Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
The aggregate market value of common stock held by non-affiliates of Sotherly Hotels Inc. as of June 28, 2013, the last business day of
Sotherly Hotels Inc.’s most recently completed second fiscal quarter, was approximately $39,193,950 based on the closing price quoted on the NASDAQ
®
Stock Market.
As of March 25, 2014, there were 10,243,677 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.
Part III of this Form 10-K incorporates by reference certain portions of Sotherly Hotels Inc.’s proxy statement for its 2014 annual meeting
of stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
We refer to Sotherly Hotels Inc. as the “Company,” Sotherly Hotels LP as the “Operating Partnership,” the Company’s
common stock as “Common Stock,” the Company’s preferred stock as “Preferred Stock,” and the Operating Partnership’s preferred interest as the “Preferred Interest.” References to “we” and
“our” mean the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
The Company conducts virtually all of its activities through the Operating Partnership and is its sole general partner. The partnership
agreement provides that the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all costs and expenses relating to the ownership and operations of, or for the benefit of, the Operating Partnership. The
partnership agreement further provides that all expenses of the Company are deemed to be incurred for the benefit of the Operating Partnership.
This report combines the Annual Reports on Form 10-K for the period ended December 31, 2013 of the Company and the Operating Partnership.
We believe combining the annual reports into this single report results in the following benefits:
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following
separate sections for each of the Company and the Operating Partnership:
Information included and incorporated by reference in this Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans,
strategies and expectations, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,”
“believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement
is not forward looking. All statements regarding our expected financial position, business and financing plans are forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are
not limited to:
Additional factors that could cause
actual results to vary from our forward-looking statements are set forth under the Section titled “Risk Factors” in Item 1A of this report.
These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by
reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable
to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report, except as required by law. In addition, our past results are not necessarily indicative of our future results.
PART I
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. The Company owns approximately 78.1% of the partnership units in the
Operating Partnership. Limited partners (including certain of the Company’s officers and directors) own the remaining Operating Partnership units.
As of February 28, 2014, our portfolio consists of eleven full-service, primarily upscale and upper-upscale hotels located in eight
states with an aggregate of 2,683 rooms and approximately 134,512 square feet of meeting space. Ten of these hotels are wholly-owned by subsidiaries of the Operating Partnership and operate under the Hilton, Crowne Plaza, DoubleTree, Sheraton and
Holiday Inn brands, and are managed on a day to day basis by MHI Hotels Services, LLC (“MHI Hotels Services”). We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture
with The Carlyle Group (“Carlyle”).
In order for the Company to qualify as a REIT, it cannot directly manage or operate our
wholly-owned hotels. Therefore, we lease our wholly-owned hotel properties to MHI Hospitality TRS, LLC (“TRS Lessee”), which in turn has engaged MHI Hotels Services, an eligible independent management company, to manage our hotels. Our TRS
Lessee is a wholly-owned subsidiary of MHI Hospitality TRS Holding, Inc. (“MHI Holding”, and collectively, “MHI TRS”). MHI TRS is a taxable REIT subsidiary for federal income tax purposes.
Our corporate office is located at 410 West Francis Street, Williamsburg, Virginia 23185. Our telephone number is (757) 229-5648.
Our Properties
In connection with the
Company’s initial public offering, the Company acquired six hotel properties for aggregate consideration of approximately $15.0 million in cash, 3,817,036 units of interest in our Operating Partnership and the assumption of approximately $50.8
million in debt. The six initial hotel properties, the Hilton Philadelphia Airport, the Holiday Inn Brownstone, the Holiday Inn Downtown Williamsburg, the Hilton Wilmington Riverside, the Hilton Savannah DeSoto and the Holiday Inn Laurel West
(formerly the Best Western Maryland Inn), are located in Pennsylvania, North Carolina, Virginia, North Carolina, Georgia, and Maryland, respectively.
On July 22, 2005, we acquired the Crowne Plaza Jacksonville Riverfront (formerly, the Hilton Jacksonville Riverfront) located in
Jacksonville, Florida, for $22.0 million.
During 2006, we sold the Holiday Inn Downtown Williamsburg for $4.75 million. We also purchased
the Louisville Ramada Riverfront Inn located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs and, after extensive renovations, re-opened the property in May 2008 as the Sheraton Louisville Riverside.
During 2007, through our joint venture with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P., and Carlyle, we acquired a
25.0% indirect, noncontrolling interest in the Crowne Plaza Hollywood Beach Resort, a 311-room hotel in Hollywood, Florida for approximately $75.8 million including transfer costs. We also purchased a hotel formerly known as the Tampa Clarion Hotel
in Tampa, Florida for
5
approximately $13.8 million including transfer costs, which, after extensive renovations, re-opened in March 2009 as the Crowne Plaza Tampa Westshore.
During 2008, we acquired the Hampton Marina Hotel located in Hampton, Virginia for approximately $7.8 million, including transfer costs.
In October 2008, the hotel was re-branded and renamed the Crowne Plaza Hampton Marina.
During 2013, we acquired the Crowne Plaza Houston
Downtown located in Houston, Texas at an aggregate value of approximately $30.9 million, including some closing costs.
In connection with
the Company’s initial public offering, the Company also acquired two leasehold interests in the Shell Island Resort, a 160-unit condominium resort property in Wrightsville Beach, North Carolina, which were purchased for $3.5 million. Our
Operating Partnership entered into sublease arrangements to sublease our entire leasehold interests in the property at Shell Island to affiliates of MHI Hotels Services. Through December 2011, the management company operated the property as a hotel
and managed a rental program for the benefit of the condominium unit owners. Our Operating Partnership received fixed annual rent and incurred annual lease expenses in connection with the subleases of such property. Consequent to the cancellation of
the management company’s contract to manage the condominium rental program and expiration of the underlying leases in December 2011, our Operating Partnership has and will continue to receive a reduced set of minimum payments through December
2014.
See Item 2 of this Form 10-K for additional detail on our properties.
Our Strategy and Investment Criteria
Our
strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the Southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties
and believe that we will be able to source significant external growth opportunities through our management team’s extensive network of industry, corporate and institutional relationships.
Our investment criteria are further detailed below:
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•
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Geographic Growth Markets
: We are focusing our growth strategy on the major markets in the Southern region of the United States. Our management team remains confident in the long-term growth potential associated
with this part of the United States. We believe these markets have, during the Company’s and our predecessors’ existence, been characterized by population growth, economic expansion, growth in new businesses and growth in the resort,
recreation and leisure segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for acquisitions only if we believe these new markets will provide similar long-term growth prospects.
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•
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Full-Service Hotels
: We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall primarily under the upscale to upper-upscale categories and include such brands as Hilton,
Doubletree by Hilton, Sheraton and Crowne Plaza. We do not own economy branded hotels. We believe that full-service hotels, with upscale to upper-upscale brands will outperform the broader U.S. hotel industry, and thus offer the highest returns on
invested capital.
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•
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Significant Barriers to Entry
: We intend to execute a strategy that entails the acquisition of hotels in prime locations with significant barriers to entry. We seek to acquire properties that will benefit from
the licensing of brands that are not otherwise present in the market and provide us with geographic exclusivity which helps to protect the value of our investment.
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•
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Proximity to Demand Generators
: We seek to acquire hotel properties located in central business districts near multiple demand generators for both leisure and business travelers within the respective markets,
including large state universities, airports, convention centers, corporate headquarters, sports venues and office parks.
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6
We typically define underperforming hotels as those that are poorly managed, suffer from
significant deferred maintenance and capital improvement 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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•
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Up-branding Opportunity
: The acquisition of properties that can be upgraded physically and enhanced operationally to qualify for what we view as higher quality franchise brands, including Hilton, Doubletree by
Hilton, Crowne Plaza and Sheraton.
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•
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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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•
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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.
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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 by the seller or third-party.
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•
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Distressed Debt Opportunities
: In sourcing acquisitions for our core growth strategy, we may pursue investments in debt instruments that are collateralized by 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.
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•
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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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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
7
of revenues for our hotels in their respective markets. Our strategy is designed to actively manage our hotels’ operating expenses in an effort to maximize hotel earnings before interest,
taxes, depreciation and amortization (“Hotel EBITDA”).
Over our long history in the lodging industry we have refined many
portfolio and asset management techniques that we believe provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market trends, one-time or exceptional revenue opportunities, and/or
changes in the regulatory climate that may impact costs. We review daily revenue results and revenue management strategies at the hotels, and we focus on MHI Hotels Services’ ability to produce high quality revenues that translate to higher
marginal profitability. We look for alternative 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. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal property taxes. We generally appeal tax increases in an effort to secure lower tax payments and
routinely pursue strategies that allow for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.
We also require detailed and refined reporting data from MHI Hotels Services, 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 guest satisfaction and
compliance with franchise brand standards.
None of our hotels is 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 derived from the major franchise companies, specifically with
respect to optimization of operating expenses and the delivery of guest services.
Our portfolio management strategy includes our effort
to optimize labor costs. The labor force in our hotels is predominately non-unionized, with only one property, the Jacksonville Crowne Plaza, having a total of approximately six employees electing to participate under a collective bargaining
arrangement. Further, the labor force at our hotels is eligible to receive health and other insurance coverage through MHI Hotels Services, which self-insures. Self-insuring has, in our opinion, provided significant cash 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
Strategic
Alliance Agreement
MHI Hotels Services is currently the management company for each of our hotels.
On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services pursuant to which (i) MHI
Hotels Services agrees to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to MHI Hotels Services, and (ii) unless a majority of the Company’s independent directors in good faith concludes
for valid business reasons that another management company should manage a hotel owned by us, we agree to offer MHI Hotels Services or its subsidiaries the right to manage hotel properties that we acquire in the United States.
8
In addition, during the term of the agreement, which expires in December 2014, MHI Hotels
Services has the right to nominate one person for election to the Company’s board of directors at the Company’s annual meeting of stockholders, subject to the approval of such nominee by the Company’s Nominating, Corporate Governance
and Compensation Committee (the “NCGC Committee”) for so long as certain of the Company’s officers and directors, Andrew Sims, Kim Sims, and Christopher Sims, and their families and affiliates, hold, in the aggregate, not less than
1.5 million units of the Operating Partnership or shares of the Company’s common stock.
Lease Agreements
In order for the Company to maintain qualification as a REIT, neither the Company nor the Operating Partnership or its subsidiaries can operate
our hotels directly. Our wholly-owned hotels are leased to our TRS Lessee, which has engaged MHI Hotels Services to manage the hotels. Each lease for the wholly-owned hotels has a non-cancelable term of three to ten years, subject to earlier
termination upon the occurrence of certain contingencies described in the lease.
During the term of each lease, our TRS Lessee is
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.
Management Agreements
Pursuant to the terms of three management agreements, we, through our TRS Lessee, have engaged MHI Hotels Services as the property manager for
our existing hotel portfolio. One of the management agreements, which we refer to as the master management agreement, covers all our wholly-owned hotels in our portfolio, excluding the Crowne Plaza Tampa Westshore and the Crowne Plaza Houston
Downtown, respectively. The second and third agreements relate to the Crowne Plaza Tampa Westshore and the Crowne Plaza Houston Downtown. Except as described below, we intend to offer MHI Hotels Services the opportunity to manage any hotels we
acquire in the future that we lease to our TRS Lessee. In addition, the joint venture entity which leases the Crowne Plaza Hollywood Beach Resort has also entered into a management agreement with MHI Hotels Services on terms that vary from those
described below. The following terms apply only to our wholly-owned hotels.
Term.
The management agreements with MHI Hotels
Services have initial terms of ten years from the date of commencement of management activities at each property. The master management agreement covering our wholly-owned hotels, excluding the Crowne Plaza Tampa Westshore and Crowne Plaza Houston
Downtown, expires between December 2014 and April 2018. The separate management agreements covering the Crowne Plaza Tampa Westshore and the Crowne Plaza Houston Downtown expire in March 2019 and April 2016, respectively. The term of the management
agreements with respect to each hotel, excluding the Crowne Plaza Houston Downtown, may be renewed by MHI Hotels Services for two successive periods of five years each upon the mutual agreement of MHI Hotels Services and our TRS Lessee, subject to
the satisfaction of certain performance tests, provided that at the time the option to renew is exercised, MHI Hotels Services is not then in default under the management agreements. If at the time of the exercise of any renewal period MHI Hotels
Services is in default, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then our TRS Lessee may terminate the management agreements. If MHI Hotels Services desires
to exercise any option to renew, it must give our TRS Lessee written notice of its election to renew the management agreements no less than 90 days before the expiration of the then current term of the management agreements. The Crowne Plaza Houston
Downtown may be renewed by MHI Hotels Services for one successive period of five years upon the mutual agreement of MHI Hotels Services and our TRS Lessee.
Any amendment, supplement or modification of the management agreements must be in writing signed by all parties and approved by a majority of
the Company’s independent directors.
9
Amounts Payable under the Management Agreements.
MHI Hotels Services receives a base
management fee, and, if the hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.
The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be a percentage of the gross
revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our wholly-owned hotels is as follows:
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2016
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2015
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2014
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2013
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2012
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2011
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2010
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Crowne Plaza Hampton Marina
(1)
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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2.0
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%
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Crowne Plaza Houston Downtown
(2)
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2.0
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%
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2.0
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%
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2.0
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%
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2.0
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%
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N/A
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N/A
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N/A
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Crowne Plaza Tampa Westshore
(3)
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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2.5
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%
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2.0
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%
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Crowne Plaza Jacksonville Riverfront
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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DoubleTree by Hilton Brownstone – University
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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Hilton Philadelphia Airport
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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Hilton Savannah DeSoto
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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Hilton Wilmington Riverside
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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Holiday Inn Laurel West
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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Sheraton Louisville Riverside
(4)
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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3.0
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%
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(1)
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In 2010, the management company abated the increase in management fee for the Crowne Plaza Hampton for 2010.
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(2)
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In November 2013, we assumed the existing management agreement with MHI Hotels Services for the management of the Crowne Plaza Houston Downtown. The provision of the agreement provide for a base management fee of 2.0%
and no incentive management fee.
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(3)
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In January 2009, we entered a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore. The provisions of the new agreement related to base management fee are the
same as those contained in the master management agreement. The provisions of the new agreement related to the incentive management fee are the same as those contained in the master management agreement except that it is calculated separately and
not aggregated with the other properties covered by the master management agreement.
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(4)
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Pursuant to the master management agreement, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was 10 years. The management company agreed to substitute the Sheraton
Louisville Riverside for the Holiday Inn Downtown Williamsburg for remainder of the term of the agreement.
