EDGAR 10-K Filing

Company CIK: 1301236
Filing Year: 2022
Filename: 1301236_10-K_2022_0001564590-22-011824.json

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ITEM 1. BUSINESS
Item 1. 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. As of the filing date, the Company owns approximately 94.0% of the general and limited partnership units in the Operating Partnership. Limited partners own the remaining Operating Partnership units.
As of December 31, 2021, our portfolio consisted of twelve full-service, primarily upscale and upper-upscale hotels located in eight states with an aggregate of 3,156 hotel rooms, and interests in two condominium hotels and their associated rental programs. All of our hotels are wholly-owned by subsidiaries of the Operating Partnership and are managed on a day-to-day basis by Our Town Hospitality, LLC (“Our Town”). Our portfolio is concentrated in markets that we believe possess multiple demand generators and have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we expect will be capable of providing strong risk-adjusted returns.
In order for the Company to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, we lease our wholly-owned hotel properties to entities that we refer to as our “TRS Lessees”, which are wholly-owned subsidiaries of MHI Hospitality TRS Holding, Inc. (“MHI Holding”, and collectively with the TRS Lessees, the “MHI TRS Entities”). The MHI TRS Entities, in turn, have engaged Our Town, which is an eligible independent management company, to manage the day-to-day operations at our hotels. MHI Holding is a taxable REIT subsidiary (“TRS”) for federal income tax purposes.
Our corporate office is located at 306 South Henry Street, Suite 100, Williamsburg, Virginia 23185. Our telephone number is (757) 229-5648.
COVID-19
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was significantly reduced and had a significant impact on our results of operations. Hotel demand has begun to improve due largely to increased vaccination rates and the lifting of government mandates. See further discussion in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10-K.
Our Properties
As of December 31, 2021, our hotels were located in Florida, Georgia, Indiana, Maryland, Virginia, North Carolina, Pennsylvania and Texas. Nine of these hotels operate under franchise agreements with major hotel brands, and three are independent hotels. We also own the hotel commercial condominium units of the Hyde Resort & Residences and Hyde Beach House Resort & Residences condominium hotels. We closed the sale of the Sheraton Louisville Riverside on February 10, 2022. The DoubleTree by Hilton Raleigh Brownstone-University is under contract to be sold. See Item 2 in Part I and Item 7 in Part II 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. Sotherly may also opportunistically acquire hotels throughout other regions of the 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. Current market conditions and the terms of our loan agreements limit our ability to pursue our growth strategy, but as economic conditions improve and demand and consumer confidence increase, we intend to position the Company to execute on our growth strategy. We are not subject to limitations on the amount or percentage of our total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location or facility type. Our policy is to acquire assets primarily for income and long-term appreciation.
Our investment criteria are further detailed below:
•
Geographic Growth Markets: Our growth strategy focuses 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. Sotherly may also opportunistically acquire hotels throughout the United States.
•
Full-Service Hotels: Our acquisition strategy focuses 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, and Hyatt, 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 limited service or extended-stay 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. Sotherly may also opportunistically acquire hotels outside of the full-service, upscale or upper-upscale category.
•
Significant Barriers to Entry: We intend to execute a strategy that focuses on 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 generally have a bias toward acquiring underperforming hotels, which we typically define 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:
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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.
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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:
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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.
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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.
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Investments in Mortgages, Structured Financings and Other Lending Policies: In sourcing acquisitions for our core turnaround growth strategy, we may pursue investments in debt instruments that are collateralized by underperforming hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to the Company’s stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures. We do not have a policy limiting our ability to invest in loans secured by properties or to make loans to other persons. We may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We may make loans to joint ventures in which we may participate in the future. However, neither Sotherly nor the Operating Partnership intend to engage in significant lending activities.
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 monitor 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 managers’ 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.
We also require detailed and refined reporting data from our hotel manager, 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 efforts to optimize labor costs. Our third-party hotel manager is responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our hotels, we monitor our hotel manager and make recommendations regarding the operation of our hotels. The labor force in our hotels is predominately non-unionized, with only one property, the DoubleTree by Hilton Jacksonville Riverfront, having approximately 31 employees electing to participate under a collective bargaining arrangement. Further, the employees at our hotels that are managed by Our Town are eligible to receive health and other insurance coverage through Our Town, 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
Our hotels are managed on a day-to-day basis by Our Town, an eligible independent management company. The base management fee for each of our hotels is a percentage of the gross revenues of the hotel and is due monthly. The applicable percentages of gross revenue for the base management fee for each of our wholly-owned hotels and our condominium hotel rental programs are shown below:
Hotel Name
Commencement
Date
Expiration
Date
Percentage Fee
Hotel Ballast Wilmington, Tapestry Collection by Hilton
January 1, 2020
March 31, 2025
2.50%
The DeSoto
January 1, 2020
March 31, 2025
2.50%
DoubleTree by Hilton Philadelphia Airport
January 1, 2020
March 31, 2025
2.50%
DoubleTree by Hilton Brownstone - University
January 1, 2020
March 31, 2025
2.50%
Sheraton Louisville Riverside (1)
January 1, 2020
March 31, 2025
2.50%
Hotel Alba Tampa, Tapestry Collection by Hilton
January 1, 2020
March 31, 2025
2.50%
DoubleTree by Hilton Jacksonville Riverfront
January 1, 2020
March 31, 2025
2.50%
DoubleTree by Hilton Laurel
January 1, 2020
March 31, 2025
2.50%
Georgian Terrace
January 1, 2020
March 31, 2025
2.50%
The Whitehall
January 1, 2020
March 31, 2025
2.50%
(1)
The Sheraton Louisville Riverside was sold on February 10, 2022.
Hotel Name
Commencement
Date
Expiration
Date
Year 1
Year 2
Year 3
Years 4-5 &
Renewals
DoubleTree Resort by Hilton Hollywood Beach
April 1, 2020
March 31, 2025
2.00%
2.25%
2.50%
2.50%
Hyde Resort & Residences
April 1, 2020
March 31, 2025
2.00%
2.25%
2.50%
2.50%
Hyde Beach House Resort & Residences
April 1, 2020
March 31, 2025
2.00%
2.25%
2.50%
2.50%
Hyatt Centric Arlington
November 15, 2020
March 31, 2025
2.00%
2.25%
2.50%
2.50%
Agreements with Our Town. Our Town is the management company for each of our twelve wholly-owned hotels, as well as the manager for our two condominium rental programs. As of December 31, 2021, Our Town was a majority-owned subsidiary of Newport Hospitality Group, Inc (“Newport”). On February 25, 2022, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer increased their beneficial ownership to approximately 51.3% and 1.5%, respectively, of the total outstanding ownership interests of Our Town. Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights.
On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the management of our hotels. Those hotel management agreements for our 11 wholly-owned hotels and the two rental programs are each referred to as an “OTH Hotel Management Agreement” and, together, the “OTH Hotel Management Agreements”.
The OTH Master Agreement:
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expires on March 31, 2025, or earlier if all of the OTH Hotel Management Agreements expire or are terminated prior to that date. The OTH Master Agreement shall be extended beyond 2025 for such additional periods as an OTH Hotel Management Agreement remains in effect;
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requires Our Town to provide dedicated executive level support for our managed hotels pursuant to certain criteria;
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sets an incentive management fee for each of the hotels managed by Our Town equal to 10% of the amount by which gross operating profit, as defined in the OTH Hotel Management Agreements, 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;
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provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021;
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provides a mechanism and establishes conditions on which the Company will offer Our Town 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 Our Town; and
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sets a base management fee for future hotels of 2.00% for the first year of the term, 2.25% for the second year of the term, and 2.50% for the third and any additional years of the term.
Each of the OTH Hotel Management Agreements has an initial term ending March 31, 2025. Each of the OTH 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 Our Town will be the sole and exclusive manager of the hotels as the agent of the respective TRS Lessee, at the sole cost and expense of the TRS Lessee (except for the initial advances and amounts borrowed by Our Town under the Credit Agreement as described below), and subject to certain operating standards. Each OTH Hotel Management Agreement may be terminated in connection with a sale of the related hotel. In connection with a termination upon the sale of the hotel, Our Town 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 OTH Hotel Management Agreement. Upon the sale of a hotel, no termination fee will be due in the event the Company elects to provide Our Town with the opportunity to manage another comparable hotel and Our Town is not precluded from accepting such opportunity. Our Town 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.
Pursuant to the management agreements for the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, Our Town manages the rental of individually owned condominium units pursuant to rental agreements entered into with individual condominium unit owners. We have also entered into an Association Sub Management and Assignment Agreement with Our Town for the management and operation of the condominium association responsible for the operation of the Hyde Beach House Resort & Residences, and a Rental Sales Management Agreement pursuant to which Our Town agreed to manage the marketing and negotiation of rental agreements with individual condominium unit owners.
Franchise Agreements
As of December 31, 2021, all but three of our wholly-owned hotels operate under franchise licenses from national hotel companies. As our franchise agreements expire, we will continue to evaluate each hotel on a case-by-case basis and decide whether to renew or terminate the agreement. We also periodically review our independent hotels to determine whether they would be better served by operating under a franchise license.
Our TRS Lessees hold the franchise licenses for our wholly-owned hotels. Our hotel manager must operate each of our hotels they manage in accordance with and pursuant to the terms of the franchise agreement for the hotel.
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:
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training of operational personnel;
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safety;
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maintaining specified insurance;
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the types of services and products ancillary to guest room services that may be provided;
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display of signage;
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marketing standards including print media, billboards, and promotions standards; and
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the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.
As the franchisee, our TRS Lessees are required to pay franchise/royalty fees, as well as certain other fees for marketing and reservations services in amounts that range from approximately 3.0% to 4.0% of gross revenues. The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties as of December 31, 2021:
Franchise/Royalty
Expiration
Fee (1)
Date
Hotel Alba Tampa, Tapestry Collection by Hilton (2)
5.0
%
June 2029
DoubleTree by Hilton Jacksonville Riverfront
5.0
%
September 2025
DoubleTree by Hilton Laurel
5.0
%
October 2030
DoubleTree by Hilton Philadelphia - Airport
5.0
%
October 2024
DoubleTree by Hilton Raleigh Brownstone - University
5.0
%
March 2023
DoubleTree Resort by Hilton Hollywood Beach
5.0
%
October 2027
Hotel Ballast Wilmington, Tapestry Collection by Hilton (2)
5.0
%
April 2028
Hyatt Centric Arlington
5.0
%
March 2038
Sheraton Louisville Riverside (3)
5.0
%
April 2023
(1) Percentage of room revenues payable to the franchisor.
(2) The Franchise/Royalty Fee is 3.0% for operating year 1, 4.0% for operating year 2, and 5.0% thereafter.
(3) The Sheraton Louisville Riverside hotel was sold on February 10, 2022.
Lease Agreements
TRS Leases
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 a third-party management company to manage the hotels. Each lease has a non-cancelable term ranging from four 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.
Other Leases
We lease the land underlying the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement. The ground lease contains a rent reset provision that will reset the rent in June 2025 to a fixed amount per annum equal to 8.0% of the land value, subject to an appraisal process. The initial term of the ground lease expires in 2035 and may be extended by us for four additional renewal periods of 10 years each. The ground lease requires us to obtain the consent of the third-party lessor in order to sell the Hyatt Centric Arlington hotel or to assign our leasehold interest in the ground lease.
In connection with the acquisition of the Hyde Beach House Resort & Residences hotel commercial condominium unit, we entered into a 20-year parking and cabana management agreement for the parking garage and poolside cabanas associated with the resort. In exchange for rights to the parking and cabana revenue, we pay the condominium association an annual payment of $271,000 per annum for the initial five-year term, with 5.0% increases on every fifth year of the term.
We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia for our corporate offices, under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement is $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent is offset by a tenant improvement allowance of $200,000, applied against one-half of each monthly rent payment until such time as the tenant improvement allowance is exhausted.
Secured Note Financing
On December 31, 2020, we closed a transaction with KWHP SOHO, LLC, a Delaware limited liability company (“KW”), as collateral agent and a note investor, and MIG SOHO, LLC, a Delaware limited liability company (“MIG”, and together with KW, the “Investors”), as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership. Under the terms of the note purchase we had an option to require the Investors to purchase an additional $10.0 million in Secured Notes, which has now expired. As of the date of this report, there is an aggregate of $20.0 million Secured Notes outstanding. The obligations of the Operating Partnership were guaranteed by the Company. We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements. The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option. The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term. Pursuant to the Pledge Agreement, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto in Savannah, Georgia; the Hotel Ballast in Wilmington, North Carolina; and the DoubleTree by Hilton Philadelphia Airport hotel (collectively, the “Pledged Collateral”). Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes. Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.
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 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 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, or TRSs, 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 TRS, 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, 2021, of approximately $55.4 million and deferred timing differences of approximately $2.4 million attributable to accrued, but not deductible, vacation and sick pay amounts, business interest, depreciation and other timing differences. The Company has not incurred federal income taxes since its formation. During the first quarter of 2020, we reduced our deferred tax assets through the establishment of a 100% valuation allowance of approximately $5.4 million. During the year ended December 31, 2020, we increased the valuation allowance to approximately $14.7 million and increased it again during the year ended December 31, 2021 to approximately $14.9 million.
