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EXCEL - IDEA: XBRL DOCUMENT - Moody National REIT I, Inc.Financial_Report.xls
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Moody National REIT I, Inc.ex32-2.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Moody National REIT I, Inc.ex31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Moody National REIT I, Inc.ex31-1.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Moody National REIT I, Inc.ex32-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

(Mark One)   

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from ________to ___________

 

Commission file number 000-55200

 


MOODY NATIONAL REIT I, INC.

(Exact Name of Registrant as Specified in Its Charter)


 

Maryland 26-1812865
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
   
 6363 Woodway Drive, Suite 110 
Houston, Texas
77057
(Address of Principal Executive Offices) (Zip Code)

 

(713) 977-7500

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ☐    No  ☒

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

  Large Accelerated filer  ☐ Accelerated filer  ☐
     
  Non-Accelerated filer  ☐ Smaller reporting company  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ☐     No  ☒

 

As of May 11, 2015, there were 12,864,335 shares of the Registrant’s common stock issued and outstanding.

 

 

 
 

  

MOODY NATIONAL REIT I, INC.  

INDEX

  

PART I FINANCIAL INFORMATION Page
 
Item 1. Financial Statements 2
     
  Consolidated Balance Sheets (unaudited) as of March 31, 2015 and December 31, 2014 2
     
  Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014 3
     
  Consolidated Statement of Equity (unaudited) for the three months ended March 31, 2015 4
     
  Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014 5
     
  Notes to Consolidated Financial Statements (unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
     
Item 4. Controls and Procedures 37
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 39

 

1
 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

MOODY NATIONAL REIT I, INC. 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    March 31, 2015   December 31, 2014
ASSETS        
Investment in hotel properties, net   $ 154,857,820     $ 144,240,644  
Cash and cash equivalents     43,935,507       23,844,072  
Restricted cash     6,002,271       5,388,193  
Accounts receivable, net of allowance of $23,000 and $21,000 as of March 31, 2015 and December 31, 2014, respectively     1,160,254       747,658  
Mortgage note receivable     12,003,689       12,059,932  
Prepaid expenses and other assets     1,283,502       731,849  
Deposits     1,365,000       1,672,500  
Deferred costs, net of accumulated amortization of $306,863 and $241,928 as of March 31, 2015 and December 31, 2014, respectively     3,086,343       2,073,625  
                 
Total Assets   $ 223,694,386     $ 190,758,473  
                 
LIABILITIES AND EQUITY                
Liabilities:                
Notes payable   $ 123,152,384     $ 112,705,196  
Accounts payable and accrued expenses     3,781,892       3,203,728  
Due to related parties     864,597       680,398  
Dividends payable     868,625       642,443  
                 
Total Liabilities     128,667,498       117,231,765  
                 
Special Partnership Units — 100 Special Units of the Operating Partnership     1,000       1,000  
                 
Commitments and Contingencies – Note 10                
                 
Equity:                
                 
Stockholders’ equity:                
Preferred stock, $0.01 par value per share; 50,000,000 shares authorized, no shares issued and outstanding            
Common stock, $0.01 par value per share; 400,000,000 shares authorized, 12,821,681 and 10,023,463 issued and outstanding at March 31, 2015 and December 31, 2014, respectively     128,217       100,235  
Additional paid-in capital     112,469,978       87,457,901  
Accumulated deficit     (17,871,601 )     (14,324,615 )
Total stockholders’ equity     94,726,594       73,233,521  
Noncontrolling interest - 100 common units of the Operating Partnership     586       610  
Noncontrolling interests in consolidated joint ventures     298,708       291,577  
Total Equity     95,025,888       73,525,708  
                 
TOTAL LIABILITIES AND EQUITY   $ 223,694,386     $ 190,758,473  

  

See accompanying notes to consolidated financial statements.

