. Leighton, whose terms expire at the annual meeting of stockholders to be held in 2024 or until their successors are elected and qualified. |
Each director will serve for a term of three years, until his or her successor is duly elected and qualified; provided, that the Class II directors will serve a term expiring at the annual meeting of stockholders in 2026. There is no limit on the number of times a director may be elected to office.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics which applies to all of our officers and directors. The full text of our Code of Conduct and Ethics is posted on our website at https://legendarycap.com/sec-info/. If any substantive amendments are made to the Code of Conduct and Ethics or any waiver is granted, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding such amendment to, or waiver from, a provision of this Code of Conduct and Ethics by posting such information on our website, at the address and location specified above.
Audit Committee
The board of directors established an Audit Committee currently composed of two directors. Perry M. Rynders, an independent director, is the Chairman of the Audit Committee. Jeffrey Leighton, an independent director, is a member of the Audit Committee. The board of directors has determined that Mr. Rynders and Mr. Leighton are “financially literate,” and have “accounting or related financial management expertise,” as such qualifications are interpreted by the board of directors in its business judgment and has determined that Mr. Rynders and Mr. Leighton are each an "audit committee financial expert" as that term is defined by the SEC. The Audit Committee is responsible for the oversight of (i) our accounting and financial reporting processes, (ii) the integrity of our financial statements, (iii) our compliance with legal and regulatory requirements, and (iv) our independent registered public accounting firm’s qualifications, performance and independence. The audit committee fulfills these responsibilities primarily by carrying out the activities enumerated in the audit committee charter. The audit committee charter is available on our website at https://legendarycap.com/sec-info/. To assist the Audit Committee with its responsibilities, we created an advisory committee (the "Audit Advisory Committee"). Todd Fisher is currently the sole member of the Audit Advisory Committee. Mr. Rynders was a member of the Audit Advisory Committee prior to being appointed to the board of directors in April 2019.
Conflicts Committee
The board of directors established a conflicts committee of the board of directors (the “Conflicts Committee”) composed of all of the independent directors. The members of the Conflicts Committee are Jeffrey T. Leighton and Perry M. Rynders. The Conflicts Committee may act on any matter permitted under Maryland law. Both the board of directors and the Conflicts Committee must act upon those conflicts of interest matters that cannot be delegated to a committee under Maryland law. The Conflicts Committee may also retain its own legal and financial advisors at our expense when appropriate. Among the matters that the Conflicts Committee may act upon are the following:
| ● | the continuation, renewal or enforcement of our agreements with the Advisor and its affiliates, including the Advisory Agreement; |
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| ● | specific known and disclosed conflicts including the approval of any management agreements between NHS, LLC dba National Hospitality Services (“NHS”) and the TRS subsidiaries who are lessees of the properties; |
| ● | transactions with affiliates; |
| ● | the offering of any of the Company’s securities; |
| ● | whether and when we seek to list our common stock on a national securities exchange; |
| ● | whether and when we seek to become self-managed; and |
| ● | whether and when we seek to sell the Company or substantially all of its assets. |
In addition, all purchases and sales of hotel properties and third-party borrowings require the approval of at least a majority of the Conflicts Committee. The Conflicts Committee does not have a separate committee charter.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires executive officers, directors and persons who beneficially own any class of a company’s common stock, to file reports of ownership and changes in ownership with the SEC. To our knowledge, based solely on a review of the copies of reports or written representations from such persons, we believe that our executive officers and directors have complied in a timely manner with all applicable Section 16(a) filing requirements except as follows:
| ● | One Form 4 was filed on July 5, 2022 for each of Jeffrey Leighton, Brian Hagen and Perry Rynders to report the acquisition of shares on March 31, 2022 and June 30, 2022. These reports were untimely with respect to the disclosure of the acquisition of shares on March 31, 2022. |
| ● | One Form 4 was filed on October 4, 2022 for Mr. Leighton to report the acquisition of shares on September 2, 2022 and September 30, 2022. This report was untimely with respect to the disclosure of the acquisition of shares on September 2, 2022. |
| ● | One Form 4 was filed on December 27, 2023 for Corey Maple to report the acquisition of Series GO II LP Units on December 22, 2023 and of Series GO LP Units on March 28, 2022. The Series GO LP Units were pending as of the closing of the offering on February 14, 2022 and the board of directors approved and ratified the sale as it was pending at the time of the offering closing. The report was untimely with respect to the disclosure of the acquisition of Series GO LP Units on March 28, 2022. |
| ● | One Form 4 was filed on March 19, 2024 for David Ekman to report the acquisition of shares on August 18, 2022. This report was untimely with respect to the disclosure of the acquisition of shares on August 18, 2022. |
Item 11. Executive Compensation.
Compensation of Executive Officers
Our executive officers do not receive compensation directly from us for services rendered to us. Our executive officers are officers and/or employees of, or hold an indirect ownership interest in, the Advisor, and/or its affiliates, and our executive officers are compensated by these entities, in part, for their services to us. Samuel C. Montgomery, our Chief Financial Officer, is an employee of an affiliate of the Advisor and we reimburse the affiliate, at cost, for an allocated portion of his compensation to the extent he provides services to us. See Item 13 of this Annual Report on Form 10-K for the year ended December 31, 2022, “Certain Relationships and Related Transactions, and Director Independence” for a discussion of the
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fees and expense reimbursements paid to the Advisor and its affiliates. The Conflicts Committee will discharge the board of directors’ responsibilities relating to the compensation of our executives to the extent applicable.
Compensation of Directors
If a director is also one of our executive officers or is otherwise affiliated with our Sponsor or Advisor, we do not pay any compensation to that person for services rendered as a director. Our current policy, effective as of March 31, 2022, is to pay $2,500 in cash and issue 500 shares of our common stock on the last day of each calendar quarter, valued at fair value at the date of issuance, to each independent director who is qualified and acting as an independent director on such date. Prior to 2022, we paid our independent directors $500 for each regularly scheduled board of directors or board of directors committee meeting the director attended in person and $250 for each meeting the director attended virtually or by telephone. If there was a meeting of the board of directors and one or more board of directors committees in a single day, the fees were limited to $500 or $250 per day, as applicable. The members of the Audit Advisory Committee will receive the same pay described above for independent directors. In addition, effective as of March 31, 2022, the chairman of the Audit Committee will also receive $5,000 per year and $500 per calendar quarter as compensation for the additional duties performed as chairman of the Audit Committee. The other members of the Audit Committee will receive $500 per calendar quarter as compensation for the additional duties performed as a member of the Audit Committee. Prior to 2022, the chairman of the Audit Committee received $2,500 each year and $500 per Audit Committee meeting as compensation for the additional duties performed as chairman of the Audit Committee. This compensation policy may be modified by the board of directors from time to time.
We have provided below certain information regarding compensation earned by or paid to our directors during fiscal year 2022.
Fees Earned or Paid in | All Other | |||||||||||
Name | Cash in 2022(1) | Stock Awards(2) | Compensation(5) | Total | ||||||||
Corey R. Maple(3) | $ | — | $ | — | $ | — | $ | — | ||||
Norman H. Leslie(3) | — | — | — | — | ||||||||
David G. Ekman | — | — | — | — | ||||||||
Brian Hagen(4) | 11,000 | 20,000 | 440 | 31,440 | ||||||||
Jeffrey T. Leighton | 13,000 | 20,000 | 447 | 33,447 | ||||||||
Perry M. Rynders | 18,750 | 20,000 | 447 | 39,197 | ||||||||
| (1) | Fees Earned in 2022 or Paid in Cash include meeting fees earned in: (i) 2021 but paid or reimbursed in the first quarter of 2022 as follows: $3,750; and (ii) 2022 and paid in 2023 as follows: $31,500. |
| (2) | Beginning in the first quarter of 2022, each independent member of the Board of Directors received 500 shares of our common stock every quarter, valued at fair value at the date of issuance. The fair value of the stock for all four quarters of 2022 was $10.00 per share as determined in accordance with FASB ASC Topic 718. |
| (3) | Directors who are also our executive officers do not receive compensation for services rendered as a director. |
| (4) | Mr. Hagen subsequently retired from the board of directors as of February 28, 2023. |
| (5) | Represents dividends paid on stock awards. Mr. Hagen received dividends in cash, and Messrs. Leighton and Rynders reinvested dividends pursuant to our dividend reinvestment plan. |
Phantom Stock Plan
The board of directors has approved the adoption of a phantom stock plan (the "Phantom Stock Plan") for the Company. However, the specific terms of the Phantom Stock Plan have not yet been determined and approved by our board. The Company intends for the shares designated pursuant to the Phantom Stock Plan (the "Phantom Shares") to be allocated to the Advisor, the Company’s taxable REIT subsidiaries collectively and NHS for distribution of the proceeds to their respective employees and service providers in accordance with their compensation plans; however, none of Corey R.
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Maple, Norman H. Leslie or Samuel C. Montgomery will receive any Phantom Shares pursuant to the Phantom Stock Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table shows, as of March 27, 2024, the amount of our common stock beneficially owned (unless otherwise indicated) by any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, and the amount of our common stock and Operating Partnership units beneficially owned (unless otherwise indicated) by (1) our directors, (2) our executive officers, and (3) all of our directors and executive officers as a group.
