Business
Organization
Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust, or REIT, that was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in primary markets in the mid-Atlantic and southern United States. On December 21, 2004, the Company successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. The Company conducts its business through Sotherly Hotels LP, its operating partnership (the “Operating Partnership”), of which the Company is the general partner. The Company owns approximately 89.1% of the partnership units in the Operating Partnership. Limited partners (including certain of the Company’s officers and directors) own the remaining Operating Partnership units.
As of December 31, 2016, our portfolio consisted of twelve full-service, primarily upscale and upper-upscale hotels located in eight states with an aggregate total of 3,011 rooms and approximately 160,928 square feet of meeting space. All of our hotels are wholly-owned by subsidiaries of the Operating Partnership, and all are managed on a day to day basis by MHI Hotels Services, LLC, which does business as Chesapeake Hospitality (“Chesapeake Hospitality”).
In order for the Company to qualify as a REIT, it cannot directly manage or operate our wholly-owned hotels. Therefore, we lease our wholly-owned hotel properties to entities that we refer to as our TRS Lessees, which in turn have engaged Chesapeake Hospitality, an eligible independent management company, to manage our hotels. Our TRS Lessees are wholly-owned subsidiaries of MHI Hospitality TRS Holding, Inc. (“MHI Holding”, and collectively, “MHI TRS”). MHI TRS is a taxable REIT subsidiary for federal income tax purposes.
Our corporate office is located at 410 West Francis Street, Williamsburg, Virginia 23185. Our telephone number is (757) 229-5648.
Our Properties
As of December 31, 2016, our hotels were located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, Texas, and Virginia. Ten of these hotels operate under franchise agreements with major hotel brands, and two are independent hotels. Developments at our properties for the five years ended December 31, 2016 included the following:
| • | In 2013 we acquired the Crowne Plaza Houston Downtown located in Houston, Texas at an aggregate value of approximately $30.9 million, including certain closing costs. |

| • | In 2014, we acquired the Georgian Terrace located in Atlanta, Georgia at an aggregate value of approximately $61.1 million, including certain closing costs. We also, after extensive renovations, re-branded and renamed the Hilton Philadelphia Airport to the DoubleTree by Hilton Philadelphia Airport. |

| • | In 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. We also, after extensive renovations, re-branded and renamed the Crowne Plaza Jacksonville Riverfront to the DoubleTree by Hilton Jacksonville Riverfront, and re-branded and renamed the Holiday Inn Laurel West to the DoubleTree by Hilton Laurel. |

| • | In 2016, after extensive renovations, we re-branded and renamed the Crowne Plaza Houston Downtown to The Whitehall. |

See Items 2 and 7 of this Form 10-K for additional detail on our properties.
Our Strategy and Investment Criteria
Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe that we will be able to source significant external growth opportunities through our management team’s extensive network of industry, corporate and institutional relationships.
5
Our investment criteria are further detailed below:
| • | Geographic Growth Markets: We are focusing our growth strategy on the major markets in the Southern region of the United States. Our management team remains confident in the long-term growth potential associated with this part of the United States. We believe these markets have, during the Company’s and our predecessors’ existence, been characterized by population growth, economic expansion, growth in new businesses and growth in the resort, recreation and leisure segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for acquisitions only if we believe these new markets will provide similar long-term growth prospects. |

| • | Full-Service Hotels: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall primarily under the upscale to upper-upscale categories and include such brands as Hilton, Doubletree by Hilton, Sheraton and Crowne Plaza, as well as independent hotels affiliated with Preferred Hotels & Resorts. We may also acquire commercial unit(s) within upscale to upper-upscale condominium hotel projects, allowing us to establish and operate unit rental programs. We do not own economy hotels. We believe that full-service hotels, in the upscale to upper-upscale categories, will outperform the broader U.S. hotel industry, and thus offer the highest returns on invested capital. |

| • | Significant Barriers to Entry: We intend to execute a strategy that entails the acquisition of hotels in prime locations with significant barriers to entry. |

| • | Proximity to Demand Generators: We seek to acquire hotel properties located in central business districts for both leisure and business travelers within the respective markets, including large state universities, airports, convention centers, corporate headquarters, sports venues and office buildings. We seek to be in walking locations that are proximate to the markets’ major demand generators. |

We typically define underperforming hotels as those that are poorly managed, suffer from significant deferred maintenance and capital investment and that are not properly positioned in their respective markets. In pursuing these opportunities, we hope to improve revenue and cash flow and increase the long-term value of the underperforming hotels we acquire. Our ultimate goal is to achieve a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing hotel. In analyzing a potential investment in an underperforming hotel property, we typically characterize the investment opportunity as one of the following:
| • | Branding Opportunity: The acquisition of properties that includes a repositioning of the property through a change in brand affiliation, which may include positioning the property as an independent hotel. Branding opportunities typically include physical upgrades and enhanced efficiencies brought about by changes in operations. |

| • | Shallow-Turn Opportunity: The acquisition of an underperforming but structurally sound hotel that requires moderate renovation to re-establish the hotel in its market. |

| • | Deep-Turn Opportunity: The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of both the business components of the operations as well as the physical plant of the hotel, including extensive renovation of the building, furniture, fixtures and equipment. |

Typically, in our experience, a deep turn opportunity takes a total of approximately four years from the initial acquisition of a property to achieving full post-renovation stabilization. Therefore, when evaluating future opportunities in underperforming hotels, we intend to focus on up-branding and shallow-turn opportunities, and to pursue deep-turn opportunities on a more limited basis and in joint venture partnerships, if possible.
Investment Vehicles. In pursuit of our investment strategy, we may employ various traditional and non-traditional investment vehicles:
| • | Direct Purchase Opportunity: Our traditional investment strategy is to acquire direct ownership interests via our Operating Partnership in properties that meet our investment criteria, including opportunities that involve full-service, upscale and upper-upscale properties in identified geographic growth markets that have significant barriers to entry for new product delivery. Such properties, or portfolio of properties, may or may not be acquired subject to a mortgage, or other financing or lending instruments, by the seller or third-party. |

| • | Joint Venture/Mezzanine Lending Opportunities: We may, from time to time, undertake a significant renovation and rehabilitation project that we characterize as a deep-turn opportunity. In such cases, we may acquire a functionally obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income commonly referred to as the “negative carry” associated with such extensive renovation programs. We will not pursue joint venture or mezzanine programs in which we would become a “de facto” lender to the real estate community. |

6
Portfolio and Asset Management Strategy
We intend to ensure that the management of our hotel properties maximizes market share, as evidenced by revenue per available room (“RevPAR”) penetration indices, and that our market share yields the optimum level of revenues for our hotels in their respective markets. Our strategy is designed to actively manage our hotels’ operating expenses in an effort to maximize hotel earnings before interest, taxes, depreciation and amortization (“Hotel EBITDA”).
Over our long history in the lodging industry we have refined many portfolio and asset management techniques that we believe provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market trends, one-time or exceptional revenue opportunities, and/or changes in the regulatory climate that may impact costs. We review daily revenue results and revenue management strategies at the hotels, and we focus on our manager’s ability to produce high quality revenues that translate to higher profit margins. We look for ancillary forms of revenues, such as leasing roof-top space for cellular towers and other communication devices and also look to lease space to third parties in our hotels, which may include, but are not limited to, gift shops or restaurants. We have and will continue to engage parking management companies to maximize parking revenue. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal property taxes. We generally appeal tax increases in an effort to secure lower tax payments and routinely pursue strategies that allow for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.
We also require detailed and refined reporting data from Chesapeake Hospitality, which includes detailed accounts of revenues, revenue segments, expenses and forecasts based on current and historic booking patterns. We also believe we optimize and successfully manage capital costs at our hotels while ensuring that adequate product standards are maintained to provide a positive guest experience.
None of our hotels are managed by a major national or global hotel franchise company. Through our long history in the lodging industry, we have found that management of our hotels by management companies other than franchisors is preferable to and more profitable than management services provided by the major franchise companies, specifically with respect to optimization of operating expenses and the delivery of guest service.
Our portfolio management strategy includes our effort to optimize labor costs. The labor force in our hotels is predominately non-unionized, with only one property, the DoubleTree by Hilton Jacksonville Riverfront, having a total of approximately 26 employees electing to participate under a collective bargaining arrangement. Further, the labor force at our hotels is eligible to receive health and other insurance coverage through Chesapeake Hospitality, which self-insures. Self-insuring has, in our opinion and experience, provided significant savings over traditional insurance company sponsored plans.
Asset Disposition Strategy. When a property no longer fits with our investment objectives, we will pursue a direct sale of the property for cash so that our investment capital can be redeployed according to the investment strategies outlined above. Where possible, we will seek to subsequently purchase a hotel in connection with the requirements of a tax-free exchange. Such a strategy may be deployed in order to mitigate the tax consequence that a direct sale may cause.
Our Principal Agreements
Management Agreements
Chesapeake Hospitality is currently the management company for each of our hotels. Andrew M. Sims, our chairman and chief executive officer owns an equity interest in Chesapeake Hospitality. Immediately prior to March 1, 2017, our chairman and chief executive officer, and another of our directors were also directors of Chesapeake Hospitality.
On December 15, 2014, we entered into a master agreement (the “Master Agreement”) and a series of individual hotel management agreements (each a “Hotel Management Agreement” and, together, the “Hotel Management Agreements”) between the Company, the Operating Partnership, and MHI Hospitality TRS, LLC (and other TRS Lessees) on the one hand and Chesapeake Hospitality on the other hand, to address the scheduled expiration of the then existing master management agreement (the “MMA”) and the strategic alliance agreement (the “SA Agreement”) and to provide for ongoing management of the Company’s hotels. The Master Agreement and Hotel Management Agreements terminated and replaced the then existing MMA and individual management agreements.
The Master Agreement:
| • | expires on December 31, 2019, or earlier if all of the Hotel Management Agreements expire or are terminated prior to that date. The Master Agreement will be extended beyond 2019 for such additional periods as a Hotel Management Agreement remains in effect; |

7
| • | terminated the then existing SA Agreement as of December 15, 2014; |

| • | extended the term of the then existing MMA until December 31, 2014 and terminated the MMA and other individual management agreements for Tampa, Houston, and Atlanta as of such date; |

| • | caused the Hotel Management Agreements to come into effect coincident with the termination of the MMA and other individual management agreements on December 31, 2014; |

| • | requires Chesapeake Hospitality to provide dedicated executive level support for our managed hotels pursuant to certain criteria; |

| • | provides a mechanism and established conditions on which the Company will offer Chesapeake Hospitality the opportunity to manage hotels acquired by the Company in the future, pursuant to a negotiated form of single facility management agreement, with the caveat that the Company is not required to offer the management of future hotels to Chesapeake Hospitality; and |

| • | sets an incentive management fee for each of the hotels to be managed by Chesapeake Hospitality equal to 10% of the amount by which gross operating profit, as defined in the Hotel 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. |

Each of the Hotel Management Agreements has a term of five years commencing January 1, 2015, with the exception of the Hotel Management Agreement for the management of the Crowne Plaza Hollywood Beach Resort, which has a term of five years commencing July 31, 2015. Each of the Hotel Management Agreements may be extended for up to two additional periods of five years subject to the approval of both parties with respect to any such extension. The agreements provide that Chesapeake Hospitality will be the sole and exclusive manager of the hotels as the agent of the respective TRS Lessee and at the sole cost and expense of the TRS Lessee and subject to certain operating standards. Each agreement may be terminated in connection with a sale of the related hotel. In connection with a termination upon the sale of the hotel, Chesapeake Hospitality will be entitled to receive a termination fee equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees paid for that number of months prior to the closing date of the hotel sale equal to the number of months remaining on the current term of the Hotel Management Agreement. No sale termination fee will be payable in the event the Company elects to provide Chesapeake Hospitality with the opportunity to manage another comparable hotel and Chesapeake Hospitality is not precluded from accepting such opportunity. Chesapeake Hospitality is required to qualify as an eligible independent contractor in order to permit the Company to continue to operate as a real estate investment trust.
Amounts Payable under the Management Agreements. Chesapeake Hospitality receives a base management fee, and, if the hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.
The base management fee for our hotels will be a percentage of the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our wholly-owned hotels is as follows (1):
| 2019 | 2018 | 2017 | 2016 | 2015 | 2014 |
| Crowne Plaza Hampton Marina (2) | N/A | N/A | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| Crowne Plaza Hollywood Beach Resort | 2.50 | % | 2.50 | % | (3) | (3) | 2.00 | % | N/A |
| Crowne Plaza Tampa Westshore (4) | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| DoubleTree by Hilton Jacksonville Riverfront | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| DoubleTree by Hilton Laurel | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| DoubleTree by Hilton Philadelphia Airport | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| DoubleTree by Hilton Raleigh Brownstone – University | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| Georgian Terrace (5) | 2.50 | % | 2.50 | % | 2.50 | % | 2.25 | % | 2.00 | % | 2.00 | % |
| Hilton Savannah DeSoto | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| Hilton Wilmington Riverside | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| Sheraton Louisville Riverside (6) | 2.50 | % | 2.50 | % | 2.65 | % | 2.65 | % | 2.65 | % | 3.00 | % |
| The Whitehall (7) | 2.50 | % | 2.50 | % | 2.50 | % | 2.25 | % | 2.00 | % | 2.00 | % |

| (1) | The fees for 2014 were set by the MMA, and the individual management agreements for Tampa, Houston, and Atlanta. The fees for 2015-2019 are set by the Master Agreement and the Hotel Management Agreements. |

| (2) | The Crowne Plaza Hampton Marina was sold on February 7, 2017; therefore, the base management fee no longer applies after February 7, 2017. |

8
| (3) | Upon acquiring the Crowne Plaza Hollywood Beach Resort in July 2015, we entered into a single facility management agreement with Chesapeake Hospitality for the management of the hotel. The terms of the agreement provide for a base management fee of 2.00% through July 2016, 2.25% through July 2017, and 2.50% thereafter. |

| (4) | In January 2009, we entered a separate management agreement with Chesapeake Hospitality for the management of the Crowne Plaza Tampa Westshore. The provisions of the new agreement related to base management fee were the same as those contained in the MMA. The provisions of the agreement related to the incentive management fee were the same as those contained in the MMA except that it was calculated separately and not aggregated with the other properties covered by the MMA. |

| (5) | In March 2014, we entered into the Atlanta Agreement with Chesapeake Hospitality for the management of the Georgian Terrace. The terms of the agreement provided for a base management fee of 2.0% and no incentive management fee. The Atlanta Agreement was terminated in connection with the entry into the Master Agreement and Hotel Management Agreements. |

| (6) | Pursuant to the MMA, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was 10 years. The management company agreed to substitute the Sheraton Louisville Riverside for the Holiday Inn Downtown Williamsburg for remainder of the term of the agreement. |

| (7) | In November 2013, we assumed the existing management agreement with Chesapeake Hospitality for the management of the Crowne Plaza Houston Downtown. The terms of the agreement provided for a base management fee of 2.0% and no incentive management fee. |

The base management fee for a hotel acquired in the future which is first leased by our TRS Lessees, other than on the first day of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full year such hotel is managed. There is no fee cap on the base management fee.
Subsequently Acquired Hotel Properties
| First year | 2.00 | % |
| Second year | 2.25 | % |
| Third year and thereafter | 2.50 | % |

Terminated Strategic Alliance Agreement and Management Agreements
On December 21, 2004, we entered into the now terminated ten-year SA Agreement with Chesapeake Hospitality pursuant to which (i) Chesapeake Hospitality agreed to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to Chesapeake Hospitality, and (ii) unless a majority of the Company’s independent directors in good faith concluded for valid business reasons that another management company should manage a hotel owned by us, we agreed to offer Chesapeake Hospitality or its subsidiaries the right to manage hotel properties that we acquired in the United States. The SA Agreement was terminated effective as of December 15, 2014, pursuant to the terms of the Master Agreement.
Pursuant to the terms of the now terminated MMA and other individual management agreements for Tampa, Houston and Atlanta, we engaged Chesapeake Hospitality as the property manager for each of our wholly-owned hotels through December 2015. The MMA had a term of ten (10) years for each initial hotel and a term of ten (10) years for each subsequently acquired hotel that became subject to the MMA. Chesapeake Hospitality benefited from the payment of management fees by us pursuant to the MMA. Chesapeake Hospitality received a base management fee equal to a percentage of each hotel’s revenues (2.0% for the first year, 2.5% for the second year and 3.0% thereafter). Additionally, pursuant to the MMA, Chesapeake Hospitality was entitled to receive certain incentive fees and project management fees. For Tampa, the base management and incentive management fees were the same as those contained in the MMA. For Houston and Atlanta, the base management fee was equal to 2% of the respective hotels’ revenues, and there was no incentive management fee. The MMA and the individual management agreements for Tampa, Houston, and Atlanta were terminated on December 31, 2014, pursuant to the terms of the Master Agreement.
Franchise Agreements
As of December 31, 2016, all but two of our wholly-owned hotels operate under franchise licenses from national hotel companies. On March 27, 2014, we purchased an independent full-service hotel in Atlanta, Georgia, which does not operate under a franchise license. On April 12, 2016, we allowed the Crowne Plaza Houston Downtown’s franchise agreement to expire and rebranded it as The Whitehall, an independent full-service hotel.
Our TRS Lessees hold the franchise licenses for our wholly-owned hotels. Chesapeake Hospitality must operate each of our hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.
9
The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must comply with the franchisors’ standards and requirements with respect to:
| • | training of operational personnel; |

| • | safety; |

| • | maintaining specified insurance; |

| • | the types of services and products ancillary to guest room services that may be provided; |

| • | display of signage; |

| • | marketing techniques including print media, billboards, and promotions standards; and |

| • | the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. |

Additionally, as the franchisee, our TRS Lessees are required to pay the franchise fees described below.
The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties as of December 31, 2016:
| Marketing/ |
| Franchise | Reservation | Expiration |
| Fee (1) | Fee (1) | Date |
| Crowne Plaza Hampton Marina (2) | 5.0 | % | 3.5 | % | 2/7/2017 |
| Crowne Plaza Hollywood Beach Resort (3) | 5.0 | % | 3.5 | % | 10/31/2017 |
| Crowne Plaza Tampa Westshore | 5.0 | % | 3.5 | % | 3/6/2019 |
| DoubleTree by Hilton Jacksonville Riverfront (4) | 5.0 | % | 4.0 | % | 9/30/2025 |
| DoubleTree by Hilton Laurel | 5.0 | % | 4.0 | % | 10/31/2030 |
| DoubleTree by Hilton Philadelphia – Airport (5) | 5.0 | % | 4.0 | % | 10/31/2024 |
| DoubleTree by Hilton Raleigh Brownstone – University (4) | 5.0 | % | 4.0 | % | 11/30/2021 |
| Hilton Savannah DeSoto (6) | 5.0 | % | 4.0 | % | 7/31/2017 |
| Hilton Wilmington Riverside | 5.0 | % | 4.0 | % | 3/31/2018 |
| Sheraton Louisville Riverside | 5.0 | % | 3.5 | % | 4/25/2023 |

| (1) | Percentage of room revenues payable to the franchisor. |

| (2) | The Crowne Plaza Hampton Marina was sold on February 7, 2017, and the franchise license was transferred to the new owners. |

| (3) | We have entered into a franchise agreement with Hilton to rebrand the Hollywood hotel as a DoubleTree by Hilton. |

| (4) | The Franchise Fee is 3.0% for operating year 1, 4.0% for operating year 2, and 5.0% thereafter. |

| (5) | The Franchise Fee is 4.0% for operating years 1 and 2, and 5.0% thereafter. |

| (6) | We intend to convert the Savannah hotel to an independent hotel. |

Lease Agreements
In order for the Company to maintain qualification as a REIT, neither the Company nor the Operating Partnership or its subsidiaries can operate our hotels directly. Our wholly-owned hotels are leased to our TRS Lessees, which have engaged Chesapeake Hospitality to manage the hotels. Each lease has a non-cancelable term of three to thirty years, subject to earlier termination upon the occurrence of certain contingencies described in the lease.
During the term of each lease, our TRS Lessees are obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent accrues and is paid monthly. Percentage rent is calculated by multiplying fixed percentages by gross room revenues, in excess of certain threshold amounts and is paid monthly or quarterly, according to the terms of the agreement.
Tax Status
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2004. In order to maintain its qualification as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute, as “qualifying distributions,” at least 90.0% of its taxable income (determined without regard to the deduction for dividends paid and by
10
excluding its net capital gains and reduced by certain non-cash items) to its stockholders. The Company has adhered to these requirements each taxable year since its formation in 2004 and intends to continue to adhere to these requirements and maintain its qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its taxable income (including its net capital gain) that is distributed to its stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, and no relief provision applies, it will be subject to federal income taxes at regular corporate rates (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the fifth taxable year after the year in which it failed to qualify as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
While the Operating Partnership is generally not subject to federal and state income taxes, the unit holders of the Operating Partnership, including the Company, are subject to tax on their respective allocable shares of the Operating Partnership’s taxable income.
The Company has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership. MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss, through December 31, 2016, of approximately $15.9 million and in addition had deferred timing differences of approximately $0.2 million attributable to start-up expenses related to the opening of several of its hotels, which was not deductible when incurred and is being amortized over 15 years and deferred timing differences of approximately $0.5 million attributable to accrued, but not deductible, vacation and sick pay amounts. The Company has not incurred federal income taxes since its formation. The cumulative taxable loss and combined timing differences result in a net deferred tax asset of approximately $6.9 million for these cumulative deferred tax loss carryforwards.
Environmental Matters
In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel properties.
Employees
As of December 31, 2016, we employed twelve full-time persons, all of whom work at our corporate office in Williamsburg, Virginia. All persons employed in the day-to-day operations of the hotels are employees of Chesapeake Hospitality, the management company engaged by our TRS Lessees to operate such hotels.
Subsequent Events
Hyde Resort & Residences
On January 30, 2017, we purchased the commercial unit of the Hyde Resort & ResidencesTM, a condominium hotel located in the Hollywood, Florida market, for an aggregate price of approximately $4.8 million, including inventory and closing fees. The trademarked Hyde Resort & Residences is operated under license from SBE Hotel Licensing, LLC.
11
We have entered into several agreements related to the Hyde Resort & Residences, which is zoned and operated as a condominium hotel with individual condominium units owned by third parties. In addition to our ownership of the commercial condominium unit, consisting of the designated lobby and front desk areas, we entered into a 20-year Lease Agreement with the condominium association responsible for the operation of the condominium, whereby we lease other common areas, including meeting rooms, office spaces, and 400 parking spaces, and also manage the parking garage. We have also entered into a 20-year Association Management Agreement with the condominium association, whereby we are engaged to manage the condominium association and to operate the Hyde Resort & Residences as a condominium hotel. Individual condominium unit owners may elect for their condominium units to be rented to condominium hotel guests pursuant to a rental management program managed for us by Chesapeake Hospitality pursuant to the Hyde Management Agreement, described below. As part of the rental management program, we have entered into individual rental agreements with condominium unit owners who have chosen to participate in our rental program, and may enter into rental agreements with unit owners in the future. We expect the number of individual condominium unit owners who elect to participate in our rental program to vary, and the number of units available for rental to condominium hotel guests at any given time will fluctuate pursuant to that participation and due to owner occupation of the condominium hotel units.
On February 3, 2017, we entered into a Condominium Hotel Management Agreement (the “Hyde Management Agreement”) with Chesapeake Hospitality for the management of the Hyde Resort & Residences condominium hotel. In accordance with the Master Agreement, the Hyde Management Agreement has an initial term of five years commencing January 30, 2017 and mirrors the material terms of the other Hotel Management Agreements. The terms of the Hyde Management Agreement provide for a base management fee equal to a percentage of gross revenues of the rental of condominium units participating in our rental program in the amount of 2.00% through January 2018, 2.25% through January 2019, and 2.50% thereafter. Pursuant to the Hyde Management Agreement, Chesapeake Hospitality will manage for us the rental of individually owned condominium units pursuant to rental agreements entered into with individual condominium unit owners. We also entered into an Association Sub Management and Assignment Agreement with Chesapeake Hospitality for the management and operation of the condominium association responsible for the operation of the Hyde Resort & Residences, and a Rental Management Agreement pursuant to which Chesapeake Hospitality agreed to manage the marketing and negotiation of rental agreements with individual condominium unit owners.
Crowne Plaza Hampton Marina Disposition
On February 7, 2017, we sold the Crowne Plaza Hampton Marina for a price of approximately $5.6 million. Following the sale, our portfolio consisted of eleven wholly-owned hotels located in seven states with an aggregate total of 2,838 rooms and approximately 149,435 square feet of meeting space, as well as our interests in the Hyde Resort & Residences.
Employee Stock Ownership Plan
Between January 3, 2017 and February 23, 2017, the Company’s Employee Stock Ownership Plan (“ESOP”) purchased 682,500 shares of the Company’s common stock. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP, which was established January 1, 2016, is funded by a loan from the Company, pursuant to which the ESOP may borrow up to $5,000,000 to purchase shares of the Company’s common stock, which serve as collateral for the loan.
Director and Officer Changes
On March 1, 2017, Kim E. Sims resigned as a member of the board of directors of the Company.
Available Information
We maintain an Internet site, http://www.sotherlyhotels.com, which contains additional information concerning Sotherly Hotels Inc. We make available free of charge through our Internet site all our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements and other reports filed with the Securities and Exchange Commission as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We have also posted on this website the Company’s Code of Business Conduct and the charters of the Company’s Nominating, Corporate Governance and Compensation (“NCGC”) and Audit Committees of the Company’s board of directors. We intend to disclose on our website any changes to, or waivers from, the Company’s Code of Business Conduct. Information on the Company’s Internet site is neither part of nor incorporated into this Form 10-K.
12
Item 1A.
Ri
sk Factors
The following are the material risks that may affect us. Any of the risks discussed herein can materially adversely affect our business, liquidity, operations, industry or financial position or our future financial performance.
Risks Related to Our Debt
We have substantial financial leverage.
As of December 31, 2016, the principal balance of our debt was approximately $309.8 million, which is comprised of approximately $284.5 million secured debt and approximately $25.3 million unsecured debt related to the 7.0% senior unsecured notes due November 20, 2019 (the “7% Notes”) (not accounting for reductions of unamortized premiums or deferred financing costs as shown on our balance sheet). Historically, we have incurred debt for acquisitions and to fund our renovation, redevelopment and rebranding programs. Limitations upon our access to additional debt could adversely affect our ability to fund these programs or acquire hotels in the future.
Our financial leverage could negatively affect our business and financial results, including the following:
| • | require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, working capital, capital expenditures, future business opportunities, paying dividends or other purposes; |

| • | limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements and other purposes; |

| • | adversely affect our ability to satisfy our financial obligations, including those related to the 7% Notes; |

| • | limit our ability to refinance existing debt; |

| • | require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing; |

| • | force us to dispose of one or more of our properties, possibly on unfavorable terms; |

| • | increase our vulnerability to adverse economic and industry conditions, and to interest rate fluctuations; |

| • | force us to issue additional equity, possibly on terms unfavorable to existing shareholders; |

| • | limit our flexibility to make, or react to, changes in our business and our industry; and |

| • | place us at a competitive disadvantage, compared to our competitors that have less debt. |