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 and Human Capital
As of December 31, 2021, we employed 10 full-time persons, all of whom work at our corporate office in Williamsburg, Virginia. We believe relations with our employees are positive. Our human capital resources objectives include attracting and retaining talented and well-qualified employees. Our compensation program, including competitive salaries and other benefits, are designed to attract, hire, retain and motivate highly qualified employees and executives. We are committed to enhancing our culture through efforts to promote and preserve inclusion and by providing and maintaining a safe work environment. All persons employed in the day-to-day operations of each of our hotels are employees of our third-party hotel manager engaged by our TRS Lessees to operate such hotels.
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.

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ITEM 1A. RISK FACTORS
Item 1A. Risk 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.
SUMMARY
Risks Related to Our Business and Properties
•
Risks related to the limited number of hotels that we own.
•
Risks related to increased hotel operating expenses and decreased hotel revenues.
•
Risks related to our investment strategy, and the acquisition, renovation, or repositioning of hotels.
•
Risks related to our third-party management companies.
•
Risks related to our ability to make distributions.
•
Risks related to the geographic concentration of our hotels.
•
Risks related to the concentration of our hotel franchise agreements.
•
Risks related to our ground lease for the Hyatt Centric Arlington.
•
Risks related to hedging against interest rate exposure.
•
Risks related to investment opportunities and growth prospects.
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Risks related to internal controls.
•
Risks related to information technology.
•
Risks related to natural disasters and the physical effects of climate change.
Risks Related to the Lodging Industry
•
Risks related to COVID-19.
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Risks related to the overall economy and our financial performance.
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Risks related to operating risks, seasonality of the hotel business, investment concentration in particular segments of a single industry, and capital expenditures.
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Risks related to operating hotels with franchise agreements.
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Risks related to restrictive covenants in certain of our franchise agreements.
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Risks related to hotel re-development.
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Risks related to obtaining financing.
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Risks related to uninsured and underinsured losses.
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Risks related to governmental regulations, including regulations covering environmental matters or the Americans with Disabilities Act.
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Risks related to unknown or contingent liabilities.
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Risks related to future terrorist activities.
General Risks Related to the Real Estate Industry
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Risks related to illiquidity of real estate investments.
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Risks related to future acquisitions.
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Risks related to property damage including harmful mold.
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Risks related to increases in property taxes.
Risks Related to Our Debt and Financing
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Risks related to our financial leverage.
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Risks related to our forbearance agreements.
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Risks related to our financial covenants.
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Risks related to our debt maturities.
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Risks related to our borrowing costs.
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Risks related to interest rates.
Risks Related to Our Organization and Structure
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Risks related to change of control.
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Risks related to our executive employment agreements.
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Risks related to ownership limitations on our common stock and preferred stock.
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Risks related to our preferred stock.
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Risks related to future indebtedness.
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Risks related to our REIT status.
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Risks related to our major corporate policies.
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Risks related to key personnel.
Risks Related to Conflicts of Interest of Our Officers and Directors
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Risks related to conflicts of interest of our officers and directors.
Federal Income Tax Risks Related to the Company’s Status as a REIT.
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Risks related to potential failure to qualify as a REIT.
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Risks related to potential failure to make distributions.
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Risks related to MHI Holding, including its TRS qualification and potential tax liability.
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Risks related to potential tax liabilities.
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Risks related to highly technical and complex REIT compliance requirements.
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Risks related to Operating Partnership’s qualification as a partnership for federal income tax purposes.
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Risks related to the qualification of our hotel manager as an “eligible independent contractor”.
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Risks related to our TRS leases.
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Risks related to taxation of dividend income and U.S. withholding tax.
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Risks related to foreign investors.
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Risks related to U.S. tax reform and related regulatory action.
DETAIL
Risks Related to Our Business and Properties
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, 2021, our portfolio consisted of twelve wholly-owned hotels with a total of 3,156 rooms and the hotel commercial condominium units of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences condominium hotels. 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.
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:
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wage and benefit costs;
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repair and maintenance expenses;
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energy costs;
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insurance costs; and
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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 loan covenants 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 loan covenants 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 our hotel management companies.
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 managers to operate our hotels pursuant to management agreements.
Under the terms of our management agreements with our hotel manager and the REIT qualification rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on our hotel manager 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 a hotel management company to change its method of operating our hotels. Additionally, in the event that we need to replace a hotel management company 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.
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 noncash 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 and limit the volume of food and beverage revenue and other operating revenue such as parking revenue.
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 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 brands owned by Hilton Worldwide (Hilton); therefore, we are subject to risks associated with concentrating our portfolio in one brand. We also own a hotel operated under the brand owned by Hyatt Hotels Corporation (Hyatt).
In our portfolio, the majority of the hotels that we owned as of December 31, 2021 utilize brands owned by Hilton. As a result, our success is dependent in part on the continued success of Hilton and their respective brands. If market recognition or the positive perception of Hilton is reduced or compromised, the goodwill associated with the 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. As of March 1, 2022, we owned one property under the Hyatt brand. Our success is also dependent in part on the continued success, market recognition, and positive perception of these brands.
Our ground lease for the Hyatt Centric Arlington may constrain us from acting in the best interest of stockholders or require us to make certain payments.
The Hyatt Centric Arlington is subject to a ground lease with a third-party lessor which requires us to obtain the consent of the relevant third-party lessor in order to sell the Hyatt Centric Arlington hotel or to assign our leasehold interest in the ground lease. Accordingly, we may be prevented from completing such a transaction if we are unable to obtain the required consent from the lessor, even if we determine that the sale of this hotel or the assignment of our leasehold interest in the ground lease is in the best interest of the Company or our stockholders. In addition, at any given time, potential purchasers may be less interested in buying a hotel subject to a ground lease and may demand a lower price for the hotel than for a comparable property without such a restriction, or they may not purchase the hotel at any price. For these reasons, we may have a difficult time selling the hotel or may receive lower proceeds from any such sale. The ground lease is subject to four additional renewal periods of 10 years each, following the first renewal period which expires in 2035. At the beginning of each renewal period, certain provisions of the lease may be adjusted by the lessor, which could impact payments we are required to make to the lessor. The ground lease contains a rent reset provision that will reset the rent in June 2025 to a fixed amount per annum equal to 8.0% of the land value, subject to an appraisal process. If we are not able to come to reasonable terms with the lessor at the end of the term or if we are found to have breached certain obligations under the ground lease, the hotel may suffer a substantial decline in value and we may be forced to dispose of the hotel at a substantial loss.
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:
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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
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available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
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the financial instruments we select may not have the effect of reducing our interest rate risk;
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the duration of the hedge may not match the duration of the related liability;
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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
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the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
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 Sarbanes-Oxley Act of 2002. While we have undertaken substantial work to maintain effective internal controls, we cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future. In the future, we may 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 and make it more difficult for the Company to raise capital. 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.
We and our hotel manager rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We and our hotel manager rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We and our hotel manager purchase some of our information technology from vendors, on whom our systems depend. We and our hotel manager rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts. Although we and our hotel manager have taken steps, we believe are necessary to protect the security of our information systems and the data maintained in those systems, it is possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper functionality, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations. Our hotel
manager carries cyber insurance policies to protect and offset a portion of potential costs incurred from a security breach. Additionally, we currently have cyber insurance policies to provide supplemental coverage above the coverage carried by our third-party manager. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, any cyber-attack occurrence could still result in losses at our properties, which could affect our results of operations. We are not aware of any cyber incidents that we believe to be material or that could have a material adverse effect on our business, financial condition and results of operations. We also rely on the reservation systems of our brand partners and those systems may be hacked or subject to denial of service attacks.
We face possible risks associated with natural disasters and the physical effects of climate change.
We are subject to the risks associated with natural disasters and the physical effects of climate change, which can include more frequent or severe storms, droughts, hurricanes and flooding, any of which could have a material adverse effect on our hotels, operations and business. Over time, our coastal markets are expected to experience increases in storm intensity and rising sea-levels causing damage to our properties. As a result, we could become subject to significant losses and/or repair costs that may or may not be fully covered by insurance. Other markets may experience prolonged variations in temperature or precipitation that may limit access to the water needed to operate our hotels or significantly increase energy costs, which may subject those hotels to additional regulatory burdens, such as limitations on water usage or stricter energy efficiency standards. Climate change also may affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable in areas most vulnerable to such events, increasing operating costs at our hotels, such as the cost of water or energy, and requiring us to expend funds as we seek to repair and protect our hotels against such risks. There can be no assurance that climate change will not have a material adverse effect on our hotels, operations or business.
Risks Related to the Lodging Industry
The novel coronavirus (COVID-19) outbreak has affected, and is likely to materially and adversely continue to affect travel and result in significantly reduced demand for our hotels.
The outbreak of COVID-19 throughout the world, classified by the World Health Organization as a pandemic, has disrupted global travel and supply chains, and has adversely impacted global commercial activity across many industries. Due to travel restrictions in the U.S. and around world, the travel and hospitality industries are particularly facing tremendous drains on resources. The COVID-19 pandemic has had, and is expected to continue to have, significant adverse impacts on economic and market conditions and global economic contraction. The uncertainty surrounding the pandemic precludes any prediction as to the scale and scope of the ultimate adverse impact and longevity of the COVID-19 pandemic or any future pandemic outbreak. There also can be no guarantee that the demand for lodging, and consumer confidence in travel generally, will recover as quickly as other industries.
Our business is likely to continue to be materially and adversely affected by the effect of the COVID-19 pandemic on the travel industry. Government travel advisories, corporate restrictions and airline travel cancellations have impacted demand at our hotels - in 2021 we experienced a substantial decline in group-related and transient business as compared to pre-pandemic levels. The ramifications of the pandemic will continue to affect our industry and our Company in the near term. Further spread or prolonged outbreak of COVID-19 or new variants may result in health or other government authorities extending existing travel restrictions, imposing additional restrictions, creating containment zones, and mandating closure of businesses, among other actions. Any such containment zones or mandatory business closures could include one or more of our hotels. Any of these events could result in a significant and prolonged drop in demand for our hotels, which would further the negative impact on our financial condition and results of operations. Due to the uncertainty inherent in the outbreak, we are not in a position to predict when or if normal travel patterns will resume.
Travel advisories and restrictions may be continued or reinstituted due to the continued outbreak or a resurgent outbreak of COVID-19. Furthermore, even in absence of such restrictions, travel demand may remain weak for a significant period of time as individuals or businesses may fear or restrict traveling, respectively. We are unable to predict if and when occupancy and the average daily rates at our hotels will return to pre-pandemic levels. Additionally, our hotels may be negatively impacted by adverse changes in the economy, including higher unemployment rates, declines in income levels, loss of personal wealth and possibly a national and/or global recession resulting from the impact of COVID-19. Declines in demand trends, occupancy and the average daily rates at our hotels may indicate that one or more of our hotels is impaired, which would adversely affect our financial condition and results of operations. COVID-19 could also affect demand as follows: (i) the postponement or cancellation of conferences, conventions, festivals, sporting events, public events and other group business that would have otherwise brought individuals to the areas in which our hotels are located, which has caused, and could continue to cause, a decrease in occupancy rates over a prolonged period of time and exacerbate the seasonal volatility at our hotels; (ii) a general decline of in-person business meetings and an increase in the use of teleconferencing and video-conferencing technology, which could cause a sustained shift away from business-related travel and have a material adverse effect on the overall demand for hotel rooms; and (iii) a decrease in individuals’ willingness to travel as a result of actual or perceived health risks.
If the economy falls 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, such as the decrease experienced due to COVID-19, 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 common stockholders of approximately $33.4 million for the 2021 fiscal year. An economic downturn, such as the once caused by COVID-19, 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.
The effects of the COVID-19 pandemic on our operations and financial performance could be long-lasting and severe.
The effects of the COVID-19 pandemic on the hotel industry are unprecedented with global demand for lodging drastically reduced and occupancy levels reaching historic lows. Due to the effects of the COVID-19 pandemic, we have experienced a severe decline in occupancy and, in turn, revenue. Despite the increases in occupancy and revenue in 2021, we are still short of pre-pandemic levels. We cannot predict the full extent and duration of the effects of the COVID-19 pandemic on our operations, although the longer and more severe the pandemic, the greater the material adverse effect on our financial condition, our results of operations, the market price of our common shares, our ability to make distributions to our stockholders, our access to credit markets and our ability to service our indebtedness.
Our ability to comply with the terms of our loan covenants, 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:
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competition from other hotel properties in our markets;
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over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels;
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dependence on business and commercial travelers and tourism;
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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;
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increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by increased room rates;
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changes in interest rates and in the availability, cost and terms of debt financing;
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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;
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adverse effects of international, national, regional and local economic and market conditions;
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adverse effects of a downturn in the lodging industry; and
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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.
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, 2021 and 2020, we spent approximately $3.2 million and approximately $4.0 million, respectively, on capital improvements to our hotels. Capital improvements and renovation projects may give rise to the following risks:
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possible environmental problems;
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construction cost overruns and delays;
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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
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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. Many operating standards and other terms can be modified or expanded at the sole discretion of the franchisor. Our franchisors periodically inspect our hotels to ensure that we, our TRS Lessees, and the management companies follow their standards. Failure by us, our TRS Lessees or a 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.
