Equibles

10-Q

SOTHERLY HOTELS LP (SOHOB)

10-Q 2021-08-16 For: 2021-06-30
View Original
Added on April 10, 2026

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 June 30, 2021

OR

☐ 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)

<br>Maryland 001-32379 20-1531029
(State or Other Jurisdiction of<br><br><br>Incorporation or Organization) (Commission<br><br><br>File Number) (I.R.S. Employer<br><br><br>Identification No.)

SOTHERLY HOTELS LP

(Exact name of registrant as specified in its charter)

Delaware 001-36091 20-1965427
(State or Other Jurisdiction of<br><br><br>Incorporation or Organization) (Commission<br><br><br>File Number) (I.R.S. Employer<br><br><br>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 August 5, 2021, there were 16,717,958 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 June 30, 2021 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;
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• combined reports are more efficient for the Company and the Operating Partnership and result in savings of time, effort and expense; and
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• combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
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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:
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• Note 6 – Preferred Stock and Units;
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• Note 7 – Common Stock and Units;
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• Note 12 – Loss Per Share and Per Unit; and
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• Part I, Item 4 - Controls and Procedures; and
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• Part II, Item 6 - Certifications of CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act.
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SOTHERLY HOTELS INC.

SOTHERLY HOTELS LP

INDEX

Page
PART I
Item 1. Consolidated Financial Statements 5
Sotherly Hotels Inc.
Consolidated Balance Sheets as of June 30, 2021(unaudited) and December 31, 2020 5
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2021 and 2020 6
Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended March and June 30, 2021 and 2020 7
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2021 and 2020 9
Sotherly Hotels LP
Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020 10
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2021 and 2020 11
Consolidated Statements of Changes in Partners’ Capital (unaudited) for the Three Months Ended March and June 30, 2021 and 2020 12
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2021 and 2020 14
Notes to Consolidated Financial Statements 15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 53
Item 4 Controls and Procedures 54
PART II
Item 1. Legal Proceedings 56
Item 1A. Risk Factors 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 3. Defaults Upon Senior Securities 56
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 57
Item 6. Exhibits 58
Item 1. Consolidated Financial Statements
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SOTHERLY HOTELS INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2020
ASSETS
Investment in hotel properties, net 419,425,216 $ 427,824,585
Cash and cash equivalents 21,822,863 25,297,771
Restricted cash 11,709,866 10,002,775
Accounts receivable, net 2,790,785 1,779,776
Accounts receivable - affiliate 298,114 401,924
Prepaid expenses, inventory and other assets 9,169,082 7,726,980
TOTAL ASSETS 465,215,926 $ 473,033,811
LIABILITIES
Mortgage loans, net 355,064,731 $ 357,545,977
Secured notes, net 18,910,413 18,694,355
Unsecured notes, net 10,719,100 10,719,100
Accounts payable and accrued liabilities 38,949,954 35,631,931
Advance deposits 1,697,617 1,964,073
Dividends and distributions payable 4,167,187 4,277,070
TOTAL LIABILITIES 429,509,002 $ 428,832,506
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,<br>   1,510,000 and 1,610,000 shares issued and outstanding; aggregate liquidation<br>    preference 42,280,000 and 42,655,000, at June 30, 2021 and December 31,<br>    2020, respectively. 15,100 16,100
7.875% Series C cumulative redeemable perpetual preferred stock,<br>    1,469,610 and 1,554,610 shares issued and outstanding; aggregate liquidation<br>    preference 41,080,196 and 41,160,731, at June 30, 2021 and December 31,<br>    2020, respectively. 14,696 15,546
8.25% Series D cumulative redeemable perpetual preferred stock,<br>   1,165,000 and 1,200,000 shares issued and outstanding; aggregate liquidation<br>   preference 32,729,219 and 31,856,250, at June 30, 2021 and December<br>   31, 2020, respectively. 11,650 12,000
Common stock, par value 0.01, 69,000,000 shares authorized, 16,717,958<br>   shares issued and outstanding at June 30, 2021 and 15,023,850<br>   shares issued and outstanding at December 31, 2020. 167,179 150,238
Additional paid-in capital 180,494,501 180,189,699
Unearned ESOP shares (3,524,148 ) (3,636,026 )
Distributions in excess of retained earnings (135,244,679 ) (127,197,489 )
Total Sotherly Hotels Inc. stockholders’ equity 41,934,299 49,550,068
Noncontrolling interest (6,227,375 ) (5,348,763 )
TOTAL EQUITY 35,706,924 44,201,305
TOTAL LIABILITIES AND EQUITY 465,215,926 $ 473,033,811

All values are in US Dollars.

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 Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE
Rooms department $ 24,045,910 $ 3,885,820 $ 39,539,514 $ 28,630,743
Food and beverage department 3,501,875 155,192 5,045,114 8,299,166
Other operating departments 6,835,524 1,252,895 12,434,212 5,572,462
Total revenue 34,383,309 5,293,907 57,018,840 42,502,371
EXPENSES
Hotel operating expenses
Rooms department 5,917,880 1,751,374 9,914,496 8,834,565
Food and beverage department 2,106,487 119,901 3,016,751 6,732,207
Other operating departments 2,648,387 701,608 4,587,264 2,973,236
Indirect 14,050,076 7,929,765 25,639,153 24,111,606
Total hotel operating expenses 24,722,830 10,502,648 43,157,664 42,651,614
Depreciation and amortization 4,969,669 4,993,107 9,951,685 9,975,983
Loss (Gain) on disposal of assets 17,221 (451 ) 17,221 (451 )
Corporate general and administrative 1,530,438 1,227,808 2,831,396 3,107,933
Total operating expenses 31,240,158 16,723,112 55,957,966 55,735,079
NET OPERATING INCOME (LOSS) 3,143,151 (11,429,205 ) 1,060,874 (13,232,708 )
Other income (expense)
Interest expense (5,526,595 ) (4,719,796 ) (11,446,118 ) (9,281,636 )
Interest income 36,308 72,001 74,907 132,366
Unrealized gain (loss) on hedging activities 303,181 (214,876 ) 693,367 (1,800,508 )
Gain on involuntary conversion of assets 496,957 14,168 496,957 26,607
Net loss before income taxes (1,546,998 ) (16,277,708 ) (9,120,013 ) (24,155,879 )
Income tax provision (6,972 ) (23,362 ) (9,581 ) (5,477,396 )
Net loss (1,553,970 ) (16,301,070 ) (9,129,594 ) (29,633,275 )
Less: Net loss attributable to noncontrolling interest 179,638 1,365,368 879,176 2,562,783
Net loss attributable to the Company (1,374,332 ) (14,935,702 ) (8,250,418 ) (27,070,492 )
Declared and undeclared distributions to preferred stockholders (1,529,613 ) (2,188,910 ) (3,718,524 ) (4,377,821 )
Gain on extinguishment of preferred stock 93,342 — 93,342 —
Net loss attributable to common stockholders $ (2,810,603 ) $ (17,124,612 ) $ (11,875,600 ) $ (31,448,313 )
Net loss per share attributable to common stockholders
Basic $ (0.19 ) $ (1.20 ) $ (0.81 ) $ (2.20 )
Weighted average number of common shares outstanding
Basic 14,850,282 14,303,119 14,733,649 14,274,668

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

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Additional Unearned Distributions
Preferred Stock Common Stock Paid- ESOP in Excess of Noncontrolling
Shares Par Value Shares Par Value In Capital Shares Retained Earnings Interest Total
Balances at December 31, 2020 4,364,610 $ 43,646 15,023,850 $ 150,238 $ 180,189,699 $ (3,636,026 ) $ (127,197,489 ) $ (5,348,763 ) $ 44,201,305
Net loss — — — — — — (6,876,085 ) (699,539 ) (7,575,624 )
Issuance of common stock — — 136,281 1,363 399,303 — — — 400,666
Issuance of restricted<br><br><br>common stock awards — — 15,000 150 43,950 — — — 44,100
Conversion of units in Operating<br><br><br>Partnership to shares of<br><br><br>common stock — — 100 1 (566 ) — — 565 —
Amortization of ESOP shares — — — — (33,853 ) 55,939 — — 22,086
Amortization of restricted<br><br><br>stock awards — — — — 18,195 — — — 18,195
Balances at March 31, 2021<br><br><br>(unaudited) 4,364,610 $ 43,646 15,175,231 $ 151,752 $ 180,616,728 $ (3,580,087 ) $ (134,073,574 ) $ (6,047,737 ) $ 37,110,728
Net loss — — — — — — (1,374,332 ) (179,638 ) (1,553,970 )
Extinguishment of preferred stock (220,000 ) (2,200 ) 1,542,727 15,427 (106,570 ) — 203,227 — 109,884
Amortization of ESOP shares — — — — (33,852 ) 55,939 — — 22,087
Amortization of restricted<br><br><br>stock awards — — — — 18,195 — — — 18,195
Balances at June 30, 2021<br><br><br>(unaudited) 4,144,610 $ 41,446 16,717,958 $ 167,179 180,494,501 $ (3,524,148 ) (135,244,679 ) $ (6,227,375 ) $ 35,706,924

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

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Additional Unearned Distributions
Common Stock Paid- ESOP in Excess of Noncontrolling
Par Value Shares Par Value In Capital Shares Retained Earnings Interest Total
Balances at December 31, 2019 4,364,610 $ 43,646 14,272,378 $ 142,723 $ 180,515,861 $ (4,105,637 ) $ (73,990,690 ) $ (1,198,732 ) $ 101,407,171
Net loss — — — — — — (12,134,789 ) (1,197,416 ) (13,332,205 )
Issuance of common stock — — 2,250 22 14,153 — — — 14,175
Issuance of restricted common<br>   stock awards — — 60,000 600 93,900 — — — 94,500
Conversion of units in Operating<br>   Partnership to shares of<br>   common stock — — 488,952 4,890 (370,890 ) — 26,266 339,734 —
Amortization of ESOP shares — — — — (12,813 ) 69,329 — — 56,516
Amortization of restricted<br>   stock awards — — — — 18,195 — — — 18,195
Preferred stock dividends declared:
Series B Preferred Stock,<br>   0.50/share — — — — — — (805,000 ) — (805,000 )
Series C Preferred Stock,<br>   0.492188/share — — — — — — (765,160 ) — (765,160 )
Series D Preferred Stock,<br>   0.515625/share — — — — — — (618,750 ) — (618,750 )
Common stock, 0.13/share<br>   dividends and distributions<br>   declared — — — — — — (1,846,214 ) (161,095 ) (2,007,309 )
Balances at March 31, 2020<br>   (unaudited) 4,364,610 $ 43,646 14,823,580 $ 148,235 $ 180,258,406 $ (4,036,308 ) $ (90,134,337 ) $ (2,217,509 ) $ 84,062,133
Net loss — — — — — — (14,935,702 ) (1,365,368 ) (16,301,070 )
Conversion of units in Operating<br>   Partnership to shares of<br>   common stock — — 57,687 577 (33,092 ) 59,684 (59,685 ) 32,516 —
Amortization of ESOP shares — — — — (43,045 ) (327 ) — — (43,372 )
Amortization of restricted<br>   stock awards — — — — 18,195 — — — 18,195
Balances at June 30, 2020<br>   (unaudited) 4,364,610 $ 43,646 14,881,267 $ 148,812 $ 180,200,464 $ (3,976,951 ) $ (105,129,724 ) $ (3,550,361 ) $ 67,735,886

All values are in US Dollars.

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

SOTHERLY HOTELS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (9,129,594 ) $ (29,633,275 )
Adjustments to reconcile net loss to net cash<br><br><br>provided by (used in) operating activities:
Depreciation and amortization 9,951,685 9,975,983
Amortization of deferred financing costs 516,814 284,943
Amortization of mortgage premium (12,341 ) (12,341 )
Gain on involuntary conversion of assets (496,957 ) (26,607 )
Unrealized (gain) loss on hedging activities (693,367 ) 1,800,508
(Gain) loss on disposal of assets 17,221 (451 )
ESOP and stock - based compensation 525,329 158,209
Changes in assets and liabilities:
Accounts receivable (1,011,009 ) 2,523,019
Prepaid expenses, inventory and other assets (1,498,515 ) (2,353,578 )
Deferred income taxes — 5,412,084
Accounts payable and other accrued liabilities 3,893,338 8,175,235
Advance deposits (266,456 ) (1,225,842 )
Accounts receivable - affiliate 103,810 43,216
Net cash provided by (used in) operating activities 1,899,958 (4,878,897 )
Cash flows from investing activities:
Improvements and additions to hotel properties (1,793,222 ) (3,023,276 )
Proceeds from involuntary conversion 496,957 26,607
Net cash used in investing activities (1,296,265 ) (2,996,669 )
Cash flows from financing activities:
Proceeds from unsecured debt — 10,719,100
Payments on mortgage loans (2,369,650 ) (1,616,513 )
Payments of deferred financing costs (1,860 ) (99,000 )
Dividends on common stock and distributions paid — (2,000,418 )
Preferred dividends paid — (2,188,910 )
Net cash (used in) provided by financing activities (2,371,510 ) 4,814,259
Net decrease in cash, cash equivalents and restricted cash (1,767,817 ) (3,061,307 )
Cash, cash equivalents and restricted cash at the beginning of the period 35,300,546 27,984,236
Cash, cash equivalents and restricted cash at the end of the period $ 33,532,729 $ 24,922,929
Supplemental disclosures:
Cash paid during the period for interest $ 10,375,892 $ 3,681,239
Cash paid during the period for income taxes $ 20,200 $ 62,782
Non-cash investing and financing activities:
Change in amount of improvements to hotel property<br><br><br>in accounts payable and accrued liabilities $ 445,430 $ 587,314

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

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

December 31, 2020
ASSETS
Investment in hotel properties, net 419,425,216 $ 427,824,585
Cash and cash equivalents 21,822,863 25,297,771
Restricted cash 11,709,866 10,002,775
Accounts receivable, net 2,790,785 1,779,776
Accounts receivable - affiliate 298,114 401,924
Loan receivable - affiliate 3,632,890 3,746,254
Prepaid expenses, inventory and other assets 9,169,082 7,726,980
TOTAL ASSETS 468,848,816 $ 476,780,065
LIABILITIES
Mortgage loans, net 355,064,731 $ 357,545,977
Secured loan, net 18,910,413 18,694,355
Unsecured notes, net 10,719,100 10,719,100
Accounts payable and other accrued liabilities 38,949,954 35,631,931
Advance deposits 1,697,617 1,964,073
Dividends and distributions payable 4,167,187 4,277,070
TOTAL LIABILITIES 429,509,002 $ 428,832,506
Commitments and contingencies (see Note 5) — —
PARTNERS’ CAPITAL
Preferred units, 11,000,000 units authorized;
8.0% Series B cumulative redeemable perpetual preferred unit;<br>   1,510,000 and 1,610,000 units issued and outstanding; aggregate liquidation<br>   preference 42,280,000 and 42,665,000, at June 30, 2021 and December 31,<br>   2020, respectively. 35,420,784 37,766,531
7.875% Series C cumulative redeemable perpetual preferred units,<br>   1,469,610 and 1,554,610 units issued and outstanding; aggregate liquidation<br>   preference 41,080,196 and 41,160,731, each at June 30, 2021 and December<br>   31, 2020, respectively. 34,468,358 36,461,955
8.25% Series D cumulative redeemable perpetual preferred units,<br>   1,165,000 and 1,200,000 units issued and outstanding; aggregate liquidation<br>   preference 32,729,219 and 31,856,250, each at June 30, 2021 and December<br>   31, 2020, respectively. 27,549,832 28,377,509
General Partner:  178,844 units and 161,904 units issued and outstanding as of<br>   June 30, 2021 and December 31, 2020, respectively. (292,945 ) (258,538 )
Limited Partners: 17,705,515 units and 16,028,447 units issued and outstanding as<br>   of June 30, 2021 and December 31, 2020, respectively. (57,806,215 ) (54,399,898 )
TOTAL PARTNERS’ CAPITAL 39,339,814 47,947,559
TOTAL LIABILITIES AND PARTNERS’ CAPITAL 468,848,816 $ 476,780,065

All values are in US Dollars.

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 Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE
Rooms department $ 24,045,910 $ 3,885,820 $ 39,539,514 $ 28,630,743
Food and beverage department 3,501,875 155,192 5,045,114 8,299,166
Other operating departments 6,835,524 1,252,895 12,434,212 5,572,462
Total revenue 34,383,309 5,293,907 57,018,840 42,502,371
EXPENSES
Hotel operating expenses
Rooms department 5,917,880 1,751,374 9,914,496 8,834,565
Food and beverage department 2,106,487 119,901 3,016,751 6,732,207
Other operating departments 2,648,387 701,608 4,587,264 2,973,236
Indirect 14,050,076 7,929,765 25,639,153 24,111,606
Total hotel operating expenses 24,722,830 10,502,648 43,157,664 42,651,614
Depreciation and amortization 4,969,669 4,993,107 9,951,685 9,975,983
Loss (Gain) on disposal of assets 17,221 (451 ) 17,221 (451 )
Corporate general and administrative 1,530,438 1,227,808 2,831,396 3,107,933
Total operating expenses 31,240,158 16,723,112 55,957,966 55,735,079
NET OPERATING INCOME (LOSS) 3,143,151 (11,429,205 ) 1,060,874 (13,232,708 )
Other income (expense)
Interest expense (5,526,595 ) (4,719,796 ) (11,446,118 ) (9,281,636 )
Interest income 36,308 72,001 74,907 132,366
Unrealized gain (loss) on hedging activities 303,181 (214,876 ) 693,367 (1,800,508 )
Gain on involuntary conversion of assets 496,957 14,168 496,957 26,607
Net loss before income taxes (1,546,998 ) (16,277,708 ) (9,120,013 ) (24,155,879 )
Income tax provision (6,972 ) (23,362 ) (9,581 ) (5,477,396 )
Net loss (1,553,970 ) (16,301,070 ) (9,129,594 ) (29,633,275 )
Declared and undeclared distributions to preferred unit holders (1,529,613 ) (2,188,910 ) (3,718,524 ) (4,377,821 )
Gain on extinguishment of preferred units 93,342 — 93,342 —
Net loss attributable to general and limited partnership<br><br><br>unit holders $ (2,990,241 ) $ (18,489,980 ) $ (12,754,776 ) $ (34,011,096 )
Net loss attributable per general and limited partner unit
Basic $ (0.18 ) $ (1.15 ) $ (0.78 ) $ (2.12 )
Weighted average number of general and limited partner units<br><br><br>outstanding
Basic 16,511,162 16,062,768 16,398,448 16,057,745

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<br><br><br>Amounts Series C<br><br><br>Amounts Series D<br><br><br>Amounts Units Amounts Units Amounts Total
Balances at December 31, 2020 4,364,610 $ 37,766,531 $ 36,461,955 $ 28,377,509 161,904 $ (258,538 ) 16,028,447 $ (54,399,898 ) $ 47,947,559
Amortization of restricted<br><br><br>unit awards — — — — — 182 — 18,013 18,195
Unit based compensation — — — — — (441 ) — (43,704 ) (44,145 )
Issuance of partnership units — — — — 1,513 4,448 149,768 440,318 444,766
Net loss — — — — — (75,757 ) — (7,499,867 ) (7,575,624 )
Balances at March 31, 2021<br><br><br>(unaudited) 4,364,610 $ 37,766,531 $ 36,461,955 $ 28,377,509 163,417 $ (330,106 ) 16,178,215 $ (61,485,138 ) $ 40,790,751
Amortization of restricted<br><br><br>unit awards — — — — — 182 — 18,013 18,195
Unit based compensation — — — — — (251 ) — (24,795 ) (25,046 )
Extinguishment of preferred units (220,000 ) (2,345,747 ) (1,993,597 ) (827,677 ) 15,427 52,769 1,527,300 5,224,136 109,884
Net loss — — — — — (15,539 ) — (1,538,431 ) (1,553,970 )
Balances at June 30, 2021<br><br><br>(unaudited) 4,144,610 $ 35,420,784 $ 34,468,358 $ 27,549,832 178,844 $ (292,945 ) 17,705,515 $ (57,806,215 ) $ 39,339,814

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

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

General Partner Limited Partner
Series B<br><br><br>Amounts Series C<br><br><br>Amounts Series D<br><br><br>Amounts Units Amounts Units Amounts Total
Balances at December 31,<br>   2019 4,364,610 $ 37,766,531 $ 36,461,955 $ 28,377,509 160,006 $ 315,959 15,840,512 $ 2,636,363 $ 105,558,317
Issuance of partnership units — — — — 623 945 61,628 107,730 108,675
Amortization of restricted unit<br>   awards — — — — — 182 — 18,013 18,195
Unit based compensation — — — — — 765 — 75,716 76,481
Preferred unit distributions<br>   declared:
Series B Preferred Units,<br>   0.50/unit — (805,000 ) — — — — — — (805,000 )
Series C Preferred Units,<br>   0.492188/unit — — (765,160 ) — — — — — (765,160 )
Series D Preferred Units,<br>   0.515625/unit — — — (618,750 ) — — — — (618,750 )
Partnership units, 0.13/unit<br>   distributions declared — — — — — (19,271 ) — (2,068,888 ) (2,088,159 )
Net loss — 805,000 765,160 618,750 — (155,211 ) — (15,365,904 ) (13,332,205 )
Balances at March 31, 2020<br>   (unaudited) 4,364,610 $ 37,766,531 $ 36,461,955 $ 28,377,509 160,629 $ 143,369 15,902,140 $ (14,596,970 ) $ 88,152,394
Amortization of restricted unit<br>   awards — — — — — 182 — 18,013 18,195
Unit based compensation — — — — — (312 ) — (30,989 ) (31,301 )
Net loss — — — — — (163,011 ) — (16,138,059 ) (16,301,070 )
Balances at June 30, 2020<br>   (unaudited) 4,364,610 $ 37,766,531 $ 36,461,955 $ 28,377,509 160,629 $ (19,772 ) 15,902,140 $ (30,748,005 ) $ 71,838,218

All values are in US Dollars.

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

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (9,129,594 ) $ (29,633,275 )
Adjustments to reconcile net loss to net cash<br><br><br>provided by (used in) operating activities:
Depreciation and amortization 9,951,685 9,975,983
Amortization of deferred financing costs 516,814 284,943
Amortization of mortgage premium (12,341 ) (12,341 )
Gain on involuntary conversion of assets (496,957 ) (26,607 )
Unrealized (gain) loss on hedging activities (693,367 ) 1,800,508
(Gain) loss on disposal of assets 17,221 (451 )
ESOP and unit - based compensation 411,964 190,245
Changes in assets and liabilities:
Accounts receivable (1,011,009 ) 2,523,019
Prepaid expenses, inventory and other assets (1,498,515 ) (2,353,578 )
Deferred income taxes — 5,412,084
Accounts payable and other accrued liabilities 3,893,338 8,175,235
Advance deposits (266,456 ) (1,225,842 )
Accounts receivable - affiliate 103,810 43,216
Net cash provided by (used in) operating activities 1,786,593 (4,846,861 )
Cash flows from investing activities:
Improvements and additions to hotel properties (1,793,222 ) (3,023,276 )
ESOP loan payments received 113,365 47,614
Proceeds from involuntary conversion 496,957 26,607
Net cash used in investing activities (1,182,900 ) (2,949,055 )
Cash flows from financing activities:
Proceeds from unsecured notes — 10,719,100
Payments on mortgage loans (2,369,650 ) (1,616,513 )
Payments of deferred financing costs (1,860 ) (99,000 )
Distributions on general and limited partnership interests — (2,080,068 )
Distributions on preferred partnership interests — (2,188,910 )
Net cash (used in) provided by financing activities (2,371,510 ) 4,734,609
Net decrease in cash, cash equivalents and restricted cash (1,767,817 ) (3,061,307 )
Cash, cash equivalents and restricted cash at the beginning of the period 35,300,546 27,984,236
Cash, cash equivalents and restricted cash at the end of the period $ 33,532,729 $ 24,922,929
Supplemental disclosures:
Cash paid during the period for interest $ 10,206,965 $ 3,681,239
Cash paid during the period for income taxes $ 20,200 $ 62,782
Non-cash investing and financing activities:
Change in amount of improvements to hotel property in<br><br><br>accounts payable and accrued liabilities $ 445,430 $ 587,314

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 to own full-service, primarily upscale and upper-upscale hotels located in primary and secondary markets in the mid-Atlantic and southern United States.  Currently, the Company is 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 consists of investments in twelve hotel properties comprising 3,156 rooms, as well as interests in two condominium hotels and their associated rental programs.  The Company owns hotels that operate under the Hilton Worldwide, Marriott International, Inc., and Hyatt Hotels Corporation brands, as well as 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 expenditures 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 June 30, 2021 was approximately 93.5% owned by the Company, through its subsidiaries leases the hotels to direct and indirect subsidiaries of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC and certain of its subsidiaries (collectively, “MHI TRS Entities”), each of which is a wholly-owned subsidiary of the Operating Partnership.  As of June 30, 2021, the MHI TRS Entities engaged Our Town Hospitality, LLC (“Our Town”), an eligible independent management company, to operate the hotels under management contracts. MHI Hospitality TRS Holding, Inc. (“MHI TRS”) is treated as a taxable REIT subsidiary for federal income tax purposes.

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

COVID-19, Management’s Plans and Liquidity

In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses. All of our hotels have remained open on a limited basis in order to serve the needs of the community, with the exception of the rental programs at our condominium hotels, which were temporarily closed during April and May of 2020. We believe that maintaining limited operations allowed us to increase capacity at individual hotels as demand has begun to return and the Centers for Disease Control (“CDC”) and state guidelines have started to permit an easing of travel and other business restrictions.  Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and we intend to continue those re-introductions, provided that we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.

COVID-19 has had a significant negative impact on our operations and financial results, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods.  Conditions in the second quarter, however, improved significantly over the same period in the prior year, as the Company witnessed increased demand fueled predominantly by leisure travel.  Revenues, profitability, and cash flows from operations during the second quarter of 2021 exceeded our expectations but were still far below the same period in 2019, before the pandemic.  While the extent and duration of the negative effects resulting from COVID-19 on the Company’s business are highly uncertain and cannot be reasonably estimated at this time, the quarter’s operations and financial results were a marked improvement over the same period in 2020.  Notwithstanding the encouraging results recorded during the second quarter of 2021, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and business travel

approaches pre-pandemic levels. At a minimum, the Company expects the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow through 2021.