We must comply with financial covenants in our mortgage loan agreements and in the indenture.
Our mortgage loan agreements and indenture contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.
If we violate the financial covenants contained in our mortgage loan agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.
If we violate the financial covenants in the indenture, we may attempt to cure that violation by engaging in one or more transactions pursuant to the cure provision in the indenture.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through debt financing, private or public offerings of debt securities, additional equity financing, or by disposing of an asset. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.
13
We have one mortgage debt obligation maturing in 2018, and if we are not successful in extending the term of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our overall financial condition could be materially and adversely affected.
We will be required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all.
In August 2018, the mortgage on our DoubleTree by Hilton Raleigh Brownstone University matures, and we have additional significant obligations maturing in subsequent years.
We have no material debt obligations maturing in 2017. The total aggregate amount of our debt obligations scheduled to mature in 2018, inclusive of monthly amortization of all our indebtedness, is approximately $24.6 million, which represents approximately 7.9% of our total debt obligation outstanding as of December 31, 2016.
We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to the respective maturity date. If we are unable to extend this loan, we may be required to repay the outstanding principal amount at maturity or a portion of such indebtedness upon refinance. If we do not have sufficient funds to repay any portion of the indebtedness, it may be necessary to raise capital through debt financing, private or public offerings of debt securities or equity financings. We are uncertain whether we will be able to refinance this obligation or if refinancing terms will be favorable. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available to meet our financial obligations. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies or we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses and potentially reducing cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be reinvested in equally profitable real property investments. Moreover, the terms of any additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the extent we cannot repay our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.
For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder the Company’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity.
Our borrowing costs are sensitive to fluctuations in interest rates.
Higher interest rates could increase our debt service requirements and interest expense. Currently, our floating rate debt is limited to the mortgages on the DoubleTree by Hilton Philadelphia Airport, the DoubleTree by Hilton Jacksonville Riverfront, the Crowne Plaza Tampa Westshore and The Whitehall. Each of these mortgages bears interest at rates tied to the 1-month London Interbank Offered Rate (“LIBOR”) and provide for minimum rates of interest. To the extent that increases in the LIBOR rate of interest cause the interest on the mortgages to exceed the minimum rates of interest, we are exposed to rising interest rates.
Should we obtain new debt financing or refinance existing indebtedness, we may increase the amount of floating rate debt that currently exists. In addition, adverse economic conditions could also cause the terms on which we borrow to be unfavorable.
Risks Related to Our Business and Properties
If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance and financial results may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.
The performance of the lodging industry and the general economy historically have been closely linked. In an economic downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels, which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating revenues, which will lower our cash flow and may affect our ability to make distributions to stockholders and to maintain compliance with our loan obligations. We had net loss attributable to the common shareholders of approximately $0.2 million for the 2016 fiscal year. A renewed economic downturn may increase our losses or reduce our income in the future. A weakening of the economy may adversely and materially affect our industry, business and results of operations and we cannot predict the likelihood, severity or duration of any such downturn. Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term business strategy.
14
We own a limited number of hotels and significant adverse changes at one hotel could have a material adverse effect on our financial performance and may limit our ability to make distributions to stockholders.
As of December 31, 2016, our portfolio consisted of twelve wholly-owned hotels with a total of 3,011 rooms. Significant adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly, on our ability to make distributions to stockholders. Following the sale of the Crowne Plaza Hampton Marina on February 7, 2017, our portfolio consisted of eleven wholly-owned hotels with a total of 2,838 rooms, as well as our interests in the Hyde Resort & Residences.
We are subject to risks of increased hotel operating expenses and decreased hotel revenues.
Our leases with our TRS Lessees provide for the payment of rent based in part on gross revenues from our hotels. Our TRS Lessees are subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but not limited to the following:
| • | wage and benefit costs; |

| • | repair and maintenance expenses; |

| • | energy costs; |

| • | property taxes; |

| • | insurance costs; and |

| • | other operating expenses. |

Any increases in these operating expenses can have a significant adverse impact on our TRS Lessees’ ability to pay rent and other operating expenses and, consequently, our earnings and cash flow.
In keeping with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.
We have in the past, and may in the future, develop or acquire hotels in geographic areas in which our management may have little or no operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient demand at new hotel properties, therefore, could adversely affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.
We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our returns are dependent on the management of our hotels by Chesapeake Hospitality.
Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or manage our hotels. Instead, we lease all of our hotels to our TRS Lessees, and our TRS Lessees retain third-party managers to operate our hotels pursuant to management agreements.
Under the terms of our management agreements with Chesapeake Hospitality and the REIT qualification rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on Chesapeake Hospitality to operate our hotels as provided in the management agreements. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel. Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR, and average daily rates (“ADR”), we may not be able to force Chesapeake Hospitality to change its method of operating our hotels. Additionally, in the event that we need to replace Chesapeake Hospitality or any other management companies in the future, we may be required by the terms of the applicable management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
15
Our ability to make distributions to the Company’s stockholders is subject to fluctuations in our financial performance, operating results and capital improvement requirements.
As a REIT, the Company is required to distribute, as “qualifying distributions,” at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items), each year to the Company’s stockholders. However, several factors may make us unable to declare or pay distributions to the Company’s stockholders, including poor operating results and financial performance or unanticipated capital improvements to our hotels, including capital improvements that may be required by our franchisors.
We lease all of our hotels to our TRS Lessees. Our TRS Lessees are subject to hotel operating risks, including risks of sustaining operating losses after payment of hotel operating expenses, including management fees. Among the factors which could cause our TRS Lessees to fail to make required rent payments are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among the factors that could reduce the net operating profits of our TRS Lessees are decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates at our hotels.
The amount of any dividend distributions to holders of the Company’s common stock is in the sole discretion of the Company’s board of directors, which will consider, among other factors, our financial performance, debt service obligations, debt covenants and capital expenditure requirements. We cannot assure you that we will continue to generate sufficient cash to fund distributions.
Geographic concentration of our hotels makes our business vulnerable to economic downturns in the mid-Atlantic and southern United States.
Our hotels are located in the mid-Atlantic and southern United States. As a result, economic conditions in the mid-Atlantic and southern United States significantly affect our revenues and the value of our hotels to a greater extent than if we had a more geographically diversified portfolio. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any resulting oversupply or reduced demand for hotels in the mid-Atlantic and southern United States and in our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.
A substantial number of our hotels operate under a brand owned by Hilton Worldwide (Hilton), InterContinental Hotels Group (IHG) and Marriott International, Inc. (Marriott) brands; therefore, we are subject to risks associated with concentrating our portfolio in three brands.
In our portfolio, the majority of the hotels that we owned as of December 31, 2016 utilize brands owned by IHG, Marriott or Hilton. As a result, our success is dependent in part on the continued success of IHG, Marriott or Hilton and their respective brands. If market recognition or the positive perception of IHG, Marriott and/or Hilton is reduced or compromised, the goodwill associated with the IHG, Marriott and Hilton branded hotels in our portfolio may be adversely affected, which may have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
Hedging against interest rate exposure may adversely affect us and our hedges may fail to protect us from the losses that the hedges were designed to offset.
Subject to maintaining the Company’s qualification as a REIT, we may elect to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:
| • | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |

| • | available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; |

| • | the financial instruments we select may not have the effect of reducing our interest rate risk; |

| • | the duration of the hedge may not match the duration of the related liability; |

| • | the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |

| • | the hedging counterparty owing money in the hedging transaction may default on its obligation to pay. |

16
As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, may fail to protect us from the losses that the hedges were designed to offset and could have a material adverse effect on us.
Our investment opportunities and growth prospects may be affected by competition for acquisitions.
We compete for investment opportunities with other entities, some of which have substantially greater financial resources than we do. This competition may generally limit the number of suitable investment opportunities offered to us, which may limit our ability to grow. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms, or at all.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which could harm our business and the value of the Company’s shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. Our internal controls and financial reporting are not subject to attestation by our independent registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. While we have undertaken substantial work to comply with Section 404, we cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future. We may in the future discover areas of our internal controls that need improvement. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of the Company’s shares. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. In 2014, we identified a material weakness in our internal control over financial reporting which has been remediated.
We are subject to cyber-security risks related to breaches of security pertaining to sensitive company, customer, employee and vendor information as well as breaches in the technology that manages operations and other business processes.
Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation, updating and independent third party verification, our information technology systems, and those of our third party providers, could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation including, but not limited to interruption to systems availability, denial of access to and misuse of applications required by our customers. Access to internal applications required to plan our operations could be denied or misused. Inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents. Any of these operational disruptions and/or misappropriation of information could result in lost sales, business delays, and negative publicity and could have a material effect on our business.
Risks Related to Conflicts of Interest of Our Officers and Directors
Conflicts of interest could result in our executive officers and certain of our directors acting in a manner other than in the Company’s stockholders’ best interest.
Conflicts of interest relating to Chesapeake Hospitality, the entity that manages the properties, and the terms of its management agreements may lead to management decisions that are not in the stockholders’ best interest.
Conflicts of interest relating to Chesapeake Hospitality may lead to management decisions that are not in the stockholders’ best interest. Andrew M. Sims, our chairman and chief executive officer, and Kim E. Sims, a former member of our board of directors, together own a substantial interest in Chesapeake Hospitality which manages our hotel properties.
Our management agreements establish the terms of Chesapeake Hospitality’s management of our hotels. The new Master Agreement provides that in the event the agreement is terminated in connection with the sale of a hotel, and Chesapeake Hospitality accepts an offer to manage another hotel which is reasonable comparable to the hotel that was sold, we will not be liable for any termination fee. If we do not offer Chesapeake Hospitality such opportunity or Chesapeake Hospitality declines such opportunity, then a termination fee equivalent to the lesser of the management fees paid for the prior twelve-month period or the management fees for the period prior to the sale that is equal to the number of months remaining under the term of the agreement will be due. If we terminate the agreement at the end of any renewable five-year term, Chesapeake Hospitality is due a termination fee equivalent to one month’s management fees, as determined under the agreement.
17
As a significant owner of Chesapeake Hospitality, which would receive any management and management termination fees payable by us under the management agreement, Andrew M. Sims may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best interests of the Company’s stockholders to do so. In addition, Andrew M. Sims will have conflicts of interest with respect to decisions to enforce provisions of the management agreement, including any termination thereof.
There can be no assurance that provisions in our bylaws will always be successful in mitigating conflicts of interest.
Under our bylaws, a committee consisting of only independent directors must approve any transaction between us and Chesapeake Hospitality or its affiliates or any interested director. However, there can be no assurance that these policies always will be successful in mitigating such conflicts, and decisions could be made that might not fully reflect the interests of all of the Company’s stockholders.
Certain of our officers and directors control trusts that hold units in our Operating Partnership and may seek to avoid adverse tax consequences, which could result from transactions that would otherwise benefit the Company’s stockholders.
Holders of units in our Operating Partnership, including trusts controlled in whole or part by members of our management team, may suffer adverse tax consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including a trust controlled by Andrew M. Sims and two former members of our board of directors, and a charitable trust controlled by Edward S. Stein, may have different objectives than holders of the Company’s stock regarding the appropriate pricing and timing of a property’s sale, or the timing and amount of a property’s refinancing. As of December 31, 2016, these trusts owned approximately 1.0% of the outstanding units in our Operating Partnership. Although the individuals controlling the trusts do not have any beneficial interest in the trusts, they may influence us not to sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to the Company’s stockholders, or may influence us to enter into tax-deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.
Our agreements with Chesapeake Hospitality and its affiliates, including the contribution agreements and the partnership agreement of our Operating Partnership, were not negotiated on an arms’ length basis and may be less favorable to us than we could have obtained from third parties.
In connection with the Company’s initial public offering, we entered into various agreements with Chesapeake Hospitality and its affiliates, including contribution agreements, a master management agreement, a strategic alliance agreement, subleases, the partnership agreement of our Operating Partnership and employment agreements – of which only the contribution agreements and the partnership agreement of our Operating Partnership have not expired. In addition, we entered into various separate management agreements with Chesapeake Hospitality which have all been superseded by the new master management agreement and new individual hotel agreements executed in December 2014. The terms of all of these agreements were determined by our management team, who had conflicts of interest as described above and ownership interests in Chesapeake Hospitality and its affiliates. The terms of all of these agreements may be less favorable to us than we could have obtained from third parties.
Risks Related to the Lodging Industry
Our ability to comply with the terms of the indenture, our ability to make distributions to the Company’s stockholders and the value of our hotels in general, may be adversely affected by factors in the lodging industry.
Operating Risks
Our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
| • | competition from other hotel properties in our markets; |

| • | over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels; |

| • | dependence on business and commercial travelers and tourism; |

| • | increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists; |

| • | increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by increased room rates; |

| • | changes in interest rates and in the availability, cost and terms of debt financing; |

| • | changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; |

18
| • | adverse effects of international, national, regional and local economic and market conditions; |

| • | adverse effects of a downturn in the lodging industry; and |

| • | risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below. |

These factors could reduce the net income of our TRS Lessees, which in turn could adversely affect the value of our hotels and our ability to comply with the terms of the indenture and to make distributions to the Company’s stockholders.
Competition for Acquisitions
We may compete for investment opportunities with entities that may have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Seasonality of the Hotel Business
The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to the Company’s stockholders.
Investment Concentration in Particular Segments of a Single Industry
Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the full-service, upscale and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our financial condition and the extent to which cash may be available for distribution to the Company’s stockholders.
Capital Expenditures
Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts for capital improvements to the secured properties on a monthly basis. For the years ended December 31, 2016 and 2015, we spent approximately $14.8 million and approximately $20.1 million, respectively, on capital improvements to our hotels. Capital improvements and renovation projects may give rise to the following risks:
| • | possible environmental problems; |

| • | construction cost overruns and delays; |

| • | a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; and |

| • | uncertainties as to market demand or a loss of market demand after capital improvements have begun. |

The costs of all these capital improvements as well as future capital improvements could adversely affect our financial condition and amounts available for distribution to the Company’s stockholders.
Operating our hotels under franchise agreements could increase our operating costs and lower our net income.
Most of our hotels operate under franchise agreements which subject us to risks in the event of negative publicity related to one of our franchisors.
The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that we, our TRS Lessees, and the management company follow their standards. Failure by us, our TRS Lessees or the management company to maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel. As a condition of continuing a franchise license, a franchisor may require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.
19
If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license or to operate the hotel without a franchise license. The loss of a franchise license could significantly decrease the revenues at the hotel and reduce the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations, our ability to comply with the terms of the indenture and reduce our cash available for distribution to stockholders.
Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or refinance our hotels, which could have a material adverse effect on us.
Franchise agreements typically contain covenants that may affect our ability to sell or refinance a hotel, including requirements to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisor’s consent is not forthcoming, the terms of a sale or refinancing may be less favorable to us than would otherwise be the case. Some of our franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the transferee agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels, we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less favorable to us, which could have a material adverse effect on our financial condition and the execution of our strategies.
Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to make distributions to stockholders.
We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general economic conditions, and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks, including risks associated with:
| • | construction delays or cost overruns that may increase project costs; |

| • | receipt of zoning, occupancy and other required governmental permits and authorizations; |

| • | development costs incurred for projects that are not pursued to completion; |

| • | acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project; |

| • | financing; and |

| • | governmental restrictions on the nature or size of a project. |

We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a project on time or within budget would increase our operating costs and reduce our net income.
The hotel business is capital intensive and our inability to obtain financing could limit our growth.
Our hotel properties will require periodic capital expenditures and renovation to remain competitive. Acquisitions or development of additional hotel properties will require significant capital expenditures. In addition, several of our mortgage lenders require that we set aside annual amounts for capital improvements to the secured property. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we must distribute at least 90.0% of our REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status. As a result, our ability to fund significant capital expenditures, acquisitions or hotel development through retained earnings is very limited. Consequently, we rely upon the availability of debt or equity capital to fund any significant investments or capital improvements. Our ability to grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity financing which will depend on market conditions. Neither our charter nor our bylaws limit the amount of debt that we can incur. However, we cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.
20
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to the Company’s stockholders.
We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like hurricanes, earthquakes and floods, such as Hurricane Matthew in October 2016 and Hurricane Sandy in October 2012, losses from foreign terrorist activities, such as those on September 11, 2001, or losses from domestic terrorist activities, such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage in conjunction with the Terrorism Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured losses resulting from acts of terrorism.
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
Noncompliance with governmental regulations could adversely affect our operating results.
Environmental Matters
Our hotels may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:
| • | our knowledge of the contamination; |

| • | the timing of the contamination; |

| • | the cause of the contamination; or |

| • | the party responsible for the contamination of the property. |

There may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.
The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to comply with our covenants and to pay distributions to stockholders.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to comply with the terms of the indenture and to make distributions to the Company’s stockholders could be adversely affected.
Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
The hotel properties that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might include:
| • | liabilities for environmental conditions; |

| • | losses in excess of our insured coverage; |

| • | accrued but unpaid liabilities incurred in the ordinary course of business; |

21
| • | tax, legal and regulatory liabilities; |

| • | claims of customers, vendors or other persons dealing with the Company’s predecessors prior to our formation or acquisition transactions that had not been asserted or were unknown prior to the Company’s formation or acquisition transactions; and |

| • | claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of our properties. |

In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations and our ability to make distributions to the Company’s stockholders.
Future terrorist activities may adversely affect, and create uncertainty in, our business.
Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years. Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and/or our results of operations and financial condition, as a whole.
We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for our hotels.
Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the outbreaks of SARS and avian flu in 2003 had a severe impact on the travel industry, the outbreaks of H1N1 flu in 2009 threatened to have a similar impact, and the perceived threat of a Zika virus outbreak in 2016 had an impact on the south Florida market. A prolonged recurrence of SARS, avian flu, H1N1 flu, Ebola virus, Zika virus or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for our hotels and adversely affect our financial conditions and results of operations.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions is limited.
The real estate market is affected by many factors that are beyond our control, including:
| • | adverse changes in international, national, regional and local economic and market conditions; |

| • | changes in interest rates and in the cost and terms of debt financing; |

| • | absence of liquidity in credit markets which limits the availability and amount of debt financing; |

| • | changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; |

| • | the ongoing need for capital improvements, particularly in older structures; |

| • | changes in operating expenses; and |

| • | civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Matthew in October 2016 and Hurricane Sandy in October 2012, which may result in uninsured losses, and acts of war or terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001. |

22
We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to comply with the terms of the indenture and to pay distributions to stockholders.
Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder dilution.
Our business strategy may not ultimately be successful and may not provide positive returns on our investments. Acquisitions may cause disruptions in our operations and divert management’s attention away from day-to-day operations. The issuance of equity securities in connection with any acquisition could be substantially dilutive to the Company’s stockholders.
Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, the presence of significant mold could expose us to liability from our guests, employees or the management company and others if property damage or health concerns arise and could harm our reputation.
Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to make distributions to the Company’s stockholders.
Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to make distributions to the Company’s stockholders could be materially and adversely affected and the market price of the Company’s shares could decline.
Risks Related to Our Organization and Structure
Our ability to effect a merger or other business combination transaction may be restricted by our Operating Partnership agreement.
In the event of a change of control of the Company, the limited partners of our Operating Partnership will have the right, for a period of 30 days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the partnership agreement. This cash redemption right may make it more unlikely or difficult for a third party to propose or consummate a change of control transaction, even if such transaction were in the best interests of the Company’s stockholders.
Provisions of the Company’s charter may limit the ability of a third party to acquire control of the Company.
Aggregate Share and Common Share Ownership Limits
The Company’s charter provides that no person may directly or indirectly own more than 9.9% of the value of the Company’s outstanding shares of capital stock or more than 9.9% of the number of the Company’s outstanding shares of common stock. These ownership limitations may prevent an acquisition of control of the Company by a third party without the Company’s board of directors’ approval, even if the Company’s stockholders believe the change of control is in their interest. The Company’s board of directors has discretion to waive that ownership limit if, including other considerations, the board receives evidence that ownership in excess of the limit will not jeopardize the Company’s REIT status.
23
Authority to Issue Stock
The Company’s amended and restated charter authorizes our board of directors to issue up to 49,000,000 shares of common stock and up to 11,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of the Company, including transactions at a premium over the market price of the Company’s stock, even if stockholders believe that a change of control is in their interest. The Company will be able to issue additional shares of common or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company’s securities may be listed or traded.
Provisions of Maryland law may limit the ability of a third party to acquire control of the Company.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of the Company’s common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
| • | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10.0% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and |

| • | “control share” provisions that provide that “control shares” of the Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by the Company’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |

The Company has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the Company’s board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in the Company’s bylaws. However, the Company’s board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and the Company may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. The Company’s board of directors has the exclusive power to amend the Company’s bylaws.
Additionally, Title 8, Subtitle 3 of the MGCL permits the Company’s board of directors, without stockholder approval and regardless of what is currently provided in the Company’s charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) the Company does not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for the Company or of delaying, deferring or preventing a change in control of the Company under the circumstances that otherwise could provide the holders of the Company’s common stock with the opportunity to realize a premium over the then current market price.
Provisions in the Company’s executive officers’ employment agreements may make a change of control of the Company more costly or difficult.
The Company’s employment agreements with Andrew M. Sims, its chief executive officer, David R. Folsom, its president and chief operating officer, and Anthony E. Domalski, its chief financial officer, contain provisions providing for substantial payments to these officers in the event of a change of control of the Company. Specifically, if the Company terminates these executive’s employment without cause or the executive resigns with good reason, which includes a failure to nominate Andrew M. Sims to the Company’s board of directors or his involuntary removal from the Company’s board of directors, unless for cause or by vote of the stockholders, or if there is a change of control, each of these executives is entitled to the following:
| • | any accrued but unpaid salary and bonuses; |

| • | vesting of any previously issued stock options and restricted stock; |

| • | payment of the executive’s life, health and disability insurance coverage for a period of five years following termination; |

| • | any unreimbursed expenses; and |

| • | a severance payment equal to three times for Andrew M. Sims’, David R. Folsom’s and Anthony E. Domalski’s respective combined salary and actual bonus compensation for the preceding fiscal year. |