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 loan covenants 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:
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construction delays or cost overruns that may increase project costs;
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receipt of zoning, occupancy and other required governmental permits and authorizations;
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development costs incurred for projects that are not pursued to completion;
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acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
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financing; and
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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.
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 Dorian in the fall of 2019, Hurricanes Harvey and Irma in August and September 2017, respectively, Hurricane Matthew in October 2016 and Hurricane Sandy in October 2012, losses from foreign terrorist activities, such as those on September 11, 2001, losses from power outages 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:
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our knowledge of the contamination;
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the timing of the contamination;
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the cause of the contamination; or
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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 our loan covenants 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:
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liabilities for environmental conditions;
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losses in excess of our insured coverage;
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accrued but unpaid liabilities incurred in the ordinary course of business;
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tax, legal and regulatory liabilities;
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claims of customers, vendors or other persons dealing with the Company’s predecessors prior to our acquisition transactions that had not been asserted or were unknown prior to the Company’s acquisition transactions; and
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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 in the past. 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.
In addition to COVID-19, we face risks related to other 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:
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adverse changes in international, national, regional and local economic and market conditions;
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changes in interest rates and in the cost and terms of debt financing;
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absence of liquidity in credit markets which limits the availability and amount of debt financing;
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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;
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the ongoing need for capital improvements, particularly in older structures;
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changes in operating expenses; and
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civil unrest, acts of war or terrorism and the consequences of terrorist acts, acts of God, including earthquakes, hurricanes, floods and other natural disasters, which may result in uninsured losses.
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 Debt
We have substantial financial leverage.
As of December 31, 2021, the principal balance of our mortgages, unsecured and secured debt was approximately $380.2 million, 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:
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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;
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limit our ability to obtain additional financing for working capital, renovation, redevelopment and rebranding plans, acquisitions, debt service requirements and other purposes;
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adversely affect our ability to satisfy our financial obligations, including those related to our loan covenants;
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limit our ability to refinance existing debt;
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require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing or to modify the terms of existing obligations;
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force us to dispose of one or more of our properties, possibly on unfavorable terms;
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increase our vulnerability to adverse economic and industry conditions, and to interest rate fluctuations;
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force us to issue additional equity, possibly on terms unfavorable to existing stockholders;
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limit our flexibility to make, or react to, changes in our business and our industry; and
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place us at a competitive disadvantage, compared to our competitors that have less debt.
We have entered into forbearance agreements and loan modification agreements with our mortgage lenders and we cannot guarantee that we will be able to comply with the terms of these agreements, or continue obtaining forbearance if needed.
In 2020 and 2021, we sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties. As of December 31, 2020, we failed to make nine consecutive monthly payments of principal and interest under the mortgage secured by our DoubleTree Resort by Hilton Hollywood Beach hotel, which constituted an Event of Default. On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms. Under the amended loan agreement and promissory note we are required to pay the aggregate amount owed by the borrowing entity relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning January 2021 and continuing through December 2022. In addition, the lender agreed to certain accommodations, including to forbear collection of default interest and late payment charges accrued and unpaid under the original loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.
As of December 31, 2021, we failed to meet financial covenant under the mortgage secured by The Whitehall in Houston, Texas. We were able to obtain a waiver from the lender of the mortgage on The Whitehall in Houston, Texas through June 30, 2022.
In order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone - University and the Hyatt Centric Arlington, we agreed to “cash traps” until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.
While the duration and extent of the reduction in hotel demand caused by the pandemic creates corresponding uncertainty regarding our future cash flows, the Company believes it has sufficient liquidity to meet its obligations for operating expenses, planned capital expenditures and scheduled payments of principal and interest - including scheduled repayments of deferred principal and interest on our mortgage debt. However, the Company believes it is probable that over the course of the next two to four quarters it may fail to satisfy financial covenants contained in the mortgage secured by The Whitehall. If the Company fails to obtain the requisite waivers, the lender could declare it in default and require repayment of the outstanding balances on the relevant loans. If that were to occur, the Company may not have sufficient funds to pay the applicable debt. While the Company believes we will be successful in obtaining waivers, forbearance arrangements and loan modifications, it cannot provide assurance that we will be able to do so on acceptable terms or at all.
In addition, the mortgage on the DoubleTree by Hilton Laurel matures in May 2022 and the mortgage on The Whitehall matures in February 2023. Given the underperformance of these hotels due to the pandemic, the Company cannot guarantee that it will be able to modify, extend, renew or refinance the existing indebtedness on acceptable terms or at all.
U.S. generally accepted accounting principles (“U.S. GAAP”) requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Due to the uncertainties described above related to future cash flows and resulting compliance with the financial covenants as well as the upcoming maturity of the mortgage on The Whitehall, the Company determined that there is substantial doubt about its ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
We must comply with financial covenants in our mortgage loan agreements.
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.
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 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.
We must comply with financial covenants in our Secured Notes.
Our Secured Notes contain various financial covenants. The Secured Notes requires us to maintain certain cash management standards and include a broad range of covenants restricting our ability to incur additional debt, make dividend payments, transfer or acquire assets, or exceed our 2019 employee compensation levels. They also require us to maintain certain financial thresholds, including limitations on our accounts payable and capital expenditures. Upon an event of default or liquidity event described in the Secured Notes, the holders of the Secured Notes have the right to require and approve our selection of one or more of our hotel properties for disposition or refinancing in order to cure an event of default or liquidity event based on a process set forth in the Secured Notes. In addition, the Secured Notes are redeemable by the holder in full upon an event of default or a change of control transaction.
Pursuant to the Pledge Agreement we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel. Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.
We have five mortgage debt obligations maturing in 2022 through 2023, and the Secured Notes maturing in 2023, and if we are not successful in extending the terms 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. The ability to refinance or replace mortgage debt is subject to market conditions and could become limited in the future. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. In May 2022, the mortgage on our DoubleTree by Hilton Laurel matures. In June 2022 and August 2022, the mortgages on the Hotel Alba Tampa, Tapestry Collection by Hilton and the DoubleTree by Hilton Raleigh-Brownstone mature, respectively. In February 2023 and October 2023, the mortgage on The Whitehall and the DoubleTree by Hilton Philadelphia Airport mature, respectively. In December 2023, the Secured Notes mature, subject to an option to extend maturity for one year. We also have additional significant obligations maturing in subsequent years. The total aggregate amount of our debt obligation scheduled to mature in 2022, inclusive of monthly principal and interest amortization of all our indebtedness, is approximately $70.3 million, which represents approximately 15.8% of our total debt obligation outstanding as of December 31, 2021. The total aggregate amount of our debt obligation scheduled to mature in 2023, inclusive of monthly principal and interest amortization of all our indebtedness, is approximately $107.2 million, which represents approximately 24.0% of our total debt obligation outstanding as of December 31, 2021. The total aggregate amount of our debt obligation scheduled to mature in 2024, inclusive of monthly principal amortization of all our mortgage indebtedness, is approximately $50.0 million, which represents approximately 11.2% of our total debt obligation outstanding as of December 31, 2021.
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 our maturing loans, 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 Sotherly’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we have given 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.
Changes in the method of determining LIBOR rates and potential phasing out of LIBOR after 2021 may affect our financial results.
The chief executive of the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, has recently announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021 (the “FCA Announcement”). It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are underway. Any alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results.
The mortgage loans encumbering our hotels located in Philadelphia, PA, Raleigh, NC, and Tampa, FL each have interest rates tied to LIBOR. The Raleigh and Tampa mortgage loans are maturing prior to the final phase out of U.S. 1-month LIBOR in 2023, and the Philadelphia mortgage loan matures shortly thereafter in October 2023. Any changes announced by the FCA, including the FCA Announcement, other regulators or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which the LIBOR rates are determined may result in a sudden or prolonged increase or decrease in the reported LIBOR rates. If that were to occur, the level of interest payments we incur may change. In addition, although certain of our LIBOR based obligations provide for alternative methods of calculating the interest rate payable on those obligations if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in (i) interest rates and/or payments that are higher than, lower than or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR rate was available in its current form or (ii) an inability to hedge against an alternative method of calculating interest on those obligations.
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 Raleigh Brownstone-University, the DoubleTree by Hilton Philadelphia Airport, the Hotel Alba Tampa, Tapestry Collection by Hilton and The Whitehall. Each of these mortgages bears interest at rates tied to the 1-month LIBOR, the New York Prime Rate, or substitute rate and provide for minimum rates of interest. To the extent that increases in the LIBOR, New York Prime Rate, or substitute 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 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 best 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.
Authority to Issue Stock
The Company’s amended and restated charter authorizes our board of directors to issue up to 69,000,000 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 best 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:
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“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
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“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 into the business combination provisions of the MGCL and the Company may, by amendment to its bylaws, opt into 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 employment agreements may make a change of control of the Company more costly or difficult.
The Company’s employment agreements with Andrew M. Sims, our Chairman, David R. Folsom, our President and Chief Executive Officer, Anthony E. Domalski, our Secretary and Chief Financial Officer, Scott M. Kucinski, our Executive Vice President and Chief Operating Officer, and Robert E. Kirkland IV, our General Counsel, 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 executives’ employment without cause or the executive resigns with good reason (which for Sims, Folsom, and Domalski, 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:
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any accrued but unpaid salary and bonuses;
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vesting of any previously issued stock options and restricted stock;
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payment of the executive’s life, health and disability insurance coverage for a period of five years following termination;
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any unreimbursed expenses; and
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a severance payment equal to three times for each executive’s respective combined salary and actual bonus compensation for the preceding fiscal year.
In the event that the Company elects not to renew Mr. Folsom’s employment agreement, then Mr. Folsom is entitled to receive the following: (i) any accrued but unpaid salary and bonuses; (ii) a severance payment equal to Mr. Folsom’s combined salary and actual bonus compensation for the preceding fiscal year, to be paid within five (5) days of Mr. Folsom’s last day of employment; and (iii) payment of the full premium (including administrative fee) for continuing health insurance coverage under COBRA or any similar state law for a period of two (2) years following the expiration of Mr. Folsom’s employment agreement.
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 each of our 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”), 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, Series C Preferred Stock, or Series D Preferred Stock, respectively, excluding any outstanding shares of Series B Preferred Stock, Series C Preferred Stock, or Series D 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, 2021, 1,510,000 shares of our Series B Preferred Stock were issued and outstanding, 1,384,610 shares of our Series C Preferred Stock were issued and outstanding, and 1,165,000 shares of our Series D Preferred Stock were issued and outstanding. The aggregate liquidation preference with respect to the outstanding shares of Series B Preferred Stock is approximately $43.0 million, and annual dividends on our outstanding shares of Series B Preferred Stock are approximately $3.0 million. The aggregate liquidation preference with respect to the outstanding shares of Series C Preferred Stock is approximately $39.4 million, and annual dividends on our outstanding shares of Series C Preferred Stock are approximately $2.7 million. The aggregate liquidation preference with respect to the outstanding shares of Series D Preferred Stock is approximately $33.3 million, and annual dividends on our outstanding shares of Series D Preferred Stock are approximately $2.4 million. Holders of our Series B, Series C, and Series D 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 the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred
Stock voting together as a separate class 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). As of December 31, 2021, distributions on our Preferred Stock are in arrears for the last eight quarterly payments. Therefore, the holders of our Series B, Series C, and Series D Preferred Stock are entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. No dividends may be paid on our common stock until such time as the Preferred Stock distributions are made current.
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 Company’s 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, Series C, and Series D 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 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 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. If the common stock price is less than $2.94, subject to adjustment, holders will receive a maximum of 8.50340 shares of our common stock per share of Series C Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series C Preferred Stock. If the common stock price is less than $3.38, subject to adjustment, holders will receive a maximum of 7.39645 shares of our common stock per share of Series D Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference of the Series D Preferred Stock. In addition, those features of our Series B, Series C, and Series D 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, Series C, and Series D 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.
Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.
Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. In addition, our organizational documents contain no limitations on the amount of debt that we may incur, and the Company’s board of directors may change our financing policy at any time. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:
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our cash flows from operations may be insufficient to make required payments of principal and interest;
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our debt may increase our vulnerability to adverse economic and industry conditions;
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we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for funds available for operations and capital expenditures, future business opportunities or other purposes; and
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the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced.
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, Andrew M. Sims; our President and Chief Executive Officer, David R. Folsom; our Executive Vice President and Chief Operating Officer, Scott M. Kucinski; and our Secretary and 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.
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 Our Town, the entity that manages our twelve wholly-owned hotels and our two condominium hotel rental programs, and the terms of our management agreements with Our Town may lead to management decisions that are not in the stockholders’ best interest.
Conflicts of interest relating to Our Town may lead to management decisions that are not in the stockholders’ best interest. Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, together own an interest of approximately 52.8%, as of February 25, 2022, in Our Town. Both Mr. Sims and Mr. Folsom serve as directors of Our Town.
Our management agreements with Our Town establish the terms of Our Town’s management of our hotels covered by those agreements. The OTH Master Agreement provides that in the event the agreement is terminated in connection with the sale of a hotel, and Our Town accepts an offer to manage another hotel which is reasonably comparable to the hotel that was sold, we will not be liable for any termination fee. If we do not offer Our Town such opportunity or Our Town 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 a hotel management agreement at the end of any renewable five-year term, Our Town is due a termination fee equivalent to one month’s management fees, as determined under the agreement.
