SOTHERLY HOTELS INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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Overview


The Company is a self-managed and self-administered lodging REIT incorporated in
Maryland in August 2004 to pursue opportunities in the full-service, primarily
upscale and upper-upscale segments of the hotel industry located in primary and
secondary markets in the mid-Atlantic and southern United States. Since January
1, 2019, we have completed the following acquisitions and dispositions:

• At September 27, 2019we acquired the hotel business unit of the Hyde

Resort on the beach & Residences, a 342-unit condominium-hotel located in

the Hollywood, Florida Marlet.

• At November 30, 2021we have concluded a contract of sale of the DoubleTree by

        Hilton Raleigh Brownstone-University hotel. The sale of the hotel is
        subject to various closing conditions.

• At February 10, 2022we sold the Sheraton Louisville Riverside Hotel

situated in Jeffersonville, Indiana.



As of March 15, 2022, our hotel portfolio consisted of eleven full-service,
primarily upscale and upper-upscale hotels with an aggregate total of 2,976
rooms, as well as interests in two condominium hotels and their associated
rental programs. Eight of our hotels operate under well-known brands such as
DoubleTree and Hyatt, and three are independent hotels. As of March 15, 2022,
our portfolio consisted of the following hotel properties:

                                            Number
Property                                   of Rooms             Location          Date of Acquisition       Chain/Class Designation
Wholly-owned Hotels
The DeSoto                                        246       Savannah, GA               December 21, 2004       Upper Upscale(1)
DoubleTree by Hilton Jacksonville
Riverfront                                        293       Jacksonville, FL           July 22, 2005                Upscale
DoubleTree by Hilton Laurel                       208       Laurel, MD                 December 21, 2004            Upscale
DoubleTree by Hilton Philadelphia
Airport                                           331       Philadelphia, PA           December 21, 2004            Upscale
DoubleTree by Hilton Raleigh
Brownstone-University (3)                         190       Raleigh, NC                December 21, 2004            Upscale
DoubleTree Resort by Hilton Hollywood
Beach                                             311       Hollywood, FL              August 9, 2007               Upscale
Georgian Terrace                                  326       Atlanta, GA                March 27, 2014          Upper Upscale(1)
Hotel Alba Tampa, Tapestry Collection
by Hilton                                         222       Tampa, FL                  October 29, 2007             Upscale
Hotel Ballast Wilmington, Tapestry
Collection by Hilton                              272       Wilmington, NC             December 21, 2004            Upscale
Hyatt Centric Arlington                           318       Arlington, VA              March 1, 2018             Upper Upscale
The Whitehall                                     259       Houston, TX                November 13, 2013       Upper Upscale(1)
Hotel Rooms Subtotal                            2,976

Condominium Hotel
Hyde Resort & Residences                          102   (2) Hollywood, FL              January 30, 2017            Luxury(1)
Hyde Beach House Resort & Residences              128   (2) Hollywood, FL              September 27, 2019          Luxury(1)
Total Hotel & Participating
Condominium Hotel Rooms                         3,206


(1) Operated as an independent hotel.

(2) We own the hotel business unit and operate a rental program. Reflects only

condominium units that participated in the rental program at

December 31, 2021. At any time, part of the participating units

in our rental program may be occupied by the owner(s) of the unit and unavailable

for rent to hotel guests. We sometimes refer to each participant

condominium unit as a “room”.

(3) At the date of this report, the DoubleTree by Hilton Raleigh

Brownstone-University is under contract to be sold.



We conduct substantially all our business through the Operating Partnership,
Sotherly Hotels LP. The Company is the sole general partner of the Operating
Partnership and currently owns an approximate 94.0% interest in the Operating
Partnership, with the remaining interest being held by limited partners who were
contributors of our initial hotel properties and related assets.

To qualify as a REIT, neither the Company nor the Operating Partnership can
operate our hotels. Therefore, our wholly-owned hotel properties are leased to
our TRS Lessees that are wholly-owned subsidiaries of the Operating Partnership,
which then engage hotel management companies to operate the hotels under a
management agreement. Our TRS Lessees have engaged Our Town to manage our
hotels. Our TRS Lessees, and their parent, MHI Holding (MHI Hospitality TRS
Holding, Inc.), are consolidated into each

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of our financial statements for accounting purposes. The earnings of MHI Holding
are taxable as regular C corporations and are subject to federal, state, local,
and, if applicable, foreign taxation on its taxable income.

Effects of the COVID-19 pandemic on our business


In March 2020, the World Health Organization declared COVID-19 to be a global
pandemic and the virus has continued to spread throughout the United States and
the world. As a result of this pandemic and subsequent government mandates and
health official recommendations, hotel demand has been significantly
reduced. Following the government mandates and health official recommendations,
we significantly reduced operations at all our hotels, suspended operations of
our hotel condominium rental programs and dramatically reduced staffing and
expenses. Our hotels have been gradually re-introducing guest amenities relative
to the return of business while focusing on profit generators and margin control
and we intend to continue those re-introductions, provided that we can be
confident that occupancy levels and reduced social distancing will not unduly
jeopardize the health and safety of our guests, employees and communities.

COVID-19 had a significant negative impact on our operations and financial
results in 2021, including a substantial decline in our revenues, profitability
and cash flows from operations compared to similar pre-pandemic periods. While
the resurgence of leisure travel demand contributed to improved results for 2021
compared to 2020, business travel demand continues to lag. As a result, although
we anticipate further recovery in 2022, the Company cannot estimate with
certainty when travel demand will fully recover.


The COVID-19 pandemic has also significantly contributed to economic uncertainty
and led to disruption and volatility in the global capital markets, which has
limited our access to capital. That economic uncertainty could increase our cost
of capital during the course of the recovery from the pandemic. Additionally, we
sought and obtained forbearance and loan modification agreements with the
lenders under the mortgages for all of our hotel properties. See the discussion
of forbearance, modifications, and waivers in Note 4 to the financial
statements.


As of December 31, 2021, we failed to meet the financial covenants under the
mortgage secured by The Whitehall. We have received a waiver of the financial
covenants from the lender on The Whitehall mortgage through June 30,
2022.  While the Company believes it will be successful in obtaining waivers,
loan modifications or securing refinance arrangements, it cannot provide
assurance that it will be able to do so on acceptable terms or at all. Based on
our current projections, following the expiration of the waiver on the financial
covenants from the mortgage lender on The Whitehall, we do not anticipate that
the financial performance of the property will have sufficiently recovered in
order to meet the existing covenants. If we fail to obtain additional waivers
from the lender, the lender could declare the Company in default under the
mortgage loan on that property and require repayment of the outstanding
balance.

From December 31, 2021the Company had approximately $13.2 million in cash without restriction and approximately $12.4 million in assigned cash.


