Sotherly Hotels Inc. - Quarter Report: 2023 September (Form 10-Q)

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, 2023


☐	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 10, 2023, there were 19,696,805 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, 2023 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 6 – Preferred Stock and Units;

•

Note 7 – Common Stock and Units;

•

Note 12 – 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, 2023 (unaudited) and December 31, 2022	5
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	6
	Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March 31, June 30, September 30, 2023 and 2022	7
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2023 and 2022	9

	Sotherly Hotels LP
	Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	10
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	11
	Consolidated Statements of Changes in Partners’ Capital (unaudited) for the Three Months Ended March 31, June 30, September 30, 2023 and 2022	12
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2023 and 2022	14
	Notes to Consolidated Financial Statements	15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4	Controls and Procedures	46

PART II
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities, Use of Proceed and Issuer Purchases of Equity Securities	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49

PART I

Item 1. Consolidated Financial Statements

SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS


	September 30, 2023			December 31, 2022
	(unaudited)
ASSETS
Investment in hotel properties, net	$	357,027,422		$	365,070,725
Cash and cash equivalents		19,198,625			21,918,680
Restricted cash		10,205,947			5,422,950
Accounts receivable, net		4,776,701			5,844,904
Prepaid expenses, inventory and other assets		9,553,741			8,311,862
TOTAL ASSETS	$	400,762,436		$	406,569,121
LIABILITIES
Mortgage loans, net	$	317,633,743		$	320,482,103
Unsecured notes		1,722,700			2,545,975
Accounts payable and accrued liabilities		25,957,518			25,704,835
Advance deposits		2,872,457			2,233,013
Dividends and distributions payable		2,088,160			4,082,472
TOTAL LIABILITIES	$	350,274,578		$	355,048,398
Commitments and contingencies (See Note 5)		—			—
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 1,464,100 shares issued and outstanding; aggregate liquidation preference each $44,655,050, at September 30, 2023 and December 31, 2022, respectively.		14,641			14,641
7.875% Series C cumulative redeemable perpetual preferred stock, 1,346,110 and 1,346,110 shares issued and outstanding; aggregate liquidation preference each $40,940,681, at September 30, 2023 and December 31, 2022, respectively.		13,461			13,461
8.25% Series D cumulative redeemable perpetual preferred stock, 1,163,100 and 1,163,100 shares issued and outstanding; aggregate liquidation preference each $35,674,458, at September 30, 2023 and December 31, 2022, respectively.		11,631			11,631
Common stock, par value $0.01, 69,000,000 shares authorized, 19,696,805 shares issued and outstanding at September 30, 2023 and 18,951,525 shares issued and outstanding at December 31, 2022.		196,968			189,515
Additional paid-in capital		176,304,184			175,611,370
Unearned ESOP shares		(2,464,231	)		(2,601,134	)
Distributions in excess of retained earnings		(122,338,042	)		(120,985,183	)
Total Sotherly Hotels Inc. stockholders’ equity		51,738,612			52,254,301
Noncontrolling interest		(1,250,754	)		(733,578	)
TOTAL EQUITY		50,487,858			51,520,723
TOTAL LIABILITIES AND EQUITY	$	400,762,436		$	406,569,121

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, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE
Rooms department	$	26,260,586		$	26,110,030		$	87,915,797		$	83,509,003
Food and beverage department		7,522,753			6,816,327			25,772,453			20,146,373
Other operating departments		5,398,024			6,286,338			18,001,724			21,080,181
Total revenue		39,181,363			39,212,695			131,689,974			124,735,557
EXPENSES
Hotel operating expenses
Rooms department		6,437,081			6,539,306			19,866,515			19,694,649
Food and beverage department		5,607,350			4,731,787			17,933,777			13,868,567
Other operating departments		2,198,058			2,386,901			6,819,661			7,470,380
Indirect		17,372,167			15,731,938			52,582,080			49,132,884
Total hotel operating expenses		31,614,656			29,389,932			97,202,033			90,166,480
Depreciation and amortization		4,715,019			4,704,806			14,056,523			13,889,621
(Gain) loss on disposal of assets		(4,700	)		1,215			(4,700	)		491,828
Corporate general and administrative		1,688,535			1,827,746			5,458,340			4,774,139
Total operating expenses		38,013,510			35,923,699			116,712,196			109,322,068
NET OPERATING INCOME		1,167,853			3,288,996			14,977,778			15,413,489
Other income (expense)
Interest expense		(4,466,630	)		(4,224,387	)		(12,868,595	)		(15,280,531	)
Interest income		222,878			40,581			592,315			92,515
Loss on early extinguishment of debt		—			—			—			(5,944,881	)
Unrealized gain (loss) on hedging activities		103,946			1,457,552			(51,686	)		2,992,311
PPP loan forgiveness		—			—			275,494			—
Gain on sale of hotel properties		—			—			—			30,053,977
Gain on involuntary conversion of assets		551,729			1,422,295			1,331,374			1,473,842
Net (loss) income before income taxes		(2,420,224	)		1,985,037			4,256,680			28,800,722
Income tax benefit (provision)		354,398			(12,474	)		322,679			(33,744	)
Net (loss) income		(2,065,826	)		1,972,563			4,579,359			28,766,978
Add: Net loss (income) attributable to noncontrolling interest		156,558			51,094			50,720			(1,317,225	)
Net (loss) income attributable to the Company		(1,909,268	)		2,023,657			4,630,079			27,449,753
Undeclared distributions to preferred stockholders		(1,994,313	)		(1,813,820	)		(5,982,938	)		(5,639,906	)
(Loss) gain on extinguishment of preferred stock		—			(97,157	)		—			64,518
Net (loss) income attributable to common stockholders	$	(3,903,581	)	$	112,680		$	(1,352,859	)	$	21,874,365
Net (loss) income per share attributable to common stockholders:
Basic	$	(0.20	)	$	0.01		$	(0.08	)	$	1.24
Diluted	$	(0.20	)	$	0.01		$	(0.08	)	$	1.20
Weighted average number of common shares outstanding
Basic		18,906,851			18,045,365			18,742,219			17,598,153
Diluted		18,906,851			18,559,666			18,742,219			18,209,766

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, 2022		3,973,310	$	39,733		18,951,525	$	189,515	$	175,611,370		$	(2,601,134	)	$	(120,985,183	)	$	(733,578	)	$	51,520,723
Net income		—		—		—		—		—			—			1,412,474			(24,960	)		1,387,514
Issuance of common stock		—		—		64,278		643		120,842			—			—			—			121,485
Issuance of restricted common stock awards		—		—		220,000		2,200		101,701			—			—			—			103,901
Amortization of ESOP shares		—		—		—		—		(33,439	)		45,634			—			—			12,195
Amortization of restricted stock awards		—		—		—		—		22,883			—			—			—			22,883
Balances at March 31, 2023 (unaudited)		3,973,310	$	39,733		19,235,803	$	192,358	$	175,823,357		$	(2,555,500	)	$	(119,572,709	)	$	(758,538	)	$	53,168,701
Net income		—		—		—		—		—			—			5,126,872			130,798			5,257,670
Conversion of units in Operating Partnership to shares of common stock		—		—		75,000		750		426,049			—			—			(426,799	)		—
Preferred stock dividends declared:
Series B Preferred Stock, $0.50/share		—		—		—		—		—			—			(1,464,100	)		—			(1,464,100	)
Series C Preferred Stock, $0.492188/share		—		—		—		—		—			—			(1,325,078	)		—			(1,325,078	)
Series D Preferred Stock, $0.515625/share		—		—		—		—		—			—			(1,199,447	)		—			(1,199,447	)
Amortization of ESOP shares		—		—		—		—		(32,916	)		45,633			—			—			12,717
Amortization of restricted stock awards		—		—		—		—		41,771			—			—			—			41,771
Balances at June 30, 2023 (unaudited)		3,973,310	$	39,733		19,310,803	$	193,108	$	176,258,261		$	(2,509,867	)	$	(118,434,462	)	$	(1,054,539	)	$	54,492,234
Net loss		—		—		—		—		—			—			(1,909,268	)		(156,558	)		(2,065,826	)
Conversion of units in Operating Partnership to shares of common stock		—		—		386,002		3,860		35,797			—			—			(39,657	)		—
Preferred stock dividends declared:
Series B Preferred Stock, $0.50/share		—		—		—		—		—			—			(732,050	)		—			(732,050	)
Series C Preferred Stock, $0.492188/share		—		—		—		—		—			—			(662,539	)		—			(662,539	)
Series D Preferred Stock, $0.515625/share		—		—		—		—		—			—			(599,723	)		—			(599,723	)
Amortization of ESOP shares		—		—		—		—		(31,644	)		45,636			—			—			13,992
Amortization of restricted stock awards		—		—		—		—		41,770			—			—			—			41,770
Balances at September 30, 2023 (unaudited)		3,973,310	$	39,733		19,696,805	$	196,968	$	176,304,184		$	(2,464,231	)	$	(122,338,042	)	$	(1,250,754	)	$	50,487,858

