NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 upper-upscale and 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 and thereafter consummated the
acquisition of six hotel properties (the initial properties). Substantially all of the Companys 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 Companys administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnerships behalf.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2013, was
approximately 78.3% owned by the Company, and its subsidiaries, lease the 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 this report to the Company, Sotherly, we,
us and our refer to Sotherly Hotels Inc., 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 prior fiscal year include the following:
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 mortgages 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, for working capital, and to prepay a portion of our indebtedness under our then-existing agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which we, at such time, had the right to borrow up to $10.0 million
on or before December 31, 2011 (the Bridge Financing). 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, we entered into an amendment of our Bridge Financing that provided, subject to a $1.5 million prepayment which we 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 Companys Series A Cumulative
Redeemable Preferred Stock (the 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 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 mortgages 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 from the Operating Partnership to the Company to redeem the 11,514 shares of Preferred Stock referenced above.
12
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 September 30, 2013. Under the terms of the extension, we were required to make monthly principal payments of $16,000 and additional 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 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 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 our existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loans 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 are required to continue to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage will remain 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 $2.1 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 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.
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., formerly MHI Hospitality Corporation, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2013 and December 31, 2012 and for the three months and nine months ended September 30,
2013 and 2012. The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. 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. All
significant inter-company balances and transactions have been eliminated.
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
13
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 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 propertys estimated fair market value would be recorded and an impairment loss recognized.
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; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to
purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0 million junior participation in the existing mortgage. Carlyle
owns a 75.0% controlling indirect interest in all these entities. We account for our 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 the Companys potential risk.
Restricted Cash
Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture,
fixtures and equipment, and cash that is otherwise restricted pursuant to certain requirements in our various mortgage agreements.
Accounts Receivable
Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of
collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible
.
Inventories
Inventories which consist primarily of food and beverage 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 un-amortized franchise fees as of September 30, 2013 and December 31, 2012 were $207,864 and $240,489, respectively. Amortization expense for each of the three
month periods ended September 30, 2013 and 2012 totaled $10,875 and for each of the nine month periods ended September 30, 2013 and 2012 totaled $32,625.
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
14
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 the then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for us making fixed-rate
payments without exchange of the underlying principal amount. We valued the 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) and included it in accounts payable and accrued liabilities. We also use derivative instruments in the Companys 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 warrant to purchase
1,900,000 shares of the Companys common stock (the Essex Warrant) as well as the warrant to purchase 1,900,000 partnership units that was issued to the Company by the Operating Partnership (the Warrant) based upon the
guidance enumerated in Accounting Standards Codification (ASC) 815-40,
Derivatives and Hedging: Contracts in Entitys Own Stock
. Both the Essex Warrant and the Warrant contain a provision that could require an adjustment to
the exercise price if we issued securities deemed to be dilutive and therefore is classified as a derivative liability. The Essex Warrant and the Warrant are carried at fair value with changes in fair value reported in earnings as long as they
remain classified as a derivative liability.
The warrant derivative liability was valued at September 30, 2013 and 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 groups 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.
The Company
classifies 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.
|
The Company endeavors 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
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
$
|
|
|
|
$
|
(7,990,712
|
)
|
|
$
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
|
|
|
|
(4,969,752
|
)
|
|
|
|
|
Cumulative Mandatorily Redeemable Preferred Stock and Preferred Interest
We account for the
Companys Preferred Stock and the Operating Partnerships Series A Preferred Interest (the 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 Companys sole source of funds to meet its
obligations under the Articles Supplementary are 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
Partnerships net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Companys 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 Companys 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.
15
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 (the Code). As a REIT, the Company generally will not be subject to federal income tax on that portion of
its net income that does not relate to MHI Hospitality TRS, LLC, our wholly-owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, 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 September 30, 2013, we have no uncertain tax positions. In
addition, we recognize obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. As of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which
we are subject generally include 2009 through 2012. In addition, as of September 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally also include 2004 through 2008.
Stock-based Compensation
The Companys 2004 Long-Term Incentive Plan (the 2004 Plan) and its 2013
Long-Term Incentive Plan (the 2013 Plan), which the Companys stockholders approved in April 2013, permit the grant of stock options, restricted (non-vested) stock and performance stock compensation awards to its employees for up to
350,000 and 750,000 shares of common stock, respectively. We believe 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 its independent directors. Of the 255,938 shares issued to certain of our executives and employees, all have vested except 30,000 shares issued to the Chief Financial
Officer upon execution of his employment contract which will vest on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Companys independent directors, all of
the shares have vested except 15,000 shares which vest at the end of 2013.