U.S. generally accepted accounting principles ("U.S. GAAP") requires that, when
preparing financial statements for each annual and interim reporting period,
management evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt regarding the Company's ability to
continue as a going concern within one year after the date the financial
statements are issued. Due to the uncertainties described above related to
future cash flows and resulting compliance with the financial covenants as well
as the upcoming maturity of the mortgage on The Whitehall, the Company
determined that there is substantial doubt about its ability to continue as a
going concern. The consolidated financial statements have been prepared assuming
that the Company will continue as a going concern and do not include any
adjustments that might result from the outcome of this uncertainty.

Secured note financing


On December 31, 2020, we closed a transaction with KW, as collateral agent and a
note investor, and MIG, as a note investor, whereby the Investors purchased
$20.0 million in Secured Notes from the Operating Partnership. Under the terms
of the note purchase, we had an option to require the Investors to purchase an
additional $10.0 million in Secured Notes, which option has now expired. As of
the date of this report, there is an aggregate of $20.0 million Secured Notes
outstanding. We entered into the following agreements: (i) a Note Purchase
Agreement; (ii) a Secured Note with KW in the amount of $10.0 million and a
Secured Note with MIG in the amount of $10.0 million; (iii) a Pledge and
Security Agreement; (iv) a Board Observer Agreement; and (v) other related
ancillary agreements. The Secured Notes mature in 3 years and will be payable on
or before the maturity date at the rate of 1.47x the principal amount borrowed
during the initial 3-year term, with a 1-year extension at Company's option. The
Secured Notes also carry a 6.0% current interest rate, payable quarterly during
the initial 3-year term. Certain subsidiaries of the Operating Partnership
entered into the Pledge Agreement with KW, pursuant to which we agreed to pledge
and grant to KW a first priority security interest in the equity interests,
including certain voting rights, of our affiliates that own The DeSoto in
Savannah, Georgia; Hotel Ballast in Wilmington, North Carolina; and the
DoubleTree by Hilton Philadelphia Airport hotel. Upon an uncured monetary

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event of default under the Secured Notes, KW, as collateral agent, has a right
to sell, lease or otherwise dispose of or realize upon the Pledged Collateral in
order to satisfy any amounts outstanding under the Secured Notes. Pursuant to
the Board Observer Agreement, the Company granted KW the option and the right,
while the Secured Notes remain outstanding, to appoint a single representative
to attend meetings of the Company's board of directors and its committees in a
non-voting, observer capacity only. We are prohibited from making any equity
distributions as long as the Secured Notes are outstanding.

Main operating parameters


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

• Occupancy, or the number of rooms sold, usually expressed as a percentage

the total number of rooms available;

• Average Daily Rate, or ADR, which is the total room revenue divided by the

number of rooms sold; and

• Revenue per available room, or RevPAR, which is the total room revenue divided

by the total number of rooms available.



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

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

Operating results

Year Ended Comparison December 31, 2021 at the end of the year December 31, 2020


The following table illustrates the key operating metrics for the years ended
December 31, 2021 and 2020 for our wholly-owned hotels and the condominium hotel
units, during each respective reporting period ("composite portfolio"
properties), as well as the key operating metrics for the twelve wholly-owned
hotel properties that were under our control during all of 2020 ("actual"
properties).

                 Year Ended December 31, 2021            Year Ended 

December 31, 2020

                Composite              Actual           Composite              Actual
Occupancy %             52.5 %               52.9 %             30.6 %               31.7 %
ADR           $       160.51       $       145.50     $       144.88       $       134.48
RevPAR        $        84.29       $        76.94     $        44.28       $        42.59




Revenue. Total revenue for the year ended December 31, 2021 was approximately
$127.6 million, an increase of approximately $56.1 million, or 78.4%, from total
revenue for the year ended December 31, 2020 of approximately $71.5 million. The
increase in revenue for the twelve months ended December 31, 2021, was due
mainly to the significant increases in demand driven by the lifting of
restrictions on travel, social gatherings and businesses; significant increases
in demand from transient consumers; increases in travel by some group business
and increases in the number of foreign travelers.



Room revenues at our properties for the year ended December 31, 2021 increased
approximately $39.4 million, or 80.2%, to approximately $88.6 million compared
to room revenues for the year ended December 31, 2020 of approximately $49.2
million with each of our properties experiencing increased occupancy.

Food and beverage revenues at our properties for the year ended December 31,
2021 increased approximately $5.1 million, or 48.3%, to approximately $15.8
million compared to food and beverage revenues of approximately $10.7 million
for the year ended December 31, 2020, with most of our properties experiencing
increased demand for food and beverage services as a result of increased
occupancy. Our properties in Laurel, Maryland, Houston, Texas and Hollywood
Beach, Florida experienced decreases in food and beverage revenues collectively
totaling approximately $0.5 million.

Other operating income for the year ended December 31, 2021 increased by approximately $11.5 millioni.e. 98.8%, at approximately $23.1 million compared to other operating income for the year ended December 31, 2020 of about $11.6

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million. Each of our properties experienced increased other operating revenues
for the period with the exception of our property in Raleigh, North Carolina,
which was relatively flat.

Hotel Operating Expenses. Hotel operating expenses, which consist of room
expenses, food and beverage expenses, other direct expenses, indirect expenses,
and management fees, increased approximately $22.0 million, or 29.4%, for the
year ended December 31, 2021 to approximately $96.7 million compared to hotel
operating expenses for the year ended December 31, 2020 of approximately $74.7
million. The increase in hotel operating expenses for the twelve months ended
December 31, 2021, is directly related to the significant increase in hotel
occupancy and gross revenue at all of our properties.

Rooms expense at our properties for the year ended December 31, 2021 increased
approximately $7.1 million, or 45.8%, to approximately $22.7 million compared to
rooms expense of approximately $15.6 million for the year ended December 31,
2020.

Food and beverage expenses at our properties for the year ended December 31,
2021 increased approximately $1.8 million, or 20.7%, to approximately $10.3
million compared to food and beverage expense of approximately $8.5 million for
the year ended December 31, 2020.

Expenses from other operating departments increased approximately $3.5 million,
or 67.4%, to approximately $8.6 million for the year ended December 31, 2021,
compared to expenses from other operating departments of approximately $5.1
million for the year ended December 31, 2020.

Indirect expenses at our properties for the year ended December 31, 2021,
increased approximately $9.6 million, or 21.1%, to approximately $55.1 million
compared to indirect expenses of approximately $45.5 million for the year ended
December 31, 2020. The increase in indirect expenses for the twelve months ended
December 31, 2021, related to an expansion of operations to accommodate
increased occupancy.

Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2021 slightly increased by 0.1%, to approximately $19.9 million
compared to depreciation and amortization expense of approximately $19.9 million
for the year ended December 31, 2020.