As owners of Our Town, which would receive any management and management termination fees payable by us under the management agreements, Mr. Sims or Mr. Folsom 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, Mr. Sims and Mr. Folsom will have conflicts of interest with respect to decisions to enforce provisions of the management agreements, 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 Our Town, 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 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, 2021, 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.
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 noncash 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.
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 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.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Overall, no more than 20.0% of the value of a REIT’s assets may consist of stock or 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 IRS 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:
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it will be required to pay tax on undistributed REIT taxable income (including net capital gain);
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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;
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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;
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MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its taxable income; and
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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.
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 TRSs) 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 TRSs) can consist of the securities of any one issuer, and no more than 20.0% of the value of the Company’s total assets can be represented by securities of one or more TRSs.
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 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 also reduced by certain noncash 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 it holds its assets through the Operating Partnership.
If MHI Holding does not qualify as a TRS, 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 stockholders.
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, as noted above. 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 TRS, and expects to continue to do so. So long as MHI Holding qualifies as a TRS, 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 TRS 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 stockholders, 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.
In addition, for the Company’s hotel management company to qualify as an “eligible independent contractor,” such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS. The Company believes the hotel manager operates qualified lodging facilities for certain persons who are not related to the REIT
or its TRSs. However, no assurances can be provided that this will continue to be the case or that any other hotel management companies that the Company may engage in the future will in fact comply with this requirement in the future. Failure to comply with this requirement would require the Company to find other managers for future contracts, and, if the Company hired a management company without knowledge of the failure, it could jeopardize the Company’s status as a REIT.
As noted above, each hotel with respect to which a TRS Lessee pays rent must be a “qualified lodging facility”. A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. The Company believes that all of the hotels leased to the TRS Lessees are qualified lodging facilities. Although the Company intends to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied in all cases.
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.
If the leases between the Operating Partnership and the TRS Lessees are recharacterized, the Company may fail to qualify as a REIT.
To qualify as a REIT for federal income tax purposes, the Company must satisfy two gross income tests, under which specified percentages of the Company’s gross income must be derived from certain sources, including “rents from real property”. Rents paid by the TRS Lessees to the Operating Partnership and its subsidiaries pursuant to the leases of the Company’s hotel properties will constitute substantially all of the Company’s gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures, or some other type of arrangement. If the leases between the TRS Lessees to the Operating Partnership and its subsidiaries are not respected as true leases for federal income tax purposes, the Company could fail to qualify as a REIT for federal income tax purposes.
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 TRS 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 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 via the Operating Partnership.
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. While the Company believes its leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree.
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%, plus a 3.8% Medicare tax discussed below. 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. Moreover, while certain of our dividends distributed to non-corporate taxpayers in taxable years prior to January 1, 2026, qualify for a potential 20.0% deduction from the tax otherwise imposed on such income, there is no assurance that we will always distribute ordinary income dividends, or that Congress will not repeal such legislation. 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.
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 as well as gains from the disposition of the Company’s stock 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 in light of such investors’ particular circumstances.
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.
U.S. tax reform and related 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 investors in Company stock. The Tax Cuts and Jobs Act (“TCJA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) made significant changes to the U.S. federal tax system. Specifically, and as relevant to the Company and its subsidiaries, the TCJA reduced the maximum corporate tax rate from 35% to 21%, allows for full expensing of certain property, revised the net operating loss (“NOL”) provisions, set limitations on certain types of interest deductions, and expanded limitations on deductions for executive compensation. The TCJA also temporarily reduced individual federal income tax rates on ordinary income (the highest individual federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026).
The TCJA and CARES Act did not modify the existing REIT rules, and we still are not required to pay federal taxes provided we comply with the existing requirements to qualify as a REIT.
The following provisions of the TCJA may have an impact on the Company and investors in Company stock:
•
Interest deductibility. The TCJA imposes a limitation on the deduction for certain business interest, subject to exceptions for electing real property trades or businesses provided the real property trade or business adopts the alternative depreciation system with respect to its property. While we believe the Company and its subsidiaries, and the Operating Partnership are each engaged in a real property trade or business, the matter is not free from doubt. As a result, if any of the Company, its subsidiaries, or the Operating Partnership cannot deduct all of their interest expense, or are ineligible to elect exemption from the rules, this will potentially increase the Company’s taxable income and potentially increase the amount of taxable dividends we distribute to investors of Company stock.
•
Reduced rate for pass-through entities. For taxable years prior to January 1, 2026, the TCJA provides non-corporate taxpayers with a potential 20% deduction against taxable income with respect to certain income earned through pass-through entities. REIT ordinary dividends, such as dividends the Company distributes to investors of its stock, automatically qualify for the deduction. In addition, the IRS has issued Treasury regulations that provide ordinary dividends earned by a non-corporate taxpayer indirectly through a regulated investment company (within the meaning of Code Section 851) will qualify for the potential 20.0% deduction against taxable income. Moreover, there is no assurance that Congress will not repeal the current favorable deduction applicable to ordinary dividends that we distribute.
•
Expanded limitations on deductions for executive compensation. The TCJA expanded the scope of section 162(m), which limits deductions for annual compensation paid to certain employees of publicly traded corporations, including REITs. If a deduction is denied under this provision, this will increase our taxable income and potentially increase the amount of taxable dividends we distribute to investors of our stock.
•
Limitation on deductions for NOLs. The TCJA limits a corporation’s deduction for NOLs arising in taxable years beginning after December 31, 2017 to 80% of the corporation’s taxable income.
The IRS has issued various Treasury regulations, guidance, and rulings relating to the TCJA. Further, technical corrections legislation with respect to the TCJA has been proposed. The proposed legislation’s final form and effect cannot be predicted and may be adverse. Many of the amendments will require further guidance through the issuance of Treasury regulations in order to assess their effect. There may be substantial delay before such Treasury regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on the REIT.
Investors in our stock are strongly encouraged to consult with a tax advisor with respect to the potential impact the TCJA and/or the CARES Act may have with respect to investing in our Company’s stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
As of December 31, 2021, 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 in Part II of this Annual Report on Form 10-K):
Number of
Occupancy
ADR
RevPAR
Occupancy
ADR
RevPAR
Occupancy
ADR
RevPAR
Wholly-Owned Properties
Rooms
The DeSoto, Savannah, Georgia
59.3
%
$
185.06
$
109.76
29.3
%
$
150.24
$
44.03
65.4
%
$
174.75
$
114.34
DoubleTree by Hilton Jacksonville Riverfront, Jacksonville, Florida
65.7
%
$
135.34
$
88.96
38.3
%
$
135.19
$
51.77
78.5
%
$
139.53
$
109.53
DoubleTree by Hilton Laurel, Laurel, Maryland
48.0
%
$
100.75
$
48.41
31.9
%
$
89.92
$
28.69
69.9
%
$
107.34
$
75.06
DoubleTree by Hilton Philadelphia Airport, Philadelphia, Pennsylvania
58.9
%
$
123.41
$
72.71
36.4
%
$
110.37
$
40.22
76.6
%
$
143.95
$
110.20
DoubleTree by Hilton Raleigh Brownstone - University, Raleigh, North Carolina (1)
43.4
%
$
115.99
$
50.35
27.0
%
$
113.86
$
30.69
76.3
%
$
139.73
$
106.63
DoubleTree Resort by Hilton Hollywood Beach, Hollywood, Florida
52.2
%
$
186.73
$
97.45
35.3
%
$
162.97
$
57.45
70.5
%
$
173.25
$
122.22
Georgian Terrace, Atlanta, Georgia
48.7
%
$
183.53
$
89.35
25.1
%
$
186.04
$
46.73
70.0
%
$
204.60
$
143.15
Hotel Alba Tampa, Tapestry Collection by Hilton, Tampa, Florida
72.8
%
$
143.09
$
104.15
34.8
%
$
137.75
$
47.98
66.2
%
$
129.91
$
85.97
Hotel Ballast Wilmington, Tapestry Collection by Hilton, Wilmington, North Carolina
54.3
%
$
171.60
$
93.18
33.1
%
$
148.48
$
49.19
68.5
%
$
161.50
$
110.58
Hyatt Centric Arlington, Arlington, Virginia
43.7
%
$
125.47
$
54.83
26.1
%
$
133.75
$
34.91
79.1
%
$
188.15
$
148.77
Sheraton Louisville Riverside, Jeffersonville, Indiana (2)
59.5
%
$
101.62
$
60.46
43.6
%
$
96.84
$
42.20
67.9
%
$
114.92
$
78.02
The Whitehall, Houston, Texas
29.5
%
$
128.31
$
37.91
21.8
%
$
132.01
$
28.81
62.2
%
$
143.33
$
89.18
Wholly-Owned Properties Total
3,156
Condominium Hotels
Hyde Resort & Residences
(3)
54.2
%
$
415.38
$
225.21
24.1
%
$
332.86
$
80.10
50.5
%
$
295.49
$
149.36
Hyde Beach House Resort & Residences
(3)
40.1
%
$
408.40
$
163.93
11.7
%
$
330.14
$
38.67
15.0
%
$
341.58
$
51.36
Total Hotel & Participating Condominium Hotel Rooms
3,386
(1)
The DoubleTree by Hilton Raleigh Brownstone-University is under contract to be sold.
(2)
The Sheraton Louisville Riverside hotel was sold on February 10, 2022.
(3)
We own the hotel commercial unit and operate a rental program. Reflects only those condominium units that were participating in the rental program as of December 31, 2021. At any given time, some portion of the units participating in our rental program may be occupied by the unit owners and unavailable for rent to hotel guests. We sometimes refer to each participating condominium unit as a “room.”

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are not involved in any material legal proceedings, nor to our knowledge, are any material legal proceedings threatened against us. We are involved in routine litigation arising out of the ordinary course of business, most 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosure
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. 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 closing price of the Company’s common stock on the NASDAQ ® Global Market on March 1, 2022 was $2.25 per share.
Stockholder Information
As of March 1, 2022, there were approximately 84 holders of record 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 December 16, 2021, a holder of units in the Operating Partnership redeemed 32,681 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(a)(2) of the Securities Act of 1933, as amended.
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, 2022, there were 9 holders of the Operating Partnership’s partnership units, including Sotherly Hotels Inc.
Recent Sales of Unregistered Securities
From time to time, the Operating Partnership may issue and/or repurchase 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 2021.
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 noncash 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.
As a result of the impact of the novel coronavirus (COVID-19) on our business, our board of directors has suspended our common stock dividend. We anticipate that our board of directors will re-evaluate our current dividend policy on an ongoing basis.
Pursuant to our PPP Loans and our Secured Notes, we are prohibited from making any equity distributions as long as those instruments are outstanding. Distributions on our preferred stock are in arrears for the last four quarterly payments. No dividends may be paid on our common stock until such time as the preferred stock distributions are made current.
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).
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 2020 to 2021. The same table sets forth the Operating Partnership’s distributions per common and preferred partnership units for fiscal year 2020 to 2021:
Dividend (Distribution) Payments - Common
Date Declared
For the Quarter Ended
Date Paid
Amount per Share and Unit
Ordinary Income
Return of Capital
January 2020
March 31, 2020
n/a (1)
$
0.130
0.00%
100.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
January 2021 (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
(1)
This dividend was declared on January 27, 2020, but both the record date and payment date have been indefinitely deferred.
(2)
This distribution has not been declared and has not been paid.
Dividend (Distribution) Payments - Series B Preferred Stock
Date Declared
For the Quarter Ended
Date Paid
Amount per Share and Unit
Ordinary Income
Return of Capital
January 2020
March 31, 2020
n/a (1)
$
0.50
0.00%
100.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
January 2021 (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
Dividend (Distribution) Payments - Series C Preferred Stock
Date Declared
For the Quarter Ended
Date Paid
Amount per Share and Unit
Ordinary Income
Return of Capital
January 2020
March 31, 2020
n/a (1)
$
0.492188
0.00%
100.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
January 2021 (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
Dividend (Distribution) Payments - Series D Preferred Stock
Date Declared
For the Quarter Ended
Date Paid
Amount per Share and Unit
Ordinary Income
Return of Capital
January 2020
n/a
n/a (1)
$
0.515625
7.18%
92.83%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
January 2021 (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
n/a (2)
n/a
n/a
$
-
0.00%
0.00%
(1)
This distribution was declared on January 27, 2020, but both the record date and payment date have been indefinitely deferred.
(2)
This distribution has not been declared and has not been paid.
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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Since January 1, 2019, we have completed the following acquisitions and dispositions:
•
On September 27, 2019, we acquired the hotel commercial unit of the Hyde Beach House Resort & Residences, a 342-unit condominium-hotel located in the Hollywood, Florida market.
•
On November 30, 2021, we entered into a contract to sell the DoubleTree by Hilton Raleigh Brownstone-University hotel. The sale of the hotel is subject to various closing conditions.
•
On February 10, 2022, we sold the Sheraton Louisville Riverside hotel located in Jeffersonville, Indiana.