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The base
management fee for a hotel acquired in the future which is first leased by our TRS Lessee, other than on the first day of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full fiscal year such hotel is
managed. There is no fee cap on the base management fee.
Subsequently Acquired Hotel Properties
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First full calendar year and any partial calendar year
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2.0
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%
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Second calendar year
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2.5
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%
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Third calendar year and thereafter
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3.0
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%
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The incentive management fee under the master management agreement, if any, will be due annually in arrears
within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of all our hotels, with the exception of the Tampa and Houston properties, on an aggregate basis for a given year exceeds the
gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive fee may not exceed 0.25% of the aggregate gross revenue of all of the hotels included in the incentive fee calculation for the year in which the
incentive fee is earned. The calculation of the incentive fee will
10
not include results of hotels for the fiscal year in which they are initially leased, or for the fiscal year in which they are sold, and newly acquired or leased hotels will be included in the
calculation beginning in the second full calendar year such hotel is managed. The management agreement for the management of the Tampa property includes a similar provision for payment of an incentive management fee on a stand-alone basis. The
management agreement for the Houston property does not include a provision for payment of an incentive management fee.
Early
Termination.
The master management agreement may be terminated with respect to one or more of the hotels earlier than the stated term, if certain events occur, including:
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a sale of a hotel or the substitution of a newly acquired hotel for an existing hotel;
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the failure of MHI Hotels Services to satisfy certain performance standards with respect to any of the future hotels or with respect to the six initial hotels after the expiration of the initial 10-year term;
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in the event of a casualty to, condemnation of, or force majeure involving a hotel; or
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upon a default by MHI Hotels Services or us that is not cured prior to the expiration of any applicable cure periods.
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The management agreement for the Crowne Plaza Tampa Westshore may also be terminated for convenience with ninety days notice to MHI Hotels
Services.
The management agreement for the Crowne Plaza Houston Downtown may also be terminated if certain events occur, including:
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gross negligence in the performance of its duties as the manager;
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if the operating profit of the hotel is less than the annual amount of the original permanent debt service.
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Termination Fees.
In certain cases of early termination of the management agreements for the Crowne Plaza Houston Downtown or the
master management agreement with respect to one or more of the hotels covered under that agreement, we must pay MHI Hotels Services a termination fee, plus any amounts otherwise due to MHI Hotels Services pursuant to the terms of that management
agreement. We will be obligated to pay termination fees in such circumstances provided that MHI Hotels Services is not then in default, subject to certain cure and grace periods.
The management agreement for our Tampa property included certain termination fees if we terminated the management agreement for convenience
during the initial year of management. As the initial year of management has been completed, there is no termination fee for the termination of the management agreement for our Tampa property.
New Acquisitions; Strategic Alliance Agreement
. Pursuant to the strategic alliance agreement with MHI Hotels Services, we have agreed
to engage MHI Hotels Services for the management of any hotels acquired in the future unless a majority of the Company’s independent directors in good faith concludes, for valid business reasons, that another management company should manage
any newly acquired hotels. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the strategic alliance agreement will also terminate.
Franchise Agreements
As
of December 31, 2013, our hotels operate under franchise licenses from national hotel companies. On January 13, 2014, we entered into an agreement to purchase an independent full-service hotel in Atlanta, Georgia, that does not operate
under a franchise license.
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We anticipate that, for the near term, most of the additional hotels we acquire will be operated
under franchise licenses. We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national
advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems. We may, however, own and operate hotels that are not
encumbered with franchise licenses, if such ownership meets our strategic investment criteria.
Our TRS Lessee holds the franchise
licenses for our wholly-owned hotels. MHI Hotels Services must operate each of our hotels it manages 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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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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marketing techniques 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.
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Additionally, as the franchisee, our TRS Lessee is required to pay the franchise fees described below.
The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:
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Franchise Fee
(1)
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Marketing/
Reservation
Fee
(1)
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Expiration
Date
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Crowne Plaza Hampton Marina
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5.0
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%
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3.5
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%
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10/06/2018
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Crowne Plaza Houston Downtown
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5.0
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%
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3.5
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%
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04/12/2016
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Crowne Plaza Jacksonville Riverfront
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5.0
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%
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3.5
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%
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04/01/2016
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Crowne Plaza Tampa Westshore
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5.0
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%
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3.5
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%
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03/06/2019
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DoubleTree by Hilton Brownstone – University
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5.0
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%
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4.0
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%
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11/30/2021
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Hilton Philadelphia Airport
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5.0
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%
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3.5
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%
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10/31/2014
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Hilton Savannah DeSoto
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5.0
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%
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4.0
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%
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07/31/2017
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Hilton Wilmington Riverside
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5.0
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%
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4.0
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%
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03/31/2018
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Holiday Inn Laurel West
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5.0
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%
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2.5
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%
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10/05/2015
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Sheraton Louisville Riverside
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5.0
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%
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3.5
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%
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04/25/2023
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(1)
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Percentage of room revenues payable to the franchisor.
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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
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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 (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the fifth taxable year after the year in which it failed to
qualify as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable
income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
While the
Operating Partnership is generally not subject to federal and state income taxes, the unitholders of the Operating Partnership, including the Company, are subject to tax on their respective allocable shares of the Operating Partnership’s
taxable income.
The Company has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership.
MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss through December 31, 2013 of $2.9 million and has paid no income taxes since its formation. In addition to a deferred tax
asset of approximately $1.0 million for these cumulative tax loss carryforwards, MHI Holding had a deferred tax asset of approximately $0.3 million attributable to start-up expenses related to the opening of several of its hotels which was not
deductible when incurred and is being amortized over 15 years and deferred tax assets of approximately $0.2 million attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay amounts.
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.
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Employees
As of February 28, 2014, we employed nine full-time persons, all of whom work at our corporate office in Williamsburg, Virginia. All
persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.
Subsequent Events
On January 13,
2014, the Company entered into an agreement to acquire an independent full-service hotel in Atlanta, Georgia for the aggregate purchase price of approximately $61.0 million. We anticipate that the purchase will be funded with a first mortgage in the
amount of $41.5 million, a $19.0 million loan secured by interests in another asset, and working capital. We hope to close the transaction by the end of the first quarter, or shortly thereafter. We plan to continue to operate the hotel as an
independent full-service hotel.
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 Audit and NCGC 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
The following are the material risks that may affect us. Any of the risks discussed herein can materially adversely affect our business,
liquidity, operations, industry or financial position or our future financial performance.
Risks Related to Our Debt and the Recent Economic Crisis
We have substantial financial leverage.
As of December 31, 2013, we had consolidated debt of approximately $188.0 million, which is comprised of approximately $160.4 million
secured debt, and approximately $27.6 million unsecured debt related to the 8.0% senior unsecured notes due September 30, 2018 (the “Notes” or, individually, a “Note”). 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 the Notes;
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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;
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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 shareholders;
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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.
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We must comply
with financial covenants in our mortgage loan agreements and in the indenture
.
Our mortgage loan agreements
and indenture contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation
activity or major weather disturbances.
If we violate the financial covenants contained in our mortgage loan agreements, we may attempt
to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or
amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel,
prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which
include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.
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If we violate the financial covenants in the indenture, we may attempt to cure that violation by
engaging in one or more transactions pursuant to the cure provision in the indenture.
If we are unable to negotiate a waiver or amendment
or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through debt financing, private or public offerings of debt securities,
additional equity financing, or by disposing of an asset. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.
We have debt obligations maturing in 2014 and 2015, and if we are not successful in extending the term of this indebtedness or in refinancing this debt
on acceptable economic terms or at all, our overall financial condition could be materially and adversely affected.
We will be
required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no
assurance that we will be able to obtain future financings on acceptable terms, if at all.
On June 28, 2013, we entered into an
agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance
on the loan to $6.0 million. We may extend the maturity date of such mortgage until June 2015, subject to certain terms and conditions. In July 2015, the mortgage on our Crowne Plaza Jacksonville Riverfront matures, but we may extend such mortgage
until July 2016 pursuant to certain terms and conditions. The total aggregate amount of our debt obligations maturing in 2014 is approximately $34.6 million, which represents approximately 18.4% of our total debt obligations. In August 2014, the
mortgage on the Hilton Philadelphia Airport matures, but we may extend such mortgage until March 2017 pursuant to certain terms and conditions.
We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. If we are unable
to extend these 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 these obligations or if refinancing terms will be favorable. If, at the time of any
refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available to meet our financial obligations. If we are unable to
obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies or we may be forced to dispose of hotel properties on disadvantageous
terms, potentially resulting in losses and potentially reducing cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be reinvested in equally profitable real property
investments. Moreover, the terms of any additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the extent we cannot repay
our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.
For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could
hinder the Company’s ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt
16
on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it
is not paid by such entity.
Our borrowing costs are sensitive to fluctuations in interest rates.
While we have reduced the amount of floating rate debt over the last year, higher interest rates could increase our debt service requirements
and interest expense. Currently, our floating rate debt is limited to the mortgage on the Crowne Plaza Hampton Marina, the mortgage on the Hilton Philadelphia Airport, and the mortgage on the Crowne Plaza Jacksonville Riverfront. Each of these
mortgages bears interest at rates tied to the 30-day London Interbank Offered Rate (“LIBOR”) and provide for minimum rates of interest. To the extent that increases in the LIBOR rate of interest cause the interest on the mortgages to
exceed the minimum rates of interest, we are exposed to rising interest rates.
Our mortgage on the Crowne Plaza Hampton Marina matures
within the next six months. 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.
Our shares may be delisted from the NASDAQ Global Market if the closing price for our shares is not maintained at
$1.00 per share or higher.
NASDAQ imposes, among other requirements, listing maintenance standards as well as minimum bid and
public float requirements. The price of our shares must trade at or above $1.00 to comply with NASDAQ’s minimum bid requirement for continued listing on the NASDAQ Global Market.
If the closing price of our shares fails to meet NASDAQ’s minimum bid price requirement for 30 consecutive days, or if we otherwise fail
to meet all other applicable requirements of the NASDAQ Global Market, NASDAQ may make a determination to delist our shares of common stock. Any such delisting could have adverse effects by, among other things:
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Reducing the trading liquidity and market price of the Company’s common stock;
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Reducing the number of investors willing to hold or acquire the Company’s common stock, thereby restricting our ability to obtain equity financing;
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Causing an event of default under certain of our debt agreements, which could serve to accelerate the indebtedness; and
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Reducing our ability to retain, attract and motivate directors, officers and employees.
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Risks Related to
Our Business and Properties
If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance
and financial results may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.
The
performance of the lodging industry and the general economy historically have been closely linked. In an economic downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels,
which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating
revenues, which will lower our cash flow and may affect our ability to make distributions to stockholders and to maintain compliance with our loan obligations. We incurred a net loss of approximately $3.8 million for our 2013 fiscal year. A renewed
economic downturn may produce continued losses. 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
17
downturn. Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term business strategy.
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, 2013, our portfolio consisted of ten wholly-owned
properties and one joint venture property with a total of 2,683 rooms. Significant adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly, on our ability to make
distributions to stockholders.
We are subject to risks of increased hotel operating expenses and decreased hotel revenues.
Our leases with our TRS Lessee provide for the payment of rent based in part on gross revenues from our hotels. Our TRS Lessee is 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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other operating expenses.
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Any increases in these operating expenses can have a significant
adverse impact on our TRS Lessee’s ability to pay rent and other operating expenses and, consequently, our earnings and cash flow.
In keeping
with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely
affect our financial performance and our ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.
We have in the past, and may in the future, develop or acquire hotels in geographic areas in which our management may have little or no
operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we
may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may
choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient demand at new hotel properties, therefore, could adversely affect our financial performance and our
ability to comply with covenants in the indenture and to make distributions to the Company’s stockholders.
We do not have the authority to
require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our returns are dependent on the management of our hotels by MHI Hotels Services.
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 subsidiaries of our TRS Lessee, and our TRS Lessee retains third-party managers to operate our hotels pursuant to management agreements.
18
Under the terms of our management agreements with MHI Hotels Services and the REIT qualification
rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on MHI Hotels Services 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 MHI Hotels Services to change its method of operating our hotels. Additionally, in the event that we need to replace MHI Hotels Services or any other management companies
in the future, we may be required by the terms of the applicable management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.
Our ability to make distributions to the Company’s stockholders is subject to fluctuations in our financial performance, operating results and
capital improvement requirements.
As a REIT, the Company is required to distribute, as “qualifying distributions”, at
least 90.0% of its REIT taxable income (determined without regard to the dividends-paid deduction and by excluding its net capital gains, and reduced by certain non-cash items), each year to the Company’s stockholders. However, several factors
may make us unable to declare or pay distributions to the Company’s stockholders, including poor operating results and financial performance or unanticipated capital improvements to our hotels, including capital improvements that may be
required by our franchisors.
We lease all of our hotels to our TRS Lessee. Our TRS Lessee is 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 Lessee 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 Lessee are
decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These factors can
reduce both occupancy and room rates at our hotels.
The amount of any dividend distributions to holders of the Company’s common
stock is in the sole discretion of the Company’s board of directors, which will consider, among other factors, our financial performance, debt service obligations, debt covenants and capital expenditure requirements. We cannot assure you that
we will continue to generate sufficient cash to fund distributions.
Geographic concentration of our hotels makes our business vulnerable to
economic downturns in the Mid-Atlantic and Southern United States.
Our hotels are located in the Mid-Atlantic and Southern United
States. As a result, economic conditions in the Mid-Atlantic and Southern United States significantly affect our revenues and the value of our hotels to a greater extent than if we had a more geographically diversified portfolio. Business layoffs or
downsizing, industry slowdowns, changing demographics and other similar factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any resulting oversupply or reduced demand for
hotels in the Mid-Atlantic and Southern United States and in our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to make distributions to stockholders.
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 continue to manage our exposure to interest rate
volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements.
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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.
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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 common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. Our internal controls and financial reporting are not subject to attestation by our independent registered
public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. While we have
undertaken substantial work to comply with Section 404, we cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes in the future. We may in the future discover
areas of our internal controls that need improvement. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or
our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of the Company’s common shares. Additionally, the existence of any material weakness or significant
deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or
significant deficiencies in a timely manner.
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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 MHI Hotels Services, the entity that manages the
properties, and the terms of its management agreements may lead to management decisions that are not in the stockholders’ best interest.
Conflicts of interest relating to MHI Hotels Services may lead to management decisions that are not in the stockholders’ best interest.
