The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States. Currently, the Company is focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. The Company’s portfolio consists of investments in twelve hotel properties comprising 3,156 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under the Hilton Worldwide, Marriott International, Inc., and Hyatt Hotels Corporation brands, as well as independent hotels.
The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six hotel properties (the “Initial Properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP (the “Operating Partnership”).
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditures incurred by it on the Operating Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which at September 30, 2020 was approximately 92.6% owned by the Company, through its subsidiaries leases the hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership. As of September 30, 2020, the MHI TRS Entities engaged eligible independent hotel management companies, Highgate Hotels, L.P. (“Highgate Hotels”) and Our Town Hospitality, LLC (“Our Town”) to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.
All references in these “Notes to Consolidated Financial Statements” to “we”, “us”, “our” and “Sotherly” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
COVID-19, Management’s Plans and Liquidity
In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all of our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels other than the rental programs at our condominium hotels, which were temporarily closed during April and May, have remained open on a limited basis in order to serve the needs of the community. The Company expects that maintaining the current limited operations will allow us to increase capacity at individual hotels as demand returns and the Centers for Disease Control (“CDC”) and state guidelines allow for an easing of travel and other business restrictions, provided we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.
COVID-19 has had a significant negative impact on the Company’s operations and financial results both during the second quarter and in the period following, including a substantial decline in our revenues, profitability and cash flows from operations. While the duration and full extent of the reduction in hotel demand caused by the pandemic, the contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and there is a substantial recovery in the economy. At a minimum, the Company expects the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow through the remainder of 2020 and well into 2021.
15
In response to those negative impacts, we took a number of actions to reduce costs and preserve liquidity. The Company’s board of directors suspended quarterly cash dividends on shares of the Company’s common stock and deferred payment of dividends on its 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”). We also suspended most planned capital expenditure projects, and reduced the compensation of our executive officers, board of directors and employees. Working closely with our hotel managers, we significantly reduced our hotels’ operating expenses.
The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which has limited our access to capital and could increase our cost of capital. As a result of the negative impacts of the pandemic and the ongoing market uncertainty, in April and May 2020, three of our wholly-owned subsidiaries sought and received funding under the federal Paycheck Protection Program (the “PPP”) provided in Section 7(a) of the Small Business Act of 1953, as amended by the Coronavirus Aid, Relief and Economic Security Act, as amended (the “CARES Act”). Pursuant to the terms of the loan agreements and promissory notes entered into with lenders under the PPP, we borrowed an aggregate amount of approximately $10.7 million (the “PPP Loans”).
We also sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties. As of September 30, 2020, we failed to make three consecutive monthly payments of principal and interest under the mortgage secured by our DoubleTree Resort by Hilton Hollywood Beach hotel, which constituted an Event of Default, and which, pursuant to the terms of the mortgage loan agreement, may cause an increase in the interest rate on the outstanding loan balance for the period during which such Event of Default persists. Following an Event of Default, our lenders (including the lender under our DoubleTree Resort by Hilton Hollywood Beach mortgage) can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel properties that are security for such loans. If the DoubleTree Resort by Hilton Hollywood Beach mortgage lender were to accelerate the payment of principal and interest on the applicable mortgage, we would likely not have sufficient funds to pay that mortgage debt. In addition, we failed to meet the financial covenants under the mortgage agreement which triggered a “cash trap” requiring substantially all the profit generated by our hotel to be deposited directly into a lockbox account and swept into cash management accounts for the benefit of the lender. We are currently negotiating an amendment to that loan agreement and have not received a Notice of Default.
As of September 30, 2020, we failed to meet the financial covenants under the mortgages secured by each of the DoubleTree by Hilton Philadelphia Airport, the Hotel Alba, and The Whitehall. We have received waivers of the financial covenants under the applicable mortgages from (i) the lender on the DoubleTree by Hilton Philadelphia Airport through March 31, 2021; (ii) the lender on the Hotel Alba mortgage through December 31, 2020, provided that we maintain the cash collateral on deposit with the lender; and (iii) the lender on The Whitehall mortgage through September 30, 2021. Cash collateral on deposit with the Hotel Alba lender was approximately $2.5 million as of September 30, 2020, subject to certain withdrawal privileges.
As of September 30, 2020, we had failed to meet the financial covenants under the mortgage secured by the DoubleTree by Hilton Jacksonville Riverfront and the Georgian Terrace, which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the profit generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”. In addition, in order to receive forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone – University, we agreed to a “cash trap” until the property meets the criteria in the forbearance agreement for exiting the “cash trap”.
The duration of the disruptions caused by the COVID-19 pandemic on global, national and local economies, and, in particular, on the hospitality industry in the United States, cannot be reasonably estimated at this time. However, as long as the effects of the COVID-19 pandemic continue, our future business operations, including the results of operations, cash flows and financial position will be significantly affected. We believe it is probable that over the course of the next four to six quarters we may fail to satisfy financial covenants in the above-described and certain other mortgage loan agreements. If we fail to obtain the requisite waivers, our lenders could declare us in default and require repayment of the outstanding balances on the relevant mortgage loans. If that were to occur, we may not have sufficient funds to pay the applicable mortgage debt. While we believe we will be successful in obtaining waivers, forbearance arrangements and loan modifications, we cannot provide assurance that we will be able to do so on acceptable terms or at all.
As of September 30, 2020, we had approximately $15.5 million in unrestricted cash and approximately $7.7 million in restricted cash. During the six months ended September 30, 2020, we utilized cash, cash and equivalents and restricted cash of approximately $9.6 million. The uncertainty regarding the duration and extent of the reduction in hotel demand caused by the pandemic creates corresponding uncertainty regarding our future cash flows. If our cash utilization going forward is consistent with the two quarters ended September 30, 2020 and we do not raise additional capital or receive continued forbearance, it is possible that the Company
16
may utilize all of its cash, cash equivalents and restricted cash within the next twelve months. Additionally, because any forbearance agreements, waivers or loan modifications would be granted at the sole discretion of the lenders, we have determined that there is substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. U.S. generally accepted accounting principles (“U.S. GAAP”) requires that in making this determination, we cannot consider future fundraising activities, whether through equity or debt offerings or dispositions of hotel properties, or the likelihood of obtaining forbearance agreements, covenant waivers or loan modifications, all of which are outside of the Company's control. Management believes that obtaining forbearance agreements, waivers or loan modifications from our lenders may remove the reason for the determination of substantial doubt. However, any such arrangement may lead to increased costs, increased interest rates, additional restrictive covenants and other possible lender protections. In addition to or in lieu of obtaining concessions from lenders as described above, we believe we could raise additional funds, if needed, through a combination of hotel dispositions or debt or equity financings.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Overview of Significant Transactions
Significant transactions occurring during the current and prior fiscal year include the following:
On April 18, 2019, the Company closed a sale and issuance of 1,080,000 shares of its 8.25% Series D cumulative redeemable perpetual preferred stock, for gross proceeds of $27.0 million before underwriting discounts and commissions and expenses payable by the Company. On May 1, 2019, the Company closed a sale and issuance of an additional 120,000 shares of its Series D Preferred Stock, for gross proceeds of $3.0 million before underwriting discounts and commissions and expenses payable by the Company, in connection with the partial exercise of the underwriters’ option to purchase additional shares of the Series D Preferred Stock. Total net proceeds after all estimated expenses were approximately $28.4 million, which the Company contributed to its Operating Partnership for an equivalent number of Series D preferred units. We used the net proceeds to redeem in full the Operating Partnership’s 7.25% Notes and for working capital.