As of March 15, 2022, our hotel portfolio consisted of eleven full-service, primarily upscale and upper-upscale hotels with an aggregate total of 2,976 rooms, as well as interests in two condominium hotels and their associated rental programs. Eight of our hotels operate under well-known brands such as DoubleTree and Hyatt, and three are independent hotels. As of March 15, 2022, our portfolio consisted of the following hotel properties:
Number
Property
of Rooms
Location
Date of Acquisition
Chain/Class Designation
Wholly-owned Hotels
The DeSoto
Savannah, GA
December 21, 2004
Upper Upscale(1)
DoubleTree by Hilton Jacksonville Riverfront
Jacksonville, FL
July 22, 2005
Upscale
DoubleTree by Hilton Laurel
Laurel, MD
December 21, 2004
Upscale
DoubleTree by Hilton Philadelphia Airport
Philadelphia, PA
December 21, 2004
Upscale
DoubleTree by Hilton Raleigh Brownstone-University (3)
Raleigh, NC
December 21, 2004
Upscale
DoubleTree Resort by Hilton Hollywood Beach
Hollywood, FL
August 9, 2007
Upscale
Georgian Terrace
Atlanta, GA
March 27, 2014
Upper Upscale(1)
Hotel Alba Tampa, Tapestry Collection by Hilton
Tampa, FL
October 29, 2007
Upscale
Hotel Ballast Wilmington, Tapestry Collection by Hilton
Wilmington, NC
December 21, 2004
Upscale
Hyatt Centric Arlington
Arlington, VA
March 1, 2018
Upper Upscale
The Whitehall
Houston, TX
November 13, 2013
Upper Upscale(1)
Hotel Rooms Subtotal
2,976
Condominium Hotel
Hyde Resort & Residences
(2)
Hollywood, FL
January 30, 2017
Luxury(1)
Hyde Beach House Resort & Residences
(2)
Hollywood, FL
September 27, 2019
Luxury(1)
Total Hotel & Participating Condominium Hotel Rooms
3,206
(1)
Operated as an independent hotel.
(2)
We own the hotel commercial unit and operate a rental program. Reflects only those condominium units that were participating in the rental program as of December 31, 2021. At any given time, some portion of the units participating in our rental program may be occupied by the unit owner(s) and unavailable for rental to hotel guests. We sometimes refer to each participating condominium unit as a “room.”
(3)
As of the date of this report, the DoubleTree by Hilton Raleigh Brownstone-University is under contract to be sold.
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 currently owns an approximate 94.0% 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 hotel management companies to operate the hotels under a management agreement. Our TRS Lessees have engaged Our Town to manage our hotels. Our TRS Lessees, and their parent, MHI Holding (MHI Hospitality TRS Holding, Inc.), are consolidated into each
of our financial statements for accounting purposes. The earnings of MHI Holding are taxable as regular C corporations and are subject to federal, state, local, and, if applicable, foreign taxation on its taxable income.
Effects of COVID-19 Pandemic on Our Business
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and we intend to continue those re-introductions, provided that we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.
COVID-19 had a significant negative impact on our operations and financial results in 2021, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods. While the resurgence of leisure travel demand contributed to improved results for 2021 compared to 2020, business travel demand continues to lag. As a result, although we anticipate further recovery in 2022, the Company cannot estimate with certainty when travel demand will fully recover.
The COVID-19 pandemic has also significantly contributed to economic uncertainty and led to disruption and volatility in the global capital markets, which has limited our access to capital. That economic uncertainty could increase our cost of capital during the course of the recovery from the pandemic. Additionally, we sought and obtained forbearance and loan modification agreements with the lenders under the mortgages for all of our hotel properties. See the discussion of forbearance, modifications, and waivers in Note 4 to the financial statements.
As of December 31, 2021, we failed to meet the financial covenants under the mortgage secured by The Whitehall. We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022. While the Company believes it will be successful in obtaining waivers, loan modifications or securing refinance arrangements, it cannot provide assurance that it will be able to do so on acceptable terms or at all. Based on our current projections, following the expiration of the waiver on the financial covenants from the mortgage lender on The Whitehall, we do not anticipate that the financial performance of the property will have sufficiently recovered in order to meet the existing covenants. If we fail to obtain additional waivers from the lender, the lender could declare the Company in default under the mortgage loan on that property and require repayment of the outstanding balance.
As of December 31, 2021, the Company had approximately $13.2 million in unrestricted cash and approximately $12.4 million in restricted cash.
U.S. generally accepted accounting principles (“U.S. GAAP”) requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Due to the uncertainties described above related to future cash flows and resulting compliance with the financial covenants as well as the upcoming maturity of the mortgage on The Whitehall, the Company determined that there is substantial doubt about its ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Secured Note Financing
On December 31, 2020, we closed a transaction with KW, as collateral agent and a note investor, and MIG, as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership. Under the terms of the note purchase, we had an option to require the Investors to purchase an additional $10.0 million in Secured Notes, which option has now expired. As of the date of this report, there is an aggregate of $20.0 million Secured Notes outstanding. We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements. The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option. The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term. Certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto in Savannah, Georgia; Hotel Ballast in Wilmington, North Carolina; and the DoubleTree by Hilton Philadelphia Airport hotel. Upon an uncured monetary
event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes. Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only. We are prohibited from making any equity distributions as long as the Secured Notes are outstanding.
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.
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, 2021 to Year Ended December 31, 2020
The following table illustrates the key operating metrics for the years ended December 31, 2021 and 2020 for our wholly-owned hotels and the condominium hotel units, during each respective reporting period (“composite portfolio” properties), as well as the key operating metrics for the twelve wholly-owned hotel properties that were under our control during all of 2020 (“actual” properties).
Year Ended December 31, 2021
Year Ended December 31, 2020
Composite
Actual
Composite
Actual
Occupancy %
52.5
%
52.9
%
30.6
%
31.7
%
ADR
$
160.51
$
145.50
$
144.88
$
134.48
RevPAR
$
84.29
$
76.94
$
44.28
$
42.59
Revenue. Total revenue for the year ended December 31, 2021 was approximately $127.6 million, an increase of approximately $56.1 million, or 78.4%, from total revenue for the year ended December 31, 2020 of approximately $71.5 million. The increase in revenue for the twelve months ended December 31, 2021, was due mainly to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from transient consumers; increases in travel by some group business and increases in the number of foreign travelers.
Room revenues at our properties for the year ended December 31, 2021 increased approximately $39.4 million, or 80.2%, to approximately $88.6 million compared to room revenues for the year ended December 31, 2020 of approximately $49.2 million with each of our properties experiencing increased occupancy.
Food and beverage revenues at our properties for the year ended December 31, 2021 increased approximately $5.1 million, or 48.3%, to approximately $15.8 million compared to food and beverage revenues of approximately $10.7 million for the year ended December 31, 2020, with most of our properties experiencing increased demand for food and beverage services as a result of increased occupancy. Our properties in Laurel, Maryland, Houston, Texas and Hollywood Beach, Florida experienced decreases in food and beverage revenues collectively totaling approximately $0.5 million.
Other operating revenues for the year ended December 31, 2021 increased approximately $11.5 million, or 98.8%, to approximately $23.1 million compared to other operating revenues for the year ended December 31, 2020 of approximately $11.6
million. Each of our properties experienced increased other operating revenues for the period with the exception of our property in Raleigh, North Carolina, which was relatively flat.
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 $22.0 million, or 29.4%, for the year ended December 31, 2021 to approximately $96.7 million compared to hotel operating expenses for the year ended December 31, 2020 of approximately $74.7 million. The increase in hotel operating expenses for the twelve months ended December 31, 2021, is directly related to the significant increase in hotel occupancy and gross revenue at all of our properties.
Rooms expense at our properties for the year ended December 31, 2021 increased approximately $7.1 million, or 45.8%, to approximately $22.7 million compared to rooms expense of approximately $15.6 million for the year ended December 31, 2020.
Food and beverage expenses at our properties for the year ended December 31, 2021 increased approximately $1.8 million, or 20.7%, to approximately $10.3 million compared to food and beverage expense of approximately $8.5 million for the year ended December 31, 2020.
Expenses from other operating departments increased approximately $3.5 million, or 67.4%, to approximately $8.6 million for the year ended December 31, 2021, compared to expenses from other operating departments of approximately $5.1 million for the year ended December 31, 2020.
Indirect expenses at our properties for the year ended December 31, 2021, increased approximately $9.6 million, or 21.1%, to approximately $55.1 million compared to indirect expenses of approximately $45.5 million for the year ended December 31, 2020. The increase in indirect expenses for the twelve months ended December 31, 2021, related to an expansion of operations to accommodate increased occupancy.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2021 slightly increased by 0.1%, to approximately $19.9 million compared to depreciation and amortization expense of approximately $19.9 million for the year ended December 31, 2020.
Impairment of Investment in Hotel Properties, Net. The impairment of investment in hotel properties, net for the years ended December 31, 2021 and 2020 was approximately $12.2 million and $0, respectively. Our review of possible impairment at two of our hotel properties revealed an excess of current carrying costs over the estimated undiscounted cash flows, which was triggered by a reduction in the holding period due to the recent sale of the Sheraton Louisville Riverside as well as lack of certainty regarding our ability to extend or refinance the mortgage on The Whitehall in Houston, Texas which matures in early 2023. The resulting adjustment to fair market value resulted in a charge of approximately $12.2 million during the period ended December 31, 2021.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2021 increased approximately $0.5 million, or 7.8%, to approximately $7.0 million compared to corporate general and administrative expenses of approximately $6.5 million for the year ended December 31, 2020. The increase in corporate general and administrative expenses was mainly due to fees related to an abandoned debt offering as well as fees to the special servicer of our mortgage on the DoubleTree Resort by Hilton Hollywood Beach.
Interest Expense. Interest expense for the year ended December 31, 2021 increased approximately $4.6 million, or 25.6%, to approximately $22.7 million compared to approximately $18.1 million of interest expense for the year ended December 31, 2020. Approximately $4.0 million of the increase is related to the secured notes issued in December 2020.
Unrealized Gain (Loss) on Hedging Activities. Unrealized gain (loss) on hedging activities primarily relates to the change in variance between the unamortized cost of the interest-rate swap related to our mortgage on the DoubleTree by Hilton Philadelphia Airport and the fair value of that interest-rate swap which is affected by both the decreasing number of payment periods in the swap period and the changes in anticipated LIBOR rates over the remaining period. Those factors contributed to an unrealized gain of approximately $1.5 million for the year ended December 31, 2021, compared to an unrealized loss of approximately $1.0 million for the year ended December 31, 2020.
Income Tax (Provision) Benefit. A decrease in our income tax provision of approximately $5.3 million primarily relates to the reduction in the deferred tax asset through a 100% valuation allowance of approximately $5.4 million taken in the year ended December 31, 2020.
Net (Loss) Income. Net loss for the year ended December 31, 2021 decreased approximately $25.1 million, or 46.8%, to approximately $28.5 million compared to a net loss of approximately $53.7 million for the year ended December 31, 2020, as a result of the operating results discussed above.
Distributions to Preferred Stockholders. During the year ended December 31, 2021, we accounted for undeclared distributions to preferred stockholders of approximately $7.7 million, compared to declared and undeclared distributions to preferred stockholders of approximately $8.8 million for the year ended December 31, 2020.
Comparison of Year Ended December 31, 2020 to Year Ended December 31, 2019
The following table illustrates the key operating metrics for the years ended December 31, 2020 and 2019, for our wholly-owned hotels and the condominium hotel units, during each respective reporting period (“composite portfolio” properties), as well as the key operating metrics for the twelve wholly-owned hotel properties that were under our control during all of 2020 (“actual” properties).
Year Ended December 31, 2020
Year Ended December 31, 2019
Composite
Actual
Composite
Actual
Occupancy %
30.6
%
31.7
%
70.1
%
71.3
%
ADR
$
144.88
$
134.48
$
161.17
$
155.92
RevPAR
$
44.28
$
42.59
$
112.94
$
111.17
Revenue. Total revenue for the year ended December 31, 2020, was approximately $71.5 million, a decrease of approximately $114.3 million, or 61.5%, from total revenue for the year ended December 31, 2019, of approximately $185.8 million. The decrease in revenue for the twelve months ended December 31, 2020, reflects the impact of the COVID-19 pandemic and the resulting reduction in travel by group business, event holders and conferences, transient consumers and the reduction of foreign travelers due to restrictions on foreign travel and closings of local business. Each of our hotel properties, with the exception of our newly acquired Hyde Beach House Resort & Residences in Hollywood, Florida, realized a reduction in hotel occupancy and a decrease in revenue as a result of these factors.
Room revenues at our properties for the year ended December 31, 2020, decreased approximately $78.9 million, or 61.6%, to approximately $49.2 million compared to room revenues for the year ended December 31, 2019, of approximately $128.1 million with each of our properties experiencing reduced occupancy.
Food and beverage revenues at our properties for the year ended December 31, 2020, decreased approximately $29.6 million, or 73.5%, to approximately $10.7 million compared to food and beverage revenues of approximately $40.3 million for the year ended December 31, 2019, with each of our properties experiencing reduced demand for food and beverage services as a result of reduced occupancy.
