Sotherly Hotels(SOHO) - 2023 Q4 - Annual Report

PART I Business Overview Sotherly Hotels Inc. is a self-managed REIT focused on owning, acquiring, renovating, and repositioning upscale and upper-upscale full-service hotels in the mid-Atlantic and southern United States Organization Structure - Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT, formed in August 2004, focused on owning, acquiring, renovating, and repositioning full-service, primarily upscale and upper-upscale hotel properties in primary markets in the mid-Atlantic and southern United States[30] - The Company conducts its business through Sotherly Hotels LP, its operating partnership, of which the Company is the general partner, owning approximately 98.2% of the general and limited partnership units[30] Our Properties - As of December 31, 2023, the portfolio consisted of ten full-service, primarily upscale and upper-upscale hotels located in seven states with an aggregate of 2,786 hotel rooms, and interests in two condominium hotels and their associated rental programs[31] - Seven of these hotels operate under franchise agreements with major hotel brands, and three are independent hotels[34] Strategy and Investment Criteria - Strategy focuses on acquiring full-service, upscale and upper-upscale hotel properties in primary markets of the southern United States, with opportunistic acquisitions elsewhere[35][36] - Bias towards acquiring underperforming hotels (poorly managed, deferred maintenance, improperly positioned) to improve revenue, cash flow, and long-term value[38] - Investment vehicles include direct purchase, joint ventures, and mezzanine lending, with a principal goal in distressed debt opportunities to ultimately acquire the underlying real estate[40] Portfolio and Asset Management Strategy - Strategy focuses on maximizing market share (RevPAR penetration indices) and optimizing Hotel EBITDA by actively monitoring operating expenses[42] - Prefers management by independent companies (Our Town Hospitality) over major national/global hotel franchise companies for better profitability and guest service[45] - Asset disposition strategy involves direct sale of non-core properties for cash, with an aim to redeploy capital and mitigate tax consequences through tax-free exchanges[47] Our Principal Agreements Management Agreements - All hotels are managed on a day-to-day basis by Our Town Hospitality, an eligible independent management company[48] - Certain officers and directors of Sotherly Hotels Inc. beneficially owned approximately 93.0% of the total outstanding ownership interests in Our Town Hospitality as of March 15, 2023[54][168] Management Fee Structure | Fee Type | Details | | :--- | :--- | | Base Management Fee | 2.50% of gross revenues for most hotels; 2.00%-2.50% for new hotels over first three years | | Incentive Management Fee | 10% of gross operating profit exceeding budget, capped at 0.25% of gross revenues | | Expiration | March 31, 2035, with two 5-year extension options | Franchise Agreements - Most wholly-owned hotels operate under franchise licenses from national hotel companies, with the majority under Hilton brands and one under Hyatt[55][95] Franchise/Royalty Fees (As of December 31, 2023) | Hotel Name | Franchise/Royalty Fee (Percentage of room revenues) | Expiration Date | | :--- | :--- | :--- | | Hotel Alba Tampa, Tapestry Collection by Hilton | 5.0 % | June 2029 | | DoubleTree by Hilton Jacksonville Riverfront | 5.0 % | September 2025 | | DoubleTree by Hilton Laurel | 4.0 % (4.0% for 2024-2025, 5.0% thereafter) | October 2030 | | DoubleTree by Hilton Philadelphia – Airport | 5.0 % | October 2024 | | DoubleTree Resort by Hilton Hollywood Beach | 5.0 % | October 2027 | | Georgian Terrace | Independent | | Hotel Alba Tampa, Tapestry Collection by Hilton | 5.0 % | June 2029 | | Hotel Ballast Wilmington, Tapestry Collection by Hilton | 5.0 % | April 2028 | | Hyatt Centric Arlington | 5.0 % | March 2038 | | The Whitehall | Independent | Lease Agreements - Wholly-owned hotels are leased to TRS Lessees, which are obligated to pay a fixed annual base rent plus a percentage rent based on gross room revenues[61][62] - The Hyatt Centric Arlington hotel is subject to a ground lease requiring annual payments of $50,000 base rent and 3.5% of gross room revenue above thresholds, with a rent reset provision in June 2025[63] - The company leases approximately 8,500 square feet for its corporate offices in Williamsburg, Virginia, with an initial annual rent of $218,875, increasing by 3.0% annually, and a 1/3rd rent reduction effective January 1, 2024[65] Tax Status - The Company elected to be taxed as a REIT, requiring distribution of at least 90.0% of its taxable income to stockholders to avoid federal corporate income tax[66] - MHI Holding, a taxable REIT subsidiary (TRS), is subject to federal, state, and local income taxes and has operated at a cumulative taxable loss of approximately $48.6 million through December 31, 2023[69] Environmental Matters - The Company is subject to federal, state, and local environmental protection laws, potentially incurring liability for hazardous substance remediation costs regardless of knowledge or responsibility[70] - The Company believes its hotels are in material compliance with