Company Quick10K Filing
Procaccianti Hotel REIT
Price1.00 EPS-926,150
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt-10 EBIT1
TEV-10 TEV/EBIT-11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-25
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-09-25
8-K 2020-06-10
8-K 2020-04-29
8-K 2020-04-21
8-K 2020-04-07
8-K 2020-03-31
8-K 2020-03-20
8-K 2020-03-03
8-K 2020-02-27
8-K 2020-01-23
8-K 2019-11-22
8-K 2019-10-29
8-K 2019-07-31
8-K 2019-07-11
8-K 2019-06-10
8-K 2019-05-23
8-K 2019-04-29
8-K 2019-04-24
8-K 2019-01-25
8-K 2018-11-16
8-K 2018-10-26
8-K 2018-08-15

PROC 10Q Quarterly Report

Note 1 - Organization and Description of Business
Note 2 - Summary of Significant Accounting Policies
Note 3 - Investments in Hotels
Note 4 - Mortgage Notes Payable
Note 5 - Interest Rate Swap
Note 6 - Related Party Transactions
Note 7 - Stockholders' Equity
Note 8 - Income Taxes
Note 9 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tm2014550d1_ex31-1.htm
EX-31.2 tm2014550d1_ex31-2.htm
EX-32.1 tm2014550d1_ex32-1.htm

Procaccianti Hotel REIT Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
806448321602016201720182020
Assets, Equity
10.07.95.83.71.6-0.52016201720182020
Rev, G Profit, Net Income
30186-6-18-302016201720182020
Ops, Inv, Fin

10-Q 1 tm2014550d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

 

For the quarter ended March 31, 2020

 

OR

 

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

 

For the transition period from            to           

 

Commission File Number 333-217578 (1933 Act)

 

 

 

PROCACCIANTI HOTEL REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

  Maryland   81-3661609

(State or Other jurisdiction of

incorporation or organization)

 

(I.R.S Employer

Identification Number)

 

1140 Reservoir Avenue, Cranston, RI

  02920-6320
(Address of Principal Executive Offices)   (Zip Code)

 

(401) 946-4600

(Registrant’s telephone number, including area code)

_________________________________________________________________________________________________________________________

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class: Trading Symbol(s) Name of each exchange on which registered:
N/A N/A N/A

_________________________________________________________________________________________________________________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. Yes  x  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes xNo ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 Exchange Act.

 

Large accelerated filer ¨    Accelerated filer ¨ 
Non-accelerated filer x    Smaller reporting company x 
Emerging growth company x   

 

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.      x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No x

 

As of May 15, 2020, there were 3,278,238 shares of the Registrant’s Class K common stock issued and outstanding, 631,699 shares of the Registrant’s Class K-I common stock issued and outstanding, 47,989 shares of the Registrant’s Class K-T common stock issued and outstanding, 537,410 shares of the Registrant’s Class A common stock issued and outstanding and 125,000 shares of the Registrant’s Class B common stock issued and outstanding.

 

 

 

 

 

 

PROCACCIANTI HOTEL REIT, INC.
INDEX
         
    Page
PART I - FINANCIAL INFORMATION    
         
Item 1.   Financial Statements (unaudited)    
    Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019   1
    Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019   2
    Condensed Consolidated Statements of Stockholders' Equity and Noncontrolling Interest for the Three Months Ended March 31, 2020 and 2019   3
    Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019   4
    Notes to Condensed Consolidated Financial Statements   6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   29
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   47
Item 4.   Controls and Procedures   47
         
PART II - OTHER INFORMATION    
         
Item 1.   Legal Proceedings   48
Item 1A.   Risk Factors   48
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   49
Item 3.   Defaults Upon Senior Securities   51
Item 4.   Mine Safety Disclosures   51
Item 5.   Other Information   51
Item 6.   Exhibits   52
         
    Signatures   55

 

 

 

 

PROCACCIANTI HOTEL REIT, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   March 31, 2020   December 31, 2019 
ASSETS          
Property and equipment, net  $91,766,589   $63,367,852 
Cash   6,433,610    11,370,148 
Restricted cash   2,670,919    1,631,649 
Accounts receivable, net   143,589    224,429 
Due from related parties   63,806    400,446 
Prepaid expenses and other assets, net   672,199    758,056 
Total Assets  $101,750,712   $77,752,580 
LIABILITIES AND EQUITY          
Liabilities          
Mortgage notes payable, net  $56,957,732   $39,437,601 
Accounts payable, accrued expenses and other, net   3,378,679    2,692,823 
Due to related parties   2,087,095    1,308,424 
Total Liabilities   62,423,506    43,438,848 
Commitments and Contingencies          
Noncontrolling interest of the Operating Partnership   1,219,168    - 
Stockholders' Equity          
Class K common stock, $0.01 par value per share; 55,500,000 shares authorized,          
3,301,738 and 2,680,845 shares issued and outstanding, respectively   33,017    26,808 
Class K-I common stock, $0.01 par value per share; 55,500,000 shares authorized,          
631,699 and 491,718 shares issued and outstanding, respectively   6,317    4,917 
Class K-T common stock, $0.01 par value per share; 116,000,000 shares authorized,          
47,989 and 45,616 shares issued and outstanding, respectively   480    456 
Class A common stock, $0.01 par value per share; 21,000,000 shares authorized,          
537,410 and 537,410 shares issued and outstanding, respectively   5,374    5,374 
Class B common stock, $0.01 par value per share; 125,000 shares authorized, issued and outstanding   1,250    1,250 
Additional paid-in capital   37,975,146    31,607,360 
Cumulative loss   (4,355,399)   (2,265,816)
Cumulative distributions   (2,081,970)   (1,631,573)
Total Stockholders' Equity   31,584,215    27,748,776 
Noncontrolling interest   6,523,823    6,564,956 
Total Equity   38,108,038    34,313,732 
Total Liabilities and Stockholders' Equity  $101,750,712   $77,752,580 

 

1

 

 

PROCACCIANTI HOTEL REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
   Three Months Ended March 31, 
   2020   2019 
Revenues          
Rooms  $2,616,236   $3,170,512 
Food and beverage   282,552    286,738 
Other operating   102,099    92,261 
Total revenues   3,000,887    3,549,511 
           
Expenses          
Rooms   692,655    666,316 
Food and beverage   262,810    250,758 
Other property expenses   1,396,545    1,294,517 
Property management fees to affiliates   90,224    106,617 
Corporate general and administrative   570,909    464,388 
Other fees to affiliates   549,756    87,411 
Acquisition costs   72,149    - 
Depreciation and amortization   662,512    544,401 
Total expenses   4,297,560    3,414,408 
           
Loss on acquisition   (133,521)   - 
           
Operating income (loss)   (1,430,194)   135,103 
           
Interest expense, net   (553,010)   (614,696)
Unrealized loss on interest rate swap   (224,609)   (68,743)
Net loss before income taxes   (2,207,813)   (548,336)
Income tax benefit (expense)   (7,029)   49,764 
Net loss   (2,214,842)   (498,572)
Net income (loss) attributable to noncontrolling interests   (125,259)   250,606 
Net loss attributable to common stockholders  $(2,089,583)  $(749,178)
           
           
Net loss attributable to Class K common stockholders - basic and diluted  $(1,461,066)  $(517,847)
Net loss per Class K common share - basic and diluted  $(0.48)  $(0.34)
Weighted average number of Class K common shares outstanding - basic and diluted   3,042,789    1,522,595 
           
Net loss attributable to Class K-I common stockholders - basic and diluted  $(269,176)  $(10,835)
Net loss per Class K-I common share - basic and diluted  $(0.48)  $(0.34)
Weighted average number of Class K-I common shares outstanding - basic and diluted   560,588    31,863 
           
Net loss attributable to Class K-T common stockholders - basic and diluted  $(22,625)  $(172)
Net loss per Class K-T common share - basic and diluted  $(0.48)  $(0.34)
Weighted average number of Class K-T common shares outstanding - basic and diluted   47,119    510 
           
Net loss attributable to Class A common stockholders - basic and diluted  $(258,047)  $(159,316)
Net loss per Class A common share - basic and diluted  $(0.48)  $(0.34)
Weighted average number of Class A common shares outstanding - basic and diluted   537,410    468,410 
           
Net loss attributable to Class B common stockholders - basic and diluted  $(78,669)  $(61,008)
Net loss per Class B common share - basic and diluted  $(0.63)  $(0.49)
Weighted average number of Class B common shares outstanding - basic and diluted   125,000    125,000 

 

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

 

2

 

 

PROCACCIANTI HOTEL REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND NONCONTROLLING INTEREST

(unaudited)

 

   Common Stock   Additional           Total Procaccianti Hotel REIT, Inc         
   Class K   Class K-I   Class K-T   Class A   Class B   Paid-in   Cumulative   Cumulative   Stockholders'   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Loss   Distributions   Equity   Interest   Equity 
BALANCE,  December 31, 2019   2,680,845   $26,808    491,718   $4,917    45,616   $456    537,410   $5,374    125,000   $1,250   $31,607,360   $(2,265,816)  $(1,631,573)  $27,748,776   $6,564,956   $34,313,732 
Issuance of common stock   617,967    6,180    137,312    1,373    2,000    20    -    -    -    -    7,436,225    -    -    7,443,798    -    7,443,798 
Issuance of common stock                                                                                
pursuant to distribution                                                                                
 reinvestment plan   2,926    29    2,669    27    373    4    -    -    -    -    56,636    -    -    56,696    -    56,696 
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees   -    -    -    -    -    -    -    -    -    -    (622,973)   -    -    (622,973)   -    (622,973)
Other offering costs to affiliates   -    -    -    -    -    -    -    -    -    -    (502,102)   -    -    (502,102)   -    (502,102)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (2,089,583)   -    (2,089,583)   (63,183)   (2,152,766)
Distributions paid   -    -    -    -    -    -    -    -    -    -    -    -    (450,397)   (450,397)   (98,000)   (548,397)
Contributions   -    -    -    -    -    -    -    -    -    -    -    -    -    -    120,050    120,050 
BALANCE,  March 31, 2020   3,301,738   $33,017    631,699   $6,317    47,989   $480    537,410   $5,374    125,000   $1,250   $37,975,146   $(4,355,399)  $(2,081,970)  $31,584,215   $6,523,823   $38,108,038 

 

   Common Stock   Additional           Total Procaccianti  Hotel REIT, Inc.         
   Class K   Class K-I   Class K-T   Class A   Class B   Paid-in   Cumulative   Cumulative   Stockholders'   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Loss   Distributions   Equity   Interest   Equity 
BALANCE,  December 31, 2018   1,364,918   $13,649    12,243   $122    510   $5    468,410   $4,684    125,000   $1,250   $15,724,108   $(2,368,768)  $(527,556)  $12,847,494   $6,865,218   $19,712,712 
Issuance of common stock   298,646    2,987    54,156    542    -    -    -    -    -    -    3,464,643    -    -    3,468,172    -    3,468,172 
Issuance of common stock                                                                                
pursuant to distribution                                                                                
reinvestment plan   6    -    118    1    -    -    -    -    -    -    1,175    -    -    1,176    -    1,176 
Commissions on sales of common stock and related dealer manager fees and stockholder servicing fees   -    -    -    -    -    -    -    -    -    -    (304,574)   -    -    (304,574)   -    (304,574)
Other offering costs to affiliates   -    -    -    -    -    -    -    -    -    -    (215,829)   -    -    (215,829)   -    (215,829)
Net income (loss)   -    -    -    -    -    -    -    -    -    -    -    (749,178)   -    (749,178)   250,606    (498,572)
Distributions paid   -    -    -    -    -    -    -    -    -    -    -    -    (194,978)   (194,978)   (36,750)   (231,728)
BALANCE,  March 31, 2019   1,663,570   $16,636    66,517   $665    510   $5    468,410   $4,684    125,000   $1,250   $18,669,523   $(3,117,946)  $(722,534)  $14,852,283   $7,079,074   $21,931,357 

 

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

 

3

 

 

PROCACCIANTI HOTEL REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)  

 

   Three Months Ended March 31, 
   2020   2019 
Cash Flows from Operating Activities:          
Net loss  $(2,214,842)  $(498,572)
Adjustments to reconcile net loss to cash provided by operating activities:          
Depreciation and amortization   662,512    544,401 
Amortization of deferred financing costs and debt discounts and premiums as interest   16,422    25,870 
Amortization of key money loans   (13,373)   (13,375)
Loss on acquisition   133,521    - 
Unrealized loss on interest rate swap   224,609    68,743 
Changes in operating assets and liabilities:          
Accounts receivable   91,323    (9,930)
Due from related parties   (165,462)   (236,987)
Prepaid expenses and other assets   172,850    (87,555)
Accounts payable, accrued expenses and other   352,038    546,501 
Due to related parties   778,671    301,135 
Net cash provided by operating activities   38,269    640,231 
Cash Flows from Investing Activities:          
Investment in Gano, net of cash acquired   (12,240,256)   - 
Capital improvements   (49,685)   (208,329)
Net cash used in investing activities   (12,289,941)   (208,329)
Cash Flows from Financing Activities:          
Proceeds from issuance of common stock   7,443,798    3,468,172 
Payment of commissions and dealer manager fees and stockholder servicing fees   (622,973)   (304,574)
Proceeds from mortgage note   2,000,000    - 
Payments of mortgage notes principal   -    (1,744,000)
Payment of deferred financing costs   (94,770)   - 
Payments of loans from affiliates   -    (1,200,000)
Distributions to stockholders   (393,701)   (193,802)
Distributions to noncontrolling interest   (98,000)   (36,750)
Contributions from noncontrolling interest   120,050    - 
Net cash provided by (used in) financing activities   8,354,404    (10,954)
           
Increase (decrease) in cash and cash equivalents and restricted cash   (3,897,268)   420,948 
Cash and cash equivalents and restricted cash, beginning of period   13,001,797    3,798,152 
Cash and cash equivalents and restricted cash, end of period  $9,104,529   $4,219,100 

 

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

 

4

 

 

Supplemental Disclosure of Cash Flow Information

 

              The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet to the amount shown in the consolidated statement of cash flows:          

 

   Three Months Ended March 31, 
   2020   2019 
Cash and cash equivalents  $6,433,610   $2,225,525 
Restricted cash   2,670,919    1,993,575 
Total cash and cash equivalents and restricted cash shown on the consolidated          
statements of cash flows  $9,104,529   $4,219,100 
           
The Company paid the following amounts for interest and income taxes:          

 

   Three Months Ended March 31, 
   2020   2019 
Cash paid for interest  $624,940   $565,718 
Cash paid for income taxes  $-   $2,300 

 

Supplemental Disclosure of Noncash Transactions

 

   Three Months Ended March 31, 
   2020   2019 
Common stock issued pursuant to distribution reinvestment plan  $56,696   $1,176 
Other offering costs paid to affiliates  $(274,877)  $(215,829)
Decrease in due from related parties  $274,877   $215,829 
Assumption of mortgage note payable  $15,598,479   $- 

 

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

 

5

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 - Organization and Description of Business

 

Procaccianti Hotel REIT, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on August 24, 2016. The Company used the proceeds from its Private Offering (defined below) and expects to use the proceeds from its Public Offering (defined below) to acquire and own a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States (“U.S.”). The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2018. Substantially all of the Company’s business is conducted through Procaccianti Hotel REIT, L.P., a Delaware limited partnership, (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership.

 

As of March 31, 2020, the Company owned interests in four select-service hotels located in four states with a total of 483 rooms. For more information on the Company’s real estate portfolio, see Note 3 – “Investments in Hotels.”

 

On September 30, 2016, the Company commenced a private offering (“Private Offering”) of shares of Class K common stock, $0.01 par value per share (“K Shares”), and units, which are comprised of four K Shares and one share of Class A common stock, each with a $0.01 par value per share (“Units”), for $10.00 per K Share and $50.00 per Unit, with a targeted maximum offering of  $150,000,000 in K Shares (including K Shares sold as part of a Unit) to accredited investors only pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The Company terminated its Private Offering prior to the commencement of the Public Offering, and, as of such termination, received approximately $15,582,755 in gross proceeds from the sale of K Shares and A Shares, including Units, in the Private Offering. Of the $15,582,755 in gross proceeds raised, $2,954,095 was from the sale of shares of Class A common stock (“A Shares”) to TPG Hotel REIT Investor, LLC (“THR”) to fund organization and offering expenses associated with the K Shares and Units. With the A Share proceeds from the Private Offering, the Company paid $782,705 in selling commissions, $275,794 in dealer manager fees and recognized $1,083,912 in other offering costs for the duration of the Private Offering.

 

On August 14, 2018, the Company commenced its initial public offering (“Public Offering”) pursuant to a registration statement on Form S-11 (Registration No. 333-217578) (“Registration Statement”), filed under the Securities Act with the U.S. Securities and Exchange Commission (“SEC”), to offer up to $550,000,000 in shares of common stock, including $500,000,000 in shares of common stock pursuant to the primary offering, consisting of the following three share classes: K Shares, at an initial offering price of $10.00 per K Share, Class K-I common stock, (“K-I Shares”), at an initial offering price of $9.50 per K-I Share and Class K-T common stock (“K-T Shares”), at an initial offering price of $10.00 per K-T Share and $50,000,000 in shares of common stock pursuant to the Company’s distribution reinvestment plan (the “DRIP”) at $9.50 per K Share, $9.50 per K-I Share and $9.50 per K-T Share. On November 16, 2018, the Company revised the offering price per K-I Share in the primary offering from $9.50 to $9.30 per K-I Share, exclusive of the DRIP, which remained at $9.50 per K-I Share.

 

Since the commencement of the Public Offering and through March 31, 2020, the Company received approximately $27,030,674 in gross proceeds from the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, including $55,899, $57,950 and $4,175 of gross proceeds from K Shares, K-I Shares and K-T Shares issued pursuant to the DRIP, respectively. Additionally, the Company received $2,190,000 from the sale of A Shares to THR from a private placement, proceeds of which were used to fund the payment of organization and offering expenses related to the Public Offering and also to account for the differences between the applicable NAV per K-I Share and the applicable offering price per K-I Share and any amount equal to any discount to the initial offering price of K Shares, K-I Shares and K-T Shares (excluding volume discounts).

