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

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Cautionary Statement Regarding Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and as such may involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements, which are based on certain assumptions and describe our current
strategies, expectations, and future plans, are generally identified by our use
of words, such as "intend," "plan," "may," "should," "will," "project,"
"estimate," "anticipate," "believe," "expect," "continue," "potential,"
"opportunity," and similar expressions, whether in the negative or affirmative,
but the absence of these words does not necessarily mean that a statement is not
forward-looking. All statements regarding our expected financial position,
business and financing plans are forward-looking statements.


Factors which could have a material adverse effect on the Company’s future results, performance and achievements include, but are not limited to:

• national and local economic and business conditions that affect occupancy

        rates and revenues at our hotels and the demand for hotel products and
        services;

• risks associated with the hotel industry, including competition and new

        supply of hotel rooms, increases in wages, energy costs and other
        operating costs;

• risks associated with the level of our indebtedness and our ability to

meet covenants in our debt agreements, including our recently negotiated

        forbearance agreements and loan modifications and, as necessary, to
        refinance or seek an extension of the maturity of such indebtedness or
        further modification of such debt agreements;

• risks associated with adverse weather conditions, including hurricanes;

• impacts on the travel industry from pandemic diseases, including COVID-19;

• the availability and terms of financing and capital and the general

        volatility of the securities markets;


  • management and performance of our hotels;


  • risks associated with maintaining our system of internal controls;

• risks associated with the conflicts of interest of the Company’s officers

and directors;

• risks associated with redevelopment and repositioning projects, including

delays and cost overruns;

• supply and demand for hotel rooms in our current and proposed market areas;

• risks associated with our ability to maintain our franchise agreements

with our third party franchisors;

• our ability to acquire additional properties and the risk that potential

        acquisitions may not perform in accordance with expectations;


  • our ability to successfully expand into new markets;

• legislative/regulatory changes, including changes to laws governing

        taxation of real estate investment trusts ("REITs");


  • the Company's ability to maintain its qualification as a REIT; and


  • our ability to maintain adequate insurance coverage.


Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that
such statements included in this report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the results or conditions
described in such statements or the objectives and plans of the Company will be
achieved.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the section titled “Risk Factors” in our Annual Report on Form 10-K.

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These risks and uncertainties should be considered in evaluating any
forward-looking statement contained in this report or incorporated by reference
herein. All forward-looking statements speak only as of the date of this report
or, in the case of any document incorporated by reference, the date of that
document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the
cautionary statements in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this report, except
as required by law. In addition, our past results are not necessarily indicative
of our future results.

Overview

Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT
incorporated in Maryland in August 2004 and focused on the acquisition,
renovation, upbranding and repositioning of upscale to upper-upscale
full-service hotels in the southern United States. Sotherly may also
opportunistically acquire hotels throughout the United States. Substantially all
of the assets of Sotherly Hotels Inc. are held by, and all of its operations are
conducted through, Sotherly Hotels LP. We commenced operations in December 2004
when we completed our initial public offering and thereafter consummated the
acquisition of the Initial Properties.

Our hotel portfolio currently consists of eleven full-service, primarily upscale
and upper-upscale hotels, comprising 2,976 rooms, as well as interests in two
condominium hotels and their associated rental programs. The Company owns hotels
that operate under well-known brands such as DoubleTree by Hilton, Tapestry
Collection by Hilton, and Hyatt Centric, as well as independent hotels. We
sometimes refer to our independent and soft-branded properties as our collection
of boutique hotels.  As of March 31, 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 Hotels
Hyde Resort & Residences                              96   (2) Hollywood, FL      January 30, 2017             Luxury(1)
Hyde Beach House Resort & Residences                 121   (2) Hollywood, FL      September 27, 2019           Luxury(1)
Total Hotel & Participating Condominium
Hotel Rooms                                        3,193



  (1) Operated as an independent hotel.

(2) Reflects only those condominium units that were participating in the

rental program, as of March 31, 2022† At any given time, some portion of

the units participating in our rental program may be occupied by the unit

owner(s) and unavailable for rental to hotel guests. We sometimes refer to

        each participating condominium unit as a "room."


    (3) As of the date of this report, the DoubleTree by Hilton Raleigh
        Brownstone-University hotel is under contract to be sold.