24
In addition, these executives will receive additional payments to compensate them for the additional taxes, if any, imposed on them under Section 4999 of the Code by reason of receipt of excess parachute payments. We will not be able to deduct any of the above amounts paid to the executives for tax purposes.
These provisions may make a change of control of the Company, even if it is in the best interests of the Company’s stockholders, more costly and difficult and may reduce the amounts the Company’s stockholders would receive in a change of control transaction.
Our ownership limitations may restrict or prevent you from engaging in certain transfers of the Company’s common stock or preferred stock.
In order to maintain the Company’s REIT qualification, it cannot be closely held (i.e., more than 50.0% in value of our outstanding stock cannot be owned, directly or indirectly, by five or fewer individuals during the last half of any taxable year). To preserve the Company’s REIT qualification, the Company’s charter contains a 9.9% aggregate share ownership limit and a 9.9% common share ownership limit. Generally, any shares of the Company’s stock owned by affiliated persons will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.
If anyone transfers shares in a way that would violate the aggregate share ownership limit or the common share ownership limit, or prevent the Company from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or fails to preserve the Company’s continued qualification as a REIT, then the Company will consider the initial intended transfer to be null and void from the outset. The intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires shares in violation of the aggregate share ownership limit, the common share ownership limit or the other restrictions on transfer in the Company’s charter bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of the Company’s stock falls between the date of purchase and the date of redemption or sale.
The Company’s articles supplementary establishing and fixing the rights and preferences of Series B preferred stock provide that no person may directly or indirectly own more than 9.9% of the aggregate number of outstanding shares of Series B preferred stock, excluding any outstanding shares of Series B preferred stock not treated as outstanding for federal income tax purposes. The Company’s board of directors has discretion to waive that ownership limit if, including other considerations, the board receives evidence that ownership in excess of the limit will not jeopardize the Company’s REIT status.
Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.
Our board of directors has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of December 31, 2016, 1,610,000 shares of our 8.0% Series B Cumulative Redeemable Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding preferred shares is approximately $40.3 million, and annual dividends on our outstanding preferred shares are approximately $3.2 million. Holders of our Series B Preferred Stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of these preferred shares have the right to elect two additional directors to our board of directors whenever dividends on the preferred shares are in arrears in an aggregate amount equivalent to six or more quarterly dividends (whether or not consecutive). Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future preferred offerings. Thus, our stockholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interest.
The change of control conversion and redemption features of the Series B Preferred Stock may make it more difficult for a party to take over our Company or discourage a party from taking over our Company.
Upon a change of control (as defined in our charter), holders of our Series B Preferred Stock will have the right (unless, as provided in our charter, we have provided or provide notice of our election to exercise our special optional redemption right before the relevant date) to convert some or all of their shares of our Series B Preferred Stock into shares of our common stock (or equivalent value of alternative consideration). Upon such a conversion, holders will be limited to a maximum number of shares equal to the share cap, subject to adjustments. If the common stock price is less than $3.015, subject to adjustment, holders will receive a maximum of
25
8.29187 shares of our common stock per share of Series B Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series B Preferred Stock. In addition, those features of our Series B Preferred Stock may have the effect of inhibiting or discouraging a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of shares of our common stock and shares of our Series B Preferred Stock with the opportunity to realize a premium over the then current market price or that stockholders may otherwise believe is in their best interests.
The board of directors’ revocation of the Company’s REIT status without stockholder approval may decrease the Company’s stockholders’ total return.
The Company’s charter provides that the Company’s board of directors may revoke or otherwise terminate the Company’s REIT election, without the approval of the Company’s stockholders, if the Company’s board of directors determines that it is no longer in the Company’s best interest to continue to qualify as a REIT. If the Company ceases to be a REIT, it would become subject to federal income tax on its taxable income and would no longer be required to distribute most of its taxable income to the Company’s stockholders, which may have adverse consequences on our total return to the Company’s stockholders.
The ability of the Company’s board of directors to change the Company’s major corporate policies may not be in your best interest.
The Company’s board of directors determines the Company’s major corporate policies, including its acquisition, financing, growth, operations and distribution policies. The Company’s board of directors may amend or revise these and other policies from time to time without the vote or consent of the Company’s stockholders.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our chairman and chief executive officer, Andrew M. Sims; our president and chief operating officer, David R. Folsom; and our chief financial officer, Anthony E. Domalski, to manage our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations.
Federal Income Tax Risks Related to the Company’s Status as a REIT
The federal income tax laws governing REITs are complex.
The Company intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. The Company has not requested or obtained a ruling from the Internal Revenue Service, or the IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that the Company will be successful in operating in a manner that will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of the Company’s qualification as a REIT. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. The Company and its stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect the Company’s ability to qualify as a REIT.
Failure to make distributions could subject the Company to tax.
In order to maintain its qualification as a REIT, each year the Company must pay out to its stockholders in distributions, as “qualifying distributions,” at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid and excluding net capital gains and reduced by certain non-cash items. To the extent that the Company satisfies this distribution requirement, but distributes less than 100.0% of its taxable income (including its net capital gain), it will be subject to federal corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a 4.0% nondeductible excise tax if the actual amount that it pays out to its stockholders as a “qualifying distribution” for a calendar year is less than the sum of: (A) 85.0% of our ordinary income for such calendar year, plus (B) 95.0% of our capital gain net income for such calendar year. The Company’s only recurring source of funds to make these distributions comes from rent received from its TRS Lessees whose only recurring source of funds with which to make these payments and distributions is the net cash flow (after payment of operating and other costs and expenses and management fees) from hotel operations, and any dividend and other distributions that we may receive from MHI Holding. Accordingly, the Company may be required to borrow money or sell assets to make distributions sufficient to enable it to pay out enough of its taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4.0% nondeductible excise tax in a particular year.
26
Failure to qualify as a REIT would subject the Company to federal income tax.
If the Company fails to qualify as a REIT in any taxable year, it will be required to pay federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause the Company to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results in order to pay any such tax. Unless it is entitled to relief under certain statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost its qualification. If the Company lost its REIT status, its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, the Company would no longer be required to make distributions to its stockholders, and it would not be able to deduct any stockholder distributions in computing its taxable income. This would substantially reduce the Company’s earnings, cash available to pay distributions, and the value of common stock.
Failure to qualify as a REIT may cause the Company to reduce or eliminate distributions to its stockholders, and the Company may face increased difficulty in raising capital or obtaining financing.
If the Company fails to remain qualified as a REIT, it may have to reduce or eliminate any distributions to its stockholders in order to satisfy its income tax liabilities. Any distributions that the Company does make to its stockholders would be treated as taxable dividends to the extent of its current and accumulated earnings and profits. This may result in negative investor and market perception regarding the market value of the Company’s stock, and the value of its stock may be reduced. In addition, the Company and the Operating Partnership may face increased difficulty in raising capital or obtaining financing if the Company fails to qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of its market valuation.
If MHI Holding exceeds certain value thresholds, this could cause the Company to fail to qualify as a REIT.
For taxable years of the Company ending on or before December 31, 2017, at the end of each quarter of each taxable year of the Company, no more than 25.0% of the value of the Company’s total assets may consist of securities of one or more taxable REIT subsidiaries (“TRSs”). For taxable years of the Company ending after December 31, 2017, at the end of each quarter of each taxable year of the Company, no more than 20.0% of the value of the Company’s total assets may consist of securities of one or more TRSs. MHI Holding is a TRS and the Company may form other TRSs in the future. The Company plans to monitor the value of its shares of MHI Holding and of any other TRS the Company may form. However, there can be no assurance that the Internal Revenue Service will not attempt to attribute additional value to the shares of MHI Holding or to the shares of any other TRS that the Company may form. If the Company is treated as owning securities of one or more TRSs with an aggregate value that is in excess of the thresholds outlined above, the Company could lose its status as a REIT or become subject to penalties.
Even if the Company remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.
Even if the Company remains qualified for taxation as a REIT, it may be subject to certain federal, state and local taxes on its income and assets. For example:
| • | it will be required to pay tax on undistributed REIT taxable income (including net capital gain); |

| • | it may be required to pay “alternative minimum tax” on its items of tax preference; |

| • | if it has net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it must pay tax on that income at the highest corporate rate; |

| • | if it (or the Operating Partnership or any subsidiary of the Operating Partnership other than MHI Holding) sells a property in a “prohibited transaction,” its gain, or its share of such gain, from the sale would be subject to a 100.0% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business; |

| • | MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its taxable income; and |

| • | it may experience increases in its state and/or local income tax burdens as states and localities continue to look to modify their tax laws in order to raise revenues, including by (among other things) changing from a net taxable income-based regime to a gross receipts-based regime, suspending and/or limiting the use of net operating losses, increasing tax rates and fees, imposing surcharges and subjecting partnerships to an entity-level tax, and limiting or disallowing certain U.S. federal deductions such as the dividends-paid deduction. |

27
Complying with REIT requirements may cause the Company to forgo attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its stock.
In general, when applying these tests, the Company is treated as owning its proportionate share of the Operating Partnership’s assets (which share is determined in accordance with the Company’s capital interest in the Operating Partnership) and as being entitled to the Operating Partnership’s income attributable to such share. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our stockholders.
Complying with REIT requirements may force the Company to liquidate otherwise attractive investments, which could result in an overall loss on its investments.
To maintain qualification as a REIT, the Company must ensure that at the end of each calendar quarter at least 75.0% of the value of its assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of the Company’s assets (other than securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of the Company’s assets (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0% (20.0% for taxable years beginning after December 31, 2017) of the value of the Company’s total assets can be represented by securities of one or more taxable REIT subsidiaries.
When applying these asset tests, the Company is treated as owning its proportionate share of the Operating Partnership’s assets (which is determined in accordance with the Company’s capital interest in the Operating Partnership). If the Company fails to comply with these requirements at the end of any calendar quarter, it must correct such failure within 30 days after the end of the calendar quarter to avoid losing its REIT status and suffering adverse tax consequences. If the Company fails to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de-minimis threshold, the Company may be able to preserve its REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, we will be required to dispose of the assets causing the failure within six months after the last day of the quarter in which the failure occurred, and we will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets.
As a result, we may be required to liquidate otherwise attractive investments.
If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, the Company could cease to qualify as a REIT and suffer other adverse consequences.
We believe that the Operating Partnership will continue to qualify to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including the Company, will be required to pay tax on its allocable share of the Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the Operating Partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for federal income tax purposes, the Company could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause the Operating Partnership to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including the Company.
The Company’s failure to qualify as a REIT would have serious adverse consequences to its stockholders.
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ended December 31, 2004. The Company believes it has operated so as to qualify as a REIT under the Code and believes that its current organization and method of operation comply with the rules and regulations promulgated under the Code to enable the Company to continue to qualify as a REIT. However, it is possible that the Company has been organized or has operated in a manner that would not allow it to qualify as a REIT, or that its future operations could cause it to fail to qualify. Qualification as a REIT requires the Company to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex sections of the Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within its control. For example, in order to qualify as a
28
REIT, the Company must satisfy a 75.0% gross income test pursuant to Code Section 856(c)(3) and a 95.0% gross income test pursuant to Code Section 856(c)(2) each taxable year. In addition, the Company must pay dividends, as “qualifying distributions,” to its stockholders aggregating annually at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding capital gains, and reduced by certain non-cash items) and must satisfy specified asset tests on a quarterly basis. While historically the Company has satisfied the distribution requirement discussed above by making cash distributions to its stockholders, the Company may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in the Company’s case because its holds its assets through the Operating Partnership.
If MHI Holding does not qualify as a taxable REIT subsidiary, or if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to its shareholders.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. The Company currently leases substantially all of its hotels to the TRS Lessees, which are disregarded entities for U.S. federal income tax purposes and are wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects to continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a “related party tenant” with respect to the Company’s properties that are managed by an independent hotel management company that qualifies as an “eligible independent contractor.” The Company believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary for federal income tax purposes, but there can be no assurance that the IRS will not challenge this status or that a court would not sustain such a challenge. If the IRS were successful in such challenge, it is possible that the Company would fail to meet the asset tests applicable to REITs and substantially all of its income would fail to be qualifying income for purposes of the two gross income tests. If the Company failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax purposes.
Additionally, if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail to qualify as a REIT. Each hotel manager that enters into a management contract with the TRS Lessees must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid by the TRS Lessees to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, a hotel manager must not own, directly or through its shareholders, more than 35.0% of the Company’s outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although the Company intends to monitor ownership of its shares by its hotel manager and its owners, there can be no assurance that these ownership levels will not be exceeded.
Foreign investors may be subject to U.S. tax on the disposition of the Company’s stock if the Company does not qualify as a “domestically controlled” REIT.
A foreign person disposing of a “U.S. real property interest,” which includes stock of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to U.S. federal income tax under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) on the gain recognized on the disposition, unless such foreign person is a “qualified foreign pension fund” or one of the certain publicly traded non-U.S. “qualified collective investment vehicles”. Additionally, the transferee will be required to withhold 15.0% on the amount realized on the disposition if the foreign transferor is subject to U.S. federal income tax under FIRPTA. This 15.0% is creditable against the U.S. federal income tax liability of the foreign transferor in connection with such transferor’s disposition of the Company’s stock. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled” (i.e., less than 50.0% of the REIT’s capital stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence). We cannot be sure that the Company will qualify as a “domestically controlled” REIT. If the Company does not so qualify, gain realized by foreign investors on a sale of the Company’s stock would be subject to U.S. income and withholding tax under FIRPTA, unless the Company’s stock were traded on an established securities market and a foreign investor did not at any time during a specified testing period directly or indirectly own more than 10.0% of the value of the Company’s outstanding stock.
MHI Holding increases our overall tax liability.
Our TRS Lessees are single-member limited liability companies that are wholly-owned, directly or indirectly, by MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Each of our TRS Lessees is disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes, such that the assets, liabilities, income, gains, losses, credits and deductions of our TRS Lessees are treated as the assets, liabilities, income, gains, losses, credits and deductions of MHI Holding for U.S. federal income tax purposes. MHI Holding is subject to federal and state income tax on its taxable income, which will consist of
29
the revenues from the hotels leased by the Company’s TRS Lessees, net of the operating expenses for such hotels and rent payments. Accordingly, although the Company’s ownership of MHI Holding and the TRS Lessees will allow it to participate in the operating income from its hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any, will be available for distribution to the Company.
The Company will incur a 100.0% excise tax on its transactions with MHI Holding and the TRS Lessees that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by the TRS Lessees exceeds an arm’s-length rental amount, such amount potentially will be subject to this excise tax. The Company intends that all transactions among itself, MHI Holding and the TRS Lessees will be conducted on an arm’s-length basis and, therefore, that the rent paid by the TRS Lessees will not be subject to this excise tax.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited or restricted or may not exist at all, and if we do not sustain our profitability, we may be required to put up a valuation allowance against our deferred tax assets.
At December 31, 2016, our financial statements reflected deferred tax assets totaling approximately $6.9 million, of which approximately $6.0 million relates to significant federal and state net operating losses (“NOLs”) generated by our TRS Lessee over the past three years. We are generally able to carry NOLs forward to reduce taxable income in future years. Our ability to use our NOLs to reduce future tax payments is dependent upon our ability to sustain profitability during the time period over which these NOLs may be used under applicable tax law. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. 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. We perform this analysis by evaluating a number of factors, including a demonstrated track record of past profitability, reasonable forecasts of future taxable income, and anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership. At December 31, 2016, we determined based on all available positive and negative evidence that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. We made this determination considering reasonable tax strategies available to us capable of ensuring the realization of our deferred tax assets, anticipated changes in the lease rental payments and one time losses that generated some of our net operating losses. However, there is no assurance that the TRS Lessee will be able to achieve profitability. The TRS Lessee’s ability to generate sustained profitability in the amounts necessary to realize our deferred tax assets against future taxable income depends upon general economic and market conditions, interest rates, and the TRS Lessee’s ability to meet our strategic plans. If the TRS Lessee is unable to generate adequate sustained profitability, we may be required to record a valuation allowance against some or all of our deferred tax assets, which would negatively impact our financial results.
Taxation of dividend income could make the Company’s stock less attractive to investors and reduce the market price of its stock.
The federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended at any time. Any new laws or interpretations may take effect retroactively and could adversely affect the Company or could adversely affect its stockholders. Currently, “qualified dividends,” which include dividends from domestic C corporations that are paid to non-corporate stockholders, are subject to a reduced maximum U.S. federal income tax rate of 20.0%. Because REITs generally do not pay corporate-level taxes as a result of the dividends-paid deduction to which they are entitled, dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from non-REIT corporations would be subject to lower tax rates.
Investors may be subject to a 3.8% Medicare tax in connection with an investment in the Company’s stock or the 7% Notes.
The U.S. tax laws impose a 3.8% “Medicare tax” on the “net investment income” (i.e., interest, dividends, capital gains, annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately), and of estates and trusts. Dividends on the Company’s stock and interest on the 7% Notes as well as gains from the disposition of the Company’s stock or the 7% Notes may be subject to the Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the Medicare tax to an investment in the Company’s stock or the 7% Notes in light of such investors’ particular circumstances.
30
Investors may be subject to U.S. withholding tax under the “Foreign Account Tax Compliance Act.”
On March 18, 2010, the Hiring Incentives to Restore Employment Act, or the HIRE Act, was enacted in the United States. The HIRE Act includes provisions known as the Foreign Account Tax Compliance Act, or FATCA, that generally impose a 30.0% U.S. withholding tax on “withholdable payments,” which consist of (i) U.S.-source dividends, interest, rents and other “fixed or determinable annual or periodical income” paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2018 to (a) “foreign financial institutions” unless (x) they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners or (y) they comply with the terms of any FATCA intergovernmental agreement executed between the authorities in their jurisdiction and the U.S., and (b) “non-financial foreign entities” (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct and indirect U.S. owners. Final regulations under FATCA were issued by the IRS on January 17, 2013, and have been subsequently supplemented by additional regulations and guidance. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.
A foreign investor that receives dividends on the Company’s stock or gross proceeds from a disposition of shares of the Company’s stock may be subject to FATCA withholding tax with respect to such dividends or gross proceeds.
Foreign investors will be subject to U.S. withholding tax on the receipt of ordinary dividends on the Company’s stock.
The portion of dividends received by a foreign investor payable out of the Company’s current and accumulated earnings and profits which are not attributable to capital gains and which are not effectively connected with a U.S. trade or business of the foreign investor will generally be subject to U.S. withholding tax at a statutory rate of 30.0%. This 30.0% withholding tax may be reduced by an applicable income tax treaty. The FATCA and nonresident withholding regulations are complex. Even if the 30.0% withholding is reduced or eliminated by treaty for payments made to a foreign investor, FATCA withholding of 30.0% could apply depending upon the foreign investor’s FATCA status. Foreign investors should consult with their independent advisors as to the U.S. withholding tax consequences to such investors with respect to their investment in the Company’s stock in light of their particular circumstances, as well as determining the appropriate documentation required to reduce or eliminate U.S. withholding tax.
Foreign investors will be subject to U.S. income tax on the receipt of capital gain dividends on the Company’s stock.
Under FIRPTA, distributions that we make to a foreign investor that are attributable to gains from our dispositions of U.S. real property interests (“capital gain dividends”) will be treated as income that is effectively connected with a U.S. trade or business, and therefore subject to U.S. federal income tax, in the hands of the foreign investor, unless such foreign person is a “qualified foreign pension fund” or one of certain publicly traded non-U.S. “qualified collective investment vehicles”. A foreign investor who is subject to tax under FIRPTA will be subject to U.S. federal income tax (at the rates applicable to U.S. investors) on any capital gain dividends, and will also be required to file U.S. federal income tax returns to report such capital gain dividends. Furthermore, capital gain dividends are subject to an additional 30.0% “branch profits tax” (which may be reduced by an applicable income tax treaty) in the hands of a foreign investor who is subject to tax under FIRPTA if such foreign investor is treated as a corporation for U.S. federal income tax purposes.
Legislative or regulatory action could adversely affect you.
Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could adversely affect our investors. You are strongly encouraged to consult with your own tax advisor with respect to the status of any legislative, regulatory or administrative developments, announcements and proposals and their potential impact on your investment in the Company’s stock.
Unresolved Staff Comments
Not applicable.
31
Item 2.
P
roperties
As of December 31, 2016, our portfolio consisted of the following properties (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics, for definitions of Occupancy, ADR, and RevPAR):
| Number of | Occupancy | ADR | RevPAR | Occupancy | ADR | RevPAR | Occupancy | ADR | RevPAR |
| Wholly-Owned Properties | Rooms | 2016 | 2016 | 2016 | 2015 | 2015 | 2015 | 2014 | 2014 | 2014 |
| Crowne Plaza Hampton Marina, Hampton, Virginia (1) | 173 | 55.2 | % | $ | 96.81 | $ | 53.40 | 55.2 | % | $ | 93.59 | $ | 51.64 | 50.8 | % | $ | 93.17 | $ | 48.27 |
| Crowne Plaza Hollywood Beach Resort, Hollywood, Florida (2) | 311 | 79.6 | % | $ | 170.57 | $ | 135.74 | 83.1 | % | $ | 174.35 | $ | 144.86 | 83.1 | % | $ | 163.13 | $ | 135.55 |
| Crowne Plaza Tampa Westshore, Tampa, Florida | 222 | 74.6 | % | $ | 116.15 | $ | 86.69 | 72.5 | % | $ | 111.08 | $ | 80.53 | 72.5 | % | $ | 104.90 | $ | 76.09 |
| DoubleTree by Hilton Jacksonville Riverfront, Jacksonville, Florida | 293 | 77.4 | % | $ | 126.67 | $ | 98.06 | 67.4 | % | $ | 109.20 | $ | 73.60 | 65.8 | % | $ | 99.20 | $ | 65.24 |
| DoubleTree by Hilton Laurel, Laurel, Maryland | 208 | 60.5 | % | $ | 104.35 | $ | 63.16 | 48.2 | % | $ | 95.19 | $ | 45.86 | 60.8 | % | $ | 89.08 | $ | 54.19 |
| DoubleTree by Hilton Philadelphia Airport, Philadelphia, Pennsylvania | 331 | 77.0 | % | $ | 144.92 | $ | 111.66 | 79.3 | % | $ | 136.32 | $ | 108.13 | 75.9 | % | $ | 133.78 | $ | 101.58 |
| DoubleTree by Hilton Raleigh Brownstone – University, Raleigh, North Carolina | 190 | 70.0 | % | $ | 134.74 | $ | 94.33 | 71.5 | % | $ | 131.61 | $ | 94.16 | 73.4 | % | $ | 122.60 | $ | 90.04 |
| Georgian Terrace, Atlanta, Georgia (3) | 326 | 70.8 | % | $ | 160.89 | $ | 113.88 | 69.9 | % | $ | 155.56 | $ | 108.70 | 76.2 | % | $ | 137.65 | $ | 104.88 |
| Hilton Savannah DeSoto, Savannah, Georgia | 246 | 71.5 | % | $ | 155.87 | $ | 111.48 | 76.9 | % | $ | 154.52 | $ | 118.89 | 75.7 | % | $ | 146.75 | $ | 111.14 |
| Hilton Wilmington Riverside, Wilmington, North Carolina | 272 | 70.5 | % | $ | 147.14 | $ | 103.72 | 71.6 | % | $ | 138.36 | $ | 99.07 | 69.7 | % | $ | 139.09 | $ | 96.90 |
| Sheraton Louisville Riverside, Jeffersonville, Indiana | 180 | 63.1 | % | $ | 137.34 | $ | 86.60 | 69.5 | % | $ | 131.74 | $ | 111.87 | 66.8 | % | $ | 150.20 | $ | 100.31 |
| The Whitehall, Houston, Texas | 259 | 54.4 | % | $ | 140.70 | $ | 76.56 | 70.9 | % | $ | 142.05 | $ | 100.66 | 76.1 | % | $ | 138.93 | $ | 105.66 |
| Total | 3,011 |

| (1) | On February 7, 2017, the Company sold the Crowne Plaza Hampton Marina. |

| (2) | The operating statistics for the Crowne Plaza Hollywood Beach Resort rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of the hotel. |

| (3) | The operating statistics for the Georgian Terrace rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of the hotel. |

Legal Proceedings
We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We have settled, during the period covered by this report, all significant claims made during the same period. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.
Mine Safety Disclosure
Not applicable.
32
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Sotherly Hotels Inc.
Market Information
The Company’s common stock trades on the NASDAQ ® Global Market under the symbol “SOHO”. The following table sets forth, for the indicated period, the intraday high and low prices for the common stock, as reported on NASDAQ ®:
| Price Range |
| High | Low |
| Year Ended December 31, 2016 |
| First Quarter | $ | 6.59 | $ | 4.59 |
| Second Quarter | $ | 5.99 | $ | 5.00 |
| Third Quarter | $ | 6.35 | $ | 5.22 |
| Fourth Quarter | $ | 7.11 | $ | 4.65 |
| Year Ended December 31, 2015 |
| First Quarter | $ | 7.87 | $ | 6.26 |
| Second Quarter | $ | 8.71 | $ | 6.94 |
| Third Quarter | $ | 7.63 | $ | 5.83 |
| Fourth Quarter | $ | 6.94 | $ | 4.50 |

The closing price of the Company’s common stock on the NASDAQ ® Global Market on March 1, 2017 was $6.97 per share.
Stockholder Information
As of March 1, 2017, there were 80 holders of record of the Company’s common stock and as of March 1, 2017, there were approximately 3,772 beneficial owners of the Company’s common stock.
In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s charter, subject to certain exceptions, limits the number of common shares that may be owned by any single person or affiliated group to 9.9% of the outstanding common shares.
Recent Sales of Unregistered Securities
On February 1, 2016, two holders of units in the Operating Partnership redeemed a total of 422,687 units for an equivalent number of shares of the Company’s common stock. The shares of common stock were issued to the unitholder pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.
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. The Company has used and expects to continue to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017, unless extended by the Board of Directors. Through December 31, 2016 the Company repurchased the following amounts of common stock and the repurchased shares have been returned to the status of authorized but unissued shares of common stock:
| Period | Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of PubliclyAnnounced Program | Maximum Number (or Approximate Dollar Value) of Shares ThatMay Yet Be Purchased Under the Program |
| December 1- December 31, 2016 | 481,100 | $ | 6.53 | 481,100 | $ | 6,835,464 |

33
Use of Proceeds from Registered Securities
On August 23, 2016, the Company sold 1,610,000 shares, $0.01 par value per share, of its 8% Series B Cumulative Redeemable Perpetual Preferred Stock pursuant to a registration statement on Form S-3 (file no. 333-199256) for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred partnership units. The Operating Partnership used the net proceeds to redeem the entire $27.6 million aggregate principal amount of its outstanding 8.0% senior unsecured notes (the “8% Notes”), to acquire the commercial condominium unit and related inventories of the Hyde Resort & Residences for approximately $4.8 million, and will use the remainder of the proceeds for general corporate purposes.
Sotherly Hotels LP
Market Information
There is no established trading market for partnership units of the Operating Partnership. The Operating Partnership does not currently propose to offer partnership units to the public, and does not currently expect that a public market for those units will develop.
Partnership Unitholder Information
As of March 1, 2017, there were 12 holders of the Operating Partnership’s partnership units, including Sotherly Hotels Inc.
Recent Sales of Unregistered Securities
From time to time, the Operating Partnership issues limited partnership units (common and/or preferred) to the Company, as required by the Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.
There were no sales of unregistered securities in the Operating Partnership during 2016.
Use of Proceeds from Registered Securities
There were no sales of registered securities in the Operating Partnership during 2016.
Sotherly Hotels Inc. and Sotherly Hotels LP
Dividend and Distribution Information
The Company elected to be taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain qualification as a REIT, we are required to make annual distributions to the Company’s stockholders of at least 90.0% of our REIT taxable income, excluding net capital gain, which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles. Our ability to pay distributions to the Company’s stockholders will depend, in part, upon our receipt of distributions from our Operating Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, our TRS Lessees may retain any after-tax earnings.
In order to maintain our qualification as a REIT, we must make distributions to our stockholders each year in an amount equal to at least:
| • | 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains; plus |

| • | 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; minus |

| • | Any excess noncash income (as defined in the Code). |

34
The following tables set forth information regarding the declaration, payment and income tax characterization of distributions by the Company on its common and preferred shares to Company’s stockholders for fiscal year 2015 to 2016. The same table sets forth the Operating Partnership’s distributions per common and preferred partnership units for fiscal year 2015 to 2016:
| Dividend (Distribution) Payments - Common |
| Date Declared | For the Quarter Ended | Date Paid | Amount per Share and Unit | Ordinary Income | Return of Capital |
| January 2015 | March 31, 2015 | April 10, 2015 | $ | 0.070 | 82.6% | 17.4% |
| April 2015 | June 30, 2015 | July 10, 2015 | $ | 0.075 | 82.6% | 17.4% |
| July 2015 | September 30, 2015 | October 9, 2015 | $ | 0.080 | 82.6% | 17.4% |
| October 2015 | December 31, 2015 | January 11, 2016 | $ | 0.080 | 82.6% | 17.4% |
| January 2016 | March 31, 2016 | April 11, 2016 | $ | 0.085 | 73.5% | 26.5% |
| April 2016 | June 30, 2016 | July 11, 2016 | $ | 0.090 | 73.5% | 26.5% |
| July 2016 | September 30, 2016 | October 11, 2016 | $ | 0.095 | 73.5% | 26.5% |
| October 2016 | December 31, 2016 | January 11, 2017 | $ | 0.095 | 73.5% | 26.5% |

| Dividend (Distribution) Payments - Preferred |
| Date Declared | For the Quarter Ended | Date Paid | Amount per Share and Unit | Ordinary Income | Return of Capital |
| August 2016 | September 30, 2016 | October 17, 2016 | $ | 0.2111 | 73.5% | 26.5% |
| October 2016 | December 31, 2016 | January 17, 2017 | $ | 0.500 | 73.5% | 26.5% |