Impairment of Investment in Hotel Properties, Net. The impairment of investment
in hotel properties, net for the years ended December 31, 2021 and 2020 was
approximately $12.2 million and $0, respectively. Our review of possible
impairment at two of our hotel properties revealed an excess of current carrying
costs over the estimated undiscounted cash flows, which was triggered by a
reduction in the holding period due to the recent sale of the Sheraton
Louisville Riverside as well as lack of certainty regarding our ability to
extend or refinance the mortgage on The Whitehall in Houston, Texas which
matures in early 2023. The resulting adjustment to fair market value resulted in
a charge of approximately $12.2 million during the period ended December 31,
2021.

Corporate General and Administrative. Corporate general and administrative
expenses for the year ended December 31, 2021 increased approximately $0.5
million, or 7.8%, to approximately $7.0 million compared to corporate general
and administrative expenses of approximately $6.5 million for the year ended
December 31, 2020. The increase in corporate general and administrative expenses
was mainly due to fees related to an abandoned debt offering as well as fees to
the special servicer of our mortgage on the DoubleTree Resort by Hilton
Hollywood Beach.

Interest Expense. Interest expense for the year ended December 31, 2021
increased approximately $4.6 million, or 25.6%, to approximately $22.7 million
compared to approximately $18.1 million of interest expense for the year ended
December 31, 2020. Approximately $4.0 million of the increase is related to the
secured notes issued in December 2020.

Unrealized Gain (Loss) on Hedging Activities. Unrealized gain (loss) on hedging
activities primarily relates to the change in variance between the unamortized
cost of the interest-rate swap related to our mortgage on the DoubleTree by
Hilton Philadelphia Airport and the fair value of that interest-rate swap which
is affected by both the decreasing number of payment periods in the swap period
and the changes in anticipated LIBOR rates over the remaining period. Those
factors contributed to an unrealized gain of approximately $1.5 million for the
year ended December 31, 2021, compared to an unrealized loss of approximately
$1.0 million for the year ended December 31, 2020.

Income Tax (Provision) Benefit. A decrease in our income tax provision of
approximately $5.3 million primarily relates to the reduction in the deferred
tax asset through a 100% valuation allowance of approximately $5.4 million taken
in the year ended December 31, 2020.

Net (Loss) Income. Net loss for the year ended December 31, 2021 decreased
approximately $25.1 million, or 46.8%, to approximately $28.5 million compared
to a net loss of approximately $53.7 million for the year ended December 31,
2020, as a result of the operating results discussed above.

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Distributions to Preferred Stockholders. During the year ended December 31,
2021, we accounted for undeclared distributions to preferred stockholders of
approximately $7.7 million, compared to declared and undeclared distributions to
preferred stockholders of approximately $8.8 million for the year ended December
31, 2020.

Year Ended Comparison December 31, 2020 at the end of the year December 31, 2019


The following table illustrates the key operating metrics for the years ended
December 31, 2020 and 2019, for our wholly-owned hotels and the condominium
hotel units, during each respective reporting period ("composite portfolio"
properties), as well as the key operating metrics for the twelve wholly-owned
hotel properties that were under our control during all of 2020 ("actual"
properties).

                 Year Ended December 31, 2020            Year Ended 

December 31, 2019

                Composite              Actual           Composite              Actual
Occupancy %             30.6 %               31.7 %             70.1 %               71.3 %
ADR           $       144.88       $       134.48     $       161.17       $       155.92
RevPAR        $        44.28       $        42.59     $       112.94       $       111.17




Revenue. Total revenue for the year ended December 31, 2020, was approximately
$71.5 million, a decrease of approximately $114.3 million, or 61.5%, from total
revenue for the year ended December 31, 2019, of approximately $185.8
million. The decrease in revenue for the twelve months ended December 31, 2020,
reflects the impact of the COVID-19 pandemic and the resulting reduction in
travel by group business, event holders and conferences, transient consumers and
the reduction of foreign travelers due to restrictions on foreign travel and
closings of local business. Each of our hotel properties, with the exception of
our newly acquired Hyde Beach House Resort & Residences in Hollywood, Florida,
realized a reduction in hotel occupancy and a decrease in revenue as a result of
these factors.

Room revenues at our properties for the year ended December 31, 2020, decreased
approximately $78.9 million, or 61.6%, to approximately $49.2 million compared
to room revenues for the year ended December 31, 2019, of approximately $128.1
million with each of our properties experiencing reduced occupancy.

Food and beverage revenues at our properties for the year ended December 31,
2020, decreased approximately $29.6 million, or 73.5%, to approximately $10.7
million compared to food and beverage revenues of approximately $40.3 million
for the year ended December 31, 2019, with each of our properties experiencing
reduced demand for food and beverage services as a result of reduced occupancy.

Other operating revenues for the year ended December 31, 2020, decreased
approximately $5.8 million, or 33.4%, to approximately $11.6 million compared to
other operating revenues for the year ended December 31, 2019, of approximately
$17.4 million. Each of our properties experienced reduced other operating
revenues for the period other than our recently acquired Hyde Beach House Resort
& Residences in Hollywood, Florida and the hotel property in Tampa, Florida,
which had an aggregate positive increase in other operating departments revenue
of approximately $0.7 million.

Hotel Operating Expenses. Hotel operating expenses, which consist of room
expenses, food and beverage expenses, other direct expenses, indirect expenses,
and management fees, decreased approximately $64.1 million, or 46.2%, for the
year ended December 31, 2020, to approximately $74.7 million compared to hotel
operating expenses for the year ended December 31, 2019, of approximately $138.8
million. The decrease in hotel operating expenses for the twelve months ended
December 31, 2020, reflects the impact of the COVID-19 pandemic and the
resulting reduction in hotel occupancy at all of our properties other than our
recently acquired Hyde Beach House Resort & Residences which had a positive
increase in hotel operating expenses of approximately $1.1 million.

Rooms expense at our properties for the year ended December 31, 2020, decreased
approximately $16.6 million, or 51.6%, to approximately $15.5 million compared
to rooms expense of approximately $32.1 million for the year ended December 31,
2019.

Food and beverage expenses at our properties for the year ended December 31,
2020, decreased approximately $20.8 million, or 70.9%, to approximately $8.5
million compared to food and beverage expense of approximately $29.3 million for
the year ended December 31, 2019.

Expenses from other operating departments decreased approximately $1.8 million,
or 26.1%, to approximately $5.1 million for the year ended December 31, 2020,
compared to expenses from other operating departments of approximately $6.9
million for the year ended December 31, 2019. Our recently acquired Hyde Beach
House Resort & Residences in Hollywood, Florida, was the only property with an
aggregate increase in other operating departments expenses of approximately $1.3
million.