 

2
 

  

MOODY NATIONAL REIT I, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

    Three Months Ended March 31,
    2015   2014
         
Revenue        
 Room revenue   $ 9,286,370     $ 3,401,635  
 Other revenue     565,627       116,376  
 Total hotel revenue     9,851,997       3,518,011  
 Interest income from note receivable     154,851       157,571  
 Total revenue     10,006,848       3,675,582  
                 
Expenses                
 Hotel operating expenses     5,987,264       2,021,383  
 Property taxes, insurance and other     627,046       262,830  
 Depreciation and amortization     1,901,081       597,710  
 Property acquisition     376,440       448,616  
 Corporate general and administrative     755,298       198,837  
 Total expenses     9,647,129       3,529,376  
                 
Operating income     359,719       146,206  
                 
Interest expense and amortization of deferred loan costs     1,572,760       536,375  
                 
Loss before income tax expense     (1,213,041 )     (390,169 )
Income tax expense (benefit)     (6,600 )     52,900  
                 
Net loss     (1,206,441 )     (443,069 )
Income attributable to noncontrolling interests in consolidated joint ventures     (19,252 )     (19,299 )
                 
Loss attributable to noncontrolling interest in common operating partnership units     4       5  
Net loss attributable to common stockholders   $ (1,225,689 )   $ (462,363 )
                 
Per-share information – basic and diluted:                
Net loss attributable to common shareholders   $ (0.10 )   $ (0.12 )
Dividends declared   $ 0.20     $ 0.20  
Weighted average common shares outstanding     11,763,298       3,723,801  

 

See accompanying notes to consolidated financial statements.

 

3
 

  

MOODY NATIONAL REIT I, INC.

CONSOLIDATED STATEMENT OF EQUITY 

Three months ended March 31, 2015

(Unaudited)

 

    Preferred Stock   Common Stock   Additional
Paid-In
Capital
 
      Noncontrolling Interest in
Operating Partnership
  Noncontrolling
Interest in
Consolidated
Joint Venture
     
    Number of Shares   Par
value
  Number of
Shares
  Par
Value
    Accumulated
Deficit
  Number
of Units
  Value     Total Equity  
                                           
Balance at December 31, 2014       $       10,023,463     $ 100,235     $ 87,457,901     $ (14,324,615 )     100     $ 610     $ 291,577   $ 73,525,708  
Issuance of common stock and operating partnership units, net of offering costs                 2,719,605       27,196       24,245,268                             24,272,464  
Issuance of common stock pursuant to dividend reinvestment plan                 78,613       786       746,040                             746,826  
Stock/unit-based compensation                             20,769                             20,769  
Net income (loss)                                   (1,225,689 )           (4 )     19,252     (1,206,441 )
Dividends and distributions declared                                   (2,321,297 )           (20 )     (12,121 )   (2,333,438 )
                                                                               
Balance at March 31, 2015       $       12,821,681   $ 128,217     $ 112,469,978   $ (17,871,601 ) 100     $ 586     $ 298,708   $ 95,025,888  

 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

MOODY NATIONAL REIT I, INC.  

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Three months ended March 31,
    2015   2014
         
Cash flows from operating activities        
Net loss   $ (1,206,441 )   $ (443,069 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
 Depreciation and amortization     1,901,081       597,710  
 Amortization of deferred loan costs     133,404       13,963  
 Stock-based compensation     20,769       20,898  
 Deferred income tax     (185,000 )      
 Changes in operating assets and liabilities -                
 Restricted cash     759,015       379,787  
 Accounts receivable     (412,596 )     (81,621 )
 Prepaid expenses and other assets     (366,653 )     (295,684 )
 Due from related parties           (12,093 )
 Accounts payable and accrued expenses     578,164       133,633  
 Due to related parties     166,071       (455,808 )
 Net cash provided by (used in) operating activities     1,387,814       (142,284 )
                 
Cash flows from investing activities                
 Increase in restricted cash     (1,373,093 )     (590,548 )
 Deposits     307,500       (311,570 )
 Repayments of mortgage note receivable     56,243       53,533  
 Improvements and additions to hotel properties     (1,509,312 )     (758,607 )
 Acquisitions of hotel properties     (11,000,000 )     (20,500,000 )
 Net cash used in investing activities     (13,518,662 )     (22,107,192 )
                 