On April 24, 2019, the Hyde Resort & Residences condominium association, 4111 South Ocean Drive Condominium Association, Inc., unilaterally terminated both (i) the existing Lease Agreement for the 400-space parking garage and meeting rooms associated with the condominium hotel and (ii) the Association Management Agreement relating to the operation and management of the hotel condominium association. We continue to operate our rental program at the Hyde Resort & Residences.
On April 26, 2019, we entered into amended loan documents to modify the existing mortgage loan on the Hotel Alba with the existing lender, Fifth Third Bank. Pursuant to the modification, the mortgage loan principal balance remained at approximately $18.2 million; the maturity date was extended to June 30, 2022, and may be extended for two additional periods of one year each, subject to certain conditions; the mortgage loan continues to bear a floating interest rate of 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%, with a new provision to reduce the floating interest rate to 1-month LIBOR plus 3.00% upon the successful achievement of certain performance hurdles; the mortgage loan amortizes on a 25-year schedule; and the mortgage loan continues to be guaranteed by the Operating Partnership.
On May 20, 2019, the Operating Partnership redeemed the entire $25.0 million aggregate principal amount of its 7.25% Notes, at a redemption price equal to 101% of the principal amount of the 7.25% Notes, plus any accrued and unpaid interest up to, but not including, the redemption date.
On September 6, 2019, we entered into a master agreement with Newport Hospitality Group, Inc., a Virginia corporation, and Our Town relating to the management of ten of our hotels. On December 13, 2019, we entered into an amendment to the master agreement, as well as a series of individual hotel management agreements for the management of those ten hotels. On January 1, 2020 ten of our individual hotel management agreements with Chesapeake Hospitality expired and management of those hotels was transitioned to Our Town. Also on December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from us, and a credit agreement with Our Town pursuant to which the Company has agreed to make a working capital line of credit of up to $850,000 available to Our Town.
On September 26, 2019, we closed on the purchase of a commercial condominium unit of the Hyde Beach House Resort & Residences, a newly constructed 342-unit condominium hotel located in Hollywood, Florida (“Hyde Beach House”), from 4000 South Ocean Property Owner, LLLP. In connection with the closing, we (i) acquired commercial unit 2 of the Hyde Beach House, along with rights to certain limited common elements appurtenant to the commercial unit, for an adjusted purchase price of approximately $5.4 million; (ii) purchased inventories and equipment for additional consideration in the amount of approximately $0.7 million; (iii) entered into a second addendum to the purchase agreement; (iv) entered into a 20-year parking and cabana management agreement for the parking garage and poolside cabanas associated with the Hyde Beach House; (v) entered into a 20-year management agreement relating to the operation and management of the Hyde Beach House condominium association; and (vi) received a pre-opening
17
services fee of $1.0 million. We began operating a condominium unit rental program for residential units in the facility in November 2019. Also, in connection with the closing, our DoubleTree Resort by Hilton Hollywood Beach acquired a commercial condominium unit consisting of a 3,000 square foot ballroom and adjacent pre-function space, as well as 200 dedicated parking spaces within the parking garage adjacent to the hotel.
The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.
On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.
On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
2. Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.
Investment in Hotel Properties – Investments in hotel properties include investments in operating properties, which are recorded at fair value on acquisition date and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures which constitute additions or improvements that extend the life of the property are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
18
Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.
Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.
Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or net realizable value, with cost determined on a method that approximates first-in, first-out basis.
Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of September 30, 2020 and December 31, 2019 were $368,742 and $413,354, respectively. Amortization expense for the three-month periods ended September 30, 2020 and 2019, totaled $14,850 and $14,869, respectively, and for the nine-month periods ended September 30, 2020 and 2019, totaled $44,612 and $43,773, respectively.
Right-of-Use Assets and Lease Obligations – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard 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 by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.
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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption.
We adopted this standard on January 1, 2019. We elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. We also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for our future obligations under the acquired operating ground lease, equipment, office space, parking and land leases for which we are the lessee. See Notes 4 and 6 to the accompanying financial statements for additional disclosures on the adoption of this standard. As of September 30, 2020, we had right of use assets of approximately $8.2 million, net and lease obligations of approximately $6.4 million. The right-of-use assets are included in investments in hotel properties, net and in prepaid expenses, inventory and other assets and the lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets.
Deferred Financing and Offering Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in advance of issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.
Deferred offering costs are netted against our equity offerings when the offering is complete, whereby the costs are offset against the equity funds raised in the future and included in additional paid-in capital on the consolidated balance sheets, or if the offering expires and the offering costs exceed the funds raised in the offering then the excess will be included in corporate general and administrative expenses in the consolidated statements of operations.
Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheets and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow
19
hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we currently use interest rate caps and an interest rate swap which act as cash flow hedges and are not designated as hedges. We value our interest-rate caps and interest rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
Level 3
|
Unobservable inputs for the asset or liability.
|
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate swap are the only assets or liabilities measured at fair value on a recurring basis, there were no non-recurring assets or liabilities for fair value measurements as of September 30, 2020 and December 31, 2019, respectively):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps (1)
|
|
$
|
—
|
|
|
$
|
4,504
|
|
|
$
|
—
|
|
Interest Rate Swap (2)
|
|
$
|
—
|
|
|
$
|
(2,064,709
|
)
|
|
$
|
—
|
|
Mortgage loans (3)
|
|
$
|
—
|
|
|
$
|
(363,229,617
|
)
|
|
$
|
—
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap (1)
|
|
$
|
—
|
|
|
$
|
473
|
|
|
$
|
—
|
|
Interest Rate Swap (2)
|
|
$
|
—
|
|
|
$
|
(3,439,984
|
)
|
|
$
|
—
|
|
Mortgage loans (3)
|
|
$
|
—
|
|
|
$
|
(364,298,561
|
)
|
|
$
|
—
|
|
(1)
|
Interest rate cap, which cap the 1-month LIBOR rate at 3.25%.
|
(2)
|
Interest rate swap, which takes the Loan Rate and swaps it for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan.
|
(3)
|
Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019.
|
Noncontrolling Interest in Operating Partnership – Certain hotel properties were acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.
Revenue Recognition – Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the
20
Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) and recognized once the performance obligations are satisfied and shown on our consolidated balance sheets.