The value of the awards is charged to compensation expense on
a straight-line basis over the vesting or service period based on the Companys stock price on the date of grant or issuance. Under either the 2004 Plan or the 2013 Plan, the Company may issue a variety of performance-based stock awards,
including nonqualified stock options. As of September 30, 2013, no performance-based stock awards have been granted under the 2004 Plan. 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 totaled $17,880 and $60,731, respectively for the three months and nine months ended September 30, 2013 and $13,078 and $39,233, respectively, for the three
months and nine months ended September 30, 2012. As of September 30, 2013, no awards have been granted under the 2013 Plan.
Comprehensive Income (Loss)
Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period
from non-owner sources. We do 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.
Recent 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
There were no new acquisitions during the nine months ended September 30, 2013.
16
4. Investment in Hotel Properties
Investment in hotel properties as of September 30, 2013 and December 31, 2012 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
(unaudited)
|
|
|
|
|
Land and land improvements
|
|
$
|
19,578,692
|
|
|
$
|
19,429,571
|
|
Buildings and improvements
|
|
|
183,246,701
|
|
|
|
181,209,101
|
|
Furniture, fixtures and equipment
|
|
|
31,186,483
|
|
|
|
33,716,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,011,876
|
|
|
|
234,355,372
|
|
Less: accumulated depreciation
|
|
|
(59,987,511
|
)
|
|
|
(57,927,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
174,024,365
|
|
|
$
|
176,427,904
|
|
|
|
|
|
|
|
|
|
|
5. Debt
Credit Facility.
During a portion of the nine months ended September 30, 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. The credit facility was established during the second quarter of 2006 and replaced a $23.0 million secured, revolving
credit facility with BB&T. On March 5, 2012, we extinguished the credit facility in conjunction with the refinance of the mortgage on the Hilton Philadelphia Airport.
17
Mortgage Debt.
As of September 30, 2013 and December 31, 2012, we had
$139,784,729 and $135,674,432 of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels as of September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Balance Outstanding as of
|
|
|
Prepayment
Penalties
|
|
|
Maturity
Date
|
|
|
Amortization
Provisions
|
|
|
Interest Rate
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crowne Plaza Hampton Marina
|
|
$
|
5,951,500
|
|
|
$
|
7,559,625
|
|
|
|
None
|
|
|
|
06/30/2014
|
(1)
|
|
$
|
16,000
|
(2)
|
|
|
LIBOR plus 4.55
|
%
(3)
|
Crowne Plaza Jacksonville Riverfront
|
|
|
13,853,898
|
|
|
|
14,135,234
|
|
|
|
None
|
|
|
|
07/10/2015
|
(4)
|
|
|
25 years
|
|
|
|
LIBOR plus 3.00
|
%
|
Crowne Plaza Tampa Westshore
|
|
|
13,672,037
|
|
|
|
13,872,077
|
|
|
|
None
|
|
|
|
06/18/2017
|
|
|
|
25 years
|
|
|
|
5.60
|
%
|
DoubleTree by Hilton Brownstone University
|
|
|
15,582,552
|
|
|
|
7,816,867
|
|
|
|
|
(5)
|
|
|
08/01/2018
|
|
|
|
30 years
|
|
|
|
4.78
|
%
|
Hilton Philadelphia Airport
|
|
|
28,927,294
|
|
|
|
29,502,666
|
|
|
|
None
|
|
|
|
08/30/2014
|
(6)
|
|
|
25 years
|
|
|
|
LIBOR plus 3.00
|
%
(7)
|
Hilton Savannah DeSoto
|
|
|
21,705,310
|
|
|
|
22,051,314
|
|
|
|
Yes
|
(8)
|
|
|
08/01/2017
|
|
|
|
25 years
|
(9)
|
|
|
6.06
|
%
|
Hilton Wilmington Riverside
|
|
|
21,046,409
|
|
|
|
21,416,922
|
|
|
|
Yes
|
(8)
|
|
|
04/01/2017
|
|
|
|
25 years
|
(10)
|
|
|
6.21
|
%
|
Holiday Inn Laurel West
|
|
|
7,182,558
|
|
|
|
7,300,465
|
|
|
|
Yes
|
(11)
|
|
|
08/05/2021
|
|
|
|
25 years
|
|
|
|
5.25
|
%
(12)
|
Sheraton Louisville Riverside
|
|
|
11,863,171
|
|
|
|
12,019,262
|
|
|
|
|
(5)
|
|
|
01/06/2017
|
|
|
|
25 years
|
|
|
|
6.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139,784,729
|
|
|
$
|
135,674,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The note provides that the mortgage can be extended until June 30, 2015 if certain conditions have been satisfied.