Common Stock Beneficially Owned(2) | Common Stock, Series GO LP Units and Series GO II LP Units Beneficially Owned(2) | Series B Units Beneficially Owned (2) | ||||||||||||
Name and Address of Beneficial Owner (1) | Number of Shares | Percent(3) | Number of Shares and Units | Percent(4) | Percent(3) | Number of Units | Percent(5) | |||||||
Ownership in Excess of 5% of Outstanding Common Stock | ||||||||||||||
N/A | ||||||||||||||
Directors and Executive Officers | ||||||||||||||
Corey R. Maple | 57,318.6 | * | 116,761.9 | (6) | * | 1.17% | 1,000.0 | (9) | 100% | |||||
Norman H. Leslie | 57,318.6 | * | 101,400.9 | (7) | * | 1.02% | 1,000.0 | (9) | 100% | |||||
Samuel C. Montgomery | — | — | 6,781.9 | (8) | * | * | — | — | ||||||
David G. Ekman | 2,955.6 | * | 2,955.6 | * | * | — | — | |||||||
Jeffrey T. Leighton | 15,823.8 | * | 15,823.8 | * | * | — | — | |||||||
Perry M. Rynders | 4,235.5 | (10) | * | 4,235.5 | * | * | — | — | ||||||
All directors and executive officers as a group | 137,652.1 | 1.38% | 247,959.6 | 1.87% | 2.49% | 1,000.0 | 100% | |||||||
* Less than 1% of the outstanding shares of common stock
| (1) | The address of each named beneficial owner is 1635 43rd Street South, Suite 205, Fargo, North Dakota 58103. |
| (2) | Beneficial ownership is determined in accordance with the rules of the SEC. Under SEC rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote, or to direct the voting of, such security, or "investment power," which includes the right to dispose of or to direct the disposition of such security. A person also is deemed to be a beneficial owner of any securities which that person has a right to acquire within 60 days. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. None of the shares or units is pledged as security. |
| (3) | Based on a total of 9,966,585 shares of common stock issued and outstanding as of March 27, 2024. |
| (4) | Based on a total of 9,966,585 shares of common stock, 3,124,503 Series GO LP Units, and 197,606 Series GO II LP Units issued and outstanding as of March 27, 2024. |
| (5) | Based on a total of 1,000.0 Series B partnership units of the Operating Partnership issued and outstanding as of March 27, 2024. |
| (6) | Includes 15,361 Series GO LP Units and 44,082.3 Series GO II LP Units |
| (7) | Includes 44,082.3 Series GO II LP Units |
| (8) | Includes 6,781.9 Series GO II LP Units |
| (9) | Includes 1,000.0 Series B partnership units of the Operating Partnership owned by Legendary Capital REIT III, LLC, which is owned and controlled by Messrs. Maple and Leslie. |
| (10) | Mr. Rynders owns all shares through the Rynders Family Trust, with respect to which he shares voting and investment power with Leah K. Rynders, Trustee. |
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
Policy Regarding Transactions with Related Persons
The Conflicts Committee will review and approve all matters our board of directors believes may involve a conflict of interest, including all transactions between the Company and affiliates of the Company and the Advisor. If we decide to acquire a property in which the Advisor, one of our directors or their respective affiliates owns an interest, a majority of members of the Conflicts Committee must first make a determination that such transaction is fair and reasonable to us and the purchase price is no greater than the price of the property to the affiliated seller, unless there is substantial justification for the excess amount and such excess amount is reasonable. Notwithstanding the foregoing, in no event will we acquire any property from an affiliated seller at an amount in excess of its current appraised value as determined by an independent third-party appraiser.
In addition, our Code of Conduct and Ethics lists examples of types of transactions with related parties that would create prohibited conflicts of interest and requires our officers and directors to be conscientious of actual and potential conflicts of interest with respect to our interests and to seek to avoid such conflicts or handle such conflicts in an ethical manner at all times consistent with applicable law. Our executive officers and directors are required to report potential and actual conflicts to the Chairman of the Audit Committee.
Certain Transactions with Related Persons
The Conflicts Committee has reviewed the material transactions between our affiliates and us since January 1, 2021, as well as any such currently proposed material transactions. Set forth below is a description of such transactions.
Our Relationship with Legendary Capital REIT III, LLC. Substantially all of our business is managed by the Advisor and its affiliates, pursuant to the Advisory Agreement. The Advisor is co-owned by Corey R. Maple and Norman H. Leslie. The Company has no direct employees. The employees of Legendary Capital, LLC, our sponsor and an affiliate of the Advisor (the “Sponsor”), provide services to us related to the negotiations of property acquisitions and financing, asset management, accounting, legal, investor relations, and all other administrative services. Pursuant to the terms of the Advisory Agreement, the Advisor is entitled to specified fees upon the provision of certain services, including acquisition fees, asset management fees, debt financing and refinancing fees, and disposition fees and real estate commissions. We also reimburse the Advisor and its affiliates, at cost, for certain expenses incurred on our behalf, including offering expenses, acquisition expenses and operating expenses. The Advisory Agreement has a term of 10 years. Pursuant to the terms of the Operating Partnership’s operating agreement, the Advisor also receives distributions from the Operating Partnership in connection with its ownership of non-voting Series B Limited Partnership Units (“Series B LP Units”) in certain circumstances.
We pay the Advisor a one-time acquisition fee of up to 1.4% of the hotel purchase price including funds allocated for any PIP at the time of each hotel property acquisition, and 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 a refinancing fee of up to 0.75% of the principal amount of any refinancing at the time of closing the refinancing. We also pay an annual asset management fee of up to 0.75% of the gross assets of the Company, which is payable on a monthly basis. Certain affiliates of the Advisor may receive an annual guarantee fee equal to 1.0% of the guaranty, paid on a monthly basis, for debt obligations of the hotel properties personally guaranteed by such affiliates. The Advisor may also receive an annual subordinated performance fee equal to 20% of the distributions after the common stockholders and Operating Partnership limited partners (other than the Series B LP Unit holders) have received a 6% cumulative, but not compounded, return per annum.
Per the terms of the Operating Partnership’s operating agreement, the Advisor receives distributions from the Operating Partnership in connection with its ownership of non-voting Series B LP Units. In years other than the year of liquidation, after the Company’s common stockholders have received a 6% cumulative but not compounded return on their original capital contributions, the Advisor receives distributions equal to 5% of the total distributions made.
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
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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 15% of the gross proceeds of the Offering. In addition, the Company may pay directly or reimburse the Advisor and its affiliates for certain costs incurred in connection with its provision of services to the Company, 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.
Fees and reimbursements earned and payable to the Advisor and its affiliates for the years ended December 31, 2023, 2022 and 2021, were as follows:
Incurred | |||||||||
For the Years Ended December 31, | |||||||||
2023 | 2022 | 2021 | |||||||
Fees: |
|
|
|
|
| ||||
Acquisition fees | $ | — | $ | 1,626,599 | $ | 1,036,796 | |||
Financing fees |
| — |
| 1,861,628 |
| 1,036,796 | |||
Asset management fees |
| 2,282,167 |
| 1,918,321 |
| 1,188,607 | |||
Performance fees | 195,874 | 181,541 |
| 160,774 | |||||
$ | 2,478,041 | $ | 5,588,089 | $ | 3,422,973 | ||||
Reimbursements: |
|
|
|
|
| ||||
Offering costs | $ | 1,935,023 | $ | 2,256,081 | $ | 1,739,185 | |||
General and administrative |
| 3,254,206 |
| 3,640,108 |
| 2,996,060 | |||
Sales and marketing |
| 144,421 |
| 321,821 |
| 211,691 | |||
Acquisition costs | 269,115 | 67,051 | 106,357 | ||||||
$ | 5,602,765 | $ | 6,285,061 | $ | 5,053,293 | ||||
For the years ended December 31, 2023, 2022 and 2021, the Operating Partnership recognized distributions payable to the Advisor in the amount of $360,821, $334,417 and $296,164, respectively, in connection with the Advisor’s ownership of Series B LP Units.
Samuel C. Montgomery, the Company’s Chief Financial Officer, is an employee of the Sponsor, and the Company reimburses the Sponsor, at cost, for an allocated portion of his compensation to the extent he provides services to the Company. For the years ended December 31, 2023, 2022 and 2021, the total amount of executive compensation expenses reimbursed by the Company for Samuel C. Montgomery was $0.1 million, $0.1 million and $0.1 million, respectively. For the years ended December 31, 2023, 2022 and 2021, the Company paid Corey Maple and Norman Leslie distributions in the amount of $40,123 in connection with their ownership of 57,319 shares, $40,123 in connection with their ownership of 57,319 shares, and $46,205 in connection with their ownership of 57,319 shares, respectively, each, of the Company’s common stock. Additionally, the Company paid Corey Maple distributions in amount of $1,994 in connection with his ownership of 15,361 Series GO LP Units.
Our Relationship with 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 certain of the Company’s hotel properties, pursuant to individual management agreements. The agreements have an initial term expiring on December 31st of the fifth full calendar year following the effective date of the agreement, which automatically renews for a period of five years on each successive five-year period, unless terminated in accordance with its terms.
NHS earns a monthly base management fee for property management services, including overseeing the day-to-day operations of the hotel properties, generally equal to 4% of gross revenue. NHS also earns an 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. The Company reimburses NHS for certain costs of operating the properties incurred on behalf of the Company. All reimbursements are paid to NHS at cost.
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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 by 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.
Fees and reimbursements earned and payable to NHS, for the years ended December 31, 20223, 2022 and 2021, were as follows:
Incurred | Payable as of | |||||||||||||||||
For the Years Ended December 31, | December 31, | |||||||||||||||||
2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||
Fees: |
|
|
| |||||||||||||||
Management fees | $ | 1,073,723 | $ | 1,071,385 | $ | 663,377 | $ | 174,984 | $ | 145,733 | $ | 66,407 | ||||||
Administrative fees |
| 119,613 |
| 184,101 |
| 107,466 |
| 19,973 |
| 22,791 |
| 9,461 | ||||||
Accounting fees |
| 159,896 |
| 195,096 |
| 125,592 |
| 30,228 |
| 31,164 |
| 12,726 | ||||||
$ | 1,353,232 | $ | 1,450,582 | $ | 896,435 | $ | 225,185 | $ | 199,688 | $ | 88,594 | |||||||
Reimbursements | $ | 810,723 | $ | 1,273,180 | $ | 490,792 | $ | 207,584 | $ | 143,009 | $ | 119,638 | ||||||
On March 6, 2023, we entered into a $600,000 loan agreement (the “NHS Loan”) with NHS. The NHS Loan requires the payment of monthly interest beginning on April 6, 2023, with all outstanding principal and interest amounts being due and payable at maturity on July 6, 2023. The NHS Loan has a fixed interest rate of 7.0% per annum. Outstanding amounts under the NHS Loan may be prepaid in whole or in part without penalty. The NHS Loan is secured by 60,000 partnership units of the Operating Partnership. On December 28, 2023, we entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to January 31, 2024. This amendment also provided that in lieu of monthly interest payments, all accrued interest shall be due and payable on the maturity date with the full principal balance. We and NHS are working to finalize an extension of the NHS loan as of the date of this filing.
