Sotherly Hotels Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

SOTHERLY HOTELS INC.

(Exact name of registrant as specified in its charter)

Maryland

001-32379

20-1531029

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

Delaware

001-36091

20-1965427

(State or Other Jurisdiction of

Incorporation or Organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

306 South Henry Street, Suite 100

Williamsburg, Virginia 23185

(757) 229-5648

(Address and Telephone Number of Principal Executive Offices)

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.

Sotherly Hotels Inc. Yes ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)

Sotherly Hotels Inc. Yes ☒ No ☐ Sotherly Hotels LP Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.

Sotherly Hotels Inc.


Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☒	Smaller Reporting Company	☒

Emerging Growth Company	☐

Sotherly Hotels LP


Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☒	Smaller Reporting Company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Sotherly Hotels Inc. Yes ☐ No ☒ Sotherly Hotels LP Yes ☐ No ☒

As of November 5, 2022, there were 18,951,525 shares of Sotherly Hotels Inc.’s common stock issued and outstanding.

Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	SOHO	The NASDAQ Stock Market LLC
8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value	SOHOB	The NASDAQ Stock Market LLC
7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value	SOHOO	The NASDAQ Stock Market LLC
8.25% Series D Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value	SOHON	The NASDAQ Stock Market LLC

EXPLANATORY NOTE

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 common partnership interest as “partnership units,” and the Operating Partnership’s preferred interest as the “preferred units.” 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 Quarterly Reports on Form 10-Q for the period ended September 30, 2022 of the Company and the Operating Partnership. We believe combining the quarterly reports into this single report results in the following benefits:

•

combined reports better reflect how management and investors view the business as a single operating unit;

•

combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

•

combined reports are more efficient for the Company and the Operating Partnership and result in savings of time, effort and expense; and

•

combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

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:

•

Consolidated Financial Statements;

•

the following Notes to Consolidated Financial Statements:

•

Note 7 – Preferred Stock and Units;

•

Note 8 – Common Stock and Units;

•

Note 13 – Income (Loss) Per Share and Per Unit; and

•

Part I, Item 4 - Controls and Procedures; and

•

Part II, Item 6 - Certifications of CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX


		Page

PART I
Item 1.	Consolidated Financial Statements	5

	Sotherly Hotels Inc.
	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	5
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March 31, June 30 and September 30, 2022 and 2021	7
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2022 and 2021	9

	Sotherly Hotels LP
	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	10
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	11
	Consolidated Statements of Changes in Partners’ Capital (unaudited) for the Three Months Ended March 31, June 30 and September 30, 2022 and 2021	12
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2022 and 2021	14
	Notes to Consolidated Financial Statements	15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4	Controls and Procedures	48

PART II
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51

PART I

Item 1. Consolidated Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS


	September 30, 2022			December 31, 2021
	(unaudited)
ASSETS
Investment in hotel properties, net	$	367,820,745		$	375,885,224
Investment in hotel properties held for sale, net		—			22,870,487
Cash and cash equivalents		23,011,471			13,166,883
Restricted cash		7,006,371			12,411,654
Accounts receivable, net		3,854,267			4,822,187
Prepaid expenses, inventory and other assets		7,332,081			6,894,228
TOTAL ASSETS	$	409,024,935		$	436,050,663
LIABILITIES
Mortgage loans, net	$	322,727,511		$	351,170,883
Secured notes, net		—			19,128,330
Unsecured notes, net		7,554,245			7,609,934
Accounts payable and accrued liabilities		26,370,295			35,960,293
Advance deposits		2,078,782			1,552,942
Dividends and distributions payable		4,082,472			4,125,351
TOTAL LIABILITIES	$	362,813,305		$	419,547,733
Commitments and contingencies (See Note 6)		—			—
EQUITY
Sotherly Hotels Inc. stockholders’ equity
Preferred stock, $0.01 par value, 11,000,000 shares authorized:
8.0% Series B cumulative redeemable perpetual preferred stock, 1,464,100 and 1,510,000 shares issued and outstanding; aggregate liquidation preference $43,923,000 and $43,035,000, at September 30, 2022 and December 31, 2021, respectively.		14,641			15,100
7.875% Series C cumulative redeemable perpetual preferred stock, 1,346,110 and 1,384,610 shares issued and outstanding; aggregate liquidation preference $40,278,142 and $39,385,669, at September 30, 2022 and December 31, 2021, respectively.		13,461			13,846
8.25% Series D cumulative redeemable perpetual preferred stock, 1,163,100 and 1,165,000 shares issued and outstanding; aggregate liquidation preference $35,070,816 and $33,329,922, at September 30, 2022 and December 31, 2021, respectively.		11,631			11,650
Common stock, par value $0.01, 69,000,000 shares authorized, 18,733,680 shares issued and outstanding at September 30, 2022 and 17,441,058 shares issued and outstanding at December 31, 2021.		187,337			174,410
Additional paid-in capital		177,567,019			177,651,954
Unearned ESOP shares		(2,931,762	)		(3,083,398	)
Distributions in excess of retained earnings		(126,071,951	)		(153,521,704	)
Total Sotherly Hotels Inc. stockholders’ equity		48,790,376			21,261,858
Noncontrolling interest		(2,578,746	)		(4,758,928	)
TOTAL EQUITY		46,211,630			16,502,930
TOTAL LIABILITIES AND EQUITY	$	409,024,935		$	436,050,663

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE
Rooms department	$	26,110,030		$	25,232,109		$	83,509,003		$	64,771,623
Food and beverage department		6,816,327			4,822,552			20,146,373			9,867,666
Other operating departments		6,286,338			5,438,465			21,080,181			17,872,677
Total revenue		39,212,695			35,493,126			124,735,557			92,511,966
EXPENSES
Hotel operating expenses
Rooms department		6,539,306			6,498,482			19,694,649			16,412,978
Food and beverage department		4,731,787			3,211,213			13,868,567			6,227,964
Other operating departments		2,386,901			2,031,983			7,470,380			6,619,247
Indirect		15,731,938			14,820,517			49,132,884			40,459,670
Total hotel operating expenses		29,389,932			26,562,195			90,166,480			69,719,859
Depreciation and amortization		4,704,806			5,005,203			13,889,621			14,956,888
Loss (gain) on disposal of assets		1,215			(176,299	)		491,828			(159,079	)
Corporate general and administrative		1,827,746			1,315,425			4,774,139			4,146,821
Total operating expenses		35,923,699			32,706,524			109,322,068			88,664,489
NET OPERATING INCOME		3,288,996			2,786,602			15,413,489			3,847,477
Other income (expense)
Interest expense		(4,224,387	)		(5,617,645	)		(15,280,531	)		(17,063,763	)
Interest income		40,581			36,391			92,515			111,299
Loss on early extinguishment of debt		—			—			(5,944,881	)		—
Unrealized gain on hedging activities		1,457,552			262,193			2,992,311			955,560
Gain on sale of assets		—			—			30,053,977			—
Gain on involuntary conversion of assets		1,422,295			10,782			1,473,842			507,739
Net income (loss) before income taxes		1,985,037			(2,521,677	)		28,800,722			(11,641,688	)
Income tax provision		(12,474	)		(6,544	)		(33,744	)		(16,126	)
Net income (loss)		1,972,563			(2,528,221	)		28,766,978			(11,657,814	)
Less: Net (income) loss attributable to noncontrolling interest		51,094			290,168			(1,317,225	)		1,169,344
Net income (loss) attributable to the Company		2,023,657			(2,238,053	)		27,449,753			(10,488,470	)
Undeclared distributions to preferred stockholders		(1,813,820	)		(2,079,028	)		(5,639,906	)		(5,797,551	)
(Loss) gain on extinguishment of preferred stock		(97,157	)		—			64,518			93,342
Net income (loss) attributable to common stockholders	$	112,680		$	(4,317,081	)	$	21,874,365		$	(16,192,679	)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.01		$	(0.27	)	$	1.24		$	(1.08	)
Diluted	$	0.01		$	(0.27	)	$	1.20		$	(1.08	)
Weighted average number of common shares outstanding
Basic		18,045,365			16,033,610			17,598,153			15,036,920
Diluted		18,559,666			16,033,610			18,209,766			15,036,920

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


											Additional			Unearned			Distributions
	Preferred Stock						Common Stock				Paid-			ESOP			in Excess of			Noncontrolling
	Shares			Par Value			Shares		Par Value		In Capital			Shares			Retained Earnings			Interest			Total
Balances at December 31, 2021		4,059,610		$	40,596			17,441,058	$	174,410	$	177,651,954		$	(3,083,398	)	$	(153,521,704	)	$	(4,758,928	)	$	16,502,930
Net loss		—			—			—		—		—			—			(649,323	)		(161,621	)		(810,944	)
Issuance of common stock		—			—			175,268		1,752		355,760			—			—			—			357,512
Issuance of restricted common stock awards		—			—			15,000		151		30,149			—			—			—			30,300
Amortization of ESOP shares		—			—			—		—		(36,391	)		50,547			—			—			14,156
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Extinguishment of preferred stock		(22,500	)		(225	)		217,775		2,178		9,222			—			—			—			11,175
Balances at March 31, 2022 (unaudited)		4,037,110		$	40,371			17,849,101	$	178,491	$	178,028,889		$	(3,032,851	)	$	(154,171,027	)	$	(4,920,549	)	$	16,123,324
Net income		—			—			—		—		—			—			26,075,419			1,529,940			27,605,359
Issuance of common stock		—			—			37,428		374		64,002			—			—			—			64,376
Conversion of units in Operating Partnership to shares of common stock		—			—			50,000		500		(318,286	)		—			—			317,786			—
Amortization of ESOP shares		—			—			—		—		(30,590	)		50,544			—			—			19,954
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Extinguishment of preferred stock		(27,600	)		(276	)		270,144		2,702		(13,601	)		—			252,401			—			241,226
Balances at June 30, 2022 (unaudited)		4,009,510		$	40,095			18,206,673	$	182,067	$	177,748,609		$	(2,982,307	)	$	(127,843,207	)	$	(3,072,823	)	$	44,072,434
Net income		—			—			—		—		—			—			2,023,657			(51,094	)		1,972,563
Issuance of common stock		—			—			167,390		1,674		344,824			—			—			—			346,498
Conversion of units in Operating Partnership to shares of common stock		—			—			40,687		407		(545,578	)		—			—			545,171			—
Amortization of ESOP shares		—			—			—		—		(41,981	)		50,545			—			—			8,564
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Extinguishment of preferred stock		(36,200	)		(362	)		318,930		3,189		42,950			—			(252,401	)		—			(206,624	)
Balances at September 30, 2022 (unaudited)		3,973,310		$	39,733			18,733,680	$	187,337	$	177,567,019		$	(2,931,762	)	$	(126,071,951	)	$	(2,578,746	)	$	46,211,630

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


											Additional			Unearned			Distributions
	Preferred Stock						Common Stock				Paid-			ESOP			in Excess of			Noncontrolling
	Shares			Par Value			Shares		Par Value		In Capital			Shares			Retained Earnings			Interest			Total
Balances at December 31, 2020		4,364,610		$	43,646			15,023,850	$	150,238	$	180,292,440		$	(3,636,026	)	$	(127,300,230	)	$	(5,348,763	)	$	44,201,305
Net loss		—			—			—		—		—			—			(6,876,085	)		(699,539	)		(7,575,624	)
Issuance of common stock		—			—			136,281		1,363		399,303			—			—			—			400,666
Issuance of restricted common stock awards		—			—			15,000		150		43,950			—			—			—			44,100
Conversion of units in Operating Partnership to shares of common stock		—			—			100		1		(566	)		—			—			565			—
Amortization of ESOP shares		—			—			—		—		(33,853	)		55,939			—			—			22,086
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Balances at March 31, 2021 (unaudited)		4,364,610		$	43,646			15,175,231	$	151,752	$	180,719,469		$	(3,580,087	)	$	(134,176,315	)	$	(6,047,737	)	$	37,110,728
Net loss		—			—			—		—		—			—			(1,374,332	)		(179,638	)		(1,553,970	)
Extinguishment of preferred stock		(220,000	)		(2,200	)		1,542,727		15,427		(106,570	)		—			203,227			—			109,884
Amortization of ESOP shares		—			—			—		—		(33,852	)		55,939			—			—			22,087
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Balances at June 30, 2021 (unaudited)		4,144,610		$	41,446			16,717,958	$	167,179	$	180,597,242		$	(3,524,148	)	$	(135,347,420	)	$	(6,227,375	)	$	35,706,924
Net loss		—			—			—		—		—			—			(2,238,053	)		(290,168	)		(2,528,221	)
Amortization of ESOP shares		—			—			—		—		(34,401	)		55,938			—			—			21,537
Amortization of restricted stock awards		—			—			—		—		18,195			—			—			—			18,195
Balances at September 30, 2021 (unaudited)		4,144,610		$	41,446			16,717,958	$	167,179	$	180,581,036		$	(3,468,210	)	$	(137,585,473	)	$	(6,517,543	)	$	33,218,435

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net Income (loss)	$	28,766,978		$	(11,657,814	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		13,889,621			14,956,888
Amortization of deferred financing costs		923,777			773,060
Amortization of mortgage premium		(18,511	)		(18,511	)
Gain on involuntary conversion of assets		(1,473,842	)		(507,739	)
Unrealized gain on hedging activities		(2,992,311	)		(955,560	)
Loss on early extinguishment of debt		5,944,881			—
Gain on sale of assets		(30,053,977	)		—
Loss (gain) on disposal of assets		491,828			(159,079	)
ESOP and stock - based compensation		895,945			565,061
Changes in assets and liabilities:
Accounts receivable		764,318			(1,731,799	)
Prepaid expenses, inventory and other assets		(580,056	)		(908,306	)
Accounts payable and other accrued liabilities		(12,876,519	)		3,768,633
Advance deposits		525,840			(356,503	)
Accounts receivable - affiliate		—			269,407
Net cash provided by operating activities		4,207,972			4,037,738
Cash flows from investing activities:
Proceeds from sale of hotel properties		52,403,981			—
Improvements and additions to hotel properties		(4,809,289	)		(2,314,102	)
Proceeds from involuntary conversion		1,677,444			507,739
Proceeds from sale of assets		32,932			200,500
Net cash provided by (used in) investing activities		49,305,068			(1,605,863	)
Cash flows from financing activities:
Proceeds from mortgage loans		7,777,475			—
Payments on mortgage loans		(36,548,807	)		(4,195,636	)
Payments on secured notes		(20,000,000	)		—
Payments on unsecured notes		(55,689	)		(677,457	)
Payments of deferred financing costs		(246,714	)		(84,561	)
Net cash used in financing activities		(49,073,735	)		(4,957,654	)
Net increase/(decrease) in cash, cash equivalents and restricted cash		4,439,305			(2,525,779	)
Cash, cash equivalents and restricted cash at the beginning of the period		25,578,537			35,300,546
Cash, cash equivalents and restricted cash at the end of the period	$	30,017,842		$	32,774,767
Supplemental disclosures:
Cash paid during the period for interest	$	20,046,224		$	16,525,596
Cash paid during the period for income taxes	$	39,908		$	20,200
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in accounts payable and accrued liabilities	$	959,859		$	303,139