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 CASH FLOWS

(unaudited)


	Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net Income	$	4,579,359		$	28,766,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,056,523			13,889,621
Amortization of deferred financing costs		448,467			923,777
Amortization of mortgage premium		(18,511	)		(18,511	)
Gain on involuntary conversion of assets		(1,331,374	)		(1,473,842	)
Unrealized (gain) loss on hedging activities		51,686			(2,992,311	)
Loss on early extinguishment of debt		—			5,944,881
PPP loan forgiveness		(275,494	)		—
Gain on disposal of assets		(4,700	)		(30,053,977	)
Loss on disposal of assets		—			491,828
ESOP and stock - based compensation		370,714			895,945
Changes in assets and liabilities:
Accounts receivable		1,086,903			764,318
Prepaid expenses, inventory and other assets		(1,350,705	)		(580,056	)
Accounts payable and other accrued liabilities		236,206			(12,876,519	)
Advance deposits		639,444			525,840
Net cash provided by operating activities		18,488,518			4,207,972
Cash flows from investing activities:
Proceeds from sale of hotel properties		—			52,403,981
Improvements and additions to hotel properties		(6,069,672	)		(4,809,289	)
Proceeds from involuntary conversion		1,312,675			1,677,444
Proceeds from sale of assets		141,952			32,932
Net cash (used in) provided by investing activities		(4,615,045	)		49,305,068
Cash flows from financing activities:
Proceeds from mortgage loans		2,715,833			7,777,475
Payments on mortgage loans		(5,580,239	)		(36,548,807	)
Payments on secured notes		—			(20,000,000	)
Payments on unsecured notes		(554,965	)		(55,689	)
Payments of deferred financing costs		(413,909	)		(246,714	)
Preferred dividends paid		(7,977,251	)		—
Net cash used in financing activities		(11,810,531	)		(49,073,735	)
Net increase in cash, cash equivalents and restricted cash		2,062,942			4,439,305
Cash, cash equivalents and restricted cash at the beginning of the period		27,341,630			25,578,537
Cash, cash equivalents and restricted cash at the end of the period	$	29,404,572		$	30,017,842
Supplemental disclosures:
Cash paid during the period for interest	$	12,619,680		$	20,046,224
Cash paid during the period for income taxes	$	614,231		$	39,908
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in accounts payable and accrued liabilities	$	8,684		$	959,859

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

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS


	September 30, 2023			December 31, 2022
	(unaudited)
ASSETS
Investment in hotel properties, net	$	357,027,422		$	365,070,725
Cash and cash equivalents		19,198,625			21,918,680
Restricted cash		10,205,947			5,422,950
Accounts receivable, net		4,776,701			5,844,904
Loan receivable - affiliate		2,519,566			2,650,526
Prepaid expenses, inventory and other assets		9,553,741			8,311,862
TOTAL ASSETS	$	403,282,002		$	409,219,647
LIABILITIES
Mortgage loans, net	$	317,633,743		$	320,482,103
Unsecured notes, net		1,722,700			2,545,975
Accounts payable and other accrued liabilities		25,957,518			25,704,835
Advance deposits		2,872,457			2,233,013
Dividends and distributions payable		2,088,160			4,082,472
TOTAL LIABILITIES	$	350,274,578		$	355,048,398

Commitments and contingencies (see Note 5)		—			—

PARTNERS’ CAPITAL
Preferred units, 11,000,000 units authorized;
8.0% Series B cumulative redeemable perpetual preferred unit; 1,464,100 and 1,464,100 units issued and outstanding; aggregate liquidation preference each $44,655,050, at September 30, 2023 and December 31, 2022, respectively.	$	34,344,086		$	34,344,086
7.875% Series C cumulative redeemable perpetual preferred units, 1,346,110 and 1,346,110 units issued and outstanding; aggregate liquidation preference each $40,940,681, each at September 30, 2023 and December 31, 2022, respectively.		31,571,778			31,571,778
8.25% Series D cumulative redeemable perpetual preferred units, 1,163,100 and 1,163,100 units issued and outstanding; aggregate liquidation preference each $35,674,458, each at September 30, 2023 and December 31, 2022, respectively.		27,504,901			27,504,901
General Partner: 205,220 units and 197,767 units issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.		(117,659	)		(106,022	)
Limited Partners: 19,855,771 units and 19,578,946 units issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.		(40,295,682	)		(39,143,494	)
TOTAL PARTNERS’ CAPITAL		53,007,424			54,171,249
TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	403,282,002		$	409,219,647

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, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE
Rooms department	$	26,260,586		$	26,110,030		$	87,915,797		$	83,509,003
Food and beverage department		7,522,753			6,816,327			25,772,453			20,146,373
Other operating departments		5,398,024			6,286,338			18,001,724			21,080,181
Total revenue		39,181,363			39,212,695			131,689,974			124,735,557
EXPENSES
Hotel operating expenses
Rooms department		6,437,081			6,539,306			19,866,515			19,694,649
Food and beverage department		5,607,350			4,731,787			17,933,777			13,868,567
Other operating departments		2,198,058			2,386,901			6,819,661			7,470,380
Indirect		17,372,167			15,731,938			52,582,080			49,132,884
Total hotel operating expenses		31,614,656			29,389,932			97,202,033			90,166,480
Depreciation and amortization		4,715,019			4,704,806			14,056,523			13,889,621
(Gain) loss on disposal of assets		(4,700	)		1,215			(4,700	)		491,828
Corporate general and administrative		1,688,535			1,827,746			5,458,340			4,774,139
Total operating expenses		38,013,510			35,923,699			116,712,196			109,322,068
NET OPERATING INCOME		1,167,853			3,288,996			14,977,778			15,413,489
Other income (expense)
Interest expense		(4,466,630	)		(4,224,387	)		(12,868,595	)		(15,280,531	)
Interest income		222,878			40,581			592,315			92,515
Loss on early extinguishment of debt		—			—			—			(5,944,881	)
Unrealized gain (loss) on hedging activities		103,946			1,457,552			(51,686	)		2,992,311
PPP loan forgiveness		—			—			275,494			—
Gain on sale of hotel properties		—			—			—			30,053,977
Gain on involuntary conversion of assets		551,729			1,422,295			1,331,374			1,473,842
Net (loss) income before income taxes		(2,420,224	)		1,985,037			4,256,680			28,800,722
Income tax benefit (provision)		354,398			(12,474	)		322,679			(33,744	)
Net (loss) income		(2,065,826	)		1,972,563			4,579,359			28,766,978
Undeclared distributions to preferred unit holders		(1,994,313	)		(1,813,820	)		(5,982,938	)		(5,639,906	)
(Loss) gain on extinguishment of preferred stock		—			(97,157	)		—			64,518
Net (loss) income attributable to general and limited partnership unit holders	$	(4,060,139	)	$	61,586		$	(1,403,579	)	$	23,191,590
Net (loss) income attributable per general and limited partner unit:
Basic	$	(0.20	)	$	-		$	(0.07	)	$	1.21
Diluted	$	(0.20	)	$	-		$	(0.07	)	$	1.20
Weighted average number of general and limited partner units outstanding
Basic		19,810,991			19,501,310			19,807,797			19,116,224
Diluted		19,810,991			19,604,222			19,807,797			19,307,832

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, 2022		3,973,310	$	34,344,086	$	31,571,778	$	27,504,901		197,767	$	(106,022	)		19,578,946		$	(39,143,494	)	$	54,171,249
Amortization of restricted unit awards		—		—		—		—		—		229			—			22,654			22,883
Unit based compensation		—		—		—		—		2,843		1,857			281,435			183,780			185,637
Net income		—		—		—		—		—		13,875			—			1,373,639			1,387,514
Balances at March 31, 2023 (unaudited)		3,973,310	$	34,344,086	$	31,571,778	$	27,504,901		200,610	$	(90,061	)		19,860,381		$	(37,563,421	)	$	55,767,283
Amortization of restricted unit awards		—		—		—		—		—		417			—			41,353			41,770
Preferred distributions paid		—		—		—		—		—		(39,886	)		—			(3,948,739	)		(3,988,625	)
Unit based compensation		—		—		—		—		—		(270	)		—			(26,752	)		(27,022	)
Net income		—		—		—		—		—		52,577			—			5,205,093			5,257,670
Balances at June 30, 2023 (unaudited)		3,973,310	$	34,344,086	$	31,571,778	$	27,504,901		200,610	$	(77,223	)		19,860,381		$	(36,292,466	)	$	57,051,076
Amortization of restricted unit awards		—		—		—		—		—		418			—			41,352			41,770
Preferred distributions paid		—		—		—		—		—		(19,943	)		—			(1,974,369	)		(1,994,312	)
Unit based compensation		—		—		—		—		—		(253	)		—			(25,031	)		(25,284	)
Conversion of units in Operating Partnership to shares of Common Stock		—		—		—		—		4,610		—			(4,610	)		—			—
Net loss		—		—		—		—		—		(20,658	)		—			(2,045,168	)		(2,065,826	)
Balances at September 30, 2023 (unaudited)		3,973,310	$	34,344,086	$	31,571,778	$	27,504,901		205,220	$	(117,659	)		19,855,771		$	(40,295,682	)	$	53,007,424