Our Relationship with One Rep Construction, LLC (“One Rep”). One Rep is a related party through common management and ownership, as Corey Maple, Norman Leslie, and David Ekman, each hold a 33.33% ownership interest in One Rep. One Rep is a construction management company which provided construction management services to the Company during 2023, 2022 and 2021 related to the renovation construction activities at certain hotel properties. For the services provided, One Rep is paid a construction management fee equal to 6% or 7% of the total project costs. The Company reimburses One Rep for certain costs incurred on behalf of the Company, and all reimbursements are paid to One Rep at cost. For the years ended December 31, 2023, 2022 and 2021, the Company incurred $191,803, $258,037 and $61,739 of construction management fees and reimbursements payable to One Rep, respectively. As of December 31, 2023, December 31, 2022 and December 31, 2021, the amounts outstanding and due to One Rep were $34,856, $33,947 and $8,138, respectively.
Our Relationship with Legendary A-1 Bonds, LLC (“A-1 Bonds”). A-1 Bonds is an affiliate of the Advisor which is owned by Mr. Leslie, a director and executive officer of the Company and principal of the Advisor, and Mr. Maple, a director of the Company and principal of the Advisor. During the year ended December 31, 2021, A-1 Bonds made a $13.0 million loan to a subsidiary of the Company secured by the Houston Property. The loan was repaid in full on September 2, 2021. During the year ended December 31, 2022, A-1 Bonds made loans with an aggregate principal amount of $42.5 million to subsidiaries of the Company secured by 4 hotel properties, of which $28.2 million was subsequently paid off. On August 9, 2022, the Company entered into a $5.0 million revolving line of credit with A-1 Bonds, which line of credit was increased to $7.5 million, $10.0 million, and $13.3 million as of December 15, 2022, January 12, 2023, and April 18, 2023, respectively.
77
As of December 31, 2023 and March 27, 2024, $13.2 million and $13.3 million, respectively, was outstanding under the A-1 Line of Credit.
Loan Guarantees. The members of the Advisor personally guaranty certain loans of the Company and may receive a guarantee fee of up to 1.0% per annum of the guaranty amount. Corey Maple is a guarantor of the Company’s loans secured by the hotel properties located in Prattville, Alabama and Southaven, Mississippi, which had original loan amounts of $9.6 million and $13.5 million, respectively, is a guarantor of 50% of the loan secured by the Houston Property, which had an original loan amount of $13.9 million, is a guarantor of the Company’s line of credit in the original amount of $5.0 million which is secured by the hotel properties located in Cedar Rapids, Iowa, Eagan, Minnesota, and Fargo, North Dakota and 300,000 Common LP Units of Lodging Fund REIT III OP, LP, and is a guarantor of the Company’s loans secured by the hotel properties located in Fargo, North Dakota, El Paso, Texas, Wichita, Kansas, and Fort Collins, Colorado, which had original loan amounts of $7.4 million, $14.4 million, $5.6 million, and $11.2 million, respectively. Mr. Leslie is a guarantor of the Company’s loans secured by the Company’s hotel properties in Pineville, North Carolina and Fort Collins, Colorado, which had original loan amounts of $9.3 million and $11.2 million, respectively. For the years ended December 31, 2023, 2022 and 2021, the Company accrued guarantee fees in the amount of $151,765, $155,676 and $159,414 respectively to each of Mr. Maple and Mr. Leslie. The total amount accrued of $1.2 million and $0.9 million remained unpaid as of December 31, 2023 and December 31, 2022, respectively.
Currently Proposed Transactions. There are no currently proposed transactions in which we were or are to be a participant and the amount involved exceeded $120,000 and in which any related person had or will have a direct or indirect material interest.
Director Independence
Two members of our board of directors, Jeffrey T. Leighton and Perry M. Rynders, are “independent” as defined by the rules of the New York Stock Exchange. The New York Stock Exchange standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). The board of directors has affirmatively determined that Jeffrey T. Leighton and Perry M. Rynders each satisfies the New York Stock Exchange independence standards. Neither of these directors has ever served as (or is related to) an employee of ours or any of our predecessors or acquired companies (if applicable) or received or earned any compensation from us or any such entities except for compensation directly related to service as a director of us. Therefore, we believe that both of these directors are independent directors. Accordingly, all of the members of the Audit Committee and the Conflicts Committee are “independent” as defined by the New York Stock Exchange.
Item 14. Principal Accountant Fees and Services.
Independent Registered Public Accounting Firm
During the year ended December 31, 2022, Deloitte & Touche LLP (“Deloitte”) served as our independent registered public accounting firm and provided certain tax and other services. Deloitte had served as our independent registered public accounting firm since our formation. On October 24, 2023, based on the approval of our Audit Committee, we dismissed Deloitte as the Company’s independent registered public accounting firm, effective as of that date. The report issued by Deloitte on the Company’s financial statements for the fiscal years ended December 31, 2021 and 2020 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Deloitte did not issue a report on the Company’s financial statements for the fiscal year ended December 31, 2022. On October 24, 2023, based on the approval of our Audit Committee, the Company engaged Marcum LLP (“Marcum”), a nationally recognized accounting firm, as the Company’s new independent registered public accounting firm. Marcum has audited the financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022.
The Audit Committee reviewed the audit and non-audit services performed by Deloitte and Marcum, as well as the fees charged for such services. In its review of the non-audit service fees, the Audit Committee considered whether the provision of such services is compatible with maintaining the auditor’s independence.
78
Pre-Approval Policies
In order to ensure that the provision of such services does not impair the independent registered public accounting firm’s independence, the Audit Committee charter imposes a duty on the Audit Committee to pre-approve all auditing services performed for us by our independent registered public accounting firm, as well as all permitted non-audit services. In determining whether or not to pre-approve services, the Audit Committee considers whether the service is a permissible service under the rules and regulations promulgated by the SEC. The Audit Committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-audit services to be performed by our independent registered public accounting firm, provided any such approval is presented to and approved by the full Audit Committee at its next scheduled meeting.
For the years ended December 31, 2022 and 2021, all services rendered by Deloitte and Marcum were pre-approved in accordance with the policies and procedures described above.
Principal Independent Registered Public Accounting Firm Fees
Fees Paid to Independent Registered Public Accounting Firm
The aggregate fees billed to us for professional accounting services related to the audit of our annual financial statements for the year ended December 31, 2022, by Marcum are set forth in the table below.
2022 | 2021 | |||||
Fees: |
| |||||
Audit fees | $ | 551,800 | $ | — | ||
Audit-related fees | 61,072 | — | ||||
Tax fees |
| 81,151 |
| — | ||
All other fees |
| — |
| — | ||
Total | $ | 694,023 | $ | — | ||
Fees Paid to Prior Independent Registered Public Accounting Firm
The aggregate fees billed to us for professional accounting services, including the audit of our annual financial statements by Deloitte for the year ended December 31, 2021, are set forth in the table below.