Certain of our officers and directors including Andrew M. Sims, our chairman and chief executive officer and Kim E. Sims, who currently serves on our board of directors, together own a substantial interest in MHI Hotels Services which manages our
hotel properties. In addition, until December 2014, unless a majority of independent directors concludes otherwise, MHI Hotels Services has a right of first offer to manage hotels we acquire in the future, subject to certain exceptions, and receives
substantial management fees based on the revenues and operating profit of our hotels. Our management agreements with MHI Hotels Services, including the financial terms thereof, were not negotiated on an arm’s-length basis and may be less
favorable to us than we could have obtained from third parties.
Our management agreements establish the terms of MHI Hotels
Services’ management of our hotels. Under certain circumstances, if we terminate our master management agreement as to one of the hotels, we will be required to pay MHI Hotels Services a termination fee. If we were to terminate the master
management agreement with respect to all covered hotels in connection with a sale of those hotels, and also terminate the management agreement with respect to the Crowne Plaza Houston Downtown Hotel in connection with a sale of the hotel, the
aggregate termination fee would be approximately $2.7 million as of December 31, 2013. There is currently no termination fee for the termination of the management agreement for our Tampa property. As significant owners of MHI Hotels Services,
which would receive any management and management termination fees payable by us under the management agreement, Andrew M. Sims and Kim E. Sims may influence our decisions to sell a hotel or acquire or develop a hotel when it is not in the best
interests of the Company’s stockholders to do so. In addition, Andrew M. Sims will have conflicts of interest with respect to decisions to enforce provisions of the management agreement, including any termination thereof.
There can be no assurance that provisions in our bylaws will always be successful in mitigating conflicts of interest.
Under our bylaws, a committee consisting of only independent directors must approve any transaction between us and MHI Hotels Services 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 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 members of our management team, may suffer adverse tax consequences upon our sale or refinancing of certain properties. Therefore, holders of units, including Andrew M. Sims, Kim E. Sims, Edward S. Stein, and a
trust controlled by Andrew M. Sims, Kim E. Sims and a former member of our board of directors, may have different objectives than holders of the Company’s common stock regarding the appropriate pricing and timing of a property’s sale, or
the timing and amount of a property’s refinancing. These individuals, together with their affiliates, owned as of December 31, 2013, in the aggregate, approximately 9.6% of the outstanding units in our Operating Partnership. These
individuals 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 they 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.
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Contractual obligations require us to nominate affiliates of the Sims family as two of our
directors.
Pursuant to a strategic alliance agreement we entered into in December 2004, during the term of the agreement, which
expires in December 2014, MHI Hotels Services has a contractual right to nominate one person for election as a director, to our board of directors, and, pursuant to his employment agreement with us, Andrew M. Sims has the right to be nominated as a
director. These provisions in effect provide the Sims family and their affiliates the right to nominate two of our directors. As discussed herein, such persons have conflicts of interest with the Company.
Our tax indemnification obligations, which were not the result of arm’s-length negotiations and which apply in the event that we sell certain
properties, could subject us to liability, which we currently estimate to be approximately $4.6 million, and limit our operating flexibility and reduce our returns on our investments.
If we dispose of certain of our hotels in taxable dispositions, we would be obligated to indemnify the original contributors (including their
permitted transferees and persons who are taxable on the income of a contributor or permitted transferee) against certain tax consequences of the sale pursuant to the tax indemnity agreements, the terms of which were not the result of
arm’s-length negotiations. These original contributors include Andrew M. Sims, the Company’s chairman and chief executive officer, William J. Zaiser, the Company’s former executive vice president and chief financial officer, Kim E.
Sims, a current Company director, and Christopher L. Sims, a former Company director. We have agreed to pay a certain amount of a contributor’s tax liability with respect to gains allocated to such contributor under Section 704(c) of the
Code if we dispose of a property contributed by such contributor in a taxable transaction during a “protected period,” which continues until the earlier of:
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10 years after the contribution of such property; or
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the date on which the contributor no longer owns, in the aggregate, at least 25.0% of the units we issued to the contributor at the time of its contribution of property to our Operating Partnership.
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This tax indemnity will be equal to a certain amount of the federal and state income tax liability a contributor incurs with respect to the
gain allocated to such contributor upon such sale based on a sliding scale percentage. Specifically, we are responsible for indemnifying the contributors for 100.0% of their tax liability during the first five years after contribution and for 50.0%
of their tax liability during the sixth year, and will indemnify them for: 40.0%, during the seventh year; 30.0%, during the eighth year; 20.0%, during the ninth year; and 10.0%, during the tenth year. The terms of the tax indemnity agreements also
require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment.
As over
nine years have elapsed since the properties were contributed, if we were to sell, during 2014 in a taxable transaction, the five hotels that were contributed to us in the Company’s initial public offering in exchange for partnership units in
the Operating Partnership (including our property in Jeffersonville, Indiana which we substituted under the tax indemnity and related agreements for the property in Williamsburg, Virginia as part of an exchange pursuant to Section 1031 of the
Code) our estimated total tax indemnification obligation to our indemnified contributors, including the gross-up payment, would be approximately $4.6 million, which amount will decrease until the end of 2014 at which time the indemnification
agreement expires.
Our agreements with MHI Hotels Services and its affiliates, including the contribution agreements, management agreements,
strategic alliance agreement, subleases, partnership agreement of our Operating Partnership and employment agreements, were not negotiated on an arms’ length basis and may be less favorable to us than we could have obtained from third parties.
In connection with the Company’s initial public offering, we entered into various agreements with MHI Hotels Services and its
affiliates, including contribution agreements, a master management agreement, a strategic alliance agreement, subleases, the partnership agreement of our Operating Partnership and employment agreements. In addition, we entered into separate
management agreements with MHI Hotels Services relating to
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our Tampa, Florida property and our joint venture for the Hollywood, Florida property. In November 2013, we assumed the existing management agreement with MHI Hotels Services for the management
of our Houston, Texas property. The terms of all of these agreements were determined by our management team, who had conflicts of interest as described above and ownership interests in MHI Hotels Services and its affiliates. The terms of all of
these agreements may be less favorable to us than we could have obtained from third parties.
We may realize reduced revenue because our management
company may experience conflicts of interest in connection with the management of its other properties.
MHI Hotels Services may
experience conflicts of interest in connection with the management of other properties located nearby in the same geographic market as our hotel properties. Currently, MHI Hotels Services manages a small city-center property in the same geographic
market as one of our hotel properties and also manages another property in the same geographic market as a second property in our portfolio. The fees that MHI Hotels Services earns for managing our properties are largely fixed under our management
agreements and may be less than the fees it earns for other properties it manages or may manage in the future. Because MHI Hotels Services oversees the marketing and solicitation of individual and group business, it may have a greater financial
incentive to direct prospective guests and customers to properties that we do not own, which would have a negative impact on our revenue and our financial condition.
Risks Related to the Lodging Industry
Our ability
to comply with the terms of the indenture, our ability to make distributions to the Company’s stockholders and the value of our hotels in general, may be adversely affected by factors in the lodging industry.
Operating Risks
Our hotel
properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
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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.
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These factors could reduce the net income of our TRS Lessee, 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.
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Competition for Acquisitions
We may compete for investment opportunities with entities that may have substantially greater financial resources than we do. These entities
generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property
owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
Seasonality of the Hotel
Business
The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our
quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these
fluctuations in revenues and to make distributions to the Company’s stockholders.
Investment Concentration in Particular Segments
of a Single Industry
Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the
full-service, upscale and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our financial condition and the extent to which cash may be available for distribution to the
Company’s stockholders.
Capital Expenditures
Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of
furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts
for capital improvements to the secured properties on a monthly basis. For the years ended December 31, 2013 and 2012, we spent approximately $4.9 million and approximately $2.9 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.
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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.
Our hotels operate under franchise agreements which subject us to risks in the event of negative
publicity related to one of our franchisors.
The maintenance of the franchise licenses for our hotels is subject to our franchisors’
operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that we, our TRS Lessee, and the management company follow their standards. Failure by us, our TRS Lessee or the management
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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 indenture and reduce our cash available for distribution to stockholders.
Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or refinance our hotels,
which could have a material adverse effect on us.
Franchise agreements typically contain covenants that may affect our ability to
sell or refinance a hotel, including requirements to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisor’s consent is not forthcoming, the terms of a sale or refinancing
may be less favorable to us than would otherwise be the case. Some of our franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to
approve any change in the hotel management company engaged to manage the hotel. Generally, we may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the transferee
agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels, we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less
favorable to us, which could have a material adverse effect on our financial condition and the execution of our strategies.
Hotel re-development is
subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to make distributions to stockholders.
We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general economic conditions,
and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks, including risks associated with:
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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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governmental restrictions on the nature or size of a project.
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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.
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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, but due to the recent recession and disruption of capital markets, these sources of funds may not yet be available to us on reasonable terms and conditions. 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 earthquakes and floods, such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist activities, such as
those on September 11, 2001, or losses from domestic terrorist activities, such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage
in conjunction with the Terrorism Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured losses resulting from acts of terrorism. The program is currently set to expire on
December 31, 2014. If the program is not renewed, we do not intend to obtain terrorism insurance on our hotel properties as we anticipate it will be costly or unavailable. Lenders may require such insurance and our failure to obtain such
insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could reduce our net income and
limit our ability to obtain future financing.
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.
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There may be unknown
environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.
The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial
remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to comply with our covenants and to pay distributions
to stockholders.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to
access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are
required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to comply with the terms of the indenture and
to make distributions to the Company’s stockholders could be adversely affected.
Our hotels may be subject to unknown or contingent
liabilities which could cause us to incur substantial costs.
The hotel properties that we acquire may be subject to unknown or
contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might include:
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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 formation or acquisition transactions that had not been asserted or were unknown prior to the Company’s
formation or 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.
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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
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financial markets. Previous terrorist attacks in the United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years. Such
attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and/or our results of operations and financial condition, as a whole.
We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for our hotels.
Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the outbreaks
of SARS and avian flu in 2003 had a severe impact on the travel industry, and the outbreaks of H1N1 flu in 2009 threatened to have a similar impact. A prolonged recurrence of SARS, avian flu, H1N1 flu 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 God, including earthquakes, floods and other natural disasters such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, which may result in uninsured losses, and
acts of war or terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001.
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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.
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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 common shares could decline.
Risks Related to Our Organization and Structure
Our ability to effect a merger or other business combination transaction may be restricted by our Operating Partnership agreement.
In the event of a change of control of the Company, the limited partners of our Operating Partnership will have the right, for a period of 30
days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the
partnership agreement. This cash redemption right may make it more unlikely or difficult for a third party to propose or consummate a change of control transaction, even if such transaction were in the best interests of the Company’s
stockholders.
Provisions of the Company’s charter may limit the ability of a third party to acquire control of the Company.
Aggregate Share and Common Share Ownership Limits
The Company’s charter provides that no person may directly or indirectly own more than 9.9% of the value of the Company’s outstanding
shares of capital stock or more than 9.9% of the number of the Company’s outstanding shares of common stock. These ownership limitations may prevent an acquisition of control of the Company by a third party without the Company’s board of
directors’ approval, even if the Company’s stockholders believe the change of control is in their interest. The Company’s board of directors has discretion to waive that ownership limit if, including other considerations, the board
receives evidence that ownership in excess of the limit will not jeopardize the Company’s REIT status.
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Authority to Issue Stock
The Company’s amended and restated charter authorizes our board of directors to issue up to 49,000,000 shares of common stock and up to
1,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of
stock may have the effect of delaying or preventing a change in control of the Company, including transactions at a premium over the market price of the Company’s stock, even if stockholders believe that a change of control is in their
interest. The Company will be able to issue additional shares of common or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on
which the Company’s securities may be listed or traded.
Provisions of Maryland law may limit the ability of a third party to acquire control
of the Company.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of the Company’s common stock with the opportunity to realize a premium over the
then-prevailing market price of such shares, including:
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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.
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The Company has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the
Company’s board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in the Company’s bylaws. However, the Company’s board of directors may by resolution elect to opt in to the business
combination provisions of the MGCL and the Company may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. The Company’s board of directors has the exclusive power to amend the Company’s bylaws.
Additionally, Title 8, Subtitle 3 of the MGCL permits the Company’s board of directors, without stockholder approval and regardless
of what is currently provided in the Company’s charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) the Company does not currently have. These provisions may have the effect of inhibiting a third
party from making an acquisition proposal for the Company or of delaying, deferring or preventing a change in control of the Company under the circumstances that otherwise could provide the holders of the Company’s common stock with the
opportunity to realize a premium over the then current market price.
Provisions in the Company’s executive officers’ employment
agreements and the strategic alliance agreement may make a change of control of the Company more costly or difficult.
The
Company’s employment agreements with Andrew M. Sims, its chief executive officer, David R. Folsom, its president and chief operating officer, and Anthony E. Domalski, its chief financial officer, contain provisions providing for
substantial payments to these officers in the event of a change of control of the
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Company. Specifically, if the Company terminates these executive’s employment without cause or the executive resigns with good reason, which includes a failure to nominate Andrew
M. Sims to the Company’s board of directors or his involuntary removal from the Company’s board of directors, unless for cause or by vote of the stockholders, or if there is a change of control, each of these executives is entitled to
the following:
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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 Andrew M. Sims’, David R. Folsom’s and Anthony E. Domalski’s respective combined salary and actual bonus compensation for the preceding fiscal year.
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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.
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 (other
than the first year for which a REIT election is made)). 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 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
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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.
We do not have the ability to control the sale of any hotel properties acquired through our joint venture program with Carlyle.
We own, through our joint venture program with Carlyle, a 25.0% indirect noncontrolling interest in the Crowne Plaza Hollywood Beach Resort.
Carlyle controls all major decisions relating to this investment, including, but not limited to, the sale of the property. We will not be able to control the timing and terms and conditions of sale of our interest in the Crowne Plaza Hollywood Beach
Resort.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a joint venture
partners’ financial condition and disputes between our joint venture partners and us.
In August 2007, we purchased a 25.0%
indirect, noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. Carlyle owns a 75.0% controlling interest in the joint venture and is in a position to exercise sole decision-making authority
regarding the property including, but not limited to, the method and timing of disposition of the property.