|
(2)
|
The Company is required to make monthly principal payments of $16,000.
|
(3)
|
The note bears a minimum interest rate of 5.00%.
|
(4)
|
The note provides that the mortgage can be extended until July 10, 2016 if certain conditions have been satisfied.
|
(5)
|
With limited exception, the note may not be prepaid until two months before maturity.
|
(6)
|
The note provides that the mortgage can be extended until March 1, 2017 if certain conditions have been satisfied.
|
(7)
|
The note bears a minimum interest rate of 3.50%.
|
(8)
|
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.
|
(9)
|
The note provided for payments of interest only until August 1, 2010 after which payments of principal and interest under a
25-year
amortization schedule are due until the
note matures on August 1, 2017.
|
(10)
|
The note provided for payments of interest only until April 1, 2009 after which payments of principal and interest under a
25-year amortization
schedule are due until
the note matures in April 1, 2017.
|
(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.
|
(12)
|
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 September 30, 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 September 30, 2013
to meet the debt service coverage requirements of the mortgage loan agreement. While we believe that the property should be able to meet the debt service coverage requirements in future periods, without a waiver from the lender, we may be
required to repay all or a portion of the outstanding indebtedness. We continue to be in compliance under the terms of the covenants in our mortgage loan agreement for the Crowne Plaza Jacksonville Riverfront by providing approximately $0.7
million cash collateral.
18
Total mortgage debt maturities as of September 30, 2013 without respect to any additional
loan extensions for the following twelve-month periods were as follows:
|
|
|
|
|
September 30, 2014
|
|
$
|
37,168,940
|
|
September 30, 2015
|
|
|
15,487,777
|
|
September 30, 2016
|
|
|
2,134,026
|
|
September 30, 2017
|
|
|
63,932,193
|
|
September 30, 2018
|
|
|
14,798,936
|
|
Thereafter
|
|
|
6,262,857
|
|
|
|
|
|
|
Total future maturities
|
|
$
|
139,784,729
|
|
|
|
|
|
|
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.
Other Loans.
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 the
joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest
of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at both
September 30, 2013 and December 31, 2012 was $3,650,220 and $4,025,220, respectively.
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. The outstanding balance on the Bridge Financing at September 30, 2013 and December 31, 2012 was $0.0 million.
6. Preferred Stock, Preferred Interest and Warrants
Preferred Stock.
On April 18, 2011, the Company entered into a securities purchase agreement with Essex
Illiquid, LLC and Richmond Hill Capital Partners, LP for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Companys 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, 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 Companys Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the
Companys board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Companys Preferred Stock will be entitled to appoint a majority of the members of the board of
directors. The holder(s) of the Companys 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.
Concurrent 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 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 Companys obligations with respect 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.
19
On June 15, 2012, the Company entered into an agreement with the holders of the
Companys 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, $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 $2.1 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, $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 unsecured notes offering 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, $0.4 million in unamortized issuance costs related to the redeemed shares were written off.
As of September 30, 2013 and December 31, 2012, there were 0 and 14,228 shares of the Preferred Stock issued and outstanding,
respectively.
Warrants.
The Essex Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the
Companys common stock. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant shall be adjusted 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. At September 30, 2013, the adjusted exercise price was $2.04 per share. The Essex
Warrant expires on October 18, 2016. The Essex Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Essex Warrant are both subject to additional adjustments under certain
circumstances. The Essex Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Essex Warrant, the holders of the Essex Warrant will be entitled to participate in certain future securities offerings of the
Company.
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 shall issue an equivalent number of the
partnership units and shall be entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.