2022 | 2021 | |||||
Fees: |
| |||||
Audit fees | $ | 440,174 | $ | 548,823 | ||
Audit-related fees | 1,895 | 27,895 | ||||
Tax fees |
| 145,530 |
| 66,873 | ||
All other fees |
| — |
| — | ||
Total | $ | 587,599 | $ | 643,591 | ||
For purposes of the preceding tables, Deloitte’s and Marcum’s professional fees are classified as follows:
| ● | Audit fees – These are fees for professional services performed for the audit of our annual financial statements and the required review of quarterly financial statements and other procedures performed by Deloitte and Marcum in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent registered public accounting firms in connection with statutory and regulatory filings or engagements. |
79
| ● | Audit-related fees – These are fees for assurance and related services that traditionally are performed by independent registered public accounting firms that are reasonably related to the performance of the audit or review of our financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, subscription to an online accounting research tool and internal control reviews and consultation concerning financial accounting and reporting standards. |
| ● | Tax fees – These are fees for all professional services performed by professional staff in our independent registered public accounting firm’s tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice, including federal, state and local issues. Services may also include assistance with tax audits and appeals before the U.S. Internal Revenue Service (the “IRS”) and similar state and local agencies, as well as federal, state and local tax issues related to due diligence. |
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-23 of this report:
Schedule III – Real Estate Assets and Accumulated Depreciation
(b) Exhibits
Exhibit No. |
| Description |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
80
3.7 | ||
3.8 | ||
3.9 | ||
3.10 | ||
3.11 | ||
3.12 | ||
3.13 | ||
3.14 | ||
3.15 | ||
3.16 | ||
3.17* | ||
3.18* | ||
3.19 | ||
4.1 | ||
81
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10.1 | ||
10.10.2 | ||
10.10.3 | ||
10.11.1 | ||
10.11.2 | ||
82
10.12.1 | ||
10.12.2 | ||
10.12.3 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19.1 | ||
10.19.2 | ||
10.19.3 | ||
10.20.1 | ||
83
10.20.2 | ||
10.21 | ||
10.22.1 | ||
10.22.2 | ||
10.22.3 | ||
10.22.4 | ||
10.22.5 | ||
10.22.6 | ||
10.22.7 | ||
10.22.8 | ||
10.22.9 | ||
10.23 | ||
10.24 | ||
84
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36 | ||
85
10.37 | ||
10.38 | ||
10.39 | ||
10.40 | ||
10.41 | ||
10.42 | ||
10.43 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | ||
10.49 | ||
10.50 |
86
10.51 | ||
10.52 | ||
10.53.1 | ||
10.53.2 | ||
10.53.3 | ||
10.54.1 | ||
10.54.2 | ||
10.54.3 | ||
10.54.4 | ||
10.54.5 | ||
10.54.6 | ||
10.54.7 | ||
10.54.8 |
87
10.55.1 | ||
10.55.2 | ||
10.55.3 | ||
10.55.4 | ||
10.55.5 | ||
10.55.6 | ||
10.55.7 | ||
10.55.8 | ||
10.56.1 | ||
10.56.2 | ||
10.56.3 | ||
10.56.4 | ||
10.56.5 | ||
88
10.56.6 | ||
10.56.7 | ||
10.56.8 | ||
10.56.10 | ||
10.56.11 | ||
10.56.13 | ||
10.57.1 | ||
10.57.2 | ||
10.57.3 | ||
10.57.4 | ||
10.57.5 | ||
10.58.1 | ||
10.58.2 |
89
10.58.3 | ||
10.58.4 | ||
10.58.5 | ||
10.58.6 | ||
10.59 | ||
10.66.1 | ||
10.66.2 | ||
10.67.1 | ||
10.67.2 | ||
10.68 | ||
10.69 | ||
10.70 | ||
90
10.71 | ||
10.72 | ||
10.73 | ||
10.74 | ||
10.75 | ||
10.76 | ||
10.77 | ||
10.78 | ||
10.79 | ||
10.80 | ||
10.81 | ||
10.82 | ||
91
10.83 | ||
10.84 | ||
10.85.1 | ||
10.85.2 | ||
10.85.3 | ||
10.85.4 | ||
10.85.5 | ||
10.85.6 | ||
10.85.7 | ||
10.85.8 | ||
10.85.9 | ||
92
10.85.10 | ||
10.86 | ||
10.87 | ||
10.95 | ||
10.96 | ||
10.97 | ||
10.99 | ||
10.100 | ||
10.101 | ||
10.102 | ||
10.103 |
93
10.104 | ||
10.105 | ||
10.106 | ||
10.107 | ||
10.108 | ||
10.109 | ||
10.110 | ||
10.111 | ||
10.112 | ||
10.113 | ||
10.114 |
94
10.115 | ||
10.116 | ||
10.117 | ||
10.118 | ||
10.119 | ||
10.120 | ||
10.121 | ||
10.122 | ||
10.123 | ||
10.124 |
95
10.125 | ||
10.126 | ||
10.127 | ||
10.128 | ||
10.129 | ||
10.130 | ||
10.131 | ||
10.132 | ||
10.133 | ||
10.134 |
96
10.135 | ||
10.136 | ||
10.137 | ||
10.138 | ||
10.139 | ||
10.140 | ||
10.141 | ||
10.142 | ||
10.143 | ||
10.144 | ||
10.145 |
97
10.146 | ||
10.147 | ||
10.148 | ||
10.149 | ||
10.150 | ||
10.151 | ||
10.152 | ||
10.153 | ||
10.154 | ||
10.155 | ||
10.156 | ||
10.157 |
98
10.158 | ||
10.159 | ||
10.160 | ||
10.161 | ||
10.162 | ||
10.163 | ||
10.164 | ||
10.165 | ||
10.166 | ||
10.167 | ||
10.168 |
99
10.169 | ||
10.170 | ||
10.171 | ||
10.172 | ||
10.173 | ||
10.174 | ||
10.175 | ||
10.176 | ||
10.177 | ||
10.178 | ||
10.179 | ||
10.180 |
100
10.181 | ||
10.182 | ||
10.183 | ||
10.184 | ||
10.185 | ||
10.186 | ||
10.187 | ||
10.188 | ||
10.189 | ||
10.190 | ||
10.191 |
101
10.192 |
10.193 | |||
10.194 | |||
10.195 | |||
10.196 | |||
10.197 | |||
10.198 | |||
10.199 | |||
10.200 | |||
10.201 | |||
10.202 | |||
102
10.203 | |||
10.204 | |||
10.205 | |||
10.206 | |||
10.207 | |||
10.208 | |||
10.209 | |||
10.210 | |||
10.211 | |||
10.212 | |||
10.213 |
103
10.214 | |||
10.215 | |||
10.216 | |||
10.217 | |||
10.219 | |||
10.220 | |||
10.221 | |||
10.222 | |||
10.223 | |||
10.224 | |||
104
10.225 | |||
10.226 | |||
10.227 | |||
10.228 | |||
10.229 | |||
10.230 | |||
10.231 | |||
10.232 | |||
10.233 | |||
10.234 | |||
10.235 | |||
105
10.236 | |||
10.237 | |||
10.238 | |||
10.239 | |||
10.240 | |||
10.241 | |||
10.242 | |||
10.243 | |||
10.244 | |||
10.245 | |||
10.246 | |||
10.247 |
106
10.248 | |||
10.249 | |||
10.250 | |||
10.251 | |||
10.252 | |||
10.253 | |||
10.254 | |||
10.255 | |||
10.256 | |||
10.257 |
107
10.258 | |||
10.259* | |||
10.260* | |||
10.261* | |||
10.262* | |||
10.263* | |||
10.264* | Mortgage related to the Wichita Property, dated as of December 21, 2022 | ||
10.265* | Assignment of Rents related to the Wichita Property, dated as of December 21, 2022 | ||
10.266* | Guaranty by Corey Maple related to the Wichita Property, dated as of December 21, 2022 | ||
10.267* | Guaranty by the Operating Partnership related to the Wichita Property, dated as of December 21, 2022 | ||
10.268* | Management Agreement with KAJ Hospitality, Inc. related to the Wichita Property | ||
10.269* | |||
10.270* | |||
10.271* | |||
10.272* | |||
10.273* | |||
10.274* | |||
108
10.275* | |||
10.276* | |||
10.277* | |||
10.278* | Amendment to the Amended and Restated Contribution Agreement regarding the El Paso HI Property | ||
10.279* | |||
10.280* | |||
10.281* | |||
10.282* | |||
21.1* | |||
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1** | |||
99.1 | |||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
109
INDEX TO FINANCIAL STATEMENTS
LODGING FUND REIT III, INC. & SUBSIDIARIES
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Lodging Fund REIT III, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Lodging Fund REIT III, Inc. and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2023.
March 26, 2024
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Lodging Fund REIT III, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Lodging Fund REIT III, Inc. and subsidiaries (the "Company"), as of December 31, 2021, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows, for the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
March 31, 2022
We served as the Company's auditor from 2018 to 2023.
F-3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LODGING FUND REIT III, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | ||||
2022 | 2021 | |||||
Assets |
|
|
|
| ||
Investment in hotel properties, net of accumulated depreciation of $ | $ | | $ | | ||
Cash and cash equivalents |
| |
| | ||
Restricted cash |
| |
| | ||
Accounts receivable, net |
| |
| | ||
Franchise fees, net |
| |
| | ||
Prepaid expenses and other assets |
| |
| | ||
Total Assets (variable interest entities - $ | $ | | $ | | ||
Liabilities and Equity |
|
|
|
| ||
Debt, net | $ | | $ | | ||
Finance lease liabilities | | — | ||||
Accounts payable |
| |
| | ||
Accrued expenses |
| |
| | ||
Distributions payable | | | ||||
Due to related parties |
| |
| | ||
Other liabilities |
| |
| | ||
Total liabilities (variable interest entities - $ |
| |
| | ||
Equity |
|
|
|
| ||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders' equity | |
| | |||
Non-controlling interest – Series B LP Units |
| ( |
| ( | ||
Non-controlling interest – Series GO LP Units | | | ||||
Non-controlling interest – Series T LP Units | | | ||||
Non-controlling interest – Common LP Units | | | ||||
Total equity |
| |
| | ||
Total Liabilities and Equity | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
F-4
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | ||||||
| 2022 |
| 2021 | |||
Revenues |
|
| ||||
Room revenue | $ | | $ | | ||
Other revenue |
| |
| | ||
Total revenue |
| |
| | ||
Expenses |
|
|
|
| ||
Property operations |
| |
| | ||
General and administrative |
| |
| | ||
Sales and marketing |
| |
| | ||
Franchise fees |
| |
| | ||
Management fees |
| |
| | ||
Acquisition expense |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Total expenses |
| |
| | ||
Other Income (Expense) |
|
|
|
| ||
Other income, net |
| |
| | ||
PPP loan forgiveness | — | | ||||
Interest expense |
| ( |
| ( | ||
Total other expense |
| ( |
| ( | ||
Net Loss Before Income Taxes |
| ( |
| ( | ||
Income tax (expense) benefit |
| ( |
| | ||
Net Loss |
| ( |
| ( | ||
Net loss attributable to non-controlling interest - Series B LP Units |
| ( |
| ( | ||
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 |
| |
| | ||
See accompanying notes to consolidated financial statements.
F-5
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock | |||||||||||||||||||||||||||||
Additional | Total | Non-controlling Interest | |||||||||||||||||||||||||||
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 |
| | | | — | |
| — | — | — | — |
| | ||||||||||||||||
Issuance of GO Units | — | — | — | — | — | — | | — | — | | |||||||||||||||||||
Issuance of T Units | — | — | — | — | — | — | — | | — | | |||||||||||||||||||
Issuance of Common LP Units | — | — | — | — | — | — | — | — | | | |||||||||||||||||||
Offering costs | — | — | — | ( | ( | — | ( | — | — | ( | |||||||||||||||||||
Distributions declared ($ | — | — | — | ( | ( | ( | — | — | ( | ( | |||||||||||||||||||
Distributions reinvested | | | | — | | — | — | — | — | | |||||||||||||||||||
Redemptions |
| ( | ( | ( | — | ( |
| — | — | — | — |
| ( | ||||||||||||||||
Net loss |
| — | — | — | ( | ( |
| ( | ( | — | ( |
| ( | ||||||||||||||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | | |||||||||
Issuance of common stock |
| | | | — | | — | — | — | — | | ||||||||||||||||||
Issuance of stock-based compensation | | | | — | | — | — | — | — | | |||||||||||||||||||
Issuance of GO Units | — | — | — | — | — | — | | — | — | | |||||||||||||||||||
Issuance of T Units | — | — | — | — | — | — | — | | — | | |||||||||||||||||||
Issuance of Common LP Units | — | — | — | — | — | — | — | — | | | |||||||||||||||||||
Offering costs | — | — | — | ( | ( | — | ( | — | — | ( | |||||||||||||||||||
Distributions declared ($ | — | — | — | ( | ( | ( | ( | — | ( | ( | |||||||||||||||||||
Distributions reinvested | | | | — | | — | — | — | — | | |||||||||||||||||||
Redemptions |
| ( | ( | ( | — | ( | — | — | — | — | ( | ||||||||||||||||||
Net loss |
| — | — | — | ( | ( | ( | ( | — | ( | ( | ||||||||||||||||||
Balance at December 31, 2022 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | $ | | |||||||||
See accompanying notes to consolidated financial statements.