In response to those negative impacts, we took a number of actions to reduce costs and preserve liquidity.  The Company’s board of directors suspended quarterly cash dividends on shares of the Company’s common stock and deferred payment of dividends on the Company’s 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Stock”), 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock (the “Series C Preferred Stock”), and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock (the “Series D Preferred Stock”). We also suspended most planned capital expenditure projects, and reduced the cash compensation of our executive officers, board of directors and employees.  Working closely with our hotel managers, we significantly curtailed our hotels’ operating expenses.  We also sought and obtained forbearance and loan modification agreements with the lenders under the mortgages for all our hotel properties.

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage through and including June 30, 2022.   See the discussion of forbearance, modifications, and waivers in Note 4.

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap”.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps”, which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.

As of June 30, 2021, the Company had approximately $21.8 million in unrestricted cash and approximately $11.7 million in restricted cash.  In addition, we have the option to obtain $10.0 million in additional proceeds from the sale of additional Secured Notes to the Investors described below.

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note the Company paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the Company relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.

U.S. generally accepted accounting principles (“U.S. GAAP”) requires that, when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The duration and extent of the reduction in hotel demand caused by the pandemic and the return to normalized operations prevents the Company from forecasting its cash flows and available liquidity to meet its obligations for operating expenses with precision and certainty.  However, based on our completed mortgage loan amendments and forbearance agreements, our current unrestricted and restricted cash, our current cash utilization, our forecast of future operating results and our anticipated ability to refinance or extend mortgage obligations maturing within the 12 months following the date of this report, we have concluded that substantial doubt of the Company’s ability to continue as a going concern has been alleviated.  Facts and circumstances could change in the future that are outside the Company’s control – such as additional government mandates, health official orders, travel restrictions and extended business shutdowns due to COVID-19.

Overview of Significant Transactions

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

The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act.  Each PPP Loan has a term of five years and carries an interest rate of 1.00%.  Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.  The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.   Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act.  No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.  On April 16, 2020, our Operating Partnership entered into a promissory note with Village Bank in connection with a PPP Loan and received proceeds of $333,500.  On April 28, 2020, we entered into a promissory note and received proceeds of $9,432,900 under a PPP Loan from Fifth Third Bank, National Association.  On May 6, 2020, we entered into a second promissory note with Fifth Third Bank, National Association and received proceeds of $952,700 under a PPP Loan.

On December 31, 2020, we closed a transaction with KWHP SOHO, LLC, a Delaware limited liability company (“KW”), as collateral agent and a note investor, and MIG SOHO, LLC, a Delaware limited liability company (“MIG”, and together with KW, the “Investors”), as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 with the closing of such option required to take place on or before December 31, 2021.  The obligations of the Operating Partnership were guaranteed by the Company.  We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements.  The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option.  The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term.  Pursuant to the Pledge Agreement, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel (collectively, the “Pledged Collateral”).  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.  Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.

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

  1. Summary of Significant Accounting Policies

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

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

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

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at fair value on acquisition date and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from our accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

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

The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on the lodging and hospitality industries, which the Company considered to be a triggering event for each of its hotels during its impairment testing for the three months ended June 30, 2021.  The Company assessed the recoverability of each of its hotel properties which included a projection of future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs, an allowance for the replacement of furniture, fixtures and equipment and projected cash flows from the eventual disposition of the hotel. The Company also projects cash flows from the eventual disposition of the hotel based upon property-specific capitalization rates.  The Company determined that there were no impairments as of June 30, 2021.

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

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

Concentration of Credit Risk – We hold cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. Our exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize our potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in our various mortgage agreements.

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

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

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of June 30, 2021 and December 31, 2020 were $324,131 and $353,872, respectively. Amortization expense for the three-month periods ended June 30, 2021 and 2020, totaled $14,871 and $14,880, respectively, and for the six-month periods ended June 30, 2021 and 2020, totaled $ 29,741 and $29,761, respectively.

Right-of-Use Assets and Lease Obligations – In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption.

As of June 30, 2021, we had right of use assets of approximately $8.1 million, net and lease obligations of approximately $6.6 million.  The right-of-use assets are included in investments in hotel properties, net and in prepaid expenses, inventory and other assets and the lease obligations are included in accounts payable and accrued liabilities on the consolidated balance sheets.

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

Derivative Instruments – Our derivative instruments are reflected as assets or liabilities on the consolidated balance sheets and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity and partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

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

Fair Value Measurements –

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

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
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Level 3 Unobservable inputs for the asset or liability.
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We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our assets and liabilities measured at fair value and the basis for that measurement (our interest rate caps and interest rate swap are the only assets or liabilities measured at fair value on a recurring basis, there were no non-recurring assets or liabilities for fair value measurements as of June 30, 2021 and December 31, 2020, respectively):

Level 1 Level 2 Level 3
December 31, 2020
Interest Rate Caps ^(1)^ $ — $ 208 $ —
Interest Rate Swap ^(2)^ $ — $ (3,038,967 ) $ —
Mortgage loans ^(3)^ $ — $ (364,112,622 ) $ —
June 30, 2021
Interest Rate Cap ^(1)^ $ — $ 94 $ —
Interest Rate Swap ^(2)^ $ — $ (2,341,663 ) $ —
Mortgage loans ^(3)^ $ — $ (360,947,262 ) $ —
(1) Interest rate cap, which cap the 1-month LIBOR rate at 3.25%.
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(2) Interest rate swap, which takes the Loan Rate and swaps it for a fixed interest rate of 5.237%; notional amounts of the swap approximate the declining balance of the loan.
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(3) Mortgage loans are reflected at outstanding principal balance, net of deferred financing costs on our Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020.
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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. 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. 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 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 $0.4 million and $0.2 million, for the three months ended June 30, 2021 and 2020, respectively, and approximately $0.8 million and $0.6 million for the six months ended June 30, 2021 and 2020, respectively.

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

For the six months ending December 31, 2021 $ 587,959
December 31, 2022 1,027,595
December 31, 2023 1,030,480
December 31, 2024 1,037,857
December 31, 2025 1,045,793
December 31, 2026 and thereafter 7,106,342
Total $ 11,836,026

Lessee Accounting – On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, which relates to the accounting for lease arrangements. The Company’s operating lease agreements are primarily the ground lease on the Hyatt Centric Arlington, the parking garage lease in Hollywood, Florida at the Hyde Beach House, and the corporate office lease.  The assets are classified as “right of use assets”, which represent our right to use an underlying asset and the operating lease liability, which represent our obligation to make lease payments arising from the lease, is classified within “accounts payable and other accrued liabilities”.  Right of use assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  Variable lease payments are excluded from the right of use assets and operating lease liabilities are recognized in the period in which the obligation for those payments is incurred.  As our leases do not provide an implicit rate, we use our incremental borrowing cost based on information available at the commencement date using our actual borrowing rates commensurate with the lease terms and fully levered borrowing.  Extension options on our leases are included in our minimum lease terms when they are reasonably certain to be exercised.

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 June 30, 2021, 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 June 30, 2021 and December 31, 2020, deferred tax assets each totaled $0, respectively.

As of June 30, 2021 and December 31, 2020, we had no uncertain tax positions. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, the tax years that remain subject to examination by the major tax jurisdictions to which the Company is subject generally include 2016 through 2019. In addition, as of June 30, 2021, the tax years that remain subject to examination by the major tax jurisdictions to which the MHI TRS Entities are subject, because of open NOL carryforwards, generally include 2014 through 2019.

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

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

As of June 30, 2021, under the 2013 Plan, the Company has made cumulative stock awards totaling 517,464 shares, including 330,881 unrestricted shares and 186,583 restricted shares issued to certain executives and employees and to its independent directors.  All awards have vested except for: 129,615 shares issued to certain employees, which will vest over the next nine years and 56,968 shares issued to the Company’s independent directors, which will vest by December 31, 2021.

Under the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based

on the value of the award as determined by the Company’s stock price on the date of grant or issuance.  As of June 30, 2021, no performance-based stock awards have been granted. Total compensation cost recognized under the 2013 Plan for the three months ended June 30, 2021 and 2020 was $18,195 and $18,195, respectively, and for the six months ended June 30, 2021 and 2020 was $481,156 and $145,065, 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 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 June 30, 2021 and 2020, the ESOP compensation cost was $22,086 and $18,487, respectively, and for the six months ended June 30, 2021 and 2020, the ESOP compensation cost was $44,172 and $64,147, 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 $454,818 and $64,964 for the three months ended June 30, 2021 and 2020, respectively, and were $ 775,584 and $ 565,260 for the six months ended June 30, 2021 and 2020, 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. During each of the three-month periods ending June 30, 2021 and 2020, we recognized $496,957 and $14,168, respectively, and during the six-month periods ending June 30, 2021 and 2020, we recognized $496,957 and 26,607, respectively, in gain on involuntary conversion of assets, which is reflected in the consolidated statements of operations.

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

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

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

New Accounting Pronouncements – In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”).  The update provides guidance in accounting for changes in contracts, hedging relationships, and other transactions as a result of this reference rate reform.  The option expedients and exceptions contained within this update, in general, only apply to contract amendments and modifications entered into prior to January 1, 2023.  The provisions of this update will most likely affect our financial reporting process relating to modifications of contracts with lenders and the hedging contracts associated with each respective modified borrowing contract.  In general, the provision of the update would benefit us by allowing modifications of debt contracts with lenders that fall under the guidance of ASC Topic 740 to be accounted for as a non-substantial modification and not be considered debt extinguishment.  As of June 30, 2021, we have not entered into any contract modification as it directly relates to reference rate reform, but we anticipate having to undertake such modifications in the future.  While the Company anticipates the impact of this update may be to its benefit, the Company is still evaluating the overall impact.

  1. Investment in Hotel Properties, Net

Investment in hotel properties, net as of June 30, 2021 and December 31, 2020 consisted of the following:

June 30, 2021 December 31, 2020
Land and land improvements $ 66,121,705 $ 66,088,705
Buildings and improvements 443,006,453 442,063,950
Right of use assets 5,945,642 5,995,438
Furniture, fixtures and equipment 56,007,744 55,796,797
571,081,544 569,944,891
Less: accumulated depreciation and impairment (151,656,328 ) (142,120,306 )
Investment in Hotel Properties, Net $ 419,425,216 $ 427,824,585

Our review of possible impairment as of June 30, 2021 and December 31, 2020, resulted in no impairment on our investment in hotel properties, respectively.

  1. Debt

Mortgage Loans, Net. As of June 30, 2021 and December 31, 2020, we had approximately $355.1 million and approximately $357.5 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels.

Balance Outstanding as of ^^
June 30, December 31, Prepayment Maturity Amortization Interest
Property 2021 2020 Penalties Date Provisions Rate
The DeSoto ^(1)^ $ 32,599,133 $ 32,820,733 Yes 7/1/2026 25 years 4.25%
DoubleTree by Hilton Jacksonville<br><br><br>Riverfront^(2)^ 33,354,864 33,655,483 Yes 7/11/2024 30 years 4.88%
DoubleTree by Hilton Laurel ^(3)^ 8,577,102 8,654,754 Yes 5/5/2022 25 years 5.25%
DoubleTree by Hilton Philadelphia Airport^(4)^ 41,069,612 41,804,700 None 10/31/2023 30 years LIBOR plus 2.27%
DoubleTree by Hilton Raleigh-<br><br><br>Brownstone University ^(5)^ 18,300,000 18,300,000 Yes 7/27/2022 (5) LIBOR plus 4.00%
DoubleTree Resort by Hilton Hollywood<br><br><br>Beach ^(6)^ 55,130,817 55,878,089 (6) 10/1/2025 30 years 4.913%
Georgian Terrace ^(7)^ 42,037,671 42,507,512 (7) 6/1/2025 30 years 4.42%
Hotel Alba Tampa, Tapestry Collection by Hilton ^(8)^ 17,946,480 17,946,480 None 6/30/2022 (8) LIBOR plus 3.75%
Hotel Ballast Wilmington, Tapestry Collection by Hilton ^(9)^ 33,043,336 33,259,067 Yes 1/1/2027 25 years 4.25%
Hyatt Centric Arlington ^(10)^ 48,990,136 48,990,136 Yes 10/1/2028 30 years 5.25%
Sheraton Louisville Riverside^(11)^ 11,037,086 11,037,086 Yes 12/1/2026 25 years 4.27%
The Whitehall ^(12)^ 14,697,831 14,697,830 Yes 2/26/2023 25 years PRIME plus 1.25%
Total Mortgage Principal Balance $ 356,784,068 $ 359,551,870 ^^
Deferred financing costs, net (1,823,925 ) (2,122,822 ) ^^
Unamortized premium on loan 104,588 116,929 ^^ ^^
Total Mortgage Loans, Net $ 355,064,731 $ 357,545,977 ^^ ^^
(1) The note amortizes on a 25-year schedule after an initial 1 year interest only period (which expired in August 2017) and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
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(2) The note is subject to a pre-payment penalty until March 2024. Prepayment can be made without penalty thereafter.
(3) Prepayment can be made on this note without penalty. On July 15, 2021, we entered into a note modification agreement whereby the maturity date was extended from August 5, 2021 to May 5, 2022.
(4) The note bears a floating interest rate of 1-month LIBOR plus 2.27%, but we entered into a swap agreement to fix the rate at 5.237%.  Under the swap agreement, notional amounts approximate the declining balance of the loan and we are responsible for any potential termination fees associated with early termination of the swap agreement.
(5) The note provides initial proceeds of $18.3 million, with an additional $5.2 million available upon the satisfaction of certain conditions; has an initial term of 4 years with a 1-year extension; bears a floating interest rate of 1-month LIBOR plus 4.00%; requires interest only monthly payments; and following a 12-month lockout, can be prepaid with penalty in year 2 and without penalty thereafter.  We entered into an interest-rate cap agreement to limit our exposure through August 1, 2022 to increases in LIBOR exceeding 3.25% on a notional amount of $23,500,000.
(6) With limited exception, the note may not be prepaid prior to June 2025.
(7) With limited exception, the note may not be prepaid prior to February 2025.
(8) The note bears a floating interest rate of 1-month LIBOR plus 3.75% subject to a floor rate of 3.75%; with monthly principal payments of $26,812; the note provides that the mortgage can be extended for two additional periods of one year each, subject to certain conditions.
(9) The note amortizes on a 25-year schedule after an initial 1 year interest only period and is subject to a pre-payment penalty except for any pre-payments made within 120 days of the maturity date.
(10) Following a 5-year lockout, the note can be prepaid with penalty in years 6-10 and without penalty during the final 4 months of the term.
(11) The note bears a fixed interest rate of 4.27% for the first 5 years of the loan, with an option for the lender to reset the interest rate after 5 years.
(12) The note bears a floating interest rate of New York Prime Rate plus 1.25% and is subject to prepayment penalty of 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022. Pre-payment can be made without penalty thereafter.
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Mortgage Forbearance Agreements

Since the onset of the COVID-19 pandemic, we have completed mortgage forbearance agreements and/or loan modification agreements for eleven of our twelve mortgage loans secured by our hotels.  The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to fifteen months, temporary elimination of requirements to make contributions to the furniture, fixtures and equipment replacement reserve, the ability to temporarily utilize furniture, fixtures and equipment replacement reserve funds for operating expenses or to fund principal and interest and required deposits to real estate tax escrows, subject to certain restrictions and conditions, including requirements to replenish such funds used; waivers for existing quarterly financial covenants for one to six quarters; and adjustments to some covenant calculations following the waiver period.  Below is a summary of those agreements for each hotel.

The DeSoto

Starting on April 1, 2020, we entered into a series of note modification agreements with the mortgage lender for The DeSoto pursuant to which we agreed with the lender on the following: (a) deferral of scheduled principal and interest payments due from April 1, 2020 to September 1, 2020, provided that interest continued to accrue during that period; (b) additional deferral of scheduled principal and interest payments due February 1, 2021, provided that interest also continued to accrue during that period; (c) a payment of interest only on March 1, 2021 in the amount of $116,240; (d) waiver of certain FF&E requirements until February 28, 2021; (e) to pay all deferred principal and interest at maturity; and (f) a guarantee by the Operating Partnership of payment of up to 5.0% of all present and future indebtedness under the loan. The maturity date under the loan modification remains unchanged.  As a condition to the loan modification, the borrowing entity, agreed to not declare, set aside or pay any distribution or dividend until the later of March 1, 2021 or the resumption of regular principal and interest payments.

DoubleTree by Hilton Jacksonville Riverfront

On April 21, 2020, we entered into a letter agreement pursuant to which the lender agreed to the following: (a) the April, May, and June 2020 principal and interest payments were paid out of FF&E reserves; (b) FF&E deposits were deferred for the April, May, and June 2020 payment dates; and (c) released FF&E and the deferred FF&E was repaid in 6 monthly installments ending with the December 2020 payment. The maturity date under the loan modification remains unchanged.

DoubleTree by Hilton Laurel

Starting on March 24, 2020, we entered into a series of deferral and note modification agreements with the mortgage lender for the DoubleTree by Hilton Laurel pursuant to which we agreed with the lender on the following: (a) an initial deferral of scheduled payments of principal and interest due from April 5, 2020 to September 5, 2020; (b) an additional deferral of schedule payment of principal only from November 5, 2020 to March 5, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any and all deferred principal is due and payable at maturity.  On July 15, 2021, we entered into a note modification agreement pursuant to which we agreed with the lender of the following: (i) the maturity date was extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, the borrower will pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%.  Concurrently with the execution of the Note Modification Agreement, the borrower paid Lender the deferred interest accumulated on the loan from April 2020 through September 2020 in the amount of $226,859.  All other terms of the mortgage remain unchanged.  A nominal amount in cash consideration was provided in exchange for the note modifications and the lender also waived the application of the December 31, 2020, calculation of the debt service coverage ratio covenant.

DoubleTree by Hilton Philadelphia Airport

We have agreed with the lender to the following: (a) deferral of scheduled principal through June 1, 2021; (b) payment of regular principal and interest to resume on July 1, 2021; (c) remaining deferred interest is to be paid in 12 equal installments beginning April 1, 2021; and (d) deferred principal is due and payable at maturity; (e) a guaranty by the Operating Partnership of payment under the loan and (f) addition of a revenue per available room financial covenant for the period between March 1, 2021 and May 31, 2021.  In connection with the guarantee, the Operating Partnership entered into an acknowledgment of confession of judgment of guarantor pursuant to which the lender is authorized to enter a judgment against the Operating Partnership upon the occurrence of an event of default.  The maturity date was extended by 3 months, or until October 31, 2023.  As of June 30, 2021, we failed to meet the financial covenants under the mortgage secured by the DoubleTree by Hilton Philadelphia Airport.  We received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021.

DoubleTree by Hilton Raleigh-Brownstone University

Starting on May 4, 2020, we entered into a series of forbearance and loan modification agreements with the mortgage lender for the DoubleTree by Hilton Raleigh-Brownstone University pursuant to which the lender has agreed to the following: (a) deferral of scheduled interest payments due from April 1, 2020 to July 31, 2021; (b) a one-time fee of $236,375 made in January 2021 and applied to deferred interest; and (c) deferral of the FF&E reserve deposit from April 2020 until July 2021 and (d) remainder of deferred interest, along with additional accrued interest on interest, is due and payable by maturity.  In consideration for the modification, the underlying loan agreement with the lender was amended to allow the lender to proceed against the Operating Partnership to recover damages if we fail to pay the deferred interest by August 1, 2021.  In the event that accrued interest is not paid in full by the July 27, 2022, the borrowing entity will be required to pay an exit fee equal to one percent of the total outstanding principal amount under the loan in addition to all outstanding payments of principal and interest on the loan.

DoubleTree Resort by Hilton Hollywood Beach

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note we paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the borrowing entity relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.

Georgian Terrace

On October 8, 2020, the lender agreed to the release of approximately $1.1 million from the FF&E reserve to fund up to 50% of (a) shortfall between gross revenues and operating expenses for the period April through July 31, 2020, and (b)scheduled payments of debt service, deposits to the real estate tax escrow and insurance expenses for the period April through August 2020.  The FF&E reserve must be replenished no later than December 31, 2021.  So long as there is no event of default under the terms of the loan agreement, lender agreed to defer deposits into the FF&E reserve account between November 2020 and April 2021. As consideration to entering into the loan modification agreement, the Operating Partnership agreed to guarantee full and prompt payment of the released reserves amounts.

Hotel Alba Tampa

Starting on May 14, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to: (a) the deferral of scheduled payments of principal due from April 1, 2020 to June 30, 2021; (b) waive certain financial covenants applicable to the borrowing entity and the Operating Partnership through the quarter ended December 31, 2020 and (c) repayment of deferred payments upon the earlier of (i) the maturity date or (ii) acceleration of the loan.  The borrowing entity may not, without prior written consent of the lender, make any distributions of cash or property until all the following conditions have been satisfied: (x) the deferral period has expired and deferred payments have been made; (y) certain conditions precedent for making distributions under the loan agreement have been satisfied; and (z) the PPP loans, have been repaid or forgiven. The borrowing entity is also restricted from making any payments on any subordinated indebtedness, mezzanine financing or certain other funded indebtedness, with certain limited exceptions, without prior written consent of the lender.  As of June 30, 2021, we were in compliance with the modified financial covenant under the mortgage secured by the Hotel Alba, provided that we maintain the cash collateral on deposit with the lender.  Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million as of June 30, 2021, subject to certain withdrawal privileges.

Hotel Ballast Wilmington

The lender has agreed to the following: (a) deferral of scheduled principal payments due from April 1, 2020 to March 1, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to September 1, 2020; (c) waiver of FF&E requirement until March 1, 2021; (d) deferred principal and interest will be due and payable at maturity; and (e) payment of up to 5.0% of the indebtedness under the loan is guaranteed by the Operating Partnership.  The maturity date under the loan modification remains unchanged.  As a condition to the modification, the borrowing entity cannot declare, set aside or pay any distributions or dividends until the later of (i) March 1, 2021 or (ii) the resumption of regular principal and interest payments.

Hyatt Centric Arlington

Starting on July 15, 2020, we entered into a series of loan modification agreements, pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal and interest due from April 1, 2020 to March 31, 2021; (b) deferral of scheduled payments of principal due from April 1, 2021 to December 31, 2021; (c) loan balance to be re-amortized as of January 1, 2022; (d) deferred principal and interest, along with additional accrued interest on interest, is due and payable by July 1, 2022; (e) $147,765 drawn from the reserve account to be replenished in full by December, 2021; and (f) wavier of the requirement to make deposits into FF&E reserve from April 2020 to April 1, 2021.  As a condition to the effectiveness of the first modification, the borrower under the loan paid (i) $50,000 to be deposited into the ground lease reserve account and (ii) $426,620 to be deposited into an escrow for impositions.  As a condition to the effectiveness of the second modification, the borrower paid (i) an additional $47,500 to be deposited into the ground lease reserve account and (ii) a one-time fee of $100,000 to be deposited into an escrow for impositions.  Until the borrower under the loan has fully repaid the deferred monthly payment and replenished the FF&E reserves account and the PPP loan is no longer outstanding, the borrower is not permitted make any distributions without prior written consent of the lender.

Sheraton Louisville Riverside

The lender has agreed to the following: (a) deferral of scheduled payments of interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent payments are required to be applied first toward current and deferred interest and then toward principal; and (d) any deferred principal is due and payable at maturity.  The maturity date under the loan modification remains unchanged.

The Whitehall

We entered into two forbearance agreement pursuant to which the lender agreed to the following: (a) deferral of scheduled payments of principal due from April 1, 2020 to July 13, 2021; (b) deferral of scheduled payments of interest from April 1, 2020 to October 12, 2020; (c) deferred payments will be added to the principal balance of the loan and subsequent payments will be calculated based on the remainder of the amortization period; (d) on July 14, 2021 principal and interest payments will resume based upon the original amortization; (e) the interest rate is changed from LIBOR plus 3.50% to New York Prime Rate plus 1.25%; (f) payment of a loan modification fee of $54,500; and (g) the prepayment penalty is changed to: (i) 2.0% if prepaid after April 12, 2021 but on or before April 12, 2022; (ii) 1.0% if prepaid after April 12, 2022 but on or before November 26, 2022; and (iii) no prepayment fee if prepaid after November 26, 2022.   The maturity date under the loan modification remains unchanged.

As conditions to the forbearance agreement, the parties agreed to the following during the forbearance period lasting until the earlier of (a) July 13, 2021 or (b) the occurrence of a forbearance event of default: (i) the borrowing entity, the Operating Partnership and the Company cannot declare, authorize or pay dividends or may any distribution to any person, without prior written consent of the lender; (ii) the borrower may not sell, convey, transfer or assign assets, other than in the ordinary course of business, without the lender’s consent and in the case of such sale, the lender may cause the buyer to pay all proceeds directly to the lender and (iii) the borrower shall not default on any of its obligations to third parties.  If we fail to meet the obligations under the forbearance agreements, lender has the right to exercise all remedies available under the loan agreement including the right to accelerate the maturity of the loan.

As of June 30, 2021, we failed to meet the financial covenants under the mortgage secured by The Whitehall.  We have received a waiver of the financial covenants from the lender on The Whitehall mortgage through June 30, 2022.

Cash Trap Provisions

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap” as well.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.