The amount of future common stock distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Code’s annual distribution requirements, and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future.
Selected Financial Data
The following table sets forth selected historical financial data for Sotherly Hotels Inc. and Sotherly Hotels LP for the years ended December 31, 2016, 2015, 2014, 2013, and 2012. The financial results for the Crowne Plaza Hollywood Beach Resort, in which we had a 25.0% indirect interest, are not consolidated through July 31, 2015, as we accounted for our investment under the equity method of accounting. However, from August 1, 2015 through December 31, 2015 we did consolidate the financial results for the Crowne Plaza Hollywood Beach Resort, as a result of our acquisition of the remaining 75.0% interest in the hotel. The following selected historical financial data was derived from audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K and in prior filings. The Company’s financial statements: for the year ended December 31, 2016, have been audited by Dixon Hughes Goodman LLP; for the years ended December 31, 2015 and 2014, have been audited by Grant Thornton LLP; and for the years ended December 31, 2013 and 2012, have been audited by PBMares, LLP (formerly Witt Mares, PLC), our independent registered public accounting firms, for such periods. The audited historical financial statements include reclassifications and all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of our financial condition and the results of operations as of those dates and for those periods under accounting principles generally accepted in the United States of America.
The information presented below is only a summary and does not provide all of the information contained in our consolidated financial statements, including notes thereto, and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
35
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
SELECTED HISTORICAL FINANCIAL DATA
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended |
| December 31, | December 31, | December 31, | December 31, | December 31, |
| 2016 | 2015 | 2014 | 2013 | 2012 |
| Statement of Operations |
| Total Revenues | $ | 152,845,752 | $ | 138,533,476 | $ | 122,939,919 | $ | 89,374,527 | $ | 87,343,220 |
| Total Operating Expenses excluding Depreciation,   Amortization, Disposal Gain and Impairment of   Investments in Hotel Properties, net | (118,854,236 | ) | (109,153,366 | ) | (95,290,304 | ) | (69,888,820 | ) | (68,519,401 | ) |
| Depreciation, Amortization, Disposal Gain and   Impairment of Investments in Hotel   Properties, net | (15,384,390 | ) | (14,050,060 | ) | (15,144,284 | ) | (9,078,228 | ) | (8,661,769 | ) |
| Net Operating Income | 18,607,126 | 15,330,050 | 12,505,331 | 10,407,479 | 10,162,050 |
| Interest Income | 115,785 | 50,461 | 19,865 | 17,914 | 16,158 |
| Interest Expense | (17,735,107 | ) | (16,515,827 | ) | (14,636,870 | ) | (9,606,479 | ) | (10,399,962 | ) |
| Other Income (Expense) – net | (1,455,289 | ) | 6,196,936 | (354,558 | ) | (3,796,410 | ) | (3,941,594 | ) |
| Income Tax Benefit (Provision) | 1,367,634 | 1,336,033 | 1,727,723 | (1,496,096 | ) | (1,246,397 | ) |
| Net Income (Loss) | 900,149 | 6,397,653 | (738,509 | ) | (4,473,592 | ) | (5,409,745 | ) |
| Net (Income) Loss Attributable to Noncontrolling   Interest | 26,567 | (1,040,987 | ) | 153,838 | 989,623 | 1,241,868 |
| Net Income (Loss) Attributable to the Company | 926,716 | 5,356,666 | (584,671 | ) | (3,483,969 | ) | (4,167,877 | ) |
| Distributions to Preferred Stockholders | (1,144,889 | ) | — | — | — | — |
| Net Income/(Loss) Attributable to Common   Stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) | $ | (3,483,969 | ) | $ | (4,167,877 | ) |
| Statement of Cash Flows |
| Cash provided by Operations – net | $ | 17,139,409 | $ | 11,377,374 | $ | 14,851,255 | $ | 9,594,751 | $ | 9,011,957 |
| Cash used in Investing – net | (12,940,766 | ) | (41,132,602 | ) | (71,096,578 | ) | (29,527,589 | ) | (3,156,121 | ) |
| Cash provided by (used in) Financing – net | 16,074,218 | 24,614,643 | 63,503,194 | 22,133,750 | (3,090,079 | ) |
| Net Increase (Decrease) in Cash and Cash   Equivalents | $ | 20,272,861 | $ | (5,140,585 | ) | $ | 7,257,871 | $ | 2,200,912 | $ | 2,765,757 |
| Balance Sheet |
| Investments in Hotel Properties, Net | $ | 348,593,912 | $ | 354,963,242 | $ | 260,192,153 | $ | 202,645,633 | $ | 176,427,904 |
| Investment in Hotel Properties Held for Sale, Net | 5,333,000 | — | — | — | — |
| Total Assets (1) | 406,019,564 | 393,058,353 | 299,820,043 | 228,169,081 | 204,223,074 |
| Mortgage Loans | 282,708,289 | 271,977,944 | 205,291,657 | 160,363,549 | 135,674,432 |
| Unsecured Notes | 24,308,713 | 52,900,000 | 52,900,000 | 27,600,000 | — |
| Redeemable Preferred Stock | — | — | — | — | 14,227,650 |
| Total Liabilities | 324,680,276 | 340,199,985 | 272,310,186 | 197,314,286 | 167,179,121 |
| Noncontrolling Interest (1) | 2,329,175 | 3,855,237 | 4,132,662 | 5,669,386 | 7,322,314 |
| Total Sotherly Hotels Inc. Stockholders’ Equity (1) | $ | 79,010,113 | $ | 49,003,131 | $ | 23,377,195 | $ | 25,185,409 | $ | 29,721,639 |
| Operating Data |
| Average Number of Available Rooms | 3,011 | 2,828 | 2,622 | 2,148 | 2,113 |
| Total Number of Available Room Nights | 1,102,026 | 1,032,353 | 957,060 | 783,936 | 773,358 |
| Occupancy Percentage (2) | 69.8 | % | 69.9 | % | 70.3 | % | 67.4 | % | 68.9 | % |
| Average Daily Rate (ADR) (2) | $ | 140.63 | $ | 134.21 | $ | 125.77 | $ | 118.91 | $ | 114.22 |
| RevPAR (2) | $ | 98.18 | $ | 93.80 | $ | 88.42 | $ | 80.16 | $ | 78.65 |
| Additional Financial Data |
| FFO (3) | $ | 15,139,650 | $ | 14,103,844 | $ | 14,765,677 | $ | 5,150,303 | $ | 3,842,699 |
| Adjusted FFO (3) | 15,100,188 | 14,904,608 | 14,142,080 | 10,766,147 | 9,218,032 |
| Hotel EBITDA (4) | 40,012,581 | 36,447,390 | 32,084,957 | 23,220,515 | 22,296,938 |
| Income (Loss) Per Basic Share | $ | (0.01 | ) | $ | 0.43 | $ | (0.06 | ) | $ | (0.34 | ) | $ | (0.42 | ) |

| (1) | As of the period end. |

| (2) | Occupancy Percent is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available. ADR is calculated by dividing the total daily room revenue by the total daily number of rooms sold. RevPAR is calculated by dividing the total daily room revenue by the total daily number of rooms available. |

36
| (3) | Industry analysts and investors use Funds from Operations (“FFO”) as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with generally accepted accounting principles (“GAAP”), excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. |

Adjusted FFO accounts for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, franchise termination costs, loan modification fees, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition transaction costs.
| (4) | Hotel EBITDA represents the portion of net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) corporate general and administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary conversions of assets and (14) other operating revenue not related to our wholly-owned portfolio. |

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2016, 2015, 2014, 2013, and 2012.
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended |
| December 31, | December 31, | December 31, | December 31, | December 31, |
| 2016 | 2015 | 2014 | 2013 | 2012 |
| Net Income/(Loss) Attributable to the Common   Stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) | $ | (3,483,969 | ) | $ | (4,186,709 | ) |
| Add: Net Income (Loss) Attributable to the   Noncontrolling Interest | (26,567 | ) | 1,040,987 | (153,838 | ) | (989,623 | ) | (1,223,036 | ) |
| Depreciation and Amortization | 15,019,071 | 13,591,495 | 11,969,284 | 8,467,228 | 8,661,769 |
| Equity in Depreciation and Amortization of Joint   Venture | — | 259,279 | 529,053 | 545,667 | 590,675 |
| Impairment of Investment in Hotel Properties, Net | — | 500,000 | 3,175,000 | 611,000 | — |
| Gain on Change in Control | — | (6,603,148 | ) | — | — | — |
| Gain on Involuntary Conversion of Asset | — | — | (169,151 | ) | — | — |
| Loss (Gain) on Asset Disposal | 365,319 | (41,435 | ) | — | — | — |
| Funds From Operations | $ | 15,139,650 | $ | 14,103,844 | $ | 14,765,677 | $ | 5,150,303 | $ | 3,842,699 |
| (Increase) Decrease in Deferred Income Taxes | (1,558,966 | ) | (1,780,571 | ) | (1,961,663 | ) | 1,370,189 | 1,241,848 |
| Acquisition Costs | — | 634,376 | 155,187 | 89,743 | — |
| Loss on Starwood Settlement | — | 324,271 | — | — | — |
| Over-Assessed Real Estate Taxes Under Appeal | — | 497,733 | — | — | — |
| Loan Modification Fees | 64,215 | 243,229 | — | — | — |
| Franchise Termination Fee | — | — | 351,800 | — | — |
| Realized and Unrealized (Gain) Loss on Hedging   Activities (A) | 37,384 | 108,819 | — | (89,998 | ) | 13,752 |
| Realized and Unrealized Loss on Warrant Derivative | — | — | — | 2,205,248 | 2,026,677 |
| Impairment of Note Receivable | — | — | — | — | 110,871 |
| Loss on Early Debt Extinguishment (A) | 1,417,905 | 772,907 | 831,079 | 2,040,662 | 1,982,184 |
| Adjusted FFO | $ | 15,100,188 | $ | 14,904,608 | $ | 14,142,080 | $ | 10,766,147 | $ | 9,218,031 |

| (A) | Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture. |

37
The following is a reconciliation of net income/(loss) to Hotel EBITDA for the years ended December 31, 2016, 2015, 2014, 2013, and 2012.
| Year Ended | Year Ended | Year Ended | Year Ended | Year Ended |
| December 31, | December 31, | December 31, | December 31, | December 31, |
| 2016 | 2015 | 2014 | 2013 | 2012 |
| Net Income/(Loss) Attributable to the Common   Stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) | $ | (3,483,969 | ) | $ | (4,186,709 | ) |
| Add: Net Income (Loss) Attributable to the   Noncontrolling Interest | (26,567 | ) | 1,040,987 | (153,838 | ) | (989,623 | ) | (1,223,036 | ) |
| Interest Expense | 17,735,107 | 16,515,827 | 14,636,870 | 9,606,479 | 10,399,962 |
| Interest Income | (115,785 | ) | (50,461 | ) | (19,865 | ) | (17,914 | ) | (16,158 | ) |
| Distributions to Preferred Stockholders | 1,144,889 | — | — | — | — |
| Income Tax Provision (Benefit) | (1,367,634 | ) | (1,336,033 | ) | (1,727,723 | ) | 1,496,096 | 1,246,397 |
| Depreciation and Amortization | 15,019,071 | 13,591,495 | 11,969,284 | 8,467,228 | 8,661,769 |
| Equity in (Earnings) Loss of Joint Venture | — | (475,514 | ) | (307,370 | ) | (449,500 | ) | (178,138 | ) |
| Loss (Gain) on Asset Disposal | 365,319 | (41,435 | ) | — | — | — |
| Gain on Involuntary Conversion of Asset | — | — | (169,151 | ) | — | — |
| Realized and Unrealized Loss (Gain) on Hedging   Activities | 37,384 | 108,819 | — | — | — |
| Realized and Unrealized Loss on Warrant Derivative | — | — | — | 2,205,248 | 2,026,677 |
| Loss on Early Debt Extinguishment | 1,417,905 | 772,907 | 831,079 | 2,040,662 | 1,982,184 |
| Impairment of Investment in Hotel Properties, Net | — | 500,000 | 3,175,000 | 611,000 | — |
| Impairment of Note Receivable | — | — | — | — | 110,871 |
| Corporate General and Administrative Expenses | 6,021,065 | 7,268,256 | 5,085,949 | 4,360,582 | 4,078,826 |
| Gain on Change in Control | — | (6,603,148 | ) | — | — | — |
| Net Lease Rental Income | — | — | (350,000 | ) | (350,000 | ) | (350,000 | ) |
| Other Fee Income | — | (200,976 | ) | (300,607 | ) | (275,774 | ) | (255,707 | ) |
| Hotel EBITDA | $ | 40,012,581 | $ | 36,447,390 | $ | 32,084,957 | $ | 23,220,515 | $ | 22,296,938 |

38
Item 7.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern United States. We commenced operations in December 2004 when the Company completed its initial public offering and thereafter consummated the acquisition of six initial hotel properties. Since the Company’s initial public offering, we have engaged in the following acquisitions and dispositions:
| • | On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront). During September 2015, after extensive renovations, we re-branded and renamed the hotel the DoubleTree by Hilton Jacksonville Riverfront. |

| • | On August 10, 2006, we sold the Holiday Inn Downtown Williamsburg. |

| • | On September 20, 2006, we acquired the Louisville Ramada Riverfront Inn, which went through an extensive renovation and re-opened in May 2008 as the Sheraton Riverside Louisville. |

| • | On August 8, 2007, through our joint venture with Carlyle, we acquired a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida. |

| • | On October 29, 2007, we acquired a hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, which went through an extensive renovation and re-opened in March 2009 as the Crowne Plaza Tampa Westshore. |

| • | On April 24, 2008, we acquired the Hampton Marina Hotel in Hampton, Virginia, which has been renovated and was converted to the Crowne Plaza Hampton Marina in October 2008. |

| • | On November 13, 2013, we acquired the Crowne Plaza Houston Downtown in Houston, Texas. |

| • | On March 27, 2014, we acquired the Georgian Terrace in Atlanta, Georgia. |

| • | On July 31, 2015, we acquired the remaining 75.0% interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort, and (ii) the entity that leases the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. |

| • | On January 30, 2017, we closed on the purchase of the hotel commercial unit of the Hyde Resort & Residences, a 400-unit condominium-hotel located in the Hollywood, Florida market. |

| • | On February 7, 2017, we closed on the sale of the Crowne Plaza Hampton Marina. |

39
As of December 31, 2016, our hotel portfolio consisted of twelve full-service, primarily upscale and upper-upscale hotels with 3,011 rooms, ten of which operate under well-known brands such as Hilton, Crowne Plaza, DoubleTree and Sheraton, and two of which are independent hotels. Following the sale of the Crowne Plaza Hampton Marina on February 7, 2017, our portfolio consisted of eleven wholly-owned hotels with a total of 2,838 rooms, as well as our interests in the Hyde Resort & Residences. As of December 31, 2016, we owned the following hotel properties:
| Number |
| Property | of Rooms | Location | Date of Acquisition | Chain Designation |
| Wholly-owned |
| Crowne Plaza Hampton Marina (1) | 173 | Hampton, VA | April 24, 2008 | Upscale |
| Crowne Plaza Hollywood Beach Resort | 311 | Hollywood, FL | August 9, 2007 | Upscale |
| Crowne Plaza Tampa Westshore | 222 | Tampa, FL | October 29, 2007 | Upscale |
| DoubleTree by Hilton Jacksonville Riverfront | 293 | Jacksonville, FL | July 22, 2005 | Upscale |
| DoubleTree by Hilton Laurel | 208 | Laurel, MD | December 21, 2004 | Upscale |
| DoubleTree by Hilton Philadelphia Airport | 331 | Philadelphia, PA | December 21, 2004 | Upscale |
| DoubleTree by Hilton Raleigh Brownstone-University | 190 | Raleigh, NC | December 21, 2004 | Upscale |
| The Georgian Terrace | 326 | Atlanta, GA | March 27, 2014 | Independent(2) |
| Hilton Savannah DeSoto | 246 | Savannah, GA | December 21, 2004 | Upper Upscale |
| Hilton Wilmington Riverside | 272 | Wilmington, NC | December 21, 2004 | Upper Upscale |
| Sheraton Louisville Riverside | 180 | Jeffersonville, IN | September 20, 2006 | Upper Upscale |
| The Whitehall | 259 | Houston, TX | November 13, 2013 | Independent(2) |
| Total | 3,011 |

| (1) | On February 7, 2017, we closed on the sale of this hotel. |

| (2) | We believe that the Georgian Terrace and The Whitehall would carry a chain scale designation of upper upscale if they were branded hotels. |

We conduct substantially all our business through the Operating Partnership, Sotherly Hotels LP. The Company is the sole general partner of the Operating Partnership and owns an approximate 89.1% interest in the Operating Partnership, with the remaining interest being held by limited partners who were contributors of our initial hotel properties and related assets.
To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessees that are wholly-owned subsidiaries of the Operating Partnership, which then engage a hotel management company to operate the hotels under a management agreement. Our TRS Lessees have engaged Chesapeake Hospitality to manage our hotels. Our TRS Lessees, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.
Key Operating Metrics
In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:
| • | Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available; |

| • | Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and |

| • | Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms. |

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all the additional variable operating costs associated with higher occupancy.
40
We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures”.
Results of Operations
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
The following table illustrates the key operating metrics for the years ended December 31, 2016 and 2015 for our wholly-owned properties during each respective reporting period (“actual” properties) as well as the key operating metrics for the eleven wholly-owned properties that were under our control during all of 2015 (“same-store” properties). Accordingly, the same-store data does not reflect the performance of the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we had a 25.0% indirect interest through July 31, 2015 and a 100.0% interest thereafter.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 |
| Actual | Same-Store | Actual | Same-Store |
| Occupancy % | 69.8 | % | 68.7 | % | 69.9 | % | 65.7 | % |
| ADR | $ | 140.63 | $ | 136.63 | $ | 134.21 | $ | 130.09 |
| RevPAR | $ | 98.18 | $ | 93.86 | $ | 93.80 | $ | 85.47 |

Revenue. Total revenue for the year ended December 31, 2016 was approximately $152.8 million, an increase of approximately $14.3 million, or 10.3%, from total revenue for the year ended December 31, 2015 of approximately $138.5 million. Approximately $11.9 million of the increase relates to the acquisition of the remaining 75.0% interest in our property in Hollywood Beach, Florida in July 2015. Increases in revenues at our properties in Wilmington, North Carolina; Raleigh, North Carolina; Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; and Atlanta, Georgia of approximately $7.1 million, were offset by decreases in revenue at our properties impacted by renovation activities in Savannah, Georgia and Houston, Texas of approximately $3.3 million, as well as the remaining properties revenue decreases of $1.6 million.
Room revenues at our properties for the year ended December 31, 2016 increased approximately $11.4 million, or 11.7%, to approximately $108.2 million compared to room revenues for the year ended December 31, 2015 of approximately $96.8 million. The increase in room revenues for the year ended December 31, 2016 resulted mainly from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $9.6 million for the period. Our properties in Wilmington, North Carolina; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Tampa, Florida; Hampton, Virginia and Atlanta, Georgia, experienced a significant increase in room revenues, offset by decreases at our properties impacted by renovation activities in Savannah, Georgia and Houston, Texas. We continue to expect occupancy and ADR to increase in 2017 as a result of continuing strong demand and the completion in 2016 of renovations at our properties in Houston, Texas and Atlanta, Georgia.
Food and beverage revenues at our properties for the year ended December 31, 2016 increased approximately $2.1 million, or 6.3%, to approximately $35.4 million compared to food and beverage revenues of approximately $33.3 million for the year ended December 31, 2015. The increase in food and beverage revenues for the year ended December 31, 2016 resulted principally from our acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.6 million for the period. Additional increases in food and beverage revenues at our properties in Savannah, Georgia; Raleigh, North Carolina; Laurel, Maryland: Jacksonville, Florida; and Tampa, Florida of approximately $1.5 million, were offset by decreases of approximately $1.0 million in food and beverage revenues at our other properties.
Other operating revenues for the year ended December 31, 2016 increased approximately $0.8 million, or 10.0%, to approximately $9.3 million compared to other operating revenues for the year ended December 31, 2015 of approximately $8.4 million. The increase in other operating department revenues for the year ended December 31, 2016 resulted principally from our acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.6 million for the period. Additional increases in other operating revenues at our properties in Philadelphia, Pennsylvania; Laurel, Maryland; Jacksonville, Florida; Jeffersonville, Indiana and Hampton, Virginia of approximately $0.5 million, were offset by decreases of approximately $0.5 million in other operating revenues at our other properties.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $10.9 million, or 10.7%, for the year ended December 31, 2016 to approximately $112.8 million compared to hotel operating expenses for the year ended December 31, 2015 of approximately $101.9 million. The increase in hotel operating expenses for the year ended December 31, 2016 was substantially related to our acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $9.0 million for the period, coupled with an increase in hotel operating expenses at our same-store properties of approximately $1.1 million, mainly from increased occupancy by 4.6%, offset with decreases in expenses at our properties in Wilmington, North Carolina; Philadelphia, Pennsylvania; Jeffersonville, Indiana; Hampton, Virginia and Houston, Texas.
41
Rooms expense at our properties for the year ended December 31, 2016 increased approximately $3.1 million, or 12.1%, to approximately $28.9 million compared to rooms expense of approximately $25.8 million for the year ended December 31, 2015. The increase in rooms expense for the year ended December 31, 2016 was substantially related to our acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $2.3 million for the period.
Food and beverage expenses at our properties for the year ended December 31, 2016 increased approximately $1.4 million, or 5.9%, to approximately $24.4 million compared to food and beverage expense of approximately $23.0 million for the year ended December 31, 2015. The increase in food and beverage expenses for the year ended December 31, 2016 was substantially related to our acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.2 million for the period.
Indirect expenses at our properties for the year ended December 31, 2016 increased approximately $5.8 million, or 11.4%, to approximately $57.1 million compared to indirect expenses of approximately $51.3 million for the year ended December 31, 2015. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. Specifically, increases in indirect expenses were substantially related to our recently acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $5.1 million for the period, compared to the year ended December 31, 2015.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2016 increased approximately $1.4 million, or 10.5%, to approximately $15.0 million compared to depreciation and amortization expense of approximately $13.6 million for the year ended December 31, 2015. The increase was mostly attributable to depreciation and amortization related to our recently acquired property in Hollywood Beach, Florida and depreciation and amortization related to our capital assets acquired in the fourth quarter of 2015 and for the year 2016, offset by reductions of intangible asset amortization during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended December 31, 2016 and 2015 was $0 and $0.5 million, respectively. Our review of possible impairment of our hotel properties revealed no excess of current carrying cost over the estimated undiscounted future cash flows, as of December 31, 2016.
Gain / Loss on Disposal of Assets. During the year ended December 31, 2016, we recorded a net loss on disposal of assets of $365,319, comprised of disposals of furniture, fixtures, and equipment of $565,319, offset by a gain on sale of $200,000, compared to a $41,435 net gain on disposal of assets for the year ended December 31, 2015, comprised of a net gain on the sale of development parcel rights and the development parcel for approximately $710,250, offset by losses on disposals of furniture, fixtures and equipment of $668,815.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2016 decreased approximately $1.2 million, or 17.2%, to approximately $6.0 million compared to corporate general and administrative expenses of approximately $7.3 million for the year ended December 31, 2015. The decrease in corporate general and administrative expenses was mainly due to decreases in acquisition costs of approximately $0.6 million, the absence of a one-time tax penalty of $0.4 million in 2016, reduced professional fees of approximately $0.2 million, reduced loan modification costs of $0.2 million and reduced audit fees of approximately $0.2 million partially offset by additional staffing and related salary increase of approximately $0.3 million, an increase in legal fees of approximately $0.4 million and increased marketing support costs of $0.2 million.
Interest Expense. Interest expense for the year ended December 31, 2016 increased approximately $1.2 million, or 7.4%, to approximately $17.7 million compared to approximately $16.5 million of interest expense for the year ended December 31, 2015. The increase in interest expense for the year ended December 31, 2016, was substantially related to the assumed mortgage loan for the acquired property in Hollywood Beach, Florida, accounting for an increase in interest expense of approximately $1.8 million. This increase was mainly offset by a decrease in interest from the redemption of the 8% Notes with an approximate decrease of $0.5 million.
Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture decreased approximately $0.5 million, or 100.0%, to $0 for the year ended December 31, 2016 compared to equity in the income of the joint venture of approximately $0.5 million for the year ended December 31, 2015, due the acquisition of the Crowne Plaza Hollywood Beach Resort in July 2015.
42
Loss on Early Debt Extinguishment. The loss on early debt extinguishment for the year ended December 31, 2016 increased approximately $0.6 million, or 83.5%, to approximately $1.4 million compared to a loss on debt extinguishment of approximately $0.8 million for the year ended December 31, 2015. During the year ended December 31, 2016, we refinanced mortgage loans at our properties in Wilmington, North Carolina; Savannah, Georgia; Jeffersonville, Indiana; Tampa, Florida and Houston, Texas with an increase in loss on early debt extinguishments of approximately $0.3 million. We also redeemed our 8% unsecured notes with the majority of the loss on early debt extinguishment of approximately $1.1 million.
Unrealized Loss on Hedging Activities. During the year ended December 31, 2015, we refinanced a variable rate mortgage loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks. During August 2015, we purchased an interest rate cap for $179,800. As of December 31, 2016, the fair market value of the interest rate cap is $33,597 compared to the fair market value of $70,981, as of December 31, 2015. The unrealized loss on hedging activities during the year ended December 31, 2016 and 2015, was $37,384 and $108,818, respectively.
Gain on Change in Control. On July 31, 2015, we acquired from Carlyle the remaining 75.0% interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort. Due to the increased fair market value of the property for our original 25.0% interest we recognized a discounted gain on change in control. The gain on change in control during the year ended December 31, 2015, was approximately $6.6 million while no such gain was recorded in 2016.
Income Tax Benefit. The income tax benefit for the year ended December 31, 2016 increased approximately $32,000, or 2.4%, to approximately $1.4 million compared to an income tax provision of approximately $1.3 million for the year ended December 31, 2015. The income tax benefit was primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized higher operating loss for the year ended December 31, 2016 compared to the year ended December 31, 2015. At December 31, 2016, deferred tax assets total approximately $6.9 million, of which approximately $6.0 million relate to net operating losses of our TRS Lessee. At December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. We will continue to regularly evaluate the likelihood that we will be able to realize our deferred tax assets and the need for a valuation allowance for the deferred tax assets.
Net Income. Net income for the year ended December 31, 2016 decreased approximately $5.5 million, or 85.9%, to approximately $0.9 million compared to net income of approximately $6.4 million for the year ended December 31, 2015, as a result of the operating results discussed above.
Distributions to Preferred Stockholders. During the year ended December 31, 2016, we recorded distributions to preferred stockholders of approximately $1.1 million, compared to no distributions to preferred stockholders for the year ended December 31, 2015. As of December 31, 2016 and 2015, we accrued $805,000 and $0, as dividends on the preferred stock, respectively.
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
The following table illustrates the key operating metrics for the years ended December 31, 2015 and 2014, for our wholly-owned properties during each respective reporting period (“actual” properties) as well as the key operating metrics for the ten wholly-owned properties that were under our control during all of 2014 (“same-store” properties). Accordingly, the same-store data does not reflect the performance of the Georgian Terrace, which was acquired in March 2014. Each table excludes performance data for the Crowne Plaza Hollywood Beach Resort, which was acquired through a joint venture and in which we had a 25.0% indirect interest through July 31, 2015 and a 100.0% interest thereafter through December 31, 2015.
| Year Ended December 31, 2015 | Year Ended December 31, 2014 |
| Actual | Same-Store | Actual | Same-Store |
| Occupancy % | 69.9 | % | 65.7 | % | 70.3 | % | 69.7 | % |
| ADR | $ | 134.21 | $ | 130.09 | $ | 15.77 | $ | 124.27 |
| RevPAR | $ | 93.80 | $ | 85.47 | $ | 88.42 | $ | 86.57 |