Cash flows from financing activities                
 Proceeds from issuance of common stock     27,196,047       8,783,004  
 Offering costs     (2,905,455 )     (1,188,300 )
 Dividends paid     (1,348,309 )     (482,368 )
 Proceeds from notes payable     17,500,000       13,250,000  
 Repayment of notes payable     (7,052,812 )     (205,554 )
 Payments of deferred financing costs     (1,155,067 )     (132,500 )
 Distributions to noncontrolling interest in joint venture     (12,121 )     (12,121 )
 Net cash provided by financing activities     32,222,283       20,012,161  
                 
Net change in cash and cash equivalents     20,091,435       (2,237,315 )
Cash and cash equivalents at beginning of period     23,844,072       5,324,315  
Cash and cash equivalents at end of period   $ 43,935,507     $ 3,087,000  
                 
Supplemental Disclosure of Cash Flow Information                
Interest paid   $ 1,491,096     $ 478,759  
Income taxes paid   $ 22,000     $ 7,564  
                 
Supplemental Disclosure of Non-Cash Investing and Financing Activity                
 Increase in accrued offering costs due to related party   $ 18,128     $ 27,823  
 Issuance of common stock from dividend reinvestment plan   $ 746,826     $ 194,592  
 Dividends payable   $ 868,625     $ 276,348  

  

See accompanying notes to consolidated financial statements.

 

5
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

   

1. Organization

 

Moody National REIT I, Inc. (the “Company”) was formed on January 15, 2008, as a Maryland corporation and has elected to qualify as a real estate investment trust (“REIT”) commencing with the year ended December 31, 2011. The Company was organized to acquire a diverse portfolio of real properties, primarily in the hospitality sector, as well as other commercial properties, real estate securities and debt-related investments. As discussed in Note 6, the Company was initially capitalized with the sale of shares of its common stock to Moody National REIT Sponsor, LLC (“Sponsor”) on February 19, 2008. The Company’s fiscal year end is December 31.

 

As of March 31, 2015, the Company owned (1) eight hotel properties located in Texas, Tennessee, South Carolina, California and Pennsylvania comprising a total of 1,204 rooms, (2) a joint venture interest in a 227-suite hotel property located in Lyndhurst, New Jersey, and (3) a 74.5% joint venture interest in a mortgage note secured by a hotel property located in Grapevine, Texas (the “Hyatt Place Note”). For more information on the Company’s portfolio, see Notes 3 and 4.

 

On April 15, 2009, the Company commenced its initial public offering pursuant to a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of $1,000,000,000 in shares of its common stock to the public in its primary offering and up to $100,000,000 in shares of its common stock to its stockholders pursuant to its distribution reinvestment plan (the “DRIP”). On October 12, 2012, the Company terminated its initial public offering and commenced a follow-on public offering (discussed below). The Company had accepted subscriptions for, and issued, 1,126,253 shares of its common stock in its initial public offering, including 29,582 shares of common stock pursuant to the DRIP, resulting in aggregate gross offering proceeds of $10,966,713.

 

On February 14, 2012, the Company commenced its follow-on public offering of up to $1,000,000,000 in shares of the Company’s common stock, comprised of up to $900,000,000 in shares offered to the public and up to $100,000,000 in shares offered to its stockholders pursuant to the DRIP. Effective February 20, 2015, the Company terminated the follow-on offering. The Company accepted investors’ subscriptions for, and issued, 11,624,456 shares of its common stock in the follow-on offering, including 272,047 shares of common stock issued pursuant to the DRIP, resulting in aggregate gross offering proceeds of $113,524,081. As of March 31, 2015, the Company had accepted subscriptions for, and issued, 12,750,709 shares of common stock in the Company’s initial public offering and follow-on offering, including 301,629 shares of common stock pursuant to the DRIP, resulting in aggregate gross offering proceeds of $124,490,794. The Company continues to offer shares of common stock pursuant to the DRIP and intends to continue to do so until as late as October 12, 2015. As of March 31, 2015, 10,254,269 shares of common stock remained available for sale pursuant to the DRIP.