We may co-invest in the
future with Carlyle or other third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In
such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances,
involve risks not present were a third party not involved, including the possibility that partners or joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Partners or joint venture partners may
have economic or other business interests or goals, which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of
impasses on decisions, such as a sale, because neither we, nor the partner or joint venture partner, would have full control over the partnership or joint venture. Disputes between us and partners or joint venture partners may result in litigation
or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or joint venture partners might result in subjecting
properties owned by the partnership or joint venture to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners or joint venture partners. For example, we may be required to guarantee
indebtedness incurred by a partnership, joint venture or other entity for the purchase or renovation of a hotel property. Such a guarantee may be on a joint and several basis with our partner or joint venture partner in which case we may be liable
in the event such party defaults on its guaranty obligation.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our chairman and chief executive officer, Andrew M. Sims; our president and chief
operating officer, David R. Folsom; and our chief financial officer, Anthony E. Domalski, to manage our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations.
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Federal Income Tax Risks Related to the Company’s Status as a REIT
The federal income tax laws governing REITs are complex.
The Company intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws. The REIT
qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. The Company has not requested or obtained a ruling from the Internal Revenue Service, or the
IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that the Company will be successful in operating in a manner that will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the
federal tax laws or the federal income tax consequences of the Company’s qualification as a REIT. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal
income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. The Company and its stockholders could be adversely affected
by any such change in, or any new, federal income tax law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect the Company’s ability to qualify as a REIT.
Failure to make distributions could subject the Company to tax.
In order to maintain its qualification as a REIT, each year the Company must pay out to its stockholders in distributions, as “qualifying
distributions”, at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid and excluding net capital gains and reduced by certain non-cash items. To the extent that the Company satisfies this
distribution requirement, but distributes less than 100.0% of its taxable income (including its net capital gain), it will be subject to federal corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a
4.0% nondeductible excise tax if the actual amount that it pays out to its stockholders as a “qualifying distribution” for a calendar year is less than the sum of: (A) 85% of our ordinary income for such calendar year, plus
(B) 95% 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 Lessee 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 it 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 (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause the Company to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results
in order to pay any such tax. Unless it is entitled to relief under certain statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost its qualification. If the
Company lost its REIT status, its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, the Company would no longer be required to make distributions to its
stockholders, and it would not be able to deduct any stockholder distributions in computing its taxable income. This would substantially reduce the Company’s earnings, cash available to pay distributions, and the value of common stock.
Failure to qualify as a REIT may cause the Company to reduce or eliminate distributions to its stockholders, and the Company may face increased
difficulty in raising capital or obtaining financing.
If the Company fails to remain qualified as a REIT, it may have to reduce or
eliminate any distributions to its stockholders in order to satisfy its income tax liabilities. Any distributions that the Company does make to its
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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 common stock, and the value of its common 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.
MHI Holding increases
our overall tax liability.
Our TRS Lessee is a single-member limited liability company that is wholly-owned by MHI Holding, a
taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessee 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 Lessee 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 Lessee, net of the operating expenses for such hotels and rent payments. Accordingly, although the Company’s ownership of MHI Holding and the TRS Lessee will
allow it to participate in the operating income from its hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any, will be available for distribution to the
Company.
The Company will incur a 100.0% excise tax on its transactions with MHI Holding and the TRS Lessee that are not conducted on an
arm’s-length basis. For example, to the extent that the rent paid by the TRS Lessee 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 Lessee will be conducted on an arm’s-length basis and, therefore, that the rent paid by the TRS Lessee will not be subject to this excise tax.
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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it may be required to pay “alternative minimum tax” on its items of tax preference;
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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 sells a property in a “prohibited transaction,” its 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.
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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
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amounts it distributes to its stockholders and the ownership of its stock. Thus, compliance with the REIT requirements may hinder the Company’s ability to operate solely on the basis of
generating strong risk-adjusted returns on invested capital for its 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
investment in securities (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more
than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of the Company’s assets (other than government securities, qualified real estate assets and securities of one
or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0% of the value of the Company’s total assets can be represented by securities of one or more taxable REIT subsidiaries. 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, the Company 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 it 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, the Company may be
required to liquidate otherwise attractive investments.
Taxation of dividend income could make the Company’s common stock less attractive to
investors and reduce the market price of its common 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. Under recently-enacted legislation,
“qualified dividends,” which include dividends from domestic C corporations that are paid to non-corporate stockholders, are subject to a reduced maximum U.S. federal income tax rate of 20.0%. Because REITs generally do not pay
corporate-level taxes as a result of the dividends-paid deduction to which they are entitled, dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an
investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from non-REIT corporations would be subject to lower tax rates.
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 Company to become subject to federal and state corporate income tax,
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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 reduced by certain non-cash items) and must satisfy specified asset tests on a quarterly basis. While historically the
Company has satisfied the distribution requirement discussed above by making cash distributions to its stockholders, the Company may choose to satisfy this requirement by making distributions of cash or other property, including, in limited
circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in the Company’s case because its holds its assets through the Operating Partnership.
If MHI Holding does not qualify as a taxable REIT subsidiary, or if the Company’s hotel manager does not qualify as an “eligible independent
contractor,” the Company would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to its shareholders.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income
tests applicable to REITs. The Company currently leases substantially all of its hotels to the TRS Lessee, which is a disregarded entity for U.S. federal income tax purposes and is wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects
to continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a “related party tenant” with respect to the Company’s properties that are managed by an independent hotel management
company that qualifies as an “eligible independent contractor.” The Company believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary for federal income tax purposes, but there can be no assurance that
the IRS will not challenge this status or that a court would not sustain such a challenge. If the IRS were successful in such challenge, it is possible that the Company would fail to meet the asset tests applicable to REITs and substantially all of
its income would fail to be qualifying income for purposes of the two gross income tests. If the Company failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax purposes.
Additionally, if the Company’s hotel manager does not qualify as an “eligible independent contractor,” the Company would fail
to qualify as a REIT. Each hotel manager that enters into a management contract with the TRS Lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid by the TRS Lessee to be qualifying
income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, a hotel manager must not own, directly or through its shareholders, more than 35.0% of the Company’s
outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although the Company intends to monitor ownership of its shares by its hotel
manager and their owners, there can be no assurance that these ownership levels will not be exceeded.
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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. Additionally, the transferee will be required to withhold 10% on the amount realized on the disposition. This 10% 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% 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 5% of the
value of the Company’s outstanding stock.
Investors may be subject to a 3.8% Medicare tax in connection with an investment in the
Company’s common stock or the Notes.
The U.S. tax laws impose a 3.8% “Medicare tax” on the “net investment
income” (i.e., interest, dividends, capital gains, annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married
filing separately), and of estates and trusts. Interest on the Notes and gains from the disposition of the Notes may be subject to the Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the
Medicare tax to an investment in the Notes 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% 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, 2016 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, which were 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 investment that receives dividends on the Company’s common stock or gross proceeds from a disposition of shares of the
Company’s common stock may be subject to FATCA withholding tax with respect to such dividends or gross proceeds.
37
Under a grandfathering rule, FATCA does not apply to any payments made under an obligation that
is outstanding on July 1, 2014 (provided such obligation is not materially modified subsequent to such date) and any gross proceeds from the disposition of such obligation. The Notes will be grandfathered obligations for FATCA purposes provided
they are not materially modified after July 1, 2014. However, if the Notes are materially modified after July 1, 2014, interest on the Notes may be subject to FATCA withholding. Prospective investors should consult their own tax advisors
regarding the potential implications of FATCA with respect to an investment in the Notes in light of their particular circumstances.
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 treated as ordinary income and will be subject to U.S. withholding tax at the rate of 30%. This 30% withholding tax may be reduced by an applicable income tax treaty. The IRS recently issued additional temporary and final
FATCA regulations that are complex and considerable in length. Even if the 30% withholding is reduced or eliminated by treaty for payments made to a foreign investor, FATCA withholding of 30% 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 in the hands of the
foreign investor. A foreign investor 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% “branch profits tax” (which may be reduced by an applicable income tax treaty) in the hands of a foreign corporate investor.
Legislative or regulatory action could adversely affect you.
Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could adversely
affect our investors. You are strongly encouraged to consult with your own tax advisor with respect to the status of any legislative, regulatory or administrative developments, announcements and proposals and their potential impact on your
investment in the Company’s stock.
38
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
As of February 28, 2014, our portfolio consisted of the following properties:
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Wholly-Owned Properties
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Number of
Rooms
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Occupancy
2013
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ADR
2013
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RevPAR
2013
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Occupancy
2012
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ADR
2012
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RevPAR
2012
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Occupancy
2011
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ADR
2011
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RevPAR
2011
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Crowne Plaza Hampton Marina, Hampton, Virginia
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173
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50.1
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%
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$
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95.27
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$
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47.72
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|
|
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56.1
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%
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$
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90.50
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|
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$
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50.82
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|
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61.7
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%
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$
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88.48
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$
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54.63
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Crowne Plaza Houston Downtown, Houston, Texas
(1)
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259
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74.6
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%
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133.51
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99.64
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68.7
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%
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124.16
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85.34
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64.2
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%
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121.51
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78.04
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Crowne Plaza Jacksonville Riverfront, Jacksonville, Florida
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292
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58.5
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%
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97.51
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57.05
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61.9
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%
|
|
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95.72
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|
|
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59.25
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53.2
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%
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101.29
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53.85
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Crowne Plaza Tampa Westshore, Tampa, Florida
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222
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67.1
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%
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99.12
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66.46
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|
|
|
70.8
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%
|
|
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100.77
|
|
|
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71.33
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|
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64.6
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%
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96.82
|
|
|
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62.58
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DoubleTree by Hilton Brownstone – University, Raleigh, North Carolina
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190
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69.9
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%
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111.56
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78.03
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|
|
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67.9
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%
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|
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104.12
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70.73
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|
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59.4
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%
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85.87
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51.02
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Hilton Philadelphia Airport, Philadelphia, Pennsylvania
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331
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78.2
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%
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134.40
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105.13
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|
77.0
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%
|
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134.21
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103.38
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|
|
|
76.8
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%
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|
128.57
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|
|
|
98.75
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Hilton Savannah DeSoto, Savannah, Georgia
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|
246
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|
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|
73.7
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%
|
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|
137.77
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|
|
|
101.61
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|
|
|
74.2
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%
|
|
|
132.59
|
|
|
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98.32
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|
|
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75.6
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%
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123.85
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|
|
|
93.61
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Hilton Wilmington Riverside, Wilmington, North Carolina
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272
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73.3
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%
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140.44
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102.91
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|
|
|
74.0
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%
|
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129.48
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|
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95.82
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|
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73.6
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%
|
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124.81
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91.81
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Holiday Inn Laurel West, Laurel, Maryland
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207
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61.5
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%
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87.68
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53.90
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|
|
|
66.9
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%
|
|
|
88.66
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|
|
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59.34
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|
|
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60.8
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%
|
|
|
89.01
|
|
|
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54.14
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Sheraton Louisville Riverside, Jeffersonville, Indiana
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180
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|
|
|
67.9
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%
|
|
|
133.19
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|
|
|
90.42
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|
|
|
63.2
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%
|
|
|
123.73
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|
|
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78.15
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|
|
|
62.9
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%
|
|
|
118.37
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|
|
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74.51
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|
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|
|
|
|
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|
|
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|
Subtotal
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2,372
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Joint Venture Property
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|
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|
|
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|
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|
|
|
Crowne Plaza Hollywood Beach Resort, Hollywood, Florida
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|
|
311
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|
|
|
82.2
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%
|
|
$
|
157.87
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|
|
$
|
129.79
|
|
|
|
79.2
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%
|
|
$
|
147.37
|
|
|
$
|
116.66
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|
|
|
79.4
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%
|
|
$
|
133.29
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|
|
$
|
105.82
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|
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|
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|
|
|
|
|
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Total
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|
2,683
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The operating statistics for the Crowne Plaza Houston Downtown rely on information from both the period prior to, and the period subsequent to, the Company’s acquisition of the hotel.
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Item 3.
Legal Proceedings
We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We are involved in
routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.
Item 4.
Mine Safety Disclosure
Not applicable.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sotherly Hotels Inc., formerly MHI Hospitality Corporation, (the “Company”) is a self-managed and
self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the
Mid-Atlantic and Southern United States. The hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn.
The Company commenced operations on December 21, 2004 when it completed its initial public offering (“IPO”) and thereafter
consummated the acquisition of six hotel properties (“initial properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP, formerly MHI Hospitality, L.P.
(the “Operating Partnership”). The Company also owns a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and
The Carlyle Group (“Carlyle”).
Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the
“Partnership Agreement”), the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating
Partnership and the Company’s administrative expenses are the obligations of the Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Partnership’s behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at December 31, 2013, was
approximately 78.1% owned by the Company, and its subsidiaries, lease its hotels to a subsidiary of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Operating
Partnership. MHI TRS then engages an eligible independent hotel management company, MHI Hotels Services, LLC (“MHI Hotels Services”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for
federal income tax purposes.
All references in these “Notes to Consolidated Financial Statements” to “we”,
“us” and “our” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.
Significant transactions occurring during the current and two prior fiscal years include the following:
On April 18, 2011, we entered into a sixth amendment to the then-existing credit agreement. Among other things, the amendment:
(i) extended the final maturity date of the credit facility to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed;
(iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including
restrictions relating to payment of dividends. In connection with the amendment, we reduced the outstanding balance on its existing credit facility by approximately $22.7 million.
On April 18, 2011, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Essex
Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the “Investors” or “Initial Holders”), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Company’s
Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”), and a warrant (the “Essex Warrant”) to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share, for a purchase price of
$25.0 million. The Company used the net proceeds from the issuance of
F-13
the Preferred Stock and the Essex Warrant to partially prepay the amounts owed by the Company under its then-existing credit agreement.
Coincident with the issuance of the Preferred Stock, the Operating Partnership issued a Series A Preferred Interest (the “Preferred
Interest”) in the Operating Partnership to the Company in an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes
the general partner to cause the Operating Partnership to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect to the Preferred Stock. In addition,
the Operating Partnership issued the Company a warrant (the “Warrant”) to purchase 1,900,000 partnership units at an amount equal to the consideration received by the Company upon exercise of the Essex Warrant, as amended.
The Operating Partnership used the net proceeds from the issuance of the Preferred Interest and Warrant to partially prepay the amounts owed
by the Operating Partnership under its then-existing credit agreement.
On April 18, 2011, the Company entered into an agreement with
Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million on or before December 31, 2011 (the “Bridge Financing”). The principal amount borrowed bore interest at
the rate of 9.25% per annum, payable quarterly in arrears and matures on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.
On June 30, 2011, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina
until June 30, 2012. Under the terms of the extension, we are required to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total
rate of interest of 5.00%.