 

On February 27, 2020, as partial consideration for the Company’s acquisition of the Hilton Garden Inn Providence (as defined herein), the Operating Partnership issued 128,124 Class K units of limited partnership interests in the Operating Partnership (“Class K OP Units”) valued at $10.00 per Class K OP Unit. Such issuance represents a total investment of $1,281,244 in Class K OP Units of the Operating Partnership. Individuals with direct or indirect interests in the sellers of the Hilton Garden Inn Providence who are direct or indirect owners of the Company’s Sponsor and PHA received only Class K OP Units and no cash as consideration.

 

6

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Subsequent to March 31, 2020, in response to adverse effects of the novel strain of coronavirus (COVID-19), the Company’s board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as the Company’s board of directors approves their resumption.

 

The Company expects to offer shares of common stock in the Public Offering over a two-year period. If the Company has not sold all of the shares to be offered in the Public Offering within two years from the effective date of the Registration Statement, the Company may continue the Public Offering until August 14, 2021. The Company may, in its discretion, terminate the Public Offering at any time. If the Company’s board of directors determines that it is in the Company’s best interest, the Company may conduct follow-on public offerings upon the termination of the Public Offering. The Company’s charter does not restrict its ability to conduct offerings in the future.

 

The Company is externally managed by Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an Advisory Agreement by and among the Company, its Operating Partnership and PHA. PHA is an affiliate of the Company’s sponsor, Procaccianti Companies, Inc. (“Sponsor”).

 

Note 2 - Summary of Significant Accounting Policies

 

Basis of Presentation

 

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

 

The Company consolidates variable interest entities (“VIEs”) as defined under the Consolidation Topic (“Topic 810”) of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) when it has the power to direct the activities that most significantly impact the VIE’s performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant. At March 31, 2020, the assets of Procaccianti Convertible Fund, LLC (“PCF”) were $38,031,869, consist primarily of land, building, furniture, fixtures, and equipment and are available to satisfy PFC’s obligations. The liabilities of PCF were $25,644,759 at March 31, 2020 and consist primarily of long-term debt. The Company has guaranteed certain obligations of its VIEs.

 

The Company has no foreign operations or assets and its operating structure includes only one segment.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assumptions and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Under GAAP, the Company is required to disclose the fair value of certain financial instruments on a recurring basis. The accompanying condensed consolidated balance sheets include the following financial instruments: cash, restricted cash, accounts receivable and mortgage notes payable.

 

7

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company considers the carrying value of cash, restricted cash, accounts receivable and accounts payable to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.

 

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

 

  ·  Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
     
  ·   Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
     
  · Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
     

  

As of March 31, 2020, the estimated fair value of the mortgage notes payable was $56,173,727 compared to the carrying value of $57,150,262. These financial instruments are valued using Level 2 inputs.

 

Revenue Recognition

 

Revenue is generally recognized as services are performed. Revenue represents primarily rooms, food and beverage, and other fees. The Company collects sales tax from all nonexempt customers and remits the entire amount to the appropriate states upon collection from the customer. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenue and expense.

 

Cash and Cash Equivalents

 

Cash and cash equivalents represent cash on hand or held in banks and highly liquid investments with original maturities of three months or less.

 

Restricted Cash

 

The Company maintains reserves for property taxes and capital improvements as required by the debt agreements. At March 31, 2020 and 2019, reserves for property taxes were $566,511 and $512,524, respectively, and reserves for capital improvements were $2,039,476 and $1,461,513, respectively. The Company also included $64,932 and $19,538 of guest advance deposits as restricted cash at March 31, 2020 and 2019, respectively.

 

Organization and Offering Costs

 

Organization and offering costs include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and meals. The Company charges organization and offering costs against additional paid in capital on the condensed consolidated balance sheet as it raises proceeds in its continuous Public Offering.

 

8

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Income Taxes

 

The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as a REIT, commencing with the taxable year ended December 31, 2018. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year following the year it initially elects to be taxed as a REIT, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to its stockholders.

 

Because the Company is prohibited from operating hotel properties pursuant to certain tax laws relating to its qualification as a REIT, the entities through which the Company owns hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays U.S. federal income tax at regular corporate rates on its taxable income.

 

The Company accounts for income taxes of its TRSs 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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period prior to when the new rates become effective. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized.

 

The Company has reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. At March 31, 2020, the Company had no material uncertain tax positions.

 

The preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company will account for interest and penalties relating to uncertain tax positions in the current period results of operations, if necessary. The Company has tax years 2016 through 2019 remaining subject to examination by federal and various state tax jurisdictions.

 

Noncontrolling Interest

 

Noncontrolling interest represents the portion of equity of PCF held by owners other than the Company. Noncontrolling interest is reported in the condensed consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest are reported in the condensed consolidated statements of operations.

 

9

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Noncontrolling Interest of the Operating Partnership

 

Noncontrolling interest of the Operating Partnership represents the value of the 128,124 Class K OP Units that were issued to third-party sellers in connection with the acquisition of the Hilton Garden Inn Providence. Noncontrolling interest of the Operating Partnership is reported in the mezzanine section of the condensed consolidated balance sheet, as the units are redeemable at the request of the holder for cash equal to the fair market value of a K share as defined in the Operating Partnership Agreement. The Company may elect to acquire any such unit presented for redemption for one K Share or cash. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest of the Operating Partnership are reported in the condensed consolidated statement of operations.

 

Per Share Data

 

The Company calculates its basic and diluted earnings per common share (“EPS”) utilizing the two-class method. Under the two-class method both basic and diluted EPS are calculated for each class of common stock considering distributions declared and accumulated, and the rights of common shares and participating securities in any undistributed earnings. Undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. Non-vested shares of restricted Class K common stock totaling 2,250 K Shares as of March 31, 2020 held by the Company’s independent directors are included in the calculation of basic EPS because such shares have been issued and participate in distributions. The Company’s calculated earnings per share for the three months ended March 31, 2020 and 2019, were as follows:

 

10

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

  Three Months Ended March 31, 
  2020   2019 
Net loss $(2,089,583)  $(749,178)
Less: Class K Common Stock dividends declared and accumulated  453,908    225,280 
Less: Class K-I Common Stock dividends declared and accumulated  83,629    4,716 
Less: Class K-T Common Stock dividends declared and accumulated  7,029    77 
Less: Class A Common Stock dividends declared and accumulated  80,171    69,299 
Undistributed net loss $(2,714,320)  $(1,048,550)
Class K Common Stock:         
Undistributed net loss $(1,914,974)  $(743,127)
Class K Common Stock dividends declared and accumulated  453,908    225,280 
Net loss $(1,461,066)  $(517,847)
Net loss per common share, basic and diluted $(0.48)  $(0.34)
Weighted average number of common shares outstanding, basic and diluted  3,042,789    1,522,595 
Class K-I Common Stock:         
Undistributed net loss $(352,805)  $(15,551)
Class K-I Common Stock dividends declared and accumulated  83,629    4,716 
Net loss $(269,176)  $(10,835)
Net loss per common share, basic and diluted $(0.48)  $(0.34)
Weighted average number of common shares outstanding, basic and diluted  560,588    31,863 
Class K-T Common Stock:         
Undistributed net loss $(29,654)  $(249)
Class K-T Common Stock dividends declared and accumulated  7,029    77 
Net loss $(22,625)  $(172)
Net loss per common share, basic and diluted $(0.48)  $(0.34)
Weighted average number of common shares outstanding, basic and diluted  47,119    510 
Class A Common Stock:         
Undistributed net loss $(338,218)  $(228,615)
Class A Common Stock dividends declared and accumulated  80,171    69,299 
Net loss $(258,047)  $(159,316)
Net loss per common share, basic and diluted $(0.48)  $(0.34)
Weighted average number of common shares outstanding, basic and diluted  537,410    468,410 
Class B Common Stock:         
Undistributed net loss $(78,669)  $(61,008)
Net loss per common share, basic and diluted $(0.63)  $(0.49)
Weighted average number of common shares outstanding, basic and diluted  125,000    125,000 

 

New Accounting Standards

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 325): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.  The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company adopted ASU No. 2016-13 using the modified retrospective approach and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

 

Note 3 – Investments in Hotels

 

The following table sets forth summary information regarding the Company’s investments in hotel properties as of March 31, 2020:

 

11

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Property Name Date Acquired Location Ownership Interest Contract Purchase Price(1) (2) Rooms Mortgage Debt Outstanding
Springhill Suites Wilmington 05/24/2017(1) Wilmington, NC 51% $18,000,000 120 $11,268,000
Staybridge Suites St. Petersburg 06/29/2017(1) St. Petersburg, FL 51% $20,500,000 119 $13,325,000
Hotel Indigo Traverse City 08/15/2018 Traverse City, MI 100% $26,050,000 107 $15,092,000
Hilton Garden Inn Providence 02/27/2020 Providence, RI 100% $28,500,000 137 $16,936,901

 

1)Represents the date and contract purchase price of PCF’s acquisition of the Springhill Suites Wilmington property (the “Springhill Suites Wilmington”) and the Staybridge Suites St. Petersburg property (the “Staybridge Suites St. Petersburg”). The Company exercised its option under an option agreement to purchase a 51% membership interest in PCF on March 29, 2018.

 

2)Contract purchase price excludes acquisition fees and costs.

 

Investments in hotel properties consisted of the following as of March 31, 2020 and 2019:

 

   March 31, 2020   March 31, 2019 
Land  $11,588,686   $7,987,069 
Building and improvements   77,222,315    53,318,817 
Furniture, fixtures, and equipment   7,140,743    4,968,125 
Construction in progress   8,027    12,515 
Total cost   95,959,771    66,286,526 
Accumulated depreciation   (4,193,182)   (1,838,935)
Investment in hotel properties, net  $91,766,589   $64,447,591 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $659,477 and $541,783, respectively.

 

Acquisition of the Hilton Garden Inn Providence

 

On February 27, 2020, the Company, through its Operating Partnership, completed the acquisition of the membership interests in Gano Holdings, LLC (“Gano”) for a purchase price of $28,500,000. Gano owns 100% of the fee simple interest in a 137-room select-service Hilton Garden Inn hotel property located in Providence, Rhode Island (“Hilton Garden Inn Providence”).

 

The Procaccianti Group, LLC (“Procaccianti Group”), an affiliate of the Sponsor, had the right to purchase the membership interests in Gano pursuant to a Membership Interest Purchase Agreement by and among Procaccianti Group, as buyer, and TPG DP JV, LLC, ETJ Gano Holdings, Inc., PRJA Gano Holdings, LLC, EHI Gano Holdings, Inc. and TPG DP Investors, LLC, collectively as seller (“Seller”), dated as of January 14, 2020 (as amended, the “MIPA”). The Seller entities are affiliated with the Sponsor, and some are controlled by certain members of the investment committee members of PHA. On February 27, 2020, Procaccianti Group assigned, and the Operating Partnership assumed, Procaccianti Group’s right, title and interest in and under the MIPA, pursuant to an Assignment of Membership Interest Purchase Agreement, by and between Procaccianti Group and the Operating Partnership, giving the Operating Partnership the right to acquire the membership interests of Gano for the purchase price.

 

The purchase price, exclusive of closing costs and typical hotel closing date adjustments, was comprised of three components as follows: (a) a $10,281,855 cash payment, (b) the issuance of 128,124 Class K OP Units of limited partnership interests in the Operating Partnership, valued at $10.00 per Class K OP Unit, and (c) the assumption of the existing debt balance on the Hilton Garden Inn Providence (the “Existing Debt”) as evidenced by a promissory note and other loan documents. The cash portion of the acquisition was funded with net proceeds from the Company’s Public Offering. Individuals with direct or indirect interests in the seller of the Hilton Garden Inn Providence who are direct or indirect owners of the Sponsor and PHA received only Class K OP Units and no cash as consideration. The value of the Class K OP Units of $1,281,244 is presented as noncontrolling interest in the Operating Partnership on the condensed consolidated balance sheet as of March 31, 2020.

 

12

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company concluded its investment in the Hilton Garden Inn Providence was an asset acquisition in accordance with ASC 805, Business Combinations (“Topic 805”), as substantially all of the fair value of the gross assets acquired by the Company is concentrated in a group of similar identifiable assets. In accordance with Topic 810, in an asset acquisition under the VIE model, the difference in the fair value of the assets acquired and consideration paid is recognized in the income statement as a gain or loss on the transaction. Costs incurred as part of the asset acquisition transaction are not considered a component of the consideration transferred nor capitalized as a part of the cost of the assets acquired. In accordance with this guidance, the fair value of the assets acquired and liabilities assumed in the acquisition were recorded by the Company as follows and $72,149 of acquisition costs were expensed.

 

   Fair Value at 
   February 27, 2020 
Land  $3,601,617 
Building and improvements   23,732,408 
Furniture, fixtures, and equipment   1,679,004 
Other assets   100,511 
Total assets acquired   29,113,540 
Long-term debt   (17,503,709)
Other liabilities assumed   (122,582)
Net assets acquired  $11,487,249 
      
Net purchase price  $11,620,770 
Loss on acquisition  $(133,521)

 

The Company utilized an independent appraisal, as well as other available market data, to assist in the determination of the fair values of the assets acquired and debt assumed.

 

Note 4 – Mortgage Notes Payable

 

Subsequent to March 31, 2020, in response to COVID-19, the Company and two of its creditors modified the terms of two of its mortgage notes payable. The information presented below presents the terms as they existed at March 31, 2020, prior to these modifications. For more information, see Note 9 – “Subsequent Events”.

 

Included in mortgage notes payable at March 31, 2020, is a $13,325,000 mortgage payable secured by the Staybridge Suites St. Petersburg (the “St. Petersburg Note”), a $11,268,000 mortgage payable secured by the Springhill Suites Wilmington (the “Wilmington Note”), a $15,092,000 mortgage payable secured by the Hotel Indigo Traverse City (the “TCI Note”) and a $16,936,901 mortgage payable secured by the Hilton Garden Inn Providence (the “HGI Note”).

 

The St. Petersburg Note requires monthly interest payments at 4.34% through August 1, 2020, and subsequent to August 1, 2020, monthly principal and interest payments of $66,255 through July 1, 2024, the maturity date. The St. Petersburg Note is collateralized by the Staybridge Suites St. Petersburg, including equipment, and has been guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor.

 

The Wilmington Note requires monthly interest payments at 4.49% through June 1, 2020, and subsequent to June 1, 2020, monthly principal and interest payments of $57,026 through June 1, 2024, the maturity date. The Wilmington Note is collateralized by the Springhill Suites Wilmington, including equipment, and has been guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor.

 

13

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The TCI Note was entered into on August 15, 2018 and had an original principal balance of $17,836,000. As of March 31, 2020, the Company had prepaid $2,744,000 outstanding on the TCI Note. The TCI Note bears interest at LIBOR plus a LIBOR rate margin of 2.50% at March 31, 2020. The TCI Note provides for interest only monthly payments until maturity. The principal amount will be due on the maturity date, which is August 15, 2021; provided, however, the maturity date may be extended by up to three additional one-year periods, provided no default exists and with prior written notice of at least 45 days before scheduled maturity. The TCI Note is collateralized by the Hotel Indigo Traverse City, including equipment, and has been guaranteed by TH Investment Holdings II, LLC, an affiliate of the Sponsor.

 

The Company assumed the HGI Note upon acquisition of the Hilton Garden Inn Providence on February 27, 2020. At the time of acquisition, the existing debt on the property was $14,936,901. At closing, the Company assumed the entire outstanding balance and increased the loan by an additional $2,000,000 to provide additional capital for the acquisition, for a total mortgage note payable of $16,936,901. The HGI Note requires monthly interest payments at a fixed rate of 4.25%. The HGI Note matures on May 15, 2025. The HGI Note provides for interest only monthly payments for 36 months, with payments based on a 30-year amortization schedule thereafter. The HGI Note is collateralized by the Hilton Garden Inn Providence, including equipment, and has been guaranteed by the Company.

 

The mortgage notes payable each contain customary affirmative covenants, negative covenants and events of default and at March 31, 2020, the Company was in compliance with such covenants. Although the Company has taken steps to enhance its ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative economic impact resulting from the COVID-19 pandemic may cause increased pressure on the Company’s ability to satisfy these covenants.

 

Interest expense on mortgage notes payable for the three months ended March 31, 2020 and 2019 was $541,129 and $499,278, respectively.

 

Also included in mortgage notes payable as of March 31, 2020, is $162,921 of net deferred financing costs and debt discounts and premiums. For the three months ended March 31, 2020 and 2019, the Company amortized $16,422 and $25,870, respectively, of net deferred financing costs and debt discounts and premiums as interest expense.

 

Note 5 – Interest Rate Swap

 

The Company is exposed to certain risks relating to its ongoing business operations, including the effect of changes in interest rates. The Company has an interest rate swap agreement to manage interest rate risk exposure on $15,092,000 of the TCI Note due in 2021.

 

The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.

 

The following table summarizes the terms of the outstanding interest rate swap agreement:

 

     Notional            Far Value of 
     Amount as of            Liability as of 
     March 31,            March 31, 
  Balance Sheet Location   2020  Interest Rate(1)   Effective Date  Maturity Date   2020(2)
  Accounts payable, accrued                   
Interest rate swap expenses and other, net  $15,092,000  5.30%  8/15/2018  8/15/2021  $(544,684)

 

14

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1)             The interest rate consists of the underlying index swapped to a fixed rate rather than floating rate LIBOR, plus a premium. The Company notes that the maturity date of the interest rate swap is prior to the LIBOR phase-out deadline and therefore does not expect any impact to the terms or value of the swap.

 

2)             Changes in fair value are recorded as unrealized gain (loss) in the condensed consolidated statements of operations as the Company did not designate this interest rate swap as a hedge. The Company valued the interest rate swap using Level 2 inputs.

 

Subsequent to March 31, 2020, the Company entered into a Swap Modification Agreement (the “Swap Modification Agreement”) to modify the swap derivative contract that fixes the interest rate on the outstanding balance of the mortgage loan. The Swap Modification Agreement modifies the requirements to make payments under the swap derivative contract and provides for a deferral of any payments during the period beginning on April 21, 2020 and ending on the earliest to occur of (i) July 1, 2020 or (ii) a Modification Termination Event (as defined in the Swap Modification Agreement). For more information, see Note 9 – “Subsequent Events”.