F-6
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, | ||||||
| 2022 |
| 2021 | |||
Cash Flows from Operating Activities: |
|
|
|
| ||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash used in operating activities: |
|
| ||||
Depreciation |
| |
| | ||
Stock-based compensation expense | | — | ||||
Amortization |
| |
| | ||
Gain on PPP loan forgiveness | — | ( | ||||
Loss on disposal of fixed assets | | | ||||
Gain on acquisition of VIE | ( | — | ||||
Deferred tax assets, net | | ( | ||||
Change in operating assets and liabilities: |
| |||||
Accounts receivable |
| ( |
| ( | ||
Franchise fees |
| ( |
| ( | ||
Prepaid expenses and other assets |
| |
| ( | ||
Increase in finance lease liability | | — | ||||
Accounts payable |
| |
| | ||
Accrued expenses |
| |
| | ||
Due to related parties |
| |
| | ||
Other liabilities |
| ( |
| | ||
Net cash used in operating activities |
| ( |
| ( | ||
Cash Flows from Investing Activities: |
|
|
|
| ||
Acquisitions of hotel properties |
| ( |
| ( | ||
Cash and restricted cash acquired in consolidation of VIE | | — | ||||
Improvements and additions to hotel properties |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash Flows from Financing Activities: |
|
|
|
| ||
Proceeds from mortgage debt |
| |
| | ||
Proceeds from lines of credit | | | ||||
Proceeds from PPP loans | — | | ||||
Principal payments on mortgage debt |
| ( |
| ( | ||
Principal payments on lines of credit | ( | ( | ||||
Payments of deferred financing costs |
| ( |
| ( | ||
Proceeds from issuance of common stock |
| |
| | ||
Proceeds from issuance of GO Units | | | ||||
Payments of offering costs |
| ( |
| ( | ||
Payments for shares redeemed | ( | ( | ||||
Distributions paid |
| ( |
| ( | ||
Net cash provided by financing activities |
| |
| | ||
Net change in cash, cash equivalents, and restricted cash |
| |
| | ||
Beginning Cash, Cash Equivalents, and Restricted Cash |
| |
| | ||
Ending Cash, Cash Equivalents, and Restricted Cash | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
F-7
LODGING FUND REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, | ||||||
2022 |
| 2021 | ||||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
Interest paid | $ | | $ | | ||
Income taxes paid | $ | | $ | — | ||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
|
|
|
| ||
Issuance of T Units for Aurora Property | $ | — | $ | | ||
Issuance of T Units for El Paso Property | $ | — | $ | | ||
Issuance of T Units for Houston Property | $ | — | $ | | ||
Issuance of T Units for Northbrook property | $ | — | $ | | ||
Issuance of Common LP Units for Northbrook 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 | $ | | $ | — | ||
Issuance of T Units for Fort Collins Property | $ | | $ | — | ||
Issuance of T Units for Pineville HGI Property | $ | | $ | — | ||
Issuance of T Units for Charlotte Property | $ | | $ | — | ||
Issuance of T Units for Wichita Property | $ | | $ | — | ||
Debt issued for acquisition of Aurora Property | $ | — | $ | | ||
Debt issued for acquisition of El Paso Property | $ | — | $ | | ||
Debt issued for acquisition of Houston Property | $ | — | $ | | ||
Debt issued for acquisition of Northbrook Property | $ | — | $ | | ||
Debt assumed for acquisition of Fargo Property | $ | | $ | — | ||
Debt issued for acquisition of Fort Collins 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 | $ | | $ | ( | ||
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.
F-8
LODGING FUND REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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that date. As of December 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 December 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, its wholly-owned subsidiaries and entities in which the Company has a controlling financial interest, including variable interest entities (“VIEs”) where the Company is the primary beneficiary. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of the rights held by other interests. If the entity is considered to be a VIE, the Company determines whether the Company is the primary beneficiary, and then consolidates those VIEs for which the Company has determined that the Company is the primary beneficiary. If the entity in which the Company holds an interest does not meet the definition of a VIE, the Company evaluates whether the Company has a controlling financial interest through the Company’s voting interest in the entity. The Company consolidates entities when the Company owns more than 50 percent of the voting shares of a company or otherwise has a controlling financial interest. References in these financial statements to the net (loss) income attributable to stockholders do not include non-controlling interests, which represent the outside ownership interests of the Company’s consolidated, non-wholly owned entities and are presented separately in the 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.
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
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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 for land improvements, for buildings and building improvements and to for FF&E. Maintenance and repair costs are expensed in the period incurred and major renewals or improvements to the hotel properties are capitalized.
The Company 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, 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 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 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.
F-11
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 $
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
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
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acquisition due diligence costs are recorded as, and included in, prepaid expenses and other assets on the accompanying consolidated balance sheets.
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.
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 the Company recognizes 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 $
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 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
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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.
Recent Accounting Pronouncements—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.
3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties as of December 31, 2022 and 2021 consisted of the following:
| December 31, | December 31, | ||||
2022 | 2021 | |||||
Land and land improvements | $ | | $ | | ||
Building and building improvements |
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Furniture, fixtures, and equipment |
| |
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Right-of-use asset - ground lease | | — | ||||
Construction in progress | | | ||||
Investment in hotel properties, at cost | |
| | |||
Less: accumulated depreciation |
| ( |
| ( | ||
Investment in hotel properties, net | $ | | $ | | ||
As of December 31, 2022, the Company consolidated
On August 10, 2022, the Company consolidated a variable interest entity (“VIE”) that owns
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obligation to absorb its losses and the right to receive benefits that could be significant to it. Accordingly, the Company initially recognized the VIE’s assets, liabilities, and noncontrolling interest at fair value. The Company’s condensed consolidated balance sheet includes the following assets and liabilities of this entity:
| December 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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| — | ||
Prepaid expenses and other assets |
| |
| — | ||
Total Assets | $ | | $ | — | ||
Liabilities |
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Debt, net | $ | | $ | — | ||
Finance lease liability | | — | ||||
Accounts payable |
| |
| — | ||
Accrued expenses |
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| — | ||
Other liabilities |
| |
| — | ||
Total liabilities | $ | | $ | — | ||
Acquisitions of Hotel Properties
The Company acquired
2022 Acquisitions | ||||||||||||||||||||
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| Number |
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Date | of Guest | Purchase | Transaction | % |
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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) | | | | % | ||||||||||
Residence Inn | Extended-Stay | Fort Collins, CO | August 3, 2022 | | | (4) | | | | % | ||||||||||
Hilton Garden Inn | Select-Service | Pineville, NC | August 25, 2022 | | | (5) | | | | % | ||||||||||
Hilton Garden Inn | Select-Service | Charlotte, NC | August 25, 2022 | | | (6) | | | | % | ||||||||||
Holiday Inn | Limited-Service | Wichita, KS | December 22, 2022 | | | (7) | | | | % | ||||||||||
| | $ | | $ | | $ | | |||||||||||||
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2021 Acquisitions | ||||||||||||||||||||
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| Number |
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Date | of Guest | Purchase | Transaction | % |
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Hotel | Property Type | Location | Acquired | Rooms | Price | Costs | Total | Interest |
| |||||||||||
Courtyard by Marriott |
| Select-Service |
| Aurora, CO | February 4, 2021 | | $ | | (8) | $ | | $ | | | % | |||||
Holiday Inn | Select-Service | El Paso, TX | May 12, 2021 | | | (9) | | | | % | ||||||||||
Hilton Garden Inn | Select-Service | Houston, TX | August 3, 2021 | | | (10) | | | | % | ||||||||||
Sheraton Hotel | Full-Service | Northbrook, IL | December 3, 2021 | | | (11) | | | | % | ||||||||||
| | $ | | $ | | $ | | |||||||||||||
(1) | Includes the issuance of $ |
(2) | Includes the issuance of $ |
(3) | Includes the issuance of $ |
(4) | Includes the issuance of $ |
(5) | Includes the issuance of $ |
(6) | Includes the issuance of $ |
(7) | Includes the issuance of $ |
(8) | Includes the issuance of $ |
(9) | Includes the issuance of $ |
(10) | Includes the issuance of $ |
(11) | Includes the issuance of $ |
In addition, on August 10, 2022, the Company acquired a
The allocation of the aggregate purchase price in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combinations, of the assets and liabilities acquired at their relative fair values of their acquisition dates, is as follows:
For the Years Ended 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) | $ | | $ | | ||
Assumed mortgage debt | | — | ||||
Net purchase price | $ | | $ | | ||
| (1) | The above market ground lease is recognized on the consolidated balance sheet within Other Liabilities as of December 31, 2021. See Northbrook Property Above Market Ground Lease discussion below. |
| (2) | Total purchase price includes purchase price plus all transaction costs. |
All acquisitions completed during the years ended December 31, 2022 and 2021 were considered asset acquisitions under ASC 805.