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS


	September 30, 2022			December 31, 2021
	(unaudited)
ASSETS
Investment in hotel properties, net	$	367,820,745		$	375,885,224
Investment in hotel properties held for sale, net		—			22,870,487
Cash and cash equivalents		23,011,471			13,166,883
Restricted cash		7,006,371			12,411,654
Accounts receivable, net		3,854,267			4,822,187
Loan receivable - affiliate		3,012,450			3,157,172
Prepaid expenses, inventory and other assets		7,332,081			6,894,228
TOTAL ASSETS	$	412,037,385		$	439,207,835
LIABILITIES
Mortgage loans, net	$	322,727,511		$	351,170,883
Secured loan, net		—			19,128,330
Unsecured notes, net		7,554,245			7,609,934
Accounts payable and other accrued liabilities		26,370,295			35,960,293
Advance deposits		2,078,782			1,552,942
Dividends and distributions payable		4,082,472			4,125,351
TOTAL LIABILITIES	$	362,813,305		$	419,547,733

Commitments and contingencies (see Note 6)		—			—

PARTNERS’ CAPITAL
Preferred units, 11,000,000 units authorized;
8.0% Series B cumulative redeemable perpetual preferred unit; 1,464,100 and 1,510,000 units issued and outstanding; aggregate liquidation preference $43,923,000 and $43,035,000, at September 30, 2022 and December 31, 2021, respectively.	$	34,344,086		$	35,420,784
7.875% Series C cumulative redeemable perpetual preferred units, 1,346,110 and 1,384,610 units issued and outstanding; aggregate liquidation preference $40,278,142 and $39,385,669, each at September 30, 2022 and December 31, 2021, respectively.		31,571,779			32,474,760
8.25% Series D cumulative redeemable perpetual preferred units, 1,163,100 and 1,165,000 units issued and outstanding; aggregate liquidation preference $35,070,816 and $33,329,922, each at September 30, 2022 and December 31, 2021, respectively.		27,504,900			27,549,832
General Partner: 196,094 units and 185,748 units issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.		(155,361	)		(469,805	)
Limited Partners: 19,413,229 units and 18,389,030 units issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.		(44,041,324	)		(75,315,469	)
TOTAL PARTNERS’ CAPITAL		49,224,080			19,660,102
TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	412,037,385		$	439,207,835

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE
Rooms department	$	26,110,030		$	25,232,109		$	83,509,003		$	64,771,623
Food and beverage department		6,816,327			4,822,552			20,146,373			9,867,666
Other operating departments		6,286,338			5,438,465			21,080,181			17,872,677
Total revenue		39,212,695			35,493,126			124,735,557			92,511,966
EXPENSES
Hotel operating expenses
Rooms department		6,539,306			6,498,482			19,694,649			16,412,978
Food and beverage department		4,731,787			3,211,213			13,868,567			6,227,964
Other operating departments		2,386,901			2,031,983			7,470,380			6,619,247
Indirect		15,731,938			14,820,517			49,132,884			40,459,670
Total hotel operating expenses		29,389,932			26,562,195			90,166,480			69,719,859
Depreciation and amortization		4,704,806			5,005,203			13,889,621			14,956,888
Loss (gain) on disposal of assets		1,215			(176,299	)		491,828			(159,079	)
Corporate general and administrative		1,827,746			1,315,425			4,774,139			4,146,821
Total operating expenses		35,923,699			32,706,524			109,322,068			88,664,489
NET OPERATING INCOME		3,288,996			2,786,602			15,413,489			3,847,477
Other income (expense)
Interest expense		(4,224,387	)		(5,617,645	)		(15,280,531	)		(17,063,763	)
Interest income		40,581			36,391			92,515			111,299
Loss on early extinguishment of debt		—			—			(5,944,881	)		—
Unrealized gain on hedging activities		1,457,552			262,193			2,992,311			955,560
Gain on sale of assets		—			—			30,053,977			—
Gain on involuntary conversion of assets		1,422,295			10,782			1,473,842			507,739
Net income (loss) before income taxes		1,985,037			(2,521,677	)		28,800,722			(11,641,688	)
Income tax provision		(12,474	)		(6,544	)		(33,744	)		(16,126	)
Net income (loss)		1,972,563			(2,528,221	)		28,766,978			(11,657,814	)
Undeclared distributions to preferred unit holders		(1,813,820	)		(2,079,028	)		(5,639,906	)		(5,797,551	)
(Loss) gain on extinguishment of preferred units		(97,157	)		—			64,518			93,342
Net income (loss) attributable to general and limited partnership unit holders	$	61,586		$	(4,607,249	)	$	23,191,590		$	(17,362,023	)
Net income (loss) attributable per general and limited partner unit:
Basic	$	0.00		$	(0.26	)	$	1.21		$	(1.05	)
Diluted	$	0.00		$	(0.26	)	$	1.20		$	(1.05	)
Weighted average number of general and limited partner units outstanding
Basic		19,501,310			17,446,920			19,116,224			16,457,973
Diluted		19,604,222			17,446,920			19,307,832			16,457,973

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL


	Preferred Units												General Partner					Limited Partner
Balances at December 31, 2021		4,059,610		$	35,420,784		$	32,474,760		$	27,549,832			185,748	$	(469,805	)		18,389,030	$	(75,315,469	)	$	19,660,102
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			1,903		2,227			188,365		343,194			345,421
Extinguishment of preferred units		(22,500	)		(302,602	)		(225,159	)		—			2,178		5,389			215,597		533,548			11,177
Net loss		—			—			—			—			—		(8,109	)		—		(802,835	)		(810,944	)
Balances at March 31, 2022 (unaudited)		4,037,110		$	35,118,182		$	32,249,601		$	27,549,832			189,829	$	(470,116	)		18,792,992	$	(75,223,549	)	$	19,223,950
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			374		391			37,054		38,705			39,096
Extinguishment of preferred units		(27,600	)		(211,117	)		(436,246	)		—			2,701		5,633			267,443		871,778			230,048
Net income		—			—			—			—			—		276,054			—		27,329,305			27,605,359
Balances at June 30, 2022 (unaudited)		4,009,510		$	34,907,065		$	31,813,355		$	27,549,832			192,904	$	(187,856	)		19,097,489	$	(46,965,748	)	$	47,116,648
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			—		3,121			—		309,000			312,121
Extinguishment of preferred units		(36,200	)		(562,979	)		(241,576	)		(44,932	)		3,190		9,467			315,740		644,573			(195,447	)
Net income		—			—			—			—			—		19,725			—		1,952,838			1,972,563
Balances at September 30, 2022 (unaudited)		3,973,310		$	34,344,086		$	31,571,779		$	27,504,900			196,094	$	(155,361	)		19,413,229	$	(44,041,324	)	$	49,224,080

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL


	Preferred Units												General Partner					Limited Partner
	Units			Series B Amounts			Series C Amounts			Series D Amounts			Units		Amounts			Units		Amounts			Total
Balances at December 31, 2020		4,364,610		$	37,766,531		$	36,461,955		$	28,377,509			161,904	$	(258,538	)		16,028,447	$	(54,399,898	)	$	47,947,559
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			—		(441	)		—		(43,704	)		(44,145	)
Issuance of partnership units		—			—			—			—			1,513		4,448			149,768		440,318			444,766
Net loss		—			—			—			—			—		(75,757	)		—		(7,499,867	)		(7,575,624	)
Balances at March 31, 2021 (unaudited)		4,364,610		$	37,766,531		$	36,461,955		$	28,377,509			163,417	$	(330,106	)		16,178,215	$	(61,485,138	)	$	40,790,751
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			—		(251	)		—		(24,795	)		(25,046	)
Extinguishment of preferred units		(220,000	)		(2,345,747	)		(1,993,597	)		(827,677	)		15,427		52,769			1,527,300		5,224,136			109,884
Net loss		—			—			—			—			—		(15,539	)		—		(1,538,431	)		(1,553,970	)
Balances at June 30, 2021 (unaudited)		4,144,610		$	35,420,784		$	34,468,358		$	27,549,832			178,844	$	(292,945	)		17,705,515	$	(57,806,215	)	$	39,339,814
Amortization of restricted unit awards		—			—			—			—			—		182			—		18,013			18,195
Unit based compensation		—			—			—			—			—		(254	)		—		(25,131	)		(25,385	)
Extinguishment of preferred units		—			4,325,747			4,166,707			3,538,849			—		(611,540	)		—		(11,419,763	)		—
Net loss		—			—			—			—			—		(25,283	)		—		(2,502,938	)		(2,528,221	)
Balances at September 30, 2021 (unaudited)		4,144,610		$	39,746,531		$	38,635,065		$	31,088,681			178,844	$	(929,840	)		17,705,515	$	(71,736,034	)	$	36,804,403

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)	$	28,766,978		$	(11,657,814	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		13,889,621			14,956,888
Amortization of deferred financing costs		923,777			773,060
Amortization of mortgage premium		(18,511	)		(18,511	)
Gain on involuntary conversion of assets		(1,473,842	)		(507,739	)
Unrealized gain on hedging activities		(2,992,311	)		(955,560	)
Loss on early extinguishment of debt		5,944,881			—
Gain on sale of assets		(30,053,977	)		—
Loss (gain) on disposal of assets		491,828			(159,079	)
ESOP and unit - based compensation		751,223			404,774
Changes in assets and liabilities:
Accounts receivable		764,318			(1,731,799	)
Prepaid expenses, inventory and other assets		(580,056	)		(908,306	)
Accounts payable and other accrued liabilities		(12,876,519	)		3,768,633
Advance deposits		525,840			(356,503	)
Accounts receivable - affiliate		—			269,407
Net cash provided by operating activities		4,063,250			3,877,451
Cash flows from investing activities:
Proceeds from sale of hotel properties		52,403,981			—
Improvements and additions to hotel properties		(4,809,289	)		(2,314,102	)
ESOP loan payments received		144,722			160,287
Proceeds from involuntary conversion		1,677,444			507,739
Proceeds from sale of assets		32,932			200,500
Net cash provided by (used in) investing activities		49,449,790			(1,445,576	)
Cash flows from financing activities:
Proceeds from mortgage loans		7,777,475			—
Payments on mortgage loans		(36,548,807	)		(4,195,636	)
Payments on secured notes		(20,000,000	)		—
Payments on unsecured notes		(55,689	)		(677,457	)
Payments of deferred financing costs		(246,714	)		(84,561	)
Net cash used in financing activities		(49,073,735	)		(4,957,654	)
Net increase/(decrease) in cash, cash equivalents and restricted cash		4,439,305			(2,525,779	)
Cash, cash equivalents and restricted cash at the beginning of the period		25,578,537			35,300,546
Cash, cash equivalents and restricted cash at the end of the period	$	30,017,842		$	32,774,767
Supplemental disclosures:
Cash paid during the period for interest	$	19,942,876		$	16,299,868
Cash paid during the period for income taxes	$	39,908		$	20,200
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in accounts payable and accrued liabilities	$	959,859		$	303,139

The accompanying notes are an integral part of these consolidated financial statements.

SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

Sotherly Hotels Inc. (the “Company”) is a self-managed and self-administered lodging real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004. The Company historically has focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. The Company’s portfolio, as of September 30, 2022, consisted of investments in ten hotel properties, comprising 2,786 rooms and two hotel commercial condominium units and their associated rental programs. Seven of our hotels operated under the Hilton, DoubleTree, and Hyatt brands, and three are independent hotels.

The Company commenced operations on December 21, 2004 when it completed its initial public offering and thereafter consummated the acquisition of six hotel properties (the “Initial Properties”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, Sotherly Hotels LP (the “Operating Partnership”).

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) of the Operating Partnership, the Company, as general partner, is not entitled to compensation for its services to the Operating Partnership. The Company, as general partner, conducts substantially all of its operations through the Operating Partnership and the Company’s administrative expenses are the obligations of the Operating Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Operating Partnership’s behalf.

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which at September 30, 2022 was approximately 94.7% owned by the Company, and its subsidiaries, lease its hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership. As of September 30, 2022, the MHI TRS Entities engaged Our Town Hospitality, LLC (“Our Town”), an eligible independent management company, to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in these “Notes to Consolidated Financial Statements” to “we”, “us”, “our” and “Sotherly” refer to the Company, its Operating Partnership and its subsidiaries and predecessors, collectively, unless the context otherwise requires or where otherwise indicated.

Overview of Significant Transactions

Significant transactions occurring during the current period and prior fiscal year include the following:

On June 21, 2021, the Company entered into a share exchange agreement with Palogic Value Fund, L.P., a Delaware limited partnership (“Palogic”). Pursuant to that share exchange agreement, Palogic agreed to exchange 100,000 shares of the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 85,000 shares of the Company’s 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 35,000 shares of the Company’s 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”) (the “Palogic Shares”), together with all of Palogic’s rights to receive accrued and unpaid dividends on those Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share (the “Company Shares”). We closed the transaction and issued the Company Shares on June 22, 2021. The Company did not receive any cash proceeds as a result of the exchange of the Palogic Shares for the Company’s common stock, and the Palogic Shares exchanged have been retired and cancelled. The issuance of the shares of the Company’s common stock was made by the Company pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), contained in Section 3(a)(9) of such act on the basis that these offers constituted an exchange with existing holders of the Company’s securities, and no commission or other remuneration was paid to any party for soliciting such exchange.