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Indirect expenses at our properties for the year ended December 31, 2020,
decreased approximately $24.9 million, or 35.4%, to approximately $45.5 million
compared to indirect expenses of approximately $70.4 million for the year ended
December 31, 2019. The decrease in indirect expenses for the twelve months ended
December 31, 2020, resulted from decreases in administrative and general,
management and franchise fees, sales and marketing, repairs and maintenance,
energy and utilities, information and communications and insurance, and other
indirect expenses for all our properties.

Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2020, decreased approximately $1.7 million, or 8.0%, to
approximately $19.9 million compared to depreciation and amortization expense of
approximately $21.6 million for the year ended December 31, 2019. The decrease
in depreciation was mainly related to our properties in Philadelphia,
Pennsylvania, Laurel, Maryland, Tampa, Florida and Atlanta Georgia from prior
year changes in estimated useful lives and disposals, with a decrease of
approximately $1.8 million. There was also an aggregate increase in depreciation
and amortization of approximately $0.1 million from our remaining properties.

Corporate General and Administrative. Corporate general and administrative
expenses for the year ended December 31, 2020, decreased approximately $0.3
million, or 4.9%, to approximately $6.5 million compared to corporate general
and administrative expenses of approximately $6.8 million for the year ended
December 31, 2019. The decrease in corporate general and administrative expenses
was mainly due to decreased salaries, professional and legal fees.

Interest Expense. Interest expense for the year ended December 31, 2020,
decreased approximately $1.7 million, or 8.7%, to approximately $18.1 million
compared to approximately $19.8 million of interest expense for the year ended
December 31, 2019. The decrease in interest expense for the twelve months ended
December 31, 2020, was substantially related to the reduction of the 7.25%
unsecured notes (the "7.25% Notes") and the three variable rate loans on
Raleigh, North Carolina, Tampa, Florida and Houston, Texas, which accounted for
a decrease of approximately $1.3 million, compared to the twelve-month period
ending December 31, 2019.  The remaining decrease of approximately $0.4 million
was due to lower loan balances.

Loss on Early Debt Extinguishment. The loss on early debt extinguishment for the
year ended December 31, 2020, decreased approximately $1.2 million, or 100.0%,
to $0 compared to a loss on debt extinguishment of approximately $1.2 million
for the year ended December 31, 2019. There were no early extinguishments of
debt in 2020. In May 2019, the 7.25% Notes were redeemed at 101% of face
value. A redemption premium of $0.25 million and the unamortized deferred
financing costs related to the 7.25% Notes comprised loss on early debt
extinguishment in 2019, of approximate $1.2 million.

Unrealized Loss on Hedging Activities. Unrealized gain (loss) on hedging
activities primarily relates to the change in variance between the unamortized
cost of the interest-rate swap related to our mortgage on the DoubleTree by
Hilton Philadelphia Airport and the fair value of that interest-rate swap which
is affected by both the decreasing number of payment periods in the swap period
and the changes in anticipated LIBOR rates over the remaining period. Those
factors contributed to an unrealized loss of approximately $1.0 million for the
year ended December 31, 2020, compared to an unrealized loss of approximately
$1.2 million for the year ended December 31, 2019.

Income Tax (Provision) Benefit. We had an income tax provision of approximately
$5.3 million for the twelve months ended December 31, 2020, compared to an
income tax benefit of approximately $0.2 million for the twelve months ended
December 31, 2019. The change in income tax provision was primarily derived from
a reduction of our deferred tax assets and through the establishment of a 100%
valuation allowance of approximately $5.4 million during the year ended December
31, 2020.

Net income (loss). Net loss for the year ended December 31, 2020increased by approximately $54.9 millioni.e. 4,666.50%, at approximately $53.7 million
compared to a net result of approximately $1.2 million for the year ended
December 31, 2019as a result of the operating results discussed above.

Distributions to Preferred Shareholders. During the year ended December 31, 2020we have recorded declared and undeclared distributions to preferred shareholders of approximately $8.8 millionagainst approximately $7.8 million distributions declared and paid to preferred shareholders for the year ended December 31, 2019.

Sources and uses of species


Our principal sources of cash are cash from hotel operations, proceeds from the
sale of common and preferred stock, proceeds from the sale of secured and
unsecured notes, proceeds of mortgage or other debt and hotel property
sales. Our principal uses of cash are acquisitions of hotel properties, capital
expenditures, debt services and maturities, operating costs, corporate expenses
and dividends. As of December 31, 2021, we had unrestricted cash of
approximately $13.2 million and restricted cash of approximately $12.4 million.

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Operating Activities. Our net cash provided by operating activities for the year
ended December 31, 2021 was approximately $2.3 million. The positive cash flow
from operations during the year was due to the increase in occupancy at our
hotels as a result of the lifting of restrictions on travel, social gatherings
and businesses; significant increases in demand from transient consumers;
increases in travel by some group business and increases in the number of
foreign travelers. Our cash used in operating activities for the year ended
December 31, 2020 was approximately $11.3 million. Cash used in or provided by
operating activities generally consists of the cash flow from hotel operations,
offset by the interest portion of our debt service, corporate expenses and
changes in working capital.

Investing Activities. Our cash used in investing activities for the year ended
December 31, 2021 was approximately $2.4 million. During the year ended December
31, 2021, we made improvements to our hotel properties including additions of
furniture, fixtures and equipment of approximately $3.2 million. Our cash used
in investing activities for the year ended December 31, 2020 was approximately
$3.8 million. During the year ended December 31, 2020, we invested approximately
$4.0 million into improvements to our hotel properties including additions of
furniture, fixtures and equipment.

Financing Activities. Our cash used in financing activities for the year ended
December 31, 2021, was approximately $9.7 million. During the year ended
December 31, 2021, we paid approximately $6.5 million in scheduled payments of
principal on our mortgage loans and paid approximately $3.1 million of unsecured
note payments. Our cash provided by financial activities for the year ended
December 31, 2020, was approximately $22.4 million. During the year ended
December 31, 2020, we sold Secured Notes for $20.0 million, borrowed
approximately $10.7 million in unsecured notes, paid approximately $1.6 million
in financing costs, paid approximately $2.6 million in scheduled payments of
principal on our mortgage loans and, prior to the start of the pandemic, made
distributions of approximately $4.2 million.

Capital expenditure


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

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

Historically, we have aimed to maintain overall capital expenditures, except for
those required by our franchisors as a condition to a franchise license or
license renewal, at 4.0% of gross revenue. In response to the COVID-19 pandemic,
we postponed all major non-essential capital expenditures. If travel demand,
occupancy, and RevPAR increase as expected through the remainder of 2022, we
expect total capital expenditures to be approximately $6.3 million for 2022.