On August 1, 2011, we entered into agreements with PNC Bank, National Association, in its capacity as
trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable
to the mortgage loan is fixed at 8.0% and the lender has waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Company
tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loan’s current outstanding principal amount to $14.0 million, and the lender waived certain covenants requiring the Company
to further pay down principal under certain circumstances.
On August 5, 2011, we obtained a 10-year, $7.5 million mortgage with Bank
of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the
then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay
down a portion of our indebtedness under its then-existing credit facility.
On October 17, 2011, we obtained a 5-year, $8.0 million
mortgage with Premier Bank, Inc. on our property in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization
schedule. The mortgage may be extended for an additional
5-year
period, at our option if certain conditions have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury
bill rate of interest. Proceeds of the mortgage were used to pay down a portion of our indebtedness under its credit facility.
On
December 15, 2011, we obtained a 5-year, $12.2 million mortgage with Goldman Sachs Commercial Mortgage Capital, L.P. on the Sheraton Louisville Riverside in Jeffersonville, Indiana. The mortgage bears interest at a rate of 6.2415% per
annum and provides for level payments of principal and interest on a monthly
F-14
basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of our indebtedness under its credit facility.
On December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan agreement with Essex Equity High Income
Joint Investment Vehicle, LLC to extend the lender’s loan commitment by 17 months through May 31, 2013.
On
December 21, 2011, the Company also amended the terms of the outstanding Essex Warrant issued by the Company in favor of the Investors. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the warrant
will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment did not take in to account quarterly dividends declared prior to
January 1, 2012.
On March 5, 2012, we obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport.
The mortgage bears interest at a rate of 30-day LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity
date is August 30, 2014, with an extension option until March 1, 2017, contingent upon the extension or acceptable replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish our indebtedness
under the then-existing credit facility, prepay a portion of the Company’s indebtedness under the Bridge Financing and for working capital. With this transaction, our syndicated credit facility was extinguished and the Crowne Plaza Tampa
Westshore hotel property was released from such mortgage encumbrance.
On June 15, 2012, the Company entered into an amendment of its
Bridge Financing that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal
amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property.
On June 15, 2012, the Company simultaneously entered
into an agreement with the holders of the Company’s Preferred Stock to redeem approximately 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash
and stock dividends.
On June 18, 2012, we obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in
Tampa, Florida. The mortgage bears interest at a rate of 5.60% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is June 18,
2017. Proceeds of the mortgage were used to pay the outstanding indebtedness under the then-existing Bridge Financing and to make a special distribution by the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock
referenced above.
On June 22, 2012, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne
Plaza Hampton Marina in Hampton, Virginia, until June 30, 2013. Under the terms of the extension, the Company was required to make monthly principal payments of $16,000 as well as quarterly principal payments to the lender of $200,000 each on
July 1, 2012, October 1, 2012, January 1, 2013 and April 1, 2013. Interest payable monthly pursuant to the mortgage remained unchanged at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of
interest of 5.00% per annum.
On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza
Jacksonville Riverfront in Jacksonville, Florida. The mortgage bears interest at a rate of LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year
amortization schedule. The maturity date is July 10, 2015, but may be extended for an additional year pursuant to certain terms and conditions. The mortgage also contains an “earn-out” feature which allows for an additional draw of up
to $3.0 million during the term of the loan contingent upon satisfaction of certain debt
F-15
service coverage and loan-to-value covenants. Proceeds of the mortgage were used to repay the existing mortgage indebtedness and to pay closing costs.
On March 22, 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the
original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University hotel property with its existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loan’s principal amount was increased to $10.0
million, the prepayment penalty was removed and the interest rate was fixed at 5.25%; if the mortgage loan is extended, it will adjust to a rate of 3.00% plus the current 5-year U.S. Treasury bill rate of interest, with an interest rate floor of
5.25%. The remaining original terms of the agreement remained the same.
On March 26, 2013, we used the net proceeds of the mortgage
on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment
of accrued and unpaid cash and stock dividends.
On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity
of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to
approximately $6.0 million and continue to be required to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage remained unchanged at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate
of interest of 5.00% per annum. Pursuant to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015.
On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone – University
in Raleigh, North Carolina. The mortgage bears interest at a rate of 4.78% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule. The maturity date is August 1, 2018. Approximately
$0.7 million of the loan proceeds were placed into a restricted reserve which can be disbursed to us upon satisfaction of certain financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing indebtedness, to
pay closing costs, to make a special distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.7 million plus the payment of accrued and unpaid cash and
stock dividends and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.
On September 30,
2013, the Operating Partnership issued 8.0% senior unsecured notes (the “Notes”) in the aggregate amount of $27.6 million. The indenture requires quarterly payments of interest and matures on September 30, 2018. The proceeds were used
to make a special distribution by the Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of accrued and unpaid cash and
stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million.
On October 23, 2013, the Company
redeemed a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant Shares (the “First Tranche of Redeemed Warrant Shares”) for an aggregate cash redemption price of $3.2 million. The First Tranche of Redeemed
Warrant Shares are no longer Issuable Warrant Shares under the Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated and extinguished.
Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed 900,000 Issuable Warrant Units, as
defined in the Warrant, for an aggregate cash redemption price of $3.2 million.
F-16
On November 13, 2013, we acquired 100% of the partnership interests of Houston Hotel
Associates Limited Partnership, L.L.P., a Virginia limited liability partnership (“HHA”), for aggregate consideration of approximately $30.9 million in cash, the issuance to MHI Hotels, L.L.C., a Virginia limited liability company
(“MHI Hotels”), of 32,929 units of limited partnership interests in the Operating Partnership plus an additional amount for HHA’s working capital as of the closing date. HHA is the sole owner of the entity that indirectly owns the
Crowne Plaza Houston Downtown.
On December 23, 2013, the Company redeemed the remaining portion of the Essex Warrant corresponding
to an aggregate of 1,000,000 Issuable Warrant Shares (the “Final Tranche of Redeemed Warrant Shares”) for an aggregate cash redemption price of approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer Issuable
Warrant Shares under the Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated and extinguished.
Concurrently with the redemption of the 1,000,000 Issuable Warrant Shares, the Operating Partnership redeemed a portion of the Warrant
corresponding to an aggregate of 1,000,000 Issuable Warrant Units from the Company for an aggregate cash redemption price of approximately $4.0 million.
On December 27, 2013, through our joint venture with The Carlyle Group (“Carlyle”), we entered into a credit and security
agreement and other loan documents to secure a $57.0 million non-recourse mortgage on the Crowne Plaza Hollywood Beach Resort in Hollywood, Florida with Bank of America, N.A. The proceeds from the loan were used to repay the existing first mortgage,
to pay closing costs, and to make a distribution to the joint venture partners. We used approximately $3.5 million of its distribution proceeds to repay its existing loan with The Carlyle Group, and the remainder for general corporate purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation –
The consolidated financial statements of the Company presented herein include all of the
accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated.
The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS
and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected
as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.
Investment in Hotel Properties –
Investments in hotel properties include investments in operating properties which are recorded at
acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset,
the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend
the life of the property, are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the
assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of
the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to
F-17
declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if
the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount
of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.
Our review of possible impairment at one of our hotel properties revealed an excess of current carrying cost over the estimated undiscounted
future cash flows of $611,000, as of December 31, 2013.
Investment in Joint Venture –
Investment in joint venture represents
our noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management
contract. Carlyle owns a 75.0% controlling indirect interest in these entities. We account for its investment in the joint venture under the equity method of accounting and are entitled to receive our pro rata share of annual cash flow. We also have
the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds.
Cash and Cash Equivalents –
We consider all highly liquid investments with an original maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk –
We hold cash accounts at several institutions in excess of the Federal Deposit
Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on
deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.
Restricted Cash –
Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture,
fixtures and equipment pursuant to certain requirements in our various mortgage agreements and previously existing line of credit.
Accounts Receivable –
Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of
collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.
Inventories
– Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost
determined on a method that approximates first-in, first-out basis.
Franchise License Fees –
Fees expended to obtain or renew
a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of December 31, 2013 and 2012 were $196,989 and $240,589, respectively. Amortization expense for the years ended December 31,
2013, 2012 and 2011 was $49,658, $43,500 and $46,912, respectively.
Deferred Financing Costs
– Deferred financing costs are
recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included
in interest expense in the consolidated statements of operations.
Derivative Instruments
– Our derivative instruments are
reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as
an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative
instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative
instrument
F-18
designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a
derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.
We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this
objective, we primarily used an interest-rate swap, which was required under our then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for the Company making
fixed-rate payments without exchange of the underlying principal amount. We valued our interest-rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). We also use derivative instruments in the Company’s stock to obtain more favorable terms on our financing. We do not enter into contracts to purchase or sell derivative
instruments for speculative trading purposes.
We account for the Essex Warrant as well as the Warrant based upon the guidance enumerated
in Accounting Standards Codification (“ASC”) 815-40,
Derivatives and Hedging: Contracts in Entity’s Own Stock
. Both the Essex Warrant and the Warrant contain a provision that could require an adjustment to the exercise price if
the Company issued securities deemed to be dilutive to the Essex Warrant and, therefore, are classified as derivative liabilities. The Essex Warrant and the Warrant are carried at fair value with changes in fair value reported in earnings as long as
the Essex Warrant and the Warrant remain classified as derivative liabilities.
The warrant derivative liabilities were valued at
December 31, 2012 using the Monte Carlo simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer
group’s future expected stock prices and minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the warrant, the current price of the
underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the warrant.
Fair Value Measurements –
We classify the inputs used to measure fair value into the following hierarchy:
|
|
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are
observable for the asset or liability.
|
|
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability.
|
We endeavor to utilize the best available information in measuring fair value. Financial assets and
liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes
(1)
|
|
$
|
(28,770,240
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
|
(4,969,752
|
)
|
|
|
—
|
|
|
(1)
|
Unsecured notes are recorded at historical cost on our Consolidated Balance Sheet as of December 31, 2013.
|
F-19
Cumulative Mandatorily Redeemable Preferred Stock
– The Company accounts for its
preferred stock based upon the guidance enumerated in ASC 480,
Distinguishing Liabilities from Equity.
The Preferred Stock was mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and
therefore is classified as a liability instrument on the date of issuance.
Preferred Interest –
The Operating Partnership
accounts for its Series A Preferred Interest based upon the guidance enumerated in ASC 480,
Distinguishing Liabilities from Equity.
The Preferred Stock was mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of
certain triggering events and therefore is classified as a liability instrument on the date of issuance. The Company’s sole source of funds to meet its obligations under the Articles Supplementary are the special distributions from the
Operating Partnership which the Company, as general partner, may declare at its sole discretion.
Noncontrolling Interest in Operating
Partnership –
Certain hotel properties have been acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is:
(i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for
the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or
the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the
period.
Revenue Recognition –
Revenues from operations of the hotels are recognized when the services are provided. Revenues
consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and
other taxes collected from customers and remitted to governmental authorities.
Income Taxes –
The Company has elected to be
taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels
from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.
We account for income taxes using the asset
and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. As of December 31, 2013, 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, 2013, the tax years that remain subject
to examination by the major tax jurisdictions to which the Company is subject generally include 2010 through 2013. In addition, as of December 31, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which
MHI TRS is subject generally include 2004 through 2009.
The Operating Partnership is generally not subject to federal and state income
taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.
Stock-based Compensation –
The Company’s 2004 Long Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term
Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permit the grant of stock options, restricted stock and performance share compensation awards to its employees for up to 350,000 and 750,000
shares of common stock, respectively. The Company believes that such awards better align the interests of its employees with those of its stockholders.
Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued
to certain executives and employees and 81,500 restricted shares issued to
F-20
its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 24,000 issued to the Chief Financial Officer upon execution of his
employment contract which will vest pro rata on each of the next four anniversaries of the effective date of his employment agreement. All of the 81,500 restricted shares issued to the Company’s independent directors have vested.
As of December 31, 2013, the Company has not made any restricted stock or deferred stock awards under the 2013 Plan.
The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the
Company’s stock price on the date of grant or issuance. Under the 2004 Plan and the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of December 31, 2013, no
performance-based stock awards have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan and 2013
Plan for the years ended December 31, 2013, 2012 and 2011 was $78,611, $157,230 and $121,190, respectively.
Comprehensive Income
(Loss)
– Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).
Segment Information –
We have determined that our business is conducted in one reportable segment: hotel ownership.
Use of Estimates –
The preparation of the financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
– Certain reclassifications have been made to the prior period balances to conform to the current period presentation.
New
Accounting Pronouncements
– There are no recent accounting pronouncements which we believe will have a material impact on our consolidated financial statements.
3. Acquisition of Hotel Properties
Houston Acquisition.
On November 13, 2013, we acquired the 259-room Crowne Plaza Houston Downtown in Houston,
Texas, for approximately $30.9 million. The allocation of the purchase price based on their fair values was as follows:
|
|
|
|
|
|
|
|
|
Crowne Plaza Houston
|
|
|
Land and land improvements
|
|
$
|
7,373,937
|
|
|
Buildings and improvements
|
|
|
22,184,692
|
|
|
Furniture, fixtures and equipment
|
|
|
718,828
|
|
|
|
|
|
|
|
|
Investment in hotel properties
|
|
|
30,277,457
|
|
|
Accounts receivable
|
|
|
391,470
|
|
|
Accounts receivable-affiliate
|
|
|
72,094
|
|
|
Prepaid expenses, inventory and other assets
|
|
|
83,378
|
|
|
Intangible assets
|
|
|
761,212
|
|
|
Accounts payable and accrued liabilities
|
|
|
(631,847
|
)
|
|
Advance deposits
|
|
|
(74,169
|
)
|
|
|
|
|
|
|
|
|
|
$
|
30,879,595
|
|
|
Issuance of units
|
|
|
(153,636
|
)
|
|
|
|
|
|
|
|
Net cash
|
|
$
|
30,725,959
|
|
|
|
|
|
|
|
F-21
The results of operations of the hotel are included in the our consolidated financial statements
from the date of acquisition. The total revenue and net loss related to the acquisition for the period November 13, 2013 to December 31, 2013 are approximately $1.4 million and $0.2 million, respectively. The following pro forma financial
information presents the results of operations of the Company and the Operating Partnership for the years ended December 31, 2013 and 2012 as if the acquisition had taken place on January 1, 2012. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2012, or of future results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Pro forma revenues
|
|
$
|
101,811,120
|
|
|
$
|
99,519,156
|
|
|
Pro forma operating expenses
|
|
|
88,186,126
|
|
|
|
87,437,739
|
|
|
Pro forma operating income
|
|
|
13,624,994
|
|
|
|
12,081,417
|
|
|
Pro forma net income (loss)
|
|
|
(1,634,498
|
)
|
|
|
(3,487,318
|
)
|
|
Pro forma earnings (loss) per basic share and unit
|
|
|
(0.16
|
)
|
|
|
(0.35
|
)
|
|
Pro forma earnings (loss) per diluted share and unit
|
|
|
(0.15
|
)
|
|
|
(0.33
|
)
|
|
Pro forma basic common shares
|
|
|
10,156,955
|
|
|
|
9,995,638
|
|
|
Pro forma diluted common shares
|
|
|
11,088,145
|
|
|
|
10,647,246
|
|
4. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2013 and 2012 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Land and land improvements
|
|
$
|
26,956,311
|
|
|
$
|
19,429,571
|
|
|
Buildings and improvements
|
|
|
206,101,663
|
|
|
|
181,209,101
|
|
|
Furniture, fixtures and equipment
|
|
|
29,829,908
|
|
|
|
33,716,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,887,882
|
|
|
|
234,355,372
|
|
|
Less: accumulated depreciation and impairment
|
|
|
(60,242,249
|
)
|
|
|
(57,927,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,645,633
|
|
|
$
|
176,427,904
|
|
|
|
|
|
|
|
|
|
|
|
5. Debt
Credit Facility.