environmental regulations and has not received notices of noncompliance[71] Employees and Human Capital - As of December 31, 2023, the Company employed nine full-time persons at its corporate office in Williamsburg, Virginia[72] - All persons employed in the day-to-day operations of each hotel are employees of the third-party hotel manager, Our Town Hospitality, with only one property having approximately 67 unionized employees[46][72] Available Information - The Company makes its annual reports, quarterly reports, current reports, proxy statements, Code of Business Conduct, and committee charters available free of charge on its website, http://www.sotherlyhotels.com[73](index=73&type=chunk) Risk Factors Sotherly Hotels Inc. faces a range of material risks, including those related to its limited number of properties, hotel operating expenses, and investment strategy. Industry-specific risks include economic downturns, seasonality, and capital-intensive operations. Financial risks stem from substantial debt, upcoming maturities, and interest rate fluctuations. Organizational risks involve potential changes of control, ownership limitations, and conflicts of interest with its management company. Furthermore, maintaining REIT status is complex and subject to various tax compliance risks Summary of Risk Factors - Key risks include limited number of hotels, increased operating expenses, investment strategy execution, reliance on management company, and ability to make distributions[78] - Risks related to the lodging industry include overall economy, operating risks, seasonality, investment concentration, and capital expenditures[78] - Financial risks involve substantial leverage, debt maturities, borrowing costs, and interest rate fluctuations[79][84] - Organizational and tax risks include change of control provisions, ownership limitations, preferred stock rights, and maintaining REIT qualification[80][82][84] Risks Related to Our Business and Properties - Owning a limited number of hotels means significant adverse changes at one property could materially affect financial performance and ability to make distributions[86] - Dependence on the hotel management company (Our Town) for daily operations limits the Company's ability to intervene, even if operations are inefficient, and replacing a manager could incur substantial termination fees[89][90] - Geographic concentration in the mid-Atlantic and southern United States makes the business vulnerable to regional economic downturns[94] - Reliance on information technology and potential cybersecurity breaches could harm business, reputation, and financial condition, despite existing insurance coverage[102][103] - Investments and business activities are restricted by REIT laws, potentially limiting opportunities like developing alternative real estate uses or owning hotels not leased to a TRS[105] Risks Related to the Lodging Industry - Lodging industry performance is closely linked to the general economy; economic downturns can harm operating performance and financial results due to declines in occupancy and average daily room rates[106] - Hotel properties require ongoing capital expenditures and renovations, which may not be fully funded by operating activities due to REIT distribution requirements, necessitating reliance on debt or equity capital[111][119] - Operating under franchise agreements subjects the company to franchisors' operating standards and potential capital expenditure requirements, with risks of termination and associated fees if standards are not met[113][115][116] - The business is vulnerable to uninsured or underinsured catastrophic losses (e.g., hurricanes, terrorism) and noncompliance with governmental regulations (e.g., environmental, ADA) could adversely affect operating results[120][121][122][124] - Heightened focus on corporate responsibility and ESG practices may impose additional costs, constrain business operations, and expose the Company to reputational damage or investor preference shifts[130][131] General Risks Related to the Real Estate Industry - Real estate investments are relatively illiquid, limiting the ability to promptly sell properties in response to changing economic, financial, and investment conditions[132] - Future acquisitions may not yield expected returns, could disrupt operations, strain management resources, and potentially dilute stockholder interests[135] - Properties may contain or develop harmful mold, leading to costly remediation programs, liability for adverse health effects, and reputational damage[136] - Increases in real and personal property taxes would raise operating costs, reduce income, and adversely affect the ability to make distributions to stockholders[137] Risks Related to Our Debt and Financing - As of December 31, 2023, the Company had approximately $318.9 million in aggregate principal balances of mortgages and unsecured debt, indicating substantial financial leverage[138] - Failure to comply with financial covenants in mortgage loan agreements could result in default, potentially requiring negotiation of waivers, amendments, or asset disposal[139][140][141] - Borrowing costs are sensitive to fluctuations in interest rates, particularly for floating-rate debt, which could increase debt service