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, 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 CASH FLOWS

(unaudited)


	Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	4,579,359		$	28,766,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,056,523			13,889,621
Amortization of deferred financing costs		448,467			923,777
Amortization of mortgage premium		(18,511	)		(18,511	)
Gain on involuntary conversion of assets		(1,331,374	)		(1,473,842	)
Unrealized (gain) loss on hedging activities		51,686			(2,992,311	)
Loss on early extinguishment of debt		—			5,944,881
PPP loan forgiveness		(275,494	)		—
Gain on disposal of assets		(4,700	)		(30,053,977	)
Loss on disposal of assets		—			491,828
ESOP and unit - based compensation		239,754			751,223
Changes in assets and liabilities:
Accounts receivable		1,086,903			764,318
Prepaid expenses, inventory and other assets		(1,350,705	)		(580,056	)
Accounts payable and other accrued liabilities		236,206			(12,876,519	)
Advance deposits		639,444			525,840
Net cash provided by operating activities		18,357,558			4,063,250
Cash flows from investing activities:
Proceeds from sale of hotel properties		—			52,403,981
Improvements and additions to hotel properties		(6,069,672	)		(4,809,289	)
ESOP loan payments received		130,960			144,722
Proceeds from involuntary conversion		1,312,675			1,677,444
Proceeds from sale of assets		141,952			32,932
Net cash (used in) provided by investing activities		(4,484,085	)		49,449,790
Cash flows from financing activities:
Proceeds from mortgage loans		2,715,833			7,777,475
Payments on mortgage loans		(5,580,239	)		(36,548,807	)
Payments on secured notes		—			(20,000,000	)
Payments on unsecured notes		(554,965	)		(55,689	)
Payments of deferred financing costs		(413,909	)		(246,714	)
Preferred dividends paid		(7,977,251	)		—
Net cash used in financing activities		(11,810,531	)		(49,073,735	)
Net increase in cash, cash equivalents and restricted cash		2,062,942			4,439,305
Cash, cash equivalents and restricted cash at the beginning of the period		27,341,630			25,578,537
Cash, cash equivalents and restricted cash at the end of the period	$	29,404,572		$	30,017,842
Supplemental disclosures:
Cash paid during the period for interest	$	12,678,642		$	19,942,876
Cash paid during the period for income taxes	$	614,231		$	39,908
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in accounts payable and accrued liabilities	$	8,684		$	959,859

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, 2023, 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, 2023 was approximately 98.2% 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. The MHI TRS Entities have 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 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 June 10, 2022, the Company 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 used the remaining net cash proceeds for general corporate purposes. Of the proceeds paid to the investors from the sale of the hotel, 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 requiring monthly payments of interest plus principal of

$40,600; 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.

From March 24, 2022 through August 24, 2022, the Company entered into various privately-negotiated share exchange agreements with holders 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 those share exchange agreements, the Company has exchanged an aggregate of 806,849 shares of its common stock for 45,900 shares of the Series B Preferred Stock, 38,500 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. The common stock was 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 26, 2023, the Company entered into amended loan documents to modify the mortgage loan on The Whitehall hotel located in Houston, TX with the lender, International Bank of Commerce. The amendment (i) extends the maturity date to February 26, 2028; (ii) maintains a floating interest rate of New York Prime Rate plus 1.25%; and (iii) subjects the interest rate to a floor rate of 7.50%. The mortgage loan continues to be guaranteed by the Operating Partnership. The amendment also required us to establish a real estate tax reserve as well as a debt service reserve that approximates the aggregate amount of one year's debt service, which was initially established at approximately $1.5 million.

On March 14, 2023, the Company entered into amended loan documents to modify the mortgage loan on the DoubleTree by Hilton Philadelphia Airport with the lender, TD Bank, N.A. The amendment provided a waiver for non-compliance with financial covenants for the periods ended September 30 and December 31, 2022, modified the reference rate replacing 1-month LIBOR with SOFR and required us to establish a debt service coverage reserve of $0.3 million.

On May 4, 2023, affiliates of the Company entered into loan documents to secure a $10.0 million mortgage loan on the DoubleTree by Hilton Laurel hotel located in Laurel, MD with Citi Real Estate Funding Inc. Pursuant to the loan documents, the mortgage loan: (i) has a principal balance of $10.0 million; (ii) has a maturity date of May 6, 2028; (iii) carries a fixed interest rate of 7.35%; (iv) requires payments of interest only; (v) cannot be prepaid until the last 4 months of the loan term; and (vi) contains customary representations, warranties, covenants and events of default for a mortgage loan.

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 the 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 value 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 and nine months ended September 30, 2023 or 2022.

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, mortgage servicing and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.


	As of		As of
	September 30, 2023		September 30, 2022
Cash and cash equivalents	$	19,198,625	$	23,011,471
Restricted cash		10,205,947		7,006,371
Cash, cash equivalents and restricted cash at the end of the period	$	29,404,572	$	30,017,842

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) and National Credit Union Administration (the “NCUA”) 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 or NCUA 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. With ongoing evaluations of our trade receivables, credit customers' risk assessment and limiting credit to only a few larger companies or organizations, our potential for expected credit losses is insignificant. Our revenue is mainly based on cash or credit card sales as of the date of service, with limited trade receivables. 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, 2023 and December 31, 2022 were $207,047 and $241,038, respectively. Amortization expense for the three and nine-month periods ended September 30, 2023 and 2022, totaled $11,059 and $12,282 and $33,991 and $36,570, 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 swaps which act as cash flow hedges and are not designated as hedges. We value our interest rate swaps 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 swaps 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, 2023 and December 31, 2022, respectively):


	Level 1		Level 2			Level 3
December 31, 2022
Interest rate swaps (1)	$	—	$	1,308,503		$	—
Mortgage loans (2)	$	—	$	(306,300,855	)	$	—

September 30, 2023
Interest rate swap (1)	$	—	$	1,308,038		$	—
Mortgage loans (2)	$	—	$	(303,808,970	)	$	—

(1)

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 only at December 31, 2022, and the other which swaps the loan rate for a fixed rate of approximately 5.576% for the Hotel Alba Tampa mortgage and is valued at September 30, 2023 and December 31, 2022. Notional amounts of the swaps approximate the declining balance of the loan.

(2)

Mortgage loans, net had a carrying value on our Consolidated Balance Sheets of $317,633,743 and $320,482,103 as of September 30, 2023 and December 31, 2022, respectively.

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 $0.3 million and $0.2 million, for the three months ended September 30, 2023 and 2022, respectively, and for the nine months ended September 30, 2023 and 2022, totaled approximately $0.8 million and $0.9 million, respectively.

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


For the remaining three months ending December 31, 2023	$	202,519
December 31, 2024		805,327
December 31, 2025		1,297,801
December 31, 2026		715,115
December 31, 2027		703,515
December 31, 2028 and thereafter		9,321,103
Total	$	13,045,380

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, 2023, 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, 2023 and December 31, 2022, deferred tax assets each totaled $0, respectively.

As of September 30, 2023 and December 31, 2022, 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, 2023, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2014 through 2022. In addition, as of September 30, 2023, 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 2022.

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 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 service/performance share compensation awards to its employees and directors for up to 2,000,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders.

Under the 2022 Plan, the Company may issue a variety of service or 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, 2023, 451,668 service-based stock awards have been granted, including 272,668 unrestricted shares and 179,000 restricted shares issued to certain executives and its independent directors. Total compensation cost recognized under the 2022 Plan for the three months ended September 30, 2023 and 2022 was $18,887 and $0, respectively, and for the nine months ended September 30, 2023 and 2022 was $263,161 and $0, respectively.

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 service or performance share compensation awards to its employees and directors for up to 750,000 shares of common stock. All future awards will be made under the 2022 Plan.

As of September 30, 2023, under the 2013 Plan, the Company has made cumulative service-based stock awards totaling 745,160 shares, including 700,160 unrestricted shares and 45,000 restricted shares issued to certain executives and employees and to its independent directors. All awards have vested except for 45,000 shares issued to certain employees, which will vest over the next two years. The remaining 4,840 shares have been deregistered.

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, 2023, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended September 30, 2023 and 2022 was $22,883 and $364,692, respectively, and for the nine months ended September 30, 2023 and 2022 was $68,648 and $853,271, respectively.

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 a 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, 2023 and 2022, the ESOP compensation cost was $13,992 and $13,871, and for the nine months ended September 30, 2023 and 2022 the ESOP compensation cost was $38,905 and $42,674, 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 $644,111, and $559,981 for the three months ended September 30, 2023 and 2022 and were $2,039,089 and $1,717,399 for the nine months ended September 30, 2023 and 2022, 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments -Credit Losses (Topic 326), which replaced the existing "incurred loss" approach with an "expected loss" model for financial instruments measured at amortized cost. For trade and other receivables, the forward-looking "expected loss" model will generally result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments -Credit Losses, which clarified that operating lease receivables accounted for under ASC 842 are not in the scope of ASU 2016-13. With the adoption of this standard on January 1, 2023, we have determined there is no significant impact on the Company's consolidated financial statements.