Certain of the Company’s hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company's consolidated statements of operations.
The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations.
Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease income as revenue from other operating departments within the consolidated statements of operations pursuant to the terms of each lease. Lease revenue was approximately $0.3 million and $0.4 million, for the three months ended September 30, 2020 and 2019, respectively and approximately $0.9 million and $1.2 million for the nine months ended September 30, 2020 and 2019, respectively.
A schedule of minimum future lease payments receivable for the remaining three and twelve-month periods is as follows:
For the three months ending December 31, 2020
|
|
$
|
404,103
|
|
December 31, 2021
|
|
|
1,455,987
|
|
December 31, 2022
|
|
|
1,387,499
|
|
December 31, 2023
|
|
|
1,390,979
|
|
December 31, 2024
|
|
|
1,400,280
|
|
December 31, 2025 and thereafter
|
|
|
8,282,740
|
|
Total
|
|
$
|
14,321,588
|
|
Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.
Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.
We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. As of September 30, 2020, we have determined that it is more-likely-than-not that we will not be able to fully utilize our deferred tax assets for future tax consequences, therefore a 100% valuation allowance is required. As of September 30, 2020 and December 31, 2019, deferred tax assets totaled $0 and $5.4 million, respectively.
As of September 30, 2020 and December 31, 2019, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation – The Company’s 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 350,000 and 750,000 shares of common stock, respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.
21
Under the 2013 Plan, the Company has made stock awards totaling 238,600 shares, including 79,850 non-restricted shares and 158,750 restricted shares issued to certain executives and employees and to its independent directors. All awards have vested except for: 15,000 shares issued to one employee, which will vest over 3 years; 30,000 shares issued to one employee, which will vest over 10 years; 15,000 shares issued to one employee, which will vest over 5 years; and 15,000 shares issued to the Company’s independent directors in February 2020, which will vest by December 31, 2020.
Under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of September 30, 2020, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended September 30, 2020 and 2019 was $18,195 and $8,025, respectively and for the nine months ended September 30, 2020 and 2019 was $163,260 and $116,408, respectively.
Additionally, the Company sponsors and maintains an Employee Stock Ownership Plan (“ESOP”) and related trust for the benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods in which they are committed to be released. For the three months ended September 30, 2020 and 2019, the ESOP compensation cost was $19,197 and $60,259, respectively and for the nine months ended September 30, 2020 and 2019, the ESOP compensation cost was $81,740 and $193,513, respectively. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
Advertising – Advertising costs were $50,566 and $132,227 for the three months ended September 30, 2020 and 2019, respectively and were $ 209,821 and $319,947 for the nine months ended September 30, 2020 and 2019, respectively. Advertising costs are expensed as incurred.
Involuntary Conversion of Assets – We record gains or losses on involuntary conversions of assets due to recovered insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds received. During each of the three-month periods ending September 30, 2020 and 2019, we recognized $13,518 and approximately $0.1 million, respectively, and during the nine-month periods ending September 30, 2020 and 2019, we recognized $40,125 and approximately $0.3 million, respectively, in gain on involuntary conversion of assets, which is reflected in the consolidated statements of operations.
Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.
Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership.
Use of Estimates – The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications – Certain amounts in the March 31, 2020 and June 30, 2020 Consolidated Statements of Changes in Equity have been reclassified to conform to the current period presentation. These reclassifications had no impact on total stockholders’ equity or net income as previously reported.
New Accounting Pronouncements – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with lenders and the hedging contracts associated with each respective modified borrowing contract. In general, the provision of the update would benefit us by allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and not be considered debt extinguishment. As of September 30, 2020, we have not entered into any contract modification as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future. While we anticipate the impact of this update may be to our benefit, we are still evaluating the overall impact.
22
3. Acquisition of Hotel Properties
Hyde Beach House Resort & Residences. On September 26, 2019, we acquired a commercial condominium unit of the Hyde Beach House condominium hotel, for a total fair value of consideration transferred including inventory and other assets of approximately $6.3 million.
The results of operations of the hotel commercial condominium unit are included in our consolidated financial statements from the date of the acquisition. The total revenue and net loss related to the acquisition for the period January 1, 2020 to September 30, 2020 are approximately $1.2 million and $1.3 million, respectively. There is no pro forma financial information since this is a new operation without prior historical information.
The allocation of the respective purchase price is based on fair value as follows:
|
|
Hyde Beach House
|
|
Land and land improvements
|
|
$
|
500
|
|
Buildings and improvements
|
|
|
5,564,219
|
|
Furniture, fixtures and equipment
|
|
|
347,621
|
|
Favorable lease and other intangible assets
|
|
|
—
|
|
Investment in hotel properties
|
|
|
5,912,340
|
|
Accrued liabilities and other costs
|
|
|
—
|
|
Prepaid expenses, inventory and other
assets
|
|
|
434,038
|
|
Net cash
|
|
$
|
6,346,378
|
|
4. Investment in Hotel Properties, Net
Investment in hotel properties, net as of September 30, 2020 and December 31, 2019 consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
66,077,310
|
|
|
$
|
66,031,443
|
|
Buildings and improvements
|
|
|
441,669,752
|
|
|
|
438,268,174
|
|
Right of use assets
|
|
|
6,109,383
|
|
|
|
6,452,259
|
|
Furniture, fixtures and equipment
|
|
|
55,623,128
|
|
|
|
55,392,434
|
|
|
|
|
569,479,573
|
|
|
|
566,144,310
|
|
Less: accumulated depreciation and impairment
|
|
|
(137,298,916
|
)
|
|
|
(122,876,862
|
)
|
Investment in Hotel Properties, Net
|
|
$
|
432,180,657
|
|
|
$
|
443,267,448
|
|
Our review of possible impairment as of September 30, 2020 and December 31, 2019, resulted in no impairment on our investment in hotel properties, respectively.