Total future mortgage debt maturities for the remaining six and twelve-month periods, without respect to any extension of loan maturity or loan modification after June 30, 2021, were as follows:

For the six months ending December 31, 2021 13,836,422
December 31, 2022 42,006,930
December 31, 2023 59,491,646
December 31, 2024 37,218,158
December 31, 2025 92,667,469
December 31, 2026 and thereafter 111,563,443
Total future maturities $ 356,784,068

PPP Loans. The Operating Partnership and certain of its subsidiaries have received PPP Loans administered by the U.S. Small Business Administration pursuant to the CARES Act.  Each PPP Loan has a term of five years and carries an interest rate of 1.00%.  Equal payments of principal and interest begin no later than 10 months following origination of the loan and are amortized over the remaining term of the loan. Pursuant to the terms of the CARES Act, the proceeds of each PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.  The promissory note for each PPP Loan contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.  Under the terms of the CARES Act, each borrower can apply for and be granted forgiveness for all or a portion of the PPP Loan.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act.  No assurance is provided that any borrower will obtain forgiveness under any relevant PPP Loan in whole or in part.  As of June 30, 2021, no application for loan forgiveness has been filed and no payments have been required.

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

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

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

Secured Notes Financing.  On December 31, 2020, we entered into the following agreements with KW, as collateral agent and an investor, and MIG, as an investor: (i) a Note Purchase Agreement with KW and MIG; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement with KW; (iv) a Board Observer Agreement with KW; and (v) other ancillary agreements.  These agreements constitute a transaction whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021 and which option is required to be completed on or before December 31, 2021, on the terms and subject to the conditions described below.

Note Purchase Agreement

On December 31, 2020, the Operating Partnership and the Company entered into the Note Purchase Agreement with KW and MIG, pursuant to which: (i) we agreed to issue and sell, and the Investors agreed to purchase, the Secured Notes with an aggregate face amount of US $20 million and on the terms described below; (ii) KW and MIG granted us an option, subject to certain conditions and exercisable by us on or before the first anniversary of the first closing date, pursuant to which we may issue and sell a second note to each of the Investors with an aggregate face amount of $10.0 million on substantially the same terms as the initial Secured Notes; (iii) the Company agreed to fully and unconditionally guaranty the obligations of the Operating Partnership; (iv) we entered into the Pledge Agreement and Board Observer Agreement; (v) we agreed to provide certain representations and warranties to the Investors; and (vi) we agreed to use the net proceeds to support the continued operation of the business conducted by the Operating Partnership.  We were required to pay a 1% origination fee on the amount of the initial Secured Notes in connection with the first closing and a 1% commitment fee on the committed amount of the Second Secured Notes.

Secured Notes

On December 31, 2020, the Operating Partnership issued and sold initial Secured Notes to the Investors in the amount of $20.0 million.  The Secured Notes: (i) have a maturity date of December 30, 2023, with a one-year extension option, subject to a fee in the amount of 1% of the outstanding principal amount under the Secured Notes as of such maturity date; (ii) accrue interest at a rate of 6.00% during the initial term and then at a rate of 10% following any extension; (iii) require quarterly interest payments, which shall initially be in the amount of $0.30 million; (iv) require principal repayment equal to 1.47 times the face amount of the Secured Notes if repaid on or prior to December 30, 2023 and 1.65 times the face amount of the Secured Notes if repaid after December 30, 2023; (v) may be prepaid without penalty, but subject to make-whole amounts for interest and the repayment multiplier; and (vi) rank pari passu with other notes issued under the Note Purchase Agreement and senior to all other indebtedness of the Operating Partnership.

The Secured Notes require us to maintain certain cash management standards and include a broad range of covenants restricting our ability to incur additional debt, make dividend payments, transfer or acquire assets, or exceed our 2019 employee compensation levels.  They also require us to maintain certain financial thresholds, including limitations on our accounts payable and capital expenditures.

Upon an event of default or liquidity event described in the Secured Notes, the holders of the Secured Notes have the right to require and approve our selection of one or more of our hotel properties for disposition or refinancing in order to cure an event of default or liquidity event based on a process set forth in the Secured Notes.  In addition, the Secured Notes are redeemable by the holder in full upon an event of default or a change of control transaction.

Pledge Agreement

On December 31, 2020, certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel.  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.

  1. 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 and six months ended June 30, 2021, totaled $20,983 and $41,966, respectively, and rent expense for this operating lease for the three and six months ended June 30, 2020, totaled $18,246 and $36,942.

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

We lease land adjacent to the Hotel Alba for use as parking under a five-year renewable agreement with the Florida Department of Transportation that commenced in July 2009.  In May 2014, we extended the agreement for an additional five years.  We signed a new agreement in April 2019, which commenced in July 2019, goes for five years and can be renewed for an additional five years.    The new agreement expires in July 2024, requires annual payments of $2,432, plus tax, and may be renewed for an additional five years.  Rent expense for the three and six months ended June 30, 2021, totaled $641 and $1,283, respectively and rent expense for each of the three and six months ended June 30, 2020, totaled $651 and $1,301, respectively.

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 is $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- and six-month periods ended June 30, 2021, totaled $55,902 and $111,804, respectively and rent expense for the three- and six-month periods ended June 30, 2020 totaled, $55,902 and $111,663, respectively.

We lease the land underlying all of the Hyatt Centric Arlington hotel pursuant to a ground lease.  The ground lease requires us to make rental payments of $50,000 per year in base rent and percentage rent equal to 3.5% of gross room revenue in excess of certain thresholds, as defined in the ground lease agreement.  The initial term of the ground lease expires in 2025 and may be extended for five additional renewal periods of 10 years each.  Rent expense for the three and six months ended June 30, 2021, was $46,966 and $89,472, respectively and rent expense for the three and six months ended June 30, 2020, was $9,944 and $106,500, respectively.

We lease 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 in base 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 June 30, 2021 and 2020, was $67,750 and $133,750, respectively, and for the six months ended June 30, 2021 and 2020, was $135,500 and $267,500, respectively.

We also lease certain storage facilities, furniture and equipment under agreements expiring between October 2021 and June 2025.

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

For the six months ending December 31, 2021 $ 356,523
December 31, 2022 683,693
December 31, 2023 671,883
December 31, 2024 663,585
December 31, 2025 668,651
December 31, 2026 and thereafter 14,758,986
Total $ 17,803,321

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 June 30, 2021, our twelve 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, 2025 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 June 30, 2021, most of our hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, we are required to pay a franchise fee generally between 3.0% and 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 3.0% and 4.0% of gross revenues from the hotels. The franchise agreements currently in force expire between November 2021 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 Raleigh Brownstone-University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, and the Georgian Terrace an amount equal to one-twelfth (1/12) of the annual real estate taxes due for the properties. We are also required by several of our lenders to establish individual property improvement funds to cover the cost of replacing capital assets at our properties. Each month, those contributions equal 4.0% of gross revenues for the Hotel Ballast, The DeSoto, the DoubleTree by Hilton Raleigh Brownstone–University, the DoubleTree by Hilton Jacksonville Riverside, the DoubleTree Resort by Hilton Hollywood Beach, The Whitehall and the Georgian Terrace and equal 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport and the Hyatt Centric Arlington.

ESOP Loan Commitment – The Company’s board of directors approved the ESOP on November 29, 2016, which was adopted by the Company in December 2016 and effective January 1, 2016.  The ESOP is a non-contributory defined contribution plan covering all employees of the Company.  The ESOP is a leveraged ESOP, meaning the contributed funds are loaned to the ESOP from the Company.  The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market. Under the loan agreement, the aggregate principal amount outstanding at any time may not exceed $5.0 million and the ESOP may borrow additional funds up to that limit in the future, until December 29, 2036.  Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.

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.

  1. 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 June 30, 2021 December 31, 2020 Per Share
Series B Preferred Stock 8.000 % $ 25.00 1,510,000 1,610,000 $ 0.500000
Series C Preferred Stock 7.875 % $ 25.00 1,469,610 1,554,610 $ 0.492188
Series D Preferred Stock 8.250 % $ 25.00 1,165,000 1,200,000 $ 0.515625

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

On March 17, 2020, the Company announced that it was deferring payment of Sotherly’s previously announced declared distributions for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending March 31, 2020.  No distributions have been declared for the Company’s Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock for the period ending June 30, 2021.

The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through June 30, 2021, are $4,530,000, $4,339,946 and $3,604,219, respectively.  Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared.  As of June 30, 2021, the undeclared cumulative preferred dividends were approximately $10.4 million and the declared unpaid preferred dividends are approximately $2.1 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 June 30, 2021 December 31, 2020 Per Unit
Series B Preferred Units 8.000 % $ 25.00 1,510,000 1,610,000 $ 0.500000
Series C Preferred Units 7.875 % $ 25.00 1,469,610 1,554,610 $ 0.492188
Series D Preferred Units 8.250 % $ 25.00 1,165,000 1,200,000 $ 0.515625

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

The total declared and undeclared, but unpaid cash dividends due on the Series B Preferred Units, Series C Preferred Units and Series D Preferred Units through June 30, 2021, is $4,530,000, $4,339,946 and $3,604,219, respectively.  Undeclared preferred cumulative dividends are reported on the statements of operations but are not considered payable until declared.  As of June 30, 2021, the undeclared cumulative preferred dividends were approximately $10.4 million and the declared unpaid preferred dividends were approximately $2.1 million.

  1. Common Stock and Units

Common Stock – As of June 30, 2021, 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, 2020, of the Company’s common stock and related units of the Operating Partnership:

On January 1, 2020, two holders of units in the Operating Partnership redeemed 488,952 units for an equivalent number of shares in the Company’s common stock.

On January 1, 2020, the Company was issued 45,000 units in the Operating Partnership and awarded shares of restricted stock to two employees.

On February 3, 2020, the Company was issued 17,250 units in the Operating Partnership and awarded shares of restricted stock to its independent directors.

On May 1, 2020, one holder of units in the Operating Partnership redeemed 57,687 units for an equivalent number of shares in the Company’s common stock.

On December 1, 2020, one holder of units in the Operating Partnership redeemed 15,000 units for an equivalent number of shares in the Company’s common stock.

On December 17, 2020, the Company was issued 127,583 units in the Operating Partnership and awarded shares of restricted stock to its independent directors and employees.

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

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

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

On June 21, 2021, we entered into a Share Exchange Agreement with Palogic.  Pursuant to the Share Exchange Agreement, Palogic agreed to exchange 100,000 shares of the Company’s Series B Preferred Stock, 85,000 shares of the Company’s Series C Preferred Stock, and 35,000 shares of the Company’s Series D Preferred Stock, together with all of Palogic’s rights to receive accrued and unpaid dividends on the remaining Palogic Shares, for 1,542,727 shares of the Company’s common stock, par value $0.01 per share. We closed the transaction and issued the Company Shares on June 22, 2021.

As of June 30, 2021 and December 31, 2020, the Company had 16,717,958 and 15,023,850 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, 2020, there have been no issuances or redemptions, of units in the Operating Partnership other than the issuances of units in the Operating Partnership to the Company described above.

As of June 30, 2021 and December 31, 2020, the total number of Operating Partnership units outstanding was 17,884,359 and 16,190,351, respectively.

As of June 30, 2021 and December 31, 2020, the total number of outstanding Operating Partnership units not owned by the Company was 1,166,401 and 1,166,501, respectively, with a fair market value of approximately $3.5 million and $2.9 million, respectively, based on the price per share of the common stock on such respective dates.

As of June 30, 2021, there were unpaid common dividends and distributions to holders of record as of March 13, 2020, in the amount of $2,088,160.

  1. Related Party Transactions

Our Town Hospitality. Our Town is currently the management company for each of our twelve wholly owned hotels, as well as the manager of our rental programs at the Hyde Resort & Residences and the Hyde Beach House Resort & Residences.  Our Town is a majority-owned subsidiary of Newport Hospitality Group, Inc. (“Newport”).  As of June 30, 2021, Andrew M. Sims, our Chairman, and David R. Folsom, our President and Chief Executive Officer, beneficially owned approximately 48.5% and 1.4%, respectively, of the total outstanding ownership interests in Our Town.  Both Mr. Sims and Mr. Folsom serve as directors of Our Town and have certain governance rights. Upon the satisfaction of certain conditions by Our Town, Mr. Sims and Mr. Folsom will be required to make an additional capital contribution to Our Town, which would result in them owning 51.3% and 1.5%, respectively, of the outstanding membership interests in Our Town. The following is a summary of the transactions with Our Town:

Accounts Receivable – At June 30, 2021 and 2020, we were due approximately $0.5 million and $0.8 million, respectively, from Our Town.

Management Agreements – On September 6, 2019, we entered into a master agreement with Newport and Our Town related to the management of ten of our hotels.  On December 13, 2019, we entered into an amendment to the master agreement (as amended, the “OTH Master Agreement”), as well as a series of individual hotel management agreements for the management of ten of our hotels.  On April 1, 2020, we engaged Our Town to manage one additional wholly-owned hotel and two condominium resort rental programs.  On November 15, 2020, Our Town became the manager of our Hyatt Centric Arlington hotel.  The hotel management agreements for each of our 12 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”.

We agreed to provide Our Town with initial working capital of up to $1.0 million, based on the anticipated management fees earned by Our Town under the individual hotel management agreements.  The advanced funds were to be offset against future management fees by means of a 25% reduction in the payment to Our Town, of fees earned each month during 2020.  At December 31, 2020, unreimbursed management fee advances totaled $549,900.

On June 4, 2021, the OTH Master Agreement and the related credit agreement were amended to provide for an increase in the balance outstanding under the credit agreement of $299,900 in satisfaction for an equivalent portion of unrepaid management fee advances and to provide for a guaranteed minimum incentive management fee of $250,000 for calendar year 2021 in satisfaction of the remainder of unrepaid management fee advances.

As of June 30, 2021, and December 31, 2020, Sotherly had advanced approximately $0.6 million and $0.6 million, respectively, to Our Town as initial working capital.  In addition, 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, 2025 but shall be extended beyond 2025 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.

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 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-month period ending June 30, 2021 and 2020, were $250,166 and $0, respectively.

Base management and administrative fees earned by Our Town for our properties was $918,676 and $127,448, for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were approximately $1.5 million and $0.8 million, respectively.

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 $147,217 and $80,596, as of June 30, 2021 and 2020, respectively.

Credit Agreement – On December 13, 2019, we entered into a credit agreement with Our Town effective January 1, 2020, pursuant to which Sotherly agreed to provide Our Town with a working capital line of credit.  The agreement, as amended, allows Our Town to borrow up to $894,900.  Our Town was allowed to draw against the line of credit from time to time prior to January 1, 2021,

when the facility became payable in full.  Interest accrues on the outstanding balance at 3.5% per annum and is payable quarterly in arrears.  In the event of a default under the credit agreement, we have the right to offset any outstanding unpaid balance against amounts we owe to Our Town under the OTH Hotel Management Agreements.  We are currently negotiating an extension to the credit agreement.  As of June 30, 2021 and 2020, the outstanding credit balance under the credit agreement was each approximately $0.6 million, respectively.

Our Town and the Company previously entered into the credit agreement effective January 1, 2020, pursuant to which the Company agreed to make a working capital line of credit of up to $500,000 available to Our Town, as amended on February 26, 2020, to increase working capital line of credit to up to $850,000 available to Our Town.  Under the credit agreement Our Town had the right draw against the facility from time to time prior to the maturity date.  The facility was to be payable in full on January 1, 2021.  Interest accrues on the outstanding balance at 3.5% per annum and is payable quarterly in arrears.  We have a right of offset against management fees and other amounts owed to Our Town under the individual hotel management agreements in the event of a default under the credit agreement.  The credit agreement was amended by the parties on June 4, 2021 such that: (i) the maximum amount of credit available is capped at $894,900; (ii) the amount of advances, as of June 4, 2021, is agreed to be $894,900; (iii) no additional advances are permitted; (iv) principal payments are required to be made by the borrower in the amount of $100,000 on each of December 31, 2021, December 31, 2022, December 31, 2023, December 31, 2024, and December 31, 2025;  (v) the maturity date is extended to December 31, 2026; and (vi) the aggregate unpaid principal amount and any other obligation are required to be paid at maturity.  An affiliate of Mr. Sims entered into a conditional financing commitment with Our Town to provide funding to permit repayment of the loan in the event the principal balance of the loan made to Our Town under the credit agreement has not been repaid prior to maturity and Sotherly declines to extend the maturity date.  The Company’s audit committee considered and approved the credit amendment and the terms thereof, and the related party aspects of the relationship with Our Town.

Employee Medical Benefits – We purchase employee medical coverage for eligible employees that are employed by Our Town that 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 $0.7 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were approximately $1.3 million and $1.8 million, respectively.

Loan Receivable – Affiliate. As of June 30, 2021 and December 31, 2020, approximately $3.6 million and $3.7 million, respectively, was due to the Operating Partnership for advances to the Company under a loan agreement dated December 29, 2016.  The Company used the proceeds to make advances to the ESOP to purchase shares of the Company’s common stock.

Others. We employ Ashley S. Kirkland, the daughter of our Chairman, as Corporate Counsel and Compliance Officer and 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 June 30, 2021 and 2020, totaled $107,115 and $104,797, respectively, and for the six months ended June 30, 2021 and 2020, were $212,984 and $226,754, respectively.

  1. 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 to consist of 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. In addition, all employer matching funds vest immediately. We ceased making matching employer contributions effective May 16, 2020.  Contributions to the plan totaled $0 and $9,989, for the three months ended June 30, 2021 and 2020, respectively, and for the six months ended June 30, 2021 and 2020, were $0 and $42,841, respectively.

Employee Stock Ownership Plan - The Company adopted an Employee Stock Ownership Plan in December 2016, effective January 1, 2016.  The ESOP is a non-contributory defined contribution plan covering all employees of the Company. The Company sponsors and maintains the ESOP and related trust for the benefit of its eligible employees.  The ESOP is a leveraged ESOP, meaning funds are loaned to the ESOP from the Company.  The Company entered into a loan agreement with the ESOP on December 29, 2016, pursuant to which the ESOP may borrow up to $5.0 million to purchase shares of the Company’s common stock on the open market, which serve as collateral for the loan.  Between January 3, 2017 and February 28, 2017, the Company’s ESOP purchased 682,500 shares of the Company’s common stock of an aggregate cost of $4.9 million.

Shares purchased by the ESOP are held in a suspense account for allocation among participants as contributions are made to the ESOP by the Company.  The share allocations will be accounted for at fair value at the date of allocation.  As of June 30, 2021, the ESOP had purchased 682,500 shares of the Company’s common stock in the open market at a cost of approximately $4.9 million, which the ESOP borrowed from the Company pursuant to the loan agreement.  A total of 186,083 shares with a fair value of $558,248 remained allocated or committed to be released from the suspense account, as of June 30, 2021.  We recognized as compensation cost $44,172 and $13,144, during the six months ended June 30, 2021 and 2020, respectively.  The remaining 493,405 unallocated shares

have an approximate fair value of $1,480,216, as of June 30, 2021.  As of June 30, 2021, the ESOP held a total of 170,419 allocated shares, 15,664 committed-to-be-released shares and 493,405 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:

June 30, 2021 December 31, 2020
Number of Shares Fair Value Number of Shares Fair Value
Allocated shares 170,419 $ 511,257 170,419 $ 426,048
Committed to be released shares 15,664 46,991 - -
Total Allocated and Committed-to-be-Released 186,083 $ 558,248 170,419 $ 426,048
Unallocated shares 493,405 1,480,216 509,069 1,272,672
Total ESOP shares 679,488 $ 2,038,464 679,488 $ 1,698,720
  1. Indirect Hotel Operating Expenses

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

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
Sales and marketing $ 2,898,571 $ 1,062,253 $ 5,032,375 $ 4,847,385
General and administrative 2,842,268 1,801,298 4,936,644 5,735,313
Repairs and maintenance 1,896,223 968,331 3,303,901 2,835,012
Utilities 1,314,988 988,704 2,452,204 2,404,106
Property taxes 1,514,781 1,508,929 3,309,910 3,318,286
Management fees, including incentive 1,001,104 133,416 1,878,866 1,004,406
Franchise fees 883,137 216,555 1,466,559 1,201,580
Insurance 883,021 729,200 1,705,093 1,519,695
Information and telecommunications 704,236 463,958 1,330,371 1,052,515
Other 111,747 57,121 223,230 193,308
Total indirect hotel operating expenses $ 14,050,076 $ 7,929,765 $ 25,639,153 $ 24,111,606
  1. Income Taxes

The components of the income tax (benefit) provision for the three and six months ended June 30, 2021 and 2020 are as follows:

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
Current:
Federal $ — $ — $ — $ —
State 6,972 23,362 9,581 65,312
6,972 23,362 9,581 65,312
Deferred:
Federal (444,489 ) (3,524,779 ) (2,053,540 ) (4,920,858 )
State (109,552 ) (760,339 ) (429,633 ) (993,667 )
Subtotals (554,041 ) (4,285,118 ) (2,483,173 ) (5,914,525 )
Change in deferred tax valuation allowance 554,041 4,285,118 2,483,173 11,326,609
- - - 5,412,084
$ 6,972 $ 23,362 $ 9,581 $ 5,477,396
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
--- --- --- --- --- --- --- --- --- --- --- ---
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
Statutory federal income tax provision $ (325,282 ) $ - $ (1,915,329 ) $ (1,653,922 )
Effect of non-taxable REIT loss 434,834 - 2,344,962 7,299,334
State income tax provision (102,580 ) 23,362 (420,052 ) (168,016 )
$ 6,972 $ 23,362 $ 9,581 $ 5,477,396
  1. Loss Per Share and Per Unit

Loss per Share. The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partner and following our election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of loss would also be added back to net 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 allocated and committed to be released shares have been included in the weighted average diluted earnings per share calculation since there would be an antidilutive effect from the dilution by these shares, although the amount of compensation for allocated shares is reflected in net loss attributable to common stockholder for basic computation. There are no ESOP units, therefore there is no dilution on the calculation of earnings per unit.  The computation of basic and diluted net loss per share is presented below:

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator
Net loss attributable to common stockholders for basic computation $ (2,810,603 ) $ (17,124,612 ) $ (11,875,600 ) $ (31,448,313 )
Denominator
Weighted average number of common shares outstanding 15,344,761 14,862,249 15,232,029 14,837,891
Weighted average number of Unearned ESOP Shares (494,479 ) (559,130 ) (498,380 ) (563,223 )
Total weighted average number of common shares outstanding for basic computation 14,850,282 14,303,119 14,733,649 14,274,668
Basic net loss per share $ (0.19 ) $ (1.20 ) $ (0.81 ) $ (2.20 )

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

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
(unaudited) (unaudited) (unaudited) (unaudited)
Numerator
Net loss attributable to general and limited partnership unitholders for basic computation $ (2,990,241 ) $ (18,489,980 ) $ (12,754,776 ) $ (34,011,096 )
Denominator
Weighted average number of general and limited partnership units outstanding 16,511,162 16,062,768 16,398,448 16,057,745
Basic net loss per general and limited partnership unit $ (0.18 ) $ (1.15 ) $ (0.78 ) $ (2.12 )
  1. Subsequent Events

On July 26, 2021, the Board authorized the deferral of payment of the quarterly distribution for the period ending September 30, 2021, for each of the Company’s Series B, Series C, and Series D Preferred Stock (and Preferred Units).

On July 15, 2021, we entered into a note modification agreement (the “Note Modification Agreement”) to extend the maturity date on the existing mortgage on the DoubleTree by Hilton Laurel (the “Hotel”) with the existing lender, United Bank, a Virginia banking corporation and successor in interest to Bank of Georgetown (the “Lender”).  Pursuant to the Note Modification Agreement: (i) the maturity date is extended by nine months, to May 5, 2022; (ii) commencing August 5, 2021 and continuing on the fifth day of each calendar month thereafter, Company shall pay monthly installments in the amount of $64,475; and (iii) the interest on the principal balance of the note shall accrue at a rate of 5.25%.  Concurrently with the execution of the Note Modification Agreement, the Company paid Lender the deferred interest accumulated on the loan from April 2020 through September 2020, in the amount of $226,859.  All other terms of the mortgage remain unchanged.

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 Exchange Act, 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.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the adverse effect of COVID-19 on the Company’s business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets. The significance, extent and duration of the impacts caused by the COVID-19 outbreak on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions mandated and taken to contain the pandemic or mitigate its impact, the Company’s ability to negotiate forbearance and/or modifications agreements with its lenders on acceptable terms, or at all, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Such additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; reduced business and leisure travel due to travel-related health concerns, including the widespread outbreak of COVID-19 or any other infectious or contagious diseases in the U.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a REIT. 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 which could have a material adverse effect on our operations and future 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;
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• risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements, including our recently negotiated forbearance agreements and loan modifications and, as necessary, to refinance or seek an extension of the maturity of such indebtedness or further modification of such debt agreements;
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• risks associated with adverse weather conditions, including hurricanes;
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• impacts on the travel industry from pandemic diseases, including COVID-19;
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• the availability and terms of financing and capital and the general volatility of the securities markets;
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• management and performance of our hotels;
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• risks associated with maintaining our system of internal controls;
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• risks associated with the conflicts of interest of the Company’s officers and directors;
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• risks associated with redevelopment and repositioning projects, including delays and cost overruns;
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• supply and demand for hotel rooms in our current and proposed market areas;
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• risks associated with our ability to maintain our franchise agreements with our third party franchisors;
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• our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;
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• our ability to successfully expand into new markets;
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• legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts (“REITs”);
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• the Company’s ability to maintain its qualification as a REIT; and
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• our ability to maintain adequate insurance coverage.
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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, in this report and subsequent reports filed with the Securities and Exchange Commission.

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 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the mid-Atlantic and southern 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 twelve full-service, primarily upscale and upper-upscale hotels, comprising 3,156 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, Sheraton 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 June 30, 2021, 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 by Hilton Raleigh Brownstone-University 190 Raleigh, NC 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
Sheraton Louisville Riverside ^(3)^ 180 Jeffersonville, IN September 20, 2006 Upper Upscale
The Whitehall 259 Houston, TX November 13, 2013 Upper Upscale^(^^1)^
Hotel Rooms Subtotal 3,156
Condominium Hotel
Hyde Resort & Residences 129 ^(2)^ Hollywood, FL January 30, 2017 Luxury^(^^1)^
Hyde Beach House Resort & Residences 135 ^(2)^ Hollywood, FL September 27, 2019 Luxury^(^^1)^
Total Hotel & Participating Condominium Hotel Rooms 3,420
(1) Operated as an independent hotel.
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(2) Reflects only those condominium units that were participating in the rental program, as of June 30, 2021.  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.”
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(3) The Company has entered into a purchase and sale agreement for the disposition of the Sheraton Louisville Riverside.  The closing of the sale is subject to various customary closing conditions.
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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 93.5% interest in our Operating Partnership, as of the date of this filing, with the remaining interest being held by limited partners who were the contributors of our Initial Properties and related assets.