 

Note 6 - Related Party Transactions

 

The Company entered into the Amended and Restated Advisory Agreement on August 2, 2018, with PHA and the Operating Partnership (as amended and renewed, the “Advisory Agreement”). The Advisory Agreement has a one-year term, subject to renewals upon mutual consent of PHA and the Company’s independent directors for an unlimited number of successive one-year periods. On July 31, 2019, the board of directors of the Company, including all independent directors of the Company, after review of PHA’s performance during the last year, authorized the Company to execute a mutual consent to renew the Advisory Agreement, by and among the Company, the Operating Partnership and PHA. The renewal was for a one-year term and was effective on August 2, 2019. On November 22, 2019, the Company, the Operating Partnership and PHA entered into the Second Amendment to the Advisory Agreement (the “Advisory Agreement Amendment”) in order to revise certain terms regarding the accrual of interest on deferred acquisition, disposition and asset management fees, as well as the deferral of asset management fees paid to PHA.

 

Pursuant to the Advisory Agreement, PHA oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, and other administrative services. PHA also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which include maintaining required financial records and preparing reports to stockholders and filings with the SEC. In addition, PHA assists an independent valuation firm and the Company’s board of directors in calculating and determining the Company’s NAV, and assists the Company in overseeing the preparation and filing of tax returns, payment of expenses and for the performance of administrative and professional services rendered to the Company by others. The Company reimburses PHA for certain expenses and pays PHA certain fees pertaining to services provided.

 

Operating Expenses

 

The Company is also required to reimburse PHA for costs incurred in providing these administrative services. PHA is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues and/or time allocations. At least annually, the Company’s board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. As of March 31, 2020, PHA has forfeited its right to collect reimbursement for providing these administrative services provided through such date.

 

Acquisition Fee

 

The Company will pay PHA acquisition fees as described below:

 

15

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Acquisition Fee: Fee for providing services including selecting, evaluating and acquiring potential investments, or the acquisition fee. The total acquisition fee payable to PHA shall equal 1.5% of the Gross Contract Purchase Price of an investment, which as defined in the Advisory Agreement, represents the amount actually paid or allocated in respect of the purchase of an investment, inclusive of acquisition expenses and any indebtedness assumed or incurred. Payment of such fee will be deferred until the occurrence of a (i) liquidation event (i.e., any voluntary or involuntary liquidation or dissolution of the Company, including as a result of the sale of all or substantially all of the Company’s assets for cash or other consideration), (ii) the Company’s sale or merger in a transaction that provides stockholders with cash, securities or a combination of cash and securities, (iii) the listing of the Company’s shares of common stock on a national securities exchange, or (iv) the termination of the Advisory Agreement, other than for cause, or the non-renewal of the Advisory Agreement. The preceding clauses (ii) and (iii) are defined as an “Other Liquidity Event”. Under the Advisory Agreement Amendment, deferred acquisition fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum until the day immediately following the Fifth Anniversary (as defined herein), at which time such interest will cease to further accrue.

 

For the three months ended March 31, 2020, the Company incurred $441,370 in acquisition fees related to the Hilton Garden Inn Providence, which are included in other fees to affiliates on the condensed consolidated statement of operations. There were no acquisition fees incurred for the three months ended March 31, 2019. As of March 31, 2020 and 2019, there were $979,350 and $537,980, respectively, of deferred acquisition fees included in due to related parties on the condensed consolidated balance sheets. Interest expense on outstanding acquisition fees was $10,413 and $7,959, respectively, for the three months ended March 31, 2020 and 2019, and is included in interest expense on the condensed consolidated statement of operations and in due to related parties on the condensed consolidated balance sheets.

 

Asset Management Fee

 

The Company will pay PHA asset management fees as described below:

 

Asset Management Fee: Quarterly fee equal to one-fourth of 0.75% of the adjusted cost of the Company’s assets and the amounts actually paid or allocated in respect of the acquisition of loans, before reduction for depreciation, amortization, impairment charges, and cumulative acquisition costs charged to expense in accordance with GAAP, or the asset management fee. The adjusted cost will include the purchase price, acquisition expenses, capital expenditures, and other customary capitalized costs. The Advisory Agreement Amendment clarified the duration of the asset management fee and accrual of interest on deferred asset management fees. The asset management fee will be payable to PHA quarterly in arrears, based on the adjusted cost on the last date of the prior quarter, adjusted for appropriate closing dates for individual investments. Payment of the asset management fee will be deferred on a quarterly basis if at any time all accumulated, accrued, and unpaid 6% distributions have not been paid in full to the holders of the K Shares, K-I Shares, K-T Shares and any parity security. Any such deferred asset management fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum. If the Company has not completed a liquidation event by the fifth anniversary of the date the Company terminates the Public Offering (including any follow-on offering) (the “Fifth Anniversary”), on the day immediately following the Fifth Anniversary, (i) the asset management fees payable pursuant to the Advisory Agreement cease to accrue and (ii) interest that accrued at a non-compounded rate of 6.0% per annum on the deferred asset management fees will cease to accrue. For the avoidance of doubt, all accrued and unpaid principal and interest amounts in connection with the asset management fee at the Fifth Anniversary will remain outstanding.

 

For the three months ended March 31, 2020 and 2019, the Company incurred $108,386 and $87,411, respectively, in asset management fees. Asset management fees are included in other fees to affiliates on the condensed consolidated statements of operations and in due to related parties on the condensed consolidated balance sheets. Interest expense on the outstanding asset management fees was $9,474 and $4,060 for the three months ended March 31, 2020 and 2019, respectively. These amounts are included in interest expense on the condensed consolidated statements of operations and in due to related parties on the condensed consolidated balance sheets.

 

Disposition Fee

 

The Company will pay PHA disposition fees as described below:

 

16

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Disposition Fee: Fee for providing a substantial amount of services in connection with the sale of a property or real estate-related assets, as determined by a majority of the Company’s independent directors, or the disposition fee. The disposition fee will equal one-half of the brokerage commissions paid on the sale of an investment. In no event will the disposition fee exceed 1.5% of the sales price of each investment. Payment of the disposition fee to PHA will be deferred until the occurrence of (i) a liquidation event, (ii) an Other Liquidity Event, or (iii) the termination of the Advisory Agreement, other than for cause, or the non-renewal of the Advisory Agreement. Under the Advisory Agreement Amendment, deferred disposition fees will accrue interest at a cumulative, non-compounded rate of 6.0% per annum until the day immediately following the Fifth Anniversary, at which time such interest will cease to further accrue.

 

There were no disposition fees incurred for the three months ended March 31, 2020 and 2019.

 

Acquisition Expenses

 

The Company will reimburse PHA for acquisition expenses actually incurred (excluding personnel costs) related to selecting, evaluating, and making investments on the Company’s behalf. All acquisition expenses as of March 31, 2020 and 2019 were paid directly by the Company and there have been no reimbursements to PHA.

 

Organization and Offering Costs

 

Organization and offering costs include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, as well as legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and meals. For more information regarding selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, see Note 7 – “Stockholders’ Equity”.

 

Certain organization and offering costs have been incurred by PHA on behalf of the Company. As of March 31, 2020, the total amount of organization and offering costs, exclusive of selling commissions, dealer manager fees and stockholder servicing fees, incurred by PHA and its affiliates related to the Private Offering and the Public Offering was $7,968,367, of which $1,026,564 has been reimbursed through the issuance of A Shares to an affiliate of PHA and payments to PHA of $2,227,597. The Company may reimburse PHA and its affiliates for organization and offering costs incurred on the Company’s behalf, but only to the extent the reimbursement would not cause the selling commissions, dealer manager fees, stockholder servicing fees and other organization and offering expenses to exceed 15% of the gross offering proceeds of the Public Offering as of the termination of the Public Offering, or the 15% cap. As of March 31, 2020, $3,457,426 is reimbursable to PHA and its affiliates by the Company in the future, subject to the 15% cap.

 

The Company records organization and offering costs as charges against additional paid in capital on the condensed consolidated balance sheets as the Company raises proceeds in its continuous Public Offering. These amounts represent 15% of the gross offering proceeds of the Private Offering and the Public Offering as of March 31, 2020, the maximum amount allowed to be recognized by the Company in its financial statements in accordance with the rules established by the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Company recognized organization and offering costs of $1,125,074 and $520,402 for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the Company had a balance due to PHA for reimbursement of O&O expenses within the 15% cap of $227,225, which is included in due to related parties in the condensed consolidated balance sheet as of March 31, 2020.

 

17

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Property Management Fee and Reimbursement

 

A wholly-owned subsidiary of PCF entered into hotel management agreements with PHR St. Petersburg Hotel Manager, LLC (the “St. Petersburg Manager”) to operate and manage the Staybridge Suites St. Petersburg, and with PHR Wilmington Hotel Manager, LLC (the “Wilmington Manager”) to operate and manage the Springhill Suites Wilmington, including making all human resource decisions. The St. Petersburg Manager and the Wilmington Manager are related to PCF through common ownership. The term of each agreement is four years, commencing on June 29, 2017 for the Staybridge Suites St. Petersburg and on May 24, 2017 for the Springhill Suites Wilmington. The employees of the hotels are employed by St. Petersburg Manager and Wilmington Manager; however, pursuant to the management agreements, all compensation of hotel personnel is recorded as a direct operating expense of the hotels. The St. Petersburg Manager and the Wilmington Manager are paid a base management fee equal to 3% of the respective hotel’s gross revenues. The St. Petersburg Manager and the Wilmington Manager are also reimbursed for certain expenses and centralized service costs.

 

A wholly-owned subsidiary of the Operating Partnership entered into a hotel management agreement with PHR Traverse City Hotel Manager, LLC (the “TCI Manager”) to operate and manage the Hotel Indigo Traverse City, including making all human resource decisions. The TCI Manager is related to the Hotel Indigo Traverse City, through common ownership. The term of the agreement is five years, commencing on August 15, 2018. The employees of the hotels are employed by the TCI Manager, however, pursuant to the management agreement, all compensation of hotel personnel is to be recorded as a direct operating expense of the hotel. The TCI Manager is paid a base management fee equal to 3% of the hotel’s gross revenues. The TCI Manager is also reimbursed for certain expenses and centralized service costs.

 

A wholly-owned subsidiary of the Operating Partnership entered into a hotel management agreement with Gano Hotel Manager, LLC (the “HGI Manager”) to operate and manage the Hilton Garden Inn Providence, including making all human resource decisions. The HGI Manager is related to the Hilton Garden Inn Providence, through common ownership. The term of the agreement is five years, commencing on February 27, 2020. The employees of the hotels are employed by the HGI Manager, however, pursuant to the management agreement, all compensation of hotel personnel is to be recorded as a direct operating expense of the hotel. The HGI Manager is paid a base management fee equal to 3% of the hotel’s gross revenues. The HGI Manager is also reimbursed for certain expenses and centralized service costs.

 

Aggregate property management fees incurred for the three months ended March 31, 2020 and 2019 were $90,224 and $106,617, respectively, and are included in property management fees to affiliates on the condensed consolidated statements of operations. As of March 31, 2020, $26,289 of accrued property management fees payable were included in due to related parties on the condensed consolidated balance sheet. Aggregate net reimbursements for certain expenses for the three months ended March 31, 2020 and 2019 were $19,968 and $16,079, respectively. As of March 31, 2020, $4,384 of expense reimbursements were included in due to related parties on the condensed consolidated balance sheet.

 

Construction Management Fee

 

The Company pays its property managers or third parties selected by PHA, after requesting bids from such parties, a construction management fee (which may include expense reimbursements) based on market rates for such services in the markets in which the hotel properties are located and will take into account the nature of the services to be performed, which generally will constitute the supervision or coordination of any construction, improvements, refurbishments, renovations, or restorations of the Company’s hotel properties. If PHA selects the property manager or another affiliate of the Sponsor to perform such services, any resulting agreement must be approved by a majority of the Company’s board of directors, including a majority of its independent directors. Construction management fees incurred during the three months ended March 31, 2020 and 2019, were $0 and $8,913, respectively, and capitalized as a part of the construction cost. During the three months ended March 31, 2020 and 2019, the Company reimbursed TPG Construction, LLC, an affiliate of the Sponsor, $25,776 and $147,424 respectively, for capital expenditure costs incurred at the hotel properties. Included in the due from related parties balance at March 31, 2020, was a $50,570 receivable from TPG Construction, LLC relating to working capital requests to provide funding for vendors and contractor deposits at the Hotel Indigo Traverse City.

 

Additional Service Fees

 

If the Company requests that PHA or its affiliates perform other services, including but not limited to, renovation evaluations, the compensation terms for those services must be approved by a majority of the Company’s board of directors, including a majority of the independent directors. No such fees for additional services were incurred for the three months ended March 31, 2020 and 2019.

 

18

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Payment Upon Listing of Shares

 

If the Company lists any of its shares of capital stock on a national securities exchange (which automatically results in a termination of the Advisory Agreement), the Company will be obligated to pay PHA the amount PHA would be entitled to receive on account of deferred asset management fees, acquisition fees, and disposition fees (and any accrued interest thereon) as if the Company liquidated and received liquidation proceeds equal to the market value of the Company, which is limited to the excess of market value over the liquidation preference on K Shares, K-I Shares and K-T Shares.

 

Payment Upon a Merger or Acquisition Transaction

 

If the Company terminates the Advisory Agreement in connection with or in contemplation of a transaction involving a merger or acquisition, the Company would be obligated to pay PHA the amount PHA would be entitled to receive as if the Company liquidated and received net liquidation proceeds equal to the consideration paid to the stockholders in such transaction.

 

Payment Upon Other Advisory Agreement Termination

 

The Company may elect not to renew the Advisory Agreement. The Company has the right to terminate the Advisory Agreement without cause, or other than in connection with a listing of the Company’s shares or a transaction involving a merger or acquisition or other than for cause (“Non-cause Advisory Agreement Termination”). If a Non-cause Advisory Agreement Termination were to occur, the Company would be obligated to make a cash payment to PHA in the amount of any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued thereon, regardless of the value of the Company’s assets or net assets. The Company would be obligated to repurchase its A Shares for an amount equal to the greater of: (1) any accrued common ordinary distributions on the A Shares plus the stated value of the outstanding A Shares ($10.00 per A Share) or (2) the amount the holders of A Shares would be entitled to receive if the Company liquidated and received net liquidation proceeds equal to the fair market value (determined by appraisals as of the termination date) of the Company’s investments less any loans secured by such investments, limited in the case of non-recourse loans to the value of investments securing such loans. Any B Shares then outstanding would remain outstanding. The amounts payable on account of the repurchase of A Shares may be paid, in the discretion of a majority of the Company’s board of directors, including a majority of the Company’s independent directors, in the form of promissory notes bearing interest at the then-current rate, as determined in good faith by a majority of the Company’s independent directors.

 

Payment Upon Advisory Agreement Termination for Cause

 

If the Company terminates the Advisory Agreement for cause, the Company would not have a current obligation to make any payments to PHA or to S2K Servicing LLC (formerly known as Colony S2K Servicing LLC), an affiliate of the dealer manager. However, any A Shares and B Shares held by them or their affiliates would remain outstanding. In addition, any deferred asset management fees, plus any interest accrued thereon, the full acquisition fees previously earned, plus any interest accrued thereon, and the full disposition fees previously earned, plus any interest accrued thereon, would remain outstanding obligations, and the deferred fees would continue to accrue interest at a non-compounded annual rate of 6.0%. Such deferred fees and interest thereon would be payable upon a liquidation event.

 

Amended and Restated Operating Partnership Agreement

 

In connection with the Hilton Garden Inn Providence acquisition, effective February 27, 2020, the Company, as general partner of the Operating Partnership, Procaccianti Hotel REIT, LP, LLC and certain principals and affiliates of the Sponsor that were issued Class K OP Units entered into an Amended and Restated Agreement of Limited Partnership of Procaccianti Hotel REIT, L.P. (the “Amended and Restated Operating Partnership Agreement”). For description of the material terms of the Amended and Restated Operating Partnership Agreement, see the Company's Current Report on Form 8-K filed with the SEC on March 3, 2020.

 

Loans from Affiliates

 

The Company has combined subordinated promissory notes of $94,194 from PHA that bear interest at the current blended long term applicable federal rate (“AFR”). The blended long term AFR was 1.745% and 3.00% for the three months ended March 31, 2020 and 2019, respectively. The maturity date of the notes is the date after all outstanding K Shares have received all accumulated, accrued and unpaid distributions due and owing under the terms of the Company’s organization documents and the liquidation preference on the K Shares pursuant to the Company’s organization documents has been paid in full, as well as upon any event of default. These amounts are included in due to related parties on the condensed consolidated balance sheets at March 31, 2020 and 2019. Interest expense was $410 and $697 for the three months ended March 31, 2020 and 2019, respectively, and is included in interest expense on the condensed consolidated statements of operations and in due to related parties on the condensed consolidated balance sheets.

 

19

 

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On August 15, 2018, in connection with the acquisition of the Hotel Indigo Traverse City, the Company entered into an unsecured loan with its Sponsor in the principal amount of $6,600,000, evidenced by a promissory note (“Promissory Note”). The Promissory Note accrued interest at the rate of 4.75% per annum and had a maturity date of August 16, 2019. The Promissory Note was approved by a majority of the Company’s board of directors, including a majority of the independent directors. The Company used proceeds from the sale of K Shares, K-I Shares and K-T Shares sold in the primary offering to prepay the Promissory Note. As of July 11, 2019, the entire principal and accrued interest balance had been repaid. Interest expense for the three months ended March 31, 2020 and 2019 was $0 and $123,850, respectively, and is included in interest expense on the condensed consolidated statements of operations.

 

Note 7 - Stockholders’ Equity

 

Under the Company’s charter, the total number of shares of common stock authorized for issuance is 248,125,000, consisting of 55,500,000 K Shares, 55,500,000 K-I Shares, 116,000,000 K-T Shares, 21,000,000 A Shares, and 125,000 shares of Class B common stock, with a par value of $0.01 per share (“B Shares”).

 

The Company’s K Shares, K-I Shares and K-T Shares entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote and to receive distributions as authorized by the Company’s board of directors. Holders of K Shares, K-I Shares and K-T Shares will be entitled to receive cumulative cash distributions on each share at the rate of 6.0% per annum of each share’s distribution base. The distribution base will initially be $10.00 per K Share, $10.00 per K-I Share and $10.00 per K-T Share and will be reduced for distributions that the board of directors declares and pays out of net sales proceeds from the sale or disposition of assets to the extent such distributions are not used to pay accumulated, accrued, and unpaid dividends on such K Shares, K-I Shares, and K-T Shares.