During 2011 and a portion of the year ended December 31, 2012, we had a secured credit facility
with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company.
On
April 18, 2011, we entered into a sixth amendment to the then-existing credit agreement which, among other things, (i) extended the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provided that no
additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from
4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, we reduced the outstanding balance on its then-existing
credit facility by approximately $22.7 million.
In March 2012, our syndicated credit facility was extinguished.
F-22
Mortgage Debt.
As of December 31, 2013 and 2012, we had approximately $160.4 million
and approximately $135.7 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding as of
|
|
|
Prepayment
Penalties
|
|
Maturity
Date
|
|
|
Amortization
Provisions
|
|
|
Interest Rate
|
|
|
Property
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
Crowne Plaza Hampton Marina
|
|
$
|
5,903,500
|
|
|
$
|
7,559,625
|
|
|
None
|
|
|
06/30/2014
|
(1)
|
|
$
|
16,000
|
(2)
|
|
|
LIBOR plus 4.55
|
%
(3)
|
|
Crowne Plaza Houston Downtown
|
|
|
21,428,258
|
|
|
|
—
|
|
|
Yes
(4)
|
|
|
04/12/2016
|
(5)
|
|
|
25 years
|
|
|
|
4.50
|
%
|
|
Crowne Plaza Jacksonville Riverfront
|
|
|
13,756,209
|
|
|
|
14,135,234
|
|
|
None
|
|
|
07/10/2015
|
(6)
|
|
|
25 years
|
|
|
|
LIBOR plus 3.00
|
%
|
|
Crowne Plaza Tampa Westshore
|
|
|
13,602,701
|
|
|
|
13,872,077
|
|
|
None
|
|
|
06/18/2017
|
|
|
|
25 years
|
|
|
|
5.60
|
%
|
|
DoubleTree by Hilton Brownstone – University
|
|
|
15,525,626
|
|
|
|
7,816,867
|
|
|
(7)
|
|
|
08/01/2018
|
|
|
|
30 years
|
|
|
|
4.78
|
%
|
|
Hilton Philadelphia Airport
|
|
|
28,731,151
|
|
|
|
29,502,666
|
|
|
None
|
|
|
08/30/2014
|
(8)
|
|
|
25 years
|
|
|
|
LIBOR plus 3.00
|
%
(9)
|
|
Hilton Savannah DeSoto
|
|
|
21,546,423
|
|
|
|
22,051,314
|
|
|
Yes
(10)
|
|
|
08/01/2017
|
|
|
|
25 years
|
|
|
|
6.06
|
%
|
|
Hilton Wilmington Riverside
|
|
|
20,919,030
|
|
|
|
21,416,922
|
|
|
Yes
(10)
|
|
|
04/01/2017
|
|
|
|
25 years
|
|
|
|
6.21
|
%
|
|
Holiday Inn Laurel West
|
|
|
7,141,845
|
|
|
|
7,300,465
|
|
|
Yes
(11)
|
|
|
08/05/2021
|
|
|
|
25 years
|
|
|
|
5.25
|
%
(12)
|
|
Sheraton Louisville Riverside
|
|
|
11,808,806
|
|
|
|
12,019,262
|
|
|
(7)
|
|
|
01/06/2017
|
|
|
|
25 years
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160,363,549
|
|
|
$
|
135,674,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
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The note provides that the mortgage can be extended until June 2015 if certain conditions have been satisfied.
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(2)
|
The Operating Partnership is required to make monthly principal payments of $16,000.
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(3)
|
The note bears a minimum interest rate of 5.00%.
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(4)
|
The note may not be prepaid during the first two years of the term.
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(5)
|
The note provides that the mortgage can be extended until November 2018 if certain conditions have been satisfied.
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(6)
|
The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.
|
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(7)
|
With limited exception, the note may not be prepaid until two months before maturity.
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(8)
|
The note provides that the mortgage can be extended until March 2017 if certain conditions have been satisfied.
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(9)
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The note bears a minimum interest rate of 3.50%.
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(10)
|
The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.
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(11)
|
Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.
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(12)
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The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.
|
With the exception of our mortgage on the Crowne Plaza Tampa Westshore, as of December 31, 2013, we were in compliance with all debt
covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. The Crowne Plaza Tampa Westshore did not realize sufficient operating performance for the four calendar quarters ended December 31, 2013 to
meet the debt service coverage requirements of the mortgage loan agreement for which we received a waiver from the lender.
Total future
mortgage debt maturities, without respect to any extension of loan maturity, as of December 31, 2013 were as follows:
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December 31, 2014
|
|
$
|
37,398,360
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|
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December 31, 2015
|
|
|
15,903,494
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|
|
December 31, 2016
|
|
|
22,624,590
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|
|
December 31, 2017
|
|
|
63,494,543
|
|
|
December 31, 2018
|
|
|
14,732,686
|
|
|
December 31, 2019 and thereafter
|
|
|
6,209,876
|
|
|
|
|
|
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Total future maturities
|
|
$
|
160,363,549
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F-23
Unsecured Notes.
On September 30, 2013, the Operating Partnership issued 8.0% senior
unsecured notes in the aggregate amount of $27.6 million. The indenture requires quarterly payments of interest and matures on September 30, 2018. The Notes are callable after September 30, 2016 at 101% of face value.
Loan from Carlyle Affiliate Lender.
On February 9, 2009, an indirect subsidiary of ours which is a member of the joint venture
entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the “Carlyle Affiliate Lender”), for the purpose of improving our liquidity. In June
2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount we contributed to the joint venture
to enable it to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan were tied to the note that was secured by the mortgage on the property. The loan bore a rate of LIBOR plus additional interest of 3.00% and
required monthly payments of interest and principal payments equal to 50.0% of any distributions it received from the joint venture.
On
December 27, 2013, the mortgage to which the loan was tied was repaid with the proceeds of a $57.0 million non-recourse mortgage loan. Excess proceeds of the mortgage were used to make a distribution to the joint venture partners. We used a
portion of our share of the distribution totaling approximately $3.5 million to extinguish the loan. The outstanding balance on the loan at December 31, 2013 and 2012 was $0 and $4,025,220, respectively.
Available Bridge Financing.
On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint
Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. On December 21, 2011, the Company entered into an
amendment to the agreement extending the right to borrow the remainder of the available financing until May 31, 2013. The principal amount borrowed bore interest at the rate of 9.25% per annum, payable quarterly in arrears. At
December 31, 2013 and 2012, the Company had borrowings under the Bridge Financing of $0.0 million.
6. Preferred Stock, Preferred Interest and Warrants
Preferred Stock and Preferred Interest.
On April 18, 2011, the Company completed a private placement to the
Investors pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Essex Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01
per share.
The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value
per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary (the “Articles Supplementary”), which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is
non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional
shares of Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will have the exclusive right, voting separately as a single
class, to elect one (1) member of the Company’s board of directors. As of December 31, 2011, there were 25,354 shares of the Preferred Stock issued and outstanding. In addition, under certain circumstances as set forth in the Articles
Supplementary, the holder(s) of the Company’s Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company’s Preferred Stock will be entitled to require that the Company
redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.
Concurrently with the issuance of the Preferred Stock, the Operating Partnership issued the Preferred Interest to the Company in an amount
equivalent to the proceeds of the Preferred Stock received by the general
F-24
partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes the general partner to make special distributions to the Company related to its Preferred
Interest for the sole purpose of fulfilling the Company’s obligations with respect to the Preferred Stock. In addition, the Operating Partnership issued the Warrant to purchase 1,900,000 partnership units at an amount equal to the consideration
received by the Company upon exercise of the Essex Warrant, as amended.
On June 15, 2012, the Company entered into an agreement with
the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.
On June 18, 2012, we used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special distribution by
the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock. The redemption resulted in a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to
the redeemed shares were written off.
On March 26, 2013, we used the net proceeds of an expansion of the mortgage on the DoubleTree
by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued
and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, approximately $0.1 million in unamortized issuance costs related to the redeemed shares were written off.
On August 1, 2013, we used the net proceeds of a new mortgage on the DoubleTree by Hilton Brownstone-University to make a special
distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends. The
redemption resulted in a prepayment fee of approximately $0.2 million. In addition, approximately $0.1 million in unamortized issuance costs related to the redeemed shares were written off.
On September 30, 2013, we used a portion of the proceeds of the Notes to make a special distribution by the Operating Partnership to the
Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment
fee of approximately $0.7 million. In addition, approximately $0.4 million in unamortized issuance costs related to the redeemed shares were written off.
As of December 31, 2013 and 2012, there were 0 and 14,228 shares of the Preferred Stock issued and outstanding, respectively.
As of December 31, 2013 and 2012, the redemption value of the Preferred Interest was $0 and $14,227,650, respectively.
Warrants.
The Essex Warrant, as modified, entitled the holder(s) to purchase up to 1,900,000 shares of the Company’s common stock
at an exercise price of $2.25 per share. Pursuant to an amendment to the Essex Warrant, the exercise price per share of common stock covered by the Essex Warrant adjusts from time to time in the event of payment of cash dividends to holders of
common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment does not take into account dividends declared prior to January 1, 2012.
Concurrently with the issuance of the Essex Warrant, the Operating Partnership issued the Warrant to the Company. Under the terms of the
Warrant, the Company is obligated to exercise the Warrant immediately and concurrently if at any time the Essex Warrant is exercised by its holders. In that event, the Operating Partnership
F-25
shall issue an equivalent number of partnership units and shall be entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.
On October 23, 2013, the Company redeemed the First Tranche of Redeemed Warrant Shares for an aggregate cash redemption price of $3.2
million. The First Tranche of Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated
and extinguished.
Concurrently with the redemption of the 900,000 Issuable Warrant Shares, the Operating Partnership redeemed 900,000
Issuable Warrant Units, as defined in the Warrant, for an aggregate cash redemption price of $3.2 million.
On December 23, 2013, the
Company redeemed the Final Tranche of Redeemed Warrant Shares for an aggregate cash redemption price of approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Warrant, and all
exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant are terminated and extinguished.
Concurrently with the redemption of the 1,000,000 Issuable Warrant Shares, the Operating Partnership redeemed 1,000,000 Issuable Warrant
Units, as defined in the Warrant, for an aggregate cash redemption price of approximately $4.0 million.
On the date of issuance, we
determined the fair market value of the warrants was approximately $1.6 million using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of
5.00%, expected volatility of 60.0%, and an expected term of 5.5 years. The fair market value is included in deferred financing costs. The deferred cost was amortized to interest expense in the accompanying consolidated statement of operations over
the period of issuance to the mandatory redemption date of the preferred stock.
7. Commitments and Contingencies
Ground, Building and Submerged Land Leases
– We lease 2,086 square feet of commercial space next to the Savannah
hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to
the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31,
2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the years ended December 31, 2013, 2012 and 2011 was $64,700, $65,812 and $66,198, respectively.
We lease, as landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease
expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump
sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.
We lease a parking lot adjacent
to the Doubletree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year
operating lease, which expires August 31, 2016. We exercised a renewal option for the first of three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. We hold an
exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. For each of the years ended December 31, 2013,
2012 and 2011, rent expense was $95,482.
F-26
In conjunction with the sublease arrangement for the property at Shell Island which expired in
December 2011, we incurred an annual lease expense for a leasehold interest other than the purchased leasehold interest. Lease expense for the year ended December 31, 2011 was $195,000.
We lease land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida Department of
Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for the years ended December 31, 2013, 2012 and 2011
was $3,036, $2,515 and $2,806, respectively.
We lease certain submerged land in the Saint Johns River in front of the Crowne Plaza
Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year operating lease requiring annual payments of $4,961, which expired September 18,
2012. A new operating lease was executed requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the years ended December 31, 2013, 2012 and 2011 was $6,020, $5,920 and $4,961, respectively.
We lease 4,836 square feet of commercial office space in Williamsburg, Virginia under an agreement, as amended, that commenced
September 1, 2009 and expires August 31, 2018. Rent expense for each of the years ended December 31, 2013, 2012 and 2011 was $63,393, $55,000 and $55,000, respectively.
We lease 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that expires February 28, 2017. The
agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the
lease term. Rent expense for the years ended December 31, 2013, 2012 and 2011 was $47,813, $44,927 and $44,320, respectively.
We
also lease certain furniture and equipment under financing arrangements expiring between February 2014 and March 2017.
A schedule of
minimum future lease payments for the following twelve-month periods is as follows:
|
|
|
|
|
|
|
December 31, 2014
|
|
$
|
412,642
|
|
|
December 31, 2015
|
|
|
353,831
|
|
|
December 31, 2016
|
|
|
285,319
|
|
|
December 31, 2017
|
|
|
93,049
|
|
|
December 31, 2018
|
|
|
63,239
|
|
|
December 31, 2019 and thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,208,080
|
|
|
|
|
|
|
|
Management Agreements
– At December 31, 2013, each of our wholly-owned operating hotels,
except for the Crowne Plaza Tampa Westshore and the Crowne Plaza Houston Downtown, are operated under a master management agreement with MHI Hotels Services that expires between December 2014 and April 2018. We entered into a separate management
agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 and assumed the existing agreement for management of the Crowne Plaza Houston Downtown which expires in April 2016 (see Note 9).