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 December 31, 2022, we have not entered into any contract modification as it directly relates to reference rate reform, with the exception of a modification 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. On March 14, 2023, the Company modified the floating-rate mortgage on the DoubleTree by Hilton Philadelphia Airport to change the reference rate from 1-month LIBOR to SOFR. The Company anticipates no additional loan modifications will be required. With the adoption of this standard on January 1, 2023, we have determined there is no significant impact on the Company's consolidated financial statements.

3. Investment in Hotel Properties, Net

Investment in hotel properties, net as of September 30, 2023 and December 31, 2022 consisted of the following:


	September 30, 2023			December 31, 2022

Land and land improvements	$	61,078,390		$	60,934,859
Buildings and improvements		416,813,251			412,717,919
Right of use assets		4,850,671			5,199,845
Furniture, fixtures and equipment		51,500,684			51,292,107
		534,242,996			530,144,730
Less: accumulated depreciation and impairment		(177,215,574	)		(165,074,005	)
Investment in Hotel Properties, Net	$	357,027,422		$	365,070,725

4. Debt

Mortgage Loans, Net. As of September 30, 2023 and December 31, 2022, we had approximately $317.6 million and approximately $320.5 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	2023			2022			Penalties	Date	Provisions	Rate
The DeSoto (1)	$	30,495,324		$	31,219,022		Yes	7/1/2026	25 years	4.25%
DoubleTree by Hilton Jacksonville Riverfront (2)		31,920,568			32,416,570		Yes	7/11/2024	30 years	4.88%
DoubleTree by Hilton Laurel (3)		10,000,000			7,412,107		(3)	5/6/2028	(3)	7.35%
DoubleTree by Hilton Philadelphia Airport (4)		38,915,488			39,413,672		None	10/31/2023	30 years	SOFR plus 2.27%
DoubleTree Resort by Hilton Hollywood Beach (5)		51,803,264			52,724,475		(5)	10/1/2025	30 years	4.913%
Georgian Terrace (6)		39,715,153			40,492,622		(6)	6/1/2025	30 years	4.42%
Hotel Alba Tampa, Tapestry Collection by Hilton (7)		24,391,000			24,756,400		None	6/30/2025	(7)	SOFR plus 2.75%
Hotel Ballast Wilmington, Tapestry Collection by Hilton (8)		30,995,244			31,699,775		Yes	1/1/2027	25 years	4.25%
Hyatt Centric Arlington (9)		46,730,206			47,534,606		Yes	10/1/2028	30 years	5.25%
The Whitehall (10)	$	14,064,662			14,226,067		None	2/26/2028	25 years	PRIME plus 1.25%
Total Mortgage Principal Balance	$	319,030,909		$	321,895,316
Deferred financing costs, net		(1,446,221	)		(1,480,779	)
Unamortized premium on loan		49,055			67,566
Total Mortgage Loans, Net	$	317,633,743		$	320,482,103


(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 requires payments of interest only and cannot be prepaid until the last 4 months of the loan term.
(4)	The note bears a floating interest rate of SOFR plus 2.27%. On August 13, 2018, we entered into a swap agreement to fix the rate at 5.237% through July 31, 2023. Notional amounts under the swap agreement approximated the declining balance of the loan. Effective October 29, 2023, we entered into a loan amendment to extend the maturity date to December 29, 2023 and to increase the interest rate to SOFR plus 3.50%.
(5)	With limited exception, the note may not be prepaid prior to June 2025.
(6)	With limited exception, the note may not be prepaid prior to February 2025.
(7)	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.
(8)	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.
(9)	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.
(10)	The note bears a floating interest rate of New York Prime Rate plus 1.25%, with a floor of 7.50%.

As of September 30, 2023, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, with the exception of a covenant default under the mortgage on the DoubleTree by Hilton Philadelphia Airport. At September 30, 2023, we failed to meet the financial covenants under the mortgage agreement. On October 29, 2023, we amended the mortgage agreement to extend the maturity date for 60 days from October 31, 2023 to December 29, 2023. We anticipate a further modification of the loan agreement to include a waiver of non-compliance with the financial covenants as well as other terms and conditions, including a further extension of the maturity date. Additionally, the mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures in July 2024. We intend to refinance that mortgage at the expected level of its indebtedness prior to maturity.

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, 2023, were as follows:


For the remaining three months ended December 31, 2023	$	40,624,873
December 31, 2024		38,069,572
December 31, 2025		116,058,765
December 31, 2026		58,588,970
December 31, 2027		1,757,220
December 31, 2028 and thereafter		63,931,509
Total future maturities	$	319,030,909

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 had an initial term of two years, with the ability extend the loan to five years, if not forgiven, 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. As of September 30, 2023, an application for full forgiveness has been filed and is still pending.

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 December 9, 2022, the Company was notified it had received principal forgiveness in the amount of approximately $4.6 million and is required to make monthly payments of $56,809 through July 1, 2025 to extinguish the loan.

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. On February 3, 2023, the Company was notified it had received principal forgiveness in the amount of approximately $268,309 and is required to make monthly payments of $13,402 through May 6, 2025 to extinguish the loan.

At September 30, 2023, the PPP loans had a cumulative balance of approximately $1.7 million.

5. 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, 2023 and 2022, each totaled $20,983, and for the nine months ended September 30, 2023 and 2022, each totaled $62,949.

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 Tampa 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, 2023 and 2022, each totaled $651, and for the nine months ended September 30, 2023 and 2022 totaled $1,952 and $1,958.

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, 2023 and 2022 each totaled $55,902, and for the nine months ended September 30, 2023 and 2022 each totaled $167,706.

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. The first renewal has been elected and the current maturity is 2035. Rent expense for the three months ended September 30, 2023 and 2022, was $152,231 and $128,415, respectively, and for the nine months ended September 30, 2023 and 2022, totaled $493,724 and $364,123 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, 2023 and 2022, each totaled $67,750, and for the nine months ended September 30, 2023 and 2022, each totaled $203,250.

We also lease certain storage facilities, furniture and equipment under agreements expiring between December 2023 and June 2026.

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


For the remaining three months ended December 31, 2023	$	170,299
December 31, 2024		686,820
December 31, 2025		696,536
December 31, 2026		690,843
December 31, 2027		347,540
December 31, 2028 and thereafter		13,539,483
Total	$	16,131,521

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, 2023, our ten wholly-owned hotels, and our two condo-hotel rental programs, operated under management agreements with Our Town (see Note 8). 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, 2023, seven 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, the Hyatt Centric Arlington and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. Several of our lenders also required us 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. We are also required by some lenders to have a debt service reserve that approximates the aggregate amount of one year's debt service, which was initially established at approximately $1.5 million, in 2022.

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 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, 2023, the balance on the loan was approximately $2.5 million, leaving capacity for additional borrowing of approximately $2.5 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.

6. 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, 2023		December 31, 2022		Per Share
Series B Preferred Stock		8.000	%	$	25.00		1,464,100		1,464,100	$	0.500000
Series C Preferred Stock		7.875	%	$	25.00		1,346,110		1,346,110	$	0.492188
Series D Preferred Stock		8.250	%	$	25.00		1,163,100		1,163,100	$	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.

On January 24, 2023, the Company announced its intention to resume quarterly payments of dividends on its preferred stock. Accordingly, the Company paid previously declared preferred dividends, in the amount of approximately $2.0 million, on March 15, 2023. The Company also declared preferred dividends in April 2023, and paid approximately $2.0 million on June 13, 2023. On May 30, 2023, the Company declared a "catch-up" dividend and paid approximately $2.0 million on July 14, 2023. On July 31, 2023, the Company declared preferred dividends in the amount of approximately $2.0 million that were paid on September 15, 2023.

The total undeclared and unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through September 30, 2023, 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, 2023, the undeclared cumulative preferred dividends were approximately $21.9 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, 2023		December 31, 2022		Per Unit
Series B Preferred Units		8.000	%	$	25.00		1,464,100		1,464,100	$	0.500000
Series C Preferred Units		7.875	%	$	25.00		1,346,110		1,346,110	$	0.492188
Series D Preferred Units		8.250	%	$	25.00		1,163,100		1,163,100	$	0.515625

The Operating Partnership 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.

The total undeclared and unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through September 30, 2023, 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, 2023, the undeclared cumulative preferred dividends were approximately $21.9 million.

7. Common Stock and Units

Common Stock – As of September 30, 2023, 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, 2022, of the Company’s common stock and related partnership units of the Operating Partnership:

On January 21, 2022 and February 15, 2022, the Company was issued 175,268 partnership 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 partnership 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 April 11, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 4,000 shares of the Company's Series B Preferred Stock and 8,000 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 116,640 shares of the Company's common stock. We closed the transaction and issued the common stock on April 12, 2022.