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

Effects of COVID-19 Pandemic on Our Business

In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand has been significantly reduced. Following the government mandates and health official recommendations, we significantly reduced operations at all our hotels, temporarily suspended operations of our hotel condominium rental programs and dramatically reduced staffing and expenses.  All of our hotels have remained open on a limited basis in order to serve the needs of the community, with the exception of the rental programs at our condominium hotels, which were temporarily closed for April and May of 2020. We believe that maintaining limited operations allowed us to increase capacity at individual hotels as demand has begun to return and the CDC and state guidelines have allowed for an easing of travel and other business restrictions.  Our hotels have been gradually re-introducing guest amenities relative to the return of business while focusing on profit generators and margin control and we intend to continue those re-introductions, provided we can be confident that occupancy levels and reduced social distancing will not unduly jeopardize the health and safety of our guests, employees and communities.

COVID-19 has had a significant negative impact on our operations and financial results, including a substantial decline in our revenues, profitability and cash flows from operations compared to similar pre-pandemic periods.  Conditions in the second quarter, however, improved significantly over the same period in the prior year, as the Company witnessed increased demand fueled predominantly by leisure travel.  Revenues, profitability, and cash flows from operations during the second quarter of 2021 exceeded our expectations but were still far below the same period in 2019, before the pandemic.  Notwithstanding the encouraging results recorded during the second quarter of 2021, the quarter’s operations and financial results were a marked improvement over the same period in 2020.  While the duration and full extent of the reduction in hotel demand caused by the pandemic, the contraction of operations at our hotels and other effects are highly uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and business travel approaches pre-pandemic levels. At a minimum, we expect the COVID-19 pandemic to continue to have a significant negative impact on our results of operations, financial position and cash flow through 2021. In response to the impact of COVID-19 on our operations, we have taken the following health and safety and cost-reduction measures at the property and corporate levels:

• In coordination with our management company partners, we implemented aggressive cost control measures at the property level, including significantly reduced operating expenses and curtailed food & beverage operations.
• We suspended most planned capital expenditure projects other than replacement of vital building systems approaching the end of their useful life.
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• We reduced expenses at the corporate level, including immediate reductions in compensation and benefits of all corporate staff as well as anticipated bonuses and the voluntary waiver by the Company’s board of directors of its director fees.
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• Suspending our regular quarterly cash common stock dividends in order to preserve liquidity.
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• Entered into various forbearance and loan modification agreements regarding payments of principal and interest required under our loan agreements.  Refer to Note 1, Note 4 and Note 13 to the accompanying consolidated financial statements for more information on the forbearance agreements with our lenders and current negotiations.
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• Deferring payment of the dividends for our Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock.
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• We have engaged in discussions with our lenders regarding relief from financial covenants for current and future periods – especially those where failure to satisfy those covenants is an “Event of Default”.
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The COVID-19 pandemic has also significantly increased economic uncertainty and led to disruption and volatility in the global capital markets, which has limited our access to capital and could increase our cost of capital during the course of the pandemic.  We have sought and obtained forbearance and loan modification agreements with lenders under the mortgages for certain of our hotel properties as described above.  On July 27, 2021, we filed a registration statement on Form S-11 with the Securities and Exchange Commission to publicly offer for sale senior unsecured notes of the Operating Partnership, guaranteed by the Company.  As of August 16, 2021, that registration statement has not been declared effective.

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage through and including June 30, 2022.   See the discussion of forbearance, modifications, and waivers in Note 4 to the financial statements.

As of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the revenue generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach and we remain in negotiations with the lender on the DoubleTree by Hilton Jacksonville Riverfront for a waiver of the “cash trap”.  Additionally, in order to receive forbearance from the lenders on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” which will continue until the properties meet the criteria in the forbearance agreements for exiting the “cash traps”.

As of June 30, 2021, the Company had approximately $21.8 million in unrestricted cash and approximately $11.7 million in restricted cash.  In addition, we have the option to obtain $10.0 million in additional proceeds from the sale of additional Secured Notes to the Investors described below.

On April 30, 2021, we entered into a loan modification and reinstatement agreement with the mortgage lender for the DoubleTree Resort by Hilton Hollywood Beach pursuant to which we agreed with the lender to amend and reinstate the promissory note and loan agreement on revised terms.  Under the amended loan agreement and promissory note the Company paid to the lender contemporaneously with the closing of the amendment and reinstatement an aggregate amount of approximately $4.0 million made up of (i) tax and insurance reserves required to be funded in certain reserve accounts in the aggregate amount of approximately $2.5 million; (ii) a lump sum payment of approximately $1.3 million in respect of amounts owed by us relating to payments for the period from January through March 2021; (iii) certain FF&E reserve amounts required to be deposited with the lender; and (iv) certain other fees and expenses.  In addition, we agreed to (a) begin regular monthly payments on May 1, 2021; (b) pay the aggregate amount owed by the Company relating to deferred monthly payments for the period from April through December 2020 in 24 equal monthly installments of $119,591 beginning on January 1, 2021 and continuing through December 2022; and (c) certain other amended terms, including to restrict the borrower under the promissory note from making any distributions until all such deferred payments have been made. In consideration for the payments made at closing and the other amended terms the loan agreement, promissory note and other loan documents thereunder were amended and reinstated in accordance with their respective terms and conditions and the lender agreed to certain accommodations, including the waiver of the cash sweep period trigger for a period of time and to forbear in collection of default interest and late payment charges accrued and unpaid under the loan agreement and promissory note, provided that in the event of a future default those amounts will become due immediately and the waivers will no longer be effective.

U.S. generally accepted accounting principles (“U.S. GAAP”) requires, that when preparing financial statements for each annual and interim reporting period, management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The duration and extent of the reduction in hotel demand caused by the pandemic and the return to normalized operations prevents the Company from forecasting its cash flows and available liquidity to meet its obligations for operating expenses with precision and certainty.  However, based on our completed mortgage loan amendments and forbearance agreements, our current unrestricted and restricted cash, our forecast of future operating results and our anticipated ability to refinance or extend mortgage obligations maturing within the 12 months following the date of this report, we have concluded that substantial doubt of the Company’s ability to continue as a going concern has been alleviated.  Facts and circumstances could change in the future that are

outside the Company’s control – such as additional government mandates, health official orders, travel restrictions and extended business shutdowns due to COVID-19.

Secured Note Financing

On December 31, 2020, we closed a transaction with KW, as collateral agent and a note investor, and MIG, as a note investor, whereby the Investors purchased $20.0 million in Secured Notes from the Operating Partnership with an option to require the Investors to purchase an additional $10.0 million in Secured Notes, expiring on November 16, 2021, and which option is required to be completed on or before December 31, 2021.  We entered into the following agreements: (i) a Note Purchase Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and Security Agreement; (iv) a Board Observer Agreement; and (v) other related ancillary agreements.  The Secured Notes mature in 3 years and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at Company’s option.  The Secured Notes also carry a 6.0% current interest rate, payable quarterly during the initial 3-year term.  Certain subsidiaries of the Operating Partnership entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge and grant to KW a first priority security interest in the equity interests, including certain voting rights, of our affiliates that own The DeSoto hotel, Hotel Ballast Wilmington, and the DoubleTree by Hilton Philadelphia Airport hotel.  Upon an uncured monetary event of default under the Secured Notes, KW, as collateral agent, has a right to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in order to satisfy any amounts outstanding under the Secured Notes.  Pursuant to the Board Observer Agreement, the Company granted KW the option and the right, while the Secured Notes remain outstanding, to appoint a single representative to attend meetings of the Company’s board of directors and its committees in a non-voting, observer capacity only.  We are prohibited from making any equity distributions as long as the Secured Notes are outstanding.

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
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• Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.
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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 six months ended June 30, 2021 and 2020, respectively, for the Company’s twelve wholly-owned properties (“actual” portfolio metrics). Accordingly, the actual data does not include the participating condominium hotel rooms at the Hyde Resort & Residences or the Hyde Beach House Resort & Residences.  The composite portfolio metrics represent all of 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 six months ended June 30, 2021, and the corresponding periods in 2020.

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Actual Portfolio Metrics
Occupancy % 58.6 % 11.5 % 49.9 % 33.0 %
ADR $ 142.79 $ 117.60 $ 138.70 $ 151.23
RevPAR $ 83.73 $ 13.53 $ 69.22 $ 49.85
Composite Portfolio Metrics
Occupancy % 59.0 % 10.5 % 50.4 % 31.4 %
ADR $ 161.00 $ 122.51 $ 159.93 $ 160.71
RevPAR $ 94.93 $ 12.91 $ 80.54 $ 50.50

Comparison of the Three Months Ended June 30, 2021 to the Three Months Ended June 30, 2020

Revenue.  Total revenue for the three months ended June 30, 2021 increased approximately $29.1 million, or 549.5%, to approximately $34.4 million compared to total revenue of approximately $5.3 million for the three months ended June 30, 2020. There was an aggregate increase in total revenue of approximately $29.1 million from all of our properties due mainly to significant increases in demand mainly driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Room revenue increased approximately $20.1 million, or 518.8%, to approximately $24.0 million for the three months ended June 30, 2021 compared to room revenue of approximately $3.9 million for the three months ended June 30, 2020.  The increase in room revenue for the three months ended June 30, 2021 resulted from an aggregate increase of approximately $20.1 million from all of our properties due mainly to increased composite occupancy of 59.0%, increased ADR to $161.00 and increased RevPAR to 94.93 compared to prior year three months ending June 30, 2020, occupancy of 10.5%, ADR of $122.51 and RevPAR of $12.91, respectively.  These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Food and beverage revenues increased approximately $3.3 million, or 2156.5%, to approximately $3.5 million for the three months ended June 30, 2021 compared to food and beverage revenues of approximately $0.2 million for the three months ended June 30, 2020.  The increase in food and beverage revenues for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $3.3 million, from all of our properties because of the significant increases in demand mainly driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Revenue from other operating departments increased approximately $5.6 million, or 445.6%, to approximately $6.8 million for the three months ended June 30, 2021, compared to revenue from other operating departments of approximately $1.2 million for the three months ended June 30, 2020.  The increase in other operating departments revenue for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $5.6 million, from all of our properties because of the significant increases in demand mainly driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

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 $14.2 million, or 135.4%, to approximately $24.7 million for the three months ended June 30, 2021, compared to total hotel operating expenses of approximately $10.5 million for the three months ended June 30, 2020.  The increase in hotel operating expenses for the three months ended June 30, 2021, resulted from an aggregate increase in total hotel operating expenses of approximately $14.2 million, from all of our properties due mainly to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Rooms expense for the three months ended June 30, 2021, increased approximately $4.2 million, or 237.9%, to approximately $5.9 million, compared to rooms expense for the three months ended June 30, 2020, of approximately $1.7 million.  The increase in rooms expense for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $4.2 million from all of our properties, due mainly to increased composite occupancy of 59.0%, increased ADR to $161.00 and increased RevPAR to 94.93, compared to prior year three months ending June 30, 2020, occupancy of 10.5%, ADR of $122.51 and RevPAR of $12.91, respectively.  These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Food and beverage expenses for the three months ended June 30, 2021, increased approximately $2.0 million, or 1,656.9%, to approximately $2.1 million, compared to food and beverage expenses of approximately $0.1 million, for the three months ended June 30, 2020. The net increase in food and beverage expenses for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $2.0 million, from all of our properties because of the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Expenses from other operating departments increased approximately $1.9 million, or 277.5%, to approximately $2.6 million for the three months ended June 30, 2021, compared to expenses from other operating departments of approximately $0.7 million for the three months ended June 30, 2020.  The increase in expenses from other operating departments for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $1.9 million, from all of our properties because of the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Indirect expenses at our wholly-owned properties for the three months ended June 30, 2021, increased approximately $6.1 million, or 77.2%, to approximately $14.0 million, compared to indirect expenses of approximately $7.9 million for the three months ended June 30, 2020.  The increase in indirect expenses for the three months ended June 30, 2021, resulted from an aggregate increase of approximately $6.1 million from all our properties.

Corporate General and Administrative.  Corporate general and administrative expenses for the three months ended June 30, 2021, increased approximately $0.3 million, or 24.6%, to approximately $1.5 million compared to corporate general and administrative expenses of approximately $1.2 million, for the three months ended June 30, 2020.  The increase in corporate general and administrative expenses was mainly due to increased legal and audit fees by approximately $0.3 million.

Interest Expense.  Interest expense for the three months ended June 30, 2021, increased approximately $0.8 million, or 17.1%, to approximately $5.5 million, as compared to interest expense of approximately $4.7 million, for the three months ended June 30, 2021.  The increase in interest expense for the three months ended June 30, 2021, was substantially related to the Secured Loan interest increase of approximately $1.1 million, offset by a reduction in the mortgage related to the Hotel Alba Tampa by approximately $0.3 million, compared to the three-month period ending June 30, 2020.

Interest Income.  Interest income for the three months ended June 30, 2021, decreased by $35,693, or 49.6%, to $36,308 compared to interest income of $72,001, for the three months ended June 30, 2020.  The decrease is due to lower amounts of interest-bearing cash and cash equivalents held during the three-month period ending June 30, 2021, compared to the three-month period ending June 30, 2020.

Unrealized Gain (Loss) on Hedging Activities.  As of June 30, 2021, the fair market value of our interest rate cap is $94 and the fair market value of our interest rate swap liability is approximately $2.3 million.  The unrealized gain on hedging activities during the three months ended June 30, 2021, was approximately $0.3 million and during the three months ended June 30, 2020, the unrealized loss on hedging activities was approximately $0.2 million.

Gain on Involuntary Conversion of Assets.  Gain on involuntary conversion of assets for the three months ended June 30, 2021 increased approximately $0.5 million, compared to a $14,168 gain on involuntary conversion of assets for the three months ended June 30, 2020.

Income Taxes.  We had an income tax provision of $6,972 for the three months ended June 30, 2021, compared to an income tax provision of $23,362, for the three months ended June 30, 2020.  Our MHI TRS Entities realized operating losses for each of the three months ended June 30, 2021 and 2020.  During the three-month period ending June 30, 2021, we increased the valuation allowance by approximately $0.6 million to approximately $17.2 million, as of June 30, 2021.

Net Loss.  We realized a net loss for the three months ended June 30, 2021, of approximately $1.6 million, compared to a net loss of approximately $16.3 million, for the three months ended June 30, 2020, because of the operating results discussed above.

Comparison of the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020

Revenue.  Total revenue for the six months ended June 30, 2021, increased approximately $14.5 million, or 34.2%, to approximately $57.0 million, compared to total revenue of approximately $42.5 million, for the six months ended June 30, 2020. The increase in revenue for the six months ended June 30, 2021, was due to an aggregate positive increase in total revenue of approximately $17.0 million from most of our properties, with the exception of properties in Raleigh, North Carolina, Houston, Texas and Arlington, Virginia, with an offsetting aggregate decrease of approximately $2.5 million.  The net increase was due mainly to the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Room revenue increased approximately $10.9 million, or 38.1%, to approximately $39.5 million for the six months ended June 30, 2021 compared to room revenue of approximately $28.6 million, for the six months ended June 30, 2020.  The increase in room revenue for the six months ended June 30, 2021, resulted from an aggregate positive increase of approximately $12.1 million from most of our properties, with the exception of properties in Raleigh, North Carolina, Houston, Texas and Arlington, Virginia, with an offsetting aggregate decrease of approximately $1.2 million. The net aggregate increase was mainly due to increased composite occupancy of 50.4%, decreased ADR to $159.93 and increased RevPAR to $80.54 compared to prior year six months ending June 30, 2020, occupancy of 31.4%, ADR of $160.71 and RevPAR of $50.50, respectively.  These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Food and beverage revenues decreased approximately $3.3 million, or 39.2%, to approximately $5.0 million for the six months ended June 30, 2021, compared to food and beverage revenues of approximately $8.3 million, for the six months ended June 30, 2020.   The decrease in food and beverage revenues for the six months ended June 30, 2021, resulted from all of our properties, with the exceptions of Savannah, Georgia and Hollywood, Florida properties, being affected by the COVID-19 pandemic and the resulting reduction of food and beverages being served in our hotels.

Revenue from other operating departments increased approximately $6.9 million, or 123.1%, to approximately $12.4 million for the six months ended June 30, 2021, compared to revenue from other operating departments of approximately $5.5 million, for the six months ended June 30, 2020.  The increase in other operating departments revenue for the six months ended June 30, 2020, resulted from an aggregate increase of approximately $6.9 million, from all of our properties, because of the significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

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 $0.5 million, or 1.2%, to approximately $43.2 million for the six months ended June 30, 2021, compared to total hotel operating expenses of approximately $42.7 million, for the six months ended June 30, 2020.  The increase in hotel operating expenses for the six months ended June 30, 2021, resulted from an aggregate increase in total hotel operating expenses of approximately $4.5 million from six of our properties, due mainly to significant increases in demand driven by the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.  Six of our hotels had decreases in hotel operating expenses aggregating to approximately $4.0 million, due to reduced staff and other operating cost increases during the period.

Rooms expense for the six months ended June 30, 2021, increased approximately $1.1 million, or 12.2%, to approximately $9.9 million compared to rooms expense for the six months ended June 30, 2020 of approximately $8.8 million.  The increase in rooms expense for the six months ended June 30, 2021, resulted from an aggregate increase of approximately $1.7 million from eight of our properties, while four of our hotel properties had decreases aggregating to approximately $0.6 million.  The net increase is due mainly to increased composite occupancy of 50.4%, decreased ADR to $159.93 and increased RevPAR to $80.54 compared to prior year six months ending June 30, 2020, occupancy of 31.4%, ADR of $160.71 and RevPAR of $50.50, respectively.  These significant increases are mainly due to the lifting of restrictions on travel, social gatherings and businesses; significant increases in demand from mostly transient consumers; increases in travel by some group business and increases in the number of foreign travelers.

Food and beverage expenses for the six months ended June 30, 2021, decreased approximately $3.7 million, or 55.2%, to approximately $3.0 million, compared to food and beverage expenses of approximately $6.7 million, for the six months ended June 30, 2020. The decrease in food and beverage expenses for the six months ended June 30, 2021, resulted from all of our properties being affected by the COVID-19 pandemic and the resulting reduction of food and beverages being served in our hotels.

Expenses from other operating departments increased approximately $1.6 million, or 54.3%, to approximately $4.6 million for the six months ended June 30, 2021, compared to expenses from other operating departments of approximately $3.0 million for the six months ended June 30, 2020.  The increase in expenses from other operating departments for the six months ended June 30, 2021, resulted from an aggregate increase in other operating expenses of approximately $1.8 million from seven of our hotel properties.  Five of our properties had decreases in other operating expenses aggregating to approximately $0.2 million.

Indirect expenses at our wholly-owned properties for the six months ended June 30, 2021, increased approximately $1.5 million, or 6.3%, to approximately $25.6 million, compared to indirect expenses of approximately $24.1 million, for the six months ended June 30, 2020.  The increase in indirect expenses for the six months ended June 30, 2021, resulted from all properties with increases in management fees, sales and marketing, franchise fees, repairs and maintenance, energy and utilities, information and communications and other indirect expenses, with the exception of the Raleigh, North Carolina, Houston, Texas, Atlanta, Georgia and Arlington, Virginia, were the only property with a decrease of indirect expenses by approximately $1.0 million.

Corporate General and Administrative.  Corporate general and administrative expenses for the six months ended June 30, 2021, decreased approximately $0.3 million, or 8.9%, to approximately $2.8 million compared to corporate general and administrative expenses of approximately $3.1 million for the six months ended June 30, 2020.  The decrease in corporate general and administrative expenses was mainly due to decreased salaries.

Interest Expense.  Interest expense for the six months ended June 30, 2021, increased approximately $2.1 million, or 23.3%, to approximately $11.4 million, as compared to interest expense of approximately $9.3 million for the six months ended June 30, 2020.  The increase in interest expense for the six months ended June 30, 2021, was substantially related to the Secured Loan interest increase of approximately $1.9 million and the Arlington loan by approximately $0.5 million, offset by a decrease of approximately $0.3 million on the mortgage related to the Hotel Alba Tampa, compared to the six months ending June 30, 2020.

Interest Income.  Interest income for the six months ended June 30, 2021, decreased by $57,459, or 43.4%, to $74,907 compared to interest income of $132,336, for the six months ended June 30, 2020.   The increase is due to lower amounts of interest-bearing cash and cash equivalents held during the six month period ending June 30, 2021, compared to the six month period ending June 30, 2020.

Unrealized Gain (Loss) on Hedging Activities.  As of June 30, 2021, the fair market value of our interest rate cap is $94 and the fair market value of our interest rate swap liability is approximately $2.3 million.  The unrealized gain on hedging activities during the six months ended June 30, 2021, was approximately $0.7 million and during the six months ended June 30, 2020, the unrealized loss on hedging activities was approximately $1.8 million.

Gain on Involuntary Conversion of Assets.  Gain on involuntary conversion of assets for the six months ended June 30, 2021, increased approximately $0.5 million, to $496,957 compared to $26,607 gain on involuntary conversion of assets, for the six months ended June 30, 2020.  We had three properties receiving payments of approximately $0.5 million, on claims during the previous year, Wilmington, North Carolina, Houston, Texas and Atlanta, Georgia.

Income Taxes.  We had an income tax provision of $9,581, for the six months ended June 30, 2021, compared to an income tax provision of approximately $5.5 million, for the six months ended June 30, 2020.  The June 30, 2020, income tax provision was primarily derived from a reduction of our deferred tax assets and through the establishment of a 100% valuation allowance of approximately $5.4 million, during the six months ending June 30, 2020.  During the six month period ending June 30, 2021, we increased the valuation allowance by approximately $2.5 million to approximately $17.2 million, as of June 30, 2021.

Our MHI TRS Entities realized operating losses, for each of the six months ended June 30, 2021 and 2020.

Net (Loss)/Income.  We realized a net loss, for the six months ended June 30, 2021, of approximately $9.1 million, compared to a net loss of approximately $29.6 million, for the six months ended June 30, 2020, because of the operating results discussed above.

Non-GAAP Financial Measures

We consider FFO Available to Common Stockholders and Unitholders, Adjusted FFO Available to Common Stockholders and Unitholders, EBITDA and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance.  These measures do not represent cash generated from operating activities determined by U.S. GAAP or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by U.S. 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 U.S. GAAP, excluding extraordinary items as defined under U.S. GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures.  Historical cost accounting for real estate assets in accordance with U.S. 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 Available to Common Stockholders and Unitholders in the same manner as we do, and investors should not assume that FFO Available to Common Stockholders and Unitholders as reported by us is comparable to FFO as reported by other REITs.

We further adjust FFO Available to Common Stockholders and Unitholders for certain additional items that are not in NAREIT’s definition of FFO, including changes in deferred income taxes, any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, gain 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, and change in control gains or losses. 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 Available to Common Stockholders and Unitholders may be different from similar measures calculated by other REITs.

The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for three and six months ended June 30, 2021 and 2020:

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net loss attributable to common stockholders $ (2,810,603 ) $ (17,124,612 ) $ (11,875,600 ) $ (31,448,313 )
Add: Net loss attributable to noncontrolling interest (179,638 ) (1,365,368 ) (879,176 ) (2,562,783 )
Depreciation and amortization - real estate 4,952,169 4,972,125 9,916,685 9,939,574
Gain on involuntary conversion of assets (496,957 ) (14,168 ) (496,957 ) (26,607 )
Gain on extinguishment of preferred stock (93,342 ) — (93,342 ) —
(Gain) loss on disposal of assets 17,221 (451 ) 17,221 (451 )
FFO attributable to common stockholders and unitholders $ 1,388,850 $ (13,532,474 ) $ (3,411,169 ) $ (24,098,580 )
Decrease in deferred income taxes — — — 5,412,084
Amortization 17,500 20,982 35,000 36,409
Contract termination fee refund — — — (72,960 )
Unrealized loss (gain) on hedging activities (303,181 ) 214,876 (693,367 ) 1,800,508
Adjusted FFO attributable to common stockholders and unitholders $ 1,103,169 $ (13,296,616 ) $ (4,069,536 ) $ (16,922,539 )
Weighted average number of shares outstanding,<br><br><br>basic 14,850,282 14,303,119 14,733,649 14,274,668
Weighted average number of non-controlling units 1,166,401 1,181,501 1,166,420 1,210,345
Weighted average number of shares and units<br><br><br>outstanding, basic 16,016,683 15,484,620 15,900,069 15,485,013
FFO per common share and unit $ 0.09 $ (0.87 ) $ (0.21 ) $ (1.56 )
Adjusted FFO per common share and unit $ 0.07 $ (0.86 ) $ (0.26 ) $ (1.09 )

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) equity in the income or loss of equity investees, (5) unrealized gains and losses on derivative instruments not included in other comprehensive income, (6) gains and losses on disposal of assets, (7) realized gains and losses on investments, (8) impairment of long-lived assets or investments, (9) gain on extinguishment of preferred stock, (10) gains or losses on change in control, (11) gain on exercise of development right, (12) corporate general and administrative expense, (13) depreciation and amortization, (14) gains and losses on involuntary conversions of assets, (15) distributions to preferred stockholders and (16) 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.  Our calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.