Franchise Agreements
– As of December 31, 2013, our hotels operate under franchise licenses from national hotel
companies. Under the franchise agreements, we are required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that
amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between October 2014 and April 2023.
F-27
Restricted Cash Reserves
– Each month, we are required to escrow with the lenders on
the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the DoubleTree by Hilton Brownstone-University and the Sheraton Louisville Riverside an amount equal to
1
/
12
of the annual real estate taxes due for the properties. The Company is also required by several of its lenders to establish individual property improvement funds to cover the cost of replacing
capital assets at its properties. Each month, those contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh
Brownstone–University, Crowne Plaza Houston Downtown and the Crowne Plaza Hampton Marina and equal 4.0% of room revenues for the Hilton Philadelphia Airport.
Pursuant to the terms of the fifth amendment to the then-existing credit agreement and until its termination in March 2012, we were required
to escrow with our lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, the we were required to make monthly contributions equal to 3.0% of room
revenues into a property improvement fund.
Litigation
– We are not involved in any material litigation, nor, to our
knowledge, is any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and none of which is expected to have a material
impact on our financial condition or results of operations.
8. Equity
Preferred Stock
– The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have
been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.
Common Stock –
The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each
outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of
directors out of assets legally available for the payment of distributions.
The following is a schedule of issuances during the years
ended December 31, 2013, 2012 and 2011 of the Company’s common stock:
On August 14, 2013, one holder of units in the
Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.
On April 1, 2013,
one holder of units in the Operating Partnership redeemed 31,641 units for an equivalent number of shares of the Company’s common stock.
On March 1, 2013, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the
Company’s common stock.
On January 25, 2013, the Company was issued 45,500 units in the Operating Partnership and awarded an
aggregate of 30,500 shares of unrestricted stock to certain executives and employees as well as 15,000 shares of restricted stock to certain of its independent directors.
On January 1, 2013, the Company was issued 30,000 units in the Operating Partnership and granted 30,000 restricted shares to its Chief
Financial Officer in accordance with the terms of his employment contract.
On February 2, 2012, the Company was issued 46,000 units
in the Operating Partnership and awarded an aggregate of 29,500 shares of unrestricted stock to certain executives and employees as well as 1,500 shares of unrestricted stock and 15,000 shares of restricted stock to certain of its independent
directors.
F-28
On December 1, 2011, one holder of units in the Operating Partnership redeemed 187,000 units
for an equivalent number of shares of the Company’s common stock.
On November 1, 2011, one holder of units in the Operating
Partnership redeemed 15,000 units for an equivalent number of shares of the Company’s common stock.
On October 3, 2011, one
holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock.
On June 7, 2011, one holder of units in the Operating Partnership redeemed 115,000 units for an equivalent number of shares of the
Company’s common stock.
On March 22, 2011, the Company was issued 29,500 units in the Operating Partnership and awarded 17,500
shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.
On January 1, 2011, the Company was issued 16,000 units in the Operating Partnership and issued 16,000 non-restricted shares to its Chief
Operating Officer and President in accordance with the terms of his employment contract, as amended.
As of December 31, 2013, the
Company had 10,206,927 shares of common stock outstanding.
Warrants for Shares of Common Stock –
The Company has granted no
warrants representing the right to purchase common stock other than the Essex Warrant described in Note 6.
Operating Partnership
Units
– Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the
Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such
redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting
the ownership interests of the limited partners or the stockholders of the Company.
The following is a schedule of issuances and
redemptions of units in the Operating Partnership in addition to the issuances of units in the Operating Partnership to the Company described above,
On November 13, 2013, the Operating Partnership issued 32,929 limited partnership units in conjunction with the purchase of the
partnership interests in HHA, which is the sole owner of the Crowne Plaza Houston Downtown.
On April 1, 2013, the Company redeemed
10,000 units in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $32,900 pursuant to the terms of the partnership agreement.
On August 1, 2012, the Company redeemed 6,000 units in the Operating Partnership held by a trust controlled by two members of the Board
of Directors for a total of $21,540 pursuant to the terms of the partnership agreement.
On May 1, 2012, the Company redeemed 6,000
units in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $14,640 pursuant to the terms of the partnership agreement.
F-29
On November 1, 2011, the Company redeemed 2,600 units in the Operating Partnership held by a
trust controlled by two members of the Board of Directors for a total of $7,150 pursuant to the terms of the partnership agreement.
As of
December 31, 2013 and 2012, the total number of Operating Partnership units outstanding was 13,038,125 and 12,972,625, respectively.
As of December 31, 2013 and 2012, the total number of outstanding Operating Partnership units not owned by the Company was 2,864,127 and
2,972,839, respectively, with a fair market value of approximately $17.0 million and approximately $9.9 million, respectively, based on the price per share of the common stock on such respective dates.
Warrants for Units in the Operating Partnership –
The Operating Partnership has granted no warrants representing the right to
purchase limited partnership units other than the Warrant described in Note 6.
Distributions
– The following table presents
the quarterly distributions by the Operating Partnership declared and payable per unit for the years ended December 31, 2013, 2012 and 2011:
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|
|
|
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|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
March 31,
|
|
$
|
0.000
|
|
|
$
|
0.020
|
|
|
$
|
0.035
|
|
|
June 30,
|
|
$
|
0.000
|
|
|
$
|
0.020
|
|
|
$
|
0.035
|
|
|
September 30,
|
|
$
|
0.020
|
|
|
$
|
0.030
|
|
|
$
|
0.040
|
|
|
December 31,
|
|
$
|
0.020
|
|
|
$
|
0.030
|
|
|
$
|
0.045
|
|
9. Related Party Transactions
MHI Hotels Services.
As of December 31, 2013, the members of MHI Hotels Services (a company that is
majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer, a member of its Board of Directors and a former member of its Board of Directors) owned 1,089,571 shares, approximately 10.7%, of the
Company’s outstanding common stock as well as 1,752,928 Operating Partnership units. The following is a summary of the transactions between MHI Hotels Services and us:
Accounts Receivable –
At December 31, 2013 and 2012, we were due $101,439 and $8,657, respectively, from MHI
Hotels Services.
Shell Island Sublease
– We had a sublease arrangement with MHI Hotels Services on our expired
leasehold interests in the property at Shell Island. For the years ended December 31, 2013, 2012 and 2011, we earned $350,000, $350,000 and $640,000, respectively, in leasehold revenue. The underlying leases at Shell Island expired on
December 31, 2011.
Strategic Alliance Agreement –
On December 21, 2004, we entered into a ten-year
strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.
Management Agreements
– Each of the operating hotels that we wholly-owned at December 31, 2013 and 2012,
except for the Crowne Plaza Tampa Westshore and the Crowne Plaza Houston Downtown, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate
management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 and assumed an existing management agreement for the Crowne Plaza Houston Downtown which expires in April 2016. Pursuant
to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company upon its formation, MHI Hotels Services has agreed that the property in Jeffersonville, Indiana shall be substituted for the
Williamsburg property under the master management agreement.
F-30
Under the master management agreement as well as the management agreement for the
Crowne Plaza Tampa Westshore, MHI Hotels Services receives a base management fee. The base management fee for any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through
December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. Under the management agreement for the Crowne Plaza Houston, MHI Hotels Services receives a base management fee
of 2.0% of gross revenues.
The incentive management fee under the master management agreement is due annually in arrears
within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate
basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation. The management agreement for the Crowne Plaza Tampa Westshore includes a similar provision
for the payment of an incentive management fee on a stand-alone basis.
Base management fees earned by MHI Hotels Services
totaled $2,652,070, $2,602,018 and $2,372,702 for the years ended December 31, 2013, 2012 and 2011, respectively. In addition, incentive management fees of $67,502, $216,824 and $97,151were accrued for the years ended December 31, 2013,
2012 and 2011, respectively.
Employee Medical Benefits –
We purchase employee medical benefits through
Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services for our employees as well as those employees that are employed by MHI Hotels Services that work exclusively for our hotel properties. Gross premiums for employee
medical benefits paid by the Company (before offset of employee co-payments) were $2,592,115, $2,344,734 and $2,448,431 for the years ended December 31, 2013, 2012 and 2011, respectively.
Redemption of Units in Operating Partnership
– During 2013, 2012 and 2011, we redeemed a total of 24,600 units in
its Operating Partnership held by a trust controlled by two current members and one former member of our Board of Directors for a total of $76,230 pursuant to the terms of the partnership agreement.
Issuance of Units in Operating Partnership
– In connection with the acquisition of the Crowne Plaza Houston
Downtown Hotel in November 2013, we purchased from MHI Hotels its 1.0% limited partnership interest in HHA, the entity that owns the property, in exchange for 32,929 units of limited partnership interests in the Company’s operating partnership
valued at $153,636 pursuant to an exchange agreement entered into between the operating partnership and MHI Hotels. The indirect equity owners of MHI Hotels include the Company’s chief executive officer, Andrew M. Sims, and a member of the
Company’s board of directors, Kim E. Sims.
Holders of the Preferred Stock and Essex Warrant.
As set forth in the Articles
Supplementary, the holders of Preferred Stock, Essex Illiquid, LLC and Richmond Hill Capital Partners, LLC, were entitled to elect one (1) member of the Company’s board of directors. The member of the board of directors elected by the
holders of Preferred Stock holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Illiquid, LLC, as well as Richmond Hill Capital Partners, LLC.
Bridge Financing Amendments.
On December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan
agreement with Essex Equity High Income Joint Investment Vehicle, LLC, an affiliate of Essex Equity Capital Management, LLC, of which one former member of the board of directors is a Managing Director, to extend the lender’s loan commitment by
17 months through May 31, 2013.
On June 15, 2012, the Company entered into an amendment of its then-existing Bridge Financing
that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments be increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts
outstanding on the Crowne Plaza Jacksonville Riverfront hotel property. The Company’s ability to borrow under the Bridge Financing ended May 31, 2013.
F-31
Essex Warrant Amendment.
On December 21, 2011, the Company also amended the terms of
the outstanding Essex Warrant. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from
such exercise price the per share amount of such cash dividends.
Modified Excepted Holder.
On July 10, 2012, the Company
amended the terms of the outstanding Essex Warrant by establishing a modified excepted holder limit (as defined in the Company’s Articles of Amendment and Restatement) for the Investors.
On December 23, 2013, the Company’s board of directors terminated and extinguished the excepted holder limit and excepted holder
status for the Investors in connection with the redemption of the Essex Warrant.
Preferred Stock Redemptions.
On June 15,
2012, the Company entered into an agreement with the holders of the Company’s Preferred Stock to redeem approximately 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related
accrued and unpaid cash and stock dividends.
On June 18, 2012, we used a portion of the proceeds of the mortgage on the Crowne Plaza
Tampa Westshore to make a special distribution by the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock for an aggregate redemption price of $12.3 million plus payment of related accrued and unpaid cash and stock
dividends. The redemption resulted in a prepayment fee of approximately $0.8 million.
On March 26, 2013, we used the net proceeds of
an expansion of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution by the Operating Partnership to the Company to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately
$2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million.
On August 1, 2013, we used the net proceeds of a new mortgage on the DoubleTree by Hilton Brownstone-University to make a special
distribution by the Operating Partnership to the Company to redeem 2,460 shares of Preferred Stock for an aggregate redemption price of approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends. The
redemption resulted in a prepayment fee of approximately $0.2 million.
On September 30, 2013, we used a portion of the proceeds of
the Notes to make a special distribution by the Operating Partnership to the Company to redeem the remaining outstanding shares of Preferred Stock for an aggregate redemption price of approximately $10.7 million plus the payment of related accrued
and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.7 million.
Essex Warrant
Redemptions.
On October 23, 2013, the Company entered into an agreement to redeem the First Tranche of Redeemed Warrant Shares for an aggregate cash redemption price of $3.2 million. The First Tranche of Redeemed Warrant Shares are no
longer Issuable Warrant Shares under the Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant Shares under the Essex Warrant were terminated and extinguished.
On December 23, 2013, the Company entered into an agreement to redeem the Final Tranche of Redeemed Warrant Shares for an aggregate cash
redemption price of approximately $4.0 million. The Final Tranche of Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Essex Warrant, and all exercise and other rights of the Initial Holders in respect of the Redeemed Warrant
Shares under the Essex Warrant were terminated and extinguished.
Others.
On June 24, 2013 we hired Ashley S. Kirkland, the
daughter of our Chief Executive Officer as a legal analyst and Robert E. Kirkland IV, her husband, as our compliance officer. Compensation for the year ended December 31, 2013 totaled $81,000 for both individuals.
F-32
10. Retirement Plans
We began a 401(k) plan for qualified employees on April 1, 2006. The plan is subject to “safe harbor”
provisions which require that we match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All employer matching funds vest immediately in accordance with the “safe harbor” provisions.
Contributions to the plan for the years ended December 31, 2013, 2012 and 2011 were $47,094, $54,865 and $46,890, respectively.