On April 19, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 5,000 shares of the Company's Series B Preferred Stock and 10,600 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 153,504 shares of the Company's common stock. We closed the transaction and issued the common stock on April 19, 2022.

On May 19, 2022, one holder of partnership 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 partnership 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 partnership 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 partnership units in the Operating Partnership and awarded an equivalent number of shares of unrestricted stock to its employees.

On August 18, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 11,000 shares of the Company's Series B Preferred Stock, 7,100 shares of the Company's Series C Preferred Stock, and 1,900 shares of the Company's Series D Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 178,800 shares of the Company's common stock. We closed the transaction and issued the common stock on August 18, 2022.

On August 23, 2022, we entered into a privately-negotiated share exchange agreement. Pursuant to the share exchange agreement, the Company agreed to exchange 13,000 shares of the Company's Series B Preferred Stock and 3,200 shares of the Company's Series C Preferred Stock, together with all of the holder’s rights to receive accrued and unpaid dividends on those preferred shares, for 140,130 shares of the Company's common stock. We closed the transaction and issued the common stock on August 24, 2022.

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

On January 12, 2023, the Company issued 15,000 restricted shares of common stock to its independent directors and 64,278 vested shares of common stock to its independent directors and one officer.

On January 23, 2023, the Company issued 205,000 restricted shares of common stock to certain its officers and employees pursuant to their employment agreements.

On April 28, 2023, one holder of partnership units in the Operating Partnership converted 75,000 units for an equivalent number of shares in the Company's stock.

On August 18, 2023, one holder of partnership units in the Operating Partnership converted 252,903 units for an equivalent number of shares in the Company's stock.

On August 30, 2023, one holder of partnership units in the Operating Partnership converted 133,099 units for an equivalent number of shares in the Company's stock.

As of September 30, 2023 and December 31, 2022, the Company had 19,696,805 and 18,951,525 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, 2022, there have been no issuances or redemptions, of partnership units in the Operating Partnership other than the issuances of partnership units in the Operating Partnership to the Company described above. In connection with the exchange agreements described in this section, an equivalent number of preferred units held by the Company were exchanged for partnership units in the Operating Partnership.

As of September 30, 2023 and December 31, 2022, the total number of Operating Partnership units outstanding was 20,060,991 and 19,776,713, respectively.

As of September 30, 2023 and December 31, 2022, the total number of outstanding Operating Partnership units not owned by the Company was 364,186 and 825,188, respectively, with a fair market value of approximately $0.6 million and $1.5 million, respectively, based on the price per share of the common stock on such respective dates.

As of September 30, 2023, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of approximately $2.1 million.

8. 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. As of September 30, 2023, an affiliate of Andrew M. Sims, our Chairman, an affiliate of David R. Folsom, our President and Chief Executive Officer, and Andrew M. Sims Jr., our Vice President - Operations & Investor Relations, beneficially owned approximately 71.0%, 7.0%, and 15.0%, respectively, of the total outstanding ownership interests of Our Town. Mr. Sims, Mr. Folsom, and Mr. Sims Jr. serve as directors of Our Town. The following is a summary of the transactions between Our Town and us:

Accounts Receivable – At September 30, 2023 and December 31, 2022, we were due approximately $0.3 million and $0.3 million, respectively, from Our Town.

Accounts Payable – At September 30, 2023 and December 31, 2022, we owed Our Town approximately $0.8 million and $1.3 million, respectively.

Management Agreements – On September 6, 2019, the Company entered into a master agreement with Our Town related to the management of certain of our hotels, as amended on December 13, 2019 (as amended, the “OTH Master Agreement”). On December 13, 2019, and subsequent dates we entered into a series of individual hotel management agreements for the management of our hotels. 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 fees earned by Our Town for our properties each totaled approximately $1.0 million, for the three months ended September 30, 2023 and 2022, respectively, and were approximately $3.4 million and $3.1 million for the nine months ended September 30, 2023 and 2022, 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 ended September 30, 2023 and 2022, were $(31,088) and $(42,656), respectively and for the nine months ended September 30, 2023 and 2022, were approximately $186,855 and $272,017, 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. In 2022, we paid Our Town approximately $0.3 million in termination fees triggered by the sale of the Sheraton Louisville Riverside and the DoubleTree by Hilton Raleigh Brownstone – University.

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 $334,473 and $235,352, as of September 30, 2023 and September 30, 2022, 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 $0.9 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively, and for the nine months ended September 30, 2023 and 2022, were approximately $2.3 million and $2.6 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, 2023 and 2022, were $134,289 and $125,935, respectively, and for the nine months ended September 30, 2023 and 2022, were $470,494 and $379,898, respectively.

9. 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. Contributions to the plan totaled $16,048 and $16,500, for the three months ended September 30, 2023 and 2022, and for the nine months ended September 30, 2023 and 2022, totaled $73,596 and $68,143, 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, 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 are accounted for at fair value at the date of allocation.

A total of 314,202 shares with a fair value of $531,002 remained allocated or committed to be released from the suspense account, as of September 30, 2023. We recognized as compensation cost $38,905 and $42,674 during the nine months ended September 30, 2023 and 2022, respectively. The remaining 345,010 unallocated shares have an approximate fair value of $583,066, as of September 30, 2023. As of September 30, 2023, the ESOP held a total of 295,035 allocated shares, 19,167 committed-to-be-released shares and 345,010 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, 2023				December 31, 2022
	Number of Shares		Fair Value		Number of Shares		Fair Value
Allocated shares		295,035	$	498,610		301,646	$	545,979
Committed to be released shares		19,167		32,392		—		—
Total Allocated and Committed-to-be-Released		314,202	$	531,002		301,646	$	545,979

Unallocated shares		345,010		583,066		364,177		659,160

Total ESOP Shares		659,212	$	1,114,068		665,823	$	1,205,139

10. 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, 2023		September 30, 2022		September 30, 2023		September 30, 2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Sales and marketing	$	3,815,349	$	3,729,867	$	12,323,121	$	11,390,258
General and administrative		3,638,354		3,396,247		11,010,177		10,186,922
Repairs and maintenance		2,164,003		2,057,298		6,486,094		6,519,845
Utilities		1,691,931		1,566,216		4,425,479		4,308,465
Property taxes		1,436,742		939,951		3,739,381		3,973,027
Management fees, including incentive		973,848		949,926		3,584,723		3,327,267
Franchise fees		972,610		960,246		3,290,490		3,126,021
Insurance		1,511,222		1,128,090		4,174,603		3,121,241
Information and telecommunications		931,573		809,593		2,799,923		2,598,399
Other		236,535		194,504		748,089		581,439
Total indirect hotel operating expenses	$	17,372,167	$	15,731,938	$	52,582,080	$	49,132,884

11. Income Taxes

The components of the income tax provision for the three and nine months ended September 30, 2023 and 2022 are as follows:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Current:
Federal	$	—		$	—		$	—		$	—
State		(354,398	)		12,474			(322,679	)		33,744
		(354,398	)		12,474			(322,679	)		33,744
Deferred:
Federal		(1,153,452	)		(544,356	)		(1,055,628	)		(572,014	)
State		(261,180	)		(62,819	)		(115,711	)		(82,652	)
Subtotals		(1,414,632	)		(607,175	)		(1,171,339	)		(654,666	)
Change in deferred tax valuation allowance		1,414,632			607,175			1,171,339			654,666
		—			—			—			—
Income tax (benefit) provision	$	(354,398	)	$	12,474		$	(322,679	)	$	33,744


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax provision (benefit)	$	(508,247	)	$	416,858		$	893,903		$	6,048,152
Federal tax impact of REIT election		(421,693	)		(825,994	)		(1,264,579	)		(6,315,568	)
Statutory federal income tax (benefit) provision at TRS		(929,940	)		(409,136	)		(370,676	)		(267,416	)
Federal impact of PPP loan forgiveness		—			—			(56,470	)		—
State income tax benefit, net of federal provision (benefit)		(839,090	)		(185,564	)		(1,066,872	)		(353,506	)
Change in valuation allowance		1,414,632			607,174			1,171,339			654,666
Income tax (benefit) provision	$	(354,398	)	$	12,474		$	(322,679	)	$	33,744

12. 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 net income (loss) per share is presented below:


	Three Months Ended				Three Months Ended			Nine Months Ended				Nine Months Ended
	September 30, 2023				September 30, 2022			September 30, 2023				September 30, 2022
	(unaudited)				(unaudited)			(unaudited)				(unaudited)
Numerator
Net (loss) income	$	(2,065,826	)		$	1,972,563		$	4,579,359			$	28,766,978
Less: Net loss (income) allocated to participating share awards		28,008				(6,597	)		(58,032	)			(94,522	)
Net loss (income) attributable to non-controlling interest		156,558				51,094			50,720				(1,317,225	)
Undeclared distributions to preferred stockholders		(1,994,313	)			(1,813,820	)		(5,982,938	)			(5,639,906	)
Gain on extinguishment of preferred stock		—				(97,157	)		—				64,518
Net (loss) income attributable to common stockholders for EPS computation	$	(3,875,573	)		$	106,083		$	(1,410,891	)		$	21,779,843


Denominator
Weighted average number common shares outstanding for basic EPS computation		18,906,851				18,045,365			18,742,219				17,598,153
Effect of dilutive participating securities:
Unvested restricted shares		—		(1)		65,000			—		(1)		63,901
Stock compensation awards unissued		—		(1)		37,912			—		(1)		129,002
Unearned ESOP shares		—		(1)		411,389			—		(1)		418,710
Weighted average number common and common equivalent shares outstanding for diluted EPS computation		18,906,851				18,559,666			18,742,219				18,209,766


Basic net (loss) income per common share:
Undistributed (loss) income	$	(0.20	)		$	0.01		$	(0.08	)		$	1.24
Total basic	$	(0.20	)		$	0.01		$	(0.08	)		$	1.24

Diluted net (loss) income per common share:
Undistributed (loss) income	$	(0.20	)		$	0.01		$	(0.08	)		$	1.20
Total diluted	$	(0.20	)		$	0.01		$	(0.08	)		$	1.20

(1) Anti-dilutive, therefore not included.