Revenue. Total revenue for the year ended December 31, 2015 was approximately $138.5 million, an increase of approximately $15.6 million, or 12.7%, from total revenue for the year ended December 31, 2014 of approximately $122.9 million. Approximately $6.2 million of the increase relates to the acquisition of our property in Atlanta, Georgia in March 2014. Approximately $7.5 million of the increase relates to the acquisition of the remaining 75.0% interest in our property in Hollywood Beach, Florida in July 2015. Increases in revenues at our properties in Wilmington, North Carolina; Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Jeffersonville, Indiana; Tampa, Florida; Hampton, Virginia and Atlanta, Georgia were offset by decreases in revenue at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas, as well as by the loss of rental income associated with Shell Island which expired in December 2014.
43
Room revenues at our properties for the year ended December 31, 2015 increased approximately $12.2 million, or 14.4%, to approximately $96.8 million compared to room revenues for the year ended December 31, 2014 of approximately $84.6 million. The increase in room revenue for the year ended December 31, 2015 resulted mainly from the acquired property in Atlanta, Georgia, accounting for an increase of approximately $3.3 million for the period and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $2.4 million for the period. Our properties in Wilmington, North Carolina; Savannah, Georgia; Raleigh, North Carolina; Philadelphia, Pennsylvania; Jacksonville, Florida; Tampa, Florida; and Hampton, Virginia and Atlanta, Georgia, experienced a significant increase in room revenue, offset by decreases at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas.
Food and beverage revenues at our properties for the year ended December 31, 2015 increased approximately $1.8 million, or 5.8%, to approximately $33.3 million compared to food and beverage revenue of approximately $31.4 million for the year ended December 31, 2014. The increase in food and beverage revenues for the year ended December 31, 2015 resulted principally from our acquired property in Atlanta, Georgia, accounting for an increase of approximately $2.1 million for the period, and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.2 million for the period. Additional increases in food and beverage revenue at our properties in Wilmington, North Carolina; Raleigh, North Carolina and Jeffersonville, Indiana of approximately $0.3 million, were offset by decreases of approximately $1.6 million in banqueting revenue at our other properties.
Other operating revenues for the year ended December 31, 2015 increased approximately $1.5 million, or 22.5%, to approximately $8.4 million compared to other operating revenues for the year ended December 31, 2014 of approximately $6.9 million. The increase in other operating departments revenues for the year ended December 31, 2015 resulted principally from our acquired property in Atlanta, Georgia, accounting for an increase of approximately $0.8 million for the period and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.5 million for the period.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $11.7 million, or 12.9%, for the year ended December 31, 2015, to approximately $101.9 million compared to hotel operating expenses for the year ended December 31, 2014 of approximately $90.2 million. The increase in hotel operating expenses for the year ended December 31, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $6.7 million of the increase in expenses for the year ended December 31, 2015 and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $9.2 million for the period, coupled by a decrease in hotel operating expenses at our same-store properties of approximately $1.0 million, mainly from reduced occupancy by 5.7% and RevPAR by 1.3% combined with decreases in expenses at our properties impacted by renovation activities in Laurel, Maryland and Houston, Texas.
Rooms expense at our properties for the year ended December 31, 2015 increased approximately $2.9 million, or 12.5%, to approximately $25.8 million compared to rooms expense of approximately $22.9 million for the year ended December 31, 2014. The increase in rooms expense for the year ended December 31, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $1.0 million of the increase and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $1.3 million for the period.
Food and beverage expenses at our properties for the year ended December 31, 2015 increased approximately $2.0 million, or 9.4%, to approximately $23.0 million compared to food and beverage expense of approximately $21.0 million for the year ended December 31, 2014. The increase in food and beverage expenses for the year ended December 31, 2015 was substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $1.5 million of the increase and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $0.9 million for the period, offset by decreases in food and beverage expenses mainly from reduced occupancy and decreases in expenses at our property impacted by renovation activities in Houston, Texas.
Indirect expenses at our properties for the year ended December 31, 2015 increased approximately $6.2 million, or 13.8%, to approximately $51.3 million compared to indirect expenses of approximately $45.1 million for the year ended December 31, 2014. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. Specifically, increases in indirect expenses were substantially related to our acquired property in Atlanta, Georgia, accounting for approximately $2.1 million of the increase and from the acquired property in Hollywood Beach, Florida, accounting for an increase of approximately $2.8 million for the period, compared to the year ended December 31, 2014.
44
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2015 increased approximately $1.6 million, or 13.6%, to approximately $13.6 million compared to depreciation and amortization expense of approximately $12.0 million for the year ended December 31, 2014. The increase was mostly attributable to depreciation and amortization related to our acquired property in Atlanta, Georgia and depreciation and amortization related to our capital assets acquired in the fourth quarter of 2014 and the year of 2015, offset by reductions of intangible asset amortization during the year ended December 31, 2015 compared to the year ended December 31, 2014.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended December 31, 2015 and 2014, was approximately $0.5 million and $3.2 million, respectively. Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which was triggered by a combination of a change in anticipated use and future branding of the property; and a re-evaluation of future revenues based on anticipated market conditions, market penetration and costs necessary to achieve such market penetration, resulting in an impairment to fair market value of $0.5 million, as of December 31, 2015.
Gain on Disposal of Assets. During the year ended December 31, 2015, we recorded a gain on disposal of assets of $41,435, compared to no gain or loss on disposal of assets for the year ended December 31, 2014.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2015 increased approximately $2.2 million, or 42.9%, to approximately $7.3 million compared to corporate general and administrative expenses of approximately $5.1 million for the year ended December 31, 2014. The increase in corporate general and administrative expenses was mainly due to an increase in acquisition costs of approximately $0.5 million, a one-time tax penalty of $0.4 million, additional staffing and related salary increase of approximately $0.3 million, increased professional fees of approximately $0.5 million, loan costs of $0.2 million on the loan modifications of the Crowne Plaza Hollywood Beach Resort mortgage and the DoubleTree by Hilton Laurel mortgage, and increased audit fees of approximately $0.1 million partially offset by a reduction in legal fees of approximately $0.1 million.
Interest Expense. Interest expense for the year ended December 31, 2015 increased approximately $1.9 million, or 12.8%, to approximately $16.5 million compared to approximately $14.6 million of interest expense for the year ended December 31, 2014. The increase in interest expense for the year ended December 31, 2015 was substantially related to the additional mortgage on our acquired property in Atlanta, Georgia of $0.7 million, the assumed mortgage loan for the acquired property in Hollywood Beach, Florida, accounting for an increase in interest expense of approximately $1.4 million, the issuance of the 7% Notes due in 2019, accounting for an increase of approximately $1.6 million. These increases were offset by a decrease in interest from the reduction of the bridge loan with Richmond Hill Capital Partners, LP during the year ending December 31, 2015 of $1.3 million.
Equity Income (Loss) in Joint Venture. Equity in the income of the joint venture increased approximately $0.2 million, or 54.7%, to approximately $0.5 million for the year ended December 31, 2015 compared to equity in the income of the joint venture of approximately $0.3 million for the year ended December 31, 2014 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort through July 31, 2015. For the year ended December 31, 2015, the Crowne Plaza Hollywood Beach Resort reported occupancy of 83.1%, ADR of $174.35 and RevPAR of $144.86. This compares with results reported by the hotel for the year ended December 31, 2014 of occupancy of 83.1%, ADR of $163.13 and RevPAR of $135.55.
Loss on Early Debt Extinguishment. The loss on early debt extinguishment for the year ended December 31, 2015 decreased approximately $0.1 million, or 7.0%, to approximately $0.7 million compared to a loss on debt extinguishment of approximately $0.8 million for the year ended December 31, 2014. During the year ended December 31, 2015, we refinanced a variable rate mortgage loan we had with the Bank of the Ozarks on the Georgian Terrace, with a new fixed rate loan from Bank of America. The amount of accumulated un-amortized loan costs of $697,582 was written off during 2015. In addition, we refinanced a variable rate mortgage loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks. The amount of accumulated un-amortized loan costs of $75,324 was written off during 2015.
Gain on Involuntary Conversion of Asset. Gain on involuntary conversion of asset for the year ended December 31, 2015 decreased approximately $0.2 million, or 100.0%, to $0 compared to approximately $0.2 million of gain on involuntary conversion of asset for the year ended December 31, 2014. During 2014, we had a one-time involuntary conversion of equipment at our Hilton Wilmington Riverside property for replacement of a water chiller in the amount of approximately $0.2 million.
Unrealized Loss on Hedging Activities. During the year ended December 31, 2015, we refinanced a variable rate mortgage loan we had with Fifth Third Bank on the DoubleTree by Hilton Jacksonville Riverfront, with a new variable rate loan from Bank of the Ozarks. During August 2015, we purchased an interest rate cap for $179,800. As of December 31, 2015, the fair market value of the interest rate cap was $70,981. The unrealized loss on hedging activities during the years ended December 31, 2015 and 2014, was approximately $0.1 million and $0, respectively.
45
Gain on Change in Control. On July 31, 2015, we acquired from Carlyle the remaining 75.0% interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort. Due to the increased fair market value of the property for our original 25.0% interest we recognized a discounted gain on change in control. The gain on change in control during the year ended December 31, 2015 was approximately $6.6 million while no such gain was recorded in 2014.
Income Tax Benefit. The income tax benefit for the year ended December 31, 2015 decreased approximately $0.4 million, or 22.7%, to approximately $1.3 million compared to an income tax benefit of approximately $1.7 million for the year ended December 31, 2014. The income tax benefit was primarily derived from the operations of our TRS Lessees. Our TRS Lessees realized lower operating loss for the year ended December 31, 2015 compared to the year ended December 31, 2014.
Net Income (Loss). Net income for the year ended December 31, 2015 increased approximately $7.1 million, or 966.3%, to approximately $6.4 million compared to net loss of approximately $0.7 million for the year ended December 31, 2014 as a result of the operating results discussed above.
Sources and Uses of Cash
The following narrative discusses our sources and uses of cash for the year ended December 31, 2016.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders of the Operating Partnership and stockholders of the Company as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2016 was approximately $17.1 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund our operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the stockholders of the Company (the unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).
Investing Activities. During the year ended December 31, 2016, we spent approximately $14.9 million on capital expenditures, of which, approximately $5.3 million related to the routine replacement of furniture, fixtures and equipment; approximately $1.8 million related to the renovation of our property in Houston, Texas in anticipation of our newly independent hotel The Whitehall which opened in May 2016; approximately $4.9 million related to the renovation of our property in Savannah, Georgia; approximately $1.5 million related to the renovation of our property in Atlanta, Georgia; approximately $0.6 million related to the renovation of our property in Wilmington, North Carolina; approximately $0.4 million related to the renovation of our property in Laurel, Maryland and approximately $0.4 million related to the renovation of our property in Hollywood Beach, Florida.
We also contributed approximately $5.3 million during 2016 into reserves required by the lenders for ten of our hotels according to the provisions of their respective loan agreements. During 2016, we received reimbursements from those reserves of approximately $7.0 million for capital expenditures related to those properties for periods ending on or before December 31, 2016.
Financing Activities. Cash flow provided by financing activities for the year ended December 31, 2016 was approximately $16.1 million. This inflow was principally from proceeds from the sale of preferred stock of approximately $37.8 million and net mortgage proceeds of approximately $14.2 million, offset by redemption of the 8% Notes for $27.6 million, repurchase of common stock for approximately $2.1 million, dividend and distribution payments of approximately $6.2 million and payments of deferred financing costs of approximately $1.5 million.
On June 27, 2016, we entered into a promissory note and other loan documents to secure a $35.0 million mortgage on the Hilton Savannah DeSoto with MONY Life Insurance Company.
On June 30, 2016, we entered into a loan agreement and other loan documents, including a guaranty of payment by the Operating Partnership, to secure a $19.0 million mortgage on the Crowne Plaza Tampa Westshore with Fifth Third Bank.
On August 23, 2016, the Company issued 1,610,000 shares, $0.01 par value per share, of its 8% Series B Cumulative Redeemable Perpetual Preferred Stock for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred partnership units.
On September 30, 2016, the Operating Partnership redeemed the entire $27.6 million aggregate principal amount of its outstanding 8% Notes.
46
On October 12, 2016, we entered into a loan agreement to secure a $20.5 million mortgage on The Whitehall with International Bank of Commerce. Pursuant to the loan documents, the loan provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions.
On November 3, 2016, we entered into a loan agreement to refinance the mortgage on the Sheraton Louisville Riverside with Symetra Life Insurance Company. Pursuant to the loan documents, the loan provides proceeds of $12.0 million.
On November 3, 2016, we entered into a loan agreement to modify and extend the $2.6 million mortgage on the Crowne Plaza Hampton Marina with TowneBank.
On December 1, 2016, we entered into a promissory note and other loan documents to secure a $35.0 million mortgage on the Hilton Wilmington Riverside with MONY Life Insurance Company. Pursuant to the loan documents, the loan provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions, namely, the completion of a renovation project.
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. The Company expects to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017, unless extended by the Board of Directors. Through December 31, 2016, the Company repurchased 481,100 shares of common stock for $3.2 million and the repurchased shares have been returned to the status of authorized but unissued shares of common stock.
The following narrative discusses our sources and uses of cash for the year ended December 31, 2015.
Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unit holders of the Operating Partnership and stockholders of the Company as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2015 was approximately $11.4 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund our operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends (distributions) to the stockholders of the Company (the unitholders of the Operating Partnership) in accordance with federal income tax laws which require us to make annual distributions, as “qualifying distributions,” to the Company’s stockholders of at least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items).
Investing Activities. During the year ended December 31, 2015, we used approximately $25.5 million to acquire the remaining 75.0% ownership interest in the Crowne Plaza Hollywood Beach Resort. We also spent approximately $20.1 million on capital expenditures, of which, approximately $5.1 million related to the routine replacement of furniture, fixtures and equipment; approximately $4.6 million related to the renovation of our property in Laurel, Maryland in anticipation of a new franchise agreement which commenced in October 2015; approximately $3.4 million related to the renovation of our property in Jacksonville, Florida in anticipation of a new franchise license which commenced in September 2015; approximately $3.1 million related to guestroom renovations at the Georgian Terrace; approximately $3.0 million in renovations at our property in Houston, Texas; and approximately $0.9 related to the renovation of our property in Philadelphia, Pennsylvania.
We also contributed approximately $5.0 million during 2015 into reserves required by the lenders for ten of our hotels according to the provisions of their respective loan agreements. During 2015, we received reimbursements from those reserves of approximately $6.4 million for capital expenditures related to those properties for periods ending on or before December 31, 2015 and we received net proceeds of approximately $2.4 million from the sale of a 0.3-acre parcel of excess land located adjacent to our property in Atlanta, Georgia and related development rights.
Financing Activities. Cash flow provided by financing activities for the year ended December 31, 2015 was approximately $24.6 million. This inflow was principally from proceeds from the sale of common stock of approximately $23.3 million and net mortgage proceeds of approximately $6.8 million, offset by dividend and distribution payments of approximately $4.1 million and payments of deferred financing costs of approximately $1.4 million.
On October 20, 2015, we secured $2.0 million of additional proceeds on the mortgage loan on the DoubleTree by Hilton Jacksonville Riverfront as part of an earn-out pursuant to the terms of the loan agreement.
On September 28, 2015, we entered into a loan agreement to secure a $60.0 million mortgage on the Crowne Plaza Hollywood Beach Resort with Bank of America, N.A.
47
On July 17, 2015, the Company sold 435,000 shares of common stock for net proceeds of approximately $2.8 million, which it contributed to the Operating Partnership for an equivalent number of units.
On July 7, 2015, we entered into a loan agreement and other loan documents to secure an $18.5 million mortgage with Bank of the Ozarks collateralized by a first mortgage on the DoubleTree by Hilton Jacksonville Riverfront. The $18.5 million mortgage was received in two parts. We received $18.0 million on July 7, 2015 and the remainder of $0.5 million on October 20, 2015. The $0.5 million was included with the additional earn-out provision of $1.5 million, for a total of $2.0 million additional proceeds.
On July 1, 2015, the Company sold 3,000,000 shares of common stock, for net proceeds of approximately $19.8 million, which it contributed to the Operating Partnership for an equivalent number of units.
During June 2015, the Company sold 98,682 shares of common stock for net proceeds of approximately $0.7 million, which it contributed to the Operating Partnership for an equivalent number of units.
On May 5, 2015, the Company obtained a $47.0 million mortgage with Bank of America, N.A. on the Georgian Terrace in Atlanta, Georgia.
Capital Expenditures
We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry. Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In addition, during fiscal years 2017 and 2018 we expect total renovation capital expenditures of approximately $23.5 million related to our properties in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida.
Given our desire to proceed with the renovation activities at our properties in Wilmington, North Carolina; Savannah, Georgia and Hollywood Beach, Florida, we aim to restrict all other capital expenditures to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to these renovation activities to total 3.50% of gross revenues in 2017.
We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hollywood Beach Resort, The DoubleTree by Hilton Jacksonville Riverside, the DoubleTree by Hilton Raleigh Brownstone-University, the Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.
Liquidity and Capital Resources
As of December 31, 2016, we had cash and cash equivalents of approximately $36.4 million, of which approximately $4.6 million was in restricted reserve accounts for capital improvements, real estate tax and insurance escrows. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of the indentures or mortgage debt).
We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
We expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, which include the repayment of the 7% Notes (which are callable after November 15, 2017) and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.
48
We do not have any debt obligations maturing until August 2018. In August 2018, the approximate $14.5 mortgage on our DoubleTree by Hilton Raleigh Brownstone University matures. We have approximately $87.6 million in debt obligations maturing in 2019, including $25.3 million of the Operating Partnership’s 7% Notes and approximately $62.3 million in mortgage debt, including reductions for future monthly principal payments on the mortgages.
On June 27, 2016, we entered into a promissory note and other loan documents to secure a $35.0 million mortgage on the Hilton Savannah DeSoto with MONY Life Insurance Company. The loan has a maturity date of July 1, 2026.
On June 30, 2016, we entered into a loan agreement and other loan documents, including a guaranty of payment by the Operating Partnership, to secure a $19.0 million mortgage on the Crowne Plaza Tampa Westshore with Fifth Third Bank. The loan has an initial term of three years with a maturity on July 1, 2019, and may be extended for two additional periods of one year each, subject to certain conditions.
On August 23, 2016, the Company issued 1,610,000 shares, $0.01 par value per share, of its 8% Series B Cumulative Redeemable Perpetual Preferred Stock for net proceeds after all expenses of approximately $37.8 million, which it contributed to the Operating Partnership for an equivalent number of preferred partnership units.
On September 30, 2016, the Operating Partnership redeemed the entire $27.6 million aggregate principal amount of its outstanding 8% Notes.
On October 12, 2016, we entered into a loan agreement to secure a $20.5 million mortgage on The Whitehall with International Bank of Commerce. Pursuant to the loan documents, the loan: provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions, has a term of five years, bears a floating interest rate of the one month LIBOR plus 3.5%, subject to a floor rate of 4.0%, amortizes on an 18-year schedule after a 2-year interest only period, is subject to prepayment fees, and is guaranteed by Sotherly Hotels LP.
On November 3, 2016, we entered into a loan agreement to refinance the mortgage on the Sheraton Louisville Riverside with Symetra Life Insurance Company. Pursuant to the loan documents, the loan: provides proceeds of $12.0 million, has a maturity date of December 1, 2026, bears a fixed interest rate of 4.27% for the first 5 years of the loan with an option for the lender to reset that rate after 5 years, amortizes on a 25-year schedule, is subject to prepayment fees, and is guaranteed by Sotherly Hotels LP at 50% of the unpaid principal balance, interest, and other amounts owed.
On December 1, 2016, we entered into a promissory note and other loan documents to secure a $35.0 million mortgage on the Hilton Wilmington Riverside with MONY Life Insurance Company. Pursuant to the loan documents, the loan: provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions, namely, the completion of a renovation project; has a term of 10 years; bears a fixed interest rate of 4.25%; amortizes on a 25-year schedule after a 1-year interest-only period and is subject to a prepayment premium.
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. The Company expects to use available working capital to fund purchases under the stock repurchase program and intends to complete the repurchase program prior to December 31, 2017, unless extended by the Board of Directors. Through December 31, 2016, the Company repurchased 481,100 shares of common stock for approximately $3.2 million and the repurchased shares have been returned to the status of authorized but unissued shares of common stock.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.
49
If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.
If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing.
Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.
At December 31, 2016, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans.
Unsecured Notes
The indenture for the 7% Notes contains certain covenants and restrictions that require us to meet certain financial ratios. We are not permitted to incur any Debt (other than intercompany Debt), as defined in the indenture, if, immediately after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value, as defined in the indenture, would be greater than 0.65 to 1.0. In addition, we are not permitted to incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense, both as defined in the indenture, on the date on which such additional Debt is to be incurred, on a pro-forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.50 to 1.0.
50
These financial measures are not calculated in accordance with GAAP and are presented below for the sole purpose of evaluating our compliance with the key financial covenants as they were or would have been applicable at December 31, 2016 and December 31, 2015, respectively.
| December 31, | December 31, |
| 2016 | 2015 |
| Ratio of Stabilized Consolidated Income Available   for Debt Service to Stabilized Consolidated   Interest Expense |
| Net income(1) | $ | 900,149 | $ | 6,397,653 |
| Interest expense(1) | 17,735,107 | 16,515,827 |
| Loss on early debt extinguishment | 1,417,905 | 772,907 |
| Unrealized loss on hedging activities | 37,384 | 108,819 |
| Gain on change in control | — | (6,603,148 | ) |
| Loss (Gain) on disposal of assets | 365,319 | (41,435 | ) |
| Income tax benefit(1) | (1,367,634 | ) | (1,336,033 | ) |
| Equity in income of joint venture(1) | — | (475,514 | ) |
| Impairment of investment in hotel properties, net(1) | — | 500,000 |
| Depreciation and amortization(1) | 15,019,071 | 13,591,495 |
| Corporate general and administrative expenses(1) | 6,021,065 | 7,268,256 |
| Consolidated income available for debt service(1) | 40,128,366 | 36,698,827 |
| Less: income of non-stabilized assets(1) | (10,203,893 | ) | (16,284,975 | ) |
| Stabilized Consolidated Income Available for   Debt Service(1) | $ | 29,924,473 | $ | 20,413,852 |
| Interest expense(1) (2) | $ | 18,011,107 | $ | 16,515,827 |
| Amortization of issuance costs(1) | (1,147,864 | ) | (1,300,032 | ) |
| Consolidated interest expense(1) | 16,863,243 | 15,215,795 |
| Less: interest expense of non-stabilized assets(1) | (3,417,412 | ) | (5,295,224 | ) |
| Stabilized Consolidated Interest Expense(1) | $ | 13,445,831 | $ | 9,920,571 |
| Ratio of Stabilized Consolidated Income Available   for Debt Service to Stabilized Consolidated   Interest Expense | 2.23 | 2.06 |
| Threshold Ratio Minimum | 1.50 | 1.50 |
| Ratio of Debt to Adjusted Total Asset Value: |
| Mortgage loans | $ | 284,757,698 | $ | 271,977,944 |
| Unsecured notes | 25,300,000 | 52,900,000 |
| Total debt | $ | 310,057,698 | $ | 324,877,944 |
| Stabilized Consolidated Income Available for   Debt Service(1) | $ | 29,924,473 | $ | 20,413,852 |
| Capitalization rate | 7.5 | % | 7.5 | % |
| 398,992,973 | 272,184,693 |
| Non-stabilized assets | 145,400,000 | 305,255,698 |
| Total cash | 36,362,920 | 17,287,754 |
| Adjusted Total Asset Value | $ | 580,755,893 | $ | 594,728,145 |
| Ratio of Debt to Adjusted Total Asset Value | 0.53 | 0.55 |
| Threshold Ratio Maximum | 0.65 | 0.65 |

| (1) | As permitted by the indenture, the Hilton Savannah DeSoto, DoubleTree by Hilton Laurel, DoubleTree by Hilton Jacksonville Riverfront and The Whitehall, for the period ended December 31, 2016, and the DoubleTree by Hilton Laurel, DoubleTree by Hilton Jacksonville Riverfront and Crowne Plaza Hollywood Beach Resort, for the period ended December 31, 2015, are considered non-stabilized assets for purposes of the financial covenants. |

| (2) | Includes losses on debt extinguishment paid for in cash of $276,000 in fiscal year 2016. |