We conduct substantially all our business through our Operating Partnership. We
are the sole general partner of our Operating Partnership, and we own an
approximate 94.0% interest in our Operating Partnership, as of the date of this
report, with the remaining interest being held by limited partners who were the
contributors of our Initial Properties and related assets.

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

Effects of COVID-19 Pandemic on Our Business

In March 2020, the World Health Organization declared COVID-19 to be a global
pandemic and the virus has continued to spread throughout the United States and
the world. The pandemic and subsequent government mandates and health official
recommendations have significantly impacted hotel demand. Following the initial
implementation of 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. 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. We
continue to experience lingering impact from COVID-19 in 2022, albeit to a
lesser degree. A significant increase in leisure travel demand contributed to
improved results for 2021 compared to 2020. While business travel demand has
increased, it continues to significantly lag behind pre-pandemic levels and it
is not clear when and to what extent that pre-pandemic level of demand will
return. As a result, although we anticipate further recovery in 2022, the
Company cannot estimate with certainty when travel demand will fully recover.

As of March 31, 2022, 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.

As of March 31, 2022, we had approximately $20.2 million in unrestricted cash
and approximately $10.1 million in restricted 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.


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

Key Operating Metrics

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

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

or total rooms available;

• Average daily rate, or ADR, which is total room revenue divided by the

number of rooms sold; and

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

by the total number of available rooms.


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

When calculating composite portfolio metrics, we include available rooms at the
Hyde Resort & Residences and the Hyde Beach House Resort & Residences that participate in our rental programs and are not reserved for owner-occupancy.

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

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Results of Operations

The following tables illustrate the key operating metrics for the three months
ended March 31, 2022, 2021 and 2019, respectively, for the Company's
wholly-owned properties ("actual" portfolio metrics). Accordingly, the actual
data does not include the participating condominium hotel rooms of the Hyde
Resort & Residences and the Hyde Beach House Resort & Residences. The eleven
wholly-owned properties in the portfolio that were under the Company's control
during the three months ended March 31, 2022 and the corresponding periods in
2021 and 2019 are considered same-store properties ("same-store" portfolio
metrics). Accordingly, the same-store data does not reflect the performance of
the Sheraton Louisville Riverside which was sold in February 2022. The composite
portfolio metrics represent the Company's wholly-owned properties and the
participating condominium hotel rooms at the Hyde Resort & Residences and the
Hyde Beach House Resort & Residences, during the three months ended March 31,
2022 and the corresponding periods in 2021 and 2019. The same-store (composite)
portfolio metrics includes all properties with the exceptions of the Sheraton
Louisville Riverside and the Hyde Beach House Resort & Residences, during the
three months ended March 31, 2022, and the corresponding periods in 2021 and
2019.

Given the drastic and unprecedented impact of the COVID-19 pandemic on our
operating results in 2021 and 2020, we believe that a comparison of our results
in the March 2022 quarter to both the March 2021 and March 2019 quarters in this
overview section allows for a better understanding of the full impact of the
COVID-19 pandemic and the progress of our recovery.

                                   Three Months Ended       Three Months 

Ended Three Months Ended

                                     March 31, 2022           March 31, 2021           March 31, 2019
Actual Portfolio Metrics
Occupancy %                                       53.7 %                   41.1 %                   70.1 %
ADR                               $             168.12     $             132.78     $             165.57
RevPAR                            $              90.36     $              54.55     $             116.01
Same-Store Portfolio Metrics
Occupancy %                                       53.9 %                   40.7 %                   71.0 %
ADR                               $             170.01     $             135.82     $             167.98
RevPAR                            $              91.60     $              55.23     $             119.33
Composite Portfolio Metrics
Occupancy %                                       53.9 %                   41.8 %                   69.9 %
ADR                               $             187.23     $             158.40     $             174.24
RevPAR                            $             100.89     $              66.14     $             121.86
Same-Store (Composite)
Portfolio Metrics
Occupancy %                                       54.1 %                   41.3 %                   70.8 %
ADR                               $             180.61     $             152.95     $             176.90
RevPAR                            $              97.72     $              63.23     $             125.32



Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended
March 31, 2021

Revenue. Total revenue for the three months ended March 31, 2022 increased
approximately $15.7 million, or 69.4%, to approximately $38.3 million compared
to total revenue of approximately $22.6 million for the three months ended March
31, 2021. There was an aggregate increase in total revenue of approximately
$16.2 million from all of our properties, with the exceptions of our properties
in Jeffersonville, Indiana and the Hyde Resort in Hollywood, Florida which had
decreases in revenue of approximately $0.5 million. These were due mainly to
significant increases in demand primarily driven by the lifting of restrictions
on travel, social gatherings and businesses; significant increases in demand
from mostly transient consumers; increases in travel by some group business and
increases in the number of foreign travelers.