Other operating revenues for the year ended December 31, 2020, decreased approximately $5.8 million, or 33.4%, to approximately $11.6 million compared to other operating revenues for the year ended December 31, 2019, of approximately $17.4 million. Each of our properties experienced reduced other operating revenues for the period other than our recently acquired Hyde Beach House Resort & Residences in Hollywood, Florida and the hotel property in Tampa, Florida, which had an aggregate positive increase in other operating departments revenue of approximately $0.7 million.
Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, decreased approximately $64.1 million, or 46.2%, for the year ended December 31, 2020, to approximately $74.7 million compared to hotel operating expenses for the year ended December 31, 2019, of approximately $138.8 million. The decrease in hotel operating expenses for the twelve months ended December 31, 2020, reflects the impact of the COVID-19 pandemic and the resulting reduction in hotel occupancy at all of our properties other than our recently acquired Hyde Beach House Resort & Residences which had a positive increase in hotel operating expenses of approximately $1.1 million.
Rooms expense at our properties for the year ended December 31, 2020, decreased approximately $16.6 million, or 51.6%, to approximately $15.5 million compared to rooms expense of approximately $32.1 million for the year ended December 31, 2019.
Food and beverage expenses at our properties for the year ended December 31, 2020, decreased approximately $20.8 million, or 70.9%, to approximately $8.5 million compared to food and beverage expense of approximately $29.3 million for the year ended December 31, 2019.
Expenses from other operating departments decreased approximately $1.8 million, or 26.1%, to approximately $5.1 million for the year ended December 31, 2020, compared to expenses from other operating departments of approximately $6.9 million for the year ended December 31, 2019. Our recently acquired Hyde Beach House Resort & Residences in Hollywood, Florida, was the only property with an aggregate increase in other operating departments expenses of approximately $1.3 million.
Indirect expenses at our properties for the year ended December 31, 2020, decreased approximately $24.9 million, or 35.4%, to approximately $45.5 million compared to indirect expenses of approximately $70.4 million for the year ended December 31, 2019. The decrease in indirect expenses for the twelve months ended December 31, 2020, resulted from decreases in administrative and general, management and franchise fees, sales and marketing, repairs and maintenance, energy and utilities, information and communications and insurance, and other indirect expenses for all our properties.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2020, decreased approximately $1.7 million, or 8.0%, to approximately $19.9 million compared to depreciation and amortization expense of approximately $21.6 million for the year ended December 31, 2019. The decrease in depreciation was mainly related to our properties in Philadelphia, Pennsylvania, Laurel, Maryland, Tampa, Florida and Atlanta Georgia from prior year changes in estimated useful lives and disposals, with a decrease of approximately $1.8 million. There was also an aggregate increase in depreciation and amortization of approximately $0.1 million from our remaining properties.
Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2020, decreased approximately $0.3 million, or 4.9%, to approximately $6.5 million compared to corporate general and administrative expenses of approximately $6.8 million for the year ended December 31, 2019. The decrease in corporate general and administrative expenses was mainly due to decreased salaries, professional and legal fees.
Interest Expense. Interest expense for the year ended December 31, 2020, decreased approximately $1.7 million, or 8.7%, to approximately $18.1 million compared to approximately $19.8 million of interest expense for the year ended December 31, 2019. The decrease in interest expense for the twelve months ended December 31, 2020, was substantially related to the reduction of the 7.25% unsecured notes (the “7.25% Notes”) and the three variable rate loans on Raleigh, North Carolina, Tampa, Florida and Houston, Texas, which accounted for a decrease of approximately $1.3 million, compared to the twelve-month period ending December 31, 2019. The remaining decrease of approximately $0.4 million was due to lower loan balances.
Loss on Early Debt Extinguishment. The loss on early debt extinguishment for the year ended December 31, 2020, decreased approximately $1.2 million, or 100.0%, to $0 compared to a loss on debt extinguishment of approximately $1.2 million for the year ended December 31, 2019. There were no early extinguishments of debt in 2020. In May 2019, the 7.25% Notes were redeemed at 101% of face value. A redemption premium of $0.25 million and the unamortized deferred financing costs related to the 7.25% Notes comprised loss on early debt extinguishment in 2019, of approximate $1.2 million.
Unrealized Loss on Hedging Activities. Unrealized gain (loss) on hedging activities primarily relates to the change in variance between the unamortized cost of the interest-rate swap related to our mortgage on the DoubleTree by Hilton Philadelphia Airport and the fair value of that interest-rate swap which is affected by both the decreasing number of payment periods in the swap period and the changes in anticipated LIBOR rates over the remaining period. Those factors contributed to an unrealized loss of approximately $1.0 million for the year ended December 31, 2020, compared to an unrealized loss of approximately $1.2 million for the year ended December 31, 2019.
Income Tax (Provision) Benefit. We had an income tax provision of approximately $5.3 million for the twelve months ended December 31, 2020, compared to an income tax benefit of approximately $0.2 million for the twelve months ended December 31, 2019. The change in income tax provision was primarily derived from a reduction of our deferred tax assets and through the establishment of a 100% valuation allowance of approximately $5.4 million during the year ended December 31, 2020.
Net (Loss) Income. Net loss for the year ended December 31, 2020, increased approximately $54.9 million, or 4,666.50%, to approximately $53.7 million compared to a net income of approximately $1.2 million for the year ended December 31, 2019, as a result of the operating results discussed above.
Distributions to Preferred Stockholders. During the year ended December 31, 2020, we accounted for declared and undeclared distributions to preferred stockholders of approximately $8.8 million, compared to approximately $7.8 million of distributions declared and paid to preferred stockholders for the year ended December 31, 2019.
Sources and Uses of Cash
Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage or other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt services and maturities, operating costs, corporate expenses and dividends. As of December 31, 2021, we had unrestricted cash of approximately $13.2 million and restricted cash of approximately $12.4 million.
Operating Activities. Our net cash provided by operating activities for the year ended December 31, 2021 was approximately $2.3 million. The positive cash flow from operations during the year was due to the increase in occupancy at our hotels as a result of the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from transient consumers; increases in travel by some group business and increases in the number of foreign travelers. Our cash used in operating activities for the year ended December 31, 2020 was approximately $11.3 million. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and changes in working capital.
Investing Activities. Our cash used in investing activities for the year ended December 31, 2021 was approximately $2.4 million. During the year ended December 31, 2021, we made improvements to our hotel properties including additions of furniture, fixtures and equipment of approximately $3.2 million. Our cash used in investing activities for the year ended December 31, 2020 was approximately $3.8 million. During the year ended December 31, 2020, we invested approximately $4.0 million into improvements to our hotel properties including additions of furniture, fixtures and equipment.
Financing Activities. Our cash used in financing activities for the year ended December 31, 2021, was approximately $9.7 million. During the year ended December 31, 2021, we paid approximately $6.5 million in scheduled payments of principal on our mortgage loans and paid approximately $3.1 million of unsecured note payments. Our cash provided by financial activities for the year ended December 31, 2020, was approximately $22.4 million. During the year ended December 31, 2020, we sold Secured Notes for $20.0 million, borrowed approximately $10.7 million in unsecured notes, paid approximately $1.6 million in financing costs, paid approximately $2.6 million in scheduled payments of principal on our mortgage loans and, prior to the start of the pandemic, made distributions of approximately $4.2 million.
Capital Expenditures
We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined through the annual budget process over which we maintain approval rights, and which are implemented or administered by our management company.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we may be required by one or more of our franchisors to complete a property improvement program (“PIP”) in order to bring the hotel up to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including restricted cash, proceeds of mortgage debt or equity offerings.
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 response to the COVID-19 pandemic, we postponed all major non-essential capital expenditures. If travel demand, occupancy, and RevPAR increase as expected through the remainder of 2022, we expect total capital expenditures to be approximately $6.3 million for 2022.
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. Except as temporarily provided through loan modifications and forbearance agreements, we deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, Tapestry Collection by Hilton, the DoubleTree Resort by Hilton Hollywood Beach, 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 and the Hyatt Centric Arlington on a monthly basis.
Liquidity and Capital Resources
The COVID-19 pandemic had a significant negative impact on our operations and financial results during 2021 and is expected to continue until at least the end of 2022. The impact includes a substantial decline in our revenues, profitability and cash flows from operations. While the duration and full financial impact of the reduction in hotel demand caused by the pandemic, contraction of operations at our hotels and other effects are uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and an economic recovery is sustained. In response to these negative impacts, we took a number of immediate actions to reduce costs and preserve liquidity including the suspension of dividends on our common and preferred stock, suspension of planned capital expenditures and reduction in cash compensation of our executive officers, board of directors, and corporate employees.
During 2020 and into 2021, we entered into forbearance agreements with all our mortgage lenders and negotiated extended payment plans with a few key vendors in order to preserve liquidity. Repayment of deferred amounts of interest, mortgage principal, and amounts due certain vendors, which began in 2021, will continue through the end of 2022, with certain amounts being deferred until the applicable loan matures. We estimate the aggregate amount of such deferred payments due in 2022 at approximately $7.5 million.
In addition, on December 31, 2020, we issued $20.0 million in Secured Notes in order to provide additional liquidity. The Secured Notes mature on December 31, 2023 and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term,
As of December 31, 2021, we had cash, cash equivalents and restricted cash of approximately $25.6 million, of which approximately $12.4 million was in restricted reserve accounts for cash collateral, 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 scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt or secured notes).
We have entered into a real estate sale agreement to sell our DoubleTree by Hilton Raleigh-Brownstone University hotel. If successful, we expect the sale to generate net proceeds of approximately $20.0 million, which we will use to repay a portion the Secured Notes and associated repayment factor.
Other than monthly mortgage loan principal payments, our only mortgage debt obligation with a scheduled maturity date in 2022 are the mortgages on the DoubleTree by Hilton Laurel and the Hotel Alba Tampa requiring us to repay or refinance balances collectively totaling approximately $25.6 million. If we are unsuccessful in selling the DoubleTree by Hilton Raleigh-Brownstone University, then we will be required to repay or refinance an additional $18.3 million. In 2023, the mortgages on The Whitehall in Houston, Texas and the DoubleTree by Hilton Philadelphia Airport mature. We intend to refinance these mortgages at the level of their existing indebtedness or request extensions at existing terms.
At December 31, 2021, we were current on all loan payments on all mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants with the exception of the Debt Service Coverage Ratio (“DSCR”) requirement related to the mortgage on The Whitehall in Houston, Texas and the Tangible Net Worth covenant related to the mortgages on the DoubleTree by Hilton Jacksonville Riverfront and the Hotel Alba in Tampa, Florida. We were able to obtain waivers from the lender of the mortgage on The Whitehall in Houston, Texas through June 30, 2022 and from the lender on the mortgage on the DoubleTree by Hilton Jacksonville Riverfront through December 31, 2022. We also anticipate receiving a waiver from the lender on the mortgage on the Hotel Alba in Tampa, Florida. We believe we are likely to remain in non-compliance with one or more of these covenants over the next two to four quarters. If we fail to obtain additional waivers or loan modifications, our lenders could declare us in default and require repayment of the outstanding balance on the mortgage loan. If that were to occur, we may not have sufficient funds to pay that mortgage debt. We believe we will be successful in obtaining necessary waivers and loan modifications from our mortgage lenders but cannot provide assurance we will be able to do so on acceptable terms or at all.
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, which we expect to be limited as a result of the COVID-19 outbreak. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.
Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, 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.
Mortgage Debt
As of December 31, 2021, we had a principal mortgage debt balance of approximately $352.6 million. The following table sets forth our mortgage debt obligations on our hotels.
December 31,
Prepayment
Maturity
Amortization
Property
Penalties
Date
Provisions
Interest Rate
The DeSoto (1)
$
32,148,819
Yes
7/1/2026
25 years
4.25%
DoubleTree by Hilton Jacksonville
Riverfront (2)
33,051,316
Yes
7/11/2024
30 years
4.88%
DoubleTree by Hilton Laurel (3)
8,175,215
None
5/5/2022
25 years
5.25%
DoubleTree by Hilton Philadelphia Airport (4)
40,734,077
None
10/31/2023
30 years
LIBOR plus 2.27%
DoubleTree by Hilton Raleigh-
Brownstone University (5)
18,300,000
Yes
8/1/2022
(5)
LIBOR plus 4.00%
DoubleTree Resort by Hilton Hollywood
Beach (6)
54,253,963
(6)
10/1/2025
30 years
4.91%
Georgian Terrace (7)
41,484,732
(7)
6/1/2025
30 years
4.42%
Hotel Alba Tampa, Tapestry Collection by Hilton (8)
17,383,397
None
6/30/2022
(8)
LIBOR plus 3.75%
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9)
32,604,948
Yes
1/1/2027
25 years
4.25%
Hyatt Centric Arlington (10)
48,990,136
Yes
10/1/2028
30 years
5.25%
Sheraton Louisville Riverside (11)
10,947,366
Yes
12/1/2026
25 years
4.27%
The Whitehall (12)
14,551,671
Yes
2/26/2023
25 years
PRIME plus 1.25%
Total Mortgage Principal Balance
352,625,640
Deferred Financing Costs, Net
(1,547,004)
Unamortized Premium on Loan
92,247
Total Mortgage Loans, Net
$
351,170,883
(1)
The note amortizes on a 25-year schedule after an initial 1 year interest only period (which expired in August 2017) and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
(2)
The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
(3)
Prepayment can be made on this note without penalty. On July 15, 2021, we entered into a note modification agreement whereby the maturity date was extended from August 5, 2021 to May 5, 2022.