On December 9, 2021, the Company entered into a share exchange agreement with Palogic. Pursuant to that share exchange agreement, Palogic agreed to exchange 75,000 shares of the Company’s Series C Preferred Stock, together with all of Palogic’s rights to receive accrued and unpaid dividends on those Series C Preferred Stock shares, for 620,919 shares of the Company’s common stock, par value $0.01 per share. Closing of the transaction occurred on December 9, 2021. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On February 10, 2022, Louisville Hotel Associates, LLC, a Delaware limited liability company and an affiliate of the Company, closed on the sale of the Sheraton Louisville Riverside hotel located in Jeffersonville, Indiana to Riverside Hotel, LLC, an Indiana limited liability company, for a purchase price of $11.5 million, including the assumption by the buyer of the mortgage loan on the hotel.

On March 24, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 96,900 shares of its common stock, par value $0.01 per share (the “Common Stock”) for 7,000 shares of the Series B Preferred Stock and 3,000 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on March 25, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On March 31, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 120,875 shares of its Common Stock for 5,900 shares of the Series B Preferred Stock and 6,600 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on March 31, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On April 11, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 116,640 shares of its Common Stock for 4,000 shares of the Series B Preferred Stock and 8,000 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 12, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On April 19, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 153,504 shares of its Common Stock for 5,000 shares of the Series B Preferred Stock and 10,600 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on April 19, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On June 10, 2022, we closed the sale of the DoubleTree by Hilton Raleigh-Brownstone University hotel. The Company used approximately $18.6 million of the net cash proceeds from the sale of the hotel to repay the existing mortgage on the property and approximately $19.8 million of the net cash proceeds to repay a portion of the secured notes (the “Secured Notes”) with KWHP SOHO, LLC and MIG SOHO, LLC (together, the “Investors”) as required by the terms of the Secured Notes. The Company intends to use the remaining net cash proceeds to make any distributions on the Company’s preferred stock that may be required in order to comply with the REIT requirements applicable to the Company related to distributions of taxable income, and for general corporate purposes. The Investors received approximately $19.8 million of the proceeds from the sale of the hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest reserves in the amount of approximately $1.6 million, of which approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.

On June 28, 2022, affiliates of the Company entered into amended loan documents to modify the existing mortgage loan on the Hotel Alba Tampa with the existing lender, Fifth Third Bank. Pursuant to the amended loan documents, the amended mortgage loan: (i) has an increased principal balance of $25.0 million; (ii) includes an extended maturity date of June 30, 2025, which may be further extended for two additional periods of one year each, subject to certain conditions; (iii) bears a floating interest rate of SOFR plus 2.75%, subject to a floor rate of 2.75%; (iv) amortizes on a 25-year schedule and requires payments of monthly interest plus $40,600 monthly amortization payments; and (v) is guaranteed by the Operating Partnership up to $12.5 million, with the guaranty reducing to $6.25 million upon the successful achievement of certain performance milestones.

On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2 million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.02 million was applied toward accrued interest. Concurrent with the cancellation of the Secured Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.

On August 18, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 178,800 shares of its Common Stock for 11,000 shares of the Series B Preferred Stock, 7,100 shares of the Series C Preferred Stock, and 1,900 shares of the Series D Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock. Closing of the transaction occurred on August 18, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

On August 23, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 140,130 shares of its Common Stock for 13,000 shares of the Series B Preferred Stock and 3,200 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on August 24, 2022. The common shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act, as amended, for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was be paid or given directly or indirectly for soliciting such an exchange.

2. Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of Sotherly Hotels Inc., the Operating Partnership, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated financial statements of the Operating Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Operating Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Operating Partnership, pursuant to the terms of the Partnership Agreement.

Variable Interest Entities – The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership and its subsidiaries. All of the Company’s debt is an obligation of the Operating Partnership and its subsidiaries.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on acquisition date and allocated to land, property and equipment and identifiable intangible assets. If substantially all the fair value of the gross assets acquired are concentrated in a single identifiable asset, the asset is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired asset. We capitalize the costs of significant additions and improvements that materially upgrade, increase the value of or extend the useful life of the property. These costs may include refurbishment, renovation, and remodeling expenditures, as well as certain direct internal costs related to construction projects. 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.

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.

The Company assesses the carrying values of its investments in hotel properties whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse permanent changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceeds its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

The Company recognized no impairment losses for the three or nine months ended September 30, 2022 or 2021.

Assets Held For Sale – The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year.

Cash and Cash Equivalents – We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

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.


	As of		As of
	September 30, 2022		September 30, 2021
Cash and cash equivalents	$	23,011,471	$	19,540,790
Restricted cash		7,006,371		13,233,977
Cash, cash equivalents and restricted cash at the end of the period	$	30,017,842	$	32,774,767

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.

Accounts Receivable – Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

Inventories – Inventories, consisting primarily of food and beverages, are stated at the lower of cost or net realizable value, with cost determined on a method that approximates first-in, first-out basis.

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of September 30, 2022 and December 31, 2021 were $253,320 and $294,390, respectively. Amortization expense for the three-month periods ended September 30, 2022 and 2021, totaled $12,282 and $14,871, respectively, and for the nine-month periods ended September 30, 2022 and 2021, totaled $ 36,570 and $44,612, respectively.

Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt and are reflected in mortgage loans, net and unsecured notes, net on the consolidated balance sheets. Deferred offering costs are recorded at cost and consist of offering fees and other costs incurred in advance of issuing equity and are reflected in prepaid expenses, inventory and other assets on the consolidated balance sheets. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheets and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative

instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

We use derivative instruments to add stability to interest expense and to manage our exposure to interest-rate movements. To accomplish this objective, we currently use interest rate caps and an interest rate swaps which act as cash flow hedges and are not designated as hedges. We value our interest-rate caps and interest rate swap at fair value, which we define as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We do not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

Fair Value Measurements –

We classify the inputs used to measure fair value into the following hierarchy:


Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2	Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3	Unobservable inputs for the asset or liability.

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate swap are the only assets or liabilities measured at fair value on a recurring basis, there were no non-recurring assets or liabilities for fair value measurements as of September 30, 2022 and there were two non-recurring assets and no non-recurring liabilities for fair value measurements as of December 31, 2021, respectively):


	Level 1		Level 2			Level 3
December 31, 2021
Interest Rate Cap (1)	$	—	$	47		$	—
Interest Rate Swap (2)	$	—	$	(1,537,319	)	$	—
Mortgage loans (3)	$	—	$	(355,496,444	)	$	—
Investment in Hotel Properties, net(4)	$	—	$	23,000,000		$	—
Investment in Hotel Properties Held for Sale, net(5)	$	—	$	11,063,952		$	—

September 30, 2022
Interest Rate Swaps (2)	$	—	$	1,362,265		$	—
Mortgage loans (3)	$	—	$	(310,999,015	)	$	—

(1)

Interest rate cap, which cap the 1-month LIBOR rate at 3.25%.

(2)

Interest rate swaps, one of which swaps the Loan Rate for a fixed interest rate of 5.237% for the DoubleTree by Hilton Philadelphia Airport mortgage and is valued at September 30, 2022 and December 31, 2021, and the other which swaps the Loan Rate for a fixed rate of 5.576% for the Hotel Alba Tampa mortgage and is valued only at September 30, 2022. Notional amounts of the swaps approximate the declining balance of the loan.

(3)

Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

(4)

Investment in hotel properties, net, a non-recurring asset, is reflected at appraised value as of December 31, 2021.

(5)

Investment in hotel properties held for sale, net, a non-recurring asset, is reflected at net realizable value as of December 31, 2021.

Noncontrolling Interest in Operating Partnership – Certain hotel properties were acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The noncontrolling interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock; and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional

paid-in capital. Net income or net loss is allocated to the noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

Revenue Recognition – Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer’s hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as advanced deposits (or contract liabilities) shown on our consolidated balance sheets and recognized once the performance obligations are satisfied.

Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the gross commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. With respect to the hotel condominium rental programs that the Company operates at the Hyde Resort and Hyde Beach House, the Company has determined that it is an agent and recognizes revenue based on its share of revenue earned under the rental agency agreement.

Certain of the Company’s hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company’s consolidated statements of operations.

The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations.

Lease Revenue – Several of our properties generate revenue from leasing commercial space adjacent to the hotel, the restaurant space within the hotel, apartment units and space on the roofs of our hotels for antennas and satellite dishes. We account for the lease income as revenue from other operating departments within the consolidated statements of operations pursuant to the terms of each lease. Lease revenue was approximately $0.2 million and $0.4 million, for the three months ended September 30, 2022 and 2021, respectively, and approximately $0.9 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.

A schedule of minimum future lease payments receivable for the remaining three and twelve-month periods is as follows:


Remaining three months ending December 31, 2022	$	304,103
December 31, 2023		1,202,326
December 31, 2024		1,199,584
December 31, 2025		1,171,782
December 31, 2026		1,162,514
December 31, 2027 and thereafter		16,419,019
Total	$	21,459,328

Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax. MHI TRS, our wholly owned taxable REIT subsidiary which leases our hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.

We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is required for deferred tax assets if, based on all available evidence, it is “more-likely-than-not” that all or a portion of the deferred tax asset will or will not be realized due to the inability to generate sufficient taxable income in certain financial statement periods. The “more-likely-than-not” analysis means the likelihood of realization is greater than 50%, that we either will or will not be able to fully utilize the deferred tax assets against future taxable income. The net amount of deferred tax assets that are recorded on the financial statements must reflect the tax benefits that are expected to be realized using these criteria. As of September 30, 2022, we have determined that it is more-likely-than-not that we will not be able to fully utilize our deferred tax assets for future tax consequences, therefore a 100% valuation allowance is required. As of September 30, 2022 and December 31, 2021, deferred tax assets each totaled $0, respectively.

As of September 30, 2022 and December 31, 2021, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2022, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2014 through 2021. In addition, as of September 30, 2022, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject, because of open NOL carryforwards, generally include 2014 through 2021.

The Operating Partnership is generally not subject to federal and state income taxes as the unit holders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.

Stock-based Compensation – The Company’s 2013 Long-Term Incentive Plan (the “2013 Plan”), which the Company’s stockholders approved in April 2013, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 750,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.

As of September 30, 2022, under the 2013 Plan, the Company has made cumulative stock awards totaling 745,160 shares, including 680,160 unrestricted shares and 65,000 restricted shares issued to certain executives and employees and to its independent directors. All awards have vested except for: 50,000 shares issued to certain employees, which will vest over the next eight years and 15,000 shares issued to the Company’s independent directors, which will vest by December 31, 2022.

Under the 2013 Plan, the Company was able to issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of September 30, 2022, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended September 30, 2022 and 2021 was $364,692 and $18,195, respectively, and for the nine months ended September 30, 2022 and 2021 was $853,271 and $499,351, respectively.

The Company’s 2022 Long-Term Incentive Plan (the “2022 Plan”), which the Company’s stockholders approved in April 2022, permits the grant of stock options, restricted stock, unrestricted stock and performance share compensation awards to its employees and directors for up to 2,000,000 shares of common stock. All future awards will be made under the 2022 Plan.

Under the 2022 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the value of the award as determined by the Company’s stock price on the date of grant or issuance. As of September 30, 2022, 167,390 performance-based stock awards have been granted.

Additionally, the Company sponsors and maintains an Employee Stock Ownership Plan (“ESOP”) and related trust for the benefit of its eligible employees. We reflect unearned ESOP shares as a reduction of stockholders’ equity. Dividends on unearned ESOP shares, when paid, are considered compensation expense. The Company recognizes compensation expense equal to the fair value of the Company’s ESOP shares during the periods in which they are committed to be released. For the three months ended September 30, 2022 and 2021, the ESOP compensation cost was $13,871 and $21,538, respectively, and for the nine months ended September 30, 2022 and 2021, the ESOP compensation cost was $42,674 and $65,709, respectively. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the differential is recognized as additional paid in capital. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.

Advertising – Advertising costs, including internet advertising, were $559,981, and $473,024 for the three months ended September 30, 2022 and 2021, respectively, and for the nine months ended September 30, 2022 and 2021 was $1,717,399 and $1,248,607, respectively. Advertising costs are expensed as incurred.

Involuntary Conversion of Assets – We record gains or losses on involuntary conversions of assets due to recovered insurance proceeds to the extent the undepreciated cost of a nonmonetary asset differs from the amount of monetary proceeds received. The gain on involuntary conversion of assets, is reflected in the consolidated statements of operations.

Comprehensive Income – Comprehensive income as defined, includes all changes in equity during a period from non-owner sources. We do not have any items of comprehensive income other than net income.

Segment Information – We have determined that our business is conducted in one reportable segment: hotel ownership.

Use of Estimates – The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform. The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023. The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with lenders and the hedging contracts associated with each respective modified borrowing contract. In general, the provision of the update would benefit us by allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and not be considered debt extinguishment. As of September 30, 2022, we may have an additional contract modification as it directly relates to reference rate reform, with the exception of modifications to the mortgages on the Whitehall in Houston, Texas, which changed the reference rate from LIBOR to the New York Prime Rate, and on Hotel Alba Tampa, Tapestry Collection in Tampa, Florida, which changed the reference rate from LIBOR to SOFR. We adopted this ASU as of January 1, 2022.