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

Cash and capital resources


The COVID-19 pandemic had a significant negative impact on our operations and
financial results during 2021 and is expected to continue until at least the end
of 2022. The impact includes a substantial decline in our revenues,
profitability and cash flows from operations. While the duration and full
financial impact of the reduction in hotel demand caused by the pandemic,
contraction of operations at our hotels and other effects are uncertain and
cannot be reasonably estimated at this time, we expect significant negative
impacts on our operations and financial results to continue until travel and
business restrictions are eased, travel orders are lifted, consumer confidence
is restored and an economic recovery is sustained. In response to these negative
impacts, we took a number of immediate actions to reduce costs and preserve
liquidity including the suspension of dividends on our common and preferred
stock, suspension of planned capital expenditures and reduction in cash
compensation of our executive officers, board of directors, and corporate
employees.

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During 2020 and into 2021, we entered into forbearance agreements with all our
mortgage lenders and negotiated extended payment plans with a few key vendors in
order to preserve liquidity. Repayment of deferred amounts of interest, mortgage
principal, and amounts due certain vendors, which began in 2021, will continue
through the end of 2022, with certain amounts being deferred until the
applicable loan matures. We estimate the aggregate amount of such deferred
payments due in 2022 at approximately $7.5 million.

In addition, on December 31, 2020, we issued $20.0 million in Secured Notes in
order to provide additional liquidity. The Secured Notes mature on December 31,
2023 and will be payable on or before the maturity date at the rate of 1.47x the
principal amount borrowed during the initial 3-year term,

As of December 31, 2021, we had cash, cash equivalents and restricted cash of
approximately $25.6 million, of which approximately $12.4 million was in
restricted reserve accounts for cash collateral, capital improvements, real
estate tax and insurance escrows. We expect that our cash on hand combined with
our cash flow from our hotels should be adequate to fund continuing operations,
recurring capital expenditures for the refurbishment and replacement of
furniture, fixtures and equipment, and monthly scheduled payments of principal
and interest (excluding any balloon payments due upon maturity of our mortgage
debt or secured notes).

We have entered into a real estate sale agreement to sell our DoubleTree by
Hilton Raleigh-Brownstone University hotel. If successful, we expect the sale to
generate net proceeds of approximately $20.0 million, which we will use to repay
a portion the Secured Notes and associated repayment factor.

Other than monthly mortgage loan principal payments, our only mortgage debt
obligation with a scheduled maturity date in 2022 are the mortgages on the
DoubleTree by Hilton Laurel and the Hotel Alba Tampa requiring us to repay or
refinance balances collectively totaling approximately $25.6 million. If we are
unsuccessful in selling the DoubleTree by Hilton Raleigh-Brownstone University,
then we will be required to repay or refinance an additional $18.3 million. In
2023, the mortgages on The Whitehall in Houston, Texas and the DoubleTree by
Hilton Philadelphia Airport mature. We intend to refinance these mortgages at
the level of their existing indebtedness or request extensions at existing
terms.

At December 31, 2021, we were current on all loan payments on all mortgages per
the terms of our mortgage agreements, as amended. We were in compliance with all
loan covenants with the exception of the Debt Service Coverage Ratio ("DSCR")
requirement related to the mortgage on The Whitehall in Houston, Texas and the
Tangible Net Worth covenant related to the mortgages on the DoubleTree by Hilton
Jacksonville Riverfront and the Hotel Alba in Tampa, Florida. We were able to
obtain waivers from the lender of the mortgage on The Whitehall in Houston,
Texas through June 30, 2022 and from the lender on the mortgage on the
DoubleTree by Hilton Jacksonville Riverfront through December 31, 2022. We also
anticipate receiving a waiver from the lender on the mortgage on the Hotel Alba
in Tampa, Florida. We believe we are likely to remain in non-compliance with one
or more of these covenants over the next two to four quarters. If we fail to
obtain additional waivers or loan modifications, our lenders could declare us in
default and require repayment of the outstanding balance on the mortgage
loan. If that were to occur, we may not have sufficient funds to pay that
mortgage debt. We believe we will be successful in obtaining necessary waivers
and loan modifications from our mortgage lenders but cannot provide assurance we
will be able to do so on acceptable terms or at all.

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

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

                                       51

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Mortgage debt


As of December 31, 2021, we had a principal mortgage debt balance of
approximately $352.6 million. The following table sets forth our mortgage debt
obligations on our hotels.

                               December 31,    Prepayment    Maturity    Amortization
Property                           2021        Penalties       Date       Provisions     Interest Rate
The DeSoto (1)                 $  32,148,819      Yes         7/1/2026       25 years        4.25%
DoubleTree by Hilton
Jacksonville
  Riverfront (2)                  33,051,316      Yes        7/11/2024       30 years        4.88%
DoubleTree by Hilton Laurel
(3)                                8,175,215      None        5/5/2022       25 years        5.25%
DoubleTree by Hilton
Philadelphia Airport (4)          40,734,077      None      10/31/2023       30 years   LIBOR plus 2.27%
DoubleTree by Hilton
Raleigh-

Brownstone University (5) 18,300,000 Yes 08/01/2022

  (5)        LIBOR plus 4.00%
DoubleTree Resort by Hilton
Hollywood                                                                    30 years
  Beach (6)                       54,253,963      (6)        10/1/2025                       4.91%
Georgian Terrace (7)              41,484,732      (7)         6/1/2025       30 years        4.42%
Hotel Alba Tampa, Tapestry
Collection by Hilton (8)          17,383,397      None       6/30/2022       (8)        LIBOR plus 3.75%
Hotel Ballast Wilmington,
Tapestry Collection by
Hilton (9)                        32,604,948      Yes         1/1/2027       25 years        4.25%
Hyatt Centric Arlington (10)      48,990,136      Yes        10/1/2028       30 years        5.25%
Sheraton Louisville
Riverside (11)                    10,947,366      Yes        12/1/2026       25 years        4.27%
The Whitehall (12)                14,551,671      Yes        2/26/2023       25 years   PRIME plus 1.25%
Total Mortgage Principal
Balance                          352,625,640
Deferred Financing Costs,
Net                              (1,547,004)
Unamortized Premium on Loan           92,247

Total mortgage loans, net $351,170,883

(1) The note is amortized over a period of 25 years after an initial interest of 1 year

single period (which expired in August 2017) and is subject to prepayment

penalty except for any advance payment made within 120 days of the due date

Dated.