requirements[145] Debt Maturity Schedule (As of December 31, 2023) | Year | Total Aggregate Amount (approx.) | Percentage of Total Debt Obligations | | :--- | :--- | :--- | | 2024 | $71.9 million | 19.1% | | 2025 | $91.4 million | 24.2% | | 2026 | $58.6 million | 15.5% | Risks Related to Our Organization and Structure - The Operating Partnership agreement grants limited partners redemption rights upon a change of control, potentially making mergers or business combinations more difficult[147] - The Company's charter limits individual ownership to 9.9% of outstanding capital stock or common stock, which may prevent third-party acquisitions of control[148] - Executive employment agreements include substantial payments (e.g., three times combined salary and bonus, vesting of stock options) to officers upon a change of control or termination without cause, increasing acquisition costs[153][154][155] - The board of directors can revoke the Company's REIT election without stockholder approval, which could subject the company to federal income tax and reduce distributions[164] - The Company's success depends on key personnel (Chairman, CEO, COO, CFO), and the loss of their services could adversely affect operations[166] Risks Related to Conflicts of Interest of Our Officers and Directors - Executive officers and certain directors (Andrew M. Sims, David R. Folsom, Andrew M. Sims Jr.) beneficially own approximately 93.0% of Our Town Hospitality, the hotel management company[168] - This ownership creates conflicts of interest, potentially influencing decisions on hotel sales, acquisitions, budget approvals (which impact incentive management fees), and enforcement of management agreements[170][171] - Provisions in bylaws require independent director approval for transactions with Our Town or interested directors, but there's no assurance these will always mitigate conflicts successfully[174] Federal Income Tax Risks Related to the Company's Status as a REIT - Maintaining REIT qualification is complex and requires satisfying numerous income, asset, and distribution tests; failure could result in federal income tax and reduced distributions[175][177] - If MHI Holding (TRS) exceeds certain value thresholds or the hotel manager (Our Town) fails to qualify as an 'eligible independent contractor,' the Company could lose its REIT status[179][190][191] - Transactions with MHI Holding must be conducted on arm's-length terms to avoid a 100% excise tax on 're-determined rent' or 're-determined deductions'[180][198] - Complying with REIT requirements may force the Company to forgo attractive investment opportunities or liquidate otherwise attractive investments[182][184] - Foreign investors may be subject to U.S. tax on stock disposition (FIRPTA) if the Company is not a 'domestically controlled' REIT, and ordinary dividends are subject to U.S. withholding tax[194][203] - U.S. tax reform (e.g., TCJA, CARES Act) and related regulatory actions could adversely affect the Company and its stockholders, potentially with retroactive application[205][206] Unresolved Staff Comments This item is not applicable as the company has no unresolved staff comments - The company has no unresolved staff comments[208] Cybersecurity The Chief Financial Officer manages cybersecurity risks, collaborating with external advisors on mitigation strategies and controls, with annual Audit Committee reviews. As of December 31, 2023, no material cybersecurity threats impacted the company's business, operations, or financial condition. The company relies on its hotel management company and franchisors for cybersecurity management and incident response - The Chief Financial Officer is responsible for managing cybersecurity risk, developing mitigation strategies, and implementing controls, with annual discussions with the Audit Committee[209] - As of December 31, 2023, no cybersecurity threats have materially affected the business, results of operations, or financial condition[210] - The Company relies on its hotel manager (Our Town) and franchisors to manage cybersecurity risk for their systems and hotel-level systems, as the Company does not have its own incident response plan[211][212] Properties As of December 31, 2023, the company's portfolio included ten wholly-owned hotels with 2,786 rooms and two condominium hotels with 140 participating rental program units. The table below presents occupancy, average daily rate (ADR), and revenue per available room (RevPAR) for each property for 2023, 2022, and 2021 - As of December 31, 2023, the portfolio consisted of ten wholly-owned hotels with 2,786 rooms and two condominium hotels with 140 participating units[214] Key Operating Metrics by Property (2021-2023) | Wholly-Owned Properties | Number of Rooms | Occupancy 2023 | ADR 2023 | RevPAR 2023 | Occupancy 2022 | ADR 2022 | RevPAR 2022 | Occupancy 2021 | ADR 2021 | RevPAR 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | The DeSoto, Savannah, Georgia | 246 | 69.2% | $211.26 | $146.23 | 65.7% | $211.49 | $139.00 | 59.3% | $185.06 | $109.76 | | DoubleTree by Hilton Jacksonville Riverfront, Jacksonville, Florida | 293 | 70.0% | $148.42 | $103.90 | 68.8% | $146.53 | $100.79 | 65.7% | $135.34 | $88.96 | | DoubleTree by Hilton Laurel, Laurel, Maryland | 208 | 