3. Disposal of Assets

Sheraton Louisville Riverside and DoubleTree by Hilton Raleigh-Brownstone University. On February 10, 2022 and June 10, 2022, we closed on the sale of our hotel properties the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh-Brownstone University, respectively. The results of operations for these two properties are included in our consolidated financial statements through the date of disposal. The following proforma financial information presents the results of operations of the Company and the Operating Partnership for the three and nine month periods ending September 30, 2022 and 2021, respectively, as if disposed of properties, the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh-Brownstone University had taken place on January 1, 2021. The following proforma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations, had the transactions taken place on January 1, 2021:


	Three Months Ended		Three Months Ended			Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2021			September 30, 2022		September 30, 2021
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
Pro forma revenues	$	39,167,592	$	32,800,032		$	121,510,744	$	86,299,201
Pro forma operating expenses	$	35,879,762	$	29,422,159		$	105,700,517	$	80,021,265
Pro forma operating income	$	3,287,830	$	3,377,873		$	15,810,228	$	6,277,936
Pro forma net income (loss)	$	1,971,397	$	(1,934,343	)	$	29,687,162	$	(9,220,147	)
Pro forma income (loss) per basic share	$	0.11	$	(0.12	)	$	1.69	$	(0.61	)
Pro forma income (loss) per diluted share	$	0.11	$	(0.12	)	$	1.63	$	(0.61	)
Pro forma income (loss) per basic unit	$	0.10	$	(0.11	)	$	1.55	$	(0.56	)
Pro forma income (loss) per diluted unit	$	0.10	$	(0.11	)	$	1.54	$	(0.56	)
Basic common shares		18,045,365		16,033,610			17,598,153		15,036,920
Diluted common shares		18,559,666		16,033,610			18,209,766		15,036,920
Basic units		19,501,310		17,446,920			19,116,224		16,457,973
Diluted units		19,604,222		17,446,920			19,307,832		16,457,973

4. Investment in Hotel Properties, Net

Investment in hotel properties, net as of September 30, 2022 and December 31, 2021 consisted of the following:


	September 30, 2022			December 31, 2021

Land and land improvements	$	60,960,202		$	60,395,168
Buildings and improvements		411,765,097			407,310,530
Right of use assets		5,315,391			5,711,607
Furniture, fixtures and equipment		51,034,065			50,505,902
		529,074,755			523,923,207
Less: accumulated depreciation and impairment		(161,254,010	)		(148,037,983	)
Investment in Hotel Properties, Net	$	367,820,745		$	375,885,224


		September 30, 2022		December 31, 2021

Land and land improvements	$		—	$	5,799,197
Buildings and improvements			—		36,115,121
Furniture, fixtures and equipment			—		5,743,949
			—		47,658,267
Less: accumulated depreciation and impairment			—		(24,787,780	)
Investment in Hotel Properties Held for Sale, Net	$		—	$	22,870,487

5. Debt

Mortgage Loans, Net. As of September 30, 2022 and December 31, 2021, we had approximately $322.7 million and approximately $351.2 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.


	Balance Outstanding as of
	September 30,			December 31,			Prepayment	Maturity	Amortization	Interest
Property	2022			2021			Penalties	Date	Provisions	Rate
The DeSoto (1)	$	31,455,182		$	32,148,819		Yes	7/1/2026	25 years	4.25%
DoubleTree by Hilton Jacksonville Riverfront (2)		32,579,284			33,051,316		Yes	7/11/2024	30 years	4.88%
DoubleTree by Hilton Laurel (3)		7,506,331			8,175,215		None	5/5/2023	25 years	5.25%
DoubleTree by Hilton Philadelphia Airport (4)		39,594,638			40,734,077		None	10/31/2023	30 years	LIBOR plus 2.27%
DoubleTree by Hilton Raleigh- Brownstone University (5)		—			18,300,000		Yes	8/1/2022	(5)	LIBOR plus 4.00%
DoubleTree Resort by Hilton Hollywood Beach (6)		53,082,280			54,253,963		(6)	10/1/2025	30 years	4.913%
Georgian Terrace (7)		40,741,040			41,484,732		(7)	6/1/2025	30 years	4.42%
Hotel Alba Tampa, Tapestry Collection by Hilton (8)		24,878,200			17,383,397		None	6/30/2025	(8)	SOFR plus 2.75%
Hotel Ballast Wilmington, Tapestry Collection by Hilton (9)		31,929,681			32,604,948		Yes	1/1/2027	25 years	4.25%
Hyatt Centric Arlington (10)		47,795,793			48,990,136		Yes	10/1/2028	30 years	5.25%
Sheraton Louisville Riverside (11)		—			10,947,366		Yes	12/1/2026	25 years	4.27%
The Whitehall (12)		14,291,879			14,551,671		Yes	2/26/2023	25 years	PRIME plus 1.25%
Total Mortgage Principal Balance	$	323,854,308		$	352,625,640
Deferred financing costs, net		(1,200,533	)		(1,547,004	)
Unamortized premium on loan		73,736			92,247
Total Mortgage Loans, Net	$	322,727,511		$	351,170,883


(1)	The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
(2)	The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
(3)	The note is subject to an exit fee of 0.75% if prepaid on or after February 5, 2023. On July 15, 2021, we entered into a note modification agreement whereby the maturity date was extended from August 5, 2021 to May 5, 2022. On April 28, 2022, we entered into an additional note modification agreement whereby the maturity date was extended from May 5, 2022 to May 5, 2023.
(4)	The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237% through July 31, 2023. Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
(5)	The hotel was sold on June 10, 2022 and the mortgage was repaid in full in connection with that sale.
(6)	With limited exception, the note may not be prepaid prior to June 2025.
(7)	With limited exception, the note may not be prepaid prior to February 2025.
(8)	The note bears a floating interest rate of SOFR plus 2.75% subject to a floor rate of 2.75%; with monthly principal payments of $40,600; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions. On July 11, 2022, we entered into a swap agreement to fix the rate at 5.576%. The swap agreement reflects notional amounts approximate to the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
(9)	The note amortizes on a 25-year schedule after an initial interest-only period of one year and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
(10)	Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
(11)	The hotel was sold on February 10, 2022.
(12)	The note bears a floating interest rate of New York Prime Rate plus 1.25% and is subject to prepayment penalty of 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022. Pre-payment can be made without penalty thereafter.

As of September 30, 2022, we were current on all loan payments on all mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement ("DSCR") covenant under the mortgages secured by The Whitehall and the DoubleTree by Hilton Philadelphia Airport. We have received a waiver of the financial covenants from the lender of the mortgage on The Whitehall mortgage through December 31, 2022. We anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport. If we are unable to obtain a waiver, we may be required to reduce the outstanding balance with a prepayment of approximately $2.3 million.

In 2023, the mortgages on the Whitehall, the DoubleTree by Hilton Laurel and the DoubleTree by Hilton Philadelphia Airport mature. We intend to refinance the mortgages maturing in 2023 at the level of their existing indebtedness or request extensions at existing terms.

Total future mortgage debt maturities for the remaining three and twelve-month periods, without respect to any extension of loan maturity or loan modification after September 30, 2022, were as follows:


Remaining three months ending December 31, 2022	$	1,600,237
December 31, 2023		67,569,526
December 31, 2024		37,701,738
December 31, 2025		115,854,265
December 31, 2026		58,273,521
December 31, 2027 and thereafter		42,855,021
Total future maturities	$	323,854,308

PPP Loans. The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act. Each PPP Loan has a term of two years, which may be extended to five years and carries an interest rate of 1.00%. Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.

On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.

On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.

On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.

As of September 30, 2022, applications for loan forgiveness totaling approximately $5.2 million have been filed and are still pending. At September 30, 2022, the PPP loans had a cumulative balance of approximately $7.6 million.

Secured Notes Financing. On December 31, 2020, we entered into the following agreements with Investors: (i) a Note Purchase Agreement with the Investors; (ii) the Secured Notes; (iii) a Pledge and Security Agreement with KW; (iv) a Board Observer Agreement with KW; and (v) other ancillary agreements. These agreements constitute a transaction whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership.

On June 10, 2022, the Company used the proceeds from the sale of the Doubletree by Hilton Raleigh Brownstone-University hotel to partially repay the Secured Notes. The Investors received approximately $19.8 million of the proceeds from the sale of the hotel, of which approximately $13.3 million was applied toward principal, approximately $6.3 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Additionally, the terms of the Secured Notes allowed for the release of a portion of the interest reserves in the amount of approximately $1.6 million, of which approximately $1.1 million was applied toward principal and approximately $0.5 million was applied toward the exit fee.

On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2 million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.1 million was applied toward accrued interest. Concurrent with the cancellation of the Secured Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.

6. Commitments and Contingencies

Ground, Building, Parking and Land Leases – We lease 2,086 square feet of commercial space next to The DeSoto for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, we signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the fourth of five optional five-year renewal periods expiring October 31, 2026. Rent expense for this operating lease for the three months ended September 30, 2022 and 2021, each totaled $20,983, respectively, and for the nine months ended September 30, 2022 and 2021 each totaled $62,949, respectively.

We lease, as landlord, the entire fourteenth floor of The DeSoto hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

We lease land adjacent to the Hotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009. In May 2014, we extended the agreement for an additional five years. We signed a new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years. The new agreement expires in July 2024, requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for the three months ended September 30, 2022 and 2021, totaled $651 and $641, respectively, and for the nine months ended September 30, 2022 and 2021, totaled $1,958 and $1,924.

We lease approximately 8,500 square feet of commercial office space in Williamsburg, Virginia under an agreement with a ten-year term beginning January 1, 2020. The initial annual rent under the agreement was $218,875, with the rent for each successive annual period increasing by 3.0% over the prior annual period’s rent. The annual rent will be offset by a tenant improvement allowance of $200,000, to be applied against one-half of each monthly rent payment until such time as the tenant improvement allowance is exhausted. Rent expense for the three months ended September 30, 2022 and 2021, each totaled $55,902, respectively, and for the nine months ended September 30, 2022 and 2021, each totaled $167,706, respectively.

We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease. The ground lease requires us to make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement. The initial term of the ground lease expires in 2025 and may be extended for five additional renewal periods of 10 years each. Rent expense for the three months ended September 30, 2022 and 2021, was

$128,415 and $68,284, respectively, and for the nine months ended September 30, 2022 and 2021, totaled $364,123 and $157,757, respectively.

We lease the parking garage and poolside cabanas associated with the Hyde Beach House. The parking and cabana lease requires us to make rental payments of $270,100 per year with increases of 5% every five years and has an initial term that expires in 2034 and which may be extended for four additional renewal periods of 5 years each. Rent expense for the three months ended September 30, 2022 and 2021, each totaled $67,750, respectively, and for the nine months ended September 30, 2022 and 2021, each totaled $203,250, respectively.

We also lease certain storage facilities, furniture and equipment under agreements expiring between October 2021 and June 2026.

A schedule of minimum future lease payments for the following three and twelve-month periods is as follows:


For the three months ending December 31, 2022	$	199,957
December 31, 2023		671,883
December 31, 2024		663,585
December 31, 2025		663,877
December 31, 2026		656,534
December 31, 2027 and thereafter		14,097,680
Total	$	16,953,516

Employment Agreements - The Company has entered into various employment contracts with employees that could result in obligations to the Company in the event of a change in control or termination without cause.

Management Agreements – As of September 30, 2022, our ten wholly-owned hotels, and our two condo-hotel rental programs, operated under management agreements with Our Town (see Note 9). The management agreements expire on March 31, 2035 and may be extended for up to two additional periods of five years each, subject to the approval of both parties. Each of the individual hotel management agreements may be terminated earlier than the stated term upon the sale of the hotel covered by the respective management agreement, in which case we may incur early termination fees.

Franchise Agreements – As of September 30, 2022, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently in force expire between October 2024 and March 2038. Each of our franchise agreements provides for early termination fees in the event the agreement is terminated before the stated term.

Restricted Cash Reserves – Each month, we are required to escrow with the lenders on the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.

ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016. The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036. At September 30, 2022, the balance on the loan was approximately $3.0 million leaving capacity for additional borrowing of approximately $2.0 million under the commitment.

Litigation –We are involved in routine litigation arising out of the ordinary course of business, all of which we expect to be covered by insurance and we believe it is not reasonably possible such matters will have a material adverse impact on our financial condition or results of operations or cash flows.

7. Preferred Stock and Units

Preferred Stock - The Company is authorized to issue up to 11,000,000 shares of preferred stock. The following table sets forth our Cumulative Redeemable Perpetual Preferred Stock by series:


	Per					Number of Shares				Quarterly
	Annum			Liquidation		Issued and Outstanding as of				Distributions
Preferred Stock - Series	Rate			Preference		September 30, 2022		December 31, 2021		Per Share
Series B Preferred Stock		8.000	%	$	25.00		1,464,100		1,510,000	$	0.500000
Series C Preferred Stock		7.875	%	$	25.00		1,346,110		1,384,610	$	0.492188
Series D Preferred Stock		8.250	%	$	25.00		1,163,100		1,165,000	$	0.515625

The Company is obligated to pay cumulative cash distributions on the preferred stock at rates in the above table per annum of the $25.00 liquidation preference per share. Holders of the Company’s preferred stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions. The preferred stock is not redeemable by the holders, has no maturity date and is not convertible into any other security of the Company or its affiliates. As previously announced, the record dates for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock that were to be paid April 15, 2020 to shareholders of record as of March 31, 2020, have each been declared and the record date and the payment of dividends on all classes of the Company’s preferred stock has been deferred.

On March 17, 2020, the Company announced that it was deferring payment of Sotherly’s previously announced declared distributions for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020. No distributions have been declared for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending September 30, 2022.

The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through September 30, 2022, are $8,052,550, $7,287,931 and $6,596,958, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2022, the undeclared cumulative preferred dividends were approximately $19.9 million and the declared unpaid preferred dividends are approximately $2.0 million.

Preferred Units - The Company is the holder of the Operating Partnership’s preferred partnership units and is entitled to receive distributions when authorized by the general partner of the Operating Partnership out of assets legally available for the payment of distributions. The following table sets forth our Cumulative Redeemable Perpetual Preferred Units by series:


	Per					Number of Units				Quarterly
	Annum			Liquidation		Issued and Outstanding as of				Distributions
Preferred Units - Series	Rate			Preference		September 30, 2022		December 31, 2021		Per Unit
Series B Preferred Units		8.000	%	$	25.00		1,464,100		1,510,000	$	0.500000
Series C Preferred Units		7.875	%	$	25.00		1,346,110		1,384,610	$	0.492188
Series D Preferred Units		8.250	%	$	25.00		1,163,100		1,165,000	$	0.515625

The Company pays cumulative cash distributions on the preferred units at rates in the above table per annum of the $25.00 liquidation preference per unit. The Company, which is the holder of the Operating Partnership’s preferred units, is entitled to receive distributions when authorized by the Operating Partnership’s general partner out of assets legally available for the payment of distributions. The preferred units are not redeemable by the holder, have no maturity date and are not convertible into any other security of the Operating Partnership or its affiliates. As previously announced, the record dates for the dividends on the Operating Partnership’s Series B Preferred Units, Series C Preferred Units, and Series D Preferred Units that were to be paid April 15, 2020, to unitholders of record as of March 31, 2020, have each been declared and the record date and the payment of dividends on all classes of the Operating Partnership’s preferred units has been deferred.