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 net income (loss) per unit is presented below:


	Three Months Ended				Three Months Ended			Nine Months Ended				Nine Months Ended
	September 30, 2023				September 30, 2022			September 30, 2023				September 30, 2022
	(unaudited)				(unaudited)			(unaudited)				(unaudited)
Numerator
Net (loss) income	$	(2,065,826	)		$	1,972,563		$	4,579,359			$	28,766,978
Less: Net loss (income) allocated to participating unit awards		28,008				(6,597	)		(58,032	)			(94,522	)
Undeclared distributions to preferred unitholders		(1,994,313	)			(1,813,820	)		(5,982,938	)			(5,639,906	)
Gain on extinguishment of preferred units		—				(97,157	)		—				64,518
Net (loss) income attributable to unitholders for EPU computation	$	(4,032,131	)		$	54,989		$	(1,461,611	)		$	23,097,068


Denominator
Weighted average number of units outstanding for basic EPU computation		19,810,991				19,501,310			19,807,797				19,116,224
Effect of dilutive participating securities:
Unvested restricted units		—		(1)		65,000			—		(1)		62,606
Unit compensation awards unissued		—		(1)		37,912			—		(1)		129,002
Weighted average number of equivalent units outstanding for diluted EPU computation		19,810,991				19,604,222			19,807,797				19,307,832


Basic net (loss) income per unit:
Undistributed (loss) income	$	(0.20	)		$	-		$	(0.07	)		$	1.21
Total basic	$	(0.20	)		$	-		$	(0.07	)		$	1.21

Diluted net (loss) income per unit:
Undistributed (loss) income	$	(0.20	)		$	-		$	(0.07	)		$	1.20
Total diluted	$	(0.20	)		$	-		$	(0.07	)		$	1.20

(1) Anti-dilutive, therefore not included.

13. Subsequent Events

On October 30, 2023, we authorized payment of a quarterly distribution of $0.50 per share (and unit) of Series B Preferred Stock (and Series B Preferred Units) to holders of the Series B Preferred Stock (and Series B Preferred Units) of record as of November 30, 2023, to be paid on December 15, 2023.

On October 30, 2023, we authorized payment of a quarterly distribution of $0.4921875 per share (and unit) of Series C Preferred Stock (and Series C Preferred Units) to holders of the Series C Preferred Stock (and Series C Preferred Units) of record as of November 30, 2023, to be paid on December 15, 2023.

On October 30, 2023, we authorized payment of a quarterly distribution of $0.515625 per share (and unit) of Series D Preferred Stock (and Series D Preferred Units) to holders of the Series D Preferred Stock (and Series D Preferred Units) of record as of November 30, 2023, to be paid on December 15, 2023.

Effective as of October 29, 2023, we entered into a loan amendment to extend the maturity date on the existing mortgage on the DoubleTree by Hilton Philadelphia Airport hotel with the existing lender, TD Bank, N.A. Pursuant to the loan amendment: (i) the maturity date was extended to December 29, 2023 and (ii) the interest rate was increased to SOFR plus 3.50%. Concurrent with the execution of the loan amendment, the Company also received a waiver of non-compliance with financial covenants for the period ended June 30, 2023, conditioned upon the increase in a reserve account maintained by the lender of $450,000, which the Company made. The loan continues to be guaranteed by the Operating Partnership. We are in negotiations with the lender to further modify and extend the mortgage loan.

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 on similar or more favorable terms;

•

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 the limitations imposed on the Company's business due to such maintenance; 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 for the year ended December 31, 2022.

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, 2023, 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		71	(2)	Hollywood, FL	January 30, 2017	Luxury(1)
Hyde Beach House Resort & Residences		76	(2)	Hollywood, FL	September 27, 2019	Luxury(1)
Total Hotel & Participating Condominium Hotel Rooms		2,933

(1)

Operated as an independent hotel.

(2)

Reflects only those condominium units that were participating in the rental program, as of September 30, 2023. 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 98.2% 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 an eligible independent hotel management company 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.

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, 2023 and 2022, 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, 2023 and the corresponding period in 2022 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, 2023 and the corresponding period in 2022. The same-store (composite) portfolio metrics includes all properties with the exceptions of the Sheraton Louisville

Riverside and the DoubleTree by Hilton Raleigh-Brownstone University, during the three and nine months ended September 30, 2023, and the corresponding period in 2022.


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Actual Portfolio Metrics
Occupancy %		62.4	%		63.0	%		64.5	%		61.7	%
ADR	$	164.14		$	161.77		$	179.18		$	170.13
RevPAR	$	102.46		$	101.87		$	115.59		$	105.00
Same-Store Portfolio Metrics
Occupancy %		62.4	%		63.0	%		64.5	%		62.3	%
ADR	$	164.14		$	161.77		$	179.18		$	171.32
RevPAR	$	102.46		$	101.87		$	115.59		$	106.74
Composite Portfolio Metrics
Occupancy %		61.5	%		62.0	%		63.8	%		61.2	%
ADR	$	167.10		$	168.18		$	184.83		$	181.72
RevPAR	$	102.82		$	104.19		$	117.89		$	111.16
Same-Store (Composite) Portfolio Metrics
Occupancy %		61.5	%		62.0	%		63.8	%		61.7	%
ADR	$	167.10		$	168.18		$	184.83		$	183.25
RevPAR	$	102.82		$	104.19		$	117.89		$	113.07

Comparison of the Three Months Ended September 30, 2023, to the Three Months Ended September 30, 2022

Revenue. Total revenue for the three months ended September 30, 2023, decreased slightly by 0.1%, and was essentially flat at approximately $39.2 million compared to total revenue of approximately $39.2 million for the three months ended September 30, 2022. Increases in total revenue at four of our wholly-owned properties, offset by decreases at eight of our other properties, resulted in a small decrease in aggregate revenue for the period.

Room revenue increased approximately $0.2 million, or 0.6%, to approximately $26.3 million for the three months ended September 30, 2023, compared to room revenue of approximately $26.1 million for the three months ended September 30, 2022. RevPAR for the three month period increased 0.6% from $101.87 in 2022, to $102.46 in 2023, driven by a 0.6% decrease in occupancy and a 1.5% increase in ADR. Increases in room revenue at four of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset room revenue decreases at the remaining six wholly-owned properties.

Food and beverage revenues increased approximately $0.7 million, or 10.4%, to approximately $7.5 million for the three months ended September 30, 2023 compared to food and beverage revenues of approximately $6.8 million for the three months ended September 30, 2022. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at eight of our wholly-owned properties offset decreases at the remaining two wholly-owned properties.

Revenue from other operating departments decreased approximately $0.9 million, or 14.1%, to approximately $5.4 million for the three months ended September 30, 2023 compared to revenue from other operating departments of approximately $6.3 million for the three months ended September 30, 2022. Most of the decrease related to lower net revenue related to the rental programs we manage for participating unit owners at the condominium hotel properties in Hollywood, Florida.

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 $2.2 million, or 7.6%, to approximately $31.6 million for the three months ended September 30, 2023, compared to total hotel operating expenses of approximately $29.4 million for the three months ended September 30, 2022. The increase in hotel operating expenses for the three months ended September 30, 2023, resulted from an aggregate increase in ten of our hotel properties by approximately $3.0 million, offset by decreases totaling approximately $0.8 million from two of our properties. This increase in hotel operating expenses was directly related to the increases in food and beverage revenues at a number of our hotels and higher indirect expenses as described below.

Rooms expense for the three months ended September 30, 2023 decreased by approximately $0.1 million, or 1.6%, to approximately $6.4 million, compared to rooms expense for the three months ended September 30, 2022 of approximately $6.5 million. The decrease in rooms expense for the three months ended September 30, 2023, resulted from an aggregate decrease in four

of our hotel properties by approximately $0.4 million, offset by increases totaling approximately $0.3 million from six of our properties.