 

The Company intends to use substantially all of the remaining net proceeds from its follow-on offering to continue to acquire a diversified portfolio of real properties, real estate securities and debt-related investments. The Company intends to continue to invest primarily in hotel properties located in the United States and Canada that it owns exclusively or in joint ventures or other co-ownership arrangements with other persons. The Company may also invest in other property types consisting of multifamily, office, retail and industrial assets located in the United States and Canada as well as securities of real estate companies and debt-related investments. The Company may also make opportunistic investments in properties that may be under-developed or newly constructed and in properties that it believes are undervalued.

 

The Company’s advisor is Moody National Advisor I, LLC (“Advisor”), a Delaware limited liability company and an affiliate of Sponsor. Subject to certain restrictions and limitations, Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an amended and restated advisory agreement (the “Advisory Agreement”) by and among the Company, Moody National Operating Partnership I, L.P., the Company’s operating partnership (the “OP”), and Advisor.

 

6
 

  

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

The OP’s partnership agreement provides that the OP will be operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the OP will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the OP being taxed as a corporation rather than as a partnership. In addition to the administrative and operating costs and expenses incurred by the OP in acquiring and operating real estate assets, the OP will pay all of the Company’s administrative costs and expenses, and such expenses will be treated as expenses of the OP. The common units of the OP may be tendered for redemption once they have been outstanding for at least one year. At such time, the Company has the option to redeem the common units for shares of the Company’s common stock, cash or a combination thereof at the Company’s sole discretion. The Special Units of the OP (the “Special Units”) held by an affiliate of the Advisor will be redeemed pursuant to the OP’s partnership agreement upon the termination or nonrenewal of the Advisory Agreement or upon certain other events outside of the control of the Special Unit holder. Upon the termination or nonrenewal of the Advisory Agreement by the Company for “cause” (as defined in the Advisory Agreement) all of the Special Units will be redeemed for $1.00. As described in more detail in Note 9, upon the occurrence of any of the events outside of the control of the Special Unit holder which trigger redemption of the Special Units, the Special Units will be redeemed, at the Advisor’s option, for shares of the Company’s common stock, a non-interest bearing promissory note payable solely from the proceeds of assets sales, or a combination thereof.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Company’s consolidated financial statements include its accounts and the accounts of its subsidiaries over which it has control. All intercompany balances and transactions are eliminated in consolidation.

 

The Company includes the accounts of its consolidated subsidiaries in its consolidated financial statements when the Company is the primary beneficiary for entities deemed to be variable interest entities (“VIEs”) through which the Company has a controlling interest. Interests in entities acquired are evaluated based on U.S. generally accepted accounting principles (“GAAP”), which requires the consolidation of VIEs in which the Company is deemed to have the controlling financial interest. The Company has the controlling financial interest if the Company has the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or receive benefits from the VIE that could be significant to the Company. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which the Company has control and/or substantive participating rights under the respective ownership agreement. The Company did not have a VIE interest as of March 31, 2015 or December 31, 2014. There are judgments and estimates involved in determining if an entity in which the Company has an investment is a VIE. The entity is evaluated to determine if it is a VIE by, among other things, determining if the equity investors as a group have a controlling financial interest in the entity and if the entity has sufficient equity at risk to finance its activities without additional subordinated financial support.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial statements and the rules and regulations of the SEC. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, readers should refer to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 31, 2015.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results could differ from those estimates.

 

7
 

  

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Organization and Offering Costs

 

Organization and offering costs of the Company are paid directly by the Company or may be incurred by Advisor on behalf of the Company. Pursuant to the Advisory Agreement, the Company is obligated to reimburse Advisor or its affiliates, as applicable, for organization and offering costs incurred by Advisor associated with each of the Company’s public offerings, provided that within 60 days of the last day of the month in which a public offering ends, Advisor is obligated to reimburse the Company to the extent organization and offering costs incurred by the Company in connection with the completed public offering exceed 15.0% of the gross offering proceeds from the sale of the Company’s shares of common stock in the completed public offering. Such organization and offering costs include selling commissions and dealer manager fees paid to the dealer manager, legal, accounting, printing and other offering expenses, including marketing, salaries and direct expenses of Advisor’s employees and employees of Advisor’s affiliates and others. Any reimbursement of Advisor or its affiliates for organization and offering costs will not exceed actual expenses incurred by Advisor.