23
5. Debt
Mortgage Loans, Net. As of September 30, 2020 and December 31, 2019, we had approximately $357.0 million and approximately $358.6 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
|
Balance Outstanding as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Prepayment
|
|
Maturity
|
|
Amortization
|
|
Interest
|
|
|
Property
|
2020
|
|
|
2019
|
|
|
Penalties
|
|
Date
|
|
Provisions
|
|
Rate
|
|
|
The DeSoto (1)
|
$
|
32,820,733
|
|
|
$
|
32,967,166
|
|
|
Yes
|
|
7/1/2026
|
|
25 years
|
|
4.25%
|
|
|
DoubleTree by Hilton Jacksonville
Riverfront (2)
|
|
33,803,039
|
|
|
|
34,225,971
|
|
|
Yes
|
|
7/11/2024
|
|
30 years
|
|
4.88%
|
|
|
DoubleTree by Hilton Laurel (3)
|
|
8,681,248
|
|
|
|
8,534,892
|
|
|
Yes
|
|
8/5/2021
|
|
25 years
|
|
5.25%
|
|
|
DoubleTree by Hilton Philadelphia Airport (4)
|
|
41,207,471
|
|
|
|
41,419,590
|
|
|
None
|
|
10/31/2023
|
|
30 years
|
|
LIBOR plus 2.27%
|
|
|
DoubleTree by Hilton Raleigh-
Brownstone University (5)
|
|
18,300,000
|
|
|
|
18,300,000
|
|
|
Yes
|
|
7/27/2022
|
|
(5)
|
|
LIBOR plus 2.27%
|
|
|
DoubleTree Resort by Hilton Hollywood
Beach (6)
|
|
55,878,089
|
|
|
|
56,057,218
|
|
|
(6)
|
|
10/1/2025
|
|
30 years
|
|
4.913%
|
|
|
Georgian Terrace (7)
|
|
42,738,529
|
|
|
|
43,335,291
|
|
|
(7)
|
|
6/1/2025
|
|
30 years
|
|
4.42%
|
|
|
Hotel Alba Tampa, Tapestry Collection by Hilton (8)
|
|
17,946,480
|
|
|
|
18,000,104
|
|
|
None
|
|
6/30/2022
|
|
(8)
|
|
LIBOR plus 2.27%
|
|
|
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9)
|
|
33,259,067
|
|
|
|
33,401,622
|
|
|
Yes
|
|
1/1/2027
|
|
25 years
|
|
4.25%
|
|
|
Hyatt Centric Arlington (10)
|
|
48,990,136
|
|
|
|
49,173,836
|
|
|
Yes
|
|
9/18/2028
|
|
30 years
|
|
5.25%
|
|
|
Sheraton Louisville Riverside (11)
|
|
11,037,086
|
|
|
|
11,114,145
|
|
|
Yes
|
|
12/1/2026
|
|
25 years
|
|
4.27%
|
|
|
The Whitehall (12)
|
|
14,369,389
|
|
|
|
14,450,420
|
|
|
Yes
|
|
2/26/2023
|
|
25 years
|
|
PRIME plus 1.25%
|
|
|
Total Mortgage Principal Balance
|
$
|
359,031,267
|
|
|
$
|
360,980,255
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net
|
|
(2,151,414
|
)
|
|
|
(2,487,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premium on loan
|
|
123,099
|
|
|
|
141,611
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Loans, Net
|
$
|
357,002,952
|
|
|
$
|
358,633,884
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The note amortizes on a 25-year schedule and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
|
(2)
|
The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
|
(3)
|
The note is subject to a pre-payment penalty until April 2021. Prepayment can be made without penalty thereafter.
|
(4)
|
The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237%. Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
|
(5)
|
The note provides initial proceeds of $18.3 million, with an additional $5.2 million available upon the satisfaction of certain conditions; has an initial term of 4 years with a 1-year extension; bears a floating interest rate of 1-month LIBOR plus 4.00%; requires interest only monthly payments; and following a 12-month lockout, can be prepaid with penalty in year 2 and without penalty thereafter. We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000.
|
(6)
|
With limited exception, the note may not be prepaid until June 2025.
|
(7)
|
With limited exception, the note may not be prepaid until February 2025.
|
(8)
|
The note bears a floating interest rate of 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%; with monthly principal payments of $26,812; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions.
|
(9)
|
The note amortizes on a 25-year schedule and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
|
(10)
|
Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
|
(11)
|
The note bears a fixed interest rate of 4.27% for the first 5 years of the loan, with an option for the lender to reset the interest rate after 5 years.
|
(12)
|
Through September 30, 2020, the note bears a floating interest rate of 1-month LIBOR plus 3.5%, subject to a floor rate of 4.0%, and is subject to prepayment penalties on a declining scale with a 3.0% penalty on or before the first anniversary date, a 2.0% penalty during the second anniversary year and a 1.0% penalty after the third anniversary date. Subsequent to September 30, 2020, a forbearance agreement changed the rate and pre-payment penalties in effect.
|
24
Property Name
|
|
Forbearance Terms
|
The DeSoto
|
|
(a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled interest payments due from April 1, 2020 to September 1, 2020; (c) deferred principal and interest are due and payable at maturity; and (d) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership. The maturity date under the loan modifications remains unchanged.
|
DoubleTree by Hilton Jacksonville Riverfront
|
|
(a) the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; (b) FF&E deposits were deferred for the April, May, and June 2020 payment dates; and (c) released FF&E and the deferred FF&E to be repaid in 6 monthly installments beginning with the July 2020 payment. The maturity date under the loan modifications remains unchanged.
|
|
DoubleTree by Hilton Laurel
|
|
(a) deferral of scheduled payments of principal and interest due from April 1, 2020 to September 30, 2020; (b) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; (c) any deferred principal is due and payable at maturity; and (d) subsequent to September 30, 2020, the lender agreed to defer principal payments for an additional three months, through January 5, 2021. The maturity date under the loan modifications remains unchanged.
|
|
DoubleTree by Hilton Philadelphia Airport
|
|
(a) deferral of scheduled principal and interest under the note as well as the interest-rate swap due from April 1, 2020 to June 30, 2020; (b) July 1, 2020 payment of regular principal and interest was paid; (c) deferred principal is due and payable at maturity; and (d) subsequent to September 30, 2020, the lender agreed to defer principal, interest, and swap payments for August, September and October, and to defer principal payments through January 2021. The maturity date was extended by 3 months.
|
DoubleTree by Hilton Raleigh-Brownstone University
|
|
(a) deferral of scheduled interest payments due from April 1, 2020 to July 1, 2020 and (b) deferred interest is due and payable by August 1, 2021.
|
DoubleTree Resort by Hilton Hollywood Beach
|
|
n/a
|
Georgian Terrace
|
|
Release of FF&E reserves to fund up to 50% of debt service, taxes, and operating expenses.
|
Hotel Alba Tampa, Tapestry Collection by Hilton
|
|
Deferral of scheduled payments of principal due from April 1, 2020 to December 1, 2020.
|
Hotel Ballast Wilmington, Tapestry Collection by Hilton
|
|
(a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to September 1, 2020; (c) deferred principal and interest will be due and payable at maturity; and (d) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership. The maturity date under the loan modifications remains unchanged.
|
Hyatt Centric Arlington
|
|
(a) deferral of scheduled payments of principal and interest due from April 1, 2020 to August 1, 2020; (b) deferral of scheduled payments of principal due from September 1, 2020 to April 1, 2021; and (c) deferred principal and interest, along with additional accrued interest on interest, is due and payable by August 31, 2021.
|
Sheraton Louisville Riverside
|
|
(a) deferral of scheduled payments of interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity. The maturity date under the loan modifications remains unchanged.
|
The Whitehall
|
|
(a) deferral of scheduled payments of principal and interest due from April 1, 2020 to October 12, 2020; (b) deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the amortization period; (c) the interest rate is changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; and (d) the prepayment penalty is changed to: (i) 3.0% if prepaid on or before April 12, 2021; (ii) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (iii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iv) no prepayment fee if prepaid after November 26, 2022. The maturity date under the loan modifications remains unchanged.
|
As of September 30, 2020, we had failed to make three consecutive monthly payments of principal and interest under the mortgage secured by our DoubleTree Resort by Hilton Hollywood Beach hotel, which constituted an Event of Default and which, pursuant to the terms of the mortgage loan agreement, may cause an increase in the interest rate on the outstanding loan balance for the period during which such Event of Default persists. Following an Event of Default, our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel property that secures such loan. In addition, we failed to meet the financial covenants under the mortgage agreement which triggered a “cash trap” requiring substantially all the profit generated by that hotel to be deposited directly into a lockbox account and swept into cash management accounts for the benefit of the lender. We are currently negotiating an amendment to the loan agreement and have not received a Notice of Default.