The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through September 30, 2022, is $8,052,550, $7,287,931 and $6,596,958, respectively. Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared. As of September 30, 2022, the undeclared cumulative preferred dividends were approximately $19.9 million and the declared unpaid preferred dividends were approximately $2.0 million.

8. Common Stock and Units

Common Stock – As of June 30, 2022, the Company was authorized to issue up to 69,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.

The following is a schedule of issuances, since January 1, 2021, of the Company’s common stock and related units of the Operating Partnership:

On February 4, 2021, one holder of units in the Operating Partnership redeemed 100 units for an equivalent number of shares in the Company’s common stock.

On February 4, 2021, the Company was issued 136,281 units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On February 4, 2021, the Company was issued 15,000 units in the Operating Partnership and awarded an equivalent number of shares of restricted stock to its independent directors.

On June 21, 2021, the Company entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 100,000 shares of the Company’s Series B Preferred Stock, 85,000 shares of the Company’s Series C Preferred Stock, and 35,000 shares of the Company’s Series D Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 1,542,727 shares of the Company’s common stock. We closed the transaction and issued the common stock on June 22, 2021.

On December 3, 2021, the Company entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 10,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 69,500 shares of the Company’s common stock. We closed the transaction and issued the common stock on December 9, 2021.

On December 9, 2021, the Company entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 75,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 620,919 shares of the Company’s common stock. We closed the transaction and issued the common stock on December 9, 2021.

On December 16, 2021, one holder of units in the Operating Partnership redeemed 32,681 units for an equivalent number of shares in the Company’s common stock.

On January 21, 2022 and February 15, 2022, the Company was issued 175,268 units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On January 21, 2022, the Company was issued 15,000 units in the Operating Partnership and awarded an equivalent number of shares of restricted stock to its independent directors.

On March 24, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 7,000 shares of the Company’s Series B Preferred Stock and 3,000 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 96,900 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 25, 2022.

On March 31, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 5,900 shares of the Company’s Series B Preferred Stock and 6,600 shares of the Company’s Series C Preferred Stock, together with all of the rights to receive accrued and unpaid dividends on those preferred shares, for 120,875 shares of the Company’s common stock. We closed the transaction and issued the common stock on March 31, 2022.

On May 19, 2022, one holder of units in the Operating Partnership converted 50,000 units for an equivalent number of shares in the Company’s common stock.

On May 23, 2022, the Company was issued 37,428 units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On July 1, 2022, one holder of units in the Operating Partnership converted 40,687 units for an equivalent number of shares in the Company’s common stock.

On July 21, 2022, the Company was issued 167,390 units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

As of September 30, 2022 and December 31, 2021, the Company had 18,733,680 and 17,441,058 shares of common stock outstanding, respectively.

Operating Partnership Units – Holders of Operating Partnership units, other than the Company as general partner, have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.

Since January 1, 2021, there have been no issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.

As of September 30, 2022 and December 31, 2021, the total number of Operating Partnership units outstanding was 19,776,713 and 18,574,778, respectively.

As of September 30, 2022 and December 31, 2021, the total number of outstanding Operating Partnership units not owned by the Company was 1,043,033 and 1,133,720, respectively, with a fair market value of approximately $2.0 million and $2.4 million, respectively, based on the price per share of the common stock on such respective dates.

As of September 30, 2022, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of approximately $2.1.

9. Related Party Transactions

Our Town Hospitality. Our Town is currently the management company for each of our ten wholly owned hotels, as well as the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. Prior to February 25, 2022, our Town was a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”). As of September 30, 2022, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 86.0% and 7.0%, respectively, of the total outstanding ownership interests in Our Town. The following is a summary of the transactions with Our Town:

Accounts Receivable – At September 30, 2022 and December 31, 2021, we were due approximately $0.2 million and $0.2 million, respectively, from Our Town.

Accounts Payable – At September 30, 2022 and December 31, 2021, we owed Our Town approximately $1.5 million and $1.0 million, respectively.

Management Agreements – On September 6, 2019, the Company entered into a master agreement with Newport and Our Town related to the management of ten of our hotels. On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements for the management of those ten of our hotels. On April 1, 2020, Our Town became the manager of our DoubleTree Resort by Hilton Hollywood Beach hotel, as well as the manager for our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. On November 15, 2020, Our Town became the manager of our Hyatt Centric Arlington hotel. The hotel management agreements for each of our ten wholly-owned hotels and the two rental programs are referred to as, individually an “OTH Hotel Management Agreement” and, together the “OTH Hotel Management Agreements”. The term of the OTH Hotel Management Agreements extends through March 31, 2035, and may be extended for two periods of five years each.

The OTH Master Agreement provides for an adjustment to the fees payable by us under the OTH Hotel Management Agreements in the event the net operating income of Our Town falls below $250,000 for any calendar year beginning on or after January 1, 2021. The OTH Master Agreement expires on March 31, 2035 but shall be extended beyond 2035 for such additional periods as an OTH Hotel Management Agreement remains in effect. The base management fees for each hotel under management

with Our Town is 2.50%. For any new individual hotel management agreements, Our Town will receive a base management fee of 2.00% of gross revenues for the first full year from the commencement date through the anniversary date, 2.25% of gross revenues the second full year, and 2.50% of gross revenues for every year thereafter.

Base management and administrative fees earned by Our Town for our properties were approximately $1.0 million and $0.9 million, for the three months ended September 30, 2022 and 2021, respectively, and for the nine months ended September 30, 2022 and 2022, were approximately $3.1 million and $2.5 million, respectively.

Each OTH Hotel Management Agreement sets an incentive management fee equal to 10.0% of the amount by which gross operating profit, as defined in the relevant management agreement, for a given year exceeds the budgeted gross operating profit for such year; provided, however, that the incentive management fee payable in respect of any such year shall not exceed 0.25% of the gross revenues of the hotel included in such calculation. Incentive management fees earned for the three months ending September 30, 2022 and 2021, were $(42,656) and $(58,652), respectively and for the nine months ending September 30, 2022, were $272,017 and $273,942, respectively.

Each OTH Hotel Management Agreement provides for the payment of a termination fee upon the sale of the hotel equal to the lesser of the management fee paid with respect to the prior twelve months or the management fees paid for the number of months prior to the closing date of the hotel sale equal to the number of months remaining on the current term of the management agreement. Coincident with the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone – University, Our Town was due $260,272 in termination fees, which amount has been paid.

Sublease – On December 13, 2019, we entered into a sublease agreement with Our Town pursuant to which Our Town subleases 2,245 square feet of office space from Sotherly for a period of 5 years, with a 5 year renewal subject to approval by Sotherly, on terms and conditions similar to the terms of the prime lease entered into by Sotherly and the third-party owner of the property. Lease payments due to the Company were $235,352 and $143,893, as of September 30, 2022 and 2021, respectively.

Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town and who work exclusively for our properties and elect to participate in Our Town’s self-insured plan. Gross premiums for employee medical benefits paid by the Company (before offset of employee co-payments) were approximately $0.8 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and for the nine months ended September 30, 2022 and 2021, were approximately $2.6 million and $2.0 million, respectively.

Others. We employed Ashley S. Kirkland, the daughter of our Chairman, as Corporate Counsel and Compliance Officer until her departure in January, 2022 and continue to employ Robert E. Kirkland IV, her husband, as our General Counsel. We also employ Andrew M. Sims Jr., the son of our Chairman, as Vice President – Operations & Investor Relations. Total compensation for all three individuals, including salary and benefits, for the three months ended September 30, 2022 and 2021, totaled $125,935 and $139,241, respectively, and for the nine months ended September 30, 2022 and 2021, were $379,898 and $352,225, respectively.

10. Retirement Plans

401(k) Plan - We maintain a 401(k) plan for qualified employees which is subject to “safe harbor” provisions. Those provisions include a matching employer contribution consisting of 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. In addition, all employer matching funds vest immediately. We ceased making matching employer contributions effective May 16, 2020 and reinstated them in January 2022. Contributions to the plan totaled $16,500 and $0, for the three months ended September 30, 2022 and 2021, respectively, and for the nine months ended September 30, 2022 and 2021, were $68,143 and $0, respectively.

Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016, which is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees. The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company. The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan.

Between January 3, 2017 and February 28, 2017, the Company’s ESOP had purchased 682,500 shares of the Company’s common stock in the open market at a cost of approximately $4.9 million. Shares purchased by the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company. The share allocations will be accounted for at fair value at the date of allocation.

A total of 268,836 shares with a fair value of $505,411 remained allocated or committed to be released from the suspense account, as of September 30, 2022. We recognized as compensation cost $42,674 and $65,710, during the nine months ended September 30, 2022 and 2021, respectively. The remaining 410,467 unallocated shares have an approximate fair value of $771,678, as of September 30, 2022. As of September 30, 2022, the ESOP held a total of 247,605 allocated shares, 21,231 committed-to-be-released shares and 410,467 suspense shares. Dividends on allocated and unallocated shares are used to pay down the ESOP loan from the Operating Partnership.

The share allocations are accounted for at fair value on the date of allocation as follows:


	September 30, 2022				December 31, 2021
	Number of Shares		Fair Value		Number of Shares		Fair Value
Allocated shares		247,605	$	465,497		247,606	$	517,496
Committed to be released shares		21,231		39,914		—		—
Total Allocated and Committed-to-be-Released		268,836	$	505,411		247,606	$	517,496

Unallocated shares		410,467		771,678		431,697		902,247

Total ESOP Shares		679,303	$	1,277,089		679,303	$	1,419,743

11. Indirect Hotel Operating Expenses

Indirect hotel operating expenses consists of the following expenses incurred by the hotels:


	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Sales and marketing	$	3,729,867	$	3,183,928	$	11,390,258	$	8,216,303
General and administrative		3,396,247		2,918,733		10,186,922		7,855,377
Repairs and maintenance		2,057,298		2,024,620		6,519,845		5,328,521
Utilities		1,566,216		1,486,370		4,308,465		3,938,574
Property taxes		939,951		1,651,190		3,973,027		4,961,101
Management fees, including incentive		949,926		860,380		3,327,267		2,739,246
Franchise fees		960,246		929,405		3,126,021		2,395,964
Insurance		1,128,090		846,241		3,121,241		2,551,334
Information and telecommunications		809,593		782,573		2,598,399		2,112,944
Other		194,504		137,077		581,439		360,306
Total indirect hotel operating expenses	$	15,731,938	$	14,820,517	$	49,132,884	$	40,459,670

12. Income Taxes

The components of the income tax provision for the three and nine months ended September 30, 2022 and 2021 are as follows:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Current:
Federal	$	—		$	—		$	—		$	—
State		12,474			6,544			33,744			16,126
		12,474			6,544			33,744			16,126
Deferred:
Federal		(544,356	)		(611,958	)		(572,014	)		(2,665,498	)
State		(62,819	)		(203,734	)		(82,652	)		(633,367	)
Subtotals		(607,175	)		(815,692	)		(654,666	)		(3,298,865	)
Change in deferred tax valuation allowance		607,175			815,692			654,666			3,298,865
		—			—			—			—
	$	12,474		$	6,544		$	33,744		$	16,126


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax provision (benefit)	$	416,858		$	(529,425	)	$	6,048,152		$	(2,444,754	)
Effect of non-taxable REIT loss		(354,039	)		733,159			(5,965,500	)		3,078,121
State income tax provision (benefit)		(50,345	)		(197,190	)		(48,908	)		(617,241	)
	$	12,474		$	6,544		$	33,744		$	16,126

13. Income (Loss) Per Share and Per Unit

Income (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 or loss would also be added back to net income or loss. The shares of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are not convertible into or exchangeable for any other property or securities of the Company, except upon the occurrence of a change of control, and have been excluded from the diluted earnings per share calculation as there would be no impact on the current controlling stockholders. The non-committed, unearned ESOP shares are treated as reducing the number of issued and outstanding common shares and similarly reducing the weighted average number of common shares outstanding. The unallocated ESOP shares have been excluded in the weighted average for the basic and diluted earnings per share computation. The computation of basic and diluted net income (loss) per share is presented below:


	Three Months Ended			Three Months Ended				Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021				September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)				(unaudited)			(unaudited)
Numerator
Net income (loss)	$	1,972,563		$	(2,528,221	)		$	28,766,978		$	(11,657,814	)
Less: Net (income)allocated to non-vested share awards		(6,597	)		—		(1)		(94,522	)		—		(1)
Net (income) loss attributable to non-controlling interest		51,094			290,168				(1,317,225	)		1,169,344
Declared and undeclared distributions to preferred stockholders		(1,813,820	)		(2,079,028	)			(5,639,906	)		(5,797,551	)
Gain on extinguishment of preferred stock		(97,157	)		—				64,518			93,342
Net income (loss) attributable to common stockholders	$	106,083		$	(4,317,081	)		$	21,779,843		$	(16,192,679	)


Denominator
Weighted average number common shares outstanding for basic EPS computation		18,045,365			16,033,610				17,598,153			15,036,920
Effect of dilutive securities:
Unvested restricted shares		65,000			—		(1)		63,901			—		(1)
Stock compensation awards unissued		37,912			—		(1)		129,002			—		(1)
Unearned ESOP shares		411,389			—		(1)		418,710			—		(1)
Weighted average number common and common equivalent shares outstanding for diluted EPS computation		18,559,666			16,033,610				18,209,766			15,036,920

Basic net income (loss) per common share:
Undistributed income (loss)	$	0.01		$	(0.27	)		$	1.24		$	(1.08	)
Allocation of (income) loss to non-vested share awards		—			—				—			—
Total basic	$	0.01		$	(0.27	)		$	1.24		$	(1.08	)

Diluted net income (loss) per common share:
Undistributed income (loss)	$	0.01		$	(0.27	)		$	1.20		$	(1.08	)
Allocation of (income) loss to non-vested share awards		—			—				—			—
Total diluted	$	0.01		$	(0.27	)		$	1.20		$	(1.08	)

(1) Item is excluded in the calculation of diluted EPS due to its antidilutive effect.