The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and six months ended June 30, 2021 and 2020:

Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net loss attributable to common stockholders $ (2,810,603 ) $ (17,124,612 ) $ (11,875,600 ) $ (31,448,313 )
Add: Net loss attributable to<br><br><br>noncontrolling interest (179,638 ) (1,365,368 ) (879,176 ) (2,562,783 )
Interest expense 5,526,595 4,719,796 11,446,118 9,281,636
Interest income (36,308 ) (72,001 ) (74,907 ) (132,366 )
Income tax provision 6,972 23,362 9,581 5,477,396
Depreciation and amortization 4,969,669 4,993,107 9,951,685 9,975,983
Distributions to preferred stockholders 1,529,613 2,188,910 3,718,524 4,377,821
EBITDA 9,006,300 (6,636,806 ) 12,296,225 (5,030,626 )
(Gain) loss on disposal of assets 17,221 (451 ) 17,221 (451 )
Gain on extinguishment of preferred stock (93,342 ) — (93,342 ) —
Gain on involuntary conversion of<br><br><br>assets (496,957 ) (14,168 ) (496,957 ) (26,607 )
Subtotal 8,433,222 (6,651,425 ) 11,723,147 (5,057,684 )
Corporate general and administrative 1,530,438 1,227,808 2,831,396 3,107,933
Unrealized loss (gain) on hedging<br><br><br>activities (303,181 ) 214,876 (693,367 ) 1,800,508
Hotel EBITDA $ 9,660,479 $ (5,208,741 ) $ 13,861,176 $ (149,243 )

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 note, proceeds of mortgage and other debt and hotel property sales.  Our principal uses of cash are acquisitions of hotel properties, capital expenditures, debt services and maturities, operating costs, corporate expenses and dividends.  As of June 30, 2021, we had approximately $21.8 million of unrestricted cash and $11.7 million of restricted cash, and also had the option to require the Investors of our Secured Notes to purchase an additional $10.0 million in additional Secured Notes.

Operating Activities.  Our net cash flow provided by operating activities for the six months ended June 30, 2021, was approximately $1.9 million generally consisting of net cash flow provided by hotel operations.  The positive cash flow from operations during the quarters and increase from the prior year was due to the increase in occupancy at our hotels as a result of increases in transient consumers, group business, and foreign travelers due to the lifting of restrictions on travel, social gatherings and businesses.  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 changes in working capital.

Investing Activities.  Our cash used in investing activities for the six months ended June 30, 2021, was approximately $1.3 million, approximately $1.8 million was related to capital expenditures for the routine replacement of furniture, fixtures and equipment.  There were proceeds received from an involuntary conversion of assets in the amount of approximately $0.5 million. The Operating Partnership received a payment on its loan to the Company relating to the ESOP totaling approximately $0.1 million.

Financing Activities. During the six months ended June 30, 2021, the Company and Operating Partnership made principal payments on its mortgages of approximately $2.4 million.

Capital Expenditures

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

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

Historically, we have aimed to maintain overall capital expenditures, except for those required by our franchisors as a condition to a franchise license or license renewal, at 4.0% of gross revenue. In response to the COVID-19 pandemic, we postponed all major non-essential capital expenditures.  If travel demand, occupancy, and RevPAR increase as expected through the remainder of 2021, we expect total capital expenditures to be approximately $4.0 million for 2021.

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 Raleigh Brownstone-University, The Whitehall and the Georgian Terrace as well as 4.0% of room revenues for the DoubleTree by Hilton Philadelphia Airport on a monthly basis.

Liquidity and Capital Resources

The COVID-19 pandemic had a significant negative impact on our operations and financial results during 2020 and is expected to continue until at least the end of 2021.  The impact includes a substantial decline in our revenues, profitability and cash flows from operations.  While the duration and full financial impact of the reduction in hotel demand caused by the pandemic, contraction of operations at our hotels and other effects are uncertain and cannot be reasonably estimated at this time, we expect significant negative impacts on our operations and financial results to continue until travel and business restrictions are eased, travel orders are lifted, consumer confidence is restored and an economic recovery is sustained.  In response to these negative impacts, we took a number of immediate actions to reduce costs and preserve liquidity including the suspension of dividends on our common and preferred stock, suspension of planned capital expenditures and reduction in compensation of our executive officers, board of directors, and corporate employees. The COVID-19 pandemic and the related economic uncertainties have led to disruption and volatility in the global capital markets, which limited our ability to access capital.

In April and May 2020, we borrowed an aggregate amount of approximately $10.7 million in PPP Loans and have sought forbearances and loan modifications with the lenders under the loan agreements secured by our hotels.

On December 31, 2020, we issued two Secured Notes for aggregate proceeds of $20.0 million with an option to sell two additional Secured Notes before December 31, 2021, for aggregate proceeds of $10.0 million.  The terms are subject to the conditions as described more fully in the Section titled “Secured Note Financing” above.

As of June 30, 2021, we had total cash of approximately $33.5 million.  During the six months ended June 30, 2021, we utilized cash, cash and equivalents and restricted cash of approximately $1.8 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 or Secured Notes).  The Secured Notes mature on December 30, 2023, unless extended pursuant to their terms, and will be payable on or before the maturity date at the rate of 1.47x the principal amount borrowed during the initial 3-year term, with a 1-year extension at the Company’s option.  The Secured Notes may be prepaid in part or in full at any time without penalty so long as certain conditions are met.  The Secured Notes accrue interest at 6.0% per annum, payable quarterly during the initial 3-year term. If the maturity of the Secured Notes is extended, the Secured Notes will accrue interest at 10% per annum.

We have no debt maturing during the remainder of 2021.  In 2022, we have approximately $44.04 million in balloon payments due upon maturity related to the mortgages on the DoubleTree by Hilton Laurel, the Hotel Alba Tampa and the DoubleTree by Hilton

Raleigh-Brownstone University.  We intend to refinance these mortgages at the level of their existing indebtedness or request extensions at existing terms.

As of the date of filing, 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 those that contained Debt Service Coverage Ratio (“DSCR”) requirements.  Except where the DSCR requirement triggered a cash management period, we were able to obtain waivers from each of our lenders.

On July 27, 2021, we filed a registration statement on Form S-11 with the Securities and Exchange Commission to publicly offer for sale senior unsecured notes of the Operating Partnership, guaranteed by the Company.  As of August 16, 2021, that registration statement has not been declared effective.  If the registration statement is declared effective, we intend to use the net proceeds from this offering to further strengthen our balance sheet, including repaying $20.0 million of outstanding secured indebtedness under our Secured Notes, plus any accrued but unpaid interest and any make-whole amounts or premium then due and payable on such secured debt, which we estimate to be approximately $9.5 million.

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 COVID-19 outbreak. 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 “-- Effects of COVID-19 Pandemic on our Business”, as of June 30, 2021, we failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Philadelphia Airport and The Whitehall.  We have received a waiver of the financial covenants from the lender on the DoubleTree by Hilton Philadelphia Airport through September 30, 2021 and from the lender on The Whitehall mortgage, through June 30, 2022.

As of June 30, 2021, we were in compliance with the modified financial covenant under the mortgage secured by the Hotel Alba, provided that we maintain the cash collateral on deposit with the lender.  Cash collateral on deposit with the Hotel Alba lender was approximately $1.9 million, as of June 30, 2021.

Certain of our loan agreements also include financial covenants that trigger a “cash trap”.  As of June 30, 2021, we had failed to meet the financial covenants under the mortgages secured by the DoubleTree by Hilton Jacksonville Riverfront, the DoubleTree Resort by Hilton Hollywood Beach and the Georgian Terrace, each of which triggered a “cash trap” under the loan documents relating to each of these properties requiring substantially all the profit generated by those hotels to be deposited directly into lockbox accounts and swept into cash management accounts for the benefit of the respective lenders until each property meets the criteria in the relevant loan agreement for exiting the “cash trap”.  Provided we continue to meet certain terms and conditions, the lender has waived the “cash trap” with respect to the DoubleTree Resort by Hilton Hollywood Beach.  In addition, in order to receive forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone – University and the Hyatt Centric Arlington, we agreed to “cash traps” until the properties meet the criteria in the forbearance agreement for exiting the “cash traps”.  Similar provisions may be a condition of additional or further lender forbearance.  We remain in negotiations with the lender and special servicer with respect to the DoubleTree by Hilton Jacksonville Riverfront “cash trap”.

Secured Notes

Our Secured Notes provide that aggregate accounts payable shall not exceed $5.0 million at any time beginning December 31, 2021, for as long as the Secured Notes are outstanding.  Failure to comply with the covenant, at December 31, 2021, shall cause the Company to Issue additional Secured Notes for aggregate proceeds of $10.0 million which shall be used to reduce the aggregate

accounts payable of the Company.  The Company expects cash, on hand combined with cash flows from our hotels should be adequate to reduce accounts payable so that it does not exceed $5.0 million by December 31, 2021.  In addition. we are prohibited from providing aggregate compensation to employees of the Company in excess of 2019 aggregate compensation, from capital expenditures in excess of $6.0M per annum, and from paying distributions on shares of the Company’s common stock or on shares of the Company’s preferred stock as long as the Secured Notes are outstanding.

Dividend Policy

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

Off-Balance Sheet Arrangements

None.

Inflation

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

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

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Indiana, 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.  These patterns have been disrupted by the impacts of the COVID-19 pandemic and we expect that disruption to continue throughout 2021 at a minimum.

Critical Accounting Policies

The critical accounting policies are described below.  We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive and are significant to fully understand and evaluate our reported financial results.

Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment.  In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels, which were acquired from third parties, contributed to us in connection with the Company’s initial public offering, are recorded at historical cost basis.  Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.

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

There were no charges for impairment of hotel properties recorded for the six months ended June 30, 2021.

In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition.  We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.

Revenue Recognition.  Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.  Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities. Receivables for amounts earned under various contracts are subject to audit.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our MHI TRS Entities, we have recorded a valuation allowance to reduce our net deferred tax asset as of June 30, 2021, to $0.  We regularly evaluate the likelihood that our MHI TRS Entities will be able to realize its deferred tax assets and the continuing need for a valuation allowance.  As of June 30, 2021, we determined, based on all available positive and negative evidence, that it is more-likely-than-not that future taxable income will not be available during the carryforward periods to absorb all of the consolidated federal and state net operating loss carryforward.

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 June 30, 2021, we had approximately $336.6 million of fixed-rate debt, including the mortgage on our Philadelphia, Pennsylvania hotel, which is fixed by an interest rate swap to 5.237%, the Secured Notes of $20.0 million, with a fixed rate of 6.0% and the PPP Loan of $10.7 Million, with a fixed rate of 1.0% and approximately $50.9 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 4.74%.  A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows.  Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR and in Prime Rate.  Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.9 million, the balance at June 30, 2021, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.2 million.

As of December 31, 2020, we had approximately $339.4 million of fixed-rate debt, including the mortgage on our DoubleTree by Hilton Philadelphia Airport hotel, which is fixed by an interest rate swap to 5.237%, secured notes of $20.0 million with a fixed rate of 6.0% and including the PPP Loan of $10.7 Million, with a fixed rate of 1.0% and approximately $50.9 million of variable-rate debt.  The weighted-average interest rate on the fixed-rate debt was 4.74%.  A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt but have no impact on interest incurred or cash flows.  Our variable-rate debt is exposed to changes in interest rates, specifically the changes in 1-month LIBOR and in Prime Rate.  Assuming that the aggregate amount outstanding on the mortgages on the Hotel Alba, The Whitehall and the DoubleTree by Hilton Raleigh Brownstone-University remains at approximately $50.9 million, the balance at December 31, 2020, the impact on our annual interest incurred and cash flows of a one percent increase in 1-month LIBOR and in Prime Rate, would be approximately $0.2 million.

Item 4.Controls and Procedures

Sotherly Hotels Inc.

Disclosure Controls and Procedures

The Company’s management, under the supervision and participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act), as of June 30, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, 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 June 30, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2021, 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.

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

Other than the risks mentioned below, 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, 2020.  Additional risks are:

Holders of our outstanding preferred shares have the rights to elect additional board members.

As of June 30, 2021, the Company had issued and outstanding 1,510,000 shares of our Series B Preferred Stock, 1,469,610 shares of our Series C Preferred Stock, and 1,165,000 shares of our Series D Preferred Stock.  Holders of Sotherly’s preferred stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares.  Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock voting together as a separate class have the right to elect two additional directors to Sotherly’s board of directors whenever dividends on the preferred shares are in arrears in an aggregate amount equivalent to six or more quarterly dividends (whether or not consecutive).  As of June 30, 2021, distributions on Sotherly’s Preferred Stock are in arrears for the last six quarterly payments.  Therefore, the holders of Sotherly’s Series B, Series C, and Series D Preferred Stock are 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.

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

On June 21, 2021, the Company exchanged a total of 1,542,727 shares of its common stock for an aggregate of 220,000 shares of preferred stock with Palogic of its 8.0% Series B Cumulative Redeemable Perpetual Preferred Stock, 7.875% Series C Cumulative Redeemable Perpetual Preferred Stock, and 8.25% Series D Cumulative Redeemable Perpetual Preferred Stock in a privately negotiated transaction.  The issuance of the shares of the common stock was made by the Company pursuant to the exemption from the registration requirements of Section 3(a)(9) of the Securities Act on the basis that these offers constituted an exchange with an existing holder of the Company’s securities.  No commission or other remuneration was paid to any party for soliciting such exchange and the transactions did not involve a public offering.  In consideration for the common share issuances, the Company received the preferred shares from the stockholders, which preferred shares were cancelled and of no further effect.

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

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

• A regular quarterly cash dividend of $0.50 per share of beneficial interest of the Series B Preferred Stock;
• A regular quarterly cash dividend of $0.4921875 per share of beneficial interest of the Series C Preferred Stock; and
--- ---
• A regular quarterly cash dividend of $0.515625 per share of beneficial interest of the Series D Preferred Stock.
--- ---

The total arrearage of unpaid cash dividends declared and undeclared on each of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock through August 12, 2021, are $4,530,000, $4,339,946, and $3,164,687, 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
10.20 Second Amendment to Master Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP, MHI Hospitality TRS, LLC, Newport Hospitality Group, Inc. and Our Town Hospitality (incorporated by reference to the document previously filed as Exhibit 10.20 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).
10.21 Amendment No. 2 to Credit Agreement between Our Town Hospitality LLC and MHI Hospitality TRS, LLC (incorporated by reference to the document previously filed as Exhibit 10.21 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 2021).
10.22 Share Exchange Agreement between Sotherly Hotels Inc. and Palogic Value Fund, L.P. (incorporated by reference to the document previously filed as Exhibit 10.22 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2021).
10.23 Amended and Restated Purchase and Sale Agreement between Louisville Hotel Associates, LLC and Lockwood Development Partners LLC.
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)

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: August 16, 2021 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

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 LP
By: SOTHERLY HOTELS INC.
Its General Partner
Date: August 16, 2021 By: /s/ David R. Folsom
David R. Folsom
President and Chief Executive Officer
By: /s/ Anthony E. Domalski
Anthony E. Domalski
Chief Financial Officer

60

soho-ex1023_68.htm

AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT

THIS AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (this “Agreement”) is made and entered into as of July 9, 2021 (the “Effective Date”), by and between LOUISVILLE HOTEL ASSOCIATES, LLC, a Delaware limited liability company (the “Seller”), and LOCKWOOD DEVELOPMENT PARTNERS LLC, a Florida limited liability company, or its permitted assigns (the “Purchaser”; Seller and Purchaser are sometimes referred to herein individually as a “Party”, and collectively as the “Parties”).

Recitals

WHEREAS, Seller is the owner of the Property (as defined herein) relating to the hotel facility located at 700 West Riverside Drive, Jeffersonville, Indiana 47130, more commonly known as the Sheraton Louisville Riverside (the “Hotel”).

WHEREAS, Seller desires to sell the Property to Purchaser, and Purchaser desires to purchase the Property from Seller, on the terms set forth in this Agreement.

WHEREAS, Seller and Purchaser previously entered into that certain Purchase and Sale Agreement dated as of June 15, 2021 (the “Original PSA”) pursuant to which the Parties were negotiating a purchase and sale transaction for the Property.

WHEREAS, Purchaser breached the Original PSA by, among other things, failing to comply with Section 4.2 of the Original PSA.

WHEREAS, Seller, as an accommodation and not a waiver of any such breach, is willing to amend and restate the Original PSA to enable Purchaser to close on its acquisition of the Property.

WHEREAS, in consideration of Seller entering into this Agreement, Purchaser is willing to waive its right to the Earnest Money (as defined in the Original PSA ).

WHEREAS, the Parties desire to amend and restate the Original PSA in its entirety pursuant to this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

DEFINITIONS

1.1Definitions. In addition to the terms defined above in the introduction and recitals to this Agreement, the following terms when used in this Agreement shall have the meanings set forth in this Section 1.1.

“Affiliate” means, with respect to the Person in question, any other Person that, directly or indirectly, (i) owns or controls fifty percent (50%) or more of the outstanding voting and/or equity interests of such Person, or (ii) controls, is controlled by or is under common control with, the Person in question. For the purposes of this definition, the term “control” and its derivations means having the power, directly or indirectly, to direct the management, policies or general conduct of business of the Person in question, whether by the ownership of voting securities, contract or otherwise.

“Applicable Law” means all (i) statutes, laws, common law, rules, regulations, ordinances, codes or other legal requirements of any Governmental Authority, stock exchange, board of fire underwriters and similar quasi-governmental

authority, including, without limitation, The Americans with Disabilities Act of 1990, as amended from time to time, and any regulations and rules issued pursuant thereto, and (ii) any judgment, injunction, order or other similar requirement of any court or other adjudicatory authority, in each case to the extent the Person or property in question is subject to the same.

“Bookings” has the meaning set forth in Section 2.1(n).

“Broker” means the Mumford Company.

“Business” means the lodging business and all activities related thereto conducted at the Hotel, including, without limitation, (i) the rental of any guest or conference rooms or other facilities at the Hotel, and (ii) the operation of any restaurant, bar or banquet services, together with all other goods and services provided at the Hotel.

“Business Day” means any day other than Saturday, Sunday or any federal legal holiday.

“Casualty” has the meaning set forth in Section 12.1.

“Causes of Action” has the meaning set forth in Section 2.1(p).

“Closing” has the meaning set forth in Section 9.1.

“Closing Date” has the meaning set forth in Section 9.1.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and any regulations, rulings, procedures and guidance issued by the Internal Revenue Service.

“Condemnation” has the meaning set forth in Section 12.2.

“Confidential Information” has the meaning set forth in Section 7.1(a).

“Contracts” means, collectively, the Equipment Leases and Operating Agreements.

“Due Diligence Contingency” has the meaning set forth in Section 4.1(a).

“Due Diligence Period” has the meaning set forth in Section 4.1(a).

“Earnest Money” has the meaning set forth in Section 3.2(a).

“Earnest Money Escrow Agreement” has the meaning set forth in Section 3.2(a).

“Employees” means, at the time in question, all persons who are employed or will be employed full-time or part-time at the Hotel.

“Environmental Claims” means all claims for reimbursement, remediation, abatement, removal, clean up, contribution, personal injury, property damage or damage to natural resources made by any Governmental Authority or other Person arising from or in connection with the (i) presence or actual or potential spill, leak, emission, discharge or release of any Hazardous Substances over, on, in, under or from the Property, or (ii) violation of any Environmental Laws with respect to the Property.

“Environmental Laws” means any Applicable Laws which regulate (i) Hazardous Substances, pollution, contamination, radiation or the condition of any water, soil, sediment, air or other environmental media, or (ii) the manufacture, generation, formulation, processing, use, treatment, handling, storage, disposal, distribution or transportation or an actual or potential spill, leak, emission, discharge, release or disposal of any Hazardous Substances, pollution, contamination or radiation into any water, soil, sediment, air or other environmental media, including, without limitation, (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., (ii) the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., (iii) the Federal Water Pollution Control Act, 33 U.S.C. § 2601 et seq., (iv) the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., (v) the Clean Water Act, 33 U.S.C. § 1251 et seq., (vi) the Clean Air Act, 42 U.S.C. § 7401 et seq., and (vii) the Hazardous Materials Transportation Act, 49 U.S.C. § 1801 et seq., and similar state and local laws, as amended from time to time, and all regulations, rules and guidance issued pursuant thereto.

“Environmental Liabilities” means all liabilities pursuant to any Environmental Laws arising from or in connection with the ownership of the Property or operation of the Business, including, without limitation, any (i) obligations to manage, control, contain, remove, remedy, respond to, clean up or abate any actual or potential spill, leak, emission, discharge or release of any Hazardous Substances, pollution, contamination or radiation into any water, soil, sediment, air or other environmental media, whether or not located on the Real Property, and (ii) all liabilities with respect to the manufacture, generation, formulation, processing, use, treatment, handling, storage, disposal, distribution or transportation of any Hazardous Substances.

“Equipment Leases” has the meaning set forth in Section 2.1(h).

“Escrow Agent” means Fidelity National Title Insurance Company.

“Excluded Property” has the meaning set forth in Section 2.2.

“Existing Loan” has the meaning set forth in Section 3.3(b).

“F&B” has the meaning set forth in Section 2.1(f).

“FF&E” has the meaning set forth in Section 2.1(c).

“Franchise Agreement” means that certain Franchise Agreement for the Hotel between Franchisor, as licensor, and Seller, as licensee as set forth in Section 4.2.

“Franchisor” means The Sheraton LLC.

“Goodwill” has the meaning set forth in Section 2.1(o).

“Governmental Authority” means any federal, state or local government or other political subdivision thereof, including, without limitation, any Person exercising executive, legislative, judicial, regulatory or administrative governmental powers or functions, in each case to the extent the same has jurisdiction over the Person or property in question.

“Hazardous Substances” means any hazardous or toxic substances, materials or waste, whether in solid, semisolid, liquid or gaseous form, including, without limitation, asbestos, polychlorinated biphenyls, petroleum or petroleum by-products and any other material or substance which is defined as a “hazardous substance”, “hazardous waste”, “toxic waste” or “toxic substance” under any Environmental Laws.

“Improvements” has the meaning set forth in Section 2.1(b).

“Indemnification Loss” means, with respect to any Indemnitee, any liability, damage, loss, cost or expense, including, without limitation, reasonable attorneys’ fees and expenses and court costs, incurred by such Indemnitee as a result of the act, omission, occurrence, circumstance or event in question.

“Indemnitee” means either a Seller Indemnitee or Purchaser Indemnitee, as the case may be.

“Inspections” has the meaning set forth in Section 4.1(b)(i).

“Intellectual Property” has the meaning set forth in Section 2.1(k).

“IT Systems” has the meaning set forth in Section 2.1(e).

“Land” has the meaning set forth in Section 2.1(a).

“Leases” has the meaning set forth in Section 2.1(q).

“Lender” has the meaning set forth in Section 3.3(b).

“Lender Approval” has the meaning set forth in Section 4.3.

“Lender Held Escrows” has the meaning set forth in Section 4.3.

“Licenses and Permits” has the meaning set forth in Section 2.1(j).

[Reserved]

“Manager” means Our Town Hospitality, LLC.

“Management Agreement” means that certain Management Agreement in effect between Manager and Seller, as the same may have been amended from time to time.

“Master Lease” has the meaning set forth in Section 14.16.

“Master Tenant” has the meaning set forth in Section 14.16.

“Material Casualty” has the meaning set forth in Section 12.1(a).

“Material Condemnation” has the meaning set forth in Section 12.2(a).

“Miscellaneous Assets” has the meaning set forth in Section 2.1(r).

“Mutual Closing Conditions” has the meaning set forth in Section 8.1(a).

“New Objections” has the meaning set forth in Section 5.1(c).

“Notice” has the meaning set forth in Section 14.1(a).

“Operating Agreements” has the meaning set forth in Section 2.1(i).

“Ordinary Course of Business” means the ordinary course of business for the operation of the Business and the operating standards for similar Hotel properties.

“Owner’s Title Policy” has the meaning set forth in Section 5.1(a).

“Person” means any natural person, corporation, general or limited partnership, limited liability company, association, joint venture, trust, estate, Governmental Authority or other legal entity, in each case whether in its own or a representative capacity.

“Personal Property” means the Property other than the Real Property.

“Plans and Specifications” has the meaning set forth in Section 2.1(l).

“Property” has the meaning set forth in Section 2.1.

“Purchase Price” has the meaning set forth in Section 3.1.

“Purchaser Closing Conditions” has the meaning set forth in Section 8.2.

“Purchaser Default” has the meaning set forth in Section 11.2.

“Purchaser Documents” has the meaning set forth in Section 6.1(s).

“Purchaser Indemnitees” means Purchaser and its Affiliates, and each of their respective shareholders, members, partners, trustees, beneficiaries, directors, officers and employees, and the successors, assigns, legal representatives, heirs and devisees of each of the foregoing.

“Purchaser’s Inspectors” has the meaning set forth in Section 4.1(b)(i).

“Real Property” has the meaning set forth in Section 2.1(b).

“Retail Merchandise” has the meaning set forth in Section 2.1(g).

“Searches” shall have the meaning set forth in Section 5.1.

“Seller Closing Conditions” has the meaning set forth in Section 8.3(a).

“Seller Default” has the meaning set forth in Section 11.1.

“Seller Documents” has the meaning set forth in Section 6.1(b).

“Seller Due Diligence Materials” has the meaning set forth in Section 4.1(c).

“Seller Indemnitees” means Seller and its Affiliates, and each of their respective shareholders, members, partners, trustees, beneficiaries, directors, officers and employees, and the successors, assigns, legal representatives, heirs and devisees of each of the foregoing.

“Seller’s Possession or Control” means (i) in the possession of any officer, employee or other Person acting at the direction of Seller, or (ii) in the possession of any other Person from whom Seller has a right to obtain the item in question.

“Supplies” has the meaning set forth in Section 2.1(d).

“Survey” has the meaning set forth in Section 5.1.

“Survival Period” has the meaning set forth in Section 13.1(a).

“Taxes” means any federal, state, local or foreign, real property, personal property, sales, use, room, occupancy, ad valorem or similar taxes, assessments, levies, charges or fees imposed by any Governmental Authority with respect to the ownership of the Property or operation of the Business, including, without limitation, any interest, penalty or fine with respect thereto, but expressly excluding any (i) federal, state, local or foreign income, capital gain, gross receipts, capital stock, franchise, profits, estate, gift or generation skipping tax, or (ii) transfer, documentary stamp, recording or similar tax, levy, charge or fee incurred with respect to the transaction described in this Agreement.

“Title Commitment” has the meaning set forth in Section 5.1.

“Warranties” has the meaning set forth in Section 2.1(m).