51
Mortgage Debt
As of December 31, 2016, we had a principal mortgage debt balance of approximately $284.5 million. The following table sets forth our mortgage debt obligations on our hotels.
| December 31, | Prepayment | Maturity | Amortization |
| Property | 2016 | Penalties | Date | Provisions | Interest Rate |
| Crowne Plaza Hampton Marina (1) | $ | 2,584,633 | None | 11/1/2019 | $ | 3 years | 5.00% |
| Crowne Plaza Hollywood Beach Resort (2) | 58,935,818 | N/A | 10/1/2025 | 30 years | 4.913% |
| Crowne Plaza Tampa Westshore (3) | 15,561,400 | None | 6/30/2019 | 25 years | LIBOR plus 3.75 % |
| DoubleTree by Hilton Jacksonville   Riverfront (4) | 19,291,716 | Yes | 7/7/2019 | 25 years | LIBOR plus 3.50 % |
| DoubleTree by Hilton Laurel (5) | 9,329,005 | Yes | 8/5/2021 | 25 years | 5.25% |
| DoubleTree by Hilton Philadelphia Airport (6) | 31,261,991 | None | 4/1/2019 | 25 years | LIBOR plus 3.00 % |
| DoubleTree by Hilton Raleigh   Brownstone University (7) | 14,773,885 | N/A | 8/1/2018 | 30 years | 4.78% |
| The Georgian Terrace (8) | 45,826,038 | N/A | 6/1/2025 | 30 years | 4.42% |
| Hilton Savannah DeSoto (9) | 30,000,000 | Yes | 7/1/2026 | 25 years | 4.25% |
| Hilton Wilmington Riverside (10) | 30,000,000 | Yes | 1/1/2027 | 25 years | 4.25% |
| Sheraton Louisville Riverside (11) | 11,977,557 | Yes | 12/1/2026 | 25 years | 4.27% |
| The Whitehall (12) | 15,000,000 | Yes | 10/12/2021 | 18 years | LIBOR plus 3.50 % |
| Total Mortgage Principal Balance | 284,542,043 |
| Deferred financing costs, net | (2,049,409) |
| Unamortized premium on loan | 215,655 |
| Total Mortgage Loans | $ | 282,708,289 |

| (1) | The note was extended and modified in November 2016 for 3 years until November 1, 2019 and the Operating Partnership was required to make monthly principal payments of $15,367. The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014. As of February 7, 2017, the note is no longer outstanding. |

| (2) | With limited exception, the note may not be prepaid until June 2025. |

| (3) | The note provides initial proceeds of $15.7 million, with an additional $3.3 million available upon the satisfaction of certain conditions; bears a floating interest rate of the 1-month LIBOR plus 3.75%, subject to a floor rate of 3.75%; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions. |

| (4) | The note is subject to a pre-payment penalty until July 2017. Prepayment can be made without penalty thereafter. The note provides that the mortgage can be extended until July 2020 if certain conditions have been satisfied. |

| (5) | The note is subject to a pre-payment penalty except for any pre-payments made either between April 2017 and August 2017, or from April 2021 through maturity of the note. The note provides that on January 5, 2018, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%. |

| (6) | The note bears a minimum interest rate of 3.50%. |

| (7) | With limited exception, the note may not be prepaid until two months before maturity. |

| (8) | With limited exception, the note may not be prepaid until February 2025. |

| (9) | The note provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions, namely, the completion of a renovation project; amortizes on a 25-year schedule after a 1-year interest-only period; and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date. |

| (10) | The note provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions namely, the completion of a renovation project. The note amortizes on a 25-year schedule after a 1-year interest-only period; and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date. |

| (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) | The note was refinanced in October 2016, provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions; bears a floating interest rate of the 1-month LIBOR plus 3.5%, subject to a floor rate of 4.0%; and is subject to prepayment penalties subject to a declining scale from 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. |

52
Contractual Obligations
The following table outlines our contractual obligations as of December 31, 2016, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).
| Payments due by period (in thousands) |
| Less than | More than |
| Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years |
| Mortgage loans, including interest | $ | 355,927 | $ | 18,895 | $ | 119,609 | $ | 55,911 | $ | 161,512 |
| Unsecured notes, including interest | 30,416 | 1,771 | 28,645 | — | — |
| Ground, building, office and equipment leases | 1,137 | 224 | 276 | 191 | 446 |
| Purchase commitment | 4,250 | 4,250 | — | — | — |
| Totals | $ | 391,730 | $ | 25,140 | $ | 148,530 | $ | 56,102 | $ | 161,958 |

In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that required us to indemnify the contributors of our initial properties against tax liabilities in the event we sold any of those properties in a taxable transaction during a 10-year period. The tax indemnity agreements expired on or about December 22, 2014. Our obligations under the contribution agreements may effectively preclude us from reducing our consolidated indebtedness below approximately $11.0 million.
Off Balance Sheet Arrangements. Through a joint venture with a Carlyle subsidiary, we owned a 25.0% indirect, noncontrolling interest in an entity (the “JV Owner”) that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida. We had the right to receive a pro rata share of operating surpluses and we had an obligation to fund our pro rata share of operating shortfalls. We also had the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. The Crowne Plaza Hollywood Beach Resort was leased to another entity (the “Joint Venture Lessee”) in which we also owned a 25.0% indirect, noncontrolling interest.
Carlyle owned a 75.0% controlling interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort. Carlyle had the right to dispose of the Crowne Plaza Hollywood Beach Resort without our consent. We accounted for our noncontrolling 25.0% interest in all of these entities under the equity method of accounting.
On July 31, 2015, indirect subsidiaries of the Operating Partnership acquired from Carlyle the remaining 75.0% interest in the entities that own and lease the Crowne Plaza Hollywood Beach Resort. As a result, the Operating Partnership now has a 100% indirect ownership interest in the entities that own the Crowne Plaza Hollywood Beach Resort. The property was refinanced on September 28, 2015 and is encumbered by a $60.0 million mortgage which matures in September 2025 and requires monthly payments of interest at a rate of 4.913%. The Crowne Plaza Hollywood Beach Resort secures the mortgage.
Distributions to Stockholders and Holders of Units in the Operating Partnership. The Company has elected to be taxed as a REIT commencing with our taxable year ending December 31, 2004. To maintain qualification as a REIT, the Company is required to make annual distributions to its stockholders of at least 90.0% of our REIT taxable income, (excluding net capital gain, which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). The Company’s ability to pay distributions to its stockholders will depend, in part, upon its receipt of distributions from the Operating Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a non-taxable return of capital. To the extent not inconsistent with maintaining the Company’s REIT status, our TRS Lessees may retain any after-tax earnings.
Distributions to Preferred Stockholders and Holder of Preferred partnership units in the Operating Partnership. The Company is obligated to pay distributions to its preferred stockholders of the Company’s preferred stock and the Operating Partnership is obligated to pay its preferred unit holder, the Company. Holders of the Company’s 8% Series B Cumulative Redeemable 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 amount of annual dividends on our outstanding preferred shares is approximately $3.2 million and the aggregate liquidation preference with respect to our outstanding preferred shares is approximately $40.3 million. 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, except in the event of a change of control.
53
The Company’s ability to pay distributions to its stockholders will depend, in part, upon its receipt of distributions from the Operating Partnership which may depend upon receipt of lease payments with respect to our properties from our TRS Lessees, and in turn, upon the management of our properties by our hotel manager. Distributions to the Company’s stockholders will generally be taxable to the Company’s stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a non-taxable return of capital. To the extent not inconsistent with maintaining the Company’s REIT status, our TRS Lessees may retain any after-tax earnings.
The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by the Company based upon a variety of factors deemed relevant by its directors, and no assurance can be given that the distribution policy will not change in the future.
Inflation
We generate revenues primarily from lease payments from our TRS Lessees and net income from the operations of our TRS Lessees. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.
Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.
Geographic Concentration and Seasonality
Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania, and Texas. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.
The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which experience significant room demand during this period.
Competition
The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel properties acquired in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided, and price, are the principal competitive factors affecting our hotels.
Critical Accounting Policies
The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.
Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels, which were acquired from third parties contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.
54
We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse permanent changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the estimated proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted future cash flows, which resulted in an impairment to fair market value by an approximate amounts of $0.5 million and $3.2 million, as of December 31, 2015 and 2014, respectively.
In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition. We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.
Revenue Recognition. Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.
Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of December 31, 2016. We regularly evaluate the likelihood that our TRS Lessee will be able to realize its deferred tax assets and the continuing need for a valuation allowance. At December 31, 2016, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward. A number of factors played a critical role in this determination, including:
| • | a demonstrated track record of past profitability and utilization of past NOL carryforwards, |

| • | reasonable forecasts of future taxable income, and |

| • | anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership. |

Should unanticipated adverse financial trends occur, or other negative evidence develop, a valuation allowance may be necessary in the future against some or all of our deferred tax assets.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Non-GAAP Financial Measures
We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.
FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization,
55
and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.
We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, change in control gains or losses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative than FFO of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.
The following is a reconciliation of net income (loss) to FFO and Adjusted FFO for the years ended December 31, 2016, 2015, and 2014.
| Year Ended | Year Ended | Year Ended |
| December 31, | December 31, | December 31, |
| 2016 | 2015 | 2014 |
| Net Income/(Loss) Attributable to the Common   Stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) |
| Add: Net Income/(Loss) Attributable to the   Noncontrolling Interest | (26,567 | ) | 1,040,987 | (153,838 | ) |
| Depreciation and Amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Impairment of Investment in Hotel Properties, Net | — | 500,000 | 3,175,000 |
| Equity in Depreciation on Joint Venture | — | 259,279 | 529,053 |
| Gain on Change in Control | — | (6,603,148 | ) | — |
| Loss (Gain) on Disposal of Assets | 365,319 | (41,435 | ) | — |
| Gain on Involuntary Conversion of Asset | — | — | (169,151 | ) |
| Funds From Operations | $ | 15,139,650 | $ | 14,103,844 | $ | 14,765,677 |
| Increase in Deferred Income Taxes | (1,558,966 | ) | (1,780,571 | ) | (1,961,663 | ) |
| Acquisition Costs | — | 634,376 | 155,187 |
| Loss on Starwood Settlement | — | 324,271 | — |
| Over-Assessed Real Estate Taxes Under Appeal | — | 497,733 | — |
| Loan Modification Fees | 64,215 | 243,229 | — |
| Franchise Termination Fee | — | — | 351,800 |
| Realized and Unrealized Loss on Hedging Activities (A) | 37,384 | 108,819 | — |
| Loss on Early Debt Extinguishment (A) | 1,417,905 | 772,907 | 831,079 |
| Adjusted FFO | $ | 15,100,188 | $ | 14,904,608 | $ | 14,142,080 |

| (A) | Includes equity in unrealized (gain)/loss on hedging activities and loss on early extinguishment of debt of joint venture. |

Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) loss on early debt extinguishment, (10) gains or losses on change in control, (11) corporate general and administrative expense, (12) depreciation and amortization, (13) gains and losses on involuntary conversions of assets and (14) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more
56
complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.
Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.
The following is a reconciliation of net loss to Hotel EBITDA for the years ended December 31, 2016, 2015, and 2014.
| Year Ended | Year Ended | Year Ended |
| December 31, | December 31, | December 31, |
| 2016 | 2015 | 2014 |
| Net Income/(Loss) Attributable to the Common   Stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) |
| Add: Net Income/(Loss) Attributable to the   Noncontrolling Interest | (26,567 | ) | 1,040,987 | (153,838 | ) |
| Interest Expense | 17,735,107 | 16,515,827 | 14,636,870 |
| Interest Income | (115,785 | ) | (50,461 | ) | (19,865 | ) |
| Distributions to Preferred Stockholders | 1,144,889 | — | — |
| Income Tax Benefit | (1,367,634 | ) | (1,336,033 | ) | (1,727,723 | ) |
| Depreciation and Amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Equity in Earnings of Joint Venture | — | (475,514 | ) | (307,370 | ) |
| Unrealized Loss on Hedging Activities | 37,384 | 108,819 | — |
| Gain on Change in Control | — | (6,603,148 | ) | — |
| Loss on Debt Extinguishment | 1,417,905 | 772,907 | 831,079 |
| Loss (Gain) on Disposal of Assets | 365,319 | (41,435 | ) | — |
| Gain on Involuntary Conversion of Asset | — | — | (169,151 | ) |
| Impairment of Investment in Hotel Properties, Net | — | 500,000 | 3,175,000 |
| Corporate General and Administrative Expenses | 6,021,065 | 7,268,256 | 5,085,949 |
| Net Lease Rental Income | — | — | (350,000 | ) |
| Other Fee Income | — | (200,976 | ) | (300,607 | ) |
| Hotel EBITDA | $ | 40,012,581 | $ | 36,447,390 | $ | 32,084,957 |

Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.
To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.
As of December 31, 2016, we had approximately $228.7 million of fixed-rate debt and approximately $81.1 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.84%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR. However, to the extent that 1-month LIBOR does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on the mortgages on the Crowne Plaza Tampa Westshore, DoubleTree by Hilton Philadelphia Airport, DoubleTree by Hilton Jacksonville Riverfront and the mortgage on The Whitehall remains at approximately $81.1 million, the balance at December 31, 2016, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.8 million.
As of December 31, 2015, we had approximately $272.6 million of fixed-rate debt and approximately $52.3 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 5.58%. A change in market interest rates on the fixed portion
57
of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month and 3-month LIBOR. However, to the extent that 1-month LIBOR does not exceed the 1-month LIBOR floor on the mortgage on the DoubleTree by Hilton Philadelphia Airport of 0.50%, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the aggregate amount outstanding on the mortgage on the DoubleTree by Hilton Philadelphia Airport and the mortgage on the DoubleTree by Hilton Jacksonville Riverfront remains at approximately $52.2 million, the balance at December 31, 2015, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and 3-month LIBOR would be approximately $0.5 million.
Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page F-1.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Controls and Procedures
Sotherly Hotels Inc.
Disclosure Controls and Procedures
The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of December 31, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2016, its disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act). The Company’s management assessed the effectiveness over internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013 Internal Control-Integrated Framework. The Company’s management has concluded that, as of December 31, 2016, its internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
58
Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over financial reporting.
Sotherly Hotels LP
Disclosure Controls and Procedures
The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of December 31, 2016. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2016, the disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels LP have been detected.
Management’s Report on Internal Control over Financial Reporting
The Operating Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act). Management assessed the effectiveness over internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 Internal Control-Integrated Framework. Management has concluded that, as of December 31, 2016, the Operating Partnership’s internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the Operating Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Operating Partnership’s independent registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Changes in Internal Control over Financial Reporting
There was no change in Sotherly Hotels LP’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over financial reporting.
Other Information
None.
59
PART III
The information required by Items 10-14 is incorporated by reference to the Company’s proxy statement for the 2017 annual meeting of stockholders (to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report).
Directors, Executive Officers and Corporate Governance
The Company has adopted a code of business conduct and ethics, including a conflicts of interest policy that applies to its principal executive officer, principal financial officer, principal accounting officer or controller performing similar functions. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business. A copy of the Company’s Code of Business Conduct is posted on the Company’s external website at www.sotherlyhotels.com. The Company and the Operating Partnership intend to post to its website any amendments to or waivers of its code. The Operating Partnership is managed by the Company, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers.
Information on the Company’s directors is incorporated by reference to the sections captioned “Proposal I – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Company’s 2017 Proxy Statement.
. Executive Compensation
The information required by this item is incorporated by reference to the section captioned “Director and Executive Compensation” contained in the Company’s 2017 Proxy Statement.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the Company’s 2017 Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to the section captioned “Principal Holders” of the Company’s 2017 Proxy Statement.
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth below is information as of December 31, 2016 with respect to compensation plans under which equity securities of the Company are authorized for issuance.
60
EQUITY COMPENSATION PLAN INFORMATION
| NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE |
| Equity compensation plans approved by security holders: |
| 2013 Plan (1) | N/A | N/A | 640,900 |
| Equity compensation plans not approved by security holders: |
| None | N/A | N/A | N/A |
| Total | N/A | N/A | 640,900 |

| (1) | On February 2, 2016, we granted 8,000 shares of stock to Andrew M. Sims, 6,000 shares of stock to Anthony E. Domalski, 7,000 shares of stock to David R. Folsom, and 1,000 shares of stock to other employees of the Company. |

On February 2, 2016, we granted 12,000 shares (3,000 each) of restricted stock to certain of our independent directors that vested on December 31, 2016. Also on February 2, 2016, we granted an additional 2,250 shares of unrestricted stock to director Herschel J. Walker in consideration for his service during 2015.
On February 15, 2017, we granted 12,000 shares (3,000 each) of restricted stock to certain of our independent directors that will vest on December 31, 2017. These shares are included in the number of securities remaining available for future issuance at December 31, 2016.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the sections captioned “Certain Relationships and Related Transactions” and “Proposal I – Election of Directors” in the Company’s 2017 Proxy Statement.
Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the section captioned “Proposal II –Ratification of Appointment of Accountants” in the Company’s 2017 Proxy Statement.
61
PART IV
Exhibits and Financial Statement Schedules
| 1. Financial Statements |
| Index to Financial Statements and Financial Statement Schedules | F-1 |
| Sotherly Hotels Inc. |
| Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP | F-2 |
| Report of Independent Registered Public Accounting Firm, Grant Thornton LLP | F-3 |
| Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2016 and 2015 | F-4 |
| Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-5 |
| Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-6 |
| Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-7 |
| Sotherly Hotels LP |
| Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP | F-8 |
| Report of Independent Registered Public Accounting Firm, Grant Thornton LLP | F-9 |
| Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2016 and 2015 | F-10 |
| Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-11 |
| Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-12 |
| Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-13 |
| Notes to Consolidated Financial Statements | F-14 |
| 2. Financial Statement Schedules |
| Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2016 | F-35 |

All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
The following exhibits are filed as part of this Form 10-K:
| Exhibits |
| 3.1 | Articles of Amendment and Restatement of the Company (incorporated by reference to the document previously filed as Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004 (File No. 333-118873)). |
| 3.1A | Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 16, 2013 (incorporated by reference to the document previously filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013). |
| 3.1B | Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of August 12, 2016 (incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2016). |
| 3.2 | Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.3 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). |
| 3.2A | Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011). |

62
| Exhibits |
| 3.2B | Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.3 to the Operating Partnership’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on August 9, 2013 (File No. 333-189821)). |
| 3.2C | Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 23, 2016). |
| 3.3 | Articles Supplementary of Sotherly Hotels Inc. (incorporated by reference to the document previously filed as Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011). |
| 3.4 | Second Amended and Restated Bylaws of the Company, effective as of April 16, 2013 (incorporated by reference to the document previously filed as Exhibit 3.8 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2013). |
| 3.5 | Articles Supplementary designating the Series B Preferred Stock of the Company, effective as of August 19, 2016 (incorporated by reference to the document previously filed as Exhibit 3.5 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 22, 2016). |
| 4.0 | Form of Common Stock Certificate. |
| 4.1 | Senior Unsecured Note issued by Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 4.6 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013). |
| 4.2 | Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee (incorporated by reference to the document previously filed as Exhibit 4.7 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, filed with the Securities and Exchange Commission on November 7, 2013). |
| 4.3 | Indenture by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit 4.8 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014). |
| 4.4 | First Supplemental Indenture, by and among Sotherly Hotels Inc., Sotherly Hotels LP and Wilmington Trust, National Association, as trustee, dated November 21, 2014 (incorporated by reference to the document previously filed as Exhibit 4.9 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 21, 2014). |
| 4.5 | 7.00% Senior Unsecured Note due 2019, issued by Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 4.10 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on April 14, 2015). |
| 4.6 | Form of Specimen Certificate of Series B Preferred Stock of the Company (incorporated by reference to the document previously filed as Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on August 22, 2016). |
| 10.1 | Sotherly Hotels Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the document previously filed as Exhibit 10.1 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). * |
| 10.1A | Form of Restricted Stock Award Agreement between Sotherly Hotels Inc. and Participant (incorporated by reference to the document previously filed as Exhibit 10.1A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on March 25, 2009). * |
| 10.2 | Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated January 12, 2015 (incorporated by reference to the document previously filed as Exhibit 10.2A to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2015). * |
| 10.3 | Executive Employment Agreement between Sotherly Hotels Inc. and Anthony E. Domalski (incorporated by reference to the document previously filed as Exhibit 10.2A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2013). * |