(4)
The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237%. Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
(5)
The note provided initial proceeds of $18.3 million, with an additional $5.2 million available upon the satisfaction of certain conditions; has an initial term of 4 years with a 1-year extension; bears a floating interest rate of 1-month LIBOR plus 4.00%; requires interest only monthly payments; and following a 12-month lockout, can be prepaid with penalty in year 2 and without penalty thereafter. We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000.
(6)
With limited exception, the note may not be prepaid prior to June 2025.
(7)
With limited exception, the note may not be prepaid prior to February 2025.
(8)
The note bears a floating interest rate of 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%; with monthly principal payments of $26,812; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions.
(9)
The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
(10)
Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
(11)
The note bears a fixed interest rate of 4.27% for the first 5 years of the loan. The lender exercised its option to reset the interest rate after 5 years to 5.25% effective December 1, 2021. With the approval of the lender, the loan can be assumed by the purchaser of the property.
(12)
The note bears a floating interest rate of New York Prime Rate plus 1.25% and is subject to prepayment penalty of 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022. Pre-payment can be made without penalty thereafter.
Mortgage Forbearance Agreements
Since the onset of the COVID-19 pandemic, we have completed mortgage forbearance agreements and/or loan modification agreements for the twelve mortgage loans secured by our hotels. The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to fifteen months, temporary elimination of requirements to make contributions to the furniture, fixtures and equipment replacement reserve, the ability to temporarily utilize furniture, fixtures and equipment replacement reserve funds for operating expenses or to fund principal and interest and required deposits to real estate tax escrows, subject to certain restrictions and conditions, including requirements to replenish such funds used; waivers for existing quarterly financial covenants for one to six quarters; and adjustments to some covenant calculations following the waiver period. Below is a summary of those agreements for each hotel.
The DeSoto
Starting on April 1, 2020, we entered into a series of note modification agreements with the mortgage lender for The DeSoto pursuant to which we agreed with the lender on the following: (a) deferral of scheduled principal and interest payments due from April 1, 2020 to September 1, 2020, provided that interest continued to accrue during that period; (b) additional deferral of scheduled principal and interest payments due February 1, 2021, provided that interest also continued to accrue during that period; (c) a payment of interest only on March 1, 2021 in the amount of $116,240; (d) waiver of certain FF&E requirements until February 28, 2021; (e) to pay all deferred principal and interest amounts at maturity; and (f) a guarantee by the Operating Partnership of payment of up to 5.0% of all present and future indebtedness under the loan. The maturity date under the loan modification remains unchanged. As a condition to the loan modification, the borrowing entity, agreed to not declare, set aside or pay any distribution or dividend until the later of March 1, 2021 or the resumption of regular principal and interest payments.
DoubleTree by Hilton Jacksonville Riverfront
On April 21, 2020, we entered into a letter agreement pursuant to which the lender agreed to the following: (a) the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; (b) FF&E deposits were deferred for the April, May, and June 2020 payment dates; and (c) released FF&E and the deferred FF&E was repaid in 6 monthly installments ending with the December 2020 payment. The maturity date under the loan modification remains unchanged.
DoubleTree by Hilton Laurel
Starting on March 24, 2020, we entered into a series of deferral and note modification agreements with the mortgage lender for the DoubleTree by Hilton Laurel pursuant to which we agreed with the lender to the following: (a) an initial deferral of scheduled payments of principal and interest due from April 5, 2020 to September 5, 2020; (b) an additional deferral of scheduled payments of principal only from November 5, 2020 to March 5, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any and all deferred principal is due and payable at maturity. On July 15, 2021, we entered into a note modification agreement pursuant to which we agreed with the lender to the following: (i) the maturity date was extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, the borrowing entity will pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%. Concurrently with the execution of the Note Modification Agreement, the borrowing entity paid lender the deferred interest accumulated on the loan from April 2020 through September 2020 in the amount of $226,859. All other terms of the mortgage remain unchanged. A nominal amount in cash consideration was provided in exchange for the note modifications and the lender also waived compliance with the DSCR covenant as of December 31, 2020.
DoubleTree by Hilton Philadelphia Airport
We have agreed with the lender to the following: (a) deferral of scheduled principal through June 1, 2021; (b) payment of regular principal and interest to resume on July 1, 2021; (c) remaining deferred interest is to be paid in 12 equal installments beginning April 1, 2021; (d) deferred principal to be repaid on a quarterly basis out of the excess of Hotel EBITDA after reserves over Actual Debt Service beginning with the quarter ending March 31, 2022, or at maturity; (e) a guaranty by the Operating Partnership of payment under the loan; (f) addition of a revenue per available room financial covenant for the period between March 1, 2021 and May 31, 2021; (g) a waiver of compliance with the DSCR covenant through September 30, 2021; and (h) revised DSCR requirements for the quarters ending December 31, 2021 through June 30, 2022. In connection with the guarantee, the Operating Partnership entered into an acknowledgment of confession of judgment of guarantor pursuant to which the lender is authorized to enter a judgment against the Operating Partnership upon the occurrence of an event of default. The maturity date was extended by 3 months, or until October 31, 2023.
DoubleTree by Hilton Raleigh-Brownstone University
Beginning on May 4, 2020, we entered into a series of forbearance and loan modification agreements with the mortgage lender for the DoubleTree by Hilton Raleigh-Brownstone University pursuant to which the lender agreed to the following: (a) deferral of scheduled interest payments due from April 1, 2020 to July 31, 2021; (b) a one-time fee of $236,375 made in January 2021 and applied to deferred interest; (c) deferral of the FF&E reserve deposit from April 2020 until July 2021; and (d) remainder of deferred interest, along with additional accrued interest on interest, is due and payable by maturity. In the event that accrued interest is not paid in full by August 1, 2022, the borrowing entity will be required to pay an exit fee equal to one percent of the total outstanding principal amount under the loan in addition to all outstanding payments of principal and interest on the loan.
DoubleTree Resort by Hilton Hollywood Beach
On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms. Under the amended loan agreement and promissory note we paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4.0 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses. In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the borrowing entity relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrowing entity under the promissory note from making any distributions until all such deferred payments have been made. Also, the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear collection of default interest and late payment charges accrued and unpaid under the original loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.
Georgian Terrace
On October 8, 2020, the lender agreed to the release of approximately $1.1 million from the FF&E reserve to fund up to 50% of (a) shortfall between gross revenues and operating expenses for the period April through July 31, 2020, and (b) scheduled payments of debt service, deposits to the real estate tax escrow and insurance expenses for the period April through August 2020. So long as there is no event of default under the terms of the loan agreement, lender agreed to defer deposits into the FF&E reserve account between November 2020 and April 2021. As consideration to entering into the loan modification agreement, the Operating Partnership agreed to guarantee full and prompt payment of the released reserves amounts. The FF&E reserve was replenished in November 2021.
Hotel Alba Tampa
Starting on May 14, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to: (a) the deferral of scheduled payments of principal due from April 1, 2020 to June 30, 2021; (b) waive certain financial covenants applicable to the borrowing entity and the Operating Partnership through the quarter ended December 31, 2020 and (c) delay repayment of deferred payments upon the earlier of (i) the maturity date or (ii) acceleration of the loan. The borrowing entity agreed to not, without prior written consent of the lender, make any distributions of cash or property until all the following conditions have been satisfied: (x) the deferral period has expired and deferred payments have been made; (y) certain conditions precedent for making distributions under the loan agreement have been satisfied; and (z) any PPP loans extended to the borrowing entity have been repaid or forgiven. The borrowing entity is also restricted from making any payments on any subordinated indebtedness, mezzanine financing or certain other funded indebtedness, with certain limited exceptions, without prior written consent of the lender. As of December 31, 2021, we had paid the deferred amounts, were in compliance with the modified DSCR and had met the requirements for release of the cash collateral on deposit with the lender. Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million as of December 31, 2021.
Hotel Ballast Wilmington
The lender has agreed to the following: (a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to September 1, 2020; (c) waiver of FF&E requirement until March 1, 2021; (d) deferred principal and interest will be due and payable at maturity; and (e) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership. The maturity date under the loan modification remains unchanged. As a condition to the modification the borrowing entity cannot declare, set aside or pay any distributions or dividends until the later of (i) March 1, 2021 or (ii) the resumption of regular principal and interest payments.
Hyatt Centric Arlington
Starting on July 15, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal and interest due from April 1, 2020 to March 31, 2021; (b) deferral of scheduled payments of principal due from April 1, 2021 to December 31, 2021; (c) loan balance to be re-amortized as of January 1, 2022; (d) deferred principal and interest, along with additional accrued interest on interest, is due and payable by July 1, 2022; (e) $147,765 drawn from the reserve account to be replenished in full by December, 2021; and (f) wavier of the requirement to make deposits into FF&E reserve from April 2020 to April 1, 2021. As a condition to the effectiveness of the first modification, the borrowing entity under the loan paid (i) $50,000 to be deposited into the ground lease reserve account and (ii) $426,620 to be deposited into an escrow for impositions. As a condition to the effectiveness of the second modification, the borrowing entity paid (i) an additional $47,500 to be deposited into the ground lease reserve account and (ii) a one-time fee of $100,000 to be deposited into an escrow for impositions. Until the borrowing entity under the loan has fully repaid the deferred monthly payment and replenished the FF&E reserves account and the PPP loan is no longer outstanding, the borrowing entity is not permitted make any distributions without prior written consent of the lender.
Sheraton Louisville Riverside
The lender has agreed to the following: (a) deferral of scheduled payments of interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent payments were required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity. The maturity date under the loan modification remains unchanged. The hotel was sold on February 10, 2022.
The Whitehall
We entered into two forbearance agreement pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal due from April 1, 2020 to July 13, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to October 12, 2020; (c) deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the amortization period; (d) on July 14, 2021 principal and interest payments will resume based upon the original amortization; (e) the interest rate was changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; (f) loan modification fees of $54,500; (g) the prepayment penalty was changed to: (i) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (ii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iii) no prepayment fee if prepaid after November 26, 2022; and (h) a waiver of the financial covenants through June 30, 2022. The maturity date under the loan modification remains unchanged. As conditions to the forbearance agreement, the parties agreed to the following during the forbearance period lasting until the earlier of (a) July 13, 2021 or (b) the occurrence of a forbearance event of default: (i) the borrowing entity, the Operating Partnership and the Company cannot declare, authorize or pay dividends or may any distribution to any person, without prior written consent of the lender; (ii) the borrowing entity may not sell, convey, transfer or assign assets, other than in the ordinary course of business, without the lender’s consent and in the case of such sale, the lender may cause the buyer to pay all proceeds directly to the lender and (iii) the borrowing entity shall not default on any of its obligations to third parties. If we fail to meet the obligations under the forbearance agreements, lender has the right to exercise all remedies available under the loan agreement including the right to accelerate the maturity of the loan.
Financial Covenants
Mortgage Loans
Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well as the effects of the ongoing global pandemic.
As described in “Effects of COVID-19 Pandemic on our Business”, we failed to meet certain financial covenants under the mortgages secured by each of the DoubleTree by Hilton Jacksonville Riverfront, the Hotel Alba, and The Whitehall. We have received waivers of the financial covenants under the applicable mortgages from (i) the lender on the DoubleTree by Hilton Jacksonville Riverfront through December 31, 2022 and (ii) the lender on The Whitehall mortgage through June 30, 2022. We expect to receive a waiver from the lender on the Hotel Alba for the period ended December 31, 2021.
Certain of our loan agreements also include financial covenants that trigger a “cash trap”. As of December 31, 2021, we had failed to meet the financial covenants under the mortgage secured by the DoubleTree Resort by Hilton Hollywood Beach. Without the waiver we received from the lender which waives compliance through December 31, 2022, non-compliance with the financial covenant on this and similar mortgages would have triggered a “cash trap” requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”. In addition, in order to receive
forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone - University and the Hyatt Centric Arlington, we agreed to “cash traps” until the properties meet the criteria in the forbearance agreement for exiting the “cash traps”. Similar provisions may be a condition of additional or further lender forbearance.
Secured Notes
Our Secured Notes provide that aggregate accounts payable shall not exceed $5.0 million at any time beginning December 31, 2021 for as long as the Secured Notes are outstanding. The Secured Notes also place a cap on employee compensation and capital expenditures and require a minimum level of liquidity. We were in compliance with the covenant as of December 31, 2021.
Contractual Obligations
The following table outlines our contractual obligations as of December 31, 2021, 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
$
406,239
$
66,855
$
122,029
$
172,534
$
44,821
Unsecured Notes
7,749
2,199
4,398
1,152
-
Secured Notes
31,834
1,217
30,617
-
-
Ground, building, parking garage, office and equipment leases
17,439
1,335
1,320
14,100
Totals
$
463,261
$
70,955
$
158,379
$
175,006
$
58,921
Dividend Policy
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 noncash 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 holders 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 Series B Preferred Stock, Series C Preferred Stock and Series D 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 $8.1 million and the aggregate liquidation preference with respect to our outstanding preferred shares is approximately $115.8 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.