 

All offering costs, including selling commissions and dealer manager fees, are recorded as an offset to additional paid-in-capital, and all organization costs are recorded as an expense when the Company has an obligation to reimburse Advisor.

 

The Company terminated its follow-on offering on February 20, 2015. As of March 31, 2015, total offering costs for the follow-on offering were $13,735,268. The Company directly incurred $11,375,281 of offering costs for the follow-on offering and $2,359,987 in offering costs reimbursable to Advisor for the follow-on offering. As of March 31, 2015, the Company had $203,963 payable to Advisor for offering costs related to the follow-on offering. As of March 31, 2015, offering costs related to the follow-on offering did not exceed 15.0% of the gross offering proceeds from the sale of the Company’s shares of common stock in the follow-on offering. The Company has not reimbursed Advisor any funds for organization costs for the follow-on offering.

 

Income Taxes

 

The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 2011. Prior to qualifying to be taxed as a REIT, the Company was subject to normal federal and state corporation income taxes. The Company previously determined not to make an election to qualify as a REIT under the Internal Revenue Code because it had net operating losses for the years ended December 31, 2010 and 2009 and had fewer than 100 stockholders as of December 31, 2010 and 2009.

 

As a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to its stockholders, so long as it distributes at least 90% of its REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). REITs are subject to a number of other organizational and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.

 

The Company leases the hotels it acquires to wholly-owned taxable REIT subsidiaries that are subject to federal, state and local income taxes. The Company accounts 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. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized.

 

The Company has reviewed tax positions under GAAP guidance that clarifies the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. The Company has no material uncertain tax positions as of March 31, 2015.

  

8
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

The preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company will account for interest and penalties relating to uncertain tax provisions in the current period results of operations, if necessary. The Company has tax years 2011, 2012, 2013, 2014 and 2015 remaining subject to examination by various federal and state tax jurisdictions.

 

Fair Value Measurement

 

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

  Level 1: Observable inputs such as quoted prices in active markets.
  Level 2: Directly or indirectly observable inputs, other than quoted prices in active markets.
  Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.

 

Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:

 

  Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
  Cost approach: Amount required to replace the service capacity of an asset (replacement cost).
  Income approach: Techniques used to convert future income amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).

 

Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

 

We elected not to use the fair value option for cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable and accrued expenses. With the exception of our fixed-rate debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates.

 

Concentration of Credit Risk

 

As of March 31, 2015, the Company had cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. The Company diversifies its cash and cash equivalents with several banking institutions in an attempt to minimize exposure to any one of these institutions. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

The Company is also exposed to credit risk with respect to its joint venture interest in the Hyatt Place Note. The failure of the borrower on the Hyatt Place Note to make payments of interest and principal when due, or any other event of default under the Hyatt Place Note, would have an adverse impact on the Company’s results of operations.

 

9
 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Valuation and Allocation of Real Property — Acquisition

 

Upon acquisition, the purchase price of real property is allocated to the tangible assets acquired, consisting of land, buildings and tenant improvements, any assumed debt, identified intangible assets and asset retirement obligations based on their fair values. Acquisition costs are charged to expense as incurred. Initial valuations are subject to change during the measurement period, but the measurement period ends as soon as the information is available. The measurement period shall not exceed one year from the acquisition date.

 

The fair value of the tangible assets acquired consists of land, buildings, furniture, fixtures and equipment. Land values are derived from appraisals, and buildings are calculated as replacement cost less depreciation or the Company’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. The value of the building is depreciated over the estimated useful life of thirty-nine years using the straight-line method. The value of furniture, fixtures and equipment is based on their fair value using replacement costs less depreciation.

 

The Company determines the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that the Company believes it could obtain at the date of acquisition. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan as interest expense.

 

In allocating the purchase price of each of the Company’s properties, the Company makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets and discount rates used to determine present values. Many of these estimates are obtained from independent third party appraisals. However, the Company is responsible for the source and use of these estimates. These estimates are judgmental and subject to being imprecise; accordingly, if different estimates and assumptions were derived, the valuation of the various categories of the Company’s real estate assets or related intangibles could in turn result in a difference in the depreciation or amortization expense recorded in the Company’s consolidated financial statements. These variances could be material to the Company’s results of operations and financial condition.