THE PROPERTY

2.1Description of the Property. Subject to the terms set forth in this Agreement, at the Closing, Seller shall sell, convey, transfer, assign and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of the property, assets, rights and interests set forth in this Section 2.1, but expressly excluding the Excluded Property (collectively, the “Property”):

(a)Land. The land described in Schedule 2.1(a), together with all appurtenant

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easements and any other rights and interests appurtenant thereto (the “Land”);

(b)Improvements. All buildings, structures and improvements located on or affixed to the Land and all fixtures on the Land which constitute real property under Applicable Law (the “Improvements”; the Land and the Improvements are referred to collectively herein as the “Real Property”);

(c)FF&E. All fixtures (other than those which constitute Improvements), furniture, furnishings, equipment, machinery, tools, vehicles, appliances, art work and other items of tangible personal property located within the Improvements and/or at the Land necessary for the operation of the Hotel (the “FF&E”);

(d)Supplies. All china, glassware and silverware, linens, uniforms, engineering, maintenance, cleaning and housekeeping supplies, matches and ashtrays, soap and other toiletries, stationery, menus, hotel services directories and other printed materials and all other similar supplies and materials in use for the operation of the Hotel (the “Supplies”);

(e)IT Systems. All computer hardware, telecommunications and information technology systems located within the Improvements and/or at the Land necessary for the operation of the Hotel (the “IT Systems”);

(f)Food and Beverage. All food and beverages located within the Improvements and/or at the Land in use for the operation of the Hotel (the “F&B”);

(g)Retail Merchandise. All merchandise for sale to guests and customers of the Hotel or the general public located at the Hotel (the “Retail Merchandise”);

(h)Equipment Leases. The leases and purchase money security agreements for any equipment, machinery, vehicles, furniture or other personal property set forth in Schedule 2.1(h) (the “Equipment Leases”), together with all deposits made thereunder;

(i)Operating Agreements. The maintenance, service and supply contracts, license and royalty agreements, booking and reservation agreements, credit card service agreements, and all other similar agreements for goods or services set forth in Schedule 2.1(i) (the “Operating Agreements”), together with all deposits made or held by Seller thereunder;

(j)Licenses and Permits. To the extent assignable, all licenses, permits, consents, authorizations, approvals, registrations and certificates issued by any Governmental Authority with respect to the Hotel, including, without limitation, the use, occupancy or operation of the Hotel or the Business or any other licenses, permits, consents, authorizations, approvals, registrations and certificates required by any Governmental Authority or necessary for the operation of the Hotel (the “Licenses and Permits”);

(k)Intellectual Property. To the extent assignable, all trademarks, trade names, service marks and other intellectual property rights held or used in the operation of the Business, except for those intellectual property rights licensed to Seller pursuant to the Franchise Agreement, or any other trademarks, trade names, service marks and other intellectual property rights necessary for the operation of the Hotel (the “Intellectual Property”);

(l)Plans and Specifications. All plans and specifications, blue prints, architectural plans, engineering diagrams and similar items located at the Hotel or in Seller’s Possession or Control which relate to the Hotel or the Business (the “Plans and Specifications”);

(m)Warranties. All warranties and guaranties with respect to the Improvements or any Personal Property (the “Warranties”);

(n)Bookings. All bookings and reservations for guest, conference and banquet rooms or other facilities at the Hotel (the “Bookings”) as of the Closing, together with all deposits held by Seller with respect thereto;

(o)Goodwill. All goodwill associated with the Hotel (the “Goodwill”);

(p)Cause of Action. Any rights held by Seller to receive or recover property, debt, or damages on a pending cause of action, whether arising in contract, tort, or otherwise, including rights to indemnification, damages for breach of warranty or any other event or circumstance, judgments, settlements, and proceeds from judgments and settlements, but only to the extent relating to the Property and only to the extent of any damages accruing after the Closing Date (“Causes of Action”);

(q)Leases. All leases or other agreements pursuant to which any Person is granted a possessory interest in, or the right to use or occupy any portion of, the Land and the Improvements (the “Leases”); and

(r)Other Assets. All other property, assets, rights or interests owned or held by

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Seller and located at the Hotel, in use in connection with the ownership of the Property or operation of the Business, expected to remain at the Hotel (the “Miscellaneous Assets”).

2.2Excluded Property. Notwithstanding anything to the contrary in Section 2.1, the property, assets, rights and interests set forth in this Section 2.2 (the “Excluded Property”) are excluded from the Property:

(a)Third-Party Property. Any fixtures, personal property or intellectual property owned by (i) the lessor under any Equipment Leases or (ii) the supplier, vendor, licensor or other party under any Operating Agreements or Licenses and Permits.

(b)Cash and Accounts Receivable. Seller is not conveying as part of this sale any cash, cash equivalents, bank accounts, reserve accounts, deposits and the like owned or held by Seller and accounts receivable attributable to Seller’s operation of the Hotel and Business prior to Closing.

PURCHASE PRICE AND EARNEST MONEY

3.1Purchase Price. The purchase price for the Property is Eleven Million Five Hundred Thousand and no/100 Dollars ($11,500,000.00) (the “Purchase Price”).

3.2Earnest Money.

(a)Deposit of Earnest Money. Purchaser, pursuant to the Original PSA, deposited with Escrow Agent the amount of Two Hundred Thousand and no/100 Dollars ($200,000.00) (the “Earnest Money”). The Earnest Money shall be held by Escrow Agent in escrow as earnest money and disbursed in accordance with the terms of this Agreement; provided, however, that Purchaser, Seller and Escrow Agent may enter into a separate escrow agreement to memorialize the obligations of Escrow Agent hereunder, the terms of which agreement shall substantially comply with the disbursement requirements set forth herein (the “Earnest Money Escrow Agreement”).

(b)Escrow Account. The Earnest Money shall be deposited by Escrow Agent in a non-interest bearing account upon Purchaser’s delivery of the Earnest Money.

(c)Disbursement of Earnest Money to Seller. Promptly after the Effective Date, Escrow Agent shall disburse the Earnest Money to Seller in accordance with the wire instructions set forth on Schedule 3.2(c) attached hereto and incorporated herein by reference. At Closing (if applicable), Purchaser shall receive a credit against the Purchase Price in the amount of the Earnest Money disbursed to Seller.

(d)Refund of Earnest Money to Purchaser. If this Agreement is terminated pursuant to the failure of a Purchaser Closing Condition, Seller shall promptly transfer the Earnest Money to Purchaser. This Section 3.2(d) shall survive the termination of this Agreement.

3.3Payment of Purchase Price. Subject to prorations and other credits set forth in this Agreement, at Closing, Purchaser shall pay to Seller an amount equal to the Purchase Price less

(a)the Earnest Money disbursed to Seller; and

(b)either (y) if Purchaser and Lender (as defined below) agree to the Loan Assumption (as defined below), the outstanding principal balance of that certain loan (the “Existing Loan”) encumbering the Property made by Symetra Life Insurance Company, an Iowa corporation (the “Lender”) in the original principal amount of Twelve Million and No/100 Dollars ($12,000,000.00) and having a current outstanding balance of approximately $10,985,347.00 (this balance is subject to change as Existing Loan payments are made) or (z) if Purchaser and/or Lender do not agree to the Loan Assumption, the full amount required by Lender to prepay and satisfy the Existing Loan, including, without limitation, any prepayment fees, yield maintenance charges and/or any other costs, penalties, fees, charges or expenses Lender requires in connection with such prepayment (the foregoing, collectively, the “Payoff Amount”). For the avoidance of doubt, the Parties acknowledge and agree that if the Loan Assumption does not close or Purchaser does not receive Lender Approval (as defined below), Purchaser shall (Y) remain fully liable for the Payoff Amount and (Z) be required to secure any and all conventional financing necessary for Purchaser to (i) acquire the Hotel and Property and/or (ii) close the subject transaction, which foregoing obligations shall survive

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Closing and/or the expiration or earlier termination of this Agreement.

3.4Allocation of Purchase Price. The Parties hereby agree that they will work together in an attempt to mutually agree to an allocation of the Purchase Price among the Land, the Improvements and the Personal Property for federal, state and local tax purposes. In the event the Parties fail to mutually agree to an allocation of the Purchase Price as set forth above, the Parties agree to use their own reasonable allocations for federal, state and local tax purposes.

CONTINGENCIES

4.1Due Diligence.

(a)Due Diligence Contingency. Purchaser shall have until 5:00 PM EST on August 16, 2021 (the “Due Diligence Period”) to perform its due diligence review of the Property and all matters related thereto which Purchaser deems advisable in its sole discretion; provided, however, that if Purchaser has not received Lender Approval (as defined in Section 4.3) or secured an Acceptable Franchise Agreement (as defined in Section 4.2) before the expiration of the Due Diligence Period, Seller may in its sole discretion extend the Due Diligence Period until September 13, 2021. In no event shall the Due Diligence Period, as extended, exceed ninety (90) days after the Effective Date. If Purchaser, in its sole discretion, is not satisfied with the results of its due diligence review of the Property or the Business for any reason or no reason whatsoever, Purchaser shall have the right to terminate this Agreement by providing written notice to Seller prior to the expiration of the Due Diligence Period (the “Due Diligence Contingency”). If Purchaser terminates this Agreement pursuant to the Due Diligence Contingency in accordance with this Section 4.1(a), the Parties shall have no further rights or obligations under this Agreement, except those which expressly survive such termination. If Purchaser does not terminate this Agreement pursuant to the Due Diligence Contingency in accordance with this Section 4.1(a), Purchaser shall be deemed to have waived its rights to terminate this Agreement pursuant to the Due Diligence Contingency. Notwithstanding anything contained herein to the contrary Purchaser may at any time, with the consent of Seller, waive the Due Diligence Period by written notice to Seller and thereafter the Due Diligence Period shall be deemed expired and the closing shall occur in accordance with Section 9.1 hereof.

(b)Due Diligence Inspections.

(i)Inspection of the Property. Purchaser shall have the right to perform such examinations, tests, investigations and studies of the Property (the “Inspections”) as Purchaser reasonably deems advisable in its sole discretion provided that: (i) Purchaser gives Seller reasonable prior written notice; (ii) such investigations are not invasive in nature; and (iii) Purchaser does not unreasonably interfere, as determined by Seller, with Seller’s operation of the Hotel or its guests at the Hotel or any tenants under any Leases. Purchaser shall order all third-party Inspections within five (5) Business Days of the Effective Date. Purchaser may conduct the Inspections with its officers, employees, contractors, consultants, agents or representatives (“Purchaser’s Inspectors”). Seller shall provide complete access to the Property for Purchaser’s Inspectors to perform the Inspections, subject to the rights of tenants and guests at the Property; provided, however, Purchaser shall coordinate with Seller and its agents to carry out any such Inspection so as to minimize, to the greatest extent possible, interference with Seller’s business and otherwise in a manner reasonably acceptable to Seller. Purchaser shall indemnify and hold Seller harmless from and against any and all liens, claims, causes of action, damages, liabilities and expenses (including reasonable attorneys’ fees and court costs actually incurred) arising out of Purchaser’s Inspections or tests or other entry onto the Property by Purchaser or its employees, agents, representatives, contractors and lenders and shall maintain adequate insurance to cover the foregoing, which insurance shall name Seller as an insured party; provided, however, that the foregoing indemnity shall not apply to any conditions that are discovered on, under or about the Property by Purchaser or its employees, agents, representatives, contractors and lenders. This indemnity shall survive the Closing or any earlier termination of this Agreement.

(ii)Communications with Other Persons. Purchaser and Purchaser’s Inspectors or their respective employees, agents, representatives, contractors and lenders may not meet or contact any tenant, hotel manager, or any employees of same in connection with the transaction contemplated by this Agreement without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed, and conditioned upon giving Seller at least three (3) Business Days’

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notice in advance by telephone or electronic mail to inform Seller of Purchaser’s intended meeting or contact and to allow Seller the opportunity to attend such meeting or monitor such contact if Seller desires.

(c)Seller’s Due Diligence Materials. The Parties acknowledge and agree that Seller satisfied its requirement, as such requirement was more particularly described in the Original PSA, to provide to Purchaser all due diligence materials in Seller’s Possession or Control relating to the Property or the Business including but not limited to all Equipment Leases, Operating Agreements, Plans and Specifications, Mortgage Loan Documents, and those items set forth on Schedule 4.1(c) (all documents and materials provided by Seller to Purchaser pursuant to this Agreement are referred to collectively herein as the “Seller Due Diligence Materials”).

4.2Franchise Contingency. Purchaser understands that Seller presently has a franchise or license agreement with Franchisor for the Hotel to be operated as a Sheraton Hotel (the “Franchise Agreement”). By or before July 9, 2021, Purchaser shall submit to such franchisor as Purchaser may reasonably select for the operation of the Hotel on the Property (such franchisor, the “Replacement Franchisor”) any application and related fees required to apply for the issuance of a new franchise agreement to Purchaser (such new franchise agreement, an “Acceptable Franchise Agreement”), and shall use diligent and commercially reasonable efforts thereafter to cause the issuance of such Acceptable Franchise Agreement to Purchaser with termination of the existing Franchise Agreement. Purchaser must diligently seek to obtain approval from the Replacement Franchisor and shall use commercially reasonable efforts thereafter to cause the issuance of an Acceptable Franchise Agreement from Replacement Franchisor to Purchaser with termination of the existing Franchise Agreement. Purchaser represents and warrants that it is a sophisticated real estate and hotel developer that will, along with its partner(s), have sufficient experience and capitalization to secure an Acceptable Franchise Agreement. Purchaser shall (y) pay all fees and costs related to the issuance of an Acceptable Franchise Agreement with Replacement Franchisor, including costs of any new property improvement plans required in connection with such Acceptable Franchise Agreement (the “PIP”), including, without limitation, any costs, fees or expenses payable for preparation of the PIP, and any and all costs to be incurred after the Closing in implementing and completing the PIP and (z) pay all fees and costs, if any, related to the termination of the existing Franchise Agreement (including, but not limited to, any costs charged to Seller to effect the issuance of an Acceptable Franchise Agreement and any termination fees, liquidated damages, penalties and/or other charges accruing or payable as a result of such termination), which foregoing payment obligations shall expressly survive the Closing and/or the expiration or earlier termination of this Agreements.

4.3Loan Assumption. By or before July 12, 2021, Purchaser shall submit any application, information and/or related fees (the foregoing, collectively, the “Required Loan Submissions”) to obtain Lender’s consent to assume the Existing Loan (the “Loan Assumption”), and Purchaser shall use diligent and commercially reasonable efforts thereafter to obtain Lender’s consent to the Loan Assumption (the “Lender Approval”). The documents governing the Existing Loan (the “Mortgage Loan Documents”) are listed at Schedule 4.3 attached hereto, and Purchaser has received, reviewed, and approved the terms of the Mortgage Loan Documents. Purchaser shall promptly provide Lender with all Required Loan Submissions and any other documents, information and fees reasonably requested by Lender in connection with the Loan Assumption. Seller shall reasonably cooperate with Purchaser in connection with obtaining Lender’s Approval and assuming the Existing Loan, including executing any and all documents reasonably requested in connection therewith; provided, however, that (a) any additional costs and expenses incurred by Seller as a result of (y) Purchaser’s obtaining Lender’s Approval or (z) the Loan Assumption shall be borne by Purchaser, and (b) Purchaser shall indemnify, defend and hold harmless Seller from any loss, liability, claim, demand or damage arising out of Seller’s cooperation hereunder. At Closing, Purchaser shall assume the Existing Loan and Purchaser shall be solely responsible for, and shall bear all costs and expenses associated with, the Loan Assumption, including, without limitation, all fees charged by Lender for such Loan Assumption, Lender’s attorneys’ fees and all reasonable expenses in connection with obtaining Lender Approval, and Purchaser shall indemnify Seller with respect to any such fees. Notwithstanding anything to the contrary herein, Seller shall be entitled to, and shall be reimbursed by Purchaser at Closing for, any and all balances in all escrows and reserves for taxes, insurance, seasonality, and capital expenditures and any and all other funds held by Lender (collectively the “Lender Held Escrows”). Seller, its affiliates and all existing guarantors of the Existing Loan shall be released at Closing by Lender from all obligations, liabilities and duties arising under the Mortgage Loan Documents, and such release shall be a condition precedent to Seller’s obligations to

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close the purchase and sale transaction described herein. Purchaser agrees to provide Lender with a replacement guarantor under any guarantees and/or indemnities provided to the Lender in connection with the Existing Loan from and after the Closing Date. Notwithstanding anything herein to the contrary, and for the avoidance of doubt, in the event (i) Purchaser fails to satisfy its requirements related to the Required Loan Submissions or (ii) Lender does not approve the Loan Assumption prior to the expiration of the Due Diligence Period, Purchaser shall be required to secure any and all conventional financing necessary for Purchaser to (Y) acquire the Hotel and Property and/or (Z) close the subject transaction. For the avoidance of doubt, Purchaser shall be responsible for all fees, charges, expenses, penalties and/or costs imposed by Lender in connection with paying off, or Purchaser’s assumption of, as the case may be, the Existing Loan, which obligation shall expressly survive the Closing and/or the expiration or earlier termination of this Agreement.

TITLE TO THE PROPERTY

5.1Title Commitment.

(a)Purchaser shall obtain no later than forty-five (45) days after the Effective Date (i) a title insurance commitment (the “Title Commitment”) provided by Escrow Agent agreeing to issue to Purchaser, upon Closing, an ALTA owner’s title insurance policy (the “Owner’s Title Policy”) in the amount of the Purchase Price, insuring title to the real property in accordance with the provisions of this Agreement, subject only to existing title exceptions and other liens, encumbrances or exceptions that are approved by Purchaser, and those which shall be discharged by Seller at, or before, Closing, (ii) a current ALTA/NSPS survey of the Property (the “Survey”) and (iii) UCC, tax lien, bankruptcy and judgment searches for the Seller (collectively, the “Searches”).

(b)Purchaser has until the expiration of the Due Diligence Period to object in writing to any issue or condition not acceptable to Purchaser. Purchaser’s failure to object in writing to any such issue or condition prior to the expiration of the Due Diligence Period shall be deemed a waiver by Purchaser of its ability to terminate this Agreement pursuant to the Due Diligence Contingency. If any objection is made, Seller may, but has no obligation to, endeavor to correct such issue or condition; provided, that if such issue or condition is a valid monetary tax lien, judgment, or valid mechanic’s lien, such lien or judgment shall be paid by Seller prior to Closing or out of Seller’s proceeds at Closing, at Seller’s discretion, and in either case, no additional cure shall be necessary. Seller shall notify Purchaser of its election to endeavor to correct any such condition within ten (10) Business Days of Seller’s receipt of Purchaser’s written objections. If Seller elects to correct such condition, Seller shall have thirty (30) days in which to exercise its best efforts to attempt to correct such condition (except for monetary liens which can be paid out of Seller’s proceeds at Closing, for which no additional cure shall be necessary) and the Closing Date shall be extended as necessary to permit such correction. If all such issues and conditions cannot be corrected within the thirty (30) day period, despite Seller’s best efforts, or if Seller does not elect to endeavor to correct such issues or conditions, Purchaser may terminate this Agreement or accept such issue or condition and close without any reduction in the Purchase Price except for liens or encumbrances of a definite or ascertainable amount which may be paid from the Purchase Price on or before Closing. Any restrictions, liens, encumbrances, easements, rights of way and other matters which are waived or are not objected to by Purchaser in the manner provided in this Section 5.1(b) shall be deemed “Permitted Exceptions”.

(c)Purchaser may from time to time update the effective date of the Title Commitment or examination. If such update discloses any unpermitted or unacceptable title exceptions affecting title to the Property which first appeared of record subsequent to the effective date of such previous Title Commitment or examination (“New Objections”), then Purchaser shall notify Seller thereof, and Seller, in Seller’s sole discretion and at Seller’s sole cost and expense, may cure all New Objections. The New Objections shall be cured within thirty (30) days from the date of such notice, and the Closing Date shall be extended, if necessary, to permit Seller such thirty (30) day period to cure. If Seller cannot or chooses not to cure all of the New Objections, then Purchaser shall have the right and option (a) to terminate this Agreement by giving written notice of such termination to Seller or (b) to acquire the Property subject to such New Objections.

5.2Conveyance of the Property. At Closing, Seller shall convey to Purchaser (a) fee simple title to the Real Property and (b) title to the Personal Property, free and clear of all liens and encumbrances other than Permitted Exceptions.

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REPRESENTATIONS AND WARRANTIES

6.1Seller’s Representations and Warranties. To induce Purchaser to enter into this Agreement and to consummate the transaction described in this Agreement, Seller hereby makes the representations and warranties in this Section 6.1, upon which Seller acknowledges and agrees that Purchaser is entitled to rely.

(a)Organization and Power. Seller is duly organized and formed, validly existing, in good standing in the jurisdiction of its organization, and has all requisite power and authority to own the Property and operate the Business.

(b)Authority and Binding Obligation. (i) Seller has full power and authority to execute and deliver this Agreement and all other documents to be executed and delivered by Seller pursuant to this Agreement (the “Seller Documents”), and to perform all obligations of Seller under each of the Seller Documents and (ii) the execution and delivery by the signer on behalf of Seller of each of the Seller Documents, and the performance by Seller of its obligations under each of the Seller Documents, has been duly and validly authorized by all necessary action by Seller.

(c)Consents and Approvals; No Conflicts. Subject to the recordation of any Seller Documents as appropriate, (i) to the best of Seller’s knowledge, no filing with, and no permit, authorization, consent or approval of, any Governmental Authority or other Person is necessary for execution or delivery by Seller of any of the Seller Documents, or the performance by Seller of any of its obligations under any of the Seller Documents or the consummation by Seller of the transaction described in this Agreement, and (ii) neither the execution and delivery by Seller of any of the Seller Documents, nor the performance by Seller of any of its obligations under any of the Seller Documents, nor the consummation by Seller of the transaction described in this Agreement, will: (A) violate any provision of Seller’s organizational or governing documents; (B) to the best of Seller’s knowledge, violate any Applicable Law to which Seller is subject; or (C) to best of Seller’s knowledge, result in a violation or breach of, or constitute a default under any of the Contracts, or (D) to the best of Seller’s knowledge, result in the creation or imposition of any lien or encumbrance on the Property or any portion thereof.

(d)Title to Real and Personal Property. Seller has good and marketable fee simple record title to the Land, and title to all tangible Personal Property, which shall be free and clear of all liens and encumbrances as of the Closing except for any lien for ad valorem taxes for the current year.

(e)All Property Included. To the best of Seller’s knowledge, the Property includes all property, assets, rights and interests currently existing and necessary for the operation of the Business.

(f)Condemnation. There is no condemnation or other proceeding in eminent domain pending or, to Seller’s knowledge, threatened materially affecting the Property or any portion thereof.

(g)Compliance with Applicable Law. (i) Seller has not received any written notice of a violation of any Applicable Law with respect to the Property or the Business which has not been cured or dismissed, (ii) no administrative proceeding, investigation or inquiry is pending or, to Seller’s knowledge, threatened with respect to any violation of Applicable Law with respect to the Property or the operation of the Hotel, and (iii) to Seller’s knowledge, there is no material violation of any Applicable Law with respect to the Property or the potential operation of the Hotel which has or could have a material adverse effect on Purchaser’s ownership or operation of the Hotel. If Seller receives written notice of a material violation of Applicable Law, Seller will provide Purchaser written notice of such material violation within five (5) Business Days of Purchaser’s receipt of such written notice. If such material violation of Applicable Law cannot be corrected at or prior to Closing, or if Seller does not elect to endeavor to correct such material violation, Purchaser may terminate this Agreement or waive such material violation and close without any reduction in the Purchase Price. If Purchaser waives such violation and closes in accordance with this Section 6.1(g), the existence of such violation of shall not constitute a misrepresentation under this Section 6.1(g) for any purpose related to this Agreement.

(h)Litigation. (i) No litigation, arbitration, administrative or other adjudicatory proceeding or legal action is pending or, to Seller’s knowledge, threatened in writing, with respect to the Property or the operation of the Hotel, which (x) is not covered by insurance, (y) would have a material adverse effect on the Property or (z) has not been

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resolved, settled or dismissed, (ii) Seller has not received any court filing, formal written charge or complaint or written request for arbitration, mediation, administrative hearing or similar legal or quasi-legal proceeding with respect to the Property or the operation of the Hotel (“Litigation Document”), which has not been resolved, settled or dismissed, and (iii) no injunction, decree, order, writ or judgment is outstanding with respect to the Property or the operation of the Hotel. If Seller receives any Litigation Document, Seller will provide Purchaser written notice of such Litigation Document within five (5) Business Days of Seller’s receipt thereof. If the Litigation Document relates to a matter that is covered by insurance, the Parties shall proceed to Closing without any reduction in the Purchase Price. If the Litigation Document relates to a matter that is not covered by insurance, with respect to which the amount in dispute is less than $100,000.00, and an adverse outcome of which would have a material adverse effect on the Property, Seller shall escrow an amount sufficient to satisfy a judgment equal to the amount in dispute pursuant to an escrow agreement mutually agreeable to the Parties, and the Parties shall proceed to Closing without any reduction in the Purchase Price. If the Litigation Document relates to a matter that is not covered by insurance, with respect to which the amount in dispute is equal to or greater than $100,000.00, and an adverse outcome of which would have a material adverse effect on the Property, either Seller or Purchaser may terminate this Agreement, and Seller shall have no further obligations under this Agreement.

(i)Employees. Seller is not a party to any collective bargaining agreement.

(j)Taxes. (i) All Taxes which would be delinquent if unpaid will be paid in full or prorated at Closing as part of the prorations pursuant to Section 10.1, (ii) Seller has not received any notice for an audit of any Taxes which has not been resolved or completed, and (iii) Seller is not currently contesting any Taxes.

(k)Environmental Matters. (i) Seller has not received any notice from any Governmental Authority or other Person of any Environmental Claims which have not been resolved, settled or dismissed, (ii) no Environmental Claims are pending or, to Seller’s knowledge, threatened with respect to the Property, and (iii) to Seller’s knowledge, Seller is not subject to any Environmental Liabilities with respect to the Property.