 

K Shares, K-I Shares and K-T Shares will rank, on a pro rata basis, senior to all other classes of stock with respect to distribution rights and rights upon the Company’s liquidation. In certain situations (other than upon liquidation), the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of K Shares, K-I Shares and K-T Shares would receive 50% of any such excess cash. Holders of K Shares, K-I Shares and K-T Shares would also generally be entitled to receive 50% of any remaining liquidation cash pro rata based on the number of K Shares, K-I Shares and K-T Shares outstanding.

 

A Shares entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote and to receive distributions and other distributions of excess cash as authorized by the Company’s board of directors. Following the payment of all accumulated, accrued and unpaid distributions on K Shares, K-I Shares and K-T Shares and payment of any accrued asset management fees (and any interest thereon), each A Share will be entitled to receive distributions at a rate not to exceed 6.0% of the stated value of $10.00 per share from income and cash flow from ordinary operations on a cumulative basis. In certain situations (other than upon liquidation), the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of A Shares will receive 37.5% of any such excess cash on a pro rata basis. A Shares would also generally be entitled to receive 37.5% of any remaining liquidation cash pro rata based on the number of A Shares outstanding.

 

B Shares will have no voting rights, other than the right to vote on and approve any further issuances of an increase of the authorized number of B Shares. In addition, if the Company were to list any shares of its common stock on a national securities exchange, the Company will repurchase its B Shares in accordance with its charter. Holders of B Shares are not entitled to distributions; however, in certain situations (other than upon liquidation) the Company may have excess cash available for distribution and the board of directors may authorize special distributions in which case the holders of B Shares would receive 12.5% of any such excess cash on a pro rata basis.  Holders of B Shares would also generally be entitled to receive 12.5% of any remaining liquidation cash pro rata based on the number of B Shares outstanding.

 

At the termination of the Private Offering, the Company had issued 1,253,618 K Shares and 23,000 A Shares to unaffiliated investors, resulting in receipt of gross proceeds of $12,398,660 from K Share issuances and $230,000 from A Share issuances. A Shares sold to unaffiliated investors were issued as part of a Unit. As of March 31, 2020, under the Public Offering, the Company had issued 2,066,765 K Shares, 625,589 K-I Shares, and 47,540 K-T Shares to unaffiliated investors, resulting in receipt of gross proceeds of $20,617,045 from K Share issuances, $5,820,206 from K-I Share issuances, and $475,400 from K-T Share issuances. As of March 31, 2020, the Company had issued 5,884 K Shares, 6,100 K-I Shares and 439 K-T Shares pursuant to the DRIP, resulting in gross proceeds pursuant to the DRIP of $55,899, $57,950 and $4,175 respectively. As of March 31, 2020, the Company had issued 750 restricted K Shares to each of the Company’s three independent directors for a total of 2,250 restricted K Shares in connection with the Company’s long-term incentive plan, as described below.

 

20

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

As of March 31, 2020, the Company had issued 384,410 A Shares to THR, an affiliate of PHA, for aggregate proceeds of $3,844,095, or $10.00 per share. In addition, the Company issued 130,000 additional A Shares to THR in exchange for notes receivable, payable to the Company upon demand. The note receivable from THR was reduced for amounts reimbursed to PHA by the Company for certain costs incurred on the Company’s behalf. As of March 31, 2020, there was no remaining receivable balance reflected in equity. As of March 31, 2020, the Company sold 10 K-I Shares for aggregate proceeds of $100, or $10.00 per K-I Share and sold 10 K-T Shares for aggregate proceeds of $100, or $10.00 per K-T Share to an affiliate of the Company. In addition, on September 29, 2016, the Company issued 125,000 B shares to S2K Servicing LLC.

 

During the three months ended March 31, 2020, pursuant to the primary portion of the Public Offering, the Company sold 617,967 K Shares for aggregate gross proceeds of $6,146,798, or $9.95 per K Share; 137,312 K-I Shares for aggregate gross proceeds of $1,277,000, or $9.30 per K-I Share; and 2,000 K-T Shares for aggregate gross proceeds of $20,000, or $10.00 per K-T Share. During the same period, pursuant to the DRIP, the Company had issued 2,926 K Shares at a price of $9.50 per K Share for aggregate gross proceeds of $27,797, 2,669 K-I Shares at a price of $9.50 per K-I Share for aggregate gross proceeds of $25,354, and 373 K-T Shares at a price of $9.50 per K-T Share for aggregate gross proceeds of $3,545.

 

On February 27, 2020, as partial consideration for the Company’s acquisition of the Hilton Garden Inn Providence, the Operating Partnership issued 128,124 Class K OP Units valued at $10.00 per Class K OP Unit. Such issuance represents a total investment of $1,281,244 in Class K OP Units of the Operating Partnership. Individuals with direct or indirect interests in the sellers of the Hilton Garden Inn Providence who are direct or indirect owners of the Company’s Sponsor and PHA received only Class K OP Units and no cash as consideration.

 

Subsequent to March 31, 2020, in response to adverse effects of COVID-19, the Company’s board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as the Company’s board of directors approves their resumption.

 

There were no sales of any classes of the Company’s stock subsequent to March 31, 2020 and through May 15, 2020, pursuant to the primary portion of the Public Offering, nor any shares issued pursuant to the DRIP.

 

PHA was obligated to purchase sufficient A Shares to fund payment of organization and offering expenses associated with the Private Offering, and is obligated to purchase sufficient A Shares to fund payment of organization and offering expenses related to the Public Offering and also to account for the difference between the applicable NAV per K-I Share and the applicable offering price per K-I Share and any amount equal to any discount to the initial offering price of K Shares, K-I Shares and K-T Shares (excluding volume discounts). PHA’s obligation can be fulfilled by its affiliates, including the Sponsor or entities affiliated with the Sponsor.

 

The Company paid S2K Financial LLC (the “dealer manager”), as dealer manager of the Private Offering, selling commissions of up to 7% of the gross offering proceeds from the sale of K Shares and Units in the Private Offering. The dealer manager re-allowed all selling commissions to participating broker-dealers. The Company also paid the dealer manager a dealer manager fee of up to 3% of the gross offering proceeds from the sale of K Shares and Units. The dealer manager could re-allow a portion of its dealer manager fees to participating broker-dealers. Selling commissions and dealer manager fees were paid with proceeds from the sale of A Shares to PHA or its affiliates. There were no selling commissions or dealer manager fees payable on account of shares of any class purchased by PHA, S2K Servicing LLC, or their affiliates. As of March 31, 2020, the Company recognized $1,058,501 of selling commissions and dealer manager fees in connection with the Private Offering.

 

21

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company pays the dealer manager selling commissions of up to 7% of the gross offering proceeds from the sale of K Shares and selling commissions of up to 3% of the gross offering proceeds from the sale of K-T Shares in the primary portion of the Public Offering. No selling commissions are payable in connection with the sale of K-I Shares. The dealer manager may re-allow all selling commissions to participating broker-dealers. The Company also pays the dealer manager a dealer manager fee of up to 3% of the gross offering proceeds from the sale of K Shares, K-I Shares and K-T Shares sold in the primary portion of the Public Offering. The dealer manager may allow a portion of its dealer manager fees to participating broker-dealers. Selling commission and dealer manager fees are generally paid with proceeds from the sale of A Shares to PHA or its affiliates. There are no selling commissions or dealer manager fees payable on account of shares of any class purchased by PHA, S2K Servicing LLC, or any K Shares, K-I Shares and K-T Shares sold pursuant to the DRIP. The selling commissions and dealer manager fees may be reduced or waived in connection with certain categories of sales. As of March 31, 2020, the Company recognized $2,210,265 of selling commissions and dealer manager fees in connection with the Public Offering.

 

The Company also pays the dealer manager with respect to each K-T Share sold in the primary portion of the Public Offering, a stockholder servicing fee equal to 1%, annualized, of the amount of the Company’s estimated NAV per K-T Share for each K-T Share purchased in the primary portion of the Public Offering, for providing services to a holder of K-T Shares. The stockholder servicing fee accrues daily and is payable monthly in arrears. The dealer manager will reallow all or a portion of the stockholder servicing fee to participating broker-dealers and servicing broker-dealers. The Company will cease paying the stockholder servicing fee with respect to K-T Shares sold in the primary portion of the Public Offering in accordance with the terms set forth in the prospectus portion of the Registration Statement. As of March 31, 2020, the Company recognized $2,588 of stockholder servicing fees in connection with the Public Offering.

 

If the Company’s board of directors determines, in any year, that the Company has excess cash, the Company’s board of directors will declare a special distribution entitling (a) the holders of K Shares, K-I Shares, K-T Shares to share, pro rata in accordance with the number of K Shares, K-I Shares and K-T Shares, 50% of such excess cash (or 87.5% of such excess cash if the A Shares have been repurchased in connection with a Non-cause Advisory Agreement Termination; (b) the holders of B Shares to share, pro rata in accordance with the number of B Shares, 12.5% of excess cash; and (c) the holders of A Shares (including PHA or its affiliates) to shares, pro rata in accordance with the number of A Shares, 37.5% of such excess cash (unless all such A Shares previously have been repurchased in connection with a Non-cause Advisory Agreement Termination, in which case the excess cash otherwise apportioned to the A Shares would be distributed to the holders of the K Shares, K-I Shares and K-T Shares as noted above).

 

Upon a liquidation event, any remaining liquidation cash will be paid as a special distribution (a) to the holders of K Shares, K-I Shares and K-T Shares, pro rata in accordance with the number of K Shares, K-I Shares and K-T Shares, 50% of such excess cash (or 87.5% of such excess cash if the A Shares have been repurchased in connection with a Non-cause Advisory Agreement Termination); (b) to the holders of B Shares, pro rata in accordance with the number of B Shares, 12.5% of excess cash; and (c) to the holders of A Shares (including PHA or its affiliates), pro rata in accordance with the number of A Shares, 37.5% of such excess cash (unless all such A Shares previously have been repurchased in connection with a Non-cause Advisory Agreement Termination, in which case the excess cash otherwise apportioned to the A Shares would be distributed to the holders of the K  Shares, K-I Shares and K-T Shares as noted above).

 

The Company established a long-term incentive plan pursuant to which the Company’s board of directors (including independent directors), officer and employees, PHA and its affiliates and their respective employees, employees of entities that provide services to the Company, managers of the Company’s advisor or directors or managers of entities that provide services to the Company and their respective employees, certain of the Company’s consultants and certain consultants to PHA and its affiliates or entities that provide services to the Company and their respective employees may be granted incentive awards in the form of restricted stock, options, and other equity-based awards.

 

22

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In accordance with the Company’s long-term incentive plan, each new independent director that joins the Company’s board of directors is awarded 250 restricted K Shares in connection to his or her initial election to the board of directors. In addition, in connection with an independent director’s re-election to the Company’s board of directors at each annual meeting of stockholders, he or she will receive an additional 250 restricted K Shares. Restricted K Shares issued to independent directors will vest in equal amounts annually over a four-year period on and following the first anniversary of the date of grant in increments of 25% per annum; provided, however, that the restricted K Shares will become fully vested on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company. On February 11, 2019, the Company issued 500 restricted K Shares to each of the Company’s three independent directors for a total of 1,500 restricted K Shares. These awards were in relation to their initial election to the board of directors and their re-election. An additional 250 restricted K Shares were awarded to each independent director upon his or her re-election at the Company’s 2019 annual meeting of stockholders on July 11, 2019.

 

Share Repurchase Program and Redeemable Common Stock

 

The Company’s share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to the Company, subject to restrictions and applicable law. The Company is not required to repurchase shares. The share repurchase program is only intended to provide interim liquidity to stockholders until a liquidity event occurs, such as the commencement of execution on a plan of liquidation, the listing of the K Shares, K-I Shares or K-T Shares (or successor security) on a national securities exchange, or the Company’s merger with a listed company. The Company cannot guarantee that a liquidity event will occur.

 

On October 26, 2018, the Company’s board of directors approved and adopted the Amended and Restated Share Repurchase Program (the “A&R SRP”). The A&R SRP provides that the Company will not repurchase in excess of 5.0% of the weighted average number of K Shares, K-I Shares and K-T Shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which repurchases are being paid (provided, however, that while shares subject to a repurchase requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be repurchased, shares subject to a repurchase requested upon the death of a stockholder will not be subject to the percentage cap). Additionally, in the event that any stockholder fails to maintain a minimum balance of $2,000 of K Shares, K-I Shares or K-T Shares, the Company may repurchase all of the shares held by that stockholder at the per share repurchase price in effect on the date the Company determines that the stockholder has failed to meet the minimum balance, less any applicable repurchase discount. Minimum account repurchases will apply even in the event that the failure to meet the minimum balance is caused solely by a decline in the Company’s estimated NAV per share.

 

In addition, the Company’s repurchase of any shares will be limited to the extent that the Company does not have, as determined in the Company’s board of directors’ discretion, sufficient funds available to fund any such repurchase. Most of the Company’s assets will consist of properties which cannot be readily liquidated without affecting the Company’s ability to realize full value upon their disposition. Therefore, the Company may not have sufficient liquid resources to satisfy all repurchase requests. In addition, the Company’s board of directors may amend, suspend (in whole or in part) or terminate the A&R SRP at any time upon 30 days’ notice to stockholders. Further, the Company’s board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.

 

In the event the Company cannot repurchase all shares presented for repurchase in any fiscal quarter, based upon insufficient cash available and/or the limit on the number of shares it may repurchase, the Company would give first priority to the repurchase of deceased stockholders’ shares. The Company would next give priority to (i) requests of stockholders with “qualifying disabilities” (as defined in the A&R SRP), and in the discretion of the Company’s board of directors, stockholders with another involuntary exigent circumstance, such as bankruptcy, and (ii) next, to requests for full repurchases of accounts with a balance of 100 or less shares at the time the Company receives the request, in order to reduce the expense of maintaining small accounts. Thereafter, the Company will honor the remaining quarterly repurchase requests on a pro-rata basis. Unfulfilled requests will be carried over automatically to subsequent repurchase periods unless a stockholder withdraws a request pursuant to the terms of the A&R SRP.

 

23

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Repurchases of K Shares, K-I Shares and K-T Shares will be made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Valid repurchase requests will be honored approximately 30 days following the end of the applicable quarter (the “Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to five business days prior to the Repurchase Date.

 

No shares can be repurchased under the Company’s A&R SRP until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder. Additionally, any shares purchased pursuant to the Company’s DRIP will be excluded from the one-year holding requirement. For stockholders that have made more than one purchase of K Shares, K-I Shares or K-T Shares in the Public Offering and/or Private Offering, the one-year holding period will be calculated separately with respect to each such purchase. Repurchases of K Shares, K-I Shares and K-T Shares, when requested, are at the Company’s sole discretion and generally will be made quarterly. Shares repurchased under the A&R SRP program will become unissued shares and will not be resold unless such sales are made pursuant to transactions that are registered or exempt from registration under applicable securities laws. The Company will not pay its Sponsor, board of directors, PHA or their affiliates any fees to complete transactions under the A&R SRP.

 

The per share repurchase price will depend on the length of time the stockholder has held such shares as follows:

 

Share Purchase Anniversary   Repurchase Price on Repurchase Date
Less than 1 year   No Repurchase Allowed
1 year   92.5% of most recent per share NAV
2 years   95.0% of most recent per share NAV
3 years   97.5% of most recent per share NAV
4 years   100.0% of most recent per share NAV
In the event of a stockholder's death or disability 100.0% of most recent per share NAV

 

Notwithstanding the foregoing, pursuant to securities laws and regulations, at any time the Company is engaged in an offering, the repurchase amount shall never be more than the current offering price of such shares. Shares repurchased in connection with a stockholder’s bankruptcy or other exigent circumstance, in the sole discretion of the Company’s board of directors, within one year from the purchase date will be repurchased at a price per share equal to the price per share the Company would pay had the stockholder held the shares for one year from the purchase date.

 

The purchase price for repurchased shares will be adjusted for any stock dividends, combinations, splits, recapitalizations, or similar corporate actions with respect to the Company’s common stock. If the Company has sold any properties and have made one or more special distributions to stockholders of all or a portion of the net proceeds from such sales, the per share repurchase price will be reduced by the net sale proceeds per share distributed to stockholders prior to the repurchase date to the extent such distributions are not used to pay accumulated, accrued and unpaid distributions on such K Shares, K-I Shares and K-T Shares. The Company’s board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While the Company’s board of directors does not have specific criteria for determining a special distribution, the Company expects that a special distribution will occur only upon the sale of a property and the subsequent distribution of net sale proceeds.

 

On March 20, 2020, the Company’s board of directors decided to temporarily suspend repurchases under the Company’s A&R SRP effective with repurchase requests that would otherwise be processed in April 2020 due to the negative impact of COVID-19 pandemic on the Company’s portfolio to date. However, the Company will continue to process repurchases due to death in accordance with the terms of its A&R SRP. The Company will announce any updates concerning the Company’s A&R SRP in a Current Report on Form 8-K. Any unprocessed requests will automatically roll over to be considered for repurchase when the Company fully reopens its A&R SRP unless a stockholder withdraws the request for repurchase five business days prior to the next repurchase date.

 

24

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

During the three months ended March 31, 2020, the Company did not fulfill any repurchase requests. The Company generally repurchases shares approximately 30 days following the end of the applicable quarter in which requests were received.

 

The Company’s board of directors approved two outstanding repurchase requests due to death that were received during the three months ended March 31, 2020 and on May 1, 2020, the Company repurchased 23,500 K Shares for $235,000, or $10.00 per K Share. The Company currently has one unfulfilled standard repurchase request that was received during the three months ended March 31, 2020 for 2,500 K Shares for $23,750, or $9.50 per K Share outstanding.

 

During the three months ended March 31, 2019, the Company did not receive any repurchase requests and as of March 31, 2019, there were no outstanding and unfulfilled repurchase requests.