The accounting for unvested share-based payment awards included in the calculation of earnings per share changed. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are now participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees

and directors are considered participating securities, and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in the basic and diluted weighted average shares outstanding calculation.

Income (Loss) Per Unit – The computation of basic and diluted net income (loss) per unit is presented below:


	Three Months Ended			Three Months Ended				Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021				September 30, 2022			September 30, 2021
	(unaudited)			(unaudited)				(unaudited)			(unaudited)
Numerator
Net income (loss)	$	1,972,563		$	(2,528,221	)		$	28,766,978		$	(11,657,814	)
Less: Net (income)allocated to non-vested unit awards		(6,597	)		—		(1)		(94,522	)		—		(1)
Declared and undeclared distributions to preferred unitholders		(1,813,820	)		(2,079,028	)			(5,639,906	)		(5,797,551	)
Gain on extinguishment of preferred units		(97,157	)		—				64,518			93,342
Net income (loss) attributable to unitholders	$	54,989		$	(4,607,249	)		$	23,097,068		$	(17,362,023	)


Denominator
Weighted average number of units outstanding for basic EPU computation		19,501,310			17,446,920				19,116,224			16,457,973
Effect of dilutive securities:
Unvested restricted units		37,912			—		(1)		129,002			—		(1)
Unit compensation awards unissued		65,000			—		(1)		62,606			—		(1)
Weighted average number of equivalent units outstanding for diluted EPU computation		19,604,222			17,446,920				19,307,832			16,457,973

Basic net income (loss) per unit:
Undistributed income (loss)	$	0.00		$	(0.26	)		$	1.21		$	(1.05	)
Allocation of (income) loss to non-vested unit awards		—			—				—			—
Total basic	$	0.00		$	(0.26	)		$	1.21		$	(1.05	)

Diluted net income (loss) per unit:
Undistributed income (loss)	$	0.00		$	(0.26	)		$	1.20		$	(1.05	)
Allocation of (income) loss to non-vested unit awards		—			—				—			—
Total diluted	$	0.00		$	(0.26	)		$	1.20		$	(1.05	)

(1) Item is excluded in the calculation of diluted EPU due to its antidilutive effect.

14. Subsequent Events

On October 31, 2022, the board of directors authorized the deferral of payment of the quarterly distribution for the period ending December 31, 2022, for each of the Company’s Series B, Series C, and Series D Preferred Stock (and Preferred Units).

On November 1, 2022, one holder of units in the Operating Partnership redeemed 217,845 units for an equivalent number of shares in the Company's common stock.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 current strategies, expectations, and future plans, 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 the Company’s future operations, performance and prospects include, but are not limited to:

•

national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;

•

risks associated with the hotel industry, including competition and new supply of hotel rooms, increases in wages, energy costs and other operating costs;

•

risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, and, as necessary, to refinance or seek an extension of the maturity of such indebtedness or further modification of such debt agreements;

•

risks associated with adverse weather conditions, including hurricanes;

•

impacts on the travel industry from pandemic diseases, including COVID-19;

•

the availability and terms of financing and capital and the general volatility of the securities markets;

•

management and performance of our hotels;

•

risks associated with maintaining our system of internal controls;

•

risks associated with the conflicts of interest of the Company’s officers and directors;

•

risks associated with redevelopment and repositioning projects, including delays and cost overruns;

•

supply and demand for hotel rooms in our current and proposed market areas;

•

risks associated with our ability to maintain our franchise agreements with our third party franchisors;

•

our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;

•

our ability to successfully expand into new markets;

•

legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);

•

the Company’s ability to maintain its qualification as a REIT; and

•

our ability to maintain adequate insurance coverage.

Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K.

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.

Overview

Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 and focused on the acquisition, renovation, up-branding and repositioning of upscale to upper-upscale full-service hotels in the southern United States. Sotherly may also opportunistically acquire hotels throughout the United States. Substantially all of the assets of Sotherly Hotels Inc. are held by, and all of its operations are conducted through, Sotherly Hotels LP. We commenced operations in December 2004 when we completed our initial public offering and thereafter consummated the acquisition of the Initial Properties.

Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels, comprising 2,786 rooms, as well as interests in two condominium hotels and their associated rental programs. The Company owns hotels that operate under well-known brands such as DoubleTree by Hilton, Tapestry Collection by Hilton, and Hyatt Centric, as well as independent hotels. We sometimes refer to our independent and soft-branded properties as our collection of boutique hotels. As of September 30, 2022, our portfolio consisted of the following hotel properties:


	Number
Property	of Rooms			Location	Date of Acquisition	Chain/Class Designation
Wholly-owned Hotels
The DeSoto		246		Savannah, GA	December 21, 2004	Upper Upscale(1)
DoubleTree by Hilton Jacksonville Riverfront		293		Jacksonville, FL	July 22, 2005	Upscale
DoubleTree by Hilton Laurel		208		Laurel, MD	December 21, 2004	Upscale
DoubleTree by Hilton Philadelphia Airport		331		Philadelphia, PA	December 21, 2004	Upscale
DoubleTree Resort by Hilton Hollywood Beach		311		Hollywood, FL	August 9, 2007	Upscale
Georgian Terrace		326		Atlanta, GA	March 27, 2014	Upper Upscale(1)
Hotel Alba Tampa, Tapestry Collection by Hilton		222		Tampa, FL	October 29, 2007	Upscale
Hotel Ballast Wilmington, Tapestry Collection by Hilton		272		Wilmington, NC	December 21, 2004	Upscale
Hyatt Centric Arlington		318		Arlington, VA	March 1, 2018	Upper Upscale
The Whitehall		259		Houston, TX	November 13, 2013	Upper Upscale(1)
Hotel Rooms Subtotal		2,786

Condominium Hotels
Hyde Resort & Residences		67	(2)	Hollywood, FL	January 30, 2017	Luxury(1)
Hyde Beach House Resort & Residences		85	(2)	Hollywood, FL	September 27, 2019	Luxury(1)
Total Hotel & Participating Condominium Hotel Rooms		2,938

(1)

Operated as an independent hotel.

(2)

Reflects only those condominium units that were participating in the rental program, as of September 30, 2022. At any given time, some portion of the units participating in our rental program may be occupied by the unit owner(s) and unavailable for rental to hotel guests. We sometimes refer to each participating condominium unit as a “room.”

We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 94.7% interest in our Operating Partnership, as of the date of this report, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.

To qualify as a REIT, neither the Company nor the Operating Partnership can operate our hotels. Therefore, our wholly-owned hotel properties are leased to our MHI TRS Entities, which are indirect wholly-owned subsidiaries of the Operating Partnership. Our MHI TRS Entities then engage eligible independent hotel management companies to operate the hotels under a management agreement. Our MHI TRS Entities have engaged Our Town to manage our hotels. Our MHI TRS Entities, and their parent, MHI Hospitality TRS Holding, Inc., are consolidated into each of our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Secured Note Financing

On December 31, 2020, we closed a transaction with KW, as collateral agent and a note investor, and MIG, as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership. We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements.

On June 29, 2022, the Company used the proceeds from the refinance of the Hotel Alba Tampa, along with approximately $0.2 million of cash on hand as well as the balance of the interest reserve under the Secured Notes of approximately $0.5 million, to satisfy and pay in full the Secured Notes. The Investors received approximately $8.3 million in satisfaction of the Secured Notes, of which approximately $5.6 million was applied toward principal, approximately $2.6 million was applied toward the exit fee owed under the Secured Notes, and approximately $0.2 million was applied toward accrued interest. Concurrent with the cancellation of the Secured Notes, the following agreements were also terminated in accordance with their terms: (i) Note Purchase Agreement; (ii) Pledge and Security Agreement; (iii) Board Observer Agreement; and (iv) other related ancillary agreements.

Key Operating Metrics

In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

•

Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

•

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

•

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

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities, room supplies, franchise fees, management fees, credit card commissions and reservations expense), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.

When calculating composite portfolio metrics, we include available rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences that participate in our rental programs and are not reserved for owner-occupancy.

We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “Non-GAAP Financial Measures.”

Results of Operations

The following tables illustrate the key operating metrics for the three and nine months ended September 30, 2022, 2021 and 2019, respectively, for the Company’s wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms of the Hyde Resort & Residences and the Hyde Beach House Resort & Residences. The ten wholly-owned properties in the portfolio that were under the Company’s control during the three and nine months ended September 30, 2022 and the corresponding periods in 2021 and 2019 are considered same-store properties (“same-store” portfolio metrics). Accordingly, the same-store data does not reflect the performance of the Sheraton Louisville Riverside which was sold in February 2022, or the DoubleTree by Hilton Raleigh-Brownstone University which was sold in June 2022. The composite portfolio metrics represent the Company’s wholly-owned properties and the participating condominium hotel rooms at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences, during the three and nine months ended September 30, 2022 and the corresponding periods in 2021 and 2019. The same-store (composite) portfolio metrics includes all properties with the exceptions of the Sheraton Louisville Riverside, DoubleTree by Hilton Raleigh-Brownstone University and the Hyde Beach House Resort & Residences, during the three and nine months ended September 30, 2022, and the corresponding periods in 2021and 2019.

Given the drastic and unprecedented impact of the COVID-19 pandemic on our operating results in 2021 and 2020, we believe that a comparison of our results through the three and nine month periods ending September 2022, to both the September 2021 and September 2019 comparable periods in this overview section, allows for a better understanding of the full impact of the COVID-19 pandemic and the progress of our recovery.


	Three Months Ended			Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September30, 2019			September 30, 2022			September 30, 2021			September 30, 2019
Actual Portfolio Metrics
Occupancy %		63.0	%		57.5	%		70.6	%		61.7	%		52.5	%		72.7	%
ADR	$	161.62		$	151.07		$	142.75		$	170.13		$	143.27		$	157.36
RevPAR	$	101.87		$	86.90		$	100.75		$	105.00		$	75.18		$	114.40
Same-Store Portfolio Metrics
Occupancy %		63.0	%		57.4	%		69.6	%		62.3	%		52.8	%		72.6	%
ADR	$	161.62		$	155.97		$	145.87		$	171.32		$	148.05		$	161.10
RevPAR	$	101.87		$	89.59		$	101.48		$	106.74		$	78.15		$	116.97
Composite Portfolio Metrics
Occupancy %		62.0	%		56.3	%		68.8	%		61.2	%		52.4	%		71.7	%
ADR	$	168.03		$	160.13		$	145.51		$	181.72		$	160.00		$	162.69
RevPAR	$	104.19		$	90.16		$	100.06		$	111.16		$	83.78		$	116.57
Same-Store (Composite) Portfolio Metrics
Occupancy %		62.7	%		57.0	%		67.6	%		62.2	%		53.0	%		71.4	%
ADR	$	164.97		$	161.57		$	148.93		$	177.88		$	158.96		$	166.95
RevPAR	$	103.42		$	92.12		$	100.66		$	110.65		$	84.23		$	119.27

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Revenue. Total revenue for the three months ended September 30, 2022 increased approximately $3.7 million, or 10.5%, to approximately $39.2 million compared to total revenue of approximately $35.5 million for the three months ended September 30, 2021. There was an aggregate increase in total revenue of approximately $6.6 million from 9 of our properties, offset by decreases of approximately $0.2 million, at the our DoubleTree by Hilton Philadelphia Airport, Philadelphia, Georgian Terrace, Atlanta and Hyde Beach House & Resort, Hollywood and a decrease of approximately $2.7 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. There were significant increases in demand primarily driven by the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel compared to the same period in the prior year.

Room revenue increased approximately $0.9 million, or 3.5%, to approximately $26.1 million for the three months ended September 30, 2022 compared to room revenue of approximately $25.2 million for the three months ended September 30, 2021. The increase in room revenue for the three months ended September 30, 2022 resulted from an aggregate increase of approximately $3.5 million from ten of our properties, offset by a decrease of approximately $2.6 million as a result of the sale of the Sheraton Louisville

Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The improvement was mainly due to an increase in occupancy from 56.3% to 62.0% coupled with an increase in ADR from $160.13 to $168.03 and an increase in RevPAR from $90.16 to $104.19. These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel.

Food and beverage revenues increased approximately $2.0 million, or 41.3%, to approximately $6.8 million for the three months ended September 30, 2022 compared to food and beverage revenues of approximately $4.8 million for the three months ended September 30, 2021. The increase in food and beverage revenues for the three months ended September 30, 2022, resulted from an aggregate increase of approximately $2.3 million from ten of our properties, offset by the loss of food and beverage revenue of approximately $0.3 million during the quarter following the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Revenue from other operating departments increased approximately $0.9 million, or 15.6%, to approximately $6.3 million for the three months ended September 30, 2022 compared to revenue from other operating departments of approximately $5.4 million for the three months ended September 30, 2021. There was an aggregate increase in revenue from other operating departments of approximately $1.0 million from 10 of our properties, offset by a decrease of approximately $0.1 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, increased approximately $2.8 million, or 10.6%, to approximately $29.4 million for the three months ended September 30, 2022, compared to total hotel operating expenses of approximately $26.6 million for the three months ended September 30, 2021. The increase in hotel operating expenses for the three months ended September 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $16.1 million, offset by decreases of approximately $2.3 million as a result of the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. This increase in hotel operating expenses was directly related to the increase in revenue.

Rooms expense for the three months ended September 30, 2022 increased slightly by approximately 0.6%, to approximately $6.5 million, compared to rooms expense for the three months ended September 30, 2021 of approximately $6.5 million. The increase in rooms expense for the three months ended September 30, 2022, resulted from an aggregate increase of approximately $0.8 million from all of our properties, offset by a decrease of approximately $0.8 million related to the sale of our properties in Raleigh, North Carolina and Jeffersonville, Indiana.