57.8% | $127.29 | $73.55 | 59.7% | $117.20 | $69.98 | 48.0% | $100.75 | $48.41 | | DoubleTree by Hilton Philadelphia Airport, Philadelphia, Pennsylvania | 331 | 61.7% | $141.15 | $87.13 | 64.6% | $140.94 | $91.01 | 58.9% | $123.41 | $72.71 | | DoubleTree Resort by Hilton Hollywood Beach, Hollywood, Florida | 311 | 59.9% | $201.48 | $120.70 | 60.6% | $206.18 | $124.93 | 52.2% | $186.73 | $97.45 | | Georgian Terrace, Atlanta, Georgia | 326 | 52.2% | $194.12 | $101.33 | 51.8% | $198.90 | $103.09 | 48.7% | $183.53 | $89.35 | | Hotel Alba Tampa, Tapestry Collection by Hilton, Tampa, Florida | 222 | 77.8% | $177.00 | $137.75 | 76.3% | $165.11 | $125.92 | 72.8% | $143.09 | $104.15 | | Hotel Ballast Wilmington, Tapestry Collection by Hilton, Wilmington, North Carolina | 272 | 69.2% | $186.91 | $129.39 | 62.2% | $183.90 | $114.45 | 54.3% | $171.60 | $93.18 | | Hyatt Centric Arlington, Arlington, Virginia | 318 | 74.5% | $207.98 | $154.99 | 64.3% | $187.12 | $120.33 | 43.7% | $125.47 | $54.83 | | The Whitehall, Houston, Texas | 259 | 44.1% | $159.13 | $70.25 | 40.0% | $150.17 | $60.11 | 29.5% | $128.31 | $37.91 | | Condominium Hotels | | | | | | | | | | | | Hyde Resort & Residences | 65 | 51.9% | $345.39 | $179.23 | 52.8% | $420.53 | $222.08 | 54.2% | $415.38 | $225.21 | | Hyde Beach House Resort & Residences | 75 | 46.4% | $305.56 | $141.93 | 42.4% | $381.07 | $161.42 | 40.1% | $408.40 | $163.93 | Legal Proceedings The company is not involved in any material legal proceedings, nor are any material legal proceedings threatened against it, beyond routine litigation expected to be covered by insurance - The Company is not involved in any material legal proceedings, nor are any material legal proceedings threatened against it, beyond routine litigation expected to be covered by insurance[215] Mine Safety Disclosure This item is not applicable - Mine Safety Disclosure is not applicable to the Company[216] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Sotherly Hotels Inc. common stock trades on NASDAQ under "SOHO," with approximately 85 record holders and 19,849,165 shares outstanding as of March 1, 2024. Its charter limits individual ownership to 9.9% for REIT compliance. Sotherly Hotels LP partnership units are not publicly traded, with the company owning about 98.2% of outstanding units. Common stock dividends are suspended, while preferred stock quarterly distributions resumed in January 2023, though approximately $21.9 million in cumulative unpaid preferred dividends remained as of December 31, 2023 Sotherly Hotels Inc. - Sotherly Hotels Inc. common stock trades on the NASDAQ Global Market under the symbol 'SOHO'[220] - As of March 1, 2024, there were approximately 85 holders of record and 19,849,165 shares of common stock issued and outstanding[10][221] - The Company's charter limits common share ownership to 9.9% by any single person or affiliated group to comply with REIT qualification requirements[222] Sotherly Hotels LP - There is no established trading market for partnership units of Sotherly Hotels LP[226] - As of March 1, 2024, there were 5 holders of the Operating Partnership's units, with Sotherly Hotels Inc. owning approximately 98.2% of outstanding units[227] - No sales of unregistered securities in the Operating Partnership occurred during 2023[229] Dividend and Distribution Information - To maintain REIT qualification, the Company must make annual distributions of at least 90.0% of its REIT taxable income[230][232] - Common stock dividends have been suspended since January 2020, and no common dividends were paid in 2022 or 2023[231][234] - Distributions on preferred stock were in arrears for the last eleven quarterly payments as of December 31, 2023, but the Company resumed quarterly distributions to preferred stockholders on January 24, 2023[160][231] 2023 Preferred Stock Dividend Payments | Preferred Stock Series | Quarter Ended (in arrears) | Date Paid | Amount per Share (Ordinary Income) | | :--- | :--- | :--- | :--- | | Series B | March 31, 2020 | March 15, 2023 | $0.500000 | | Series B | June 30, 2020 | June 15, 2023 | $0.500000 | | Series B | September 30, 2020 | July 14, 2023 | $0.500000 | | Series B | December 31, 2020 | September 15, 2023 | $0.500000 | | Series B | March 31, 2021 | December 15, 2023 | $0.500000 | | Series C | March 31, 2020 | March 15, 2023 | $0.492188 | | Series C | June 30, 2020 | June 15, 2023 | $0.492188 | | Series C | September 30, 2020 | July 14, 2023 | $0.492188 | | Series C | December 31, 2020 | September 15, 2023 | $0.492188 | | Series C | March 31, 2021 | December 15, 2023 | $0.492188 | | Series D | March 31, 2020 | March 15, 2023 | $0.515625 | | Series D | June 30, 2020 | June 15, 2023 | $0.515625 | | Series D | September 30, 2020 | July 14, 2023 | $0.515625 | | Series D | December 31, 2020 | September 15, 2023 | $0.515625 | | Series D | March 31, 2021 | December 15, 2023 | $0.515625 | Reserved This item is reserved and contains no specific information - Item 6 is reserved and contains no information[235] Management's Discussion and Analysis of Financial Condition and Results of Operations This section outlines Sotherly Hotels Inc.'s business, focusing on its REIT hotel portfolio and operating model. It compares 2023 and 2022 financial performance, including