 

Valuation and Allocation of Real Property — Ownership

 

Investment in real estate is recorded at historical cost. Major improvements that extend the life of an asset are capitalized and depreciated over a period equal to the shorter of the life of the improvement or the remaining useful life of the asset. The cost of ordinary repairs and maintenance are charged to expense when incurred.

 

Depreciation or amortization expenses are computed using the straight-line and accelerated methods based upon the following estimated useful lives:

 

    Estimated Useful Lives  
Buildings and improvements     39  years 
Exterior improvements     10-20  
Furniture, fixtures and equipment     5-10  

 

10
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Impairments

 

The Company monitors events and changes in circumstances indicating that the carrying amounts of the hotel properties may not be recoverable. When such events or changes in circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset from operating activities and from its eventual disposition, to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows, the Company recognizes an impairment loss to adjust the carrying amount of the asset to estimated fair value for assets held for use and fair value less costs to sell for assets held for sale. There were no such impairment losses for the three months ended March 31, 2015 and 2014.

 

In evaluating the Company’s hotel properties for impairment, the Company makes several estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during the Company’s ownership and the projected sales price of each of the properties. A change in these estimates and assumptions could result in a change in the estimated undiscounted cash flows or fair value of the Company’s hotel properties which could then result in different conclusions regarding impairment and material changes to the Company’s consolidated financial statements.

 

Revenue Recognition

 

Hotel revenues, including room, food, beverage and other ancillary revenues, are recognized as the related services are delivered. Interest income is recognized when earned. Revenue is recorded net of any sales and other taxes collected from customers.

 

Cash and Cash Equivalents

 

Cash and cash equivalents represent cash on hand or held in banks and short-term investments with an initial maturity of three months or less at the date of purchase.

 

Restricted Cash

 

Restricted cash includes reserves for debt service, property taxes and insurance, as well as reserves for property improvements and furniture, fixtures, and equipment, as required by certain management or mortgage debt agreement restrictions and provisions.

 

Valuation of Accounts Receivable

 

The Company takes into consideration certain factors that require judgments to be made as to the collectability of receivables. Collectability factors taken into consideration are the amounts outstanding, payment history and financial strength of the customer, which taken as a whole determines the valuation. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

 

Mortgage Note Receivable

 

The Company provides first-mortgage financing in the form of a note receivable. The loan is held for investment and is intended to be held to maturity and, accordingly, is recorded at cost and net of the allowance for losses when the loan is deemed to be impaired. Premiums, discounts and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. The Company discontinues recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received.

 

11
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Impairment of Note Receivable

 

The Company reviews the mortgage note receivable for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts recorded as assets on the consolidated balance sheets. The Company applies normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.

 

When a loan is impaired, the Company measures impairment based on the present value of expected cash flows discounted at the loan’s effective interest rate against the value of the asset recorded on the consolidated balance sheets. The Company may also measure impairment based on a loan’s observable market price or the fair value of collateral if the loan is collateral dependent. If a loan is deemed to be impaired, the Company records a valuation allowance through a charge to earnings for any shortfall. The Company’s assessment of impairment is based on considerable judgment and estimates. The Company did not record a valuation allowance during the three months ended March 31, 2015 or 2014.

 

Prepaid Expenses and Other Assets 

 

Prepaid expenses include prepaid property insurance and hotel operating expenses. Other assets include accrued interest receivable and the deferred income tax asset.

 

Deferred Costs 

 

Deferred costs consist of deferred financing fees and franchise costs. Deferred financing fees are recorded at cost and are amortized to interest expense using a method that approximates the effective interest method over the life of the related debt. The deferred franchise costs are recorded at cost and amortized over the term of the franchise contract on a straight-line basis. Accumulated amortization of deferred costs was $306,863 and $241,928 as of March 31, 2015 and 2014, respectively. Expected future amortization of deferred financing fees and franchise costs is as follows: 

 

Years Ending
December 31
  Total  Loan Costs  Franchise Costs
 2015   $388,717   $355,582   $33,135 
 2016    517,428    473,248    44,180 
 2017    429,078    384,898    44,180 
 2018    232,443    188,263    44,180 
 Thereafter    1,518,677    1,062,153    456,524 
 Total   $3,086,343   $2,464,144   $622,199 

 

Earnings (Loss) per Share 

 

Earnings (loss) per share (“EPS”) is calculated based on the weighted average number of shares outstanding during each period. Basic and diluted EPS are the same for all periods presented. Restricted stock was included in primary earnings per share because the restricted stock participates in dividends.