Food and beverage expenses for the three months ended September 30, 2023 increased approximately $0.9 million, or 18.5%, to approximately $5.6 million, compared to food and beverage expenses of approximately $4.7 million, for the three months ended September 30, 2022. The net increase in food and beverage expenses for the three months ended September 30, 2023, resulted from an aggregate increase of approximately $0.9 million from nine of our properties, with a slight offset decrease by one of our properties. 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, 2023, decreased approximately $0.2 million or 7.9%, to approximately $2.2 million, compared to other operating departments expense for the three months ended September 30, 2022 of approximately $2.4 million. The decrease in other operating departments expense for the three months ended September 30, 2023, resulted from seven of our properties.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2023 increased approximately $1.6 million, or 10.4%, to approximately $17.3 million, compared to indirect expenses of approximately $15.7 million for the three months ended September 30, 2022. An increase of approximately $0.5 million driven by an increase in real estate and personal property taxes accounted for a majority of the increase. We also saw an increase of approximately $0.4 million driven by an increase in premiums for property and casualty coverage which accounted for a significant amount of the increase. Increased payroll costs due to increased staffing levels also contributed to the increase.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2023, decreased approximately $0.1 million, or 7.6%, to approximately $1.7 million compared to corporate general and administrative expenses of approximately $1.8 million, for the three months ended September 30, 2022. A decrease in professional fees for the current quarter accounted for the majority of the decrease.

Interest Expense. Interest expense for the three months ended September 30, 2023, increased approximately $0.3 million, or 5.7%, to approximately $4.5 million, as compared to interest expense of approximately $4.2 million, for the three months ended September 30, 2022. The increase in interest expense for the three months ended September 30, 2023, was substantially related to increases in the amount of corporate debt affected by increasing interest rates on the variable rate mortgages.

Unrealized Gain on Hedging Activities. As of September 30, 2023, the fair market value of our interest rate swap assets are approximately $1.3 million. The unrealized gain on hedging activities during the three months ended September 30, 2023, was approximately $0.1 million, compared to a gain of approximately $1.4 million during the three months ended September 30, 2022. The unrealized gain on hedging activities was driven by changes in expectation of short-term rates over the term of the hedging instruments offset by any decrease in the remaining term of each instrument.

Gain on Involuntary Conversion of Assets. Gain on involuntary conversion of assets decreased approximately $0.9 million, from approximately $1.4 million for the three months ended September 30, 2022 to approximately $0.5 million, for the three months ending September 30, 2023. The gains were related to casualties at our properties in Savannah, Georgia and Atlanta, Georgia.

Income Taxes. We had an income tax benefit of $354,398 for the three months ended September 30, 2023, compared to an income tax provision of $12,474, for the three months ended September 30, 2022.

Net (Loss) Income. We realized a net loss for the three months ended September 30, 2023, of approximately $2.1 million, compared to a net income of approximately $2.0 million, for the three months ended September 30, 2022, because of the operating results discussed above.

Comparison of the Nine Months Ended September 30, 2023, to the Nine Months Ended September 30, 2022

Revenue. Total revenue for the nine months ended September 30, 2023, increased approximately $7.0 million, or 5.6%, to approximately $131.7 million compared to total revenue of approximately $124.7 million for the nine months ended September 30, 2022. There was a net aggregate increase in total revenue of approximately $13.6 million, at eight of our wholly-owned properties, offset mainly by decreases at our three Hollywood Beach, Florida properties. There was also a decrease of approximately $3.2 million related to the disposition of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Room revenue increased approximately $4.4 million, or 5.3%, to approximately $87.9 million for the nine months ended September 30, 2023, compared to room revenue of approximately $83.5 million for the nine months ended September 30, 2022. RevPAR increased 10.1% from $105.00 for the nine month period ended September 30, 2022, to $115.59 for the same period in 2023,

driven by a 2.8% increase in occupancy and a 5.3% increase in ADR offset by a 4.4% decrease in rooms available for sale as a result of the sale of the DoubleTree by Hilton Raleigh Brownstone – University in June 2022. Increases in room revenue at seven of our wholly-owned properties were driven by increases in small group and corporate business travel demand and offset decreases in room revenue at the remaining three wholly-owned properties.

Food and beverage revenues increased approximately $5.7 million, or 27.9%, to approximately $25.8 million for the nine months ended September 30, 2023, compared to food and beverage revenues of approximately $20.1 million for the nine months ended September 30, 2022. Increases in banqueting and catering for small groups and meetings as well as increases in demand at our restaurant outlets at nine of our wholly-owned properties offset a decrease at the remaining wholly-owned property.

Revenue from other operating departments revenues decreased approximately $3.1 million, or 14.6%, to approximately $18.0 million for the nine months ended September 30, 2023, compared to revenue from other operating departments of approximately $21.1 million for the nine months ended September 30, 2022. Most of the decrease related to lower net revenue related to the rental programs we manage for participating unit owners at the condominium hotel properties in Hollywood, Florida. Additionally, in the comparable nine month period of 2022, we had received a one-time $1.0 million grant from the state of North Carolina, which was not available and which we did not receive in 2023.

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 $7.0 million, or 7.8%, to approximately $97.2 million for the nine months ended September 30, 2023, compared to total hotel operating expenses of approximately $90.2 million for the nine months ended September 30, 2022. The increase in hotel operating expenses for the nine months ended September 30, 2023, resulted from an aggregate increase in total hotel operating expenses of approximately $10.7 million from ten of our properties, offset by decreases totaling approximately $1.3 million from two of our properties in addition to a decrease of approximately $2.4 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 nine months ended September 30, 2023, increased by approximately 0.2 million, or 0.9%, to approximately $19.9 million, compared to rooms expense for the nine months ended September 30, 2022 of approximately $19.7 million. The increase in rooms expense for the nine months ended September 30, 2023, resulted from an aggregate increase of approximately $1.6 million from seven of our hotel properties, offset by a decrease totaling approximately $0.7 million from three of our properties in addition to a decrease of approximately $0.7 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.

Food and beverage expenses for the nine months ended September 30, 2023, increased approximately $4.1 million, or 29.3%, to approximately $17.9 million, compared to food and beverage expenses of approximately $13.8 million, for the nine months ended September 30, 2022. The net increase in food and beverage expenses for the nine months ended September 30, 2023, resulted from an aggregate increase of approximately $4.3 million, offset by a decrease totaling approximately $0.2 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. The increase was directly related to the increase in food and beverage revenue.

Expenses from other operating departments for the nine months ended September 30, 2023, decreased approximately $0.7 million or 8.7%, to approximately $6.8 million, compared to other operating departments expense for the nine months ended September 30, 2022 of approximately $7.5 million. The decrease in other operating departments expense for the nine months ended September 30, 2023, resulted from an aggregate decrease of approximately $0.9 million from six of our properties, including the two disposed properties, offset by an increase totaling approximately $0.2 million from six of our properties.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2023, increased approximately $3.4 million, or 7.0%, to approximately $52.5 million, compared to indirect expenses of approximately $49.1 million for the nine months ended September 30, 2022. There was a net aggregate increase of approximately $5.5 million from ten of our properties, offset by a decrease of approximately $2.0 million from two of our properties. The increases were driven by an approximately $1.9 million increase in premiums for property and casualty insurance coverage and increased payroll costs due to additional staffing levels. These increases were offset by a decrease of approximately $1.5 million, as a result of the dispositions of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2023, increased approximately $0.7 million, or 14.3%, to approximately $5.5 million compared to corporate general and administrative expenses of approximately $4.8 million, for the nine months ended September 30, 2022. A benefit of approximately $0.2 million in the prior period related to the employee retention credit, as well as an increase in employee compensation, audit, legal and other professional fees of approximately $0.9 million contributed to the increase.

Interest Expense. Interest expense for the nine months ended September 30, 2023, decreased approximately $2.4 million, or 15.8%, to approximately $12.9 million, as compared to interest expense of approximately $15.3 million, for the nine months ended September 30, 2022. The decrease in interest expense for the nine months ended September 30, 2023, was substantially related to decreases in the amount of corporate debt attributable to the sales of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022 and the extinguishment of certain secured notes in June 2022.

Unrealized (Loss)/Gain on Hedging Activities. As of September 30, 2023, the fair market value of our interest rate swap assets is approximately $1.3 million. The unrealized loss on hedging activities during the nine months ended September 30, 2023, was approximately $0.1 million, as compared to a $3.0 million gain during the nine months ended September 30, 2022. The unrealized loss 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 benefit of $322,679 for the nine months ended September 30, 2023, compared to an income tax provision of $33,744, for the nine months ended September 30, 2022.

Net Income. We realized a net income for the nine months ended September 30, 2023, of approximately $4.6 million, compared to a net income of approximately $28.8 million, for the nine months ended September 30, 2022, because of the operating results discussed above and the dispositions of the Sheraton Louisville Riverside in February 2022 and the DoubleTree by Hilton Raleigh Brownstone University in June 2022.