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 noncash 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, Maryland, North Carolina, Pennsylvania, Texas and Virginia. 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
Our consolidated financial statements, prepared in conformity with U.S. GAAP, require management to make estimates and assumptions that affect the reported amount of assets and liability at the date of our financial statements, the reported amounts of revenue and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2, Significant Accounting Policies, in the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the following accounting policies are critical because they require difficult, subjective and complex judgments and include estimates about matters that are inherently uncertain, involve various assumptions, require management judgment, and because they are important for understanding and evaluating our financial position, results of operations and related disclosures. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our historical experiences and various matters that we believe are reasonable and appropriate for consideration under the circumstances. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on our financial position or results of operations.
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.
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.
The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on the lodging and hospitality industries, which the Company considered to be a triggering event for each of its hotels during its impairment testing for the year ended December 31, 2021. The Company assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon significant assumptions regarding its ability to maintain ownership of the property, growth rates, occupancy, room rates, economic trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash flows from the eventual disposition of the hotel. The Company also projects cash flows from the eventual disposition of the hotel based upon property-specific capitalization rates. The Company determined that two impairments were triggered by a reduction in the holding period due to the recent sale of the Sheraton Louisville Riverside as well as lack of certainty regarding our ability to extend or refinance the mortgage on The Whitehall in Houston, Texas which matures in early 2023. The resulting adjustment to fair market value resulted in a charge of approximately $12.2 million during the period ended December 31, 2021.
Income Taxes. The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. The MHI TRS Entities which leases our hotels from subsidiaries of the Operating Partnership, are subject to federal and state income taxes.
We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. As of December 31, 2021, we have determined that it is more-likely-than-not that we will not be able to fully utilize our deferred tax assets for future tax consequences, therefore a 100% valuation allowance is required. As of December 31, 2021 and 2020, deferred tax assets each totaled $0, respectively.
As of December 31, 2021, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2016 through 2020. In addition, as of December 31, 2021, the tax years that remain subject to examination by the major tax jurisdictions to which the MHI TRS Entities are subject, because of open NOL carryforwards, generally include 2014 through 2020.
The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Recent Accounting Pronouncements
For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Non-GAAP Financial Measures
We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s 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 or impairment, stock compensation costs 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 Available to Common Stockholders and Unitholders 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, gains on extinguishment of preferred stock, 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, management contract termination costs, operating asset depreciation and amortization, change in control gains or losses, ESOP and stock compensation expenses 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 loss to FFO and Adjusted FFO for the years ended December 31, 2021, 2020, and 2019.
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Net (Loss) Income
$
(28,539,640
)
$
(53,682,905
)
$
1,175,568
Depreciation and Amortization - Real Estate
19,838,017
19,825,382
21,578,309
Impairment of investment in hotel properties, net
12,201,461
-
-
(Gain) Loss on Disposal of Assets
(158,286
)
136,063
123,739
Distributions to preferred stockholders
(7,541,891
)
(8,755,642
)
(7,820,695
)
Gain on Involuntary Conversion of Asset
(588,586
)
(179,856
)
(293,534
)
FFO Available to Common Stockholders and Unitholders
$
(4,788,925
)
$
(42,656,958
)
$
14,763,387
Decrease (Increase) in Deferred Income Taxes
-
5,412,084
(280,905
)
Amortization
71,209
71,390
59,007
ESOP and stock - based compensation
689,547
754,111
385,561
Aborted Offering Costs
631,952
-
-
Termination (Refund) Fee
-
(19,709
)
291,841
Unrealized Loss on Hedging Activities (A)
(1,493,841
)
986,200
1,177,871
Loss on Early Debt Extinguishment (A)
-
-
1,152,356
Adjusted FFO Available to Common Stockholders and Unitholders
$
(4,890,058
)
$
(35,452,882
)
$
17,549,118
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) unrealized gains and losses on derivative instruments not included in other comprehensive income, (5) gains and losses on disposal of assets, (6) impairment of long-lived assets or investments, (7) loss on early debt extinguishment, (8) gain on exercise of development right, (9) corporate general and administrative expense, (10) depreciation and amortization, (11)
gains and losses on involuntary conversions of assets, and (12) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more 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, 2021, 2020, and 2019.
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Net (Loss) Income
$
(28,539,640
)
$
(53,682,905
)
$
1,175,568
Interest Expense
22,686,694
18,056,874
19,768,193
Interest Income
(147,025
)
(210,426
)
(444,459
)
Income Tax Provision (Benefit)
27,392
5,280,443
(249,480
)
Depreciation and Amortization
19,909,226
19,896,772
21,637,316
Impairment of investment in hotel properties, net
12,201,461
-
-
Unrealized Loss on Hedging Activities
(1,493,841
)
986,200
1,177,871
Loss on Early Debt Extinguishment
-
-
1,152,356
Loss on Sale or Disposal of Assets
(158,286
)
136,063
123,739
Gain on Exercise of Development Right
-
-
(3,940,000
)
Gain on Involuntary Conversion of Asset
(588,586
)
(179,856
)
(293,534
)
Corporate General and Administrative Expenses
6,997,166
6,492,526
6,830,354
Hotel EBITDA
$
30,894,561
$
(3,224,309
)
$
46,937,924

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. 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, 2021, we had approximately $330.0 million of fixed-rate debt, including the mortgage on our DoubleTree by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, secured notes of $20.0 million with a fixed rate of 6.0%, the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $50.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.77%. 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 and in Prime Rate. Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.2 million, the balance at December 31, 2021, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.2 million.
As of December 31, 2020, we had approximately $339.4 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237% and approximately $50.9 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.74%. 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. Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba Tampa, Tapestry Collection by Hilton, DoubleTree by Hilton Raleigh Brownstone and the mortgage on The Whitehall remains at approximately $50.9 million, the balance at December 31, 2020, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR would be approximately $0.2 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. 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, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, 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 within 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, 2021. 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, 2021, the Company’s 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.
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, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, 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 within 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, 2021. 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, 2021, 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.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Information about our 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, executive officers and corporate governance is incorporated by reference to the sections captioned “Proposal I - Election of Directors” and “Delinquent Section 16(a) Reports” contained in the Company’s 2022 Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. 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 2022 Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. 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 2022 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 2022 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, 2021 with respect to compensation plans under which equity securities of the Company are authorized for issuance.
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
232,536
Equity compensation plans not approved by security holders:
None
N/A
N/A
N/A
Total
N/A
N/A
232,536
(1)
On February 4, 2021, we granted (i) 136,281 shares of stock to our officers and employees, and (ii) 15,000 shares of restricted stock to our independent directors, all of which vested on December 31, 2021.
On January 21, 2022, we granted (i) 168,037 shares of stock to our independent directors, officers, and employees, and (ii) 15,000 shares of restricted stock to our independent directors. These shares are included in the number of securities remaining available for future issuance as of December 31, 2021.
On February 15, 2022, we granted 7,231 shares of stock to one of our employees. These shares are included in the number of securities remaining available for future issuance as of December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. 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 2022 Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. 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 2022 Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
Index to Financial Statements and Financial Statement Schedules
Sotherly Hotels Inc.
Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP
Consolidated Balance Sheets for Sotherly Hotels Inc. as of December 31, 2021 and 2020
Consolidated Statements of Operations for Sotherly Hotels Inc. for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Equity for Sotherly Hotels Inc. for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for Sotherly Hotels Inc. for the years ended December 31, 2021, 2020 and 2019
Sotherly Hotels LP
Report of Independent Registered Public Accounting Firm, Dixon Hughes Goodman LLP
Consolidated Balance Sheets for Sotherly Hotels LP as of December 31, 2021 and 2020
Consolidated Statements of Operations for Sotherly Hotels LP for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for Sotherly Hotels LP for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2021
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).
3.1C
Articles of Amendment to the Articles of Amendment and Restatement of the Company, effective as of April 12, 2019 (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 April 16, 2019).
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).
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).
3.2D
Amendment No. 4 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 October 11, 2017).
3.2E
Amendment No. 5 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP (incorporated by reference to the document previously filed as Exhibit 3.2E to our current report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2018).
3.2F
Amendment No. 6 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 April 18, 2019).
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).
3.6
Articles Supplementary designating the Series C Preferred Stock of the Company, effective as of October 5, 2017 (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 October 10, 2017).
3.7
Articles Supplementary dated August 30, 2018 (incorporated by reference to the document previously filed as Exhibit 3.7 to our current report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2018).
3.8
Articles Supplementary designating the Series D Preferred Stock of the Company, effective as of April 15, 2019 (incorporated by reference to the document previously filed as Exhibit 3.6 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 16, 2019).
4.0
Form of Common Stock Certificate (incorporated by reference to the document previously filed as Exhibit 4.0 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 22, 2017).
4.1
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).
4.2
Form of Specimen Certificate of Series C 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 October 10, 2017).
4.3
Form of Specimen Certificate of Series D 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 April 16, 2019).
4.4
Description of Registered Securities.
Exhibits
10.1
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
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). *
10.3
Executive Employment Agreement between Sotherly Hotels Inc. and Anthony E. Domalski, dated as of January 1, 2018 (incorporated by reference to the document previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2018). *
10.4
Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality LLC (incorporated by reference to the document previously filed as Exhibit 10.17 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2019).
10.5
Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality LLC (incorporated by reference to the document previously filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2019).
10.6
Credit Agreement between Our Town Hospitality LLC and MHI Hospitality TRS, LLC dated as of January 1, 2020 (incorporated by reference to the document previously filed as Exhibit 10.22 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2019).
10.7
Sublease Agreement between Our Town Hospitality LLC and Sotherly Hotels Inc. dated December 13, 2019 (incorporated by reference to the document previously filed as Exhibit 10.23 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2019).
10.8
Executive Employment Agreement between Sotherly Hotels Inc. and Andrew M. Sims, dated as of January 1, 2020 (incorporated by reference to the document previously filed as Exhibit 10.24 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020). *
10.9
Executive Employment Agreement between Sotherly Hotels Inc. and David R. Folsom, dated as of January 1, 2020 (incorporated by reference to the document previously filed as Exhibit 10.25 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020). *
10.10
Executive Employment Agreement between Sotherly Hotels Inc. and Scott M. Kucinski, dated as of January 1, 2020 (incorporated by reference to the document previously filed as Exhibit 10.26 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020). *
10.11
Executive Employment Agreement between Sotherly Hotels Inc. and Robert E. Kirkland IV, dated as of January 1, 2020 (incorporated by reference to the document previously filed as Exhibit 10.27 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2020). *
10.12
Promissory Note between Sotherly Hotels LP and Village Bank dated as of April 16, 2020 (incorporated by reference to the document previously filed as Exhibit 10.16 to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 24, 2020).
10.13
Promissory Note between MHI Hospitality TRS, LLC and Fifth Third Bank, National Association, dated as of April 28, 2020 (incorporated by reference to the document previously filed as Exhibit 10.17 to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 24, 2020).
10.14
Promissory Note between SOHO Arlington TRS LLC and Fifth Third Bank, National Association, dated as of May 6, 2020 (incorporated by reference to the document previously filed as Exhibit 10.18 to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 24, 2020).
10.15
Note Purchase Agreement dated December 31, 2020 (incorporated by reference to the document previously filed as Exhibit 10.19 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2020.
10.16
Secured Notes dated December 31, 2020 (incorporated by reference to the document previously filed as Exhibit 10.20 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2020.
10.17
Pledge and Security Agreement dated December 31, 2020 (incorporated by reference to the document previously filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2020).
Exhibits
10.18
Board Observer Agreement dated December 31, 2020 (incorporated by reference to the document previously filed as Exhibit 10.22 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2020).
10.19
Second Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality (incorporated by reference to the document previously filed as Exhibit 10.20 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).
10.20
Amendment No. 2 to Credit Agreement between Our Town Hospitality LLC and MHI Hospitality TRS, LLC (incorporated by reference to the document previously filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).
10.21
Share Exchange Agreement between Sotherly Hotels Inc. and Palogic Value Fund, L.P. (incorporated by reference to the document previously filed as Exhibit 10.22 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2021).
10.22
Real Estate Sale Agreement by and between Raleigh Hotel Associates, LLC and CS Acquisition Vehicle, LLC, dated November 30, 2021.
10.23
Share Exchange Agreement between Sotherly Hotels Inc. and Palogic Value Fund, L.P. (incorporated by reference to the document previously filed as Exhibit 10.24 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2021).
10.24
Purchase and Sale Agreement by and between Louisville Hotel Associates, LLC and Riverside Hotel, LLC, dated December 13, 2021 (incorporated by reference to the document previously filed as Exhibit 10.26 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2022).
10.25
First Amendment to Employment Agreement between Sotherly Hotels Inc. and Robert E. Kirkland IV, dated February 8, 2022 (incorporate by reference to the document previously filed as Exhibit 10.25 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2022).
10.26
First Amendment to Real Estate Sale Agreement by and between Raleigh Hotel Associates, LLC and CS Acquisition Vehicle, LLC, dated February 28, 2022.
21.1
List of Subsidiaries of Sotherly Hotels Inc.
21.2
List of Subsidiaries of Sotherly Hotels LP.
23.1
Consent of Dixon Hughes Goodman LLP.
23.2
Consent of Dixon Hughes Goodman 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
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Exhibits
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.0
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Denotes management contract and/or compensatory plan/arrangement.