Room revenue increased approximately $9.4 million, or 60.4%, to approximately
$24.9 million for the three months ended March 31, 2022 compared to room revenue
of approximately $15.5 million for the three months ended March 31, 2021. The
increase in room revenue for the three months ended March 31, 2022 resulted from
an aggregate increase of approximately $9.7 million from all of our properties,
with the exception of our property in Jeffersonville, Indiana which had a
decrease in revenue of approximately $0.3 million. The improvement was mainly
due mainly to increased composite occupancy of 53.9%, increased ADR to $187.23
and increased RevPAR to $100.89, compared to the three months ending March 31,
2021, composite occupancy of 41.8%, ADR of $158.40 and RevPAR of $66.14,
respectively. These significant increases are mainly due to the lifting of
restrictions on travel, social gatherings and businesses; significant increases
in demand from mostly transient consumers; increases in travel by some group
business and increases in the number of foreign travelers.

Food and beverage revenues increased approximately $4.1 million, or 264.0%, to
approximately $5.6 million for the three months ended March 31, 2022 compared to
food and beverage revenues of approximately $1.5 million for the three months
ended March 31, 2021. The increase in food and beverage revenues for the three
months ended March 31, 2022, resulted from an aggregate

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increase from all of our properties, with the exception of our property in
Jeffersonville, Indiana, because of the significant increases in demand mainly
driven by the lifting of restrictions on travel, social gatherings and
businesses; significant increases in demand from mostly transient consumers;
increases in travel by some group business and increases in the number of
foreign travelers.

Revenue from other operating departments increased approximately $2.3 million,
or 40.8%, to approximately $7.9 million for the three months ended March 31,
2022 compared to revenue from other operating departments of approximately $5.6
million for the three months ended March 31, 2021. The increase in other
operating departments revenue for the three months ended March 31, 2022 resulted
from an aggregate increase of approximately $2.6 million, from all of our
properties and included $1.0 million in grants received from the State of North
Carolina and granted to our two properties in Wilmington and Raleigh, North
Carolina. There were exceptions from our properties in Laurel, Maryland,
Jeffersonville, Indiana and the Hyde Resort in Hollywood, Florida, which had a
decrease in other operating revenue of approximately $0.3 million. The increase
in other operating revenue is due to the significant increases in demand mainly
driven by the lifting of restrictions on travel, social gatherings and
businesses; significant increases in demand from mostly transient consumers;
increases in travel by some group business and increases in the number of
foreign travelers.

Hotel Operating Expenses. Hotel operating expenses, which consist of room
expenses, food and beverage expenses, other direct expenses, indirect expenses
and management fees, increased approximately $10.0 million, or 53.9%, to
approximately $28.4 million for the three months ended March 31, 2022, compared
to total hotel operating expenses of approximately $18.4 million for the three
months ended March 31, 2021. The increase in hotel operating expenses for the
three months ended March 31, 2022 resulted from an aggregate increase in total
hotel operating expenses of approximately $10.3 million, with the exception of
our property in Jeffersonville, Indiana which had a decrease in hotel operating
expenses of approximately $0.3 million. This was due mainly to the significant
increases in demand driven by the lifting of restrictions on travel, social
gatherings and businesses; significant increases in demand from mostly transient
consumers; increases in travel by some group business and increases in the
number of foreign travelers.

Rooms expense for the three months ended March 31, 2022 increased approximately
$1.9 million, or 48.9%, to approximately $5.9 million, compared to rooms expense
for the three months ended March 31, 2021 of approximately $4.0 million. The
increase in rooms expense for the three months ended March 31, 2022, resulted
from an aggregate increase of approximately $2.1 million from all of our
properties, with the exception of our property in Jeffersonville, Indiana which
had a decrease in hotel operating expenses of approximately $0.1 million. The
improvement was mainly due to increased composite occupancy of 53.9%, compared
to prior year three months ending March 31, 2021, occupancy of 41.8%. This
significant increase is mainly due to the above mentioned factors.