63
| Exhibits |
| 10.4 | Contribution Agreement dated August 23, 2004 by and between the owners of Capitol Hotel Associates L.P., L.L.P. and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.6 to the Company’s Pre-Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 15, 2004 (File No. 333-118873)). |
| 10.5 | Contribution Agreement dated August 23, 2004 by and between the owners of Savannah Hotel Associates LLC and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.7 to the Company’s Pre-Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 15, 2004 (File No. 333-118873)). |
| 10.6 | Contribution Agreement dated August 23, 2004 by and between KDCA Partnership, MAVAS LLC, and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.8 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). |
| 10.7 | Contribution Agreement dated September 8, 2004 by and between Elpizo Limited Partnership, Phileo Land Corporation and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.9 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). |
| 10.8 | Asset Purchase Agreement dated August 19, 2004 by and between Accord LLC, West Laurel Corporation and MHI Hotels Services, LLC (incorporated by reference to the document previously filed as Exhibit 10.10 to the Company’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004 (File No. 333-118873)). |
| 10.9 | Agreement to Assign and Sublease Common Space Lease and Form of Sublease by and between MHI Hospitality L.P. and MHI Hotels, LLC (incorporated by reference to the document previously filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011). |
| 10.10 | Agreement to Assign and Sublease Commercial Space Lease and Form of Sublease by and between MHI Hospitality L.P. and MHI Hotels Two, Inc. (incorporated by reference to the document previously filed as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011). |
| 10.11 | Lease Agreement by and between Philadelphia Hotel Associates, LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K (incorporated by reference to the document previously filed as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011). |
| 10.12 | Management Restructuring Agreement by and between MHI Hospitality TRS, LLC, MHI Hotels Services, LLC and Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 10.14 to the Company’s Pre-Effective Amendment No. 3 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on November 15, 2004 (File No. 333-118873)). |
| 10.13 | Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc. (incorporated by reference to the document previously filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011). |
| 10.14 | Executive Employment Agreement, dated as of January 1, 2016, between Sotherly Hotels Inc. and David R. Folsom (incorporated by reference to the document previously filed as Exhibit 10.20A to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2016). * |
| 10.15 | Promissory Note dated March 29, 2007, made by Capitol Hotel Associates, L.P., L.L.P. and MONY Life Insurance Company (incorporated by reference to the document previously filed as Exhibit 10.25 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007). |
| Exhibits |
| 10.16 | Limited Liability Company Agreement of MHI/Carlyle Hotel Investment Program I, L.L.C. dated April 26, 2007 (incorporated by reference to the document previously filed as Exhibit 10.26A to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007). |
| 10.17 | Limited Liability Company Agreement of MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007 (incorporated by reference to the document previously filed as Exhibit 10.26B to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007). |
| 10.18 | Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company (incorporated by reference to the document previously filed as Exhibit 10.29 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2007). |
| 10.19 | Sotherly Hotels Inc. 2013 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 20, 2013). * |
| 10.20 | Sales Agency Agreement, dated July 9, 2014, among Sotherly Hotels Inc., Sotherly Hotels LP and Sandler O’Neill & Partners, L.P. (incorporated by reference to the document previously filed as Exhibit 10.51 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 9, 2014). |
| 10.21 | Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC and MHI Hotels Services LLC (incorporated by reference to the document previously filed as Exhibit 10.52 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014). |
| 10.22 | Purchase and Sale Agreement by and between MHI Hospitality TRS II, LLC, MHI Hotel Investments Holdings LLC and CRP/MHI Holdings, L.L.C., dated as of June 19, 2015 (incorporated by reference to the document previously filed as Exhibit 10.53 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2015). |
| 10.23 | Agreement for Sale and Purchase of Property by and between Hampton Hotel Associates LLC, Three Capital Hotels, Inc., and Ajitkumar B. Patel, dated as of April 29, 2016 (incorporated by reference to the document previously filed as Exhibit 10.54 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, filed with the Securities and Exchange Commission on August 12, 2016). |
| 10.24 | Amendment to the Agreement for Sale and Purchase of Property by and between Hampton Hotel Associates LLC, Three Capital Hotels, Inc., and Ajitkumar B. Patel, dated as of June 10, 2016 (incorporated by reference to the document previously filed as Exhibit 10.55 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, filed with the Securities and Exchange Commission on August 12, 2016). |
| 10.25 | Commercial Unit Purchase Agreement between Sotherly Hotels Inc. and 4111 South Ocean Drive, LLC, dated as of September 14, 2016 (incorporated by reference to the document previously filed as Exhibit 10.56 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2016). |
| 10.26 | Addendum to Commercial Unit Agreement between Sotherly Hotels Inc. and 4111 South Ocean Drive, LLC, dated as of September 14, 2016 (incorporated by reference to the document previously filed as Exhibit 10.57 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2016). |
| 10.27 | Agreement for Sale and Purchase of Property by and between Hampton Hotel Associates LLC, Marina Hotel, LLC, Neil Amin and Shamin Hotels, Inc., dated as of October 6, 2016 (incorporated by reference to the document previously filed as Exhibit 10.58 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 9, 2017). |
| 10.28 | Amendment to Agreement for Sale and Purchase of Property by and between Hampton Hotel Associates LLC, Marina Hotel, LLC, Neil Amin and Shamin Hotels, Inc., dated as of February 7, 2017 (incorporated by reference to the document previously filed as Exhibit 10.59 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 9, 2017). |
| 16.1 | Letter from Grant Thornton LLP, dated April 6, 2016 (incorporated by reference to the document previously filed as Exhibit 16.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2016). |
| 21.1 | List of Subsidiaries of Sotherly Hotels Inc. |
| 21.2 | List of Subsidiaries of Sotherly Hotels LP. |
| Exhibits |
| 23.1 | Consent of Dixon Hughes Goodman LLP. |
| 23.2 | Consent of Grant Thornton LLP. |
| 23.3 | Consent of Dixon Hughes Goodman LLP. |
| 23.4 | Consent of Grant Thornton LLP. |
| 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.3 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.4 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14 and 15(d)-14, as adopted, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002. |
| 32.3 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002. |
| 32.4 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Denotes management contract and/or compensatory plan/arrangement. |
| SOTHERLY HOTELS INC. |
| By: | /s/ ANDREW M. SIMS |
| Andrew M. Sims Chief Executive Officer |
| Signature | Title | Date |
| /s/ ANDREW M. SIMS Andrew M. Sims | Chief Executive Officer and Chairman of the Board of Directors | March 22, 2017 |
| /s/ DAVID R. FOLSOM David R. Folsom | President, Chief Operating Officer and Director | March 22, 2017 |
| /s/ ANTHONY E. DOMALSKI Anthony E. Domalski | Chief Financial Officer | March 22, 2017 |
| /s/ HERSCHEL J. WALKER Herschel J. Walker | Director | March 22, 2017 |
| /s/ DAVID J. BEATTY David J. Beatty | Director | March 22, 2017 |
| /s/ EDWARD S. STEIN Edward S. Stein | Director | March 22, 2017 |
| /s/ ANTHONY C. ZINNI Anthony C. Zinni | Director | March 22, 2017 |
| SOTHERLY HOTELS LP, |
| by its General Partner, |
| SOTHERLY HOTELS INC. |
| By: | /s/ ANDREW M. SIMS |
| Andrew M. Sims Chief Executive Officer |
| Signature | Title | Date |
| /s/ ANDREW M. SIMS Andrew M. Sims | Chief Executive Officer and Chairman of the Board of Directors of the General Partner | March 22, 2017 |
| /s/ DAVID R. FOLSOM David R. Folsom | President, Chief Operating Officer and Director of the General Partner | March 22, 2017 |
| /s/ ANTHONY E. DOMALSKI Anthony E. Domalski | Chief Financial Officer of the General Partner | March 22, 2017 |
| /s/ HERSCHEL J. WALKER Herschel J. Walker | Director of the General Partner | March 22, 2017 |
| /s/ DAVID J. BEATTY David J. Beatty | Director of the General Partner | March 22, 2017 |
| /s/ EDWARD S. STEIN Edward S. Stein | Director of the General Partner | March 22, 2017 |
| /s/ ANTHONY C. ZINNI Anthony C. Zinni | Director of the General Partner | March 22, 2017 |
| Sotherly Hotels Inc. |
| Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP | F-2 |
| Report of Independent Registered Public Accounting Firm, Grant Thornton LLP | F-3 |
| Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2016 and 2015 | F-4 |
| Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-5 |
| Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-6 |
| Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2016, 2015 and 2014 | F-7 |
| Sotherly Hotels LP |
| Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP | F-8 |
| Report of Independent Registered Public Accounting Firm, Grant Thornton LLP | F-9 |
| Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2016 and 2015 | F-10 |
| Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-11 |
| Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-12 |
| Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2016, 2015 and 2014 | F-13 |
| Notes to Consolidated Financial Statements | F-14 |
| Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2016 | F-35 |
| December 31, 2016 | December 31, 2015 |
| ASSETS |
| Investment in hotel properties, net | $ | 348,593,912 | $ | 354,963,242 |
| Investment in hotel properties held for sale, net | 5,333,000 | — |
| Cash and cash equivalents | 31,766,775 | 11,493,914 |
| Restricted cash | 4,596,145 | 5,793,840 |
| Accounts receivable, net | 4,127,748 | 4,071,175 |
| Accounts receivable-affiliate | 4,175 | 226,552 |
| Loan proceeds receivable | — | 2,600,711 |
| Prepaid expenses, inventory and other assets | 4,648,469 | 4,432,431 |
| Deferred income taxes | 6,949,340 | 5,390,374 |
| TOTAL ASSETS | $ | 406,019,564 | $ | 388,972,239 |
| LIABILITIES |
| Mortgage loans, net | $ | 282,708,289 | $ | 270,331,724 |
| Unsecured notes, net | 24,308,713 | 50,460,106 |
| Accounts payable and accrued expenses | 12,970,960 | 12,334,878 |
| Advance deposits | 2,315,787 | 1,651,840 |
| Dividends and distributions payable | 2,376,527 | 1,335,323 |
| TOTAL LIABILITIES | $ | 324,680,276 | $ | 336,113,871 |
| Commitments and contingencies (See Note 6) | — | — |
| EQUITY |
| Sotherly Hotels Inc. stockholders’ equity |
| 8% Series B Cumulative Redeemable Perpetual Preferred stock, par value $0.01,   11,000,000 shares authorized, liquidation preference $25 per share, 1,610,000   shares and 0 shares issued and outstanding at December 31, 2016 and 2015,   respectively | 16,100 | — |
| Common stock, par value $0.01, 49,000,000 shares authorized, 14,468,551   shares and 14,490,714 shares issued and outstanding at December 31, 2016   and 2015, respectively | 144,685 | 144,907 |
| Additional paid in capital | 118,395,082 | 82,749,058 |
| Distributions in excess of retained earnings | (39,545,754 | ) | (33,890,834 | ) |
| Total Sotherly Hotels Inc. stockholders’ equity | 79,010,113 | 49,003,131 |
| Noncontrolling interest | 2,329,175 | 3,855,237 |
| TOTAL EQUITY | 81,339,288 | 52,858,368 |
| TOTAL LIABILITIES AND EQUITY | $ | 406,019,564 | $ | 388,972,239 |
| 2016 | 2015 | 2014 |
| REVENUE |
| Rooms department | $ | 108,199,151 | $ | 96,837,386 | $ | 84,618,889 |
| Food and beverage department | 35,384,530 | 33,273,599 | 31,444,984 |
| Other operating departments | 9,262,071 | 8,422,491 | 6,876,046 |
| Total revenue | 152,845,752 | 138,533,476 | 122,939,919 |
| EXPENSES |
| Hotel operating expenses |
| Rooms department | 28,895,371 | 25,782,992 | 22,913,479 |
| Food and beverage department | 24,357,248 | 23,005,629 | 21,026,202 |
| Other operating departments | 2,438,860 | 1,786,197 | 1,192,183 |
| Indirect | 57,141,692 | 51,310,292 | 45,072,491 |
| Total hotel operating expenses | 112,833,171 | 101,885,110 | 90,204,355 |
| Depreciation and amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Impairment of investment in hotel properties, net | — | 500,000 | 3,175,000 |
| Loss (gain) on disposal of assets | 365,319 | (41,435 | ) | — |
| Corporate general and administrative | 6,021,065 | 7,268,256 | 5,085,949 |
| Total operating expenses | 134,238,626 | 123,203,426 | 110,434,588 |
| NET OPERATING INCOME | 18,607,126 | 15,330,050 | 12,505,331 |
| Other income (expense) |
| Interest expense | (17,735,107 | ) | (16,515,827 | ) | (14,636,870 | ) |
| Interest income | 115,785 | 50,461 | 19,865 |
| Equity income in joint venture | — | 475,514 | 307,370 |
| Loss on early debt extinguishment | (1,417,905 | ) | (772,907 | ) | (831,079 | ) |
| Unrealized loss on hedging activities | (37,384 | ) | (108,819 | ) | — |
| Gain on change in control | — | 6,603,148 | — |
| Gain on involuntary conversion of asset | — | — | 169,151 |
| Net income/(loss) before income taxes | (467,485 | ) | 5,061,620 | (2,466,232 | ) |
| Income tax benefit | 1,367,634 | 1,336,033 | 1,727,723 |
| Net income/(loss) | 900,149 | 6,397,653 | (738,509 | ) |
| Less: Net (income)/loss attributable to the noncontrolling interest | 26,567 | (1,040,987 | ) | 153,838 |
| Net income/(loss) attributable to the Company | 926,716 | 5,356,666 | (584,671 | ) |
| Distributions to preferred stockholders | (1,144,889 | ) | — | — |
| Net income/(loss) attributable to common stockholders | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) |
| Net income/(loss) per share attributable to the common stockholders |
| Basic and diluted | $ | (0.01 | ) | $ | 0.43 | $ | (0.06 | ) |
| Weighted average number of common shares outstanding |
| Basic and diluted | 14,896,994 | 12,541,117 | 10,377,125 |
| Additional | Distributions |
| Preferred Stock | Common Stock | Paid- | in Excess of | Noncontrolling |
| Shares | Par Value | Shares | Par Value | In Capital | Retained Earnings | Interest | Total |
| Balances at December 31, 2013 | — | $ | — | 10,206,927 | $ | 102,069 | $ | 57,534,113 | $ | (32,450,773 | ) | $ | 5,669,386 | $ | 30,854,795 |
| Net loss | — | — | — | — | — | (584,671 | ) | (153,838 | ) | (738,509 | ) |
| Conversion of units in Operating   Partnership to shares of   common stock | — | — | 310,000 | 3,100 | 755,750 | — | (758,850 | ) | — |
| Redemption of units in Operating   Partnership | — | — | — | — | — | — | (25,621 | ) | (25,621 | ) |
| Issuance of unrestricted common   stock awards | — | — | 24,750 | 248 | 147,112 | — | — | 147,360 |
| Issuance of restricted common   stock awards | — | — | 12,000 | 120 | 78,165 | — | — | 78,285 |
| Issuance of common stock through   ATM offering, net | — | — | 17,255 | 172 | 124,739 | — | — | 124,911 |
| Amortization of restricted stock   award | — | — | — | — | 19,920 | — | — | 19,920 |
| Dividends and distributions   declared | — | — | — | — | (2,352,869 | ) | (598,415 | ) | (2,951,284 | ) |
| Balances at December 31, 2014 | — | $ | — | 10,570,932 | $ | 105,709 | $ | 58,659,799 | $ | (35,388,313 | ) | $ | 4,132,662 | $ | 27,509,857 |
| Net income | — | — | — | — | — | 5,356,666 | 1,040,987 | 6,397,653 |
| Issuance of unrestricted common   stock awards | — | — | 26,350 | 264 | 193,936 | — | — | 194,200 |
| Issuance of restricted common   stock awards | — | — | 9,750 | 98 | 71,760 | — | — | 71,858 |
| Issuance of common stock from   ATM sales | — | — | 98,682 | 986 | 681,222 | — | — | 682,208 |
| Issuance of common stock from   equity offering | — | — | 3,435,000 | 34,350 | 22,534,259 | — | — | 22,568,609 |
| Conversion of Operating Partnership units into   shares of common stock | — | — | 350,000 | 3,500 | 588,162 | — | (591,662 | ) | — |
| Amortization of restricted stock   award | — | — | — | — | 19,920 | — | — | 19,920 |
| Dividends and distributions   declared | — | — | — | — | — | (3,859,187 | ) | (726,750 | ) | (4,585,937 | ) |
| Balances at December 31, 2015 | — | $ | — | 14,490,714 | $ | 144,907 | $ | 82,749,058 | $ | (33,890,834 | ) | $ | 3,855,237 | $ | 52,858,368 |
| Net income (loss) | — | — | — | — | — | 926,716 | (26,567 | ) | 900,149 |
| Issuance of Series B Preferred   Stock | 1,610,000 | 16,100 | — | — | 37,750,431 | — | — | 37,766,531 |
| Issuance of unrestricted   common stock awards | — | — | 24,250 | 242 | 128,040 | — | — | 128,282 |
| Issuance of restricted   common stock awards | — | — | 12,000 | 120 | 63,360 | — | — | 63,480 |
| Repurchase of common stock | — | — | (481,100 | ) | (4,811 | ) | (3,159,725 | ) | — | — | (3,164,536 | ) |
| Conversion of Operating Partnership units into   shares of common stock | — | — | 422,687 | 4,227 | 843,998 | — | (848,225 | ) | — |
| Amortization of restricted   stock award | — | — | — | — | 19,920 | — | — | 19,920 |
| Preferred stock dividends   declared | — | — | — | — | — | (1,144,889 | ) | — | (1,144,889 | ) |
| Common stockholders'   dividends and   distributions declared | — | — | — | — | — | (5,436,747 | ) | (651,270 | ) | (6,088,017 | ) |
| Balances at December 31, 2016 | 1,610,000 | $ | 16,100 | 14,468,551 | $ | 144,685 | $ | 118,395,082 | $ | (39,545,754 | ) | $ | 2,329,175 | $ | 81,339,288 |
| 2016 | 2015 | 2014 |
| Cash flows from operating activities: |
| Net income (loss) | $ | 900,149 | $ | 6,397,653 | $ | (738,509 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
| Depreciation and amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Gain on change in control | — | (6,603,148 | ) | — |
| Equity income in joint venture | — | (475,514 | ) | (307,370 | ) |
| Impairment of investment in hotel properties | — | 500,000 | 3,175,000 |
| Amortization of deferred financing costs | 1,147,864 | 1,300,032 | 1,428,674 |
| Amortization of mortgage premium | (24,682 | ) | (18,820 | ) | — |
| Unrealized loss on derivative instrument | 37,384 | 108,819 | — |
| Loss (gain) on disposal of assets | 365,319 | (41,435 | ) | — |
| Loss on early debt extinguishment | 1,141,905 | 772,907 | — |
| Charges related to equity-based compensation | 211,682 | 285,978 | 245,565 |
| Changes in assets and liabilities: |
| Restricted cash | (560,817 | ) | 584,926 | (92,439 | ) |
| Accounts receivable | (56,573 | ) | (2,021,825 | ) | 369,685 |
| Prepaid expenses, inventory and other assets | (334,063 | ) | (623,980 | ) | (1,677,032 | ) |
| Deferred income taxes | (1,558,966 | ) | (1,780,571 | ) | (1,961,663 | ) |
| Accounts payable and other accrued liabilities | (35,188 | ) | (1,001,376 | ) | 2,338,688 |
| Advance deposits | 663,947 | 431,111 | 89,099 |
| Accounts receivable - affiliate | 222,377 | (28,878 | ) | 12,273 |
| Net cash provided by operating activities | 17,139,409 | 11,377,374 | 14,851,255 |
| Cash flows from investing activities: |
| Acquisitions of hotel properties | — | (25,525,754 | ) | (61,106,085 | ) |
| Improvements and additions to hotel properties | (14,912,677 | ) | (20,136,427 | ) | (9,801,018 | ) |
| Payments on involuntary insurance conversions | — | — | — |
| Distributions from joint venture | — | 600,000 | 750,000 |
| Funding of restricted cash reserves | (5,276,518 | ) | (4,973,602 | ) | (3,692,045 | ) |
| Proceeds of restricted cash reserves | 7,035,029 | 6,376,459 | 2,583,419 |
| Proceeds from involuntary conversion of assets | — | 124,609 | 169,151 |
| Proceeds from the sale of assets | 213,400 | 2,402,113 | — |
| Net cash used in investing activities | (12,940,766 | ) | (41,132,602 | ) | (71,096,578 | ) |
| Cash flows from financing activities: |
| Proceeds of unsecured debt | — | — | 25,300,000 |
| Proceeds of mortgage debt | 102,700,000 | 127,000,000 | 48,600,000 |
| Proceeds from mortgage loan receivable | 2,600,711 | — | — |
| Proceeds from loans | — | — | 19,000,000 |
| Proceeds from sale of common stock, net | — | 23,250,818 | 124,911 |
| Proceeds from sale of preferred stock, net | 37,766,531 | — | — |
| Payments on mortgage loans | (89,619,564 | ) | (120,154,764 | ) | (24,171,892 | ) |
| Redemption of unsecured notes | (27,600,000 | ) | — | — |
| Repurchase of common stock | (2,061,407 | ) | — | — |
| Payment of deferred financing costs | (1,520,351 | ) | (1,377,882 | ) | (2,637,637 | ) |
| Dividends and distributions paid | (5,851,813 | ) | (4,103,529 | ) | (2,686,567 | ) |
| Preferred dividends paid | (339,889 | ) | — | — |
| Redemption of units in Operating Partnership | — | — | (25,621 | ) |
| Net cash provided by financing activities | 16,074,218 | 24,614,643 | 63,503,194 |
| Net increase (decrease) in cash and cash equivalents | 20,272,861 | (5,140,585 | ) | 7,257,871 |
| Cash and cash equivalents at the beginning of the period | 11,493,914 | 16,634,499 | 9,376,628 |
| Cash and cash equivalents at the end of the period | $ | 31,766,775 | $ | 11,493,914 | $ | 16,634,499 |
| Supplemental disclosures: |
| Cash paid during the period for interest | $ | 16,881,223 | $ | 15,415,695 | $ | 13,766,824 |
| Cash paid during the period for income taxes | $ | 192,965 | $ | 570,762 | $ | 263,621 |
| Non-cash investing and financing activities: |
| Mortgage debt proceeds receivable and related loan costs | $ | — | $ | 2,704,415 | $ | — |
| Assumption of mortgage loan on Crowne Plaza Hollywood Beach Resort acquisition | $ | — | $ | 57,000,000 | $ | — |
| Assumption of loan premium on the Crowne Plaza Hollywood Beach Resort   assumed loan | $ | — | $ | 246,815 | $ | — |
| Change in amount of deferred financing and deferred offering cost in accounts   payable and accrued liabilities | $ | — | $ | 624,117 | $ | 375,487 |
| Change in amount of hotel property improvements in accounts payable and   accrued liabilities | $ | 431,858 | $ | 601,895 | $ | 1,108,182 |
| December 31, 2016 | December 31, 2015 |
| ASSETS |
| Investment in hotel properties, net | $ | 348,593,912 | $ | 354,963,242 |
| Investment in hotel property held for sale, net | 5,333,000 | — |
| Cash and cash equivalents | 31,766,775 | 11,493,914 |
| Restricted cash | 4,596,145 | 5,793,840 |
| Accounts receivable, net | 4,127,748 | 4,071,175 |
| Accounts receivable-affiliate | 4,175 | 226,552 |
| Loan proceeds receivable | — | 2,600,711 |
| Prepaid expenses, inventory and other assets | 4,648,469 | 4,432,431 |
| Deferred income taxes | 6,949,340 | 5,390,374 |
| TOTAL ASSETS | $ | 406,019,564 | $ | 388,972,239 |
| LIABILITIES |
| Mortgage loans, net | $ | 282,708,289 | $ | 270,331,724 |
| Unsecured notes, net | 24,308,713 | 50,460,106 |
| Accounts payable and other accrued liabilities | 12,970,960 | 12,334,878 |
| Advance deposits | 2,315,787 | 1,651,840 |
| Dividends and distributions payable | 2,376,527 | 1,335,323 |
| TOTAL LIABILITIES | $ | 324,680,276 | $ | 336,113,871 |
| Commitments and contingencies (see Note 6) | — | — |
| PARTNERS’ CAPITAL |
| 8% Series B Cumulative Redeemable Perpetual Preferred partnership units, liquidation preference   $25 per unit, 1,610,000 units and 0 units issued and outstanding at December 31,   2016 and 2015, respectively | 37,766,531 | — |
| General Partner: 162,467 units and 166,915 units issued and outstanding as of   December 31, 2016 and 2015, respectively | 681,389 | 774,295 |
| Limited Partners: 16,084,224 units and 16,524,626 units issued and outstanding as   of December 31, 2016 and 2015, respectively | 42,891,368 | 52,084,073 |
| TOTAL PARTNERS’ CAPITAL | 81,339,288 | 52,858,368 |
| TOTAL LIABILITIES AND PARTNERS’ CAPITAL | $ | 406,019,564 | $ | 388,972,239 |
| 2016 | 2015 | 2014 |
| REVENUE |
| Rooms department | $ | 108,199,151 | $ | 96,837,386 | $ | 84,618,889 |
| Food and beverage department | 35,384,530 | 33,273,599 | 31,444,984 |
| Other operating departments | 9,262,071 | 8,422,491 | 6,876,046 |
| Total revenue | 152,845,752 | 138,533,476 | 122,939,919 |
| EXPENSES |
| Hotel operating expenses |
| Rooms department | 28,895,371 | 25,782,992 | 22,913,479 |
| Food and beverage department | 24,357,248 | 23,005,629 | 21,026,202 |
| Other operating departments | 2,438,860 | 1,786,197 | 1,192,183 |
| Indirect | 57,141,692 | 51,310,292 | 45,072,491 |
| Total hotel operating expenses | 112,833,171 | 101,885,110 | 90,204,355 |
| Depreciation and amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Impairment of investment in hotel properties, net | — | 500,000 | 3,175,000 |
| Loss on disposal of assets | 365,319 | (41,435 | ) | — |
| Corporate general and administrative | 6,021,065 | 7,268,256 | 5,085,949 |
| Total operating expenses | 134,238,626 | 123,203,426 | 110,434,588 |