F-16
calendar year following the effective date of the agreement, which will automatically renew for successive periods unless terminated earlier in accordance with its terms. The Pineville Property was being managed on a day-to-day basis by Beacon IMG, Inc. (“Beacon”), an affiliate of the seller of the Pineville Property, pursuant to a sub-management agreement. On February 1, 2023, day-to-day management was transferred to HP Hotel Management, Inc. The Southaven Property is subject to a management agreement with Vista Host Inc. (“Vista”) with an initial term expiring on February 21 of the fifth full calendar year following the effective date of the agreement. The agreement will automatically renew for
The seller of the Pineville Property, an affiliate of Beacon, was 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 could have made a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, was 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 December 31, 2022, no amounts were owed or paid to the seller of the Pineville Property, and no election to receive the additional consideration had been made. As of the date of this filing, the period to elect to receive additional consideration has passed with no election being made.
2022 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”) for contractual consideration comprised of $
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”) for contractual consideration comprised of $
F-17
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”) for contractual consideration of $
Residence Inn by Marriott Fort Collins – Fort Collins, Colorado
On August 3, 2022, the Operating Partnership acquired a Residence Inn by Marriott hotel property in Fort Collins, Colorado (the “Fort Collins Property”) for contractual consideration comprised of $
Hilton Garden Charlotte North – Charlotte, North Carolina
On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Charlotte, North Carolina (the “Charlotte Property”) for contractual consideration comprised of the payoff of the existing loan secured by the Charlotte Property in the amount of $
Hilton Garden Pineville – Pineville, North Carolina
On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Pineville, North Carolina (the “Pineville HGI Property”) for contractual consideration comprised of the payoff of the existing loan secured by the Pineville HGI in the amount of $
F-18
the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $
Holiday Inn Express & Suites - Wichita Airport
On December 22, 2022, the Operating Partnership acquired a Holiday Inn Express & Suites hotel property in Wichita, Kansas (the “Wichita Property”) for contractual consideration comprised of the origination of a new loan by subsidiaries of the Operating Partnership with Choice Financial Group (the “Wichita HIEX Lender”) for $
2022 Business Combinations
Hilton Garden Inn El Paso University – El Paso, Texas
On August 10, 2022, the Operating Partnership acquired an equity and profits interest in High Desert Garden Holdings, LLC, a Delaware limited liability company (“HDGH”), the parent of the entity which holds a leasehold interest in a Hilton Garden Inn located in El Paso, Texas (the “El Paso University Property”) pursuant to a Reorganization and Membership Interest Purchase Agreement dated as of August 10, 2022 by and among the Operating Partnership, Roma Commercial, Inc., ASI Capital, LLC, and VB Hotel Group A, LLC and pursuant to a First Amendment to the Fourth Amended and Restated Operating Agreement of High Desert Garden Holdings, LLC (collectively and as amended (the “El Paso University Amended Agreements”)). High Desert Investors, LP, a Delaware limited partnership (“HDI”), a wholly-owned subsidiary of HDGH, holds a leasehold interest in real estate and the El Paso University Property located on such real estate.
Pursuant to the El Paso University Amended Agreements, the Operating Partnership acquired a
The Company accounted for this transaction as a business combination in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combination. As such, the Company recognized a gain for the difference between the sum of the fair value of any consideration paid, the fair value of the noncontrolling interest, and the net fair value of identifiable assets and liabilities of the VIE. The assets of the Company’s VIE are only available to settle the obligation of this entity. The Company has expensed all transaction costs as an acquisition expense on the Company’s Consolidated Statement of Operations amounting to $
F-19
rates that best reflect current market interest rates for financings with similar characteristics and credit quality, and assuming the loan is outstanding through its maturity. The fair values were based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs were categorized as Level 3, as defined in the GAAP fair value hierarchy. Level 3 valuations incorporate subjective judgements and consider assumptions that are not observable in the market.
In connection with this transaction, the Company allocated the purchase price of HDGH based on the estimated fair value of assets acquired and liabilities assumed as follows:
| August 10, | ||
2022 | |||
Assets |
|
| |
Building | $ | | |
Furniture, fixtures & equipment | | ||
Right-of-use asset - ground lease | | ||
Cash and cash equivalents |
| | |
Restricted cash |
| | |
Accounts receivable, net |
| | |
Prepaid expenses and other assets |
| | |
Total Assets | $ | | |
Liabilities |
|
| |
Debt | $ | | |
Finance lease liability | | ||
Accounts payable |
| | |
Accrued expenses |
| | |
Other liabilities |
| | |
Total liabilities | $ | | |
Assets in excess of liabilities (gain on acquisition of VIE) | $ | | |
2021 Acquisitions
The Courtyard by Marriott in Aurora, Colorado (the “Aurora Property”) was acquired on February 4, 2021 for contractual consideration comprised of $
On May 12, 2021, the Operating Partnership acquired the Holiday Inn El Paso West Sunland Park hotel property in El Paso, Texas (the “El Paso HI Property”) for contractual consideration comprised of $
F-20
On August 3, 2021, the Operating Partnership acquired the Hilton Garden Inn Houston Bush Intercontinental Airport hotel property in Houston, Texas (the “Houston Property”) for contractual consideration comprised of $
On December 3, 2021, the Operating Partnership acquired the Sheraton Hotel Chicago Northbrook hotel property located in Northbrook, Illinois (the “Northbrook Property”) for contractual consideration comprised of $
Northbrook Property Above Market Ground Lease
On December 3, 2021, in connection with the purchase of the Northbrook Property, the Company recorded 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 $
El Paso University Property Ground Lease
On August 10, 2022, in connection with the El Paso University Property, the Company recognized a finance lease liability of $
F-21
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 December 31, 2022.
2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total finance lease payments | | ||
Interest | ( | ||
Present value of finance lease liabilities | $ | |
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consisted of the following:
December 31, | December 31, | |||||
2022 | 2021 | |||||
Franchise fees(1) | $ | | $ | | ||
Acquisition costs | | | ||||
Deferred tax assets, net | — | | ||||
Insurance | | | ||||
Other | | | ||||
$ | | $ | | |||
| (1) | Prepaid franchise fees paid in 2022 in relation to Sheraton Albuquerque Airport, terminated in 2023. Prepaid franchise fees paid in 2021 in relation to the Fargo acquisition, El Paso Airport acquisition, and El Paso University acquisition in 2022. See Note 13 Subsequent Events. |
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31, | December 31, | |||||
2022 | 2021 | |||||
Property taxes | $ | | $ | | ||
Interest | | | ||||
Other | | | ||||
$ | | $ | | |||
6. DEBT
Lines of Credit
Revolving Line of Credit - Western State Bank
On February 10, 2020, the Company entered into a $
F-22
May 5, 2022, the Western Line of Credit was amended to extend the maturity date to December 15, 2022. On December 15, 2022, the Western Line of Credit was amended to extend the maturity to April 15, 2023. Additionally, through the amendment on December 15, 2022, the Western Line of Credit is secured by the Company’s Hampton Inn hotel property in Eagan, Minnesota, the Company’s Holiday Inn Express hotel property in Cedar Rapids, Iowa, the Company’s Hampton Inn hotel property in Fargo, North Dakota and limited partnership units of the Operating Partnership. No other changes were made to the Western Line of Credit as a result of the amendments.
The interest rate as of December 31, 2022 was
Revolving Line of Credit – Legendary A-1 Bonds, LLC
On August 10, 2022, the Operating Partnership entered into a $
Mortgage Debt
As of December 31, 2022, the Company had $
F-23
As of December 31, 2022, the Company was not in compliance with the required financial covenants under the terms of its promissory notes secured by the Pineville Property, Cedar Rapids Property and Houston Property and related loan documents (the “Pineville Loan”), (the “Cedar Rapids Loan”) and (the “Houston Loan”) which constitutes an event that puts the Company into a trigger period pursuant to the loan documents. The Company has requested and received waivers of the financial covenants for the year ending December 31, 2022 for the Pineville Property, Cedar Rapids Property and Houston Property. Except as described above, the Company was in compliance with all debt covenants as of December 31, 2022.
Paycheck Protection Program (“PPP”) Loans
In April 2020, the Company entered into
In January 2021, the Company entered into
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
F-24
The following table sets forth the hotel properties securing each loan, the interest rate, maturity date, and the outstanding balance as of December 31, 2022 and 2021 for each of the Company’s mortgage debt obligations.