11. Unconsolidated Joint Venture
We own a 25% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the
entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial
information for this investment, which is accounted for under the equity method, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investment in hotel property, net
|
|
$
|
64,449,892
|
|
|
$
|
65,899,055
|
|
|
Cash and cash equivalents
|
|
|
2,896,841
|
|
|
|
3,298,009
|
|
|
Accounts receivable
|
|
|
251,587
|
|
|
|
301,921
|
|
|
Prepaid expenses, inventory and other assets
|
|
|
1,335,472
|
|
|
|
1,409,924
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
68,933,792
|
|
|
$
|
70,908,909
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Mortgage loan, net
|
|
$
|
57,000,000
|
|
|
$
|
33,100,000
|
|
|
Accounts payable and other accrued liabilities
|
|
|
1,869,476
|
|
|
|
2,995,271
|
|
|
Advance deposits
|
|
|
280,339
|
|
|
|
257,950
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
59,149,815
|
|
|
|
36,353,221
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL MEMBERS’ EQUITY
|
|
|
9,783,977
|
|
|
|
34,555,688
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS’ EQUITY
|
|
$
|
68,933,792
|
|
|
$
|
70,908,909
|
|
|
|
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
$
|
14,732,609
|
|
|
$
|
13,279,070
|
|
|
Food and beverage department
|
|
|
2,506,852
|
|
|
|
2,529,851
|
|
|
Other operating departments
|
|
|
1,445,446
|
|
|
|
1,238,243
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,684,907
|
|
|
|
17,047,164
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
|
3,111,968
|
|
|
|
2,847,660
|
|
|
Food and beverage department
|
|
|
1,981,068
|
|
|
|
1,996,968
|
|
|
Other operating departments
|
|
|
580,150
|
|
|
|
596,842
|
|
|
Indirect
|
|
|
7,080,180
|
|
|
|
6,661,672
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
12,753,366
|
|
|
|
12,103,142
|
|
|
Depreciation and amortization
|
|
|
2,182,667
|
|
|
|
2,362,692
|
|
|
General and administrative
|
|
|
119,338
|
|
|
|
79,380
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,055,371
|
|
|
|
14,545,214
|
|
|
Operating income
|
|
|
3,629,536
|
|
|
|
2,501,950
|
|
|
Interest expense
|
|
|
(2,174,731
|
)
|
|
|
(1,758,244
|
)
|
|
Unrealized gain (loss) on hedging activities
|
|
|
359,993
|
|
|
|
(55,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,814,798
|
|
|
$
|
688,698
|
|
|
|
|
|
|
|
|
|
|
|
12. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Year Ended
December 31, 2011
|
|
|
General and administrative
|
|
$
|
7,171,437
|
|
|
$
|
6,813,616
|
|
|
$
|
6,454,042
|
|
|
Sales and marketing
|
|
|
7,516,785
|
|
|
|
7,133,300
|
|
|
|
6,644,654
|
|
|
Repairs and maintenance
|
|
|
4,701,421
|
|
|
|
4,606,547
|
|
|
|
4,518,327
|
|
|
Utilities
|
|
|
4,301,755
|
|
|
|
4,425,441
|
|
|
|
4,609,509
|
|
|
Franchise fees
|
|
|
3,096,058
|
|
|
|
2,875,875
|
|
|
|
2,627,147
|
|
|
Management fees, including incentive
|
|
|
2,719,573
|
|
|
|
2,818,842
|
|
|
|
2,469,853
|
|
|
Property taxes
|
|
|
2,480,909
|
|
|
|
2,643,931
|
|
|
|
2,621,896
|
|
|
Insurance
|
|
|
1,447,485
|
|
|
|
1,369,800
|
|
|
|
1,276,527
|
|
|
Other
|
|
|
248,063
|
|
|
|
232,258
|
|
|
|
562,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect hotel operating expenses
|
|
$
|
33,683,486
|
|
|
$
|
32,919,610
|
|
|
$
|
31,784,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
13. Income Taxes
The components of the provision for (benefit from) income taxes for the years ended December 31, 2013, 2012 and 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Year Ended
December 31, 2011
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
102,701
|
|
|
$
|
(113,699
|
)
|
|
$
|
113,919
|
|
|
State and local
|
|
|
57,476
|
|
|
|
2,461
|
|
|
|
106,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,177
|
|
|
|
(111,238
|
)
|
|
|
220,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,065,861
|
|
|
|
1,136,334
|
|
|
|
576,136
|
|
|
State and local
|
|
|
295,144
|
|
|
|
276,133
|
|
|
|
109,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,361,005
|
|
|
|
1,412,467
|
|
|
|
685,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,521,182
|
|
|
$
|
1,301,229
|
|
|
$
|
905,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax provision (benefit) to the Company’s provision for
(benefit from) income tax is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
|
Year Ended
December 31,
2011
|
|
|
Statutory federal income tax benefit
|
|
$
|
(783,021
|
)
|
|
$
|
(1,369,004
|
)
|
|
$
|
(1,893,728
|
)
|
|
Effect of non-taxable REIT loss
|
|
|
1,951,583
|
|
|
|
2,391,639
|
|
|
|
2,583,783
|
|
|
State income tax provision (benefit)
|
|
|
352,620
|
|
|
|
278,594
|
|
|
|
215,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,521,182
|
|
|
$
|
1,301,229
|
|
|
$
|
905,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 and 2012, we had a net deferred tax asset of approximately $1.2 million and
$2.6 million, respectively, of which, approximately $0.7 million and $1.9 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2028 if not utilized. As of both December 31,
2013 and 2012, approximately $0.3 and $0.4 million, respectively, of the deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort and start-up expenses related to the opening of the
Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, all of which were not deductible when incurred and are now being amortized over 15 years. The remainder of the deferred tax asset is attributable to year-to-year timing differences
for accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. We believe that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is
required.
14. Loss per Share and per Unit
Loss Per Share
. The limited partners’ outstanding limited partnership units in the Operating Partnership (which
may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the
amounts since the limited partners’ share of income would also be added back to net income. The effect of the allocation of net income (loss) attributable to the limited partners’ interests by
F-35
the issuance of dilutive shares has been excluded, since there would be an anti-dilutive effect from the pro forma dilution of the Essex Warrant discussed in Note 6 issued in April 2011. The
computation of basic and diluted earnings per share is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
|
Year ended
December 31, 2011
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company for basic and diluted computation
|
|
$
|
(3,454,059
|
)
|
|
$
|
(4,104,675
|
)
|
|
$
|
(4,844,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
10,156,955
|
|
|
|
9,995,638
|
|
|
|
9,676,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Unit
. The computation of basic and diluted earnings per unit is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
|
Year ended
December 31, 2011
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,435,185
|
)
|
|
$
|
(5,327,711
|
)
|
|
$
|
(6,475,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units outstanding
|
|
|
13,042,020
|
|
|
|
12,973,953
|
|
|
|
12,934,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per unit
|
|
$
|
(0.34
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
15. Quarterly Operating Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2013
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total revenue
|
|
$
|
20,189,812
|
|
|
$
|
25,250,643
|
|
|
$
|
21,458,637
|
|
|
$
|
22,475,434
|
|
|
Total operating expenses
|
|
|
18,306,556
|
|
|
|
20,285,017
|
|
|
|
19,123,547
|
|
|
|
20,581,632
|
|
|
Net operating income
|
|
|
1,883,256
|
|
|
|
4,965,626
|
|
|
|
2,335,090
|
|
|
|
1,893,802
|
|
|
Net income (loss) attributable to the Company
|
|
|
(2,594,916
|
)
|
|
|
1,310,592
|
|
|
|
(1,649,722
|
)
|
|
|
(520,013
|
)
|
|
Earnings per share – basic
|
|
|
(0.26
|
)
|
|
|
0.13
|
|
|
|
(0.16
|
)
|
|
|
(0.05
|
)
|
|
Earnings per share – diluted
|
|
|
(0.26
|
)
|
|
|
0.12
|
|
|
|
(0.16
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
Quarters Ended 2012
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Total revenue
|
|
$
|
20,025,146
|
|
|
$
|
25,112,522
|
|
|
$
|
21,771,213
|
|
|
$
|
20,434,338
|
|
|
Total operating expenses
|
|
|
18,719,004
|
|
|
|
20,410,903
|
|
|
|
19,577,732
|
|
|
|
18,330,698
|
|
|
Net operating income (loss)
|
|
|
1,306,142
|
|
|
|
4,701,619
|
|
|
|
2,193,481
|
|
|
|
2,103,640
|
|
|
Net income (loss) attributable to the Company
|
|
|
(2,294,355
|
)
|
|
|
(1,653,654
|
)
|
|
|
(1,615,020
|
)
|
|
|
1,458,354
|
|
|
Earnings per share – basic
|
|
|
(0.23
|
)
|
|
|
(0.17
|
)
|
|
|
(0.16
|
)
|
|
|
0.15
|
|
|
Earnings per share – diluted
|
|
|
(0.23
|
)
|
|
|
(0.17
|
)
|
|
|
(0.16
|
)
|
|
|
0.14
|
|
16. Subsequent Events
On January 10, 2014, we paid a quarterly dividend (distribution) of $0.045 per common share (and unit) to those
stockholders (and unitholders of the Operating Partnership) of record on December 13, 2013.
On January 13, 2014, we entered
into an agreement to acquire an independent full-service hotel in Atlanta, Georgia for the aggregate purchase price of approximately $61.0 million. We anticipate that the purchase will be completed by the end of the first quarter, or shortly
thereafter, and will be funded with a first mortgage in the amount of $41.5 million, a $19.0 million loan secured by interests in another asset, and working capital.
On January 20, 2014, we authorized payment of a quarterly dividend (distribution) of $0.045 per common share (and unit) to the
stockholders (and unitholders of the Operating Partnership) of record as of March 14, 2014. The dividend (distribution) is to be paid on April 11, 2014.
On February 14, 2014, the Company was issued 12,750 partnership units by the Operating Partnership and granted 12,750 of restricted stock
to certain of its independent directors. The Company was also issued 24,000 partnership units by the Operating Partnership and granted 24,000 shares of non-restricted stock to its principal executive officers under the Company’s 2013 Plan.
F-37
SOTHERLY HOTELS INC.
SOTHERLY HOTELS LP
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2013
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Costs
|
|
|
Costs Capitalized
Subsequent to Acquisition
|
|
|
Gross Amount At End of Year
|
|
|
Accumulated
Depreciation
& Impairment
|
|
|
Date of
Construction
|
|
|
Date
Acquired
|
|
|
Life on
Which
Depreciation
on Latest
Statement of
Operations
is Computed
|
|
|
Description
|
|
Encum-
brances
|
|
|
Land
|
|
|
Building &
Improvements
|
|
|
Land
|
|
|
Building &
Improvements
|
|
|
Land
|
|
|
Building &
Improvements
|
|
|
Total
|
|
|
|
|
|
|
Crowne Plaza Hampton Marina Hampton, Virginia
|
|
$
|
5,904
|
|
|
$
|
1,061
|
|
|
$
|
6,733
|
|
|
$
|
33
|
|
|
$
|
3,383
|
|
|
$
|
1,094
|
|
|
$
|
10,116
|
|
|
$
|
11,210
|
|
|
$
|
(2,231
|
)
|
|
|
1988
|
|
|
|
2008
|
|
|
|
3-39 years
|
|
|
Crowne Plaza Houston Downtown Houston, Texas
|
|
|
21,428
|
|
|
|
7,374
|
|
|
|
22,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,374
|
|
|
|
22,185
|
|
|
|
29,559
|
|
|
|
(75
|
)
|
|
|
1963
|
|
|
|
2013
|
|
|
|
3-39 years
|
|
|
Crowne Plaza Jacksonville Riverfront Jacksonville, Florida
|
|
|
13,756
|
|
|
|
7,090
|
|
|
|
14,604
|
|
|
|
51
|
|
|
|
3,698
|
|
|
|
7,141
|
|
|
|
18,302
|
|
|
|
25,443
|
|
|
|
(3,823
|
)
|
|
|
1970
|
|
|
|
2005
|
|
|
|
3-39 years
|
|
|
Crowne Plaza Tampa Westshore Tampa, Florida
|
|
|
13,603
|
|
|
|
4,153
|
|
|
|
9,670
|
|
|
|
283
|
|
|
|
21,993
|
|
|
|
4,436
|
|
|
|
31,663
|
|
|
|
36,099
|
|
|
|
(4,723
|
)
|
|
|
1973
|
|
|
|
2007
|
|
|
|
3-39 years
|
|
|
DoubleTree by Hilton Brownstone – University Raleigh, North Carolina
|
|
|
15,526
|
|
|
|
815
|
|
|
|
7,416
|
|
|
|
203
|
|
|
|
4,862
|
|
|
|
1,018
|
|
|
|
12,278
|
|
|
|
13,296
|
|
|
|
(3,329
|
)
|
|
|
1971
|
|
|
|
2004
|
|
|
|
3-39 years
|
|
|
Hilton Philadelphia Airport Philadelphia, Pennsylvania
|
|
|
28,731
|
|
|
|
2,100
|
|
|
|
22,031
|
|
|
|
93
|
|
|
|
4,141
|
|
|
|
2,193
|
|
|
|
26,172
|
|
|
|
28,365
|
|
|
|
(6,210
|
)
|
|
|
1972
|
|
|
|
2004
|
|
|
|
3-39 years
|
|
|
Hilton Savannah DeSoto Savannah, Georgia
|
|
|
21,546
|
|
|
|
600
|
|
|
|
13,562
|
|
|
|
14
|
|
|
|
11,165
|
|
|
|
614
|
|
|
|
24,727
|
|
|
|
25,341
|
|
|
|
(6,374
|
)
|
|
|
1968
|
|
|
|
2004
|
|
|
|
3-39 years
|
|
|
Hilton Wilmington Riverside Wilmington, North Carolina
|
|
|
20,919
|
|
|
|
785
|
|
|
|
16,829
|
|
|
|
222
|
|
|
|
10,524
|
|
|
|
1,007
|
|
|
|
27,353
|
|
|
|
28,360
|
|
|
|
(8,910
|
)
|
|
|
1970
|
|
|
|
2004
|
|
|
|
3-39 years
|
|
|
Holiday Inn Laurel West Laurel, Maryland
|
|
|
7,142
|
|
|
|
900
|
|
|
|
9,443
|
|
|
|
187
|
|
|
|
2,497
|
|
|
|
1,087
|
|
|
|
11,940
|
|
|
|
13,027
|
|
|
|
(3,310
|
)
|
|
|
1985
|
|
|
|
2004
|
|
|
|
3-39 years
|
|
|
Sheraton Louisville Riverside Jeffersonville, Indiana
|
|
|
11,809
|
|
|
|
782
|
|
|
|
6,891
|
|
|
|
210
|
|
|
|
14,477
|
|
|
|
992
|
|
|
|
21,368
|
|
|
|
22,360
|
|
|
|
(3,590
|
)
|
|
|
1972
|
|
|
|
2006
|
|
|
|
3-39 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,364
|
|
|
$
|
25,660
|
|
|
$
|
129,364
|
|
|
$
|
1,296
|
|
|
$
|
76,740
|
|
|
$
|
26,956
|
|
|
$
|
206,104
|
|
|
$
|
233,060
|
|
|
$
|
(42,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION
RECONCILIATION OF REAL ESTATE
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
195,886
|
|
|
Improvements
|
|
|
3,380
|
|
|
Disposal of Assets
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
198,959
|
|
|
Improvements
|
|
|
1,807
|
|
|
Disposal of Assets
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
200,639
|
|
|
Acquisitions
|
|
|
29,559
|
|
|
Improvements
|
|
|
3,290
|
|
|
Disposal of Assets
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
233,060
|
|
|
|
|
|
|
|
RECONCILIATION OF ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
26,145
|
|
|
Current Expense
|
|
|
5,325
|
|
|
Disposal of Assets
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
31,304
|
|
|
Current Expense
|
|
|
5,500
|
|
|
Disposal of Assets
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
36,677
|
|
|
Current Expense
|
|
|
5,604
|
|
|
Impairment
|
|
|
611
|
|
|
Disposal of Assets
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
42,557
|
|
|
|
|
|
|
|