Food and beverage expenses for the three months ended September 30, 2022 increased approximately $1.5 million, or 47.4%, to approximately $4.7 million, compared to food and beverage expenses of approximately $3.2 million, for the three months ended September 30, 2021. The net increase in food and beverage expenses for the three months ended September 30, 2022 resulted from an aggregate increase of approximately $1.7 million, offset by a decrease of approximately $0.2 million related to the sale of our properties in Raleigh, North Carolina and Jeffersonville, Indiana. The increase was directly related to the increase in food and beverage revenue.

Expenses from other operating departments for the three months ended September 30, 2022 increased approximately $0.4 million or 17.5%, to approximately $2.4 million, compared to other operating departments expense for the three months ended September 30, 2021 of approximately $2.0 million. The increase in other operating departments expense for the three months ended September 30, 2022, resulted from an aggregate increase of approximately $0.5 million from all of our properties, offset by a decrease of approximately $0.1 million related to the sale of our properties in Raleigh, North Carolina and Jeffersonville, Indiana.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2022 increased approximately $0.9 million, or 6.1%, to approximately $15.7 million, compared to indirect expenses of approximately $14.8 million for the three months ended September 30, 2021. The increase in indirect expenses for the three months ended September 30, 2022 resulted from an aggregate increase in total indirect expenses of approximately $3.1 million, offset by a decrease of approximately $1.4 million related to the sale of our properties in Raleigh, North Carolina, Jeffersonville, Indiana. Additionally, we realized refunds of prior year real estate property taxes at our properties in Savannah, Georgia, and the DoubleTree by Hilton Hollywood Beach in Hollywood, Florida, totaling approximately $0.8 million.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2022 increased approximately $0.5 million, or 38.9%, to approximately $1.8 million compared to corporate general and administrative expenses of approximately $1.3 million, for the three months ended September 30, 2021. The increase in corporate general and administrative expenses was mainly due to increased salaries, legal and other professional fees of approximately $0.5 million.

Interest Expense. Interest expense for the three months ended September 30, 2022 decreased approximately $1.4 million, or 24.8%, to approximately $4.2 million, as compared to interest expense of approximately $5.6 million, for the three months ended September 30, 2021. The decrease in interest expense for the three months ended September 30, 2022, was substantially related to decreases in the amount of corporate debt especially attributable to the sale of the hotel property in Jeffersonville, Indiana in February 2022 and the extinguishment of the Secured Notes in the previous quarter.

Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets for the three months ended September 30, 2022, increased approximately $1.4 million, to approximately $1.4 million for the three months ended September 30, 2022, from approximately $0 for the three months ended September 30, 2021. The gains were related to casualties at our property in Atlanta, Georgia.

Unrealized Gain on Hedging Activities. As of September 30, 2022, the fair market value of our interest rate swap asset is approximately $1.4. The unrealized gain on hedging activities during the three months ended September 30, 2022, was approximately $1.4 million and was approximately $0.3 million during the three months ended September 30, 2021, the unrealized gain on hedging activities was driven by changes in expectation of short-term rates over the term of the hedging instruments.

Income Taxes. We had an income tax provision of $12,474 for the three months ended September 30, 2022 compared to an income tax provision of $6,544, for the three months ended September 30, 2021. MHI TRS realized operating losses for each of the three months ended September 30, 2022 and 2021.

Net Income (Loss). We realized a net income for the three months ended September 30, 2022 of approximately $2.0 million, compared to a net loss of approximately $2.5 million, for the three months ended September 30, 2021, because of the operating results discussed above.

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Revenue. Total revenue for the nine months ended September 30, 2022 increased approximately $32.2 million, or 34.8%, to approximately $124.7 million compared to total revenue of approximately $92.5 million for the nine months ended September 30, 2021. There was an aggregate increase in total revenue of approximately $35.9 million from nine of our properties, offset by a decrease of approximately $0.7 million at the Hyde Resort in Hollywood, Florida and a decrease of approximately $3.0 million as a result of the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. There were significant increases in demand primarily driven by the lifting of restrictions on travel, social gatherings and businesses as well as, significant increases in demand for business travel.

Room revenue increased approximately $18.7 million, or 28.9%, to approximately $83.5 million for the nine months ended September 30, 2022 compared to room revenue of approximately $64.8 million for the nine months ended September 30, 2021. The increase in room revenue for the nine months ended September 30, 2022 resulted from an aggregate increase of approximately $21.7 million from ten of our properties, offset by a decrease of approximately $3.0 million as a result of the sale of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022. The improvement was due to an increase occupancy from 52.4% to 61.2% and an increase in ADR from $160.00 to $181.72. These increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses as well as significant increases in demand for business travel.

Food and beverage revenues increased approximately $10.3 million, or 104.2%, to approximately $20.1 million for the nine months ended September 30, 2022 compared to food and beverage revenues of approximately $9.8 million for the nine months ended September 30, 2021. The increase in food and beverage revenues for the nine months ended September 30, 2022, resulted from an aggregate increase of approximately $10.5 million from ten of our properties, offset by the loss of food and beverage revenue of approximately $0.2 million during the quarter following the sale of the Sheraton Louisville Riverside in Jeffersonville, Indiana, in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Revenue from other operating departments increased approximately $3.2 million, or 17.9%, to approximately $21.1 million for the nine months ended September 30, 2022 compared to revenue from other operating departments of approximately $17.9 million for the nine months ended September 30, 2021. Increases in parking revenue at many of our properties as well as $1.0 million received under the North Carolina Business Recovery Grant offset decreases in fees of approximately $0.6 million earned at the Hyde Resort in Hollywood, Florida; a non-recurring $0.2 million in business interruption proceeds earned in the prior year at our property in Wilmington, North Carolina; and a non-recurring COVID relief grant of approximately $0.3 million received in the prior period by our hotel in Laurel, Maryland.

months ended September 30, 2021. The increase in hotel operating expenses for the nine months ended September 30, 2022 resulted from an aggregate increase in total hotel operating expenses of approximately $24.0 million, offset by decreases of approximately $3.6 million as a result of the sales of the Jeffersonville, Indiana, Raleigh, North Carolina.

Rooms expense for the nine months ended September 30, 2022 increased approximately $3.3 million, or 20.0%, to approximately $19.7 million, compared to rooms expense for the nine months ended September 30, 2021 of approximately $16.4 million. The increase in rooms expense for the nine months ended September 30, 2022, resulted from an aggregate increase of approximately $4.4 million from all of our properties, offset by a decrease of approximately $1.1 million as a result of the sale of our properties in Jeffersonville, Indiana and Raleigh, North Carolina.

Food and beverage expenses for the nine months ended September 30, 2022 increased approximately $7.6 million, or 122.7%, to approximately $13.8 million, compared to food and beverage expenses of approximately $6.2 million, for the nine months ended September 30, 2021. The net increase in food and beverage expenses for the nine months ended September 30, 2022 resulted from an aggregate increase of approximately $7.7 million, offset by a decrease of approximately $0.1 million as a result of the sale of our properties in Jefferson, Indiana and Raleigh, North Carolina.

Expenses from other operating departments increased approximately $0.9 million, or 12.9%, to approximately $7.5 million for the nine months ended September 30, 2021, compared to expenses from other operating departments of approximately $6.6 million for the nine months ended September 30, 2020. The increase in expenses from other operating departments for the nine months ended September 30, 2021, resulted from an aggregate increase in other operating expenses of approximately $1.4 million from twelve of our hotel properties. Four of our properties had decreases in other operating expenses aggregating to approximately $0.5 million.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2022 increased approximately $8.7 million, or 21.4%, to approximately $49.1 million, compared to indirect expenses of approximately $40.6 million for the nine months ended September 30, 2021. The increase in indirect expenses for the nine months ended September 30, 2022 resulted from an aggregate increase in total indirect expenses of approximately $11.4 million, offset by a decrease of approximately $2.1 million as a result of the sale of our properties in Jeffersonville, Indiana and Raleigh, North Carolina. Additionally, we realized refunds of prior year real estate property taxes at our properties in Savannah, Georgia, and the DoubleTree by Hilton Hollywood Beach in Hollywood, Florida, totaling approximately $0.8 million.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2022 increased approximately $0.6 million, or 15.1%, to approximately $4.7 million compared to corporate general and administrative expenses of approximately $4.1 million, for the nine months ended September 30, 2021. The increase in corporate general and administrative expenses was mainly due to net aggregate increases in salaries, audit fees and legal costs, offset by one-time loan modification fees in the prior period associated with the mortgage on the DoubleTree by Hilton Resort Hollywood Beach.

Interest Expense. Interest expense for the nine months ended September 30, 2022 decreased approximately $1.8 million, or 10.5%, to approximately $15.3 million, as compared to interest expense of approximately $17.1 million, for the nine months ended September 30, 2021. The decrease in interest expense for the nine months ended September 30, 2022, was substantially related to decreases in the amount of debt attributable to the mortgages on the hotel properties in Jeffersonville, Indiana and Raleigh, North Carolina, sold earlier this year, as well as the extinguishment of Secured Notes in June 2022.

Loss on Early Extinguishment of Debt. The loss relates to the repayment and cancellation of the Secured Notes in June 2022 resulting in a loss on early extinguishment consisting of the unamortized exit fee as well as the unamortized origination costs, which totaled approximately $5.9 million for the nine months ended September 30, 2022. No prepayment of debt occurred in the three months ended September 30, 2021.

Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets increased approximately $1.0 million, from approximately $0.5 million for the nine months ended September 30, 2021 to approximately $1.5 million, for the nine months ending September 30, 2022. The gains were related to casualties at our properties in Savannah, Georgia, Houston, Texas and Atlanta, Georgia.

Unrealized Gain on Hedging Activities. As of September 30, 2022, the fair market value of our interest rate swap asset is approximately $1.4 million. The unrealized gain on hedging activities during the nine months ended September 30, 2022, was approximately $3.0 million and during the nine months ended September 30, 2021, the unrealized gain on hedging activities was approximately $1.0 million.

Gain on Sale of Assets. During the nine month period ended September 30, 2022, we sold the property in Raleigh, North Carolina for a gain of approximately $30.1 million.

Income Taxes. We had an income tax provision of $33,744 for the nine months ended September 30, 2022 compared to an income tax provision of $16,126, for the nine months ended September 30, 2021. MHI TRS realized operating losses for each of the nine months ended September 30, 2022 and 2021.

Net Income (Loss). We realized a net income for the nine months ended September 30, 2022 of approximately $28.8 million, compared to a net loss of approximately $11.6 million, for the nine months ended September 30, 2021, because of the operating results discussed above.

Non-GAAP Financial Measures

We consider the non-GAAP financial measures of FFO available to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO available to common stockholders and unitholders, EBITDA and Hotel EBITDA to be key supplemental measures of the Company’s performance and could be considered along with, not alternatives to, net income (loss) as a measure of the Company’s performance. These measures do not represent cash generated from operating activities determined by generally accepted accounting principles (“GAAP”) or amounts available for the Company’s discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.

FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations (“FFO”), as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, gains or losses from involuntary conversions of assets, plus certain non-cash items such as real estate asset depreciation and amortization or impairment, stock compensation costs and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.

We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

We further adjust FFO Available to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, gains on extinguishment of preferred stock, aborted offering costs, loan modification fees, franchise termination costs, costs associated with the departure of executive officers, litigation settlement, over-assessed real estate taxes on appeal, management contract termination costs, operating asset depreciation and amortization, change in control gains or losses, ESOP and stock compensation expenses and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more

indicative than FFO of the on-going performance of our business and assets. Our calculation of adjusted FFO may be different from similar measures calculated by other REITs.

The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for three and nine months ended September 30, 2022 and 2021:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net income (loss)	$	1,972,563		$	(2,528,221	)	$	28,766,978		$	(11,657,814	)
Depreciation and amortization - real estate		4,690,712			4,987,703			13,846,737			14,904,387
Distributions to preferred stockholders		(1,813,820	)		(2,079,028	)		(5,639,906	)		(5,797,551	)
Loss (gain) on disposal & sale of assets		1,215			(176,299	)		(29,562,149	)		(159,079	)
Gain on involuntary conversion of assets		(1,422,295	)		(10,782	)		(1,473,842	)		(507,739	)
FFO attributable to common stockholders and unitholders		3,428,375			193,373			5,937,818			(3,217,796	)
Amortization		14,094			17,500			42,884			52,501
ESOP and stock - based compensation		373,256			39,732			895,945			565,061
Loss on early extinguishment of debt		—			—			5,944,881			—
Unrealized gain on hedging activities		(1,457,552	)		(262,193	)		(2,992,311	)		(955,560	)
Adjusted FFO attributable to common stockholders and unitholders	$	2,358,173		$	(11,588	)	$	9,829,217		$	(3,555,794	)

Weighted average number of shares outstanding, basic		18,045,365			16,033,610			17,598,153			15,036,920

Weighted average number of non-controlling units		1,043,033			1,166,401			1,095,284			1,166,414

Weighted average number of shares and units outstanding, basic		19,088,398			17,200,011			18,693,437			16,203,334

FFO per common share and unit	$	0.18		$	0.01		$	0.32		$	(0.20	)

Adjusted FFO per common share and unit	$	0.12		$	(0.00	)	$	0.53		$	(0.22	)

EBITDA. We believe that excluding the effect of non-operating expenses and non-cash charges, and the portion of those items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrued directly to shareholders.

Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) income tax provision or benefit, (4) depreciation and amortization, (5) impairment of long-lived assets or investments, (6) gains and losses on disposal and/or sale of assets, (7) gains and losses on involuntary conversions of assets, (8) unrealized gains and losses on derivative instruments not included in other comprehensive income, (9) loss on early debt extinguishment, (10) gain on exercise of development right, (11) corporate general and administrative expense, and (12) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.