(l)Licenses and Permits. Seller has not received any written notice from any Governmental Authority or other Person of (A) any violation, suspension, revocation or non-renewal of any Licenses and Permits that has not been cured or dismissed, or (B) any failure by Seller to obtain any Licenses and Permits required for the use, occupancy or operation of the Hotel that has not been cured or dismissed.

(m)Equipment Leases. The list of Equipment Leases set forth in Schedule 2.1(h) comprise all material leases or purchase money security agreements for any equipment, machinery, vehicles or other personal property necessary for the operation of the Hotel. (i) Seller has neither given nor received any written notice of any breach or default under any of the Equipment Leases which has not been cured, and (ii) to Seller’s knowledge, no event has occurred or circumstance exists which, with notice or the passage of time, would result in a breach or default by Seller or the other party thereunder.

(n)Operating Agreements. The list of Operating Agreement set forth in Schedule 2.1(i) includes all material maintenance, service and supply contracts, license and royalty agreements, booking and reservation agreements, credit card service agreements and all other agreements for goods or services necessary in the operation of the Business. (i) Seller has neither given nor received any written notice of any breach or default under any of the Operating Agreements which has not been cured, and (ii) to Seller’s knowledge, no event has occurred or circumstance exists which, with notice or the passage of time, would result in a breach or default by Seller or the other party thereunder. Seller will terminate the Management Agreement in connection with Closing.

(o)Franchise Agreements. Except for the Franchise Agreement, Seller is not a party to any license or franchise agreements with respect to the Hotel.

(p)Finders and Investment Brokers. Except for Broker, Seller has not dealt with any Person who has acted, directly or indirectly, as a broker, finder, financial adviser or in such other capacity for or on behalf of Seller in connection with the transaction described by this Agreement in a manner which would entitle such Person to any fee or commission in connection with this Agreement or the transaction described in this Agreement.

(q)Foreign Person. Seller is a “United States person” (as defined in Section 7701(a)(30)(B) or (C) of the Code) for the purposes of the provisions of Section 1445(a) of the Code.

(r)Bankruptcy. Seller has not filed any petition in bankruptcy or other insolvency

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proceedings or proceedings for reorganization of Seller or for the appointment of a receiver or trustee for all or any substantial part of the Property, nor has Seller made any assignment for the benefit of its creditors or filed a petition for an arrangement, or entered into an arrangement with creditors or filed a petition for an arrangement with creditors or otherwise admitted in writing its inability to pay its debt as they become due.

(s)Rights to Purchase. Neither Seller nor any Affiliate of Seller has granted any option, right of first refusal or any other unexpired right in favor of any Person to purchase or otherwise acquire the Property, any portion thereof or any interest therein, or any interest in any Seller.

(t)AS IS; DISCLOSURES; WAIVER. Notwithstanding anything to the contrary contained in this Agreement, if the Closing of the transactions hereunder shall have occurred, Seller shall have no liability to Purchaser (and Purchaser shall make no claim against Seller) for a breach of any representation or warranty or any other covenant, agreement or obligation of Seller, or for indemnification, under this Agreement or any Seller Closing Documents, unless (a) the valid claims for all such breaches and indemnifications collectively aggregate to more than Seventy-Five Thousand and 00/100 Dollars ($75,000.00) (in which case Purchaser shall not be entitled to recover any amounts below such “floor”), and (b) the liability of Seller under this Agreement and such documents shall not exceed, in the aggregate, an amount equal to Five Hundred Thousand and 00/100 Dollars ($500,000.00). In no event shall Seller be liable for any consequential or punitive damages. In connection with any action alleging a breach of any warranty of title in the Deed, Purchaser agrees that it shall in good faith pursue Escrow Agent under the Owner’s Title Policy with respect to any claim relating to the warranty of title under the Deed prior to bringing an action against Seller.

6.2Purchaser’s Representations and Warranties. To induce Seller to enter into this Agreement and to consummate the transaction described in this Agreement, Purchaser hereby makes the representations and warranties in this Section 6.2, upon which Purchaser acknowledges and agrees that Seller is entitled to rely.

(a)Organization and Power. Purchaser is duly incorporated or formed (as the case may be), validly existing and in good standing under the laws of the state of its organization, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as currently being conducted.

(b)Authority and Binding Obligation. (i) Purchaser has full power and authority to execute and deliver this Agreement and all other documents to be executed and delivered by Purchaser pursuant to this Agreement (the “Purchaser Documents”), and to perform all obligations of Purchaser arising under each of the Purchaser Documents, (ii) the execution and delivery by the signer on behalf of Purchaser of each of the Purchaser Documents, and the performance by Purchaser of its obligations under each of the Purchaser Documents, has been duly and validly authorized by all necessary action by Purchaser, and (iii) each of the Purchaser Documents, when executed and delivered, will constitute the legal, valid and binding obligations of Purchaser enforceable against Purchaser in accordance with its terms, except to the extent Seller itself is in default thereunder.

(c)Consents and Approvals; No Conflicts. (i) No filing with, and no permit, authorization, consent or approval of, any Governmental Authority or other Person is necessary for the execution or delivery by Purchaser of any of the Purchaser Documents, the performance by Purchaser of any of its obligations under any of the Purchaser Documents, or the consummation by Purchaser of the transaction described in this Agreement, and (ii) neither the execution and delivery by Purchaser of any of the Purchaser Documents, nor the performance by Purchaser of any of its obligations under any of the Purchaser Documents, nor the consummation by Purchaser of the transaction described in this Agreement, will: (A) violate any provision of the organizational or governing documents of Purchaser; (B) violate any Applicable Law to which Purchaser is subject; or (C) result in a violation or breach of or constitute a default under any contract, agreement or other instrument or obligation to which Purchaser is a party or by which any of Purchaser’s properties are subject.

(d)Finders and Investment Brokers. Purchaser has not dealt with any Person who has acted, directly or indirectly, as a broker, finder, financial adviser or in such other capacity for or on behalf of Purchaser in connection with the transaction described by this Agreement in a manner which would entitle such Person to any fee or commission in connection with this Agreement or the transaction described in this Agreement.

(e)Bankruptcy. Purchaser has not filed any petition in bankruptcy or other insolvency proceedings or proceedings for

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reorganization of Purchaser or for the appointment of a receiver or trustee for all or any substantial part of its property, nor has Purchaser made any assignment for the benefit of its creditors or filed a petition for an arrangement, or entered into an arrangement with creditors or filed a petition for an arrangement with creditors or otherwise admitted in writing its inability to pay its debt as they become due.

(f)OFAC. Purchaser is in compliance with the requirements of Executive Order No. 133224, 66 Fed. Reg. 49079 (Sept. 25, 2001) (the “Order”) and other similar requirements contained in the rules and regulations of the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) and in any enabling legislation or other Executive Orders or regulations in respect thereof (the Order and such other rules, regulations, legislation, or orders are collectively called the “Orders”). Purchaser is not:

(i)listed on the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to the Order and/or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Orders (such lists are collectively referred to as the “Lists”);

(ii)a person or entity who has been determined by competent authority to be subject to the prohibitions contained in the Orders; or

(iii)owned or controlled by, or acts for or on behalf of, any person or entity on the Lists or any other person or entity who has been determined by competent authority to be subject to the prohibitions contained in the Orders.

(g)AS IS; DISCLOSURES; WAIVER. PURCHASER REPRESENTS, WARRANTS AND ACKNOWLEDGES THAT: (A) PURCHASER HAS ALREADY INSPECTED THE PROPERTY OR WILL HEREAFTER INDEPENDENTLY CAUSE THE PROPERTY TO BE INSPECTED ON ITS BEHALF; AND (B) PURCHASER HAS NOT ENTERED INTO THIS AGREEMENT BASED UPON ANY REPRESENTATION, WARRANTY, AGREEMENT, STATEMENT OR EXPRESSION OF OPINION BY SELLER OR BY ANY PERSON OR ENTITY ACTING OR ALLEGEDLY ACTING FOR OR ON BEHALF OF SELLER AS TO THE PROPERTY OR THE CONDITION OF THE PROPERTY (OTHER THAN THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY SET FORTH IN SECTION 6.1). PURCHASER AGREES THAT THE PROPERTY IS TO BE SOLD TO AND ACCEPTED BY PURCHASER AT CLOSING, AS IS, WHERE IS, WITH ALL FAULTS, IF ANY, AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED (OTHER THAN THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY SET FORTH IN SECTION 6.1 HEREOF.) IN ADDITION TO, AND WITHOUT LIMITATION ON THE GENERALITY OF THE FOREGOING DISCLAIMER OF WARRANTIES, PURCHASER SPECIFICALLY ACKNOWLEDGES THAT SELLER MAKES NO REPRESENTATION OR WARRANTY CONCERNING THE ENVIRONMENTAL CONDITION OF THE LAND (OTHER THAN THE REPRESENTATIONS AND WARRANTIES SPECIFICALLY SET FORTH IN SECTION 6.1). THE DISCLAIMER OF WARRANTIES AND ALL OTHER PROVISIONS OF SECTION 6.1 SHALL SURVIVE THE CLOSING AND PURCHASER SPECIFICALLY ACKNOWLEDGES THAT, EXCEPT AS PROVIDED FOR IN THIS AGREEMENT, PURCHASER IS NOT RELYING AND SHALL NOT RELY ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, FROM SELLER AS TO ANY MATTERS CONCERNING THE PURCHASED PROPERTY INCLUDING WITHOUT LIMITATION THE HISTORICAL OR PROJECTED REVENUES, EXPENSES, OCCUPANCY RATES, ROOM RATES, PROFITABILITY OR OTHER FINANCIAL STATISTICS OF THE PROPERTY. PURCHASER REPRESENTS THAT IT IS A KNOWLEDGEABLE, EXPERIENCED AND SOPHISTICATED PURCHASER OF REAL ESTATE AND THAT IT IS RELYING SOLELY ON ITS OWN EXPERTISE AND THAT OF PURCHASER’S CONSULTANTS IN PURCHASING THE PROPERTY AND SHALL MAKE AN INDEPENDENT VERIFICATION OF THE ACCURACY OF ANY DOCUMENTS AND INFORMATION PROVIDED BY SELLER. BY FAILING TO TERMINATE THIS AGREEMENT PRIOR TO THE EXPIRATION OF THE DUE DILIGENCE PERIOD, PURCHASER ACKNOWLEDGES THAT SELLER HAS AFFORDED PURCHASER A FULL OPPORTUNITY TO CONDUCT SUCH INVESTIGATIONS OF THE PROPERTY AND THE HOTEL AS PURCHASER DEEMED NECESSARY TO SATISFY ITSELF AS TO THE CONDITION OF THE PROPERTY AND THE HOTEL. UPON CLOSING, PURCHASER SHALL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING, BUT NOT LIMITED TO, ADVERSE

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PHYSICAL OR CONSTRUCTION DEFECTS, ADVERSE ENVIRONMENTAL, HEALTH OR SAFETY CONDITIONS, OR ADVERSE MATTERS EXISTING OR ARISING IN RESPECT OF THE PROPERTY OR THE HOTEL WHICH MAY NOT HAVE BEEN REVEALED BY PURCHASER’S INSPECTIONS AND INVESTIGATIONS AND SELLER SHALL HAVE NO LIABILITY OR OBLIGATION THEREFOR EXCEPT TO THE EXTENT SUCH MATTER CONSTITUTES A BREACH OF A REPRESENTATION, WARRANTY OR COVENANT HEREUNDER.

COVENANTS

7.1Confidentiality.

(a)Disclosure of Confidential Information. Seller and Purchaser shall keep confidential and not make any public announcement or disclose to any Person the existence or any terms of this Agreement (or the Original PSA), any information disclosed by the Inspections or in the Seller Due Diligence Materials or any other documents, materials, data or other information with respect to the Property or Hotel which is not generally known to the public (the “Confidential Information”). Notwithstanding the foregoing, Seller and Purchaser shall be permitted to (i) disclose any Confidential Information to the extent required under Applicable Law, or (ii) disclose any Confidential Information to any Person on a “need-to-know” basis, such as their respective shareholders, partners, members, trustees, beneficiaries, directors, officers, employees, attorneys, consultants, engineers, surveyors, lenders, investors, managers, franchisors and such other Persons whose assistance is required to consummate the transactions described in this Agreement, including, without limitation, Purchaser’s Inspectors; provided, however, that Seller or Purchaser (as the case may be) shall (A) advise such Person of the confidential nature of such Confidential Information, and (B) use commercially reasonable efforts to cause such Person to maintain the confidentiality of such Confidential Information. This Section 7.1(a) shall survive the Closing or termination of this Agreement.

(b)Public Announcements. Notwithstanding the foregoing in Section 7.1(a), a Party shall have the right to make a public announcement regarding the transaction described in this Agreement upon the Closing provided that such announcement does not disclose the Purchase Price.

7.2Continuation of Operations. Following the Effective Date of this Agreement and to and including the Closing Date, the Seller shall continue normal and prudent maintenance and management of the Business in accordance with Seller’s current practices and in the ordinary course of business. Seller shall keep, or shall cause to be kept, the Property insured against fire and other hazards covered by extended coverage endorsement and comprehensive public liability insurance against claims for bodily injury, death and property damage occurring in, on or about the Property, consistent with Seller’s prior practices.

7.3Contracts. Any execution of a new contract relating to the Property after the expiration of the Due Diligence Contingency may only be done with the approval of Purchaser or if such contract can be terminated with ninety (90) days’ notice or less.

7.4Employees. Any hiring of a general manager after the expiration of the Due Diligence Contingency may only be done with prior written notification to the Purchaser.

CLOSING CONDITIONS

8.1Mutual Closing Conditions.

(a)Satisfaction of Mutual Closing Conditions. The respective obligations of Seller and Purchaser to close the transaction contemplated in this Agreement are subject to the satisfaction at or prior to Closing of the following conditions precedent (the “Mutual Closing Conditions”):

(i)Adverse Proceedings. No litigation or other court action shall have been commenced seeking to obtain an injunction or other relief from such court to enjoin the consummation of the transaction described in this Agreement, and no preliminary or permanent injunction or other order, decree or ruling shall have

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been issued by a court of competent jurisdiction or by any Governmental Authority, that would make illegal or invalid or otherwise prevent the consummation of the transaction described in this Agreement.

(ii)Adverse Law. No Applicable Law shall have been enacted that would, and no legislation shall have been passed that upon enactment would, make illegal or invalid or otherwise prevent the consummation of the transaction described in this Agreement.

8.2Purchaser’s Closing Conditions.

(a)Satisfaction of Purchaser’s Closing Conditions. In addition to the Mutual Closing Conditions, Purchaser’s obligations to close the transactions described in this Agreement are subject to the satisfaction at or prior to Closing of the following conditions precedent (the “Purchaser Closing Conditions”):

(i)Representations and Warranties. Certification by Seller that each of the representations and warranties made by Seller in this Agreement shall be true and correct in all material respects as of the Closing (or as of such other date to which such representation or warranty expressly is made).

(ii)Covenants and Obligations. Each of the covenants and obligations of Seller in this Agreement shall have been performed in all material respects.

(iii)Additional Documents. Seller shall have executed all documents required under this Agreement, and such further instruments of conveyance, assignments, approvals, waivers, consents, confirmations, releases, entity documentation and other documents as may be reasonably necessary to effectuate the sale and transfer of all title, ownership, and possessory rights in and to the Property to Purchaser, and to otherwise consummate and evidence the capacity and authority of Seller to consummate the transactions contemplated herein.

(iv)Title. Seller shall be ready, willing and able to deliver fee simple title to the Property in accordance with the terms and conditions of this Agreement.

8.3Seller Closing Conditions.

(a)Satisfaction of Seller’s Closing Conditions. In addition to the Mutual Closing Conditions, Seller’s obligations to close the transactions contemplated in this Agreement are subject to the satisfaction at or prior to Closing of the following conditions precedent (the “Seller Closing Conditions”):

(i)Receipt of the Purchase Price. Purchaser shall have (i) paid to Seller or deposited with Escrow Agent with written direction to disburse the same to Seller, the Purchase Price (as adjusted pursuant to Section 3.1), and (ii) delivered written direction to Escrow Agent to disburse the Earnest Money to Seller.

(ii)Representations and Warranties. The representations and warranties of Purchaser in this Agreement shall be true and correct in all material respects as of the Closing (or as of such other date to which such representation or warranty expressly is made).

(iii)Covenants and Obligations. Each of the covenants and obligations of Purchaser in this Agreement shall have been performed in all material respects.

8.4Failure of Closing Conditions. So long as a Party is not in default hereunder, if any condition to such Party’s obligation to proceed with the Closing hereunder has not been satisfied as of the Closing Date (or such earlier date as provided herein), such Party may, in its sole discretion, terminate this Agreement, or elect to close notwithstanding the non-satisfaction of such condition, and in that event said Party shall be deemed to have waived said condition, and there shall be no liability on the part of the other Party hereto. In the event that this Agreement is terminated pursuant to this Article VIII, the Earnest Money shall be transferred in accordance with the terms of Section 3.2 hereof and the Parties shall have no further rights or obligations under this Agreement, except for those which expressly survive such termination.

CLOSING

9.1Closing Date. The closing of the transaction described in this Agreement (the “Closing”) shall occur no later than October 13, 2021 (the date on which the Closing occurs is referred to herein as the “Closing Date”); provided, however, if required by Lender, the Closing shall occur only on a monthly payment date under the Existing Loan and the Closing Date may be extended at Seller’s option

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to the next such monthly payment date after the expiration of such initial thirty (30) day period. The Closing shall be an escrow closing and may occur remotely.

9.2Documents to be Delivered by Seller at Closing. Prior to Closing, Seller shall prepare for Purchaser’s approval the Deed, A & A Agreements, Bill of Sale and any other transfer documents identified in this Section 9.2. At Closing, Seller shall execute, acknowledge and/or deliver, as applicable, the following to Purchaser or the Escrow Agent:

(a)A special or limited warranty deed (the “Deed”) conveying title to the Property subject only to the Permitted Exceptions.

(b)An Assignment and Assumption of Leases (the “Assignment of Leases”) assigning from Seller, and assuming by Purchaser, all of Seller’s right, title and interest in and to the Leases.

(c)An Assignment and Assumption of Contracts and Licenses (the “Contract and License Assignments”) assigning from Seller, and assuming by Purchaser, all of Seller’s and Affiliates’ right, title and interest in and to the (i) Licenses and Permits and (ii) Contracts. Furthermore, mutual indemnifications shall be included in the Contract and License Assignments which provide that Seller shall indemnify and hold Purchaser harmless for all liabilities thereunder arising prior to the Closing Date and that Purchaser shall indemnify and hold Seller harmless for all liabilities arising thereunder after the Closing Date.

(d)An Assignment and Assumption of Intangible Property, assigning from Seller, and assuming by Purchaser all of Seller’s right, title and interest, if any, in and to all Intangible Property (the “Intangible Property Assignments”) with Seller’s warranty that all Intangible Property is owned by Seller free and clear of all liens and encumbrances. The Assignment of Leases, Contract and License Assignments and the Intangible Property Assignments are herein referred to collectively as the “A & A Agreements”.

(e)A Bill of Sale (the “Bill of Sale”) conveying, transferring and selling to Purchaser all right, title and interest, if any, of Seller in and to all Personal Property.

(f)To the extent in Seller’s possession and not already located at the Property, keys to all entrance doors to, and equipment and utility rooms located in, the Property.

(g)To the extent in Seller’s possession and not already located at the Property, all Licenses.

(h)The advance Booking deposits.

(i)An inventory of all baggage, valises, packages and trunks checked or left in the care of Seller and the contents of all trunk and storage rooms at the Property, together with all books, records, and keys relating to such items.

(j)All other documents which Seller is required to deliver pursuant to the provisions of this Agreement or which are necessary to carry out the intent and purposes of this Agreement.

(k)All corporate authority and good standing documents and other reasonable documentation as may be reasonably required by the Escrow Agent.

(l)Affidavit reaffirming that all representations and warranties made by Seller under this Agreement are true and correct as of the date of Closing, pursuant to the terms hereof.

(m)All affidavits reasonably required by Escrow Agent to issue the Owner’s Title Policy and endorsements in a form acceptable to Purchaser.

(n)FIRPTA certification.

9.3Documents to be Delivered by Purchaser at Closing. At the Closing, Purchaser shall execute, acknowledge and/or deliver, as applicable, the following to Seller:

(a)The cash portion of the Purchase Price, subject to apportionments, credits and adjustments as provided in this Agreement.

(b)The A & A Agreements.

(c)All other documents which Purchaser is required to deliver pursuant to the provisions of this Agreement or which are necessary to carry out the intent and purpose of this Agreement.

(d)All corporate authority and good standing documents and other reasonable documentation required by the Escrow Agent.

(e)Affidavit reaffirming that all representations and warranties made by Purchaser under this Agreement are true and correct as of the date of Closing, pursuant to the terms hereof.

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PRORATIONS AND EXPENSES

10.1Prorations. The following accounts shall be prorated as of the Closing Date and purchased in cash by Purchaser or credited against cash due to Seller or due from Purchaser, as applicable:

(a)Real estate, personal property taxes, ad valorem taxes and sanitary sewer assessments and similar impositions on the Property (the “Taxes”) if any, for the period prior to Closing shall be prorated as of the Closing Date. The Taxes for the year in which the Closing occurs shall be prorated as of the Closing Date based on the assessment for that year if the assessed value and applicable rates are known at the time of Closing; otherwise, Taxes shall be prorated on the basis of the most recent ascertainable assessed value and rates.

(b)All prepaid rents and amounts payable under the leases, license agreements, service, operating and maintenance contracts assigned to and assumed by the Purchaser, as set forth herein, to the extent same shall cover periods subsequent to Closing shall be credited to Seller.

(c)Amounts prepaid as fees for business permits and licenses which are permitted by law to be assigned to and credited to Seller.

(d)Refundable deposits paid to Seller as lessor under leases or agreements that Purchaser agrees to assume and advance deposits received by Seller for reservations on and after the date of Closing shall transfer to Purchaser, and Purchaser shall thereupon acquire and assume all of Seller’s rights and obligations, if any, in and to such deposits.

(e)All charges for utilities and telephones shall be prorated as of the Closing Date. Purchaser shall transfer all utilities including telephones into its name as of the Closing Date and shall pay all charges therefor from and after Closing.

(f)All Lender Held Escrows shall be assumed by Purchaser and credited to Seller as of the Closing Date.

10.2Adjustments, Allocation and Settlement. The following adjustments to the income and expenses from the Property and purchases or credits shall be made at Closing or subsequent settlement:

(a)The final night’s room revenue (revenue from rooms occupied on the evening preceding the Closing) including any sales tax, shall belong to Seller including accounts receivable of registered guests who have not checked out and are occupying rooms on the evening preceding the Closing Date (the “Tray Ledger”). On the Closing Date, the Tray Ledger accounts shall be checked out as accounts of Seller and, if any accounts are continuing to occupy rooms, re-checked in as accounts of Purchaser. All other accounts receivable originating for services or room nights sold and occupied and checked out prior to the Closing Date shall belong to and be the responsibility of Seller. Purchaser shall have no obligation to collect any such accounts receivable for Seller, and Purchaser shall promptly remit such amounts collected to Seller. If Purchaser collects any cash from any Tray Ledger accounts that are indebted to Purchaser as well as Seller, Purchaser shall apply such collections on a pro-rata basis between its own accounts receivable and to Seller for any accounts belonging to Seller.

(b)Seller shall be entitled to retain the sum of all cash within the control of Seller at the Property in use at time of the Closing.

(c)At the Closing, Seller shall set over and assign unto the Purchaser to the extent permitted by applicable vending machine agreement(s) any right, title and interest Seller may have in and to any commissions or revenues derived from vending machines after the Closing.

(d)Seller shall be responsible for all hotel employee(s) wages, payroll taxes and benefits through midnight of the day preceding Closing, and Seller shall reimburse or credit Purchaser for such expense. Such employees shall be terminated by Seller effective as of 11:59:59 p.m. (local time) of the day preceding Closing. Purchaser shall not be obligated to re-hire any of Seller’s employees.

(e)Purchaser shall be entitled to advance deposits received by Seller prior to Closing for periods subsequent to 12:00:01 a.m. (local time) on the date of Closing. Advance reservations and bookings shall be provided by the Seller at Closing. Purchaser agrees to provide rooms and services for persons and organizations who made advance reservations, and Purchaser agrees to indemnify and hold Seller harmless from and against any claim brought against Seller as a result of Purchaser’s failure to honor any such reservations and bookings.

(f)Purchaser shall purchase from Seller, at Seller’s invoice price, and in addition to the

17

Purchase Price, the unopened supplies, inventory and F&B located at the Hotel on the Closing Date, if any.

10.3Transaction Costs.

(a)Seller’s Transaction Costs. In addition to the other costs and expenses to be paid by Seller as set forth elsewhere in this Agreement, Seller shall pay for the following items in connection with this transaction: (i) one-half (½) of the fees and expenses for the escrow services provided by Escrow Agent, (ii) the fees and expenses of its own attorneys, accountants and consultants and (iii) any fee due to Broker from Seller pursuant to a separate agreement between Seller and Broker.

(b)Purchaser’s Transaction Costs. In addition to the other costs and expenses to be paid by Purchaser as set forth elsewhere in this Agreement, Purchaser shall pay for the following items in connection with this transaction: (i) any stamp taxes, transfer, sales or similar tax payable in connection with the conveyance of the Property, (ii) the fees, costs and expenses for the Title Commitment, Owner’s Title Policy (including endorsements), Survey and Searches, (iii) the fees and expenses incurred by Purchaser for Purchaser’s Inspectors or otherwise in connection with the Inspections, (iv) any mortgage tax, title insurance fees and expenses for any loan title insurance policies or recording charges or other amounts payable in connection with the assumption of the Existing Loan, (v) one half (½) of the fees and expenses for the Escrow Agent, (vi) the fees and expenses of its own attorneys, accountants and consultants, (vii) costs of recording the deed to transfer the Property and (viii) any costs related to the issuance of an Acceptable Franchise Agreement, including , but not limited to all fees and costs, if any, related to the termination of the existing Franchise Agreement (including, but not limited to, any costs charged to Seller to effect the issuance of an Acceptable Franchise Agreement and any termination fees, liquidated damages or other charges accruing or payable as a result of such termination). Purchaser shall indemnify and hold Seller harmless from and against any liens, claims, causes of action, damages, liabilities and expenses related to such costs, which indemnity shall survive the Closing or termination of this Agreement.