Non-GAAP Financial Measures

We consider the non-GAAP financial measures of FFO attributable to common stockholders and unitholders (including FFO per common share and unit), Adjusted FFO attributable 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 Attributable 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 the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Net (loss) income	$	(2,065,826	)	$	1,972,563		$	4,579,359		$	28,766,978
Depreciation and amortization - real estate		4,702,148			4,690,712			14,017,095			13,846,737
Distributions to preferred stockholders		(1,994,313	)		(1,813,820	)		(5,982,938	)		(5,639,906	)
(Gain) loss on disposal of assets		(4,700	)		1,215			(4,700	)		(29,562,149	)
Gain on involuntary conversion of assets		(551,729	)		(1,422,295	)		(1,331,374	)		(1,473,842	)
FFO attributable to common stockholders and unitholders		85,580			3,428,375			11,277,442			5,937,818
Amortization		12,871			14,094			39,428			42,844
ESOP and stock - based compensation		55,763			373,256			370,714			895,945
Loss on early debt extinguishment		—			—			—			5,944,881
Unrealized (gain) loss on hedging activities		(103,946	)		(1,457,552	)		51,686			(2,992,311	)
Adjusted FFO attributable to common stockholders and unitholders	$	50,268		$	2,358,173		$	11,739,270		$	9,829,177

Weighted average number of shares outstanding, basic		18,906,851			18,045,365			18,742,219			17,598,153

Weighted average number of non-controlling units		578,744			1,043,033			724,555			1,095,284

Weighted average number of shares and units outstanding, basic		19,485,595			19,088,398			19,466,774			18,693,437

FFO per common share and unit	$	0.00		$	0.18		$	0.58		$	0.32

Adjusted FFO per common share and unit	$	0.00		$	0.12		$	0.60		$	0.53

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) Paycheck Protection Program (PPP) debt forgiveness, (11) gain on exercise of development right, (12) corporate general and administrative expense, and (13) 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, 2023 and 2022:


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Net (loss) income	$	(2,065,826	)	$	1,972,563		$	4,579,359		$	28,766,978
Interest expense		4,466,630			4,224,387			12,868,595			15,280,531
Interest income		(222,878	)		(40,581	)		(592,315	)		(92,515	)
Income tax (benefit) provision		(354,398	)		12,474			(322,679	)		33,744
Depreciation and amortization		4,715,019			4,704,806			14,056,523			13,889,621
EBITDA		6,538,547			10,873,649			30,589,483			57,878,359
PPP loan forgiveness		—			—			(275,494	)		—
Loss on early debt extinguishment		—			—			—			5,944,881
(Gain) loss on disposal of assets		(4,700	)		1,215			(4,700	)		(29,562,149	)
Gain on involuntary conversion of assets		(551,729	)		(1,422,295	)		(1,331,374	)		(1,473,842	)
Subtotal		5,982,118			9,452,569			28,977,915			32,787,249
Corporate general and administrative		1,688,535			1,827,746			5,458,340			4,774,139
Unrealized (gain) loss on hedging activities		(103,946	)		(1,457,552	)		51,686			(2,992,311	)
Hotel EBITDA	$	7,566,707		$	9,822,763		$	34,487,941		$	34,569,077

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, 2023, we had approximately $19.2 million of unrestricted cash and $10.2 million of restricted cash.

Operating Activities. Our net cash flow provided by operating activities for the nine months ended September 30, 2023, was approximately $18.5 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 leisure transient, small group and corporate business travel. 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 used in investing activities for the nine months ended September 30, 2023, was approximately $4.6 million. Of this amount approximately $6.1 million was related to capital expenditures for improvements and additions to hotel properties. There were also insurance proceeds related to involuntary conversions of approximately $1.3 million and proceeds from the grant of a utility easement of approximately $0.1 million.

Financing Activities. During the nine months ended September 30, 2023, the Company and Operating Partnership received proceeds from a mortgage loan of approximately $2.7 million, made principal payments on its mortgages of approximately $5.6 million, payments on its unsecured notes of approximately $0.6 million and payments on deferred financing costs of approximately $0.4 million, and paid preferred dividends of approximately $8.0 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 2020, we postponed all major non-essential capital expenditures. As travel demand returned, and occupancy and RevPAR gradually increased, we increased the level of capital expenditures. We expect total capital expenditures for 2023 to be approximately $7.6 million.

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

Liquidity and Capital Resources

As of September 30, 2023, we had total cash of approximately $29.4 million. During the nine months ended September 30, 2023, we generated cash, cash equivalents and restricted cash of approximately $2.1 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).

On May 4, 2023, we secured a $10.0 million mortgage loan on the DoubleTree by Hilton Laurel hotel with Citi Real Estate Funding Inc. Pursuant to the loan documents, the loan has a maturity date of May 6, 2028; carries a fixed rate of interest of 7.35%; required monthly payments of interest only; and cannot be prepaid until the last four months of the loan term. We used a portion of the proceeds to repay the existing first mortgage on the hotel and will use the balance of the proceeds for general corporate purposes.

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 DoubleTree by Hilton Philadelphia Airport. The mortgage was set to mature on October 31, 2023, but was extended to December 29, 2023 pursuant to an amendment to the loan agreement. We anticipate a further extension of the maturity date the loan for an additional 18 to 36 months as well as a waiver of the non-compliance with the financial covenant subject to additional terms and conditions which may include a reduction of the principal balance and deposits into interest, FF&E and other reserve accounts.

In July 2024, the mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures. We intend to refinance the mortgage at the expected level of maturing indebtedness.

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, 2023, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans, with the exception of a covenant default under the mortgage on the DoubleTree by Hilton Philadelphia Airport. We anticipate a waiver of non-compliance in conjunction with and extension of the loan term.

Certain of our loan agreements also include financial covenants that trigger a “cash trap”. As of September 30, 2023, we failed to meet the financial covenants under the mortgage secured by the DoubleTree Resort by Hilton Hollywood Beach, 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

We may not make distributions with respect to any shares of our common stock, unless and until full cumulate 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.

On January 24, 2023, we announced that we will resume quarterly distributions to holders of our preferred stock and set a record date of February 28, 2023 with a payment date of March 15, 2023.

On April 24, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of May 31, 2023 and a payment date of June 13, 2023.

On May 30, 2023, we announced the declaration of a "catch up" distribution to holders of our preferred stock with a record date of June 30, 2023 and a payment date of July 14, 2023.

On August 1, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of August 31, 2023 and a payment date of September 15, 2023.

On October 30, 2023, we announced the declaration of a quarterly distribution to holders of our preferred stock with a record date of November 30, 2023 and a payment date of December 15, 2023.

As of September 30, 2023, the amount of cumulative unpaid dividends on our outstanding preferred shares as approximately $21.9 million. We expect that any reduction in the level of cumulative unpaid distributions will be made in the form of a series of "catch up" distributions, such as the distribution announced on May 30, 2023. The amount, timing and frequency of distributions, including additional “catch-up” distributions, will be authorized by our board of directors and based upon a variety of factors deemed relevant by the directors. No assurance can be given that the distribution policy will not change in the future.

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 that differ from the general rate of 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, 2022. 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, 2023, we had approximately $267.8 million of fixed-rate debt, including the mortgage on our Tampa, Florida hotel, which is fixed by an interest rate swap to approximately 5.576%, and the PPP Loans of approximately $1.7 million, with a fixed rate of 1.0% and approximately $53.0 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.87%. 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 mortgages on our Philadelphia, Pennsylvania and Houston, Texas hotels remains at approximately $53.0 million, the balance at September 30, 2023, the impact on our annual interest incurred and cash flows of a one percent increase in SOFR and the Prime Rate, would be approximately $0.5 million.

As of December 31, 2022, we had approximately $310.2 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%, the mortgage on our Hotel Alba Tampa, Tapestry Collection by Hilton, which is fixed by an interest rate swap to approximately 5.576% and the PPP Loans of $2.5 million, with a fixed rate of 1.0% and approximately $14.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 4.83%. 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, SOFR, and in Prime Rate. Assuming that the aggregate amount outstanding on the mortgage on The Whitehall remains at approximately $14.2 million, the balance at December 31, 2022, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR, SOFR, and in Prime Rate, would be approximately $0.1 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, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, 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, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, 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, 2022.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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.

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.

As of November 10, 2023, the Company has deferred payment and is in arrears on dividends for the Company's Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the periods ending March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022, September 30, 2022, December 31, 2022, March 31, 2023, June 30, 2023, and September 30, 2023. 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 Company has declared dividends in the respective amounts shown above for each of the Series B, Series C, and Series D Preferred Stock, for the distribution period ending March 31, 2021, payable on December 15, 2023. The total arrearage of cumulative unpaid cash dividends on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through November 10, 2023, 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

10.1		Executive Officer Incentive Compensation Recovery Policy (incorporated by reference to the document previously filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2023).

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. **

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 13, 2023	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 13, 2023	By:	/s/ David R. Folsom
		David R. Folsom
		President and Chief Executive Officer

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