 

Distributions

 

On January 25, 2019, the Company’s board of directors authorized the payment of distributions with respect to each K Share, K-I Share and K-T Share outstanding as of December 31, 2018, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on January 28, 2019. The board of directors determined that, with respect to the K Shares, K-I Share and K-T Share outstanding as of December 31, 2018, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share, K-I Shares and K-T Shares since September 30, 2018, was $193,826, or $0.0016438356 per K Share per day, $1,123, or $0.0016438356 per K-I Share per day, and $29, or $0.0013698656 per K-T Share per day, respectively. Such distributions were paid to stockholders in cash or in additional shares pursuant to the DRIP on January 31, 2019.

 

On April 29, 2019, the Company’s board of directors authorized the payment of distributions with respect to each K Share, K-I Share and K-T Share outstanding as of March 31, 2019, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on April 30, 2019. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of March 31, 2019, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share and K-I Share outstanding since December 31, 2018, and with respect to each K-T Share outstanding since the date the first K-T Share was issued by the Company less any distributions previously paid with respect to such K-T Shares, was $225,280, $4,722, and $88, respectively, or $0.0016438356 per K Share per day, $0.0016438356 per K-I Share per day, and $0.0016438356 per K-T Share per day. Such distributions were paid to stockholders in cash or in additional shares pursuant to the DRIP on May 1, 2019.

 

On July 31, 2019, the Company’s board of directors authorized the payment of distributions with respect to each K Share, K-I Share and K-T Share outstanding as of June 30, 2019, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on August 1, 2019. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of June 30, 2019, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share, K-I Share and K-T Share outstanding since March 31, 2019, was $272,176, $22,536, and $531, respectively, or $0.0016438356 per K Share per day, $0.0016438356 per K-I Share per day, and $0.0016438356 per K-T Share per day. Such distributions were paid to stockholders in cash or in additional shares pursuant to the DRIP on August 2, 2019.

 

On October 29, 2019, the Company’s board of directors authorized the payment of distributions with respect to each K Share, K-I Share and K-T Share outstanding as of September 30, 2019, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on October 31, 2019. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of September 30, 2019, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share, K-I Share and K-T Share outstanding since June 30, 2019, was $331,011, $50,842, and $1,857, respectively, or $0.0016438356 per K Share per day, $0.0016438356 per K-I Share per day, and $0.0016438356 per K-T Share per day. Such distributions were paid to stockholders in cash or in additional shares pursuant to the DRIP on November 1, 2019.

 

25

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On January 23, 2020, the Company’s board of directors authorized the payment of distributions, with respect to each K Share, K-I Share and K-T Share outstanding as of December 31, 2019, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on January 28, 2020. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of December 31, 2019, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share, K-I Shares and K-T Shares since September 30, 2019, was $378,942, or $0.0016438356 per K Share per day, $65,432, or $0.0016438356 per K-I Share per day, and $6,023, or $0.0016438356 per K-T Share per day, respectively. Such distributions were paid to stockholders in cash or in additional shares pursuant to the DRIP on January 31, 2020.

 

On April 29, 2020, the Company’s board of directors authorized the payment of distributions, with respect to each K Share, K-I Share and K-T Share outstanding as of March 31, 2020, to the holders of record of K Shares, K-I Shares and K-T Shares as of the close of business on April 30, 2020. With respect to the K Shares, K-I Shares and K-T Shares outstanding as of March 31, 2020, the cumulative amount of distributions that had accrued on a daily basis with respect to each K Share, K-I Shares and K-T Shares since December 31, 2019, was $453,908, or $0.0016393443 per K Share per day, $83,629, or $0.0016393443 per K-I Share per day, and $7,029 or $0. 0016393443 per K-T Share per day, respectively. Such distributions were paid to stockholders in cash on May 1, 2020.

 

On March 3, 2020, the Company’s stockholders approved to amend the Company’s charter (1) to increase the rate at which cash distributions on K Shares, K-I Shares and K-T Shares automatically accrue under the Company’s charter from 6% to 7% per annum of the K Share Distribution Base of such K Share, K-I Share Distribution Base of such K-I Share and K-T Share Distribution Base of such K-T Share, respectively, and (2) to increase the maximum rate at which distributions on A Shares may be authorized by the Company’s board of directors and declared by the Company from 6% to 7% of the stated value of an A Share ($10.00) from income and cash flow from ordinary operations on a cumulative basis. The changes pursuant to the Articles of Amendment to the Company’s charter are effective beginning with distributions that accrued on March 31, 2020.

 

The Company paid quarterly distributions with respect to the quarter ended March 31, 2020 with operating cash flow, consistent with prior distributions. The Company’s board of directors will make determinations as to the payment of future distributions on a quarter by quarter basis; however, distributions will continue to accrue pursuant to the Company’s charter.

 

Note 8 - Income Taxes

 

The Company recognized income tax expense of $7,029 and an income tax benefit of $49,764 for the three months ended March 31, 2020 and 2019, respectively. These amounts relate to the operations of the Company’s TRSs.

 

Note 9 – Subsequent Events

 

Suspension of sale of Shares

 

On April 7, 2020, the Company’s board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as the Board approves their resumption.

 

The Company’s board of directors made this difficult decision because it does not believe it is appropriate for the Company to continue to sell shares of common stock until it has determined an updated NAV per share. The Company expects to release an updated NAV per share of all classes of its capital stock calculated as of March 31, 2020 when available, which it expects to be lower than the current NAV per share.

 

Entry into a Material Definitive Agreement

 

Due to the market and economic challenges impacting the Company and the hospitality industry as a whole as a result of the ongoing COVID-19 pandemic, which has resulted in significant declines in the Company’s properties’ revenues, and the uncertainty of the rapidly developing situation, the Company entered into loan modification agreements with certain of its lenders to relieve some pressure on these properties during this time, as described in more detail below.

 

26

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Modification to Hotel Indigo Traverse City Loan Documents

 

On April 21, 2020, a subsidiary of the Operating Partnership, entered into a First Amendment to Loan Agreement and Other Loan Documents (the “Hotel Indigo Loan Modification Documents”) with its existing lender, Citizens Bank, N.A. (“Citizens Bank”), to amend the terms of its mortgage loan on the Hotel Indigo Traverse City property located in Traverse City, Michigan. Pursuant to the Hotel Indigo Loan Modification Documents, the interest only payments that were scheduled to be paid on April 1, 2020, May 1, 2020 and June 1, 2020 shall be deferred (collectively, the “Deferred Payments”). The Deferred Payments will not accrue interest but shall be deemed principal to be due and payable in full on or before June 30, 2021. Regularly scheduled interest payments will recommence on July 1, 2020. Prepayment of the Deferred Payments is allowed without penalty and the Operating Partnership’s obligation to pay the Deferred Payments may be accelerated by Citizens Bank as allowed under the Loan Documents. In addition, Citizens Bank waived the Operating Partnership’s requirement to achieve the stated debt service coverage ratio for the period from January 1, 2020 through June 30, 2021. The Hotel Indigo Loan Modification Documents also provide that all net worth, liquidity and financial covenant testing and any requirements of the guarantor, which is TH Investment Holdings II, LLC, an affiliate of the Sponsor, to comply with such covenants are waived from January 1, 2020 through June 30, 2021.

 

Concurrent with the loan modification, the Operating Partnership, through its subsidiary, entered into a Swap Modification Agreement with Citizens Bank (the “Swap Modification Agreement”) to modify the swap derivative contract with Citizens Bank that fixes the interest rate on the outstanding balance of the mortgage loan. The Swap Modification Agreement modifies the requirements to make payments under the swap derivative contract and provides for a deferral of any payments during the period beginning on April 21, 2020 and ending on the earliest to occur of (i) July 1, 2020 or (ii) a Modification Termination Event (as defined in the Swap Modification Agreement).

 

Modification to Hilton Garden Inn Loan Documents

 

On April 23, 2020, the Operating Partnership, through its subsidiary, and the Company entered into an Omnibus Amendment and Reaffirmation Agreement (the “Hilton Garden Inn Loan Modification Agreement”) with the existing lender, East Boston Savings Bank, to amend the terms of the mortgage loan and loan documents on the Hilton Garden Inn Providence property located in Providence, Rhode Island. Pursuant to the Hilton Garden Inn Loan Modification Agreement, interest only payments that were due on the six consecutive payment days starting with the payment scheduled for April 2020 will be deferred until the date that is twelve months after the date each payment was originally due. Further, all financial covenant testing and any other requirements of the Operating Partnership to comply with such covenants are waived until the year ending December 31, 2021. The Hilton Garden Inn Loan Modification Agreement also provides that all net worth, liquidity and financial covenant testing and any requirements of the Company as guarantor to comply with such covenants are waived until the year ending December 31, 2021.

 

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)

 

The federal government announced its intention to provide various forms of aid to the industries negatively affected by the virus, including the hospitality industry, and on March 27, 2020, the CARES Act was adopted, which, among other things, provides emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. The CARES Act also included the establishment of the Paycheck Protection Program (“PPP”), a Small Business Association loan to businesses with fewer than 500 employees that may be partially forgivable. As of May 15, 2020, the Company has received $1,019,117 in PPP loans relating to the four hotel properties (the “PPP Loans”). The PPP Loans accrue interest at 1.00% per annum and may be prepaid in whole or in part without penalty. Principal and interest are payable in 18 monthly installments beginning on October 20, 2020, plus a final payment equal to all unpaid principal and accrued interest on the maturity dates. Pursuant to the CARES Act, the Company can apply for, and be granted, forgiveness for all or a portion of the PPP Loans and such forgiveness will be determined, subject to limitations and ongoing rulemaking by the U.S. Small Business Administration, based on the use of loan proceeds for payroll costs, mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. The Company intends to use all of the proceeds from the PPP Loans to retain employees and maintain payroll and make mortgage payments and utility payments to support business continuity throughout the COVID-19 pandemic, which amounts are intended to be eligible for forgiveness, subject to the provisions of the CARES Act. However, no assurance is provided that the Company will obtain forgiveness of the PPP Loans in whole or in part.

 

27

 

 

Procaccianti Hotel REIT, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Novel Coronavirus (COVID-19)

 

The global and domestic response to the COVID-19 outbreak continues to rapidly evolve. Thus far, certain responses to the COVID -19 outbreak have included mandates from federal, state and/or local authorities that required temporary closure of certain travel and hospitality. As a result of COVID-19 the New Hanover County North Carolina Board of Commissioners instituted a State of Emergency effective March 28, 2020. Accordingly, as a result of this declaration our Springhill Suites hotel in Wilmington, NC was instructed to close effective March 30, 2020 and remained closed until May 1, 2020. The Company has implemented cost elimination and efficiency initiatives at each of the hotels by reducing labor costs and tempering certain services and amenities. The COVID-19 outbreak and associated responses could negatively impact future hotel revenues and operations at the Company’s properties, which could result in a material impact to the Company’s future results of operations, cash flows and financial condition. The Company believes cash and restricted cash on hand, cash generated from operations, proceeds from the Company’s Public Offering and borrowings from other sources, including advances from the Company’s Sponsor, if necessary, will be sufficient to meet the Company’s anticipated cash needs for at least the next 12 months.

 

The Company was in compliance with its mortgage notes payable debt covenants as of March 31, 2020. In response to COVID-19, the creditors for the Indigo Traverse City and the Hilton Garden Inn Providence have waived financial covenant testing for the respective mortgage notes through at least June 30, 2021. The creditors for both the Staybridge Suites St. Petersburg and Springhill Suites Wilmington have not modified the terms of their respective mortgage notes. Therefore, any sustained material adverse impact on the Company’s revenues, net income and other operating results due to COVID-19 could cause the financial covenants under the Company’s loan agreements to be adversely affected.

 

28

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.

 

As used herein, the terms “we,” “our” and “us” refer to Procaccianti Hotel REIT, Inc., a Maryland corporation and, as required by context, Procaccianti Hotel REIT, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their respective subsidiaries.

 

The following discussions and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”). The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 30, 2020.

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

our ability to raise proceeds in our Public Offering (as defined below);

 

our ability to effectively deploy the proceeds raised in our Public Offering;

 

adverse effects of the novel strain of coronavirus (COVID-19), including a potential general reduction in business and personal travel and potential travel restrictions in regions where our hotels are located;

 

changes in economic conditions generally and the real estate and debt markets specifically;

 

our ability to obtain financing on acceptable terms;

 

our levels of debt and the terms and limitations imposed on us by our debt agreements;

 

our ability to successfully identify and acquire properties on terms that are favorable to us;

 

29

 

 

risks inherent in the real estate business, including potential liability relating to environmental matters and the lack of liquidity of real estate investments;

 

changes in demand for rooms at our hotel properties;

 

the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s-length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us;

 

our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor;

 

our ability to generate sufficient cash flows to pay distributions to our stockholders;

 

legislative or regulatory changes (including changes to the laws governing the taxation of REITs (as defined below);

 

the availability of capital;

 

changes in interest rates; and

 

changes to U.S. generally accepted accounting principles (“GAAP”).

 

Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.

 

Overview

 

Procaccianti Hotel REIT, Inc., (which is referred to in this Quarterly Report, as context requires, as the “Company,” “we,” “us,” or “our”) was formed on August 24, 2016, under the laws of Maryland to acquire and own a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay and compact full-service hotel properties throughout the United States. As of March 31, 2020, we owned an interest in four select-service hotel properties. We elected to be taxed as, and currently operate as, a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2018.

 

Substantially all of our business is conducted through Procaccianti Hotel REIT, L.P., a Delaware limited partnership (the “Operating Partnership”). We are the sole general partner of the Operating Partnership. We are externally managed by our advisor, Procaccianti Hotel Advisors, LLC (“PHA”) pursuant to an advisory agreement by and among us, our Operating Partnership and PHA, dated August 2, 2019 (as amended, the “Advisory Agreement”). PHA is an affiliate of our sponsor, Procaccianti Companies, Inc. (“Sponsor”).

 

Subscription proceeds from K Shares, K-I Shares and K-T Shares in our Private Offering and our Public Offering, as discussed below, have been and will be applied to investments in hotel properties or real estate-related investments relating to hotel properties. We will experience a relative increase in liquidity as we receive additional subscriptions for shares and a relative decrease in liquidity as we spend net offering proceeds in connection with the acquisition and operation of our hotel properties. The number of properties and other assets we will acquire will depend upon the number of shares sold and the resulting amount of net proceeds available for investment in properties and other assets.

 

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We intend to make reserve allocations as necessary to aid our objective of preserving capital for our investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties. There is no assurance that such funds will be available, or if available, that the terms will be acceptable to us.

 

On September 30, 2016, we commenced a private offering (“Private Offering”) of shares of Class K common stock, $0.01 par value per share (“K Shares”), and units, which are comprised of four K Shares and one share of Class A common stock, each $0.01 par value per share (“Units”), for $10.00 per K Share and $50.00 per Unit, with a targeted maximum offering of  $150,000,000 in K Shares (including K Shares sold as part of a Unit) to accredited investors only pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). PHA and its affiliates agreed to purchase Class A common stock (separate from the purchase of Units), at $10.00 per share (“A Shares”). We terminated our Private Offering prior to the commencement of the Public Offering (as defined below), and, as of such termination, received approximately $15,582,755 in gross proceeds from the sale of K Shares and A Shares, including Units, in the Private Offering. Of the $15,582,755 in gross proceeds received, $2,954,095 was from the sale of A Shares to TPG Hotel REIT Investor, LLC (“THR”), an affiliate of PHA, to fund organization and offering expenses associated with the K Shares and Units.

 

On August 14, 2018, we commenced our public offering (“Public Offering”) pursuant to a Registration Statement on Form S-11 (Registration No. 333-217578) (“Registration Statement”), filed under the Securities Act with the U.S. Securities and Exchange Commission (“SEC”), to offer up to $550,000,000 in shares of common stock, including $500,000,000 in shares of common stock pursuant to the primary offering, consisting of the following three share classes: K Shares at an initial offering price of $10.00 per K Share, K-I Shares (“K-I Shares”), at an initial offering price of $9.50 per K-I Share, and K-T Shares (“K-T Shares”), at an initial offering price of $10.00 per K-T Share and $50,000,000 in shares of common stock pursuant to our distribution reinvestment plan (the “DRIP”), at $9.50 per K Share, $9.50 per K-I Share and $9.50 per K-T Share. On November 16, 2018, we revised the offering price per K-I Share in the primary offering from $9.50 to $9.30 per K-I Share.

 

On May 23, 2019, our board of directors determined an estimated net asset value (“NAV”) per share of all classes of our capital stock, each calculated as of March 31, 2019, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $3.97 per A Share; and (v) $0.00 per B Share. On March 22, 2018, our board of directors determined an estimated NAV per share of all classes of the our capital stock, each calculated as of February 28, 2018, as follows: (i) $10.00 per K Share; (ii) $10.00 per K-I Share; (iii) $10.00 per K-T Share; (iv) $0.00 per A Share; and (v) $0.00 per B Share. The NAV per share of all classes of our capital stock was published before the COVID-19 pandemic, and may differ significantly from our actual estimated NAV per share until such time as sufficient information is available and analyzed, the financial impact is fully evaluated, and the appropriate adjustment is made to the our estimated NAV per share, as determined by the board of directors. Any resulting disparity may be to the detriment of a purchaser of our shares. We expect to release an updated NAV per share of all classes of our capital stock calculated as of March 31, 2020, which may be lower than the current NAV per share of all classes of our capital stock.

 

Since the commencement of the Public Offering and as of March 31, 2020, we received approximately $27,030,674 in gross proceeds from the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, inclusive of proceeds from the sale of $55,899 of K Shares, $57,950 of K-I Shares and $4,175 of K-T Shares pursuant to the DRIP. Additionally, on October 26, 2018 and June 10, 2019, we received $1,500,000 and $690,000, respectively, from the sale of A Shares to THR in private placements. We intend to use the proceeds from A Shares to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we will allocate proceeds from the sale of A shares in amounts that represent the difference between (i) the applicable estimated NAV per K-I Share and the offering price of K-I Shares sold in our primary offering and (ii) any discount to the initial offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer manager fees.

 

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As of May 15, 2020, we had sold 3,328,516 K Shares, 631,699 K-I Shares, 47,989 K-T Shares and 537,410 A Shares in all our offerings for gross proceeds of $33,071,604, $5,878,256, $479,675 and $5,374,095, respectively, and $44,803,630 in the aggregate. These gross proceeds are inclusive of 5,884 K Shares, 6,100 K-I Shares and 439 K-T Shares issued pursuant to our DRIP, for gross offering proceeds of $55,899, $57,950 and $4,175, respectively, or $118,024 in the aggregate.