As of September 30, 2020, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport, the Hotel Alba, and The Whitehall. We have received waivers of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through March 31, 2021, from the lender on the Hotel Alba mortgage through December 31, 2020, provided that we maintain the cash collateral on deposit with the lender, and from the lender on The Whitehall mortgage through September 30, 2021. Cash collateral on deposit with the Hotel Alba lender was approximately $2.5 million as of September 30, 2020, subject to certain withdrawal privileges.
As of September 30, 2020, we had failed to meet the financial covenants under the mortgage secured by the DoubleTree by Hilton Jacksonville Riverfront and the Georgian Terrace, which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the profit generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”. In addition, in order to receive forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone – University, we agreed to a “cash trap” until the property meets the criteria in the forbearance agreement for exiting the “cash trap”.
25
Total future mortgage debt maturities for the remaining three and twelve-month periods, without respect to any extension of loan maturity or loan modification after September 30, 2020, were as follows:
For the three months ending December 31, 2020
|
$
|
2,013,060
|
|
December 31, 2021
|
|
15,209,787
|
|
December 31, 2022
|
|
42,407,921
|
|
December 31, 2023
|
|
60,021,105
|
|
December 31, 2024
|
|
37,506,223
|
|
December 31, 2025 and thereafter
|
|
201,873,171
|
|
Total future maturities
|
$
|
359,031,267
|
|
PPP Loans. The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.
On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.
On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.
On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.
6. Commitments and Contingencies
Ground, Building, Parking and Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the third of five optional five-year renewal periods expiring October 31, 2021. Rent expense for this operating lease for the three and nine months ended September 30, 2020, totaled $18,246 and $54,738, respectively and for the three and nine months ended September 30, 2019, totaled $18,246 and $54,738, respectively.
We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.
We lease land adjacent to the Hotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009. In May 2014, we extended the agreement for an additional five years. We signed a new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years. The new agreement expires in July 2024, requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for each of the three months ended September 30, 2020 and 2019, totaled $ 661 and $412, respectively and for the nine months ended September 30, 2020 and 2019, totaled $1,963 and $1,713, respectively.
We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement is $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as the tenant improvement allowance is exhausted. Rent expense for the three-and nine-month periods ended September 30, 2020 totaled $56,042 and $167,706, respectively.
26
We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement. The initial term of the ground lease expires in 2025 and may be extended for five additional renewal periods of 10 years each. Rent expense for the three months ended September 30, 2020 and 2019, was $28,166 and $141,587, respectively, and for the nine months ended September 30, 2020 and 2019 was $134,685 and $474,945, respectively.
We lease parking garage and poolside cabanas associated with the Hyde Beach House. The parking and cabana lease requires us to make rental payments of $270,100 per year in base and has an initial term that expires in 2034 and which may be extended for four additional renewal periods of 5 years each. Rent expense for the three months ended September 30, 2020 and 2019, was $67,749 and $0, respectively, and for the nine months ended September 30, 2020 and 2019 was $203,247 and $0, respectively.
We also lease certain storage facilities, furniture and equipment under agreements expiring between October 2021 and June 2025.
A schedule of minimum future lease payments for the following three and twelve-month periods is as follows:
For the three months ending December 31, 2020
|
|
$
|
148,763
|
|
December 31, 2021
|
|
|
594,936
|
|
December 31, 2022
|
|
|
651,176
|
|
December 31, 2023
|
|
|
618,886
|
|
December 31, 2024
|
|
|
625,853
|
|
December 31, 2025 and thereafter
|
|
|
14,870,043
|
|
Total
|
|
$
|
17,509,657
|
|
Employment Agreements - The Company has entered into various employment contracts with employees that could result in obligations to the Company in the event of a change in control or termination without cause.
Management Agreements – As of September 30, 2020, the Hyatt Centric Arlington hotel operated under a management agreement with Highgate Hotels L.P. The management agreement has an initial term of three years expiring March 1, 2021.
As of September 30, 2020, ten of our wholly-owned hotels operated under management agreements with Our Town (see Note 9). The management agreements expire on March 31, 2025 and may be extended for up to two additional periods of five years each, subject to the approval of both parties. Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees. As of April 1, 2020, the DoubleTree Resort by Hilton Hollywood Beach and the rental program and condominium association of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences operated under management agreements with Our Town.
Franchise Agreements – As of September 30, 2020, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently in force expire between November 2021 and October 2030. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.
Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone–University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.
ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the
27
aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
Litigation –We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.
7. Preferred Stock and Units
Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:
|
|
Per
|
|
|
|
|
|
|
Number of Shares
|
|
|
Quarterly
|
|
|
|
Annum
|
|
|
Liquidation
|
|
|
Issued and Outstanding as of
|
|
|
Distributions
|
|
Preferred Stock - Series
|
|
Rate
|
|
|
Preference
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Per Share
|
|
Series B Preferred Stock
|
|
|
8.000
|
%
|
|
$
|
25.00
|
|
|
|
1,610,000
|
|
|
|
1,610,000
|
|
|
$
|
0.500000
|
|
Series C Preferred Stock
|
|
|
7.875
|
%
|
|
$
|
25.00
|
|
|
|
1,554,610
|
|
|
|
1,554,610
|
|
|
$
|
0.492188
|
|
Series D Preferred Stock
|
|
|
8.250
|
%
|
|
$
|
25.00
|
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
|
$
|
0.515625
|
|
(1)
|
As previously announced, the record dates for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020 have each been declared and the payment of dividends on all classes of the Company’s preferred stock has been deferred. As of September 30, 2020, there are undeclared and cumulative preferred dividends, of approximately $4.4 million.
|
The Company is required to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the $25.00 liquidation preference per share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions, payable when declared. The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (collectively, the “Preferred Stock”) are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s Preferred Stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the Preferred Stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.
On March 17, 2020, the Company announced that it was deferring payment of Sotherly’s previously announced declared distributions for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020. No distributions have been declared for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending September 30, 2020.