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, and is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statements 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. These 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 the three months and nine months ended September 30, 2013 totaled $15,867 and $48,490, respectively, and totaled $17,074 and $49,136 for the three months and nine
months ended September 30, 2012, respectively, for this operating lease.
20
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 expired 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. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value no earlier than August 1,
2018, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2013 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612 for the three
months and nine months ended September 30, 2012, respectively.
We lease a parking lot adjacent to the Crowne Plaza Tampa Westshore
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
totaled $651 and $1,952 for the three months and nine months ended September 30, 2013, respectively, and totaled $638 and $1,864 for the three months and nine months ended September 30, 2012, 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 is leased under a five-year operating lease, which expires in September 2017, requiring annual payments of $6,020. Rent expense totaled $1,505 and $4,515 for the three
months and nine months ended September 30, 2013, respectively, and totaled $1,285 and $3,765 for the three months and nine months ended September 30, 2012, 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 totaled $15,848 and $43,348 for the three months and nine months ended September 30, 2013, respectively, and totaled $13,750 and $41,250 for the three months and nine months
ended September 30, 2012, respectively.
We lease 1,632 square feet of commercial office space in Rockville, Maryland under an
agreement that commenced December 14, 2009 and 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 totaled $10,911 and $32,982 for the three months and nine months ended September 30, 2013, respectively, and totaled $11,474 and
$33,746 for the three months and nine months ended September 30, 2012, respectively.
We also lease certain furniture and equipment
under financing arrangements expiring between August 2013 and September 2017.
A schedule of minimum future lease payments for the
following twelve-month periods is as follows:
|
|
|
|
|
September 30, 2014
|
|
$
|
426,523
|
|
September 30, 2015
|
|
|
382,240
|
|
September 30, 2016
|
|
|
329,482
|
|
September 30, 2017
|
|
|
121,186
|
|
September 30, 2018
|
|
|
86,953
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
1,346,384
|
|
|
|
|
|
|
Management Agreements
At September 30, 2013, each of our wholly-owned operating hotels,
except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement 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 (see Note 9).
Franchise Agreements
As of
September 30, 2013, all of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee of 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.
21
Restricted Cash Reserves
Each month, we are required to escrow with the lenders on
the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the Sheraton Louisville Riverside and the DoubleTree by Hilton Brownstone-University an amount equal to
1
/
12
of the annual real estate taxes due for the properties. In addition, the lender on the DoubleTree by Hilton Brownstone-University requires that we escrow an amount equal to
1
/
12
of our annual insurance premiums. We are also required by several of our lenders to establish individual property improvement funds to cover
the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina, the Sheraton Louisville Riverside
and the DoubleTree by Hilton Raleigh Brownstone-University 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, 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 legal proceedings arising out of the ordinary course of business, all of which we expect to be covered by insurance. We do not expect any pending legal proceedings 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 Companys common stock are entitled to receive distributions when authorized by the Companys board of
directors out of assets legally available for the payment of distributions.
On August 16, 2013, one holder of units in the Operating
Partnership redeemed 50,000 units for an equivalent number of shares of the Companys 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 Companys 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
Companys common stock.
On January 25, 2013, the Company 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 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 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.
As of September 30, 2013 and December 31, 2012, the Company had 10,206,927 and 9,999,786 shares of common stock
outstanding, respectively.
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 Companys 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 Companys 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.
22
On April 1, 2013, May 1, 2012 and August 1, 2012, the Company redeemed
10,000, 6,000 and 6,000 units, respectively, in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $69,080 pursuant to the terms of the partnership agreement.
As of September 30, 2013 and December 31, 2012, the total number of Operating Partnership units outstanding was 2,831,198 and
2,972,839, with a fair market value of approximately $13.4 million and $9.9 million, respectively, based on the price per share of the common stock on such respective dates.
9. Related Party Transactions
MHI Hotels Services.
As of September 30, 2013, the members of MHI Hotels Services (a company that is
majority-owned and controlled by the Companys chief executive officer, its former chief financial officer as well as a current member of its Board of Directors and a former member of its Board of Directors) owned approximately 11.2% of the
Companys outstanding common stock and 1,720,029 Operating Partnership units. The following is a summary of the transactions with MHI Hotels Services:
Accounts Receivable
We were due $10,127 and $8,657 from MHI Hotels Services at September 30, 2013 and December 31,
2012, respectively.