 

On April 7, 2020, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as our board of directors approves their resumption.

 

We expect to offer shares of our common stock in the Public Offering over a two-year period. If we have not sold all of the shares to be offered in the Public Offering within two years from the effective date of the Registration Statement, we may continue the Public Offering until August 14, 2021. We may, in our sole discretion, terminate the Public Offering at any time.

 

If our board of directors determines that it is in our best interest, we may conduct follow-on public offerings upon the termination of the Public Offering. Our charter does not restrict our ability to conduct offerings in the future.

 

S2K Financial LLC is the dealer manager for our offering and is responsible for the distribution of our common stock in our offering. PHA is our advisor and is an affiliate of our Sponsor. Subject to certain restrictions and limitations, PHA manages our day-to-day operations and our portfolio of properties and real estate-related assets. PHA sources and presents investment opportunities to our board of directors and provides investment management, marketing, investor relations and other administrative services on our behalf. We have no paid employees and rely on PHA to provide substantially all of our services. Pursuant to our Advisory Agreement with PHA, we will reimburse PHA for costs incurred in providing these administrative services. PHA will be required to allocate the cost of such services to us based on objective factors such as total assets, revenues and/or time allocations. At least annually, our board of directors will review the amount of administrative services expense reimbursable to PHA to determine whether such amounts are reasonable in relation to the services provided. As of March 31, 2020, PHA has forfeited its right to collect reimbursement for providing these administrative services provided through such date.

 

In addition, pursuant to provisions contained in our charter and in the Advisory Agreement, our board of directors has the ongoing responsibility of limiting our total operating expenses (as defined in our charter) for the trailing four consecutive quarters to amounts that do not exceed the greater of 2% of our average invested assets (as defined in our charter) or 25% of our net income (as defined in our charter), calculated in the manner set forth in our charter, unless a majority of the directors (including a majority of the independent directors) has made a finding that, based on unusual and non-recurring factors that they deem sufficient, a higher level of expenses is justified. In the event that a majority of the directors (including a majority of the independent directors) does not determine that such excess expenses are justified, PHA must reimburse to us the amount of the excess expenses paid or incurred (the “Excess Amount”).

 

During the twelve months ended March 31, 2019, the twelve months ended June 30, 2019, the twelve months ended September 30, 2019, the twelve months ended December 31, 2019, and the twelve months ended March 31, 2020, our total operating expenses exceeded the greater of 2% of our average invested assets and 25% of our net income, or Excess Amounts. We incurred operating expenses of approximately $1,520,345 and incurred an Excess Amount of approximately $1,273,355 during the twelve months ended March 31, 2019. We incurred operating expenses of approximately $1,567,373 and incurred an Excess Amount of approximately $1,143,625 during the twelve months ended June 30, 2019. We incurred operating expenses of approximately $1,529,939 and incurred an Excess Amount of approximately $760,883 during the twelve months ended September 30, 2019. We incurred operating expenses of approximately $1,445,599 and incurred an Excess Amount of approximately $640,437 during the twelve months ended December 31, 2019. We incurred operating expenses of approximately $1,551,924 and incurred an Excess Amount of approximately $1,076,317 during the twelve months ended March 31, 2020. Our board of directors (including a majority of our independent directors) determined that the Excess Amount for each of the twelve months ended March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020, was justified as unusual and non-recurring as we are in the early stages of raising and deploying capital.

 

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Because we are prohibited from operating hotel properties pursuant to certain tax laws relating to our qualification as a REIT, the entities through which we own hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays federal income tax at regular corporate rates on its taxable income. The TRSs will enter into any franchise agreements to brand our hotels and will generally enter into property management agreements with one or more affiliated property management companies. These may include TPG Hotels & Resorts, Inc., an affiliate of our Sponsor and PHA, or TPG Hotels & Resorts, Inc.’s wholly owned subsidiaries, which we collectively refer to as TPG, or other affiliates or designees of TPG. We expect our property manager will operate and manage all or substantially all of our hotel properties.

 

We anticipate that we will acquire properties with property management agreements that can be terminated with little or no cost. In such cases, our TRSs will enter into property management agreements with one or more property management companies affiliated with our Sponsor. We expect our property manager will operate and manage all or substantially all of our hotel properties. We collectively refer to TPG and other property management companies affiliated with our Sponsor as our property manager.

 

PHA and affiliated property managers will be entitled to receive fees during the acquisition and operational stages of the Company, and PHA may be eligible to receive fees during the liquidation stage of the Company. S2K Financial LLC has received and will continue to receive fees for services related to offering our securities.

 

We elected to be taxed as, and currently qualify as, a REIT under the Code commencing with our taxable year ended December 31, 2018. As a REIT, we generally will not be subject to U.S. federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year following the year we initially elect to be taxed as a REIT, we will be subject to U.S. federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.

 

Recent Developments

 

COVID-19 Impact

 

The negative impact on room demand within our portfolio stemming from the novel coronavirus (COVID-19) is significant. We experienced an initial decline in hotel revenue that began in February. However, with the increased spread of the novel coronavirus (COVID-19) across the globe, the impact has accelerated rapidly, and we are seeing a much greater effect on occupancy and hotel revenue per room (“RevPAR”) throughout our hotel portfolio. We expect the occupancy and RevPAR reduction associated with the novel coronavirus (COVID-19) to continue as we are experiencing significant reservation cancellations as well as a significant reduction in new reservations relative to prior expectations. While intense efforts to reduce operating costs are underway, we cannot be certain as to what level of savings can be achieved overall to mitigate the material decline in hotel revenues we are experiencing. The federal government announced its intention to provide various forms of aid to the industries negatively affected by the virus, including the hospitality industry, and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was adopted, which, among other things, provides emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. The CARES Act also included the establishment of the Paycheck Protection Program (“PPP”), a Small Business Association loan to businesses with fewer than 500 employees that may be partially forgivable. As of May 15, 2020, we have received $1,019,117 in PPP loans relating to our four hotel properties. Until such time as the virus is contained or eradicated and business and personal travel return to more customary levels, we expect to see substantial erosion in hotel cash flow. There may also be lasting effects related to the novel coronavirus (COVID-19). For an unknown period related to a slowdown in the U.S. economy, increased labor costs, increased operating costs, reduced air travel or other unknown factors which could materially reduce our operating cash flow. Further, the market and economic challenges associated with COVID-19 could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.

 

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Market Outlook

 

The hospitality industry has been severely disrupted due to travel and other policy restrictions related to the novel coronavirus (COVID-19) and as a result, our hotels have experienced steep and significant declines in occupancy. These developments have led to material and significant declines in anticipated revenue for us for the first quarter of 2020 and we expect the same to continue into at least the second quarter of 2020.

 

We are deeply committed to the overall health and safety of all hotel associates and guests and will continue to work closely with our management company to ensure appropriate measures are in place as the situation evolves. During periods of dramatic changes in hotel demand and travel, we will rely on our experience and the hotel brand protocols, to deploy best practices across our portfolio and take thoughtful steps to attempt to mitigate revenue declines and preserve our assets to the best extent possible. Given the size and geographic diversification of our portfolio of hotel properties, we believe that we will be well positioned to emerge from this period when the pandemic wanes in the future.

 

Critical Accounting Policies 

 

Our accounting policies have been established to conform with GAAP. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates was included in our Annual Report.

 

Income Taxes

 

We elected to be taxed as, and currently qualify as, a REIT under the Code and have operated as such commencing with our taxable year ended December 31, 2018. To qualify as a REIT for tax purposes, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). We must also meet certain asset and income tests, as well as other requirements. As a REIT, we will not be subject to U.S. federal income tax to the extent we make distributions to our stockholders equal to or in excess of our taxable income. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following 2018, we would be subject to U.S. federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate income tax rates and generally would not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we are, and intend to continue to be, organized and operated in such a manner as to qualify for treatment as a REIT.

 

We lease our hotel properties to our wholly owned TRSs that are subject to federal, state and local income taxes.

 

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We account for income taxes of our TRSs 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. We record a valuation allowance for net deferred tax assets that are not expected to be realized.

 

We have reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We had no material uncertain tax positions at March 31, 2020.

 

The preparation of our various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which our estimates may change is not expected to be material. We will account for interest and penalties relating to uncertain tax provisions in the current period’s results of operations, if necessary. We have not been assessed interest or penalties by any major tax jurisdictions. We have tax years 2016 through 2019 remaining subject to examination by various federal and state tax jurisdictions.

 

Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements are described in Note 2 — “Summary of Significant Accounting Policies” to our unaudited interim condensed consolidated financial statements in this Quarterly Report.

 

Distributions

 

Our board of directors may authorize payment of distributions in excess of those required for us to maintain REIT status as it deems appropriate. We currently pay regular quarterly distributions to our stockholders. We expect to continue to pay distributions quarterly unless our results of operations, our general financial condition, applicable provisions of Maryland law or other factors make it imprudent to do so. As a result of the potential impact of the novel coronavirus (COVID-19) on our business, we expect that the board of directors will reconsider our current distribution policy and may take further action with respect to distributions for our common stock, and could consider eliminating, suspending, or significantly reducing the payment of distributions until more information regarding the effect of the virus and its duration is available. The timing and amount of distributions will be determined by our board of directors, in its sole discretion, and may vary from time to time. Our board of directors’ discretion will be influenced in substantial part by its obligation to cause us to comply with the REIT requirements of the Code. We can provide no assurance that we will be able to pay distributions on our K Shares, K-I Shares or K-T Shares.

 

Our board of directors has adopted a policy to refrain from funding distributions with offering proceeds; instead, we plan to fund distributions from cash flows from operations and capital transactions (other than the Public Offering or other securities offerings but which may include the sale of one or more assets). However, our charter does not restrict us from paying distributions from any particular source, including proceeds from securities offerings, and our board of directors has the ability to change our policy regarding the source of distributions. However, in accordance with Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; or (2) cause our total assets to be less than the sum of our total liabilities plus, unless our charter provides otherwise, senior liquidation preferences. Our charter currently provides that amounts that would be needed, if we were to dissolve at the time of such distributions, to satisfy the preferential rights upon dissolution of holders of K Shares, K-I Shares and K-T Shares shall not be added to our total liabilities for these purposes. Subject to the preceding, our board of directors will determine the amount of distributions we will pay to our stockholders. We have not established a minimum distribution level.

 

For information on distributions paid during the three months ended March 31, 2020, refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report.

 

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We have funded distributions with operating cash flows from our hotel properties and with proceeds from loans from affiliates and from the issuance of common stock pursuant to the DRIP. To the extent we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the three months ended March 31, 2020 and 2019:

 

   For the Three Months Ended March 31, 
   2020   2019 
Distributions paid in cash  $393,701        $193,802      
Distributions reinvested   56,696         1,176      
Total distributions  $450,397        $194,978      
                     
Source of distributions:                    
Cash flows provided by operations  $393,701    87%  $193,802    99%
Offering proceeds from issuance of common stock pursuant to the DRIP   56,696    13%   1,176    1%
Total sources  $450,397    100%  $194,978    100%

 

On March 3, 2020, our stockholders approved to amend our charter (1) to increase the rate at which cash distributions on K Shares, K-I Shares and K-T Shares automatically accrue under our charter from 6% to 7% per annum of the K Share Distribution Base of such K Share, K-I Share Distribution Base of such K-I Share and K-T Share Distribution Base of such K-T Share, respectively, and (2) to increase the maximum rate at which distributions on A Shares may be authorized by our board of directors and declared by us from 6% to 7% of the stated value of an A Share ($10.00) from income and cash flow from ordinary operations on a cumulative basis. The changes pursuant to the Articles of Amendment to our charter are effective beginning with distributions that accrued on March 31, 2020.

 

We paid quarterly distributions with respect to the quarter ended March 31, 2020 with operating cash flow, consistent with prior distributions. Our board of directors will make determinations as to the payment of future distributions on a quarter by quarter basis; however, distributions will continue to accrue pursuant to our charter.

 

On April 7, 2020, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as our board of directors approves their resumption.

 

Results of Operations

 

The discussion that follows is based on our consolidated results of operations for the three ended March 31, 2020 and 2019. The ability to compare one period to another is significantly affected by acquisitions completed during those periods and the effect of COVID-19. We commenced real estate operations on March 29, 2018, in connection with our first investment, a 51% ownership interest in two select-service hotel properties, the Springhill Suites Wilmington and the Staybridge Suites St. Petersburg, through our joint venture with Procaccianti Convertible Fund, LLC (“PCF”), an affiliate of our Sponsor. We completed our second investment, a 100% fee simple interest in the Hotel Indigo Traverse City, a select-service hotel property, on August 15, 2018. We completed our third investment in the Hilton Garden Inn Providence, a select-service hotel property, on February 27, 2020. Therefore, our results of operations for the three months ended March 31, 2020 are not directly comparable to those for the three months ended March 31, 2019.

 

Factors That May Influence Results of Operations

 

We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and those risks listed in Part I Item 1A “Risk Factors” of our Annual Report on for the year ended December 31, 2019, and in Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, including but not limited to coronavirus (COVID-19), as discussed below, that may be reasonably expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties.

 

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COVID-19

 

We are taking the ongoing coronavirus (COVID-19) pandemic extremely seriously and are proactively taking steps to attempt to address the corresponding operational threats to our hotel properties in an effort to minimize the impact of COVID-19 on our financial results and position us to rebound as quickly as possible once the situation has stabilized. Although reasonable projections of a ‘V’ or ‘U’ shaped economic recovery might be anticipated following this crisis, presently there are no clear indications as to the depth, severity or duration of the coronavirus (COVID-19) pandemic in the United States.

 

The negative impact on room demand at our hotel properties stemming from the novel coronavirus (COVID-19) is significant. With the increased spread of the novel coronavirus (COVID-19) across the globe, the impact has accelerated rapidly, and we are seeing a profound effect on occupancy and RevPAR at our hotel properties.

 

Our Sponsor’s principals and senior executives, and our highly experienced property level management teams employed by TPG Hotels & Resorts, our hospitality and property management affiliate, have over three decades of experience in the hospitality industry, and have weathered many market swings, including experience dealing with the impacts of previous disruptive events such as 9/11 and the significant recession of 2008.

 

Our primary responsibility is to ensure the safety and security of hotel employees and the guests we serve, by facilitating healthy environments. To that end, we have equipped staff with appropriate training, tools and protocols crafted in accordance with the Centers for Disease Control and Prevention (“CDC”) guidance and best practices. At all of our hotel properties, additional cleanliness procedures are being implemented, which include, but are not limited to:

 

·Placing additional hand sanitizer dispensers throughout each property, especially around frequent contact ‘touch points’ and hard surfaces touched by numerous people, such as elevators, food and beverage areas, front desks, fitness rooms and public restroom facilities;
·Increased sanitizing efforts in public areas using disinfecting products, with a focus on areas touched by multiple people, such as door handles, elevator buttons and room key cards; and
·Implementing protocols to more frequently sanitize guest room surfaces using disinfecting products, including faucets, remote controls, pens, phones and clock radios.

 

While we would expect a select-service hotel portfolio like ours to lend itself to a lesser impact than conference center hotels or resort-conference hotels (i.e., destination venues), the situation is highly fluid and there is no way to currently predict the ultimate extent and duration of the impact of COVID-19 on any of our hotel properties or our overall financial results. Accordingly, our experienced hotel management teams are implementing both best practices revenue management and significant expense cutting strategies.

 

1.Revenue strategies include focusing on occupancy driven revenue as opposed to rate driven revenue, which is accomplished by pursuing and accepting business that may not be in the traditional preferred rate range while continuing to maintain current and previous hotel accounts and providing incentives to rebook on future dates.
2.Expense strategies include the implementation of intense cost saving measures such as: staffing reductions, furloughs, limiting services, energy conservation measures, etc.

 

We cannot, however, predict with certainty, even with our best efforts in these strategies, what level of potential revenues and expense savings can be achieved overall to mitigate the material decline in business our hotels are experiencing.

 

The impact of COVID-19 on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information, which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19 and reactions by consumers, companies, governmental entities and capital markets.

 

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Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

 

Rooms revenues

 

We expect the majority of our revenues to be derived from the operation of our hotel properties. Rooms revenues are the product of the number of rooms sold and the average daily room rate. Rooms revenues decreased to $2,616,236 for the three months ended March 31, 2020 from $3,170,512 for the three months ended March 31, 2019. The decrease of $554,276 was mainly a result of the negative impact of COVID-19, which was partially offset by the incremental rooms revenue generated by the Hilton Garden Inn Providence that we acquired on February 27, 2020. The decrease in rooms revenues of $287,579, or 30.9%, at the Springhill Suites Wilmington, the decrease in rooms revenues of $421,807, or 28.0%, at the Staybridge Suites St. Petersburg and the decrease in rooms revenues of $69,738, or 9.5%, at the Hotel Indigo Traverse City are all primarily a result of the negative impact of COVID-19. During the three months ended March 31, 2020, the Hilton Garden Inn Providence, which was purchased on February 27, 2020, recognized rooms revenues of $224,848.

 

Food and beverage revenues

 

Food and beverage revenues decreased to $282,552 for the three months ended March 31, 2020 from $286,738 for the three months ended March 31, 2019. These amounts are comprised of revenues realized in hotel food and beverage outlets as well as catering events. The $4,186 decrease from the prior year period is primarily a result of the negative impact of COVID-19 at the Spring Hill Suites Wilmington and the Staybridge Suites St. Petersburg, partially offset by the acquisition of the Hilton Garden Inn Providence which generated $17,178 of food and beverage revenues during the three months ended March 31, 2020. The Company owned the Hilton Garden Inn Providence for approximately one month and three days during the three months ended March 31, 2020. Excluding the impact of the Hilton Garden Inn Providence, food and beverage revenues decreased $21,364, or 7.5%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Food and beverage revenues at the Hotel Indigo Traverse City increased $3,814, or 2.0% in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The first quarter is historically the weakest performing quarter in terms of revenues at the Hotel Indigo Traverse City.