In October 2017, the Company issued 1,300,000 shares of Series C Preferred Stock, for net proceeds after all estimated expenses of approximately $30.5 million. The Company contributed the net proceeds from the offering to its Operating Partnership for an equivalent number of Series C Preferred Units. Holders of the Company’s Series C Preferred Stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. The Company pays cumulative cash distributions on the Series C Preferred Stock at a rate of 7.875% per annum of the $25.00 liquidation preference per share. The Series C Preferred Stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates.
On August 31, 2018, we entered into a Sales Agency Agreement, with Sandler O’Neill, under which the Company may sell from time to time through Sandler O’Neill, as sales agent, up to 400,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share. Through the period ended December 31, 2018, the Company sold 52,141 shares of Series C Preferred Stock, for net proceeds of approximately $1.0 million. During September 2019, the Company issued and sold 202,469 shares of Series C Preferred Stock, for net proceeds after all estimated expenses of approximately $4.9 million, pursuant to the Sales Agency Agreement. The Company contributed the net proceeds from the offering to its Operating Partnership for an equivalent number of Series C Preferred Units.
28
In April and May 2019, the Company issued 1,200,000 shares of Series D Preferred Stock, for net proceeds after all estimated expenses of approximately $28.4 million. The Company contributed the net proceeds from the offering to its Operating Partnership for an equivalent number of Series D Preferred Units.
The total declared and unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through September 30, 2020 is $805,000, $765,160 and $618,750, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2020, the undeclared cumulative preferred dividends were approximately $4.4 million.
Preferred Units - The Company is the holder of the Operating Partnership’s preferred partnership units and is entitled to receive distributions when authorized by the general partner of the Operating Partnership out of assets legally available for the payment of distributions. The following table sets forth our Cumulative Redeemable Perpetual Preferred Units by series:
|
|
Per
|
|
|
|
|
|
|
Number of Units
|
|
|
Quarterly
|
|
|
|
Annum
|
|
|
Liquidation
|
|
|
Issued and Outstanding as of
|
|
|
Distributions
|
|
Preferred Units - Series
|
|
Rate
|
|
|
Preference
|
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Per Unit
|
|
Series B Preferred Units
|
|
|
8.000
|
%
|
|
$
|
25.00
|
|
|
|
1,610,000
|
|
|
|
1,610,000
|
|
|
$
|
0.500000
|
|
Series C Preferred Units
|
|
|
7.875
|
%
|
|
$
|
25.00
|
|
|
|
1,554,610
|
|
|
|
1,554,610
|
|
|
$
|
0.492188
|
|
Series D Preferred Units
|
|
|
8.250
|
%
|
|
$
|
25.00
|
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
|
$
|
0.515625
|
|
(1)
|
As previously announced, the record dates for the dividends on the Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15, 2020 to unitholders of record as of March 31, 2020 have each been declared and the payment of dividends on all classes of the Operating Partnership’s preferred units has been deferred. As of September 30, 2020, there are undeclared and cumulative preferred distributions of approximately $4.4 million.
|
The Operating Partnership pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00 liquidation preference per unit. Holders of the Operating Partnership’s preferred units are entitled to receive distributions when authorized by the Operating Partnership’s general partner out of assets legally available for the payment of distributions. The preferred units are not redeemable by the holders, have no maturity date and are not convertible into any other security of the Operating Partnership or its affiliates.
In September 2019, the Operating Partnership issued 202,469 units of 7.875% Series C Preferred Units to the Company for net proceeds of approximately $4.9 million.
In April and May 2019, the Operating Partnership issued 1,200,000 units of 8.25% Series D Preferred Units, to the Company for net proceeds after all estimated expenses of approximately $28.4 million.
In September and December 2018, the Operating Partnership issued a total of 52,141 units of 7.875% Series C Preferred Units, to the Company for net proceeds after all estimated expenses of approximately $1.0 million.
In October 2017, the Operating Partnership issued 1,300,000 units of 7.875% Series C Preferred Units, to the Company for net proceeds after all estimated expenses of approximately $30.5 million. The Operating Partnership used the net proceeds to redeem in full the Operating Partnership’s 7% Notes and for working capital.
The total declared and unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through September 30, 2020 is $805,000, $765,160 and $618,750, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2020, the undeclared cumulative preferred dividends were approximately $4.4 million.
8. Common Stock and Units
Common Stock – As of September 30, 2020, the Company was authorized to issue up to 69,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.
On December 2, 2016, the Company’s board of directors authorized a stock repurchase program under which the Company may purchase up to $10.0 million of its outstanding common stock, par value $0.01 per share, at prevailing prices on the open market or in privately negotiated transactions, at the discretion of management. Through December 31, 2019 the Company repurchased 882,820
29
shares of common stock for approximately $5.9 million and the repurchased shares have been returned to the status of authorized but unissued shares of common stock.
During 2017, the ESOP purchased 682,500 shares of the Company’s common stock for approximately $4.9 million. There have been no more purchases of shares of common stock made by the ESOP in 2018, 2019 or during the three months ended September 30, 2020.
The following is a schedule of issuances, since January 1, 2019, of the Company’s common stock and related units of the Operating Partnership:
On May 1, 2020, one holder of units in the Operating Partnership redeemed 57,687 units for an equivalent number of shares in the Company’s common stock
On February 3, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
On January 1, 2020, the Company was issued 45,000 units in the Operating Partnership and awarded shares of restricted stock to two employees.
On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of shares in the Company’s common stock.
On October 1, 2019, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.
On February 11, 2019, the Company was issued 12,750 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.
On February 22, 2019, the Company was issued 250 units in the Operating Partnership and awarded shares of restricted stock to an independent director.
As of September 30, 2020 and December 31, 2019, the Company had 14,881,267 and 14,272,378 shares of common stock outstanding, respectively.
Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.
Since January 1, 2019, there have been no issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.
As of September 30, 2020 and December 31, 2019, the total number of Operating Partnership units outstanding was 16,062,768 and 16,000,518, respectively.
As of September 30, 2020 and December 31, 2019, the total number of outstanding Operating Partnership units not owned by the Company was 1,181,501 and 1,728,140, respectively, with a fair market value of approximately $2.1 million and $11.7 million, respectively, based on the price per share of the common stock on such respective dates.
9. Related Party Transactions
Chesapeake Hospitality. Chesapeake Hospitality is owned and controlled by individuals including Kim E. Sims and Christopher L. Sims, each a former director of Sotherly and a sibling of our Chairman. As of September 30, 2020, Kim E. Sims and Christopher L. Sims, beneficially owned, directly or indirectly, approximately 24.8% and 24.8%, respectively, of the total outstanding ownership interests of Chesapeake Hospitality. Prior to November 2019, Andrew M. Sims, our Chairman, owned approximately 19.3% of the
30
total outstanding ownership interests of Chesapeake Hospitality, all of which have since been sold. The following is a summary of the transactions between Chesapeake Hospitality and us:
Accounts Receivable – At September 30, 2020 and December 31, 2019, we were due $0 and $81,223, respectively, from Chesapeake Hospitality.