(c)Other Transaction Costs. All other fees, costs and expenses not expressly addressed in this Section 10.3 or elsewhere in this Agreement shall be allocated between Seller and Purchaser in accordance with applicable local custom for similar transactions.

(d)True Up. Except as otherwise provided herein, to the extent that the amount of any of the above items shall not be available for exact proration and adjustment as of the Closing Date at Closing, Seller or its representative and Purchaser or its representative shall determine, compute, settle and adjust, or readjust, Closing prorations between the parties as of the Closing Date. All prorations and adjustments shall be subject to a true up period of ninety (90) days after Closing (the “True Up Period”). All of Seller’s liabilities and obligations which can reasonably be paid and satisfied at or prior to the Closing Date shall be so paid. The Parties acknowledge that such liabilities and obligations which cannot be so paid prior to Closing Date or which have accrued but are then unpaid, including, but not limited to, liabilities for utility expenses, sales taxes, unemployment taxes, social security taxes, income tax withholding and any other federal, state, local and other applicable taxes and fees, all or any of which may not be payable prior to Closing, shall be paid and satisfied by Seller as promptly as such can be determined and are due and payable but under no circumstance should said payments be made more than ten (10) days after Seller receives notice of said payment becoming due and payable.

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DEFAULT

11.1Seller’s Default. If, at or any time prior to Closing, Seller fails to perform its covenants or obligations under this Agreement in any material respect, which breach or default is not caused by a Purchaser Default and such failure remains uncured (a “Seller Default”), then Purchaser, as its sole and exclusive remedies for such Seller Default, may elect to (a) terminate this Agreement, in which case the Earnest Money shall be refunded to Purchaser in accordance with Section 3.2(d), and the Parties shall have no further rights or obligations under this Agreement, except those which expressly survive such termination or (b) proceed to Closing, in which case Purchaser shall be deemed to have waived such Seller Default; provided, however, that Purchaser shall not be deemed to have waived any Seller Default unless the Closing occurs or Purchaser provides Seller with written notice of such waiver prior to Closing.

11.2Purchaser’s Default. If at any time prior to Closing, Purchaser fails to perform any of its other covenants or obligations under this Agreement in any material respect, which breach or default is not caused by a Seller Default and such failure remains uncured (a “Purchaser Default”), then Seller, as its sole and exclusive remedies for such Purchaser Default, may elect to (a) terminate this Agreement by providing written notice to and Seller may retain the Earnest Money as full liquidated damages (and not as a penalty) for all loss, damage and other expenses suffered by Seller, it being agreed that Seller’s damages are impossible to ascertain and the sum specified as liquidated damages is a reasonable estimation of the probable loss which would be sustained by the Seller by reason of such default or breach, and is not a penalty or forfeiture or (b) proceed to Closing pursuant to this Agreement, in which case Seller shall be deemed to have waived such Purchaser Default; provided, however, that Seller shall not be deemed to have waived any Purchaser Default unless the Closing occurs or Seller provides Purchaser with written notice of such waiver prior to Closing.

RISK OF LOSS

12.1Casualty. If, at any time after the Effective Date and prior to Closing or earlier termination of this Agreement, the Property or any material portion thereof is damaged or destroyed by fire or any other casualty (a “Casualty”), Seller shall give written notice of such Casualty to Purchaser as promptly as practicable after the occurrence of such Casualty, but in any event prior to the Closing.

(a)Material Casualty. If the amount of the repair or restoration of the Property required by a Casualty equals or exceeds twenty percent (20%) of the Purchase Price (a “Material Casualty”), then Purchaser shall have the right to elect, by providing written notice to Seller within fifteen (15) Business Days after Purchaser’s receipt of Seller’s written notice of such Casualty, to (i) terminate this Agreement, in which case the Parties shall have no further rights or obligations under this Agreement, except those which expressly survive such termination, or (ii) proceed to Closing, in which case Seller shall provide Purchaser with a credit against the Purchase Price in an amount equal to the costs and expenses required to repair or restore the Property affected by the Material Casualty as agreed to by the Parties. If Purchaser (1) fails to provide written notice of its election to Seller within such time period, or (2) provides written notice of its election to proceed to Closing, but subsequently the Parties are unable to agree on the amount of the credit to be provided to Purchaser at Closing despite a good faith effort by Purchaser to so agree, Purchaser shall be deemed to have elected to terminate this Agreement pursuant to clause (i) of the preceding sentence. If the Closing is scheduled to occur prior to the expiration of Purchaser’s election period, then the Closing shall be postponed until the date which is five (5) Business Days after the earlier of Purchaser’s delivery of its election notice to Seller or the expiration of Purchaser’s election period.

(b)Non-Material Casualty. In the event of any Casualty other than a Material Casualty, then Purchaser shall not have the right to terminate this Agreement, but shall proceed to Closing, in which case Seller shall (A) provide Purchaser with a credit against the Purchase Price in an amount equal to the applicable insurance deductible, and (B) assign and transfer to Purchaser all of Seller’s right, title and interest in and to all proceeds from all casualty and lost profits insurance policies maintained by Seller with respect to such Casualty by delivering an assignment instrument to Purchaser at

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Closing in form and substance reasonably satisfactory to Purchaser.

12.2Condemnation. If, at any time after the Effective Date and prior to Closing or the earlier termination of this Agreement, any Governmental Authority commences any condemnation proceeding or other proceeding in eminent domain with respect to all or any material portion of the Real Property (a “Condemnation”), Seller shall give written notice of such Condemnation to Purchaser promptly after Seller receives notice of such Condemnation.

(a)Material Condemnation. If the Condemnation would (i) result in the loss of more than twenty percent (20%) of the fair market value of the Land or Improvements (which shall be deemed to be equal to the Purchase Price), (ii) result in any material restriction in access to the Land or Improvements, or (iii) have a materially adverse effect on the operation of the Hotel or the Business as conducted prior to such Condemnation (a “Material Condemnation”), then Purchaser shall have the right to elect, by providing written notice to Seller within fifteen (15) Business Days after Purchaser’s receipt of Seller’s written notice of such Condemnation, to (A) terminate this Agreement, in which case the Parties shall have no further rights or obligations under this Agreement, except those which expressly survive such termination, or (B) proceed to Closing, without terminating this Agreement, in which case Seller shall assign to Purchaser all of Seller’s right, title and interest in all proceeds and awards from such Condemnation by delivering an assignment instrument to Purchaser at Closing in form and substance reasonably satisfactory to Purchaser. If Purchaser fails to provide written notice of its election to Seller within such time period, then Purchaser shall be deemed to have elected to terminate this Agreement pursuant to clause (A) of the preceding sentence. If the Closing is scheduled to occur within Purchaser’s fifteen (15) Business Day election period, then the Closing shall be postponed until the date which is five (5) Business Days after the Purchaser’s delivery of its election notice to Seller.

(b)Non-Material Condemnation. In the event of any Condemnation other than a Material Condemnation, Purchaser shall not have the right to terminate this Agreement, but shall proceed to Closing, in which case Seller shall assign to Purchaser all of Seller’s right, title and interest in all proceeds and awards from such Condemnation by delivering an assignment instrument to Purchaser at Closing in form and substance reasonably satisfactory to Purchaser.

ARTICLE XIII

SURVIVAL AND INDEMNIFICATION

13.1Survival.

(a)Survival of Representations and Warranties. The representations and warranties of Seller shall survive the Closing or termination of this Agreement for three (3) months (the period any such representation or warranty survives the Closing or termination of this Agreement (as the case may be) is referred to herein as the “Survival Period”). No claim for a breach of any representation or warranty shall be actionable or payable if the breach in question results from or is based on a condition, state of facts or other matter which was known to the other party prior to Closing.

(b)Survival of Covenants and Obligations. If this Agreement is terminated, only those covenants and obligations to be performed by the Parties under this Agreement which expressly survive the termination of this Agreement shall survive such termination. If the Closing occurs, only those covenants and obligations to be performed by the Parties under this Agreement which expressly survive the Closing shall survive the Closing.

(c)Survival of Indemnification. This Article XIII and all other rights and obligations of defense and indemnification as expressly set forth in this Agreement shall survive the Closing or termination of this Agreement.

(d)Indemnification by Seller. Seller shall indemnify and hold harmless the Purchaser Indemnitees from and against any Indemnification Loss incurred by any Purchaser Indemnitee to the extent resulting from (i) the breach of any express representations or warranties of Seller in this Agreement which expressly survives the Closing or termination of this Agreement (as the case may be) and (ii) the breach by Seller of any of its covenants or obligations under this Agreement which expressly survives the Closing or termination of this Agreement (as the case may be).

(e)Indemnification by Purchaser. Purchaser shall indemnify and hold harmless the Seller Indemnitees from and against any Indemnification Loss incurred by any Seller

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Indemnitee the extent resulting from (i) any breach of any representations or warranties of Purchaser in this Agreement which expressly survives the Closing or termination of this Agreement (as the case may be) and (ii) any breach by Purchaser of any of its covenants or obligations under this Agreement which expressly survives the Closing or termination of this Agreement (as the case may be).

MISCELLANEOUS PROVISIONS

14.1Notices.

(a)Method of Delivery. All notices, requests, demands and other communications required to be provided by any Party under this Agreement (each, a “Notice”) shall be in writing and delivered, at the sending Party’s cost and expense, by (i) personal delivery, (ii) certified U.S. mail, with postage prepaid and return receipt requested, (iii) overnight courier service, (iv) facsimile transmission or (v) electronic mail, with a verification copy sent within three (3) Business Days by any of the methods set forth in clauses (i), (ii) or (iii), to the recipient Party at the following address or facsimile number:

If to Seller:

Louisville Hotel Associates, LLC

c/o Sotherly Hotels Inc.

306 South Henry Street, Suite 100

Williamsburg, Virginia 23185

Attention: Scott M. Kucinski

Email: scottkucinski@sotherlyhotels.com

With Copy to:

Frost Brown Todd LLC 400 West Market Street, Suite 3200 Louisville, Kentucky 40202 Attention: Geoffrey White Facsimile No.: 502-581-1087

Email: gwhite@fbtlaw.com

If to Purchaser:

Lockwood Development Partners, LLC

70 SE 4^th^ Avenue

Delray Beach, Florida 33483

Attention: Charles Everhardt

Email:

c.everhardt@lockwooddevelopmentpartners.com

With Copy to:

Michael Herskowitz, Esq.

2329 Nostrand Avenue, Suite 100

Brooklyn, New York 11210

Telephone No.: 917-232-6282

Email: Michael@lawofficemh.com

(b)Receipt of Notices. All Notices sent by a Party (or its counsel pursuant to Section 14.1(d)) under this Agreement shall be deemed to have been received by the Party to whom such Notice is sent upon (i) delivery to the address, facsimile number or electronic mail address of the recipient Party, provided that such delivery is made prior to 5:00 p.m. (local time for the recipient Party) on a Business Day, otherwise the following Business Day, or (ii) the attempted delivery of such Notice if (A) such recipient Party refuses delivery of such Notice, or (B) such recipient Party is no longer at such address, facsimile number or electronic mail address, and such recipient Party failed to provide the sending Party with its current address or facsimile number pursuant to Section 14.1(c).

(c)Change of Address. The Parties and their respective counsel shall have the right to change their respective address and/or facsimile number for the purposes of this Section 14.1 by providing a Notice of such change in address, facsimile number and/or electronic mail address as required under this Section 14.1.

(d)Delivery by Party’s Counsel. The Parties agree that the attorney for such Party shall have the authority to deliver Notices on such Party’s behalf to the other Party hereto.

14.2Time is of the Essence. Time is of the essence of this Agreement; provided, however, that notwithstanding anything to the contrary in this Agreement, if the time period for the performance of any covenant or obligation, satisfaction of any condition or delivery of any Notice or item required under this Agreement shall expire on a day other than a Business Day, such time period shall be extended automatically to the next Business Day.

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14.3Assignment. Seller may not assign this Agreement or any interest therein to any Person, without the prior written consent of Purchaser, which consent may be withheld in its sole discretion. Purchaser shall have the right to assign all of its right, title and interest in this Agreement to any entity that is an Affiliate of Purchaser upon five (5) Business Days’ notice to Seller but without prior consent of Seller.

14.4Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties, and their respective successors and permitted assigns.

14.5Third Party Beneficiaries. This Agreement shall not confer any rights or remedies on any Person other than (i) the Parties and their respective successors and permitted assigns, and (ii) any Indemnitee to the extent such Indemnitee is expressly provided any right of defense or indemnification in this Agreement.

14.6Governing Law. This Agreement shall be governed by the laws of the State of Indiana, without giving effect to any principles regarding conflict of laws.

14.7Rules of Construction. The following rules shall apply to the construction and interpretation of this Agreement:

(a)Singular words shall connote the plural as well as the singular, and plural words shall connote the singular as well as the plural, and the masculine shall include the feminine and the neuter, as the context may require.

(b)All references in this Agreement to particular articles, sections, subsections or clauses (whether in upper or lower case) are references to articles, sections, subsections or clauses of this Agreement, unless otherwise expressly stated or clearly apparent from the context of such reference. All references in this Agreement to particular exhibits or schedules (whether in upper or lower case) are references to the exhibits and schedules attached to this Agreement, unless otherwise expressly stated or clearly apparent from the context of such reference.

(c)The headings in this Agreement are solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect.

(d)Each Party and its counsel have reviewed and revised (or requested revisions of) this Agreement and have participated in the preparation of this Agreement, and therefore any rules of construction requiring that ambiguities are to be resolved against the Party which drafted the Agreement or any exhibits hereto shall not be applicable in the construction and interpretation of this Agreement or any exhibits hereto.

(e)The terms “hereby,” “hereof,” “hereto,” “herein,” “hereunder” and any similar terms shall refer to this Agreement, and not solely to the provision in which such term is used.

(f)The terms “include,” “including” and similar terms shall be construed as if followed by the phrase “without limitation.”

(g)The term “sole discretion” with respect to any determination to be made a Party under this Agreement shall mean the sole and absolute discretion of such Party, without regard to any standard of reasonableness or other standard by which the determination of such Party might be challenged.

14.8Severability. If any term or provision of this Agreement is held to be or rendered invalid or unenforceable at any time in any jurisdiction, such term or provision shall not affect the validity or enforceability of any other terms or provisions of this Agreement, or the validity or enforceability of such affected term or provision at any other time or in any other jurisdiction.

14.9Jurisdiction and Venue. ANY LITIGATION OR OTHER COURT PROCEEDING WITH RESPECT TO ANY MATTER ARISING FROM OR IN CONNECTION WITH THIS AGREEMENT SHALL BE CONDUCTED IN THE COURTS IN THE COUNTY AND STATE THE PROPERTY IS LOCATED AND SELLER (FOR ITSELF AND ALL SELLER INDEMNITEES) AND PURCHASER (FOR ITSELF AND ALL PURCHASER INDEMNITEES) HEREBY SUBMIT TO JURISDICTION AND CONSENT TO VENUE IN SUCH COURTS, AND WAIVE ANY DEFENSE BASED ON FORUM NON CONVENIENS.

14.10SERVICE OF pROCESS; Waiver of Trial by Jury. THE PARTIES AGREE THAT, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, SERVICE OF PROCESS SHALL BE EFFECTIVE AS TO A PARTY IF DELIVERY OF ANY COURT DOCUMENTS TO SUCH PARTY IS EFFECTED IN ACCORDANCE WITH SECTION 14.1.

Each Party hereby waives its right to a trial by jury in any litigation or other court proceeding with respect to any matter arising from or in connection with this Agreement.

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14.11Incorporation of Recitals, Exhibits and Schedules. The recitals to this Agreement, and all exhibits and schedules referred to in this Agreement are incorporated herein by such reference and made a part of this Agreement, and the Parties represent, warrant, acknowledge and agree that each of the recitals is true, correct and accurate in all respects.

14.12Entire Agreement. This Agreement sets forth the entire understanding and agreement of the Parties hereto, and shall supersede any other agreements and understandings (written or oral) between the Parties on or prior to the Effective Date with respect to the transaction described in this Agreement, including, for the avoidance of doubt, the Original PSA.

14.13Amendments, Waivers and Termination of Agreement. No amendment or modification to any terms or provisions of this Agreement, waiver of any covenant, obligation, breach or default under this Agreement or termination of this Agreement (other than as expressly provided in this Agreement), shall be valid unless in writing and executed and delivered by each of the Parties.

14.14Execution of Agreement. A Party may deliver executed signature pages to this Agreement by facsimile or electronic transmission to any other Party, which facsimile or electronic copy shall be deemed to be an original executed signature page. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which counterparts together shall constitute one agreement with the same effect as if the Parties had signed the same signature page.

14.151031 or 1033 Exchange. In the event that Seller wishes to enter into a tax deferred exchange for the Property described herein, Purchaser agrees to cooperate with Seller in connection with such exchange, including the execution of such documents as may be reasonably necessary to effectuate the same. Provided that: (a) Purchaser shall not be obligated to unreasonably delay the Closing, (b) all additional costs in connection with the exchange shall be borne by Seller, and (c) Purchaser shall not be obligated to execute any note, contract, deed, or other document providing for any personal liability which would survive the exchange, nor shall Purchaser be obligated to take title to any property other than the Property described in this Agreement. Purchaser shall be indemnified and held harmless against any liability which arises or is claimed to have arisen on account of the acquisition of the exchange property.

14.16Master Lease. Notwithstanding anything to the contrary in this Agreement, the Parties acknowledge and agree that the Property is subject to a master lease (the “Master Lease”) between Seller, as landlord, and MHI Louisville TRS, LLC (“Master Tenant”), which is an Affiliate of Seller. Seller will cause Master Tenant to do any and all things necessary for performance of Seller’s obligations under this Agreement and consummation of the transactions contemplated hereby. Any and all revenue that is paid to Master Tenant shall be deemed property of the Seller under this Agreement and shall be transferred in accordance with the terms of this Agreement. Any interest which Master Tenant has in the Property (separate and apart from its leasehold estate) shall be conveyed to Purchaser at Closing. Although the Master Lease constitutes a Lease under this Agreement, it is not being transferred under this Agreement and shall constitute Excluded Property. Seller shall terminate the Master Lease as of Closing by an instrument in recordable form.

[Signatures on following pages]

23

IN WITNESS WHEREOF, each Party has caused this Agreement to be executed and delivered in its name by a duly authorized officer or representative.

SELLER:

LOUISVILLE HOTEL ASSOCIATES, LLC,

a Delaware limited liability company

By: /s/ David R. Folsom

Name: David R. Folsom

Title: Authorized Signatory

PURCHASER:

LOCKWOOD DEVELOPMENT PARTNERS, LLC,

a Florida limited liability company

By: /s/ Charles Everhardt

Name: Charles Everhardt

Title: Manager

Master Tenant agrees to do all things necessary to enable Seller to perform its obligations under Section 14.16 of this Agreement.

MASTER TENANT:

MHI LOUISVILLE TRS, LLC, a Delaware limited liability company

By: MHI Hospitality TRS, LLC, a Delaware limited liability company, Its Sole Member
By: MHI Hospitality TRS Holding, Inc., a Maryland corporation, Its Sole Member
--- ---
By: /s/ David R. Folsom
--- ---

Name: David R. Folsom

Title: Authorized Signatory

[Louisville Hotel Associates/Lockwood Development Partners – Louisville Sheraton A&R PSA]

Schedule 2.1(a)

DESCRIPTION OF LAND

i

Schedule 2.1(h)

EQUIPMENT LEASES

1. That certain Phase II Dishmachine Rental Agreement (Agreement Code LSA-000119141) by and between Ecolab Inc. and Bridge and Barrel executed approximately April 2, 2018;
2. That certain Phase II Dishmachine Rental Agreement (Agreement Code LSA-000120506) by and between Ecolab Inc. and Bridge & Barrel executed approximately April 11, 2018;
--- ---
3. That certain Standard DM Rental Program Dishmachine Rental Agreement (Agreement Code: LSA-000191605) by and between Ecolab Inc. and Sheraton Riverside executed approximately September 3, 2019;
--- ---
4. The certain Premier Advantage Agreement by and between Konica Minolta Business Solutions U.S.A. and MHI Hospitality TRS, LLC executed approximately May 8, 2017;
--- ---
5. That certain Maintenance Agreement by and between Konica Minolta Business Solutions U.S.A. and MHI Hospitality TRS, LLC for Account # 0001199139; and
--- ---
6. That certain Rental Agreement (Proposal 119175) by and between PHSI Pure Water Finance and MHI Hospitality TRS, LLC executed as of July 2, 2010.
--- ---

ii

Schedule 2.1(i)

OPERATING AGREEMENTS

1. That certain Outdoor Lighting Service Agreement (Agreement Number CLRILCLM0000016211) dated as of December 9, 2019 and executed as of December 10, 2019 by and between Duke Energy Indiana and MHI Hospitality LLC;
2. That certain Service Agreement dated February 28, 2020 by and between Westrock Recycling and Sheraton Hotel;
--- ---
3. That certain Master Professional Services Agreement dated as of April 29, 2015 by and between Elavon, Inc. and Sheraton Louisville Riverside;
--- ---
4. That certain Master Services Agreement (Contract # 6855571) by and between TravelClick, Inc and Sheraton Louisville Riverside Hotel dated approximately September 23, 2019;
--- ---
5. The certain Sheraton Louisville Riverside Hotel Bronze Fire Service Agreement (Proposal #: 5704200) delivered on March 19, 2021 from Siemens Industry, Inc. to MHI HOSPITALITY TRS LLC; and
--- ---
6. That certain Full Maintenance Elevator Contract dated as of January 26, 2018 by and between Sheraton Louisville Riverside Hotel and The Murphy Elevator Company, Inc.
--- ---

iii

Schedule 3.2(c)

[Seller’s wire instructions]

iv

Schedule 4.1(c)

Seller’s Due Diligence Materials

1. Profit and lost statements for the property for the preceding 3 years.
2. Current payroll report.
--- ---
3. Copies of utilities, cable, telephone and other recurring bills for the preceding 6 months.
--- ---
4. Property tax bills for the preceding 3 years.
--- ---
5. Service Contracts (excluding the Management Agreement and current Franchise Agreement).
--- ---
6. Monthly STR report for the previous twenty-four (24) months.
--- ---
7. A list of major capital improvements completed in the past two years.
--- ---
8. Copies of fire/sprinkler inspection(s) and any test reports.
--- ---
9. Copies of elevator inspection(s). Copies of elevator repair company records.
--- ---
10. Copies of all Leases.
--- ---

v

Schedule 4.2

[Reserved]

vi

Schedule 4.3

Mortgage Loan Documents

(each dated as of November 3, 2016 unless otherwise noted)

1. Mortgage, Assignment of Rents, Security and Fixture Filing executed by Seller and Master Tenant.
2. Real Estate Note (with Interest Rate Adjustment) executed by Seller.
--- ---
3. Partial Recourse Guaranty executed by Sotherly Hotels LP, a Delaware limited partnership (“Existing Guarantor”).
--- ---
4. Environmental Agreement and Indemnity executed by Seller and Existing Guarantor.
--- ---
5. Subordination Agreement executed by Seller, the Tenant party thereto, and Lender applicable to operating lease or similar structure.
--- ---
6. Subordination of Management Agreement and Consent and Subordination of Manager executed by Seller, Master Tenant, Manager, and Lender.
--- ---

0110570.0725634   4846-2312-2929v8

vii

soho-ex311_6.htm

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, David R. Folsom, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
  1. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ David R. Folsom
Name: David R. Folsom
Title: President and Chief Executive Officer

soho-ex312_10.htm

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, Anthony E. Domalski, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels Inc.;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
  1. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ Anthony E. Domalski
Name: Anthony E. Domalski
Title: Chief Financial Officer

soho-ex313_13.htm

EXHIBIT 31.3

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, David R. Folsom, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels LP;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
  1. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ David R. Folsom
Name: David R. Folsom
Title: President and Chief Executive Officer
Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

soho-ex314_7.htm

EXHIBIT 31.4

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, Anthony E. Domalski, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Sotherly Hotels LP;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
--- ---
  1. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ Anthony E. Domalski
Name: Anthony E. Domalski
Title: Chief Financial Officer
Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

soho-ex321_11.htm

EXHIBIT 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

In connection with the Quarterly Report of Sotherly Hotels Inc. (the “Corporation”) on Form 10-Q for the period ending June 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Folsom, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ David R. Folsom
Name: David R. Folsom
Title: President and Chief Executive Officer

soho-ex322_8.htm

EXHIBIT 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

In connection with the Quarterly Report of Sotherly Hotels Inc. (the “Corporation”) on Form 10-Q for the period ending June 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony E. Domalski, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ Anthony E. Domalski
Name: Anthony E. Domalski
Title: Chief Financial Officer

soho-ex323_12.htm

EXHIBIT 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

In connection with the Quarterly Report of Sotherly Hotels LP (the “Operating Partnership”) on Form 10-Q for the period ending June 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Folsom, Chief Executive Officer of the Sotherly Hotels Inc., sole general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ David R. Folsom
Name: David R. Folsom
Title: President and Chief Executive Officer
Sotherly Hotels Inc., sole general partner of Sotherly Hotels LP

soho-ex324_9.htm

EXHIBIT 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

In connection with the Quarterly Report of Sotherly Hotels LP (the “Operating Partnership”) on Form 10-Q for the period ending June 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony E. Domalski, Chief Financial Officer of Sotherly Hotels Inc., sole general partner of the Operating Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.
--- ---
Date: August 16, 2021
--- --- ---
By: /s/ Anthony E. Domalski
Name: Anthony E. Domalski
Title: Chief Financial Officer
Sotherly Hotels, Inc., sole general partner of Sotherly Hotels LP

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