 

Other operating revenues

 

Other operating revenues increased to $102,099 for the three months ended March 31, 2020 from $92,261 for the three months ended March 31, 2019. These amounts include ancillary hotel revenues and other items primarily driven by occupancy such as telephone/internet, parking, gift shops, and other guest services. The $9,838 increase from the prior year period is primarily driven by higher parking revenues generated at the Hotel Indigo Traverse City and the incremental revenue generated by the acquisition of the Hilton Garden Inn Providence, which generated $3,184 of other operating revenues primarily from gift shop sales during the three months ended March 31, 2020. The Company owned the Hilton Garden Inn Providence for approximately one month and three days during the three months ended March 31, 2020. Excluding the impact of the Hilton Garden Inn Providence, other operating revenues for the three months ended March 31, 2020 increased $6,654, or 7.2%, compared to the three months ended March 31, 2019. These increases were partially offset by declines in other operating revenues at the Springhill Suites Wilmington and Staybridge Suites St. Petersburg of $3,028, or 19.1%, and $298, or 2.5%, respectively, for the three months ended March 31, 2020 compared to March 31, 2019, primarily due to the negative impact of COVID-19.

 

Rooms expense

 

Rooms expenses increased to $692,655 for the three months ended March 31, 2020 from $666,316 for the three months ended March 31, 2019. The $26,339 increase in rooms expenses is primarily driven by the acquisition of the Hilton Garden Inn Providence, which generated $58,603 of rooms expenses for the one month and three days we owned the hotel property during the three months ended March 31, 2020. Excluding the impact of the Hilton Garden Inn Providence, rooms expenses decreased $32,264, or 4.8%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Rooms expenses are primarily driven by the corresponding revenue account and occupancy.

 

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Food and beverage expense

 

Food and beverage expenses were $262,810 and $250,758 for the three months ended March 31, 2020 and 2019, respectively. The $12,052 increase in food and beverage expenses is primarily driven by the acquisition of the Hilton Garden Inn Providence, which generated $20,222 of food and beverage expenses for the one month and three days we owned the hotel property during the three months ended March 31, 2020. Excluding the impact of the Hilton Garden Inn Providence, food and beverage expenses decreased $8,170, or 3.3%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Food and beverage expenses are primarily driven by the corresponding revenue account and occupancy.

 

Other property expenses

 

Other property expenses were $1,396,545 and $1,294,517, for the three months ended March 31, 2020 and 2019, respectively. The $102,028 increase in other property expenses is primarily driven by the acquisition of the Hilton Garden Inn Providence, which generated $149,851 of other property expenses for the three months ended March 31, 2020. Excluding the impact of the Hilton Garden Inn Providence, other property expenses decreased $47,823, or 3.7%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Other property expenses are primarily driven by the corresponding revenue account and occupancy. These amounts also include maintenance, utilities, sales and marketing, and general and administrative expenses of the hotel properties, as well as net franchise fees, property taxes and other taxes.

 

Property management fees to affiliates

 

Property management fees to affiliates were $90,224 and $106,617 for the three months ended March 31, 2020 and 2019, respectively. Property management fees are property level expenses equal to 3% of the hotel properties’ gross revenues and we expect them to fluctuate accordingly. The $16,393 decrease in property management fees is primarily due to the negative impact of COVID-19 on revenues, offset by the ownership of the Hilton Garden Inn Providence for one month and three days during the three months ended March 31, 2020.

 

Corporate general and administrative

 

Corporate general and administrative expenses were $570,909 and $464,388 for the three months ended March 31, 2020 and 2019, respectively. Corporate general and administrative expenses consist primarily of transfer agent fees, fees paid to the board of directors, audit and tax fees, and other professional services fees. The $106,521 increase is primarily due to professional fees associated with the acquisition of the Hilton Garden Inn Providence.

 

Other fees to affiliates

 

Other fees to affiliates were $549,756 and $87,411 for the three months ended March 31, 2020 and 2019, respectively. Other fees to affiliates include asset management fees due to PHA that are paid quarterly in arrears equal to one-fourth of 0.75% of the adjusted cost of our assets. Asset management fees increased to $108,386 for the three months ended March 31, 2020 from $87,411 for the three months ended March 31, 2019. The $20,975 increase in asset management fees is primarily driven by the fact that we owned the Springhill Suites Wilmington, the Staybridge Suites St. Petersburg and the Hotel Indigo Traverse City for the full three months ended March 31, 2020 and 2019, but only owned the Hilton Garden Inn Providence for one month and three days during the three months ended March 31, 2020. We have deferred payment of the quarterly asset management fees due to PHA until adequate cash flow is available. Other fees to affiliates also include acquisition fees due to an affiliate for providing services including selecting, evaluating and acquiring potential investments. This fee is equal to 1.5% of the Gross Contract Purchase Price of an investment (as defined in the Advisory Agreement). Payment of the acquisition fees is deferred until the occurrence of a liquidation event. Acquisition fees incurred for the three months ended March 31, 2020 were $441,370 and related to the purchase of the Hilton Garden Inn Providence. There were no acquisition fees incurred for the three months ended March 31, 2019.

 

Acquisition costs

 

Acquisition costs of $72,149 relating to the purchase the Hilton Garden Inn Providence were expensed as incurred in accordance with Topic 810 for the three months ended March 31, 2020. There were no acquisition costs for the three months ended March 31, 2019. Acquisition costs include closing costs associated with the purchase of the Hilton Garden Inn Providence.

 

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Depreciation and amortization

 

Depreciation and amortization expenses were $662,512 and $544,401 for the three months ended March 31, 2020 and 2019, respectively. These amounts include depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization of our franchise fees and certain intangibles. The $118,111 increase in depreciation and amortization expense is primarily the result of owning the Hilton Garden Inn Providence for one month and three days during the three months ended March 31, 2020.

 

Loss on acquisition

 

The $133,521 loss on acquisition for the three months ended March 31, 2020, represents the loss incurred as a result of purchase of the Hilton Garden Inn Providence. The transaction was accounted for as an asset acquisition under the VIE model and therefore the difference in the fair value of the net assets acquired and consideration paid is recognized as a gain or loss. The loss is primarily a result of significant decreases in interest rates and its impact on the fair value of debt due to COVID-19. As any subsequent investments will be independent of this transaction, we cannot predict any future gains or losses but we will evaluate any future acquisitions accordingly. There were no gains on acquisitions for the three months ended March 31, 2019.

 

Interest expense, net

 

Interest expense, net, was $553,010 and $614,696 for the three months ended March 31, 2020 and 2019, respectively. Interest expense represents monthly fixed rate payments on the outstanding mortgage notes payable balance. Interest expense also includes accrued interest on the outstanding asset management fees, acquisition fees and promissory notes from PHA and our Sponsor. Also included in interest expense are the amortization of deferred financing costs and debt discounts or premiums. The $61,686 decrease in interest expense is primarily due to the fact that during the three months ended March 31, 2019, we incurred $76,833 of interest expense on a $6,600,000 promissory note with our Sponsor related to the acquisition of the Hotel Indigo Traverse City. The note was repaid in full by July 11, 2019 and, therefore, there was no interest expense associated with this promissory note for the three months ended March 31, 2020. Interest expense also decreased due to a decrease in the interest rate on the outstanding mortgage note payable relating to the Hotel Indigo Traverse City. Upon completion of a loan paydown in February 2019, the outstanding increase rate was reduced by 0.50%. Additionally, during the three months ended March 31, 2020, we incurred $71,410 of interest expense relating to the outstanding mortgage note payable on the Hilton Garden Inn Providence for the one month and three days of ownership, offset by $11,026 relating to the amortization of the fair value of debt premium.

 

Interest income on interest-bearing cash accounts was $25,727 and $0 for three months ended March 31, 2020 and 2019, respectively, which is presented as a reduction of the total interest expense on the consolidated income statement.

 

Unrealized loss on interest rate swap

 

Unrealized loss on our interest rate swap was $224,609 and $68,743 for the three months ended March 31, 2020 and 2019, respectively.

 

Income tax benefit or expense

 

We had an income tax expense of $7,029 for the three months ended March 31, 2020 and income tax benefit of $49,764 for the three months ended March 31, 2019. The income tax expenses and benefits are related to taxable income at the TRSs.

 

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Net income or loss

 

For the three months ended March 31, 2020, we had a net loss of $2,214,842 compared to a net loss of $498,572 for the three months ended March 31, 2019. The increase in net loss of $1,716,270 over the comparable prior year period was primarily due to an increase in operations as a result of the Hilton Garden Inn Providence and offset by the associated increases to corporate general and administrative costs, acquisition costs and acquisition fees, and the negative impact of COVID-19 on the hotel properties.

 

Net income or loss attributable to noncontrolling interests

 

Net loss relating to noncontrolling interests was $125,259 for the three months ended March 31, 2020 compared to net income of $250,606 for the three months ended March 31, 2019. This amount includes net income or losses attributable to a third-party’s 49% ownership interest in PCF and will fluctuate accordingly with any increases or decreases to net income at PCF. This amount also includes net income or losses attributable to the noncontrolling Operating Partnership Class K OP Units issued as part of the Hilton Garden Inn Providence acquisition. The noncontrolling Class K OP Units are allocated net income or loss attributable to the Operating Partnership based on the total outstanding Class K OP Units as a percentage of all our outstanding common stock.

 

Liquidity and Capital Resources

 

The negative impact on room demand within our portfolio stemming from the novel coronavirus (COVID-19) is significant. We experienced an initial decline in hotel revenue that began in February 2020 in our markets. However, the increased spread of COVID-19 across the globe has accelerated rapidly, and we are seeing a much greater effect on occupancy and RevPAR throughout our hotel portfolio.

 

While intense efforts to reduce operating costs are underway, we cannot be certain as to what level of savings can be achieved overall to mitigate the material decline in hotel revenues that we are experiencing.

 

In anticipation of a significant strain on the hotels’ cash flows we have implemented cost reduction procedures at all of our hotels including significant reduction in staffing levels, discussions with vendors to extend payments terms and discount current pricing, discussions with our lenders to defer loan interest payments for a period of three to six months, and utilize provisions from the recently passed CARES Act to provide additional liquidity from federally supported loan programs. As of May 15, 2020, we have received $1,019,117 in PPP loans relating to our four hotel properties. We have also made modifications to our existing debt. For more information, refer to Note 9 - “Subsequent Events” to our unaudited interim condensed consolidated financial statements.

 

On April 7, 2020, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as our board of directors approves their resumption.

 

Our board of directors made this difficult decision because it does not believe it is appropriate for us to continue to sell shares of common stock until it has determined an updated NAV per share. We expect to release an updated NAV per share of all classes of our capital stock calculated as of March 31, 2020 when available, which we expect to be lower than the current NAV per share.

 

In addition, the board of directors will reconsider our current distribution policy and may take further action with respect to distributions for our common stock, and could consider eliminating, suspending, or significantly reducing the payment of distributions until more information regarding the effect of the virus and its duration is available. We paid quarterly distributions with respect to the quarter ended March 31, 2020 with operating cash flow, consistent with prior distributions. Our board of directors will make determinations as to the payment of future distributions on a quarter by quarter basis; however, distributions will continue to accrue pursuant to our charter.

 

We also temporarily suspended repurchases, other than share repurchases due to death, under our share repurchase program effective with repurchase requests that would otherwise be processed in April 2020.

 

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In a normal operating environment, our sources of funds are primarily the net proceeds of our Public Offering, funds equal to amounts reinvested in the DRIP, operating cash flows and borrowings. Our principal demands for funds will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and distributions to and repurchases from our stockholders. Generally, we will fund our acquisitions from the net proceeds of the Public Offering. We intend to acquire our assets with cash, including proceeds from the Public Offering, and mortgage or other debt. PHA and its affiliates have agreed to purchase A Shares in a private placement in order to provide us with funds sufficient to pay the selling commissions, dealer manager fees, stockholder servicing fees, and other organizational and offering expenses related to the K Shares, K-I Shares and K-T Shares sold in the primary offering portion of our Public Offering. In addition, we will allocate proceeds from the sale of A Shares in amounts that represent the difference between (i) the applicable estimated NAV per K-I Share and the offering price of K-I Shares sold in our primary offering and (ii) any discount to the initial offering price of K Shares, K-I Shares and K-T Shares arising from reduced or waived selling commissions (other than reduced selling commissions for volume discounts) or dealer
manager fees.

 

In addition, in a normal operating environment, we expect to use debt financing as a source of capital. Our charter provides that the maximum amount of our total indebtedness shall not exceed 300% of our total “net assets” (as defined in accordance with NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation, however, will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.

 

We do not intend to fund distributions from offering proceeds; however, if we have not generated sufficient cash flow from our operations and other sources, such as from borrowings, advances from PHA, PHA’s deferral, suspension and/or waiver of its fees and expense reimbursements, to fund distributions, we may use offering proceeds. Subject to certain limited exceptions, there is no limit to the amount of distributions that we may pay from offering proceeds. Moreover, our board of directors may change this policy, in its sole discretion, at any time.

 

Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit and undistributed cash flow. Note that, currently, we have not identified any additional sources of financing, aside from utilizing funds provided by the CARES Act, and there is no assurance that such sources of financings will be available on favorable terms or at all.

 

We believe that cash and restricted cash on hand, cash from operations after implementing cost reduction procedures, net offering proceeds from the sale of common stock in the Public Offering and borrowings from other sources, including advances from PHA and the Company’s Sponsor, if necessary, will be sufficient to fund our operating and administrative expenses and continuing debt service obligations over the next twelve months.

 

Sources and Uses of Cash

 

Proceeds from the sale of common stock in the Private Offering and Public Offering were partially used to fund our investments in hotel properties and the related costs associated with the transactions. Such proceeds were also used to pay general and administrative expenses for the three months ended March 31, 2020. The remaining proceeds are held in liquid cash accounts. Cash balances from our investments in hotel properties were consolidated during the three months ended March 31, 2020 and 2019.

 

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Cash Flows Provided by (Used in) Operating Activities

 

We owned an interest in three hotel properties for the full three-month period ended March 31, 2020 and a fourth hotel property for approximately one month and three days during the same three-month period. We owned an interest in three hotel properties for the full three-month period ending March 31, 2019. During the three months ended March 31, 2020, net cash provided by operating activities was $38,269 compared to the net cash provided by operating activities of $640,231 for the three months ended March 31, 2019. Our operating cash flows during the three months ended March 31, 2020 was the result of our net loss, offset partially by adjustments for non-cash expenses, including depreciation and amortization, the loss on the acquisition of the Hilton Garden Inn Providence and the change in fair value of the interest rate swap agreement, and by adjustments for receivables, other assets, amounts due to and from related parties, and accounts payable and accrued liabilities. Our operating cash flows during the three months ended March 31, 2019 was the result of our net loss, offset partially by adjustments for non-cash expenses, including depreciation and amortization, and the change in fair value of the interest rate swap agreement, and by adjustments for receivables, other assets, amounts due to and from related parties, and accounts payable and accrued liabilities.

 

Cash Flows Provided by (Used in) Investing Activities

 

Cash used in investing activities will vary based on how quickly we raise funds in our Public Offering and how quickly we invest those funds towards acquisitions of real estate and real-estate related investments. During the three months ended March 31, 2020, cash used in investing activities was $12,289,941, which represented the investment in the Hilton Garden Inn Providence, net, and capital improvements at our hotel properties. During the three months ended March 31, 2019, net cash used in investing activities was $208,329 and was primarily the result of capital improvements at our hotel properties.

 

Cash Flows Provided by (Used in) Financing Activities

 

During the three months ended March 31, 2020, net cash provided by financing activities was $8,354,404. We received $2,000,000 of mortgage note proceeds relating to the acquisition of the Hilton Garden Inn Providence offset by $94,770 of deferred financing costs incurred. We received proceeds of $7,443,798 through the sale of common stock in our Public Offering. These proceeds are offset by the payment of offering costs consisting partially of selling commissions, dealer manager fees and stockholder servicing fees totaling $622,973 for the three months ended March 31, 2020. We paid cash distributions of $393,701 to stockholders with proceeds from operations. Cash flow from financing activities for the three months ended March 31, 2020, also includes $98,000 of distributions and $120,050 of contributions from noncontrolling interest. During the three months ended March 31, 2019, net cash used in financing activities was $10,954. We received proceeds of $3,468,172 through the sale of common stock. These proceeds are offset by the payment of offering costs consisting partially of selling commissions, dealer manager fees and stockholder servicing fees totaling $304,574 for the three months ended March 31, 2019. We made prepayments of $1,744,000 on mortgage notes payable and $1,200,000 on loans from affiliates. We paid cash distributions of $193,802 to stockholders with proceeds from operations. Cash flow from financing activities for the three months ended March 31, 2019, also includes $36,750 of distributions to noncontrolling interest.

 

Debt

 

We intend to maintain amounts outstanding under long-term debt arrangements or lines of credit so that we will have more funds available for investment in properties, which will allow us to acquire a more diversified portfolio. However, the percentage of debt financing we utilize at any given time will be dependent upon various factors to be considered in the sole discretion of our board of directors, including, but not limited to, our ability to raise equity proceeds from the sale of our securities in the Public Offering, our ability to pay distributions, the availability of properties meeting our investment criteria, the availability of debt financing, and changes in the cost of debt financing. To help finance our initial acquisitions, we may utilize short-term borrowings. However, after our initial property acquisitions, as a general principle, we anticipate that the term of any debt financing we utilize will correspond to the anticipated holding period for the respective property.

 

We may repay borrowings under any future credit facility or under any future long-term mortgage debt with proceeds from the sale of properties, operating cash flow, long-term mortgage debt, proceeds from the Public Offering, proceeds from any future offerings, or proceeds from any other future securities offerings.

 

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Contractual Obligations

 

We enter into contracts that contain a variety of indemnification provisions. Our maximum exposure under these arrangements is unknown; however, we have not had prior claims or losses pursuant to these contracts. Management of PHA has reviewed our existing contracts and expects the risk of loss to us to be remote.

 

We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon our financial condition or results of operations.

 

Our contractual obligations as of March 31, 2020 are as follows:

 

   2020   2021-2022   2023-2024   Thereafter   Total 
Outstanding debt obligations  $2,171,897   $15,901,769   $24,065,264   $14,483,097   $56,622,027 
Interest payments on outstanding debt obligations   1,946,062    3,936,422    2,880,944    257,417    9,020,845 
Total  $4,117,959   $19,838,191   $26,946,208   $14,740,514   $65,642,872 

 

The contractual obligations as of March 31, 2020 presented above do not include the impact of any debt modifications that occurred subsequent to March 31, 2020. For additional details regarding debt modifications at our hotel properties, refer to Note 9 – “Subsequent Events”.