 

Comprehensive Income

 

For the periods presented, there were no differences between reported net income (loss) attributable to common stockholders and comprehensive income.

 

12
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 changes the criteria for disclosing discontinued operations and enhances the related disclosure requirements. Pursuant to ASU 2014-08, only disposals representing a strategic shift in operations, such as a major line of business, a major geographical area or a major equity investment, should be presented as a discontinued operation. ASU 2014-08 was effective for us beginning January 1, 2015 with early adoption permitted but only for disposals or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance. The Company implemented the provisions of the ASU as of January 1, 2014. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. This standard is effective for periods beginning after December 31, 2015 with early adoption permitted and will be applied on a retrospective basis. The new standard will be effective for the Company on January 1, 2016 and will not have a material effect on the Company’s financial position, results of operations or cash flows.

 

3. Investment in Hotel Properties

 

The following table sets forth summary information regarding the Company’s investments in hotel properties as of March 31, 2015:

 

Property Name   Date Acquired   Location   Ownership Interest     Purchase Price(1)   Rooms   Mortgage Debt Outstanding(2)
Woodlands Hotel (Homewood Suites by Hilton)   November 8, 2012   The Woodlands, Texas   100 %   $ 12,000,000       91     $ 9,300,000  
                                       
Germantown Hotel (Hyatt Place)   April 9, 2013   Germantown, Tennessee   100 %     11,300,000       127       7,565,363  
                                       
Charleston Hotel (Hyatt Place)   July 2, 2013   North Charleston, South Carolina   100 %     11,800,000       113       7,620,834  
                                       
Austin Hotel (Hampton Inn)   December 30, 2013   Austin, Texas   100 %     15,350,000       123       11,323,078  
                                       
Grapevine Hotel (Residence Inn)    March 31, 2014    Grapevine, Texas   100 %     20,500,000       133       13,087,067  
                                       
Silicon Valley Hotel (TownPlace Suites)    June 24, 2014   Newark, California   100 %     10,000,000       127       4,979,959  
                                       
Lyndhurst Hotel (Marriott Courtyard)   September 30, 2014   Lyndhurst, New Jersey   (3 )     33,322,000       227       31,821,937  
                                       
Austin Arboretum Hotel (Hilton Garden Inn)   November 20, 2014   Austin, Texas   100 %     29,250,000       138       19,000,000  
                                       
Great Valley Hotel (Hampton Inn)
  March 27, 2015   Frazer, Pennsylvania   100 %     11,000,000       125       8,200,000  
                                       
Totals                 $ 154,522,000       1,204     $ 112,898,238  

 

13
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 


(1) Excludes closing costs.
(2) As of March 31, 2015.
(3) The Lyndhurst Hotel is owned by MN Lyndhurst Venture, LLC (the “Lyndhurst Joint Venture”). The OP contributed $100 to the Lyndhurst Joint Venture in exchange for 100% of the Class B membership interests of the Lyndhurst Joint Venture (“the Class B Interests”). Pursuant to the operating agreement of the Lyndhurst Joint Venture, the OP also agreed to pay up to $5.37 million in costs and fees and capital reserve requirements associated with the transfer of the Lyndhurst Hotel to the Lyndhurst Joint Venture, all of which amounts are deemed to be additional capital contributions by the OP to the Lyndhurst Joint Venture in exchange for additional Class B Interests. The prior tenant-in-common owners of the Lyndhurst Hotel contributed their tenant-in-common (TIC) ownership interests in the Lyndhurst Hotel (valued at $1,000 in the aggregate) to the Lyndhurst Joint Venture in exchange for non-voting class A membership interests of the Lyndhurst Joint Venture (the “Class A Interests”). The OP serves as the sole manager of the Lyndhurst Joint Venture and manages the business and affairs of the Lyndhurst Joint Venture. Cash available for distribution to the members of the Lyndhurst Joint Venture will be distributed as follows: (1) first, 100% to the OP until it has received cash distributions equal to a 12% annual, cumulative, non-compounded return on its capital contributions to the Lyndhurst Joint Venture and a return of 100% of its unreturned capital contributions to the Lyndhurst Joint Venture, (2) next, 100% to the holders of the Class A Interests until they have received a return of 100% of their capital contributions to the Lyndhurst Joint Venture (valued at $1,000 in the aggregate), and (3) next, 60% to the OP and 40% to the holders of the Class A Interests.