| NET OPERATING INCOME | 18,607,126 | 15,330,050 | 12,505,331 |
| Other income (expense) |
| Interest expense | (17,735,107 | ) | (16,515,827 | ) | (14,636,870 | ) |
| Interest income | 115,785 | 50,461 | 19,865 |
| Equity income in joint venture | — | 475,514 | 307,370 |
| Loss on early debt extinguishment | (1,417,905 | ) | (772,907 | ) | (831,079 | ) |
| Unrealized loss on hedging activities | (37,384 | ) | (108,819 | ) | — |
| Gain on change in control | — | 6,603,148 | — |
| Gain on involuntary conversion of asset | — | — | 169,151 |
| Net income/(loss) before income taxes | (467,485 | ) | 5,061,620 | (2,466,232 | ) |
| Income tax benefit | 1,367,634 | 1,336,033 | 1,727,723 |
| Net income/(loss) | 900,149 | 6,397,653 | (738,509 | ) |
| Distributions to preferred unit holders | (1,144,889 | ) | — | — |
| Net income/(loss) attributable to operating partnership unit holders | $ | (244,740 | ) | $ | 6,397,653 | $ | (738,509 | ) |
| Net income/(loss) attributable per operating partner unit |
| Basic and diluted | $ | (0.01 | ) | $ | 0.43 | $ | (0.06 | ) |
| Weighted average number of operating partner units outstanding |
| Basic and diluted | 16,710,935 | 14,924,410 | 13,107,413 |
| Preferred Units | General Partner | Limited Partner |
| Units | Amount | Units | Amount | Units | Amounts | Total |
| Balances at December 31, 2013 | — | $ | — | 130,711 | $ | 554,316 | 12,940,343 | $ | 30,300,479 | $ | 30,854,795 |
| Issuance of partnership units | — | — | 540 | 3,534 | 53,465 | 347,022 | 350,556 |
| Amortization of restricted   units award | — | — | — | 199 | — | 19,721 | 19,920 |
| Distributions declared | — | — | — | (29,644 | ) | — | (2,921,640 | ) | (2,951,284 | ) |
| Redemption of limited   partnership units | — | — | (33 | ) | (228 | ) | (3,267 | ) | (25,393 | ) | (25,621 | ) |
| Net loss | — | — | — | (7,386 | ) | — | (731,123 | ) | (738,509 | ) |
| Balances at December 31, 2014 | — | $ | — | 131,218 | $ | 520,791 | 12,990,541 | $ | 26,989,066 | $ | 27,509,857 |
| Issuance of partnership units | — | — | 35,697 | 235,237 | 3,534,085 | 23,281,638 | 23,516,875 |
| Amortization of restricted   units award | — | — | — | 149 | — | 19,771 | 19,920 |
| Distributions declared | — | — | — | (45,859 | ) | — | (4,540,078 | ) | (4,585,937 | ) |
| Net income | — | — | — | 63,977 | — | 6,333,676 | 6,397,653 |
| Balances at December 31, 2015 | — | $ | — | 166,915 | $ | 774,295 | 16,524,626 | $ | 52,084,073 | $ | 52,858,368 |
| Issuance of common   partnership units | — | — | 363 | 1,918 | 35,887 | 189,844 | 191,762 |
| Issuance of preferred partnership units | 1,610,000 | 37,766,531 | — | — | — | — | 37,766,531 |
| Repurchased common units | — | — | (4,811 | ) | (31,645 | ) | (476,289 | ) | (3,132,891 | ) | (3,164,536 | ) |
| Amortization of restricted   units award | — | — | — | 149 | — | 19,771 | 19,920 |
| Preferred partnership units distributions declared | — | (1,144,889 | ) | — | — | — | — | (1,144,889 | ) |
| Partnership units distributions declared | — | — | — | (60,880 | ) | — | (6,027,137 | ) | (6,088,017 | ) |
| Net income | — | 1,144,889 | — | (2,447 | ) | — | (242,293 | ) | 900,149 |
| Balances at December 31, 2016 | 1,610,000 | $ | 37,766,531 | 162,467 | $ | 681,389 | 16,084,224 | $ | 42,891,368 | $ | 81,339,288 |
| 2016 | 2015 | 2014 |
| Cash flows from operating activities: |
| Net income (loss) | $ | 900,149 | $ | 6,397,653 | $ | (738,509 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating   activities: |
| Depreciation and amortization | 15,019,071 | 13,591,495 | 11,969,284 |
| Gain on change in control | — | (6,603,148 | ) | — |
| Equity income in joint venture | — | (475,514 | ) | (307,370 | ) |
| Impairment of investment in hotel properties | — | 500,000 | 3,175,000 |
| Amortization of deferred financing costs | 1,147,864 | 1,300,032 | 1,428,674 |
| Amortization of mortgage premium | (24,682 | ) | (18,820 | ) | — |
| Unrealized loss on derivative instrument | 37,384 | 108,819 | — |
| Loss (gain) on disposal of assets | 365,319 | (41,435 | ) | — |
| Loss on early debt extinguishment | 1,141,905 | 772,907 | — |
| Charges related to equity-based compensation | 211,682 | 285,978 | 245,565 |
| Changes in assets and liabilities: |
| Restricted cash | (560,817 | ) | 584,926 | (92,439 | ) |
| Accounts receivable | (56,573 | ) | (2,021,825 | ) | 369,685 |
| Prepaid expenses, inventory and other assets | (334,063 | ) | (623,980 | ) | (1,677,032 | ) |
| Deferred income taxes | (1,558,966 | ) | (1,780,571 | ) | (1,961,663 | ) |
| Accounts payable and other accrued liabilities | (35,188 | ) | (1,001,376 | ) | 2,338,688 |
| Advance deposits | 663,947 | 431,111 | 89,099 |
| Accounts receivable - affiliate | 222,377 | (28,878 | ) | 12,273 |
| Net cash provided by operating activities | 17,139,409 | 11,377,374 | 14,851,255 |
| Cash flows from investing activities: |
| Acquisitions of hotel properties | — | (25,525,754 | ) | (61,106,085 | ) |
| Improvements and additions to hotel properties | (14,912,677 | ) | (20,136,427 | ) | (9,801,018 | ) |
| Payments on involuntary insurance conversions | — | — | — |
| Distributions from joint venture | — | 600,000 | 750,000 |
| Funding of restricted cash reserves | (5,276,518 | ) | (4,973,602 | ) | (3,692,045 | ) |
| Proceeds from involuntary conversion of assets | — | 124,609 | 169,151 |
| Proceeds of restricted cash reserves | 7,035,029 | 6,376,459 | 2,583,419 |
| Proceeds from the sale of assets | 213,400 | 2,402,113 |
| Net cash used in investing activities | (12,940,766 | ) | (41,132,602 | ) | (71,096,578 | ) |
| Cash flows from financing activities: |
| Proceeds of unsecured debt | — | — | 25,300,000 |
| Proceeds of mortgage debt | 102,700,000 | 127,000,000 | 48,600,000 |
| Proceeds from mortgage loan receivable | 2,600,711 | — | — |
| Proceeds from loans | — | — | 19,000,000 |
| Proceeds from sale of operating units | — | 23,250,818 | 124,911 |
| Proceeds from sale of preferred operating units | 37,766,531 | — | — |
| Payments on mortgage loans | (89,619,564 | ) | (120,154,764 | ) | (24,171,892 | ) |
| Redemption of unsecured notes | (27,600,000 | ) |
| Repurchase of common units | (2,061,407 | ) | — | — |
| Payment of deferred financing costs | (1,520,351 | ) | (1,377,882 | ) | (2,637,637 | ) |
| Distributions paid | (5,851,813 | ) | (4,103,529 | ) | (2,686,567 | ) |
| Preferred dividends paid | (339,889 | ) | — | — |
| Redemption of units in Operating Partnership | — | — | (25,621 | ) |
| Net cash provided by financing activities | 16,074,218 | 24,614,643 | 63,503,194 |
| Net increase (decrease) in cash and cash equivalents | 20,272,861 | (5,140,585 | ) | 7,257,871 |
| Cash and cash equivalents at the beginning of the period | 11,493,914 | 16,634,499 | 9,376,628 |
| Cash and cash equivalents at the end of the period | $ | 31,766,775 | $ | 11,493,914 | $ | 16,634,499 |
| Supplemental disclosures: |
| Cash paid during the period for interest | $ | 16,881,223 | $ | 15,415,695 | $ | 13,766,824 |
| Cash paid during the period for income taxes | $ | 192,965 | $ | 570,762 | $ | 263,621 |
| Non-cash investing and financing activities: |
| Mortgage debt proceeds receivable and related loan costs | $ | — | $ | 2,704,415 | $ | — |
| Assumption of mortgage loan on Crowne Plaza Hollywood Beach Resort acquisition | $ | — | $ | 57,000,000 | $ | — |
| Assumption of loan premium on the Crowne Plaza Hollywood Beach Resort   assumed loan | $ | — | $ | 246,815 | $ | — |
| Change in amount of deferred financing and deferred offering cost in accounts   payable and accrued liabilities | $ | — | $ | 624,117 | $ | 375,487 |
| Change in amount of hotel property improvements in accounts payable and   accrued liabilities | $ | 431,858 | $ | 601,895 | $ | 1,108,182 |
| 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. |
| Level 1 | Level 2 | Level 3 |
| December 31, 2015 |
| Investment in hotel property, net (1) | $ | — | $ | — | $ | 5,700,762 |
| Interest Rate Cap (4) | $ | — | $ | 70,981 | $ | — |
| Mortgage loans (2) | $ | — | $ | (272,933,327 | ) | $ | — |
| Unsecured notes (3) | $ | (54,238,600 | ) | $ | — | $ | — |
| December 31, 2016 |
| Interest Rate Cap (4) | $ | — | $ | 33,597 | $ | — |
| Mortgage loans (2) | $ | — | $ | (281,840,780 | ) | $ | — |
| Unsecured notes (3) | $ | (26,241,160 | ) | $ | — | $ | — |
| (1) | A non-recurring fair value measurement was conducted in 2015 for our investment in hotel property, which resulted in a recorded impairment charge for the year ended December 31, 2015, which represent the amounts by which the carrying value of the asset group exceeded its fair value. |
| (2) | Mortgage loans are reflected at carrying value on our Consolidated Balance Sheet as of December 31, 2016 and December 31, 2015. |
| (3) | Unsecured notes are recorded at historical cost on our Consolidated Balance Sheet as of December 31, 2016 and December 31, 2015. |
| (4) | An interest rate cap on the DoubleTree by Hilton Jacksonville Riverfront mortgage with the Bank of the Ozarks is recorded at fair value on our Consolidated Balance Sheet as of December 31, 2016 and December 31, 2015. |
| December 31, 2017 | $ | 1,105,165 |
| December 31, 2018 | 632,365 |
| December 31, 2019 | 544,920 |
| December 31, 2020 | 499,294 |
| December 31, 2021 | 246,388 |
| December 31, 2022 and thereafter | 1,661,913 |
| Total | $ | 4,690,045 |
| Georgian Terrace | Crowne Plaza Hollywood Beach Resort |
| Land and land improvements | $ | 10,127,687 | $ | 24,008,289 |
| Buildings and improvements | 45,385,939 | 64,854,787 |
| Furniture, fixtures and equipment | 5,163,135 | 2,802,135 |
| Investment in hotel properties | 60,676,761 | 91,665,211 |
| Restricted cash | 124,658 | 1,159,759 |
| Accounts receivable | 465,287 | 140,588 |
| Prepaid expenses, inventory and other assets | 430,997 | 797,505 |
| Assumed mortgage | — | (57,259,159 | ) |
| Accounts payable and accrued liabilities | (591,618 | ) | (2,485,442 | ) |
| Equity investment | — | (1,889,560 | ) |
| Gain on change in control | — | (6,603,148 | ) |
| Net cash | $ | 61,106,085 | $ | 25,525,754 |
| December 31, 2015 | December 31, 2014 |
| (unaudited) | (unaudited) |
| Pro forma revenues | $ | 151,931,931 | $ | 147,451,042 |
| Pro forma operating expenses | $ | 133,346,497 | $ | 129,961,867 |
| Pro forma operating income | $ | 18,585,434 | $ | 17,489,175 |
| Pro forma net income (loss) | $ | 1,017,180 | $ | (1,671,774 | ) |
| Pro forma earnings (loss) per basic and diluted share | $ | 0.07 | $ | (0.10 | ) |
| Pro forma earnings (loss) per basic and diluted units | $ | 0.07 | $ | (0.10 | ) |
| Pro forma basic and diluted common shares | 12,541,117 | 13,812,125 |
| Pro forma basic and diluted units | 14,924,410 | 16,542,413 |
| December 31, 2016 | December 31, 2015 |
| Land and land improvements | $ | 57,851,380 | $ | 59,910,212 |
| Buildings and improvements | 336,996,876 | 333,720,421 |
| Furniture, fixtures and equipment | 43,458,781 | 42,245,334 |
| 438,307,037 | 435,875,967 |
| Less: accumulated depreciation and impairment | (89,713,125 | ) | (80,912,725 | ) |
| Investment in Hotel Properties, Net | $ | 348,593,912 | $ | 354,963,242 |
| December 31, 2016 | December 31, 2015 |
| Land and land improvements | $ | 1,097,096 | $ | — |
| Buildings and improvements | 6,242,504 | — |
| Furniture, fixtures and equipment | 2,289,008 | — |
| 9,628,608 | — |
| Less: accumulated depreciation and impairment | (4,295,608 | ) | — |
| Investment in Hotel Properties Held for Sale, Net | $ | 5,333,000 | $ | — |
| Balance Outstanding as of |
| December 31, | December 31, | Prepayment | Maturity | Amortization | Interest |
| Property | 2016 | 2015 | Penalties | Date | Provisions | Rate |
| Crowne Plaza Hampton Marina (1) | $ | 2,584,633 | $ | 3,512,586 | None | 11/1/2019 | 3 years | 5.00% |
| Crowne Plaza Hollywood Beach Resort (2) | 58,935,818 | 59,795,743 | n/a | 10/1/2025 | 30 years | 4.913% |
| Crowne Plaza Tampa Westshore (3) | 15,561,400 | 13,016,045 | None | 6/30/2019 | 25 years | LIBOR plus 3.75 % |
| DoubleTree by Hilton Jacksonville   Riverfront (4) | 19,291,716 | 19,774,577 | Yes | 7/7/2019 | 25 years | LIBOR plus 3.50 % |
| DoubleTree by Hilton Laurel (5) | 9,329,005 | 9,500,000 | Yes | 8/5/2021 | 25 years | 5.25% |
| DoubleTree by Hilton Philadelphia Airport (6) | 31,261,991 | 32,376,795 | None | 4/1/2019 | 25 years | LIBOR plus 3.00 % |
| DoubleTree by Hilton Raleigh   Brownstone University (7) | 14,773,885 | 15,029,121 | n/a | 8/1/2018 | 30 years | 4.78% |
| The Georgian Terrace (8) | 45,826,038 | 46,579,011 | n/a | 6/1/2025 | 30 years | 4.42% |
| Hilton Savannah DeSoto (9) | 30,000,000 | 20,522,836 | Yes | 7/1/2026 | 25 years | 4.25% |
| Hilton Wilmington Riverside (10) | 30,000,000 | 19,825,772 | Yes | 1/1/2027 | 25 years | 4.25% |
| Sheraton Louisville Riverside (11) | 11,977,557 | 11,345,866 | Yes | 12/1/2026 | 25 years | 4.27% |
| The Whitehall (12) | 15,000,000 | 20,459,256 | Yes | 10/12/2021 | 18 years | LIBOR plus 3.50 % |
| Total Mortgage Principal Balance | $ | 284,542,043 | $ | 271,737,608 |
| Deferred financing costs, net | (2,049,409 | ) | (1,646,220 | ) |
| Unamortized premium on loan | 215,655 | 240,336 |
| Total Mortgage Loans, Net | $ | 282,708,289 | $ | 270,331,724 |
| (1) | The note was extended and modified in November 2016 for 3 years until November 1, 2019 and the Operating Partnership was required to make monthly principal payments of $15,367. The note rate was changed to a fixed rate of 5.00%, effective June 27, 2014. As of February 7, 2017, the note is no longer outstanding. |
| (2) | With limited exception, the note may not be prepaid until June 2025. |
| (3) | The note provides initial proceeds of $15.7 million, with an additional $3.3 million available upon the satisfaction of certain conditions; bears a floating interest rate of the 30-day LIBOR plus 3.75%, subject to a floor rate of 3.75%; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions. |
| (4) | The note is subject to a pre-payment penalty until July 2017. Prepayment can be made without penalty thereafter. The note provides that the mortgage can be extended until July 2020 if certain conditions have been satisfied. |
| (5) | The note is subject to a pre-payment penalty except for any pre-payments made either between April 2017 and August 2017, or from April 2021 through maturity of the note. The note provides that on January 5, 2018, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%. |
| (6) | The note bears a minimum interest rate of 3.50%. |
| (7) | With limited exception, the note may not be prepaid until two months before maturity. |
| (8) | With limited exception, the note may not be prepaid until February 2025. |
| (9) | The note provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions, namely, the completion of a renovation project; amortizes on a 25-year schedule after a 1-year interest-only period; and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date. |
| (10) | The note provides initial proceeds of $30.0 million, with an additional $5.0 million available upon the satisfaction of certain conditions namely, the completion of a renovation project; amortizes on a 25-year schedule after a 1-year interest-only period; and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date. |
| (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) | The note was refinanced in October 2016, provides initial proceeds of $15.0 million, with an additional $5.5 million available upon the satisfaction of certain conditions; bears a floating interest rate of the 1-month LIBOR plus 3.5%, subject to a floor rate of 4.0% and is subject to prepayment penalties subject to a declining scale from 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. |
| For the year ending: December 31, 2017 | $ | 6,363,323 |
| December 31, 2018 | 24,626,923 |
| December 31, 2019 | 73,423,203 |
| December 31, 2020 | 9,248,750 |
| December 31, 2021 | 31,008,186 |
| December 31, 2022 and thereafter | 139,871,658 |
| Total future maturities | $ | 284,542,043 |
| For the year ending: December 31, 2017 | $ | 223,682 |
| December 31, 2018 | 176,740 |
| December 31, 2019 | 100,480 |
| December 31, 2020 | 95,482 |
| December 31, 2021 | 95,482 |
| December 31, 2022 and thereafter | 445,583 |
| Total | $ | 1,137,449 |
| Quarter Ended | 2014 | 2015 | 2016 |
| March 31, | $ | 0.045 | $ | 0.070 | $ | 0.085 |
| June 30, | $ | 0.050 | $ | 0.075 | $ | 0.090 |
| September 30, | $ | 0.065 | $ | 0.080 | $ | 0.095 |
| December 31, | $ | 0.065 | $ | 0.080 | $ | 0.095 |
| Seven Months Ended | Year Ended |
| July 31, 2015 | December 31, 2014 |
| Revenue |
| Rooms department | $ | 10,605,941 | $ | 15,386,595 |
| Food and beverage department | 1,911,950 | 2,968,395 |
| Other operating departments | 880,564 | 1,385,469 |
| Total revenue | 13,398,455 | 19,740,459 |
| Expenses |
| Hotel operating expenses |
| Rooms department | 2,062,515 | 3,270,930 |
| Food and beverage department | 1,442,139 | 2,270,918 |
| Other operating departments | 388,087 | 655,818 |
| Indirect | 4,774,322 | 7,436,198 |
| Total hotel operating expenses | 8,667,063 | 13,633,864 |
| Depreciation and amortization | 1,060,339 | 2,116,211 |
| General and administrative | 252,565 | 148,873 |
| Total operating expenses | 9,979,967 | 15,898,948 |
| Operating income | 3,418,488 | 3,841,511 |
| Interest expense | (1,516,433 | ) | (2,612,032 | ) |
| Net income | $ | 1,902,055 | $ | 1,229,479 |
| 2016 | 2015 | 2014 |
| General and administrative | $ | 12,419,221 | $ | 11,595,819 | $ | 9,823,853 |
| Sales and marketing | 13,754,600 | 11,426,637 | 9,788,079 |
| Repairs and maintenance | 7,401,755 | 6,948,699 | 6,278,411 |
| Utilities | 6,429,686 | 6,124,459 | 5,763,990 |
| Franchise fees | 4,091,729 | 4,016,083 | 4,122,726 |
| Management fees, including incentive | 3,865,362 | 3,490,586 | 3,439,807 |
| Property taxes | 5,983,280 | 5,110,659 | 3,664,022 |
| Insurance | 2,594,783 | 2,305,966 | 1,927,935 |
| Other | 601,276 | 291,383 | 263,668 |
| Total indirect hotel operating expenses | $ | 57,141,692 | $ | 51,310,292 | $ | 45,072,491 |
| Year Ended | Year Ended | Year Ended |
| December 31, 2016 | December 31, 2015 | December 31, 2014 |
| Current: |
| Federal | $ | — | $ | — | $ | — |
| State | 191,332 | 444,538 | 233,940 |
| 191,332 | 444,538 | 233,940 |
| Deferred: |
| Federal | (1,294,408 | ) | (1,510,726 | ) | (1,718,351 | ) |
| State | (264,558 | ) | (269,845 | ) | (243,312 | ) |
| (1,558,966 | ) | (1,780,571 | ) | (1,961,663 | ) |
| $ | (1,367,634 | ) | $ | (1,336,033 | ) | $ | (1,727,723 | ) |
| Year Ended | Year Ended | Year Ended |
| December 31, 2016 | December 31, 2015 | December 31, 2014 |
| Statutory federal income tax expense | $ | (158,859 | ) | $ | 1,705,610 | $ | (838,519 | ) |
| Effect of non-taxable REIT income | (1,135,549 | ) | (2,866,950 | ) | (898,576 | ) |
| State income tax benefit | (73,226 | ) | (174,693 | ) | 9,372 |
| $ | (1,367,634 | ) | $ | (1,336,033 | ) | $ | (1,727,723 | ) |
| • | a demonstrated track record of past profitability and utilization of past NOL carryforwards, |
| • | reasonable forecasts of future taxable income, and |
| • | anticipated changes in the lease rental payments from the TRS Lessee to subsidiaries of the Operating Partnership. |
| Year Ended | Year Ended | Year Ended |
| December 31, 2016 | December 31, 2015 | December 31, 2014 |
| Numerator |
| Net income/(loss) attributable to the common   shareholders for basic computation | $ | (218,173 | ) | $ | 5,356,666 | $ | (584,671 | ) |
| Denominator |
| Weighted average number of common shares   outstanding for basic computation | 14,896,994 | 12,541,117 | 10,377,125 |
| Basic and diluted net income (loss) per share | $ | (0.01 | ) | $ | 0.43 | $ | (0.06 | ) |
| Year Ended | Year Ended | Year Ended |
| December 31, 2016 | December 31, 2015 | December 31, 2014 |
| Numerator |
| Net income/(loss) attributable to the common   unitholders for basic computation | $ | (244,740 | ) | $ | 6,397,653 | $ | (738,509 | ) |
| Denominator |
| Weighted average number of units outstanding | 16,710,935 | 14,924,410 | 13,107,413 |
| Basic and diluted net income (loss) per unit | $ | (0.01 | ) | $ | 0.43 | $ | (0.06 | ) |
| Quarters Ended 2016 |
| March 31 | June 30 | September 30 | December 31 |
| Total revenue | $ | 37,810,144 | $ | 41,824,954 | $ | 37,275,312 | $ | 35,935,342 |
| Total operating expenses | 33,025,990 | 34,645,809 | 33,539,913 | 33,026,914 |
| Net operating income | 4,784,154 | 7,179,145 | 3,735,399 | 2,908,428 |
| Net income(loss) | 545,874 | 1,977,550 | (1,549,191 | ) | (74,084 | ) |
| Net income (loss) attributable to common shareholders | 483,095 | 1,761,106 | (1,716,234 | ) | (746,140 | ) |
| Earnings (loss) per share attributable to common   shareholders– basic and diluted | $ | 0.03 | $ | 0.12 | $ | (0.11 | ) | $ | (0.05 | ) |
| Quarters Ended 2015 |
| March 31 | June 30 | September 30 | December 31 |
| Total revenue | $ | 30,975,630 | $ | 36,865,108 | $ | 33,941,875 | $ | 36,750,863 |
| Total operating expenses | 27,410,462 | 29,689,455 | 31,976,036 | 34,127,473 |
| Net operating income | 3,565,168 | 7,175,653 | 1,965,839 | 2,623,390 |
| Net income(loss) | 713,859 | 1,759,109 | 4,636,644 | (711,959 | ) |
| Net income (loss) attributable to common shareholders | 575,336 | 1,431,110 | 3,872,394 | (522,174 | ) |
| Earnings (loss) per share attributable to common   shareholders– basic and diluted | $ | 0.05 | $ | 0.13 | $ | 0.27 | $ | (0.04 | ) |
| Costs Capitalized | Life on |
| Initial Costs | Subsequent to Acquisition | Gross Amount At End of Year | Accumulated | Which |
| Building & | Building & | Building & | Depreciation | Date of | Date | Depreciation |
| Description | Encumbrances | Land | Improvements | Land | Improvements | Land | Improvements | Total | & Impairment | Construction | Acquired | is Computed |
| Crowne Plaza Hampton Marina – Hampton, Virginia | $ | 2,585 | $ | 1,061 | $ | 6,733 | $ | 36 | 3,796 | $ | 1,097 | $ | 10,529 | $ | 11,626 | $ | (4,296 | ) | 1988 | 2008 | 3-39 years |
| Crowne Plaza Hollywood Beach Resort - Hollywood   Beach, Florida | 58,936 | 22,865 | 67,660 | — | (124 | ) | 22,865 | 67,536 | 90,401 | (2,646 | ) | 1972 | 2015 | 3-39 years |
| Crowne Plaza Tampa Westshore – Tampa, Florida | 15,561 | 4,153 | 9,670 | 297 | 22,259 | 4,450 | 31,929 | 36,379 | (7,707 | ) | 1973 | 2007 | 3-39 years |
| DoubleTree by Hilton Jacksonville Riverfront –   Jacksonville, Florida | 19,292 | 7,090 | 14,604 | 89 | 7,113 | 7,179 | 21,717 | 28,896 | (5,881 | ) | 1970 | 2005 | 3-39 years |
| DoubleTree by Hilton Laurel – Laurel, Maryland | 9,329 | 900 | 9,443 | 175 | 5,679 | 1,075 | 15,122 | 16,197 | (3,913 | ) | 1985 | 2004 | 3-39 years |
| DoubleTree by Hilton Philadelphia Airport –   Philadelphia, Pennsylvania | 31,262 | 2,100 | 22,031 | 260 | 5,478 | 2,360 | 27,509 | 29,869 | (8,281 | ) | 1972 | 2004 | 3-39 years |
| DoubleTree by Hilton Raleigh Brownstone –   University – Raleigh, North Carolina | 14,774 | 815 | 7,416 | 213 | 5,761 | 1,028 | 13,177 | 14,205 | (4,831 | ) | 1971 | 2004 | 3-39 years |
| Georgian Terrace – Atlanta, Georgia | 45,826 | 10,128 | 45,386 | (1,332 | ) | 4,811 | 8,796 | 50,197 | 58,993 | (3,715 | ) | 1911 | 2014 | 3-39 years |
| Hilton Savannah DeSoto – Savannah, Georgia | 30,000 | 600 | 13,562 | 31 | 14,545 | 631 | 28,107 | 28,738 | (8,640 | ) | 1968 | 2004 | 3-39 years |
| Hilton Wilmington Riverside – Wilmington,   North Carolina | 30,000 | 785 | 16,829 | 228 | 12,514 | 1,013 | 29,343 | 30,356 | (11,283 | ) | 1970 | 2004 | 3-39 years |
| Sheraton Louisville Riverside – Jeffersonville, Indiana | 11,977 | 782 | 6,891 | 222 | 14,566 | 1,004 | 21,457 | 22,461 | (5,074 | ) | 1972 | 2006 | 3-39 years |
| The Whitehall – Houston, Texas | 15,000 | 7,374 | 22,185 | 78 | 4,431 | 7,452 | 26,616 | 34,068 | (2,239 | ) | 1963 | 2013 | 3-39 years |
| $ | 284,542 | $ | 58,653 | $ | 242,410 | $ | 297 | $ | 100,829 | $ | 58,950 | $ | 343,239 | $ | 402,189 | $ | (68,506 | ) |
| (1) | For the year ending December 31, 2016, the aggregate cost of our real estate assets for federal income tax purposes was approximately $398.6 million. |
| Balance at December 31, 2014 | $ | 294,827 |
| Acquisitions | 91,669 |
| Improvements | 11,105 |
| Disposal of Assets | (3,971 | ) |
| Balance at December 31, 2015 | $ | 393,630 |
| Acquisitions | — |
| Improvements | 9,473 |
| Disposal of Assets | (914 | ) |
| Balance at December 31, 2016 | $ | 402,189 |
| Balance at December 31, 2014 | $ | 53,233 |
| Current Expense | 8,790 |
| Impairment | 500 |
| Disposal of Assets | (482 | ) |
| Balance at December 31, 2015 | $ | 62,041 |
| Current Expense | 7,018 |
| Impairment | — |
| Disposal of Assets | (553 | ) |
| Balance at December 31, 2016 | $ | 68,506 |


Question: What is the average annual franchise fee, in percentage, if the company operates the franchise for a period of 5 years based on the franchise fee for operating year 1, 2 and thereafter?

Python solution:
def solution():
     #Define variables name and value
    year1_fee = 3.0
    year2_fee = 4.0
    thereafter_fee = 5.0
    thereafter_years = 5 - 2  # calculate the number of years that falls in "thereafter" category

    #Do math calculation to get the answer
    total_fee_percentage = year1_fee + year2_fee + (thereafter_fee * thereafter_years)
    average_annual_fee = total_fee_percentage / 5
    answer = average_annual_fee
    return answer


Answer: 4.4