(2) The ticket is subject to a prepayment penalty up to March 2024. Prepayment

can be done without penalty thereafter. (3) Prepayment may be made on this ticket without penalty. At July 15, 2021we

entered into a rating modification agreement whereby the due date was

extended by August 5, 2021 for May 5, 2022. (4) The note bears a floating interest rate of 1 month LIBOR plus 2.27%, but we

entered into a swap agreement to fix the rate at 5.237%. under the exchange

agreement, the notional amounts approximate the declining balance of the loan

and we are responsible for all potential termination fees associated with

early termination of the swap contract. (5) The note provided initial proceeds of $18.3 millionwith a supplement $5.2

million available subject to the satisfaction of certain conditions; has a

initial term of 4 years with an extension of 1 year; carries floating interest

1-month LIBOR plus 4.00%; only requires monthly interest payments;

and following a 12 month lockout, can be prepaid with penalty in year 2 and

without penalty thereafter. We have entered into an interest rate cap agreement

to limit our exposure through August 1, 2022 increases in LIBOR exceeding

     3.25% on a notional amount of $23,500,000.
(6)  With limited exception, the note may not be prepaid prior to June 2025.
(7)  With limited exception, the note may not be prepaid prior to February 2025.
(8)  The note bears a floating interest rate of 1-month LIBOR plus 3.75% subject

at a floor rate of 3.75%; with monthly principal payments of $26,812; the

note provides that the mortgage can be extended for two additional periods

one year each, under certain conditions. (9) The note is amortized over a 25-year schedule after an initial interest period

period of one year and is subject to a prepayment penalty except for

prepayments made within 120 days of the due date. (10) Following a blocking of 5 years, the ticket can be prepaid with penalty in years

6-10 and without penalty during the last 4 months of the term. (11) The note bears interest at a fixed rate of 4.27% for the first 5 years of

to lend. The lender exercised its option to adjust the interest rate after 5

years at 5.25% efficiency December 1, 2021. With the lender’s approval,

the loan can be assumed by the buyer of the property. (12) The note bears a variable interest rate equal to the New York prime rate plus 1.25%

and is subject to a 2.0% prepayment penalty if prepaid after April 12, 2021

but on or before April 12, 2022 and 1.0% if prepaid after April 12, 2022 corn

on or before November 26, 2022. Prepayment can be made without penalty

     thereafter.


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Mortgage forbearance agreements


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

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

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

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

DoubleTree by Hilton Philadelphia Airport
We have agreed with the lender to the following: (a) deferral of scheduled
principal through June 1, 2021; (b) payment of regular principal and interest to
resume on July 1, 2021; (c) remaining deferred interest is to be paid in 12
equal installments beginning April 1, 2021; (d) deferred principal to be repaid
on a quarterly basis out of the excess of Hotel EBITDA after reserves over
Actual Debt Service beginning with the quarter ending March 31, 2022, or at
maturity; (e) a guaranty by the Operating Partnership of payment under the loan;
(f) addition of a revenue per available room financial covenant for the period
between March 1, 2021 and May 31, 2021; (g) a waiver of compliance with the DSCR
covenant through September 30, 2021; and (h) revised DSCR requirements for the
quarters ending December 31, 2021 through June 30, 2022. In connection with the
guarantee, the Operating Partnership entered into an acknowledgment of
confession of judgment of guarantor pursuant to which the lender is authorized
to enter a judgment against the Operating Partnership upon the occurrence of an
event of default.  The maturity date was extended by 3 months, or until October
31, 2023.








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

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

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

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

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

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Hyatt Centric Arlington
Starting on July 15, 2020, we entered into a series of loan modification
agreements, pursuant to which the lender agreed to the following: (a) deferral
of scheduled payments of principal and interest due from April 1, 2020 to March
31, 2021; (b) deferral of scheduled payments of principal due from April 1, 2021
to December 31, 2021; (c) loan balance to be re-amortized as of January 1, 2022;
(d) deferred principal and interest, along with additional accrued interest on
interest, is due and payable by July 1, 2022; (e) $147,765 drawn from the
reserve account to be replenished in full by December, 2021; and (f) wavier of
the requirement to make deposits into FF&E reserve from April 2020 to April 1,
2021. As a condition to the effectiveness of the first modification, the
borrowing entity under the loan paid (i) $50,000 to be deposited into the ground
lease reserve account and (ii) $426,620 to be deposited into an escrow for
impositions. As a condition to the effectiveness of the second modification, the
borrowing entity paid (i) an additional $47,500 to be deposited into the ground
lease reserve account and (ii) a one-time fee of 0,000 to be deposited into
an escrow for impositions. Until the borrowing entity under the loan has fully
repaid the deferred monthly payment and replenished the FF&E reserves account
and the PPP loan is no longer outstanding, the borrowing entity is not permitted
make any distributions without prior written consent of the lender.

Sheraton Louisville Riverside
The lender has agreed to the following: (a) deferral of scheduled payments of
interest due from May 1, 2020 to July 1, 2020; (b) deferral of scheduled
payments of principal due from May 1, 2020 to April 1, 2021; (c) subsequent
payments were required to be applied first toward current and deferred interest
and then toward principal; and (d) any deferred principal is due and payable at
maturity. The maturity date under the loan modification remains unchanged. The
hotel was sold on February 10, 2022.

The Whitehall
We entered into two forbearance agreement pursuant to which the lender agreed to
the following: (a) deferral of scheduled payments of principal due from April 1,
2020 to July 13, 2021; (b) deferral of scheduled payments of interest from April
1, 2020 to October 12, 2020; (c) deferred payments will be added to the
principal balance of the loan and subsequent payments will be calculated based
on the remainder of the amortization period; (d) on July 14, 2021 principal and
interest payments will resume based upon the original amortization; (e) the
interest rate was changed from LIBOR plus 3.50% to New York Prime Rate plus
1.25%; (f) loan modification fees of $54,500; (g) the prepayment penalty was
changed to: (i) 2.0% if prepaid after April 12, 2021 but on or before April 12,
2022; (ii) 1.0% if prepaid after April 12, 2022 but on or before November 26,
2022; and (iii) no prepayment fee if prepaid after November 26, 2022; and (h) a
waiver of the financial covenants through June 30, 2022.  The maturity date
under the loan modification remains unchanged. As conditions to the forbearance
agreement, the parties agreed to the following during the forbearance period
lasting until the earlier of (a) July 13, 2021 or (b) the occurrence of a
forbearance event of default: (i) the borrowing entity, the Operating
Partnership and the Company cannot declare, authorize or pay dividends or may
any distribution to any person, without prior written consent of the lender;
(ii) the borrowing entity may not sell, convey, transfer or assign assets, other
than in the ordinary course of business, without the lender's consent and in the
case of such sale, the lender may cause the buyer to pay all proceeds directly
to the lender and (iii) the borrowing entity shall not default on any of its
obligations to third parties. If we fail to meet the obligations under the
forbearance agreements, lender has the right to exercise all remedies available
under the loan agreement including the right to accelerate the maturity of the
loan.

Financial Covenants

Mortgage Loans

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

As described in "Effects of COVID-19 Pandemic on our Business", we failed to
meet certain financial covenants under the mortgages secured by each of the
DoubleTree by Hilton Jacksonville Riverfront, the Hotel Alba, and The
Whitehall. We have received waivers of the financial covenants under the
applicable mortgages from (i) the lender on the DoubleTree by Hilton
Jacksonville Riverfront through December 31, 2022 and (ii) the lender on The
Whitehall mortgage through June 30, 2022. We expect to receive a waiver from the
lender on the Hotel Alba for the period ended December 31, 2021.