Shell Island Sublease
We have a sublease arrangement with MHI Hotels Services on its expired leasehold
interests in the Shell Island Resort in Wrightsville Beach, North Carolina. Leasehold revenue was $87,500 for each of the three month periods ended September 30, 2013 and 2012 and was $262,500 for each of the nine month periods ended
September 30, 2013 and 2012. 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 us and the management of our hotels by MHI Hotels
Services.
Management Agreements
Each of the hotels that we wholly-owned at September 30, 2013, except for the Crowne
Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement 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. Under both management agreements, MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive 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. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company and the Operating Partnership upon their formation, MHI Hotels Services agreed
that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, 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.
Base management fees earned by
MHI Hotels Services totaled $639,404 and $1,992,717 for the three months and nine months ended September 30, 2013, respectively, and $649,445 and $1,994,398 for the three months and nine months ended September 30, 2012, respectively. In
addition, estimated incentive management fees of $15,955 and $78,082 were accrued for the three months and nine months ended September 30, 2013, respectively, and estimated incentive management fees of $54,095 and $166,145 were accrued for the
three months and nine months ended September 30, 2012, 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 $615,762 and $1,910,486 for the three months and nine months ended September 30, 2013, respectively and $564,659 and $1,785,547 for the
three months and nine months ended September 30, 2012, respectively.
23
Redemption of Units in Operating Partnership
During 2012 and the nine months ended
September 30, 2013, the Operating Partnership redeemed 22,000 limited partnership units held by a trust controlled by two current members and one former member of our Board of Directors for a total of $69,080 pursuant to the terms of the
Partnership Agreement.
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 Companys 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.
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 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 Companys ability to borrow under the Bridge Financing ended May 31, 2013.
On June 15,
2012, the Company simultaneously entered into an agreement with the holders of the Companys 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. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.8 million.
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 Companys Articles of Amendment and Restatement) for Essex Illiquid, LLC and Richmond Hill Capital Partners, LP.
On
March 26, 2013, the Company redeemed 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 pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.
On August 1, 2013, the
Company redeemed 2,460 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 pursuant to the
provisions of the Articles Supplementary of approximately $0.2 million.
On September 30, 2013, the Company redeemed 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 pursuant to the provisions of
the Articles Supplementary of approximately $0.7 million.
10. Retirement Plan
We maintain a 401(k) plan for qualified employees which is subject to safe harbor provisions and which requires
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 provision. Company contributions to
the plan totaled $6,200 and $42,379 for the three months and nine months ended September 30, 2013, respectively, and $12,308 and $48,113 for the three months and nine months ended September 30, 2012, respectively.
24
11. Unconsolidated Joint Venture
We own a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the
entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which
leased the parking garage for use by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these entities. 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net
|
|
$
|
64,745,596
|
|
|
$
|
65,899,055
|
|
Cash and cash equivalents
|
|
|
3,332,624
|
|
|
|
3,298,009
|
|