revenue, expenses, and net income changes, and discusses key operating metrics (occupancy, ADR, RevPAR). It details cash sources and uses, capital expenditure plans, liquidity, capital resources, and compliance with mortgage debt and financial covenants. Additionally, it covers dividend policy, inflation, geographic concentration, seasonality, competition, critical accounting policies, and reconciliations of non-GAAP financial measures (FFO, Adjusted FFO, and Hotel EBITDA) Overview - Sotherly Hotels Inc. is a self-managed lodging REIT focused on upscale to upper-upscale full-service hotels in the mid-Atlantic and southern United States[236] - As of December 31, 2023, the portfolio consisted of ten hotels (2,786 rooms) and two condominium hotel rental programs, with seven franchised and three independent hotels[236] - The Company conducts business through Sotherly Hotels LP, its Operating Partnership, and leases hotels to TRS Lessees managed by Our Town Hospitality[237][238] Key Operating Metrics - Key performance indicators in the hotel industry are Occupancy, Average Daily Rate (ADR), and Revenue per Available Room (RevPAR)[240] - Changes in RevPAR driven by ADR generally have a greater impact on operating margins and profitability than those driven by occupancy[240] - Non-GAAP financial measures such as Funds from Operations (FFO), Adjusted FFO, and Hotel EBITDA are used as supplemental measures of operating performance[241] Results of Operations Comparison of Year Ended December 31, 2023 to Year Ended December 31, 2022 Key Operating Metrics (2023 vs. 2022) | Metric | 2023 Composite | 2023 Actual | 2022 Composite | 2022 Actual | | :--- | :--- | :--- | :--- | :--- | | Occupancy % | 62.8 % | 63.5 % | 60.0 % | 60.8 % | | ADR | $182.97 | $177.74 | $181.34 | $171.34 | | RevPAR | $114.96 | $112.84 | $108.87 | $104.17 | Revenue Comparison (2023 vs. 2022) | Revenue Category | 2023 (approx.) | 2022 (approx.) | Change (approx.) | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $173.8 million | $166.0 million | +$7.8 million | +4.7% | | Room Revenues | $114.7 million | $109.6 million | +$5.1 million | +4.7% | | Food and Beverage Revenues | $35.2 million | $29.5 million | +$5.7 million | +19.2% | | Other Operating Revenues | $23.9 million | $27.0 million | -$3.1 million | -11.5% | Expenses and Income Comparison (2023 vs. 2022) | Item | 2023 (approx.) | 2022 (approx.) | Change (approx.) | | :--- | :--- | :--- | :--- | | Hotel Operating Expenses | $129.0 million | $119.6 million | +$9.4 million | | Interest Expense | $17.6 million | $19.8 million | -$2.2 million | | Unrealized Gain (Loss) on Hedging Activities | -$0.7 million | +$2.9 million | -$3.6 million | | Gain on Sale of Assets | $0 | +$30.1 million | -$30.1 million | | Net Income (Loss) | $3.8 million | $34.0 million | -$30.2 million | | Distributions to Preferred Stockholders | $8.0 million | $7.6 million | +$0.4 million | Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021 Key Operating Metrics (2022 vs. 2021) | Metric | 2022 Composite | 2022 Actual | 2021 Composite | 2021 Actual | | :--- | :--- | :--- | :--- | :--- | | Occupancy % | 60.0 % | 60.8 % | 52.5 % | 52.9 % | | ADR | $181.34 | $171.34 | $160.51 | $145.50 | | RevPAR | $108.87 | $104.17 | $84.29 | $76.94 | Revenue Comparison (2022 vs. 2021) | Revenue Category | 2022 (approx.) | 2021 (approx.) | Change (approx.) | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $166.1 million | $127.6 million | +$38.5 million | +30.2% | | Room Revenues | $109.6 million | $88.6 million | +$21.0 million | +23.6% | | Food and Beverage Revenues | $29.5 million | $15.8 million | +$13.7 million | +86.7% | | Other Operating Revenues | $26.9 million | $23.1 million | +$3.8 million | +16.5% | Expenses and Income Comparison (2022 vs. 2021) | Item | 2022 (approx.) | 2021 (approx.) | Change (approx.) | | :--- | :--- | :--- | :--- | | Hotel Operating Expenses | $119.6 million | $96.7 million | +$22.9 million | | Impairment of Investment in Hotel Properties, Net | $0 | $12.2 million | -$12.2 million | | Interest Expense | $19.8 million | $22.7 million | -$2.9 million | | Loss on Early Extinguishment of Debt | $5.9 million | $0 | +$5.9 million | | PPP Loan Forgiveness | $4.7 million | $0 | +$4.7 million | | Gain on Sale of Assets | $30.1 million | $0 | +$30.1 million | | Net Income (Loss) | $34.0 million | -$28.5 million | +$62.5 million | | Distributions to Preferred Stockholders | $7.6 million | $7.5 million | +$0.1 million | Sources and Uses of Cash - Principal cash sources are cash from hotel operations, proceeds from the sale of common and preferred stock, proceeds from the sale of secured and unsecured notes, proceeds of mortgage or other debt, and hotel property sales[289] - Principal cash uses include acquisitions of hotel properties, capital expenditures, debt service and balloon maturities, operating costs, corporate expenses, and dividends[289] Cash Flow Summary (2023) | Category | Amount (approx.) | | :--- | :--- | | Unrestricted Cash (Dec 31, 2023) | $17.1 million | | Restricted Cash (Dec 31, 2023) | $9.1 million | | Net Decrease in Cash (2023) | $1.1 million | | Cash Provided by Operating Activities (2023) | $21.4 million | | Cash Used in Investing Activities (2023) | $6.7 million | | Cash Used in