Certain of our loan agreements also include financial covenants that trigger a
"cash trap". As of December 31, 2021, we had failed to meet the financial
covenants under the mortgage secured by the DoubleTree Resort by Hilton
Hollywood Beach. Without the waiver we received from the lender which waives
compliance through December 31, 2022, non-compliance with the financial covenant
on this and similar mortgages would have triggered a "cash trap" requiring
substantially all the revenue generated by those hotels to be deposited directly
into lockbox accounts and swept into cash management accounts for the benefit of
the respective lenders until each property meets the criteria in the relevant
loan agreement for exiting the "cash trap". In addition, in order to receive

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forbearance from the lender on the DoubleTree by Hilton Raleigh Brownstone -
University and the Hyatt Centric Arlington, we agreed to "cash traps" until the
properties meet the criteria in the forbearance agreement for exiting the "cash
traps". Similar provisions may be a condition of additional or further lender
forbearance.

Secured Notes

Our Secured Notes provide that aggregate accounts payable shall not exceed $5.0
million at any time beginning December 31, 2021 for as long as the Secured Notes
are outstanding. The Secured Notes also place a cap on employee compensation and
capital expenditures and require a minimum level of liquidity. We were in
compliance with the covenant as of December 31, 2021.

Contractual obligations

The following table presents our contractual obligations as of December 31, 2021and the effect these obligations are expected to have on our liquidity and cash flows in future periods (in thousands).


                                                    Payments due by period 

(in thousands)

                                                  Less than                                       More than
Contractual Obligations             Total          1 year         1-3 years       3-5 years        5 years
Mortgage loans, including
interest                         $   406,239     $    66,855     $   122,029     $   172,534     $    44,821
Unsecured Notes                        7,749           2,199           4,398           1,152               -
Secured Notes                         31,834           1,217          30,617               -               -
Ground, building, parking
garage, office and equipment
leases                                17,439             684           1,335           1,320          14,100
Totals                           $   463,261     $    70,955     $   158,379     $   175,006     $    58,921


Dividend Policy

Distributions to Stockholders and Holders of Units in the Operating Partnership.
The Company has elected to be taxed as a REIT commencing with our taxable year
ending December 31, 2004. To maintain qualification as a REIT, the Company is
required to make annual distributions to its stockholders of at least 90.0% of
our REIT taxable income, (excluding net capital gain, which does not necessarily
equal net income as calculated in accordance with generally accepted accounting
principles). The Company's ability to pay distributions to its stockholders will
depend, in part, upon its receipt of distributions from the Operating
Partnership which may depend upon receipt of lease payments with respect to our
properties from our TRS Lessees, and in turn, upon the management of our
properties by our hotel manager. Distributions to the Company's stockholders
will generally be taxable to the Company's stockholders as ordinary income;
however, because a portion of our investments will be equity ownership interests
in hotels, which will result in depreciation and noncash charges against our
income, a portion of our distributions may constitute a non-taxable return of
capital. To the extent not inconsistent with maintaining the Company's REIT
status, our TRS Lessees may retain any after-tax earnings.

Distributions to Preferred Stockholders and Holder of Preferred partnership
units in the Operating Partnership. The Company is obligated to pay
distributions to its holders of the Company's preferred stock and the Operating
Partnership is obligated to pay its preferred unit holder, the Company. Holders
of the Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock are entitled to receive distributions when authorized by the
Company's board of directors out of assets legally available for the payment of
distributions. The amount of annual dividends on our outstanding preferred
shares is approximately $8.1 million and the aggregate liquidation preference
with respect to our outstanding preferred shares is approximately $115.8
million. The preferred stock is not redeemable by the holders, has no maturity
date and is not convertible into any other security of the Company or its
affiliates, except in the event of a change of control.

The Company's ability to pay distributions to its stockholders will depend, in
part, upon its receipt of distributions from the Operating Partnership which may
depend upon receipt of lease payments with respect to our properties from our
TRS Lessees, and in turn, upon the management of our properties by our hotel
manager. Distributions to the Company's stockholders will generally be taxable
to the Company's stockholders as ordinary income; however, because a portion of
our investments will be equity ownership interests in hotels, which will result
in depreciation and noncash charges against our income, a portion of our
distributions may constitute a non-taxable return of capital. To the extent not
inconsistent with maintaining the Company's REIT status, our TRS Lessees may
retain any after-tax earnings.

The amount, timing and frequency of distributions will be authorized by the
Company's board of directors and declared by the Company based upon a variety of
factors deemed relevant by its directors, and no assurance can be given that the
distribution policy will not change in the future.

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Inflation


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

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

Geographic concentration and seasonality


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

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

Competetion


The hotel industry is highly competitive with various participants competing on
the basis of price, level of service and geographic location. Each of our hotels
is located in a developed area that includes other hotel properties. The number
of competitive hotel properties in a particular area could have a material
adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel properties
acquired in the future. We believe that brand recognition, location, the quality
of the hotel, consistency of services provided, and price, are the principal
competitive factors affecting our hotels.

Critical accounting policies


Our consolidated financial statements, prepared in conformity with U.S. GAAP,
require management to make estimates and assumptions that affect the reported
amount of assets and liability at the date of our financial statements, the
reported amounts of revenue and expenses during the reporting periods and the
related disclosures in the consolidated financial statements and accompanying
footnotes. We believe that of our significant accounting policies, which are
described in Note 2, Significant Accounting Policies, in the audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K, the following accounting policies are critical because they require
difficult, subjective and complex judgments and include estimates about matters
that are inherently uncertain, involve various assumptions, require management
judgment, and because they are important for understanding and evaluating our
financial position, results of operations and related disclosures. We evaluate
our estimates, assumptions and judgments on an ongoing basis, based on
information that is available to us, our historical experiences and various
matters that we believe are reasonable and appropriate for consideration under
the circumstances. Actual results may differ significantly from these estimates
due to changes in judgments, assumptions and conditions as a result of
unforeseen events or otherwise, which could have a material impact on our
financial position or results of operations.

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

                                       57
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We review our hotel properties for impairment whenever events or changes in
circumstances indicate the carrying value of the hotel properties may not be
recoverable. Events or circumstances that may cause us to perform our review
include, but are not limited to, adverse permanent changes in the demand for
lodging at our properties due to declining national or local economic conditions
and/or new hotel construction in markets where our hotels are located. When such
conditions exist, management performs a recoverability analysis to determine if
the estimated undiscounted future cash flows from operating activities and the
estimated proceeds from the ultimate disposition of a hotel property exceed its
carrying value. If the estimated undiscounted future cash flows are found to be
less than the carrying amount of the hotel property, an adjustment to reduce the
carrying value to the related hotel property's estimated fair market value would
be recorded and an impairment loss recognized.