Food and beverage expenses for the three months ended March 31, 2022 increased
approximately $3.0 million, or 326.3%, to approximately $3.9 million, compared
to food and beverage expenses of approximately $0.9 million, for the three
months ended March 31, 2021. The net increase in food and beverage expenses for
the three months ended March 31, 2022 resulted from an aggregate increase of
approximately $3.0 million, from all of our properties because of the
significant increases in demand driven by the lifting of restrictions on travel,
social gatherings and businesses; significant increases in demand from mostly
transient consumers; increases in travel by some group business and increases in
the number of foreign travelers.

Expenses from other operating departments increased approximately $0.6 million,
or 28.1%, to approximately $2.5 million for the three months ended March 31,
2022 compared to expenses from other operating departments of approximately $1.9
million for the three months ended March 31, 2021. The increase in expenses from
other operating departments for the three months ended March 31, 2022 resulted
from an aggregate increase of approximately $0.6 million, from all of our
properties, with the exceptions of our properties in Jeffersonville, Indiana,
Tampa, Florida and the Hyde Resort in Hollywood, Florida, because of the
significant increases in demand driven by the lifting of restrictions on travel,
social gatherings and businesses; significant increases in demand from mostly
transient consumers; increases in travel by some group business and increases in
the number of foreign travelers.

Indirect expenses at our wholly-owned properties for the three months ended
March 31, 2022 increased approximately $4.5 million, or 38.6%, to approximately
$16.1 million, compared to indirect expenses of approximately $11.6 million for
the three months ended March 31, 2021. Each of our properties experienced an
increase in indirect expenses for the three months ended March 31, 2022.

Corporate General and Administrative. Corporate general and administrative
expenses for the three months ended March 31, 2022 increased approximately $0.2
million, or 16.4%, to approximately $1.5 million compared to corporate general
and administrative expenses of approximately $1.3 million, for the three months
ended March 31, 2021. The increase in corporate general and administrative
expenses was mainly due to a catch up for administrative salaries from previous
year's reductions by approximately $0.2 million.

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Interest Expense. Interest expense for the three months ended March 31, 2022
decreased approximately $0.2 million, or 3.5%, to approximately $5.7 million, as
compared to interest expense of approximately $5.9 million, for the three months
ended March 31, 2022. The decrease in interest expense for the three months
ended March 31, 2022, was substantially related to the deferred interest on
mortgage loans for the hotels in Philadelphia, Pennsylvania and Arlington,
Virginia based on increased deferred principal for the previous year, compared
to the three-month period ending March 31, 2021.

Unrealized Gain (Loss) on Hedging Activities. As of March 31, 2022, the fair
market value of our interest rate cap is $97 and the fair market value of our
interest rate swap liability is approximately $0.6 million. The unrealized gain
on hedging activities during the three months ended March 31, 2022, was
approximately $1.0 million and during the three months ended March 31, 2021, the
unrealized gain on hedging activities was approximately $0.4 million.

Income Taxes. We had an income tax provision of $9,654 for the three months
ended March 31, 2022 compared to an income tax provision of $2,609, for the
three months ended March 31, 2021. Our MHI TRS Entities realized operating
losses for each of the three months ended March 31, 2022 and 2021. During the
three-month period ending March 31, 2022, we increased the valuation allowance
by approximately $0.4 million to approximately $15.3 million, as of March 31,
2022.

Net Loss. We realized a net loss for the three months ended March 31, 2022 of
approximately $0.8 million, compared to a net loss of approximately $7.6
million, for the three months ended March 31, 2021, because of the operating
results discussed above.







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.

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

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indicative than FFO of the on-going performance of our business and assets. Our
calculation of adjusted FFO may be different from similar measures calculated by
other REITs.