| Interest | Outstanding | Outstanding | |||||||
Rate as of | Balance as of | Balance as of | ||||||||
December 31, | Maturity | December 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(4) | | | |||||||
Holiday Inn - El Paso(3) | 5/15/2023(5) | | | |||||||
Hilton Garden Inn - Houston(6) | 9/2/2026 | | | |||||||
Sheraton - Northbrook(3)(7) | 12/5/2024 | | | |||||||
Hampton Inn - Fargo(8) | 3/1/2027 | | — | |||||||
Courtyard by Marriott - El Paso(9)(10) | 5/13/2027 | | — | |||||||
Fairfield Inn & Suites - Lakewood(3) | 3/28/2023(11) | | — | |||||||
Residence Inn - Fort Collins(12)(13) | 8/3/2023 | | — | |||||||
Hilton Garden Inn - El Paso | 8/6/2025 | | — | |||||||
Hilton Garden Inn - Pineville(14) | 8/25/2027 | | — | |||||||
Hilton Garden Inn - Charlotte(14) | 8/25/2027 | | — | |||||||
Holiday Inn Express - Wichita(9) | 12/21/2027 | | — | |||||||
Total Mortgage Debt |
| |
| | ||||||
Premium on assumed debt, net |
| |
| | ||||||
Deferred financing costs, net | ( | ( | ||||||||
Net Mortgage | | | ||||||||
$ | 4/15/2023(17) | | | |||||||
$ | 12/31/2023 | | — | |||||||
Total Lines of Credit | | | ||||||||
Debt, net | $ | | $ | | ||||||
| (1) | Loan is interest-only through April 30, 2022 and is at a fixed rate of interest. |
| (2) | Variable interest rate equal to 30-day LIBOR plus |
| (3) | Loan is interest-only until maturity. |
| (4) | The Company has notified the lender of its intention to exercise the option under the loan agreement to extend the maturity date to February 5, 2025. The parties are working to finalize the extension documents as of the date of this filing. |
| (5) | Maturity date extended to May 15, 2024. See Note 13 “Subsequent Events.” |
| (6) | Loan is interest-only for the first |
| (7) | Variable interest rate equal to 30-day LIBOR or equivalent rate plus |
| (8) | Proceeds of this loan were used to repay in full the original loan secured by the Fargo Property entered into on January 24, 2022 with A-1 Bonds. |
| (9) | Loan is interest-only for the first |
| (10) | Proceeds of this loan were used to repay in full the original loan secured by the El Paso Airport Property entered into on February 14, 2022 with A-1 Bonds. |
| (11) | Maturity date extended to March 28, 2024 per terms of loan agreement. See Note 13 “Subsequent Events.” |
| (12) | Tranche 3’s maturity date is August 2, 2028. Tranche 1 is interest-only until maturity, beginning six months after the issuance of the loan. Tranche 3’s payments are deferred until a certain appraised value is attained in accordance with the terms of the loan. |
| (13) | On April 18, 2023, this loan was repaid in full and refinanced with a new loan secured by the Fort Collins Property. See Note 13 “Subsequent Events.” |
| (14) | Loan is interest-only through February 25, 2024. |
F-25
| (15) | Variable interest rate equal to U.S. Prime plus |
| (16) | See note 9, - Legendary A-1 Bonds, LLC (“A-1 Bonds”) |
| (17) | Maturity date extended to April 30, 2024. See Note 13 “Subsequent Events.” |
Future Minimum Payments
As of December 31, 2022, the future minimum principal payments on the Company’s debt were as follows:
2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
| |||
Premium on assumed debt, net |
| | |
Deferred financing costs, net |
| ( | |
$ | |
The $
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments as of December 31, 2022 and 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 December 31, 2022 and 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 an estimate of current borrowing rates for debt instruments with similar terms and maturities, which are Level 3 inputs in the fair value hierarchy. As of December 31, 2022, the estimated fair value of the Company’s mortgage debt was $
8. 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 not pay any federal and state income taxes for the periods ended December 31, 2022 and 2021. The Company did not have any uncertain tax positions as of December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, all distributions paid were determined to be
The Company’s TRS generated a net operating loss (“NOL”) for the years ended December 31, 2022 and 2021, which can be carried forward to offset future taxable income. As of December 31, 2022 and 2021, the Company had recorded a net deferred tax liability of $
F-26
tax purposes 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.
The components of the Company’s income tax benefit are as follows:
For the Years Ended December 31, | |||||
2022 | 2021 | ||||
Federal: | |||||
Deferred | $ | ( | $ | | |
State: | |||||
Current | ( | ( | |||
Deferred | ( | | |||
Income tax (expense)/benefit | $ | ( | $ | | |
The provision for income taxes is derived from the income tax expense that is determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
For the Years Ended December 31, | ||||||||
2022 | % | 2021 | % | |||||
Expected income tax benefit at U.S. Federal statutory rate | $ | | - | $ | | - | ||
Tax impact of REIT election | ( | ( | ||||||
Expected tax benefit at TRS | | - | | - | ||||
Valuation Allowance | ( | - | ||||||
Gross tax (expense)/benefit | ( | | ||||||
State income tax expense, net | ( | ( | ||||||
Temporary differences - deprecation | ( | ( | ||||||
Permanent differences - PPP | - | | - | |||||
Income tax (expense)/benefit | $ | ( | $ | | - | |||
F-27
As of December 31, 2022 and 2021, the Company’s deferred tax assets and liabilities consisted of the following:
December 31, | ||||||
2022 | 2021 | |||||
Deferred Tax Assets: | ||||||
Net operating loss carryforwards - Federal | $ | | $ | | ||
Net operating loss carryforwards - State | | | ||||
Valuation Allowance | ( | - | ||||
- | | |||||
Deferred Tax Liabilities: | ||||||
Tax FF&E basis less than book basis - Federal | ( | ( | ||||
Tax FF&E basis less than book basis - State | ( | ( | ||||
( | ( | |||||
Deferred tax (liabilities)/assets, net | $ | ( | $ | | ||
9. 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
F-28
and the limited partners have received a return of their original capital 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 years ended December 31, 2022 and 2021, were as follows:
Incurred | ||||||
For the Years Ended December 31, | ||||||
2022 | 2021 | |||||
Fees: |
|
|
| |||
Acquisition fees | $ | | $ | | ||
Financing fees |
| |
| | ||
Asset management fees |
| |
| | ||
Performance fees | |
| | |||
$ | | $ | | |||
Reimbursements: |
|
|
| |||
Offering costs | $ | | $ | | ||
General and administrative |
| |
| | ||
Sales and marketing |
| |
| | ||
Acquisition costs | | | ||||
$ | | $ | | |||
For the years ended December 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
F-29
As of December 31, 2022 and 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 up to
NHS also earns a flat fee of $
Fees and reimbursements earned and payable to, NHS for the years ended December 31, 2022 and 2021, were as follows:
Incurred | Payable as of | |||||||||||
For the Years Ended December 31, | December 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 , , and David Ekman, 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 a director and executive officer of the Company and principal of the Advisor and Mr. Maple a director of the Company and principal of the Advisor. During the year ended December 31, 2021, A-1 Bonds made a $
F-30
filing. On August 9, 2022, the Company entered into a $
10. FRANCHISE AGREEMENTS
As of December 31, 2022 and 2021, all of the Company’s hotel properties were operated under franchise agreements with initial terms of
11. 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
F-31
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 | $ | | $ | | $ | | $ | | $ | | $ | ( | ||||||
Second Quarter 2022 | | | | | | | ||||||||||||
Third Quarter 2022 | | | | | | | ||||||||||||
Fourth 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, 2021 were payable to each stockholder |
| (2) | Assumes each 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
F-32
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 was offering up to
Non-Controlling Interests
As of December 31, 2022, the Operating Partnership had four classes of Limited Partner Units which included 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
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Advisor and 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 $
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of that date. As of December 31, 2022, the Operating Partnership had issued and sold
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 December 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 December 31, 2022, the Operating Partnership had issued and sold
12. COMMITMENTS AND CONTINGENCIES
Legal Matters — From time to time, the Company may become party to legal proceedings that arise in the ordinary course of its business. After consulting with legal counsel, management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations, cash flows or financial condition, which would require accrual or disclosure of the contingency and possible range of loss, other than the matter described below.
On September 12, 2022, the Advisor and Corey R. Maple received a “Wells notice” from the SEC stating that the SEC staff had made a preliminary determination to recommend to the SEC that it bring an enforcement action against the Advisor and Mr. Maple alleging violations of securities laws in connection with the SEC’s investigation of 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 Wells notice was neither a formal charge of wrongdoing nor a final determination that the Advisor or Mr. Maple has violated any law.
As of December 31, 2022, the Company was unable to estimate the cost of complying with the Wells notice or its outcome. The Advisor and Corey R. Maple agreed to a settlement with the SEC in connection with the action described above on August 28, 2023. See Note 13, “Subsequent Events.”
Property Acquisitions
The seller of the Pineville Property was 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 could have made a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, was 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 December 31, 2022,
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receive the additional consideration had been made. As of the date of this filing, the period to elect to receive additional consideration has passed with no election being made.
In November 2019, the Company entered into a purchase agreement, to acquire
Properties under Contract as of December 31, 2022
On August 16, 2022, the Operating Partnership and Terrapin ABQ Airport, LLC (the “Sheraton Albuquerque Airport Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Sheraton Albuquerque Airport Contribution Agreement”), pursuant to which the Sheraton Albuquerque Airport Contributor agreed to contribute the
The Company terminated the Sheraton Albuquerque Airport Contribution Agreement subsequent to December 31, 2022. See Note 13 “Subsequent Events” of the notes to the consolidated financial statements included as part of this Annual Report on Form 10-K for a description of the termination of this agreement as well as the contribution agreements entered into subsequent to December 31, 2022.
The Operating Partnership entered into contribution agreements for the contribution of hotel properties in Fort Collins, Colorado, Manhattan, Kansas, and Lawrence Kansas, during 2022. Each of these agreements was terminated by the Operating Partnership on August 30, 2022, and the earnest money deposit with respect to each such property was fully refunded to the Operating Partnership on August 30, 2022.
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13. SUBSEQUENT EVENTS
Update to Offering Price and Share NAV
The Company’s board of directors approved a revised net asset value (“NAV”) of the Company’s assets as of December 31, 2022. As a result, the price per share of the Company’s common stock, $
A-1 Line of Credit Amendments
On January 12, 2023, the Operating Partnership, the Company and A-1 Bonds entered into a Change in Terms Amendment in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $
On April 18, 2023, the Operating Partnership, the Company and A-1 Bonds entered into a Change in Terms Amendment in connection with the A-1 Line of Credit. This Amendment increased the A-1 Line of Credit to $
The Company and A-1 Bonds are working to finalize an extension of the A-1 Line of Credit as of the date of this filing, however there can be no assurance that an extension will be granted.
Western Line of Credit Amendments
On April 15, 2023, the Operating Partnership, the Company and Corey Maple entered into a Change in Terms Amendment in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from April 15, 2023 to June 15, 2023.
On July 31, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from June 15, 2023 to September 15, 2023. This amendment also added an additional
On October 9, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement, effective as of October 4, 2023 in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from September 15, 2023 to November 15, 2023. This amendment also reduced the maximum credit to $
On December 27, 2023, the Operating Partnership, the Company, Corey Maple, LF3 Fargo Med, LLC, LF3 Eagan, LLC, and LF3 Cedar Rapids, LLC entered into a Change in Terms Agreement in connection with the Western Line of Credit, which extended the maturity date of the Western Line of Credit from November 15, 2023 to April 30, 2024.