The COVID-19 pandemic has had, and is expected to continue to have, an adverse
impact on the lodging and hospitality industries, which the Company considered
to be a triggering event for each of its hotels during its impairment testing
for the year ended December 31, 2021. The Company assessed the recoverability of
each of its hotel properties which included a projection of future operating
cash flows based upon significant assumptions regarding its ability to maintain
ownership of the property, growth rates, occupancy, room rates, economic trends,
property-specific operating costs, an allowance for the replacement of
furniture, fixtures and equipment and projected cash flows from the eventual
disposition of the hotel. The Company also projects cash flows from the eventual
disposition of the hotel based upon property-specific capitalization rates. 

the

Company determined that two impairments were triggered by a reduction in the
holding period due to the recent sale of the Sheraton Louisville Riverside as
well as lack of certainty regarding our ability to extend or refinance the
mortgage on The Whitehall in Houston, Texas which matures in early 2023. The
resulting adjustment to fair market value resulted in a charge of approximately
$12.2 million during the period ended December 31, 2021.

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

We account for income taxes using the asset and liability method under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance is required for deferred tax assets if, based on
all available evidence, it is "more-likely-than-not" that all or a portion of
the deferred tax asset will or will not be realized due to the inability to
generate sufficient taxable income in certain financial statement periods. The
"more-likely-than-not" analysis means the likelihood of realization is greater
than 50%, that we either will or will not be able to fully utilize the deferred
tax assets against future taxable income. The net amount of deferred tax assets
that are recorded on the financial statements must reflect the tax benefits that
are expected to be realized using these criteria. As of December 31, 2021, we
have determined that it is more-likely-than-not that we will not be able to
fully utilize our deferred tax assets for future tax consequences, therefore a
100% valuation allowance is required. As of December 31, 2021 and 2020, deferred
tax assets each totaled $0, respectively.

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

The operating partnership is generally not subject to federal and state income tax since Partnership unitholders are subject to tax on their respective shares of the Partnership’s taxable income.

Recent accounting pronouncements


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

Non-GAAP Financial Measures


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

                                       58
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FFO and Adjusted FFO. Industry analysts and investors use Funds from Operations
("FFO"), as a supplemental operating performance measure of an equity REIT. FFO
is calculated in accordance with the definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT"). FFO, as defined by NAREIT, represents net income or loss determined
in accordance with GAAP, excluding extraordinary items as defined under GAAP and
gains or losses from sales of previously depreciated operating real estate
assets, plus certain non-cash items such as real estate asset depreciation and
amortization or impairment, stock compensation costs and after adjustment for
any noncontrolling interest from unconsolidated partnerships and joint
ventures. Historical cost accounting for real estate assets in accordance with
GAAP implicitly assumes that the value of real estate assets diminishes
predictably over time. Since real estate values instead have historically risen
or fallen with market conditions, many investors and analysts have considered
the presentation of operating results for real estate companies that use
historical cost accounting to be insufficient by itself.

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

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

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 20212020 and 2019.

                                          Year Ended        Year Ended         Year Ended
                                         December 31,      December 31,       December 31,
                                             2021              2020               2019
Net (Loss) Income                        $ (28,539,640 )   $ (53,682,905 )    $   1,175,568
Depreciation and Amortization - Real
Estate                                      19,838,017        19,825,382    

21,578,309

Impairment of investment in hotel
properties, net                             12,201,461                 -                  -
(Gain) Loss on Disposal of Assets             (158,286 )         136,063    

123,739

Distributions to preferred
stockholders                                (7,541,891 )      (8,755,642 )       (7,820,695 )
Gain on Involuntary Conversion of
Asset                                         (588,586 )        (179,856 )         (293,534 )
FFO Available to Common Stockholders
and Unitholders                          $  (4,788,925 )   $ (42,656,958 )    $  14,763,387
Decrease (Increase) in Deferred Income
Taxes                                                -         5,412,084           (280,905 )
Amortization                                    71,209            71,390    

59,007

ESOP and stock - based compensation            689,547           754,111            385,561
Aborted Offering Costs                         631,952                 -                  -
Termination (Refund) Fee                             -           (19,709 )          291,841
Unrealized Loss on Hedging Activities
(A)                                         (1,493,841 )         986,200    

1,177,871

Loss on Early Debt Extinguishment (A)                -                 -    

1,152,356

Adjusted FFO Available to Common
Stockholders and Unitholders             $  (4,890,058 )   $ (35,452,882 )    $  17,549,118




Hotel EBITDA. We define Hotel EBITDA as net income or loss excluding: (1)
interest expense, (2) interest income, (3) income tax provision or benefit, (4)
unrealized gains and losses on derivative instruments not included in other
comprehensive income, (5) gains and losses on disposal of assets, (6) impairment
of long-lived assets or investments, (7) loss on early debt extinguishment, (8)
gain on exercise of development right, (9) corporate general and administrative
expense, (10) depreciation and amortization, (11)

                                       59
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gains and losses on involuntary conversions of assets, and (12) other operating
revenue not related to our wholly-owned portfolio. We believe this provides a
more complete understanding of the operating results over which our wholly-owned
hotels and its operators have direct control. We believe hotel EBITDA provides
investors with supplemental information on the on-going operational performance
of our hotels and the effectiveness of third-party management companies
operating our business on a property-level basis.

Our calculation of Hotel EBITDA may differ from similar measures calculated by other REITs.

Here is a reconciliation of the net loss with Hotel EBITDA for the years ended December 31, 20212020 and 2019.


                                                     Year Ended        Year 

Year ended

                                                    December 31,      

the 31st of December, the 31st of December,

                                                        2021              2020              2019
Net (Loss) Income                                   $ (28,539,640 )   $ (53,682,905 )   $   1,175,568
Interest Expense                                       22,686,694        18,056,874        19,768,193
Interest Income                                          (147,025 )        (210,426 )        (444,459 )
Income Tax Provision (Benefit)                             27,392         5,280,443          (249,480 )
Depreciation and Amortization                          19,909,226        19,896,772        21,637,316
Impairment of investment in hotel properties, net      12,201,461                 -                 -
Unrealized Loss on Hedging Activities                  (1,493,841 )         986,200         1,177,871
Loss on Early Debt Extinguishment                               -                 -         1,152,356
Loss on Sale or Disposal of Assets                       (158,286 )         136,063           123,739
Gain on Exercise of Development Right                           -                 -        (3,940,000 )
Gain on Involuntary Conversion of Asset                  (588,586 )        (179,856 )        (293,534 )
Corporate General and Administrative Expenses           6,997,166         6,492,526         6,830,354
Hotel EBITDA                                        $  30,894,561     $  

(3,224,309) $46,937,924

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