The following is a reconciliation of net income (loss) to FFO and Adjusted FFO, for three and three months ended March 31, 2022 and 2021:

                                           Three Months Ended       Three Months Ended
                                             March 31, 2022           March 31, 2021
Net loss                                  $           (810,944 )   $         (7,575,624 )
Depreciation and amortization - real
estate                                               4,550,376              

4,964,515

Distributions to preferred stockholders             (1,936,617 )             (2,188,910 )
Gain on disposal of assets                             (29,542 )            

FFO attributable to common stockholders
and unitholders                           $          1,773,273     $         (4,800,019 )
Amortization                                            14,696              

17,500

ESOP and stock - based compensation                    420,161              

485.047

Unrealized gain on hedging activities                 (962,263 )               (390,185 )
Adjusted FFO attributable to common
stockholders and unitholders              $          1,245,867     $        

(4,687,657)

Weighted average number of shares
outstanding,
 basic                                              17,169,532               14,615,720

Weighted average number of
non-controlling units                                1,133,720                1,166,440

Weighted average number of shares and
units
 outstanding, basic                                 18,303,252              

15,782,160

FFO per common share and unit             $               0.10     $        

(0.30 )

Adjusted FFO per common share and unit    $               0.07     $              (0.30 )




EBITDA. We believe that excluding the effect of non-operating expenses and
non-cash charges, and the portion of those items related to unconsolidated
entities, all of which are also based on historical cost accounting and may be
of limited significance in evaluating current performance, can help eliminate
the accounting effects of depreciation and financing decisions and facilitate
comparisons of core operating profitability between periods and between REITs,
even though EBITDA also does not represent an amount that accrued directly to
shareholders.


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

The following is a reconciliation of net income (loss) to Hotel EBITDA for the three and three months ended March 31, 2022 and 2021:

                                         Three Months Ended       Three Months Ended
                                           March 31, 2022           March 31, 2021
Net loss                                $           (810,944 )   $         (7,575,624 )
Interest expense                                   5,713,205                5,919,523
Interest income                                      (24,448 )                (38,599 )
Income tax provision (benefit)                         9,654                

2,609

Depreciation and amortization                      4,565,072                4,982,015
EBITDA                                             9,452,539                3,289,924
Gain on disposal of assets                           (29,542 )                      -
Subtotal                                           9,422,997                3,289,924
Corporate general and administrative               1,514,027                

1,300,958

Unrealized gain on hedging activities               (962,263 )               (390,185 )
Hotel EBITDA                            $          9,974,761     $          4,200,697


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Sources and Uses of Cash

Our principal sources of cash are cash from hotel operations, proceeds from the
sale of common and preferred stock, proceeds from the sale of secured and
unsecured notes, proceeds of mortgage and other debt and hotel property
sales. Our principal uses of cash are acquisitions of hotel properties, capital
expenditures, debt service and balloon maturities, operating costs, corporate
expenses and dividends. As of March 31, 2022, we had approximately $20.2 million
of unrestricted cash and $10.1 million of restricted cash.

Operating Activities. Our net cash flow provided by operating activities for the
three months ended March 31, 2022 was approximately $7.5 million generally
consisting of net cash flow provided by hotel operations. The positive cash flow
from operations during the quarters and increase from the prior year was due to
the increase in occupancy at our hotels as a result of increases in transient
consumers, group business, and foreign travelers due to the lifting of
restrictions on travel, social gatherings and businesses. Cash used in or
provided by operating activities generally consists of the cash flow from hotel
operations, offset by the interest portion of our debt service, corporate
expenses and positive or negative changes in working capital.

Investing Activities. Our cash provided by investing activities for the three
months ended March 31, 2022, was approximately $10.0 million. Of this amount
approximately $11.1 million came from the sale of Sheraton Louisville Riverside
property and approximately $1.1 million was related to capital expenditures for
improvements and additions to hotel properties. There were proceeds from the
sale of assets of approximately $0.03 million.

Financing Activities. During the three months ended March 31, 2022the Company and Operating Partnership made principal payments on its mortgages of approximately $12.7 millionincluding the Sheraton Louisville Riverside mortgage.

Capital Expenditures

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

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

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


Liquidity 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 into 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

                                       41

planned capital expenditures and reduction in cash compensation of our executive officers, board of directors, and corporate employees.

During 2020 and into 2021, we entered into forbearance agreements with all our
mortgage lenders and negotiated extended payment terms 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 deferred payments
due in 2022 at approximately $7.5 million, of which approximately $6.5 million
remained at March 31, 2022.