Accounts receivable
|
|
|
104,078
|
|
|
|
301,921
|
|
Prepaid expenses, inventory and other assets
|
|
|
830,289
|
|
|
|
1,409,924
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
69,012,587
|
|
|
$
|
70,908,909
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Mortgage loans, net
|
|
$
|
32,600,000
|
|
|
$
|
33,100,000
|
|
Accounts payable and other accrued liabilities
|
|
|
2,794,650
|
|
|
|
2,995,271
|
|
Advance deposits
|
|
|
324,331
|
|
|
|
257,950
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
35,718,981
|
|
|
|
36,353,221
|
|
TOTAL MEMBERS EQUITY
|
|
|
33,293,606
|
|
|
|
34,555,688
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND MEMBERS EQUITY
|
|
$
|
69,012,587
|
|
|
$
|
70,908,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
$
|
2,549,657
|
|
|
$
|
2,285,771
|
|
|
$
|
11,047,955
|
|
|
$
|
9,748,930
|
|
Food and beverage department
|
|
|
476,836
|
|
|
|
509,019
|
|
|
|
1,869,821
|
|
|
|
1,864,182
|
|
Other operating departments
|
|
|
316,895
|
|
|
|
337,036
|
|
|
|
1,102,859
|
|
|
|
953,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,343,388
|
|
|
|
3,131,826
|
|
|
|
14,020,635
|
|
|
|
12,566,755
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms department
|
|
|
707,671
|
|
|
|
647,369
|
|
|
|
2,332,407
|
|
|
|
2,130,035
|
|
Food and beverage department
|
|
|
433,192
|
|
|
|
425,006
|
|
|
|
1,474,361
|
|
|
|
1,489,930
|
|
Other operating departments
|
|
|
145,219
|
|
|
|
141,882
|
|
|
|
435,108
|
|
|
|
484,500
|
|
Indirect
|
|
|
1,625,053
|
|
|
|
1,551,360
|
|
|
|
5,300,822
|
|
|
|
5,027,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating expenses
|
|
|
2,911,135
|
|
|
|
2,765,617
|
|
|
|
9,542,698
|
|
|
|
9,131,655
|
|
Depreciation and amortization
|
|
|
560,951
|
|
|
|
542,683
|
|
|
|
1,634,906
|
|
|
|
1,825,653
|
|
General and administrative
|
|
|
27,180
|
|
|
|
11,987
|
|
|
|
85,023
|
|
|
|
62,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,499,266
|
|
|
|
3,320,287
|
|
|
|
11,262,627
|
|
|
|
11,020,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(155,878
|
)
|
|
|
(188,461
|
)
|
|
|
2,758,008
|
|
|
|
1,546,489
|
|
Interest expense
|
|
|
(437,605
|
)
|
|
|
(440,161
|
)
|
|
|
(1,305,327
|
)
|
|
|
(1,315,745
|
)
|
Unrealized gain (loss) on hedging activities
|
|
|
102,936
|
|
|
|
(21,232
|
)
|
|
|
285,238
|
|
|
|
(169,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(490,547
|
)
|
|
$
|
(649,854
|
)
|
|
$
|
1,737,919
|
|
|
$
|
61,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
12. Indirect Hotel Operating Expenses
Indirect hotel operating expenses consists of the following expenses incurred by the hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
General and administrative
|
|
$
|
1,768,605
|
|
|
$
|
1,747,412
|
|
|
$
|
5,328,181
|
|
|
$
|
5,171,402
|
|
Sales and marketing
|
|
|
1,836,140
|
|
|
|
1,765,457
|
|
|
|
5,549,907
|
|
|
|
5,411,702
|
|
Repairs and maintenance
|
|
|
1,199,038
|
|
|
|
1,174,889
|
|
|
|
3,451,004
|
|
|
|
3,489,280
|
|
Utilities
|
|
|
1,195,522
|
|
|
|
1,278,568
|
|
|
|
3,221,738
|
|
|
|
3,444,575
|
|
Franchise fees
|
|
|
756,311
|
|
|
|
741,205
|
|
|
|
2,350,664
|
|
|
|
2,229,515
|
|
Management fees, including incentive
|
|
|
655,359
|
|
|
|
703,537
|
|
|
|
2,070,799
|
|
|
|
2,160,543
|
|
Insurance
|
|
|
358,688
|
|
|
|
340,513
|
|
|
|
1,075,083
|
|
|
|
1,001,717
|
|
Property taxes
|
|
|
608,300
|
|
|
|
688,083
|
|
|
|
1,776,710
|
|
|
|
2,045,141
|
|
Other
|
|
|
60,274
|
|
|
|
44,717
|
|
|
|
185,772
|
|
|
|
173,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indirect hotel operating expenses
|
|
$
|
8,438,237
|
|
|
$
|
8,484,381
|
|
|
$
|
25,009,858
|
|
|
$
|
25,127,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Income Taxes
The components of the income tax provision for the three months and nine months ended September 30, 2013 and 2012 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
17,400
|
|
|
$
|
9,250
|
|
|
$
|
85,301
|
|
|
$
|
(39,717
|
)
|
State
|
|
|
191
|
|
|
|
1,439
|
|
|
|
56,766
|
|
|
|
9,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,591
|
|
|
|
10,689
|
|
|
|
142,067
|
|
|
|
(30,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
60,013
|
|
|
|
11,578
|
|
|
|
1,048,762
|
|
|
|
880,342
|
|
State
|
|
|
16,358
|
|
|
|
5,712
|
|
|
|
278,006
|
|
|
|
240,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,371
|
|
|
|
17,290
|
|
|
|
1,326,768
|
|
|
|