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NHS Loan
On March 6, 2023, the Company entered into a $
On December 28, 2023, the Company entered into a Change in Terms Agreement with the Operating Partnership and NHS in connection with the NHS Loan to extend the maturity date of the NHS Loan to January 31, 2024. This amendment also provided that in lieu of monthly interest payments, all accrued interest shall be due and payable on the maturity date with the full principal balance.
The Company and NHS are working to finalize an extension of the NHS loan as of the date of this filing, however there can be no assurance that an extension will be granted.
Fort Collins Loan Refinancing
On April 18, 2023, pursuant to the Loan Agreement, dated as of April 18, 2023 (the “New Fort Collins Loan Agreement”), LF3 RIFC, LLC and LF3 RIFC TRS LLC (collectively, the “Fort Collins Borrower”), subsidiaries of the Operating Partnership entered into a new $
Pursuant to the New Fort Collins Loan Agreement, Corey Maple and Norman Leslie entered into a Guaranty with Access Point to guarantee payment when due of the principal amount of indebtedness outstanding, including accrued interest and collection costs and expenses, and the performance of the agreements of the Fort Collins Borrower contained in the loan documents.
El Paso HI Loan Modification
LF3 El Paso, LLC and LF3 El Paso TRS LLC (collectively, the “El Paso HI Borrower”), subsidiaries of the Operating Partnership, entered into a $
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secured by the El Paso HI Property, pursuant to a loan agreement, dated as of May 12, 2021. The Holiday Inn El Paso Loan had a maturity date of May 15, 2023.
On May 15, 2023, the El Paso HI Borrower, the Operating Partnership and Corey R. Maple entered into a first loan modification agreement with EPH, which extended the maturity date to May 15, 2024. As a condition to the extension, the El Paso HI Borrower agreed to pay down $
As an additional condition to the extension, the Operating Partnership and HD Sunland Park Property LLC (the “El Paso HI Contributor”) agreed to amend the Amended and Restated Contribution Agreement, dated as of May 12, 2021, to allow the Operating Partnership to offer the El Paso HI Contributor of the El Paso HI Property an adjustment in the conversion of Series T Limited Units to Common Limited Units or other financial adjustments if the Operating Partnership determines that the El Paso HI Contributor’s extension of the determination of the Series T value to
Lakewood Loan Extended
As previously disclosed, the subsidiaries of the Operating Partnership and A-1 Bonds entered into a loan agreement in the amount of $
SEC Settlement
As mentioned in Note 12 “Commitments and Contingencies”, on August 28, 2023, the Advisor and Corey R. Maple agreed to a settlement with the SEC, in which the Advisor agreed to pay disgorgement of $
Creation of Series GO II LP Units
On April 7, 2023, the Operating Partnership established the terms of a new series of limited partner units designated as Series Growth & Opportunity II Limited Partner Units (“Series GO II LP Units”) to be issued from time to time. The Operating Partnership commenced a separate offering for the purchase of the Series GO II LP Units at a purchase price equal to
Resolution of Litigation with PA Sellers
Effective November 20, 2023, the Operating Partnership and Central PA Equities 17, LLC, Central PA Equities 19, LLC, and Springwood – FHP LP (collectively, the “PA Seller”) enter into a settlement agreement and general release of all claims (the “Settlement Agreement”) regarding the asset purchase agreement dated November 22, 2019 (as amended, the “Purchase Agreement”). Pursuant to the Purchase Agreement, the Operating Partnership agreed to acquire the 108-room Fairfield Inn & Suites by Marriott hotel in Hershey, Pennsylvania, the 107-room Home2 Suites by Hilton hotel in York, Pennsylvania, and the 100-room Hampton Inn & Suites by Hilton hotel in York, Pennsylvania (collectively, the “Hotel Properties”) from the PA Seller for $
Pursuant to the Settlement Agreement, the PA Seller received $
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Agreement. The Operating Partnership and all related entities are released and forever discharged from all claims related to or arising from the Purchase Agreement.
Distributions Paid
On January 10, 2023, the Company paid cash distributions totaling $
On February 7, 2023, the Company declared cash distributions totaling $
On March 7, 2023, the Company declared cash distributions totaling $
On April 4, 2023, the Company declared cash distributions totaling $
On May 9, 2023, the Company declared cash distributions totaling $
On June 12, 2023, the Company declared cash distributions totaling $
On July 10, 2023, the Company declared cash distributions totaling $
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On August 8, 2023, the Company declared cash distributions totaling $
On September 11, 2023, the Company declared cash distributions totaling $
On October 24, 2023, the Company declared cash distributions totaling $
On November 7, 2023, the Company declared cash distributions totaling $
On December 6, 2023, the Company declared cash distributions totaling $
On January 16, 2024, the Company declared cash distributions totaling $
Properties Under Contract
On January 31, 2023, the Operating Partnership and CS Real Estate Holding LLC (the “College Station Voco Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “College Station Voco Contribution Agreement”), pursuant to which the College Station Voco Contributor agreed to contribute the
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Partnership of Series T Limited Units of the Operating Partnership and cash at closing. As required by the College Station Voco Contribution Agreement, the Operating Partnership will deposit $
On April 23, 2023, the Operating Partnership terminated the Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement entered into on August 16, 2022 in connection with the contribution of the 276-room Sheraton Hotel Albuquerque Airport in Albuquerque, New Mexico. Subsequent to December 31, 2022 and prior to termination, the Operating Partnership deposited an additional $
Status of the Offering
Our board of directors extended the term of the Offering to May 31, 2024. As of the date of this filing, the Company’s private offering remained open for new investment, and since the inception of the offering the Company had issued and sold
Series T LP Units
The Operating Partnership did not issue any Series T LP Units during the year ended December 31, 2023 to the date of this filing.
Common LP Units
The Operating Partnership did not issue any Common LP Units during the year ended December 31, 2023 to the date of this filing.
GO II Unit Offering
On April 7, 2023, the Operating Partnership commenced an offering of Series GO II LP Units. The Operating Partnership has issued and sold
******
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LODGING FUND REIT III, INC. - SCHEDULE III
Real Estate and Accumulated Depreciation
As of December 31, 2022
Costs | ||||||||||||||||||||||||||||||
Capitalized | ||||||||||||||||||||||||||||||
Subsequent to | ||||||||||||||||||||||||||||||
Initial Cost | Acquisition | Gross Amounts at End of Year | ||||||||||||||||||||||||||||
|
|
| Building, | Building, | Building, | |||||||||||||||||||||||||
Land and | Building | Building | Land and | Building | ||||||||||||||||||||||||||
Date | Number | Land | Improvements | Improvements | Land | Improvements | Accumulated | Depreciable | ||||||||||||||||||||||
Description | Acquired | of Rooms | Encumbrances | Improvements | and FF&E | and FF&E | Improvements | and FF&E | Total(1) | Depreciation | Lives | |||||||||||||||||||
Holiday Inn Express - | Nov - 2018 | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | ||||||||||||
Hampton Inn & Suites - | Mar - 2019 | | |
| | | | | | | ( | |||||||||||||||||||
Hampton Inn - |
| Jun - 2019 | | |
| | | | | | | ( | ||||||||||||||||||
Home2 Suites - |
| Jul - 2019 | | | | | | | | | ( | |||||||||||||||||||
Home2 Suites - |
| Dec - 2019 | | | | | | | | | ( | |||||||||||||||||||
Fairfield Inn & Suites - | Jan - 2020 | | | | | | | | | ( | ||||||||||||||||||||
Homewood Suites - | Feb - 2020 | | | | | | | | | ( | ||||||||||||||||||||
Courtyard by Marriott - | Feb - 2021 | | | | | | | | | ( | ||||||||||||||||||||
Holiday Inn - | May - 2021 | | | | | | | | | ( | ||||||||||||||||||||
Hilton Garden Inn - | Aug - 2021 | | | | | | | | | ( | ||||||||||||||||||||
Sheraton Hotel - | Dec - 2021 | | | | | ( | | | | ( | ||||||||||||||||||||
Hampton Inn & Suites - | Jan - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Courtyard by Marriott - | Feb - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Fairfield Inn & Suites - | Mar - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Residence Inn - | Aug - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Hilton Garden Inn - | Aug - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Hilton Garden Inn - | Aug - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Hilton Garden inn - | Aug - 2022 | | | | | | | | | ( | ||||||||||||||||||||
Holiday Inn Express - | Dec - 2022 | | | | | | | | | ( | ||||||||||||||||||||
| $ | |
| $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | |||||||||||||
Investment in Real Estate: | 2022 | |||||
Balance at beginning of period | $ | | ||||
Acquisitions | | |||||
Improvements | | |||||
Balance at end of period | $ | | ||||
Accumulated Depreciation: | 2022 | |||||
Balance at beginning of period | $ | ( | ||||
Depreciation expense | ( | |||||
Asset write-offs | | |||||
Balance at end of period | $ | ( | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2024 | By: | /s/ Norman H. Leslie |
Norman H. Leslie | ||
President, Chief Executive Officer, Secretary, Chief Investment Officer, Treasurer and Director | ||
(principal executive officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
Date |
| Name and Title |
March 27, 2024 | /s/ Norman H. Leslie | |
Norman H. Leslie, President, Chief Executive Officer, Secretary, Chief Investment Officer, Treasurer and Director (principal executive officer) | ||
March 27, 2024 | /s/ Samuel C. Montgomery | |
Samuel C. Montgomery, Chief Financial Officer (principal financial officer and principal accounting officer) | ||
March 27, 2024 | /s/ Corey R. Maple | |
Corey R. Maple, Chairman of the Board and Director | ||
March 27, 2024 | /s/ David G. Ekman | |
David G. Ekman, Director | ||
March 27, 2024 | /s/ Jeffrey T. Leighton | |
Jeffrey T. Leighton, Director | ||
March 27, 2024 | /s/ Perry Rynders | |
Perry Rynders, Director |