Management Agreements – Prior to January 1, 2020, Chesapeake Hospitality was the manager for each of our hotels that we wholly-owned, with the exception of the Hyatt Centric Arlington, under various hotel management agreements. On January 1, 2020, the management agreements for ten of our wholly-owned hotels expired. Those hotels are now managed by Our Town as described below. Effective April 1, 2020, Chesapeake Hospitality no longer serves as manager for any of our properties and management of the remaining properties that had been managed by Chesapeake Hospitality were transitioned to Our Town. Upon the termination of the last remaining individual hotel management agreements with Chesapeake Hospitality, the master agreement with Chesapeake Hospitality automatically terminated in accordance with its terms. In connection with the termination of the individual hotel management agreements with Chesapeake Hospitality, we paid Chesapeake Hospitality approximately $0.2 million in aggregate termination fees.
The master agreement with Chesapeake Hospitality had an initial term of five-years but was automatically extended for so long as an individual management agreement remained in effect. The base management fee under that agreement was 2.50%.
Each management agreement set an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.
Base management and administrative fees earned by Chesapeake Hospitality for our properties were $0 and approximately $1.1 million for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were approximately $0.2 million and approximately $3.6 million, respectively. In addition, estimated incentive management fees were $0 and $(17,335) for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were $40,375 and approximately $0.1 million, respectively.
Employee Medical Benefits – Prior to March 31, 2020, we purchased employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of Chesapeake Hospitality for those employees that are employed by Chesapeake Hospitality that worked exclusively for our hotel properties that were managed by Chesapeake Hospitality. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were $0 and approximately $1.4 million for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were approximately $0.2 million and $4.2 million, respectively.
Workers’ Compensation Insurance – Prior to March 31, 2020, pursuant to our management agreements with Chesapeake Hospitality, we paid the premiums for workers’ compensation insurance under a self-insured policy owned by Chesapeake Hospitality or its affiliates, and which covers those employees of Chesapeake Hospitality that worked exclusively for the properties managed by Chesapeake Hospitality. For the three months ended September 30, 2020 and 2019, we paid $0 and approximately $0.2 million, respectively and for the nine months ended September 30, 2020 and 2019 were approximately $0.1 million and $0.8 million, respectively, in premiums for the portion of the plan covering those employees that work exclusively for our properties under our management agreements with Chesapeake Hospitality.
Our Town Hospitality. Our Town is currently the management company for eleven of our twelve wholly owned hotels. Our Town is a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”). As of September 30, 2020, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 19.5% and 2.5%, respectively, of the total outstanding ownership interests in Our Town. Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights. The following is a summary of the transactions with Our Town:
Management Agreements – On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of ten of our hotels. On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements (each an “OTH Hotel Management Agreement” and, together, the “OTH Hotel Management Agreements”) for the management of ten of our hotels. On April 1, 2020, we engaged Our Town to manage one additional wholly-owned hotel and two condominium resort rental programs. We agreed to provide Our Town with initial working capital of up to $1.0 million as an advance on the management fees that we will owe to Our Town under the OTH Hotel Management Agreements. The advanced funds will be offset against future management fees otherwise payable to Our Town by means of a 25% reduction in such fees each month during 2020. Any management fee advances not recouped in such fashion will be deemed satisfied at the end of 2020. As of September 30, 2020, and December 31, 2019, Sotherly
31
had advanced approximately $0.6 million and $0.6 million, respectively, to Our Town as initial working capital. In addition, the OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2025 but shall be extended beyond 2025 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for each hotel under management with Our Town is 2.50%. For any new individual hotel management agreements, Our Town will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.
Each OTH Hotel Management Agreement sets an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation.
Base management and administrative fees earned by Our Town for our properties was approximately $0.4 million and $0 for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were approximately $1.1 million and $0, respectively.
Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5 year renewal subject to approval by Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third party owner of the property. Lease payments due to the Company were $40,301 and $0 for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were $80,603 and $0, respectively.
Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020, pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit. The agreement, as amended, allows Our Town to borrow up to $850,000. Our Town may draw against the line of credit from time to time prior to January 1, 2021 when the facility becomes payable in full. Interest will accrue on the outstanding balance at 3.5% per annum and is payable quarterly in arrears. In the event of a default under the credit agreement, we have the right to offset any outstanding unpaid balance against amounts we owe to Our Town under the OTH Hotel Management Agreements. As of September 30, 2020, the outstanding credit balance under the credit agreement was approximately $0.6 million.
Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town that work exclusively for our properties and elect to participate in Our Town’s self-insured plan. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $0.5 million and $0 for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were approximately $2.3 million and $0, respectively.
Loan Receivable – Affiliate. As of September 30, 2020 and December 31, 2019, approximately $4.0 million and $4.2 million, respectively, was due to the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016. The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.
Others. We employ Ashley S. Kirkland, the daughter of our Chairman, as Corporate Counsel and Compliance Officer and Robert E. Kirkland IV, her husband, as our General Counsel. We also employ Andrew M. Sims Jr., the son of our Chairman, as Vice President – Operations & Investor Relations. Total compensation, including salary and benefits, for the three months ended September 30, 2020 and 2019 totaled $104,644 and $103,585, and for the nine months ended September 30, 2020 and 2019 were $331,397 and $309,875, respectively for all three individuals.
During the three-month period ending September 30, 2020 and 2019, the Company reimbursed $0 and $26,157, respectively and for the nine months ended September 30, 2020 and 2019, reimbursed $0 and $113,415, respectively to a partnership controlled by our Chairman for business-related air travel pursuant to the Company’s travel reimbursement policy.
10. Retirement Plans
401(k) Plan - We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions include a matching employer contribution to consist of 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. In addition, all employer matching funds vest immediately. We ceased making matching employer contributions effective May 16, 2020. Contributions to the plan totaled $0 and $12,892 for the three months ended September 30, 2020 and 2019, respectively and for the nine months ended September 30, 2020 and 2019 were $42,841 and $63,453, respectively.
32
Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan. Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.