 

Funds from Operations and Modified Funds from Operations

 

One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments and the corresponding expenses associated with that process are operational features of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts (“NAREIT”) an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to our net income (loss) as determined under GAAP.

 

We define FFO, consistent with NAREIT’s definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.

 

We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.

 

Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report its investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of its investment in real estate assets.

 

The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.

 

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In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rooms revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rooms revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date.

 

Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five to seven years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITs, the Institute for Portfolio Alternatives (the “IPA”), an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and distribution policy. MFFO is not equivalent to our net income (loss) as determined under GAAP.

 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (“Practice Guideline”), issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan; unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting; adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income (loss); and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our condensed consolidated statements of operations. Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offerings to be used to fund acquisition fees and expenses. Acquisition fees and expenses include payments to PHA or its affiliates and third parties. Such fees and expenses will not be reimbursed by PHA or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, PHA or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying condensed consolidated statements of operations, and acquisition expenses associated with transactions determined to be an asset purchase are capitalized.

 

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All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.

 

In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations in accordance with GAAP.

 

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as the average daily rate and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

 

Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value since impairment write-downs are taken into account in determining net asset value but not in determining MFFO.

 

FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operation performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body.

 

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Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2020 and 2019:

 

   For the Three Months Ended March 31, 
   2020   2019 
Reconciliation of net loss to MFFO:        
Net loss  $(2,214,842)  $(498,572)
Depreciation and amortization   662,512    544,401 
Loss on acquisition   133,521    - 
FFO   (1,418,809)   45,829 
Less noncontrolling interest:          
Net loss (income) attributable to noncontrolling interest   125,259    (250,606)
Depreciation and amortization attributable to noncontrolling interest   (171,733)   (166,448)
FFO attributable to common stockholders   (1,465,283)   (371,225)
Acquisition fees and expenses   513,519      
Amortization of deferred financing costs and debt discount as interest   16,422    25,870 
Unrealized loss on interest rate swap   224,609    68,743 
MFFO attributable to common stockholders  $(710,733)  $(276,612)

 

Off-Balance Sheet Arrangements

 

As of March 31, 2020, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Related-Party Transactions and Agreements

 

We have entered into agreements with PHA and its affiliates whereby we pay certain fees to, or reimburse certain expenses of, PHA or its affiliates for acquisition fees and expenses, asset management fees, disposition fees, property management fees, organization and offering costs and reimbursement of certain operating costs. Refer to Note 6 – “Related Party Transactions” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

 

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we conducted an evaluation as of September 30, 2019 under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2020, were effective at a reasonable assurance level.

 

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(b) Changes in internal control over financial reporting. There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against the Company. From time to time, we may be party to certain legal proceedings in the ordinary course of business. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon its financial condition or results of operations.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020, except as noted below.

 

Legislative or regulatory action could adversely affect the returns to our investors.

 

In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments in real estate and REITs, including the passage of the Tax Cuts and Jobs Act of 2017. Federal legislation intended to ameliorate the economic impact of the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, has been enacted that makes technical corrections to, or modifies on a temporary basis, certain of the provisions of the Tax Cut and Jobs Act of 2017, and it is possible that additional such legislation may be enacted in the future. The full impact of the Tax Cuts and Jobs Act of 2017 and the CARES Act may not become evident for some period of time. In addition, there can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or enacted that could impact our business and financial results. The REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain of such changes could have an adverse impact on our business and financial results.

 

Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interests of the Company.

 

We urge you to consult with your own tax advisor with respect to the status of any legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.

 

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The outbreak of the novel coronavirus (COVID-19) has significantly impacted our occupancy rates and RevPAR.

 

Our business has been adversely affected by the impact of, and the public perception of a risk of, a pandemic disease. In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China, which has subsequently spread to other regions of the world, and has resulted in increased travel restrictions and extended shutdown of certain businesses in affected regions. Since late February, we have experienced a significant decline in occupancy and RevPAR and we expect the occupancy and RevPAR reduction associated with the novel coronavirus (COVID-19) to continue as we are recording significant reservation cancellations as well as a significant reduction in new reservations relative to prior expectations. A continued outbreak of the virus in the U.S. would likely further reduce travel and demand at our hotels. In addition, as a result of COVID-19, the New Hanover County North Carolina Board of Commissioners instituted a State of Emergency effective March 28, 2020. Accordingly, as a result of this declaration, our Springhill Suites hotel located in Wilmington, NC was instructed to close effective March 30, 2020 and remained closed through May 1, 2020. A prolonged occurrence of the virus may result in health or other government authorities imposing restrictions on travel or other market impacts. The hotel industry and our portfolio are already experiencing the postponement or cancellation of business conferences and similar events. Additionally, the public perception of a risk of a pandemic or media coverage of these diseases, or public perception of health risks linked to perceived regional food and beverage safety, particularly if focused on regions in which our hotels are located, may adversely affect us by reducing demand for our hotels. Currently, no vaccines have been developed, and there can be no assurance that an effective vaccine can be discovered in time to protect against a potential pandemic. Any of these events could result in a sustained, significant drop in demand for our hotels and could have a material adverse effect on us. 

 

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

 

Unregistered Sales of Equity Securities

 

On February 27, 2020, as partial consideration for our acquisition of the Hilton Garden Inn Providence, our Operating Partnership issued 128,124 Class K units of limited partnership interests in our Operating Partnership, or Class K OP Units, valued at $10.00 per Class K OP Unit. Such issuance represents a total investment of $1,281,244 in Class K OP Units of our Operating Partnership. Individuals with direct or indirect interests in the sellers of the Hilton Garden Inn Providence who are direct or indirect owners of our Sponsor and PHA received only Class K OP Units and no cash as consideration.

 

Use of Proceeds

 

On August 14, 2018, our Registration Statement on Form S-11 (File No. 333-217579), covering a public offering of up to $550,000,000 in shares of our common stock, was declared effective by the SEC under the Securities Act. We are offering up to $550,000,000 in shares of our common stock, including $500,000,000 in shares of our common stock pursuant to our primary offering, consisting of the following three share classes: K Shares at an initial offering price of  $10.00 per share (up to $125,000,000 in shares), K-I Shares at an offering price of  $9.30 per share (up to $125,000,000 in shares), and K-T Shares at an initial offering price of  $10.00 per share (up to $250,000,000 in shares), which reflect the estimated NAV per share of each of the K Shares, K-I Shares, and K-T Shares as of February 28, 2018, and $50,000,000 in shares of our common stock pursuant to the DRIP at $9.50 per K Share (up to $12,500,000 in shares), $9.50 per K-I Share (up to $12,500,000 in shares) and $9.50 per K-T Share (up to $25,000,000 in shares).

 

On May 23, 2019, our board of directors determined an estimated NAV per share of all classes of our common stock as of March 31, 2019. Our board of directors determined that no updates to the offering prices of the K Shares, K-I Shares and K-T Shares in our Public Offering were required. The NAV per share of all classes of our capital stock was published before the COVID-19 pandemic, and may differ significantly from the our actual estimated NAV per share until such time as sufficient information is available and analyzed, the financial impact is fully evaluated, and the appropriate adjustment is made to the our estimated NAV per share, as determined by the board of directors. Any resulting disparity may be to the detriment of a purchaser of our shares. We expect to release updated NAV per share of all classes of our capital stock calculated as of March 31, 2020, which may be lower than the current NAV per share of all classes of our capital stock.

 

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On April 7, 2020, our board of directors unanimously approved the temporary suspension of (i) the sale of K Shares, K-I Shares and K-T Shares in the Public Offering, effective as of April 7, 2020 and (ii) the operation of the DRIP, effective as of April 17, 2020. Sales of shares in the Public Offering and pursuant to the DRIP will each remain suspended until such time as our board of directors approves their resumption.

 

Our board of directors made this difficult decision because it does not believe it is appropriate for us to continue to sell shares of common stock until it has determined an updated NAV per share. We expect to release an updated NAV per share of all classes of our capital stock calculated as of March 31, 2020 when available, which it expects to be lower than the current NAV per share.

 

From the commencement of the Public Offering through March 31, 2020, we sold 2,066,765 K Shares at a weighted average price of $9.98 per share for gross proceeds of $20,617,045, 625,589 K-I Shares at a weighted average price of $9.30 per share for gross proceeds of $5,820,206, 47,540 K-T Shares at a weighted average price of $10.00 per share for gross proceeds of $475,400, for total gross proceeds of $26,912,651 in the Public Offering. During the same period, pursuant to the DRIP, we issued 5,884 K Shares to investors at a weighted average of $9.50 per K Share for gross proceeds of $55,899, 6,100 K-I Shares at a weighted average of $9.50 per K-I Share for gross proceeds of $57,950, and 439 K-T Shares at a weighted average of $9.50 per K-T Share for gross proceeds of $4,175, for total gross DRIP proceeds of $118,023.

 

From commencement of the Public Offering through March 31, 2020, we had incurred $2,212,853 of selling commissions, dealer manager fees and stockholder servicing fees in connection with the Public Offering, which were paid with proceeds from the issuance of A Shares to THR.

 

From inception through March 31, 2020, we recognized selling commissions, dealer manager fees, and organization and other offering costs in the Private Offering as follows:

 

Type of Expense Amount  Amount   Estimated/Actual 
Selling commissions and dealer manager fees  $1,058,501    Actual 
Other organization and offering costs   1,083,912    Actual 
Total  $2,142,413      

 

The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Private Offering.

 

From inception through March 31, 2020, we recognized selling commissions, dealer manager fees, stockholder servicing fees, and organization and other offering costs in the Public Offering as follows:

 

Type of Expense Amount  Amount   Estimated/Actual 
Selling commissions, stockholder servicing fees and dealer manager fees  $2,212,853    Actual 
Other organization and offering costs   2,170,248    Actual 
Total  $4,383,101      

 

The amounts above were charged against additional paid in capital on the condensed consolidated balance sheet to the extent that the total organization and offering costs recognized would not exceed 15% of gross proceeds from the Public Offering.

 

As of March 31, 2020, the net offering proceeds to us from our Private Offering and our Public Offering, after deducting the total expenses incurred as described above, were approximately $38,278,115.

 

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We expect to use the net proceeds from our Public Offering to acquire and own a diverse portfolio of hospitality properties consisting primarily of select-service, extended-stay, and compact full-service hotel properties throughout the United States. We may also make investments in distressed debt and preferred equity where the intent is to acquire hotel properties underlying such investments. As of March 31, 2020, we had an ownership interest in four hotel properties for a total purchase price of $63,322,489 inclusive of acquisition and closing costs. These hotel property acquisitions were funded from net proceeds from our Private Offering, Public Offering and borrowings.

 

Share Repurchase Program

 

We have a share repurchase program that may provide an opportunity for stockholders to have their shares of common stock repurchased by us, subject to certain restrictions and limitations. Refer to Note 7 – “Stockholders’ Equity” to our unaudited interim condensed consolidated financial statements included in this Quarterly Report for a discussion of the details of our share repurchase program.

 

On March 20, 2020, our board of directors decided to temporarily suspend repurchases under our share repurchase program effective with repurchase requests that would otherwise be processed in April 2020 due to the negative impact of the coronavirus (COVID-19) pandemic on our portfolio to date. However, we will continue to process repurchases due to death in accordance with the terms of our share repurchase program. We will announce any updates concerning our share repurchase program in a Current Report on Form 8-K. Any unprocessed requests will automatically roll over to be considered for repurchase when we fully reopen our share repurchase program, unless a stockholder withdraws the request for repurchase five business days prior to the next repurchase date.

 

During the three months ended March 31, 2020, we did not fulfill any repurchase requests. We generally repurchase shares approximately 30 days following the end of the applicable quarter in which requests were received.

 

Our board of directors approved two outstanding repurchase requests due to death that were received during the three months ended March 31, 2020 and on May 1, 2020, we repurchased 23,500 K Shares for $235,000, or $10.00 per K Share. We currently have one unfulfilled standard repurchase request that was received during the three months ended March 31, 2020 for 2,500 K Shares for $23,750, or $9.50 per K Share outstanding.

 

During the three months ended March 31, 2019, we did not receive any repurchase requests, and as of March 31, 2019, there were no outstanding and unfulfilled repurchase requests.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

The following exhibits are filed as a part of this report or incorporated by reference.

 

Exhibit No.   Description 
3.1   Second Articles of Amendment and Restatement of Procaccianti Hotel REIT, Inc. (included as Exhibit 3.1 to the Company’s Registration Statement on Form S-11 (File No. 333-217578) filed May 1, 2017 and incorporated herein by reference).
     
3.2   Bylaws of Procaccianti Hotel REIT, Inc. (included as Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (File No. 333-217578) filed May 1, 2017 and incorporated herein by reference).
     
3.5   Articles of Amendment of Procaccianti Hotel REIT, Inc., effective as of March 31, 2020 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 31, 2020)
     
4   Third Articles of Amendment and Restatement of Procaccianti Hotel REIT, Inc. (included as Exhibit 3.3 to Post-effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (File No. 333-217578) filed August 14, 2018 and incorporated herein by reference).
     
4.1   Subscription Agreement and Subscription Agreement Signature Page (included as Appendix C to the Company’s Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-217578) filed August 15, 2018, as supplemented, and incorporated herein by reference).
     
4.2   Distribution Reinvestment Plan (included as Appendix B to the Company’s Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-217578) filed August 15, 2018, as supplemented, and incorporated herein by reference).
     
4.3   Description of Securities Registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 (filed as Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K (File No. 333-217578) filed on March 30, 2020, and incorporated by reference herein).

 

10.1Assignment of Membership Interest Purchase Agreement, dated as of February 27, 2020, by and between The Procaccianti Group, LLC, as assignor, and Procaccianti Hotel REIT, L.P., as assignee (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.2Membership Interest Purchase Agreement, dated as of January 14, 2020, by, between and among TPG DP JV, LLC, ETJ Gano Holdings, Inc., PRJA Gano Holdings, LLC, and EHI Gano Holdings, Inc., as Sellers, and the Procaccianti Group, LLC, as Purchaser (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.3First Amendment to Membership Interest Purchase Agreement, dated as of February 12, 2020, by, between and among TPG DP JV, LLC, ETJ Gano Holdings, Inc., PRJA Gano Holdings, LLC, and EHI Gano Holdings, Inc., as Sellers, and the Procaccianti Group, LLC, as Purchaser (included as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.4Second Amendment to Membership Interest Purchase Agreement, dated as of February 20, 2020, by, between and among TPG DP JV, LLC, ETJ Gano Holdings, Inc., PRJA Gano Holdings, LLC, and EHI Gano Holdings, Inc., as Sellers, and the Procaccianti Group, LLC, as Purchaser (included as Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

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10.5Third Amendment to Membership Interest Purchase Agreement, dated as of February 27, 2020, by and between TPG DP JV, LLC, ETJ Gano Holdings, Inc., PRJA Gano Holdings, LLC, EHI Gano Holdings, Inc. and TPG DP Investors, Inc., as Sellers, and the Procaccianti Group, LLC, as Purchaser (included as Exhibit 10.5 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.6Omnibus Amendment, Assignment, Assumption, Release and Reaffirmation Agreement, made as of February 27, 2020, between and among Gano Holdings, LLC, as Borrower, Hotel Manager Gano Opco Sub, LLC, Procaccianti Hotel REIT, Inc., and James A. Procaccianti, and East Boston Savings Bank (included as Exhibit 10.6 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.7Amended and Restated Commercial Real Estate Promissory Note, as of February 27, 2020, made by Gano Holdings, LLC and payable to East Boston Savings bank (included as Exhibit 10.7 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.8Collateral Assignment and Security Agreement in respect of Contracts, Licenses and Permits, effective as of February 27, 2020, by and between Gano Holdings, LLC, and East Boston Savings Bank (included as Exhibit 10.8 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.9Collateral Assignment and Security Agreement in respect of Contracts, Licenses and Permits, effective as of February 27, 2020, by and between Hotel Manager Gano Opco Sub, LLC and Gano Holdings, LLC (included as Exhibit 10.9 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.10Third Amendment to (i) Open-End Mortgage, Security Agreement and Assignment to Secure Present and Future Loans Under Chapter 25 of Title 34 of the General Laws of the State of Rhode Island and (ii) Assignment of Borrower’s Interests in Leases, Rents and Profits granted to East Boston Savings Bank, as Mortgagee, by Gano Holdings, LLC, as Mortgagor (included as Exhibit 10.10 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

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10.11Hotel Lease between Gano Holdings, LLC, as Landlord, and PHR Gano Opco Sub, LLC, as Tenant, dated February 27, 2020 (included as Exhibit 10.11 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.12Hotel Management Agreement between PHR Gano Opco Sub, LLC and Gano Hotel Manager, LLC, made as of February 27, 2020 (included as Exhibit 10.12 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.13Tri-Party Agreement by Gano Holdings, LLC, as Owner, PHR Gano Opco Sub, LLC, as Tenant, Gano Hotel Manager, LLC, as Operator and East Boston Savings Bank, as Lender (included as Exhibit 10.13 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

10.14Amended and Restated Agreement of Limited Partnership of Procaccianti Hotel REIT, L.P., dated as of February 27, 2020 (included as Exhibit 10.14 to the Company’s Current Report on Form 8-K (File No. 333-217578) filed March 3, 2020 and incorporated herein by reference).

 

31.1*   Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1**   Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1   Consent of Robert A. Stanger & Co., Inc. (filed as Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K (File No. 333-217578) filed on March 30, 2020, and incorporated by reference herein).
     
101.INS*   XBRL Instance Document.
     
101.SCH*   XBRL Taxonomy Extension Schema Document.
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document.

 

 

* Filed herewith.

 

** Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

 

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Signatures

 

Pursuant to the requirements 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.

 

  PROCACCIANTI HOTEL REIT, INC.
   
Date: May 15, 2020 By: /s/ James A. Procaccianti
  James A. Procaccianti
  Chief Executive Officer, President and
  Chairman of the Board of Directors
  (Principal Executive Officer)

 

 

Date: May 15, 2020 By: /s/ Gregory Vickowski
  Gregory Vickowski
  Chief Financial Officer, Treasurer
  and Director
  (Principal Accounting Officer and
  Principal Financial Officer)
   

 

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