Financing Activities (2023) | $15.8 million | Capital Expenditures - Routine capital improvements are determined through an annual budget process and administered by the management company[294] - A Property Improvement Program (PIP) for the DoubleTree by Hilton Philadelphia Airport is anticipated for 2024-2026, with an estimated expenditure of $9.5 million to $11.0 million[295] - Total capital expenditures for 2024 are expected to be approximately $7.0 million, funded by working capital, reserve accounts, and proceeds of mortgage debt or equity offerings[295][296] - Reserve accounts require monthly deposits of 4.0% of gross revenue (or room revenue for some properties) for capital improvements[297] Liquidity and Capital Resources - The mortgage loan on The Whitehall hotel was amended in February 2023, extending its maturity to February 26, 2028, with a floating interest rate of New York Prime Rate plus 1.25% (7.50% floor)[301] - A $10.0 million mortgage loan was secured for the DoubleTree by Hilton Laurel in May 2023, maturing May 6, 2028, with a fixed rate of 7.35% (interest-only payments)[302] - A $35.0 million mortgage loan was secured for the Hotel Alba in February 2024, maturing March 6, 2029, with a fixed rate of 8.49% (interest-only payments)[303][593] - The mortgage on the DoubleTree by Hilton Philadelphia Airport, maturing April 29, 2024, is expected to be further extended with a waiver of DSCR non-compliance[305][594] - The mortgage on the DoubleTree by Hilton Jacksonville Riverfront matures in July 2024 and is intended for refinancing[306] Cash and Restricted Cash (As of December 31, 2023) | Category | Amount (approx.) | | :--- | :--- | | Cash, Cash Equivalents, and Restricted Cash | $26.2 million | | Unrestricted Cash | $17.1 million | | Restricted Reserve Accounts | $9.1 million | Mortgage Debt - As of December 31, 2023, the total principal mortgage debt balance was approximately $317.4 million[308][309] Mortgage Debt Obligations (As of December 31, 2023) | Property | Balance Outstanding (Dec 31, 2023) | Prepayment Penalties | Maturity Date | Amortization Provisions | Interest Rate | | :--- | :--- | :--- | :--- | :--- | :--- | | The DeSoto | $30,248,929 | Yes | 7/1/2026 | 25 years | 4.25% | | DoubleTree by Hilton Jacksonville Riverfront | $31,749,695 | Yes | 7/11/2024 | 30 years | 4.88% | | DoubleTree by Hilton Laurel | $10,000,000 | (3) | 5/6/2028 | (3) | 7.35% | | DoubleTree by Hilton Philadelphia Airport | $38,915,488 | None | 2/29/2024 | 30 years | SOFR plus 2.27% | | DoubleTree Resort by Hilton Hollywood Beach | $51,495,662 | (5) | 10/1/2025 | 30 years | 4.91% | | Georgian Terrace | $39,455,095 | (6) | 6/1/2025 | 30 years | 4.42% | | Hotel Alba Tampa, Tapestry Collection by Hilton | $24,269,200 | None | 6/30/2025 | (7) | SOFR plus 2.75% | | Hotel Ballast Wilmington, Tapestry Collection by Hilton | $30,755,374 | Yes | 1/1/2027 | 25 years | 4.25% | | Hyatt Centric Arlington | $46,454,972 | Yes | 10/1/2028 | 30 years | 5.25% | | The Whitehall | $14,009,874 | None | 2/26/2028 | 25 years | PRIME plus 1.25% | | Total Mortgage Principal Balance | $317,354,289 | | | | | Financial Covenants - As of December 31, 2023, the Company was in compliance with all debt covenants except for the Debt Service Coverage Requirement (DSCR) covenant under the mortgage on the DoubleTree by Hilton Philadelphia Airport, with a waiver anticipated[315] - Financial covenant failures triggered 'cash trap' provisions for the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, requiring hotel revenues to be swept into a cash management account for the lender[316] Contractual Obligations Contractual Obligations (As of December 31, 2023, in thousands of USD) | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Mortgage loans, including interest | $375,964 | $91,263 | $171,419 | $77,745 | $35,537 | | Unsecured Notes | $1,552 | $1,552 | $0 | $0 | $0 | | Ground, building, parking garage, office and equipment leases | $13,938 | $607 | $1,221 | $1,274 | $10,836 | | Totals | $391,454 | $93,422 | $172,640 | $79,019 | $46,373 | Dividend Policy - The Company is required to make annual distributions of at least 90.0% of its REIT taxable income to maintain REIT qualification[319] - No distributions may be made with respect to any shares of common stock unless and until full cumulative distributions on the outstanding preferred stock for all past unpaid periods are paid or declared[320] - As of December 31, 2023, cumulative unpaid dividends on preferred shares totaled approximately $21.9 million, with an aggregate liquidation preference of approximately $121.3 million[325] - The Company resumed quarterly distributions to preferred stockholders on January 24, 2023[321] Inflation - Revenues depend on the ability to adjust room rates to keep pace with inflation, which may be limited by competitive pressures[326] - Expenses such as hotel operating, administrative, real estate taxes, and property/casualty insurance are subject to inflation, with some (energy, insurance, employee benefits, wages) potentially varying at different rates[327] Geographic Concentration and Seasonality - Hotels are concentrated in Florida, Georgia, Maryland, North Carolina, Pennsylvania, Texas, and Virginia, making the company susceptible to adverse regional