As of March 31, 2022, we had total cash of approximately $30.3 million. During
the three months ended March 31, 2022, we generated cash, cash equivalents and
restricted cash of approximately $4.7 million. We expect that our cash on hand
combined with our cash flow from our hotels should be adequate to fund
continuing operations, recurring capital expenditures for the refurbishment and
replacement of furniture, fixtures and equipment, and monthly scheduled payments
of principal and interest (excluding any balloon payments due upon maturity of
our mortgage debt or Secured Notes).

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

Other than monthly mortgage loan principal payments and amounts due our lenders
under the forbearance agreements included in the discussion above, our only
mortgage debt obligations with a scheduled maturity date in 2022 are the
mortgage on the Hotel Alba and the DoubleTree by Hilton Raleigh Brownstone -
University. If we are unsuccessful in refinancing the indebtedness on the Hotel
Alba, we intend to request an extension under the terms of the existing mortgage
agreement. If we are unsuccessful in selling the DoubleTree by Hilton Raleigh
Brownstone - University, we will be required to repay or refinance the existing
indebtedness of $18.3 million, or request an extension on the existing terms of
the mortgage agreement for the portion of the loan qualifying for such an
extension, which we estimate to range between $13.0 million and $15.0 million.

In 2023, the mortgages on The Whitehall, the DoubleTree by Hilton Laurel and the
DoubleTree by Hilton Philadelphia Airport mature. We intend to refinance the
mortgages maturing in 2023 at the level of their existing indebtedness or
request extensions at existing terms.

As of the date of filing, we were current on all loan payments on all other
mortgages per the terms of our mortgage agreements, as amended. We were in
compliance with all loan covenants except the Debt Service Coverage Requirement
("DSCR") covenant under the mortgage secured by The Whitehall and the Tangible
Net Worth covenants under the mortgages secured by the DoubleTree by Hilton
Jacksonville Riverfront and the Hotel Alba. We have received waivers of the
financial covenants from the lender of the mortgage on the DoubleTree by Hilton
Jacksonville Riverfront through December 31, 2022 and from the lender of the
mortgage on The Whitehall mortgage through June 30, 2022. We expect to receive a
waiver from the lender of the mortgage on the Hotel Alba for the periods ended
December 31, 2021 and March 31, 2022.

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

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


Financial Covenants

Mortgage Loans

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

As described in "Liquidity and Capital Resources", as of March 31, 2022, 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

                                       42
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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
periods ended December 31, 2021 and March 31, 2022.

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
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 March 31, 2022.

Dividend Policy

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

Off-Balance Sheet Arrangements

none.

inflation

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

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

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Maryland, North Carolina,
Pennsylvania, Texas and Virginia. As a result, we are particularly susceptible
to adverse market conditions in these geographic areas, including industry
downturns, relocation of businesses, local stay-at-home and business closure
orders, and any oversupply of hotel rooms or a reduction in lodging
demand. Adverse economic developments in the markets in which we have a
concentration of hotels, or in any of the other markets in which we operate,

                                       43
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or any increase in hotel supply or decrease in lodging demand resulting from the
local, regional or national business climate, could materially and adversely
affect us.

The operations of our hotel properties have historically been seasonal. The
months of April and May are traditionally strong, as is October. The periods
from mid-November through mid-February are traditionally slow with the exception
of hotels located in certain markets, namely Florida and Texas, which typically
experience significant room demand during this period. These patterns have been
disrupted by the impacts of the COVID-19 pandemic and we expect some level of
disruption to continue throughout 2022 at a minimum.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liability at the date of our financial statements and the reported
amounts of revenue and expenses during the reporting period.  It is possible
that the actual amounts may differ significantly from these estimates and
assumptions.  It is also possible that actual amounts may differ significantly
from these estimates and assumptions.  We evaluate our estimates, assumptions
and judgment on an ongoing basis, based on information that is available to us,
our business and industry experience, and various other matters that we believe
are reasonable and appropriate for consideration under the circumstances.  All
of our significant accounting policies, including certain critical accounting
policies, are disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2021.  There have been no material changes in these critical
accounting policies or the methods or assumptions we apply.

Recent Accounting Pronouncements

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

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