Shares purchased by the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation. As of September 30, 2020, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market at a cost of approximately $4.9 million, which the ESOP borrowed from the Company pursuant to the loan agreement. A total of 130,998 shares with a fair value of $235,796 remained allocated or committed to be released from the suspense account as of September 30, 2020. We recognized as compensation cost $81,740 and $170,700 during the nine months ended September 30, 2020 and 2019, respectively. The remaining 548,490 unallocated shares have an approximate fair value of $987,282, as of September 30, 2020. As of September 30, 2020, the ESOP held a total of 104,625 allocated shares, 26,373 committed-to-be-released shares and 548,490 suspense shares. Dividends on allocated and unallocated shares are used to pay down the ESOP loan from the Operating Partnership. The share allocations are accounted for at fair value on the date of allocation as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
Allocated shares
|
|
|
104,625
|
|
|
$
|
188,325
|
|
|
|
66,295
|
|
|
$
|
449,480
|
|
Committed to be released shares
|
|
|
26,373
|
|
|
|
47,471
|
|
|
|
38,377
|
|
|
|
260,196
|
|
Total Allocated and Committed-to-be-Released
|
|
|
130,998
|
|
|
$
|
235,796
|
|
|
|
104,672
|
|
|
$
|
709,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated shares
|
|
|
548,490
|
|
|
|
987,282
|
|
|
|
574,816
|
|
|
|
3,897,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP Shares
|
|
|
679,488
|
|
|
$
|
1,223,078
|
|
|
|
679,488
|
|
|
$
|
4,606,928
|
|
11. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Sales and marketing
|
|
$
|
1,469,254
|
|
|
$
|
4,164,001
|
|
|
$
|
6,316,638
|
|
|
$
|
12,848,029
|
|
General and administrative
|
|
|
2,462,088
|
|
|
|
3,698,817
|
|
|
|
8,197,401
|
|
|
|
11,511,241
|
|
Repairs and maintenance
|
|
|
1,196,864
|
|
|
|
2,013,706
|
|
|
|
4,031,876
|
|
|
|
5,997,166
|
|
Utilities
|
|
|
1,255,305
|
|
|
|
1,750,826
|
|
|
|
3,659,411
|
|
|
|
4,761,352
|
|
Property taxes
|
|
|
1,899,979
|
|
|
|
1,751,234
|
|
|
|
5,218,265
|
|
|
|
5,212,700
|
|
Management fees, including incentive
|
|
|
380,736
|
|
|
|
1,053,456
|
|
|
|
1,385,142
|
|
|
|
3,792,643
|
|
Franchise fees
|
|
|
443,868
|
|
|
|
1,095,564
|
|
|
|
1,645,448
|
|
|
|
3,597,319
|
|
Insurance
|
|
|
774,153
|
|
|
|
823,420
|
|
|
|
2,293,849
|
|
|
|
2,497,230
|
|
Information and telecommunications
|
|
|
554,901
|
|
|
|
612,988
|
|
|
|
1,607,416
|
|
|
|
1,855,903
|
|
Other
|
|
|
61,647
|
|
|
|
230,136
|
|
|
|
254,955
|
|
|
|
683,944
|
|
Total indirect hotel operating expenses
|
|
$
|
10,498,795
|
|
|
$
|
17,194,148
|
|
|
$
|
34,610,401
|
|
|
$
|
52,757,527
|
|
33
12. Income Taxes
The components of the income tax (benefit) provision for the three and nine months ended September 30, 2020 and 2019 are as follows:
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(125,587
|
)
|
|
$
|
(33,254
|
)
|
|
$
|
(125,587
|
)
|
|
$
|
(125,587
|
)
|
State
|
|
(7,646
|
)
|
|
|
41,839
|
|
|
|
57,667
|
|
|
|
112,741
|
|
|
|
(133,233
|
)
|
|
|
8,585
|
|
|
|
(67,920
|
)
|
|
|
(12,846
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(2,519,202
|
)
|
|
|
(569,928
|
)
|
|
|
(7,440,060
|
)
|
|
|
356,590
|
|
State
|
|
(650,957
|
)
|
|
|
(132,847
|
)
|
|
|
(1,644,624
|
)
|
|
|
95,579
|
|
Subtotals
|
|
(3,170,159
|
)
|
|
|
(702,775
|
)
|
|
|
(9,084,684
|
)
|
|
|
452,169
|
|
Change in deferred tax valuation allowance
|
|
3,170,159
|
|
|
|
—
|
|
|
|
14,496,768
|
|
|
|
—
|
|
|
|
-
|
|
|
|
(702,775
|
)
|
|
|
5,412,084
|
|
|
|
452,169
|
|
|
$
|
(133,233
|
)
|
|
$
|
(694,190
|
)
|
|
$
|
5,344,164
|
|
|
$
|
439,323
|
|
13. Loss Per Share and Per Unit
Loss per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of loss would also be added back to net loss. The shares of the Series B Preferred Stock and Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control, and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The non-committed, unearned ESOP shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average number of common shares outstanding. The allocated and committed to be released shares have been included in the weighted average diluted earnings per share calculation since there would be an antidilutive effect from the dilution by these shares, although the amount of compensation for allocated shares is reflected in net loss attributable to common stockholder for basic computation. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit. The computation of basic and diluted net loss per share is presented below.
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders for basic computation
|
$
|
(12,259,908
|
)
|
|
$
|
(106,827
|
)
|
|
$
|
(43,708,223
|
)
|
|
$
|
(2,492,298
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
14,881,267
|
|
|
|
14,222,378
|
|
|
|
14,852,455
|
|
|
|
14,220,416
|
|
Weighted average number of Unearned ESOP Shares
|
|
(549,620
|
)
|
|
|
(585,672
|
)
|
|
|
(558,656
|
)
|
|
|
(595,656
|
)
|
Total weighted average number of common shares outstanding for basic computation
|
|
14,331,647
|
|
|
|
13,636,706
|
|
|
|
14,293,799
|
|
|
|
13,624,760
|
|
Basic net loss per share
|
$
|
(0.86
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(3.06
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Income Per Unit – The computation of basic and diluted net loss per unit is presented below.
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to general and limited partnership unitholders for basic computation
|
$
|
(13,228,181
|
)
|
|
$
|
(120,164
|
)
|
|
$
|
(47,239,279
|
)
|
|
$
|
(2,803,940
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of general and limited partnership units outstanding
|
|
16,062,768
|
|
|
|
16,000,518
|
|
|
|
16,059,431
|
|
|
|
15,998,556
|
|
Basic net loss per general and limited partnership unit
|
$
|
(0.82
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.94
|
)
|
|
$
|
(0.18
|
)
|
14. Subsequent Events
On October 14, 2020 we entered into a hotel management agreement, effective as of November 15, 2020, with Our Town for the management of the Hyatt Centric Arlington. On November 15, 2020, we expect management of the Hyatt Centric Arlington will transition from Highgate Hotels, L.P. to Our Town. Following the transition, Our Town will manage each of the Company’s twelve wholly-owned hotels, as well as our two condominium hotel rental programs.
On October 22, 2020, we entered into a fourth amendment to loan and security agreement with the mortgage lender for the DoubleTree by Hilton Philadelphia Airport whereby the lender agreed to defer principal, interest, and swap payments for August, September and October, and to defer principal payments through January 2021.
On October 26, 2020, the Board authorized the deferral of payment of the quarterly distribution for the period ending September 30, 2020 for each of the Company’s Series B, Series C, and Series D Preferred Stock (and Preferred Units).
On October 28, 2020, we entered into a note modification agreement with the mortgage lender for the DoubleTree by Hilton Laurel whereby the lender agreed to defer principal payments for an additional three months, through January 5, 2021.
35