1,120,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,962
|
|
|
$
|
27,979
|
|
|
$
|
1,468,835
|
|
|
$
|
1,090,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax expense (benefit) to the Companys income tax
provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Statutory federal income tax expense (benefit)
|
|
$
|
(688,108
|
)
|
|
$
|
(702,855
|
)
|
|
$
|
(783,255
|
)
|
|
$
|
(2,084,592
|
)
|
Effect of non-taxable REIT (income) loss
|
|
|
765,521
|
|
|
|
723,683
|
|
|
|
1,917,318
|
|
|
|
2,925,217
|
|
State income tax expense (benefit)
|
|
|
16,549
|
|
|
|
7,151
|
|
|
|
334,772
|
|
|
|
250,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,962
|
|
|
$
|
27,979
|
|
|
$
|
1,468,835
|
|
|
$
|
1,090,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013 and December 31, 2012, we had a net deferred tax asset of $1,237,759 and
$2,649,282, respectively, of which, approximately $0.6 million and $1.9 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by such time. As of September 30,
2013 and December 31, 2012, approximately $0.3 million of the net deferred tax asset is attributable to our share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton
Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including
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.
26
14. Earnings (Loss) Per Share and Unit
Earnings (Loss) Per
Share The computation of basic and diluted earnings per share is presented below. The
limited partners outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company for basic computation
|
|
$
|
(1,649,722
|
)
|
|
$
|
(1,615,020
|
)
|
|
$
|
(2,934,048
|
)
|
|
$
|
(5,563,029
|
)
|
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest
|
|
|
(37,847
|
)
|
|
|
(27,738
|
)
|
|
|
(56,319
|
)
|
|
|
(74,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company for dilutive computation
|
|
$
|
(1,687,569
|
)
|
|
$
|
(1,642,758
|
)
|
|
$
|
(2,990,367
|
)
|
|
$
|
(5,637,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding for basic computation
|
|
|
10,181,927
|
|
|
|
9,999,786
|
|
|
|
10,137,021
|
|
|
|
9,994,246
|
|
Dilutive effect of warrants
|
|
|
1,021,229
|
|
|
|
801,604
|
|
|
|
951,855
|
|
|
|
608,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number common shares outstanding for dilutive computation
|
|
|
11,203,156
|
|
|
|
10,801,390
|
|
|
|
11,088,876
|
|
|
|
10,603,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Unit
The computation of basic and diluted earnings (loss) per unit is
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2013
|
|
|
Three months ended
September 30, 2012
|
|
|
Nine months ended
September 30, 2013
|
|
|
Nine months ended
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,117,808
|
)
|
|
$
|
(2,095,198
|
)
|
|
$
|
(3,772,526
|
)
|
|
$
|
(7,221,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units outstanding for basic computation
|
|
|
13,038,125
|
|
|
|
12,974,647
|
|
|
|
13,037,422
|
|
|
|
12,974,399
|
|
Dilutive effect of warrants
|
|
|
1,021,229
|
|
|
|
801,604
|
|
|
|
951,855
|
|
|
|
608,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units outstanding for dilutive computation
|
|
|
14,059,354
|
|
|
|
13,776,251
|
|
|
|
13,989,277
|
|
|
|
13,583,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per unit
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per unit
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Subsequent Events
On October 11, 2013, we paid a quarterly dividend (distribution) of $0.04 per common share (and unit) to those
stockholders (and unitholders of the Operating Partnership) of record on September 13, 2013.
27
On October 22, 2013, we authorized payment of a quarterly dividend (distribution) of $0.045
per common share (and unit) to those stockholders (and unitholders of the Operating Partnership) of record as of December 13, 2013. The dividend (distribution) is to be paid on January 10, 2014.
On October 23, 2013, the Company redeemed a portion of the Essex Warrant corresponding to an aggregate of 900,000 Issuable Warrant
Shares, as defined in the Essex Warrant, (the Redeemed Warrant Shares) for an aggregate cash purchase price of $3.2 million. The Redeemed Warrant Shares are no longer Issuable Warrant Shares under the Essex Warrant, and all exercise and
other rights of the 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 purchase price of $3.2 million.