market conditions[328] - Hotel operations are seasonal, with strong periods in April, May, and October, and slower periods from mid-November to mid-February, except for Florida and Texas markets[329] Competition - The hotel industry is highly competitive, with participants competing on price, level of service, and geographic location[330] - Principal competitive factors for the Company's hotels include brand recognition, location, quality, consistency of services, and price[330] Critical Accounting Policies - Critical accounting policies require difficult, subjective, and complex judgments and estimates, particularly for investment in hotel properties and income taxes[332] - Hotel properties are reviewed for impairment when circumstances indicate carrying value may not be recoverable, involving analysis of estimated undiscounted future cash flows and fair market value[334] - No impairment loss was recognized for the years ended December 31, 2023 and 2022[335] - Income taxes are accounted for using the asset and liability method, with a 100% valuation allowance recorded against deferred tax assets as of December 31, 2023, due to uncertainty of realization[337] Recent Accounting Pronouncements - The Company adopted ASU 2016-13 (Financial Instruments - Credit Losses) with no material impact on its consolidated financial statements[507] - ASU 2020-04 (Reference Rate Reform) provides temporary expedients for the transition from LIBOR to alternative reference rates, impacting modifications of debt and hedging contracts[508][509] Non-GAAP Financial Measures - FFO, Adjusted FFO, and Hotel EBITDA are key supplemental non-GAAP measures used to assess the Company's operating performance[341] - FFO is calculated per NAREIT definition, excluding extraordinary items, gains/losses from asset sales, and real estate depreciation/amortization[342] - Adjusted FFO further adjusts FFO for items like deferred income taxes, unrealized hedging gains/losses, loan impairment losses, and early debt extinguishment losses, to provide a more indicative view of ongoing business performance[344] - Hotel EBITDA excludes various non-operating and corporate expenses to provide a clearer understanding of property-level operational results[347] Reconciliation of Net Income (Loss) to FFO and Adjusted FFO | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income (loss) | $3,809,711 | $33,959,848 | $(28,539,640) | | Depreciation and amortization - real estate | $18,735,804 | $18,593,359 | $19,838,017 | | Impairment of investment in hotel properties, net | $0 | $0 | $12,201,461 | | Gain on sale of hotel properties | $0 | $(30,053,977) | $0 | | Distributions to preferred stockholders | $(7,977,250) | $(7,634,219) | $(7,541,891) | | FFO available to common stockholders and unitholders | $13,192,524 | $13,737,889 | $(4,788,925) | | Unrealized (gain) loss on hedging activities | $737,682 | $(2,918,207) | $(1,493,841) | | Loss on early debt extinguishment | $0 | $5,944,881 | $0 | | Adjusted FFO available to common stockholders and unitholders | $14,542,370 | $17,819,964 | $(4,890,058) | Reconciliation of Net Loss to Hotel EBITDA | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net (loss) income | $3,809,711 | $33,959,848 | $(28,539,640) | | Interest expense | $17,588,091 | $19,772,802 | $22,686,694 | | Depreciation and amortization | $18,788,748 | $18,650,336 | $19,909,226 | | Gain on sale of hotel properties | $0 | $(30,053,977) | $0 | | PPP loan forgiveness | $(275,494) | $(4,720,278) | $0 | | Corporate general and administrative expenses | $7,078,222 | $6,621,221 | $6,997,166 | | Hotel EBITDA | $44,787,701 | $46,462,568 | $30,894,561 | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through fixed and floating-rate debt and hedging instruments like interest rate caps and swaps. As of December 31, 2023, it held approximately $266 million in fixed-rate debt (4.87% weighted-average) and $52.9 million in floating-rate debt, with a 1% increase in floating rates projected to impact annual interest expense and cash flow by approximately $0.4 million - The Company manages interest rate risk by using a combination of fixed and variable rate debt and may employ interest rate hedging arrangements (caps, swaps) to limit the impact of interest rate changes[353] Debt Structure and Interest Rate Sensitivity (As of December 31, 2023) | Debt Type | Amount (approx.) | Weighted-Average Interest Rate | | :--- | :--- | :--- | | Fixed-Rate Debt | $266.0 million | 4.87% | | Variable-Rate Debt | $52.9 million | N/A | | Impact of 1% increase in variable rates | $0.4 million on annual interest and cash flows | N/A | Financial Statements and Supplementary Data This item directs to the Index to Financial Statements and Financial Statement Schedules on page F-1 for comprehensive financial data - This item directs to the Index to Financial Statements and Financial Statement Schedules on page F-1 for comprehensive financial data[356] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company has no changes in or disagreements with accountants regarding accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[357] Controls and Procedures Sotherly Hotels Inc. and Sotherly Hotels LP management, including the CEO and CFO, concluded that disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2023. No material changes to internal control over financial reporting were identified in the most recent fiscal quarter Sotherly Hotels Inc. - Sotherly Hotels Inc.'s management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2023[358] - Management assessed and concluded that the Company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[360] - No material changes in internal control over financial reporting were identified during the last fiscal quarter[362] Sotherly Hotels LP - Sotherly Hotels LP's management, under the supervision of Sotherly Hotels Inc.'s CEO and CFO, concluded that its disclosure controls and procedures were effective as of December 31, 2023[363] - Management assessed and concluded that the Operating Partnership's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[365] - No material changes in internal control over financial reporting were identified for Sotherly Hotels LP during the last fiscal quarter[367][368] Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 trading arrangements during the three months ended December 31, 2023. The company has an insider trading policy, reviewed annually by the board of directors - No directors or officers adopted, modified, or terminated Rule 10b5-1 trading arrangements during the three months ended December 31, 2023[369] - The Company has an insider trading policy, filed as Exhibit 19.1, which is reviewed annually by the board of directors[369] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[370] PART III Information about our Directors, Executive Officers and Corporate Governance Information required for this item is disclosed by reference to the Company's 2024 Proxy Statement for its Annual Meeting of Stockholders. The company has adopted a Code of Business Conduct and Ethics, including a conflicts of interest policy, available on its website - Information on directors, executive officers, and corporate governance is incorporated by reference from the Company's 2024 Proxy Statement[375] - The Company has adopted a Code of Business Conduct and Ethics, including a conflicts of interest policy, applicable to its principal executive, financial, and accounting officers, available on its website[374] Executive Compensation Information required for this item is disclosed by reference to the "Director and Executive Compensation" section of the Company's 2024 Proxy Statement - Executive compensation information is incorporated by reference from the 'Director and Executive Compensation' section of the Company's 2024 Proxy Statement[376] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the "Principal Holders" section of the Company's 2024 Proxy Statement. Management is unaware of any arrangements that could lead to a change in company control. As of December 31, 2023, 1,548,332 securities remained available for future issuance under the 2022 Long-Term Incentive Plan - Security ownership information for beneficial owners and management is incorporated by reference from the 'Principal Holders' section of the Company's 2024 Proxy Statement[377][378] - Management knows of no arrangements that may result in a change in control of the Company[379] - The 2022 Long-Term Incentive Plan, approved in April 2022, permits grants of stock options, restricted stock, unrestricted stock, and performance share awards for up to 2,000,000 shares of common stock[383] Equity Compensation Plan Information (As of December 31, 2023) | Plan | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | 2022 Plan | N/A | N/A | 1,548,332 | | Equity compensation plans not approved by security holders | N/A | N/A | N/A | | Total | N/A | N/A | 1,548,332 | Certain Relationships and Related Transactions, and Director Independence Information required for this item is disclosed by reference to the "Certain Relationships and Related Transactions" and "Proposal One – Election of Directors" sections of the Company's 2024 Proxy Statement - Information on certain relationships and related transactions, and director independence is incorporated by reference from the Company's 2024 Proxy Statement[386] Principal Accountant Fees and Services Information required for this item is disclosed by reference to the "Proposal Two – Ratification of Appointment of Accountants" section of the Company's 2024 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 'Proposal II – Ratification of Appointment of Accountants' section of the Company's 2024 Proxy Statement[387] PART IV Exhibits and Financial Statement Schedules This section provides a complete list of financial statements, financial statement schedules (including Schedule III – Real Estate and Accumulated Depreciation), and all exhibits filed as part of the Form 10-K report, encompassing organizational documents, employment agreements, and certifications - This section includes the Index to Financial Statements and Financial Statement Schedules, such as Consolidated Balance Sheets, Statements of Operations, Changes in Equity, and Cash Flows for Sotherly Hotels Inc. and Sotherly Hotels LP[389] - Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2023, is provided[389] - A comprehensive list of exhibits is filed, including organizational documents, employment agreements, and certifications[391][392][393][394]