The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net income (loss)	$	1,972,563		$	(2,528,221	)	$	28,766,978		$	(11,657,814	)
Interest expense		4,224,387			5,617,645			15,280,531			17,063,763
Interest income		(40,581	)		(36,391	)		(92,515	)		(111,299	)
Income tax provision		12,474			6,544			33,744			16,126
Loss (gain) on disposal & sale of assets		1,215			(176,299	)		(29,562,149	)		(159,079	)
Depreciation and amortization		4,704,806			5,005,203			13,889,621			14,956,888
EBITDA		10,874,864			7,888,481			28,316,210			20,108,585
Loss on early extinguishment of debt		—			—			5,944,881			—
Gain on involuntary conversion of assets		(1,422,295	)		(10,782	)		(1,473,842	)		(507,739	)
Subtotal		9,452,569			7,877,699			32,787,249			19,600,846
Corporate general and administrative		1,827,746			1,315,425			4,774,139			4,146,821
Unrealized gain on hedging activities		(1,457,552	)		(262,193	)		(2,992,311	)		(955,560	)
Hotel EBITDA	$	9,822,763		$	8,930,931		$	34,569,077		$	22,792,107

Sources and Uses of Cash

Our principal sources of cash are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage and other debt and hotel property sales. Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses and dividends. As of September 30, 2022, we had approximately $23.0 million of unrestricted cash and $7.0 million of restricted cash.

Operating Activities. Our net cash flow provided by operating activities for the nine months ended September 30, 2022 was approximately $4.2 million generally consisting of net cash flow provided by hotel operations. The positive cash flow from operations during the quarter and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in transient consumers, group business, and other business travel due to the lifting of restrictions on travel, social gatherings and business operations. Cash used in or provided by operating activities generally consists of the cash flow from hotel operations, offset by the interest portion of our debt service, corporate expenses and positive or negative changes in working capital.

Investing Activities. Our cash provided by investing activities for the nine months ended September 30, 2022, was approximately $49.3 million. Of this amount approximately $10.9 million came from the sale of Sheraton Louisville Riverside property and approximately $41.5 million came from the sale of the DoubleTree by Hilton Raleigh Brownstone University property, approximately $4.8 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $1.7 million.

Financing Activities. During the nine months ended September 30, 2022, the Company and Operating Partnership received proceeds of $7.8 million from the refinance of the Hotel Alba mortgage loan, made principal payments on its mortgages of approximately $36.5 million, including the payment of the extinguishment of debt related to the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone University. In addition, the Company extinguished debt on its Secured Notes of $20.0 million.

Capital Expenditures

We intend to maintain all our hotels, including any hotel we acquire in the future, in good repair and condition, in conformity with applicable laws and regulations and, when applicable, with franchisor’s standards. Routine capital improvements are determined through the annual budget process over which we maintain approval rights, and which are implemented or administered by our management company.

From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotel, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, we may be required by one or more of our franchisors to complete a property improvement program (“PIP”) in order to bring the hotel up to the franchisor’s standards. Generally, we expect to fund renovations and improvements out of working capital, including restricted cash, proceeds of mortgage debt or equity offerings.

Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In response to the COVID-19 pandemic, we postponed all major non-essential capital expenditures. If travel demand, occupancy, and RevPAR increase as expected through the remainder of 2022, we expect total capital expenditures to be approximately $7.2 million for 2022.

We expect capital expenditures for the recurring replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. Except as temporarily provided through loan modifications and forbearance agreements, we deposit an amount equal to 4.0% of gross revenue for The DeSoto, the Hotel Ballast Wilmington, Tapestry Collection by Hilton, the DoubleTree Resort by Hilton Hollywood Beach, The DoubleTree by Hilton Jacksonville Riverside, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.

Liquidity and Capital Resources

The COVID-19 pandemic had a significant negative impact on our operations and financial results during 2020 and 2021. While the effects have moderated substantially, we continue to experience their effects and expect them to continue for the remainder of 2022. The impact included a substantial decline in our revenues, profitability and cash flows from operations.

During 2020 and into 2021, we entered into forbearance agreements with all our mortgage lenders and negotiated extended payment terms with a few key vendors in order to preserve liquidity. Repayment of deferred amounts of interest, mortgage principal and amounts due certain vendors, which began in 2021, will continue through the end of 2022, with certain amounts being deferred until the applicable loan matures. We estimate the aggregate amount of deferred payments due in 2022 at approximately $7.6 million, of which approximately $0.8 million remained at September 30, 2022.

As of September 30, 2022, we had total cash of approximately $30.0 million. During the nine months ended September 30, 2022, we generated cash, cash equivalents and restricted cash of approximately $4.4 million. We expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, and monthly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of our mortgage debt).

In June 2022, we sold the DoubleTree by Hilton Raleigh Brownstone – University which generated net proceeds of approximately $19.8 million, which we used to repay a portion of the Secured Notes and the associated repayment factor. Also in June 2022, we refinanced the Hotel Alba mortgage and generated proceeds of approximately $7.5 million, which we used to pay the remainder of the Secured Notes and accrued interest in combination with approximately $2.3 million of unrestricted and restricted cash.

As of the date of this report, we were current on all loan payments on all other mortgages per the terms of our mortgage agreements, as amended. We were in compliance with all loan covenants except the Debt Service Coverage Requirement (“DSCR”) covenant under the mortgage secured by The Whitehall and the DoubleTree by Hilton Philadelphia Airport. We have received a waiver of the financial covenants from the lender of the mortgage on The Whitehall mortgage through December 31, 2022. We anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport. If we are unable to obtain a waiver, we may be required to reduce the outstanding balance with a prepayment of up to approximately $2.3 million per the terms of the loan agreement.

In 2023, the mortgages on The Whitehall, the DoubleTree by Hilton Laurel and the DoubleTree by Hilton Philadelphia Airport mature. We intend to refinance the mortgages maturing in 2023 at the level of their existing indebtedness or request extensions at existing terms.

We intend to continue to invest in hotel properties as suitable opportunities arise. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources, which we expect to be limited as a result of the continuing impact of the COVID-19 pandemic. There can be no assurance that we will continue to make investments in properties that meet our investment criteria or have access to capital during this period. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.

Over the long term, we expect to meet our liquidity requirements for hotel property acquisitions, property redevelopment, investments in new joint ventures and debt maturities, and the retirement of maturing mortgage debt, through net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, the selective disposition of non-core assets, and cash on hand. We remain committed to a flexible capital structure and strive to maintain prudent debt leverage.

Financial Covenants

Mortgage Loans

Our mortgage loan agreements contain various financial covenants directly related to the financial performance of the collateralized properties. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, disruption caused by renovation activity, major weather disturbances, general economic conditions as well as the effects of the ongoing global pandemic.

As described in “Liquidity and Capital Resources”, as of September 30, 2022, we failed to meet certain financial covenants under the mortgage secured by The Whitehall and the DoubleTree by Hilton Philadelphia Airport. We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through December 31, 2022, and we anticipate receiving a waiver from the lender of the mortgage on the DoubleTree by Hilton Philadelphia Airport.

Certain of our loan agreements also include financial covenants that trigger a “cash trap”. As of September 30, 2022, we failed to meet the financial covenants under the mortgage secured by the Georgian Terrace, which triggers a “cash trap” under the loan documents, requiring substantially all the revenue generated by the hotel to be deposited directly into a lockbox account and swept into a cash management account for the benefit of the lender until the property meets the criteria in the loan agreement for exiting the “cash trap”.

Dividend Policy

As approved by its board of directors and announced on March 17, 2020, the Company has suspended its regular quarterly cash common stock dividends in order to preserve liquidity as a result of the impact from the COVID-19 pandemic. The amount of future common stock (and Operating Partnership unit) distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements and other factors, which the Company’s board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by the Company’s board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future. As previously announced, the record date for the dividends on the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock, that were to be paid April 15, 2020, to shareholders of record as of March 31, 2020, have each been declared and the payment of dividends on all classes of the Company’s preferred stock has been deferred. The Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. Distributions on shares of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for the last twelve quarterly periods.

Off-Balance Sheet Arrangements

None.

Inflation

We generate revenues primarily from lease payments from our MHI TRS Entities and net income from the operations of our MHI TRS Entities. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses, local stay-at-home and business closure orders, and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

The operations of our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of hotels located in certain markets, namely Florida and Texas, which typically experience significant room demand during this period.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liability at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. It is also possible that actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgment on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in these critical accounting policies or the methods or assumptions we apply.

Recent Accounting Pronouncements

For a summary of recently adopted and newly issued accounting pronouncements, please refer to the New Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.

As of September 30, 2022, we had approximately $317.1 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237%, mortgage on our Tampa, Florida hotel, which is fixed by an interest rate swap to 5.576%, and the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $14.3 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.77%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in the Prime Rate. Assuming that the aggregate amount outstanding on the mortgage on The Whitehall remains at approximately $14.3 million, the balance at September 30, 2022, the impact on our annual interest incurred and cash flows of a one percent increase in the Prime Rate, would be approximately $0.1 million.

As of December 31, 2021, we had approximately $330.0 million of fixed-rate debt, including the mortgage on our DoubleTree by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, secured notes of $20.0 million with a fixed rate of 6.0% and including the PPP Loan of $7.6 million, with a fixed rate of 1.0% and approximately $50.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.77%. A change in market interest rates on the fixed portion of

our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR and in Prime Rate. Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.2 million, the balance at December 31, 2021, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.2 million.

Item 4. Controls and Procedures

Sotherly Hotels Inc.

Disclosure Controls and Procedures

The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of September 30, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, its disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels Inc. have been detected.

Changes in Internal Control over Financial Reporting

There was no change in Sotherly Hotels Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels Inc.’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels Inc.’s internal control over financial reporting.

Sotherly Hotels LP

Disclosure Controls and Procedures

The Operating Partnership’s management, under the supervision and participation of the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of September 30, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, the disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed in the reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions, and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of Sotherly Hotels Inc., as general partner, does not expect that the disclosure controls and procedures or the internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within Sotherly Hotels LP have been detected.

Changes in Internal Control over Financial Reporting

There was no change in Sotherly Hotels LP’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Sotherly Hotels LP’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, Sotherly Hotels LP’s internal control over financial reporting.

PART II

Item 1. Legal Proceedings

We are not involved in any material legal proceedings, 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 most of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, the Operating Partnership issues limited partnership units to the Company, as required by the Partnership Agreement, to mirror the capital structure of the Company to reflect additional issuances by the Company and to preserve equitable ownership ratios.

On August 18, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 178,800 shares of its Common Stock for 11,000 shares of the Series B Preferred Stock, 7,100 shares of the Series C Preferred Stock, and 1,900 shares of the Series D Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock. Closing of the transaction occurred on August 18, 2022. Those shares of Common Stock were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such an exchange. Concurrently with the issuance of the shares of Common Stock, the Operating Partnership issued 178,800 limited partnership units to the Company in exchange for 11,000 of the Operating Partnership’s Series B Preferred Units, 7,100 of the Operating Partnership’s Series C Preferred Units, and 1,900 of the Operating Partnership's Series D Preferred Units.

On August 23, 2022, the Company entered into a privately-negotiated share exchange agreement with a holder of its Series B Preferred Stock and Series C Preferred Stock, in reliance on Section 3(a)(9) of the Securities Act. Pursuant to that share exchange agreement, the Company exchanged 140,130 shares of its Common Stock for 13,000 shares of the Series B Preferred Stock and 3,200 shares of the Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those shares of Series B Preferred Stock and Series C Preferred Stock. Closing of the transaction occurred on August 24, 2022. Those shares of Common Stock were also issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act for securities exchanged by an issuer with an existing security holder in a transaction where no commission or other remuneration was paid or given directly or indirectly for soliciting such an exchange. Concurrently with the issuance of the shares of Common Stock, the Operating Partnership issued 140,130 limited partnership units to the Company in exchange for 13,000 of the Operating Partnership’s Series B Preferred Units and 3,200 of the Operating Partnership’s Series C Preferred Units.

Item 3. Defaults upon Senior Securities

Preferred Stock

The Company’s distribution on the shares of the Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock are in arrears for nine quarterly periods. When distributions on any shares of the Company’s Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are in arrears for six or more quarterly periods, whether or not consecutive, the holders of the Company’s preferred stock shall be entitled to vote for the election of a total of two additional directors of the Company, at a special meeting or at the next annual meeting of stockholders and at each subsequent annual meeting of the stockholders until full cumulative distributions for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside. In addition, the Company may not make distributions with respect to any shares of its common stock, unless and until full cumulative distributions on the preferred stock for all past unpaid periods are paid or declared and a sum sufficient for the payment thereof in cash is set aside.

The Company announced that it was deferring payment of Sotherly’s previously announced dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020, and deferring payment of dividends for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the periods ending June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021,

December 31, 2021, March 31, 2022, June 30, 2022, September 30, 2022, and December 31, 2022. The relevant distributions were as follows:

•

A regular quarterly cash dividend of $0.50 per share of beneficial interest of the Series B Preferred Stock;

•

A regular quarterly cash dividend of $0.4921875 per share of beneficial interest of the Series C Preferred Stock; and

•

A regular quarterly cash dividend of $0.515625 per share of beneficial interest of the Series D Preferred Stock.

The total arrearage of unpaid cash dividends declared and undeclared on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through November 10, 2022, are $8,052,550, $7,287,931, and $6,596,958, respectively.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of this Form 10-Q:


Exhibit
Number		Description of Exhibit

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company. **

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Company. **

31.3		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership. **

31.4		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership. **

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company. **

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Company. **

32.3		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership. **

32.4		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Operating Partnership. **

99.1		Unaudited pro forma financial information of Sotherly Hotels Inc. (incorporated by reference to the document previously filed as Exhibit 99.1 to our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on August 31, 2022).

99.2		Unaudited pro forma financial information of Sotherly Hotels Inc. (incorporated by reference to the document previously filed as Exhibit 99.1 to our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on October 5, 2022).

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document (+)

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (+)

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (+)

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document (+)

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (+)

104		Cover Page Interactive Data File (embedded within the Inline XBRL document) (+)

** Filed herewith

(+) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SOTHERLY HOTELS INC.

Date: November 14, 2022	By:	/s/ David R. Folsom
		David R. Folsom
		President and Chief Executive Officer

	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer

SIGNATURES


	SOTHERLY HOTELS LP

	By:	SOTHERLY HOTELS INC.
		Its General Partner

Date: November 14, 2022	By:	/s/ David R. Folsom
		David R. Folsom
		President and Chief Executive Officer

	By:	/s/ Anthony E. Domalski
		Anthony E. Domalski
		Chief Financial Officer