  

Investments in hotel properties consisted of the following at March 31, 2015 and December 31, 2014:

  

    March 31, 2015   December 31, 2014
Land   $ 19,698,000     $ 17,573,000  
Buildings and improvements     127,957,071       118,661,552  
Furniture, fixtures and equipment     14,664,848       13,576,055  
Total cost     162,319,919       149,810,607  
Accumulated depreciation     (7,462,099 )     (5,569,963 )
Investment in hotel properties, net   $ 154,857,820     $ 144,240,644  

  

First Quarter Acquisition

 

Great Valley Hotel

 

On March 27, 2015, Moody National 2020-Great Valley Holding, LLC, a wholly owned subsidiary of the OP (“Moody Great Valley Holding”), acquired fee simple title to the Great Valley Hotel from the current tenant-in-common owners of the Great Valley Hotel, for an aggregate purchase price of $11,000,000, excluding acquisition costs. The Company financed the acquisition of the Great Valley Hotel with proceeds from its public offering and approximately $8,200,000 of indebtedness secured by the Great Valley Hotel. The purchase price of the Great Valley Hotel, excluding acquisition expenses, was preliminarily allocated to land, buildings and improvements and furniture, fixtures and equipment in the amounts of $2,125,000, $8,125,000, and $750,000, respectively. Acquisition costs of $358,830 were incurred and expensed in connection with the acquisition of the Great Valley Hotel. The Company has recognized approximately $33,040 in revenues and a $435,000 net loss, which includes acquisition costs, for the Great Valley Hotel for the three months ended March 31, 2015. In connection with the acquisition of the Great Valley Hotel, the Company formed a taxable REIT subsidiary (the “Great Valley Hotel TRS”). Upon the closing of the acquisition of the Great Valley Hotel, Moody National 2020-Great Valley MT, LLC, a wholly owned subsidiary of the Great Valley Hotel TRS (the “Great Valley Master Tenant”), entered into a Hotel Lease Agreement pursuant to which the Great Valley Master Tenant leases the Great Valley Hotel to the Great Valley Hotel TRS. Moody National Hospitality Management, LLC, an affiliate of the Company, manages the Great Valley Hotel pursuant to a Hotel Management Agreement with the Great Valley Master Tenant.

 

14
 

 

 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

The following unaudited pro forma consolidated financial information for the three months ended March 31, 2015 and 2014 is presented as if the Company acquired the Grapevine Hotel, Silicon Valley Hotel, Lyndhurst Hotel, Austin Arboretum Hotel and Great Valley Hotel on January 1, 2014. This information is not necessarily indicative of what the actual results of operations would have been had the Company completed the acquisition of the Grapevine Hotel, Silicon Valley Hotel, Lyndhurst Hotel, Austin Arboretum Hotel and Great Valley Hotel on January 1, 2014, nor does it purport to represent the Company’s future operations:

 

    Three months ended 31,
    2015   2014
Revenue   $ 10,841,558     $ 10,184,556  
Net loss     (981,149 )     (4,533,313 )
Net loss attributable to common stockholders     (1,000,397 )     (4,552,607 )
Net loss per common share - basic and diluted   $ (0. 09 )   $ (0. 67 )

 

4. Notes Receivable

 

As of March 31, 2015 and December 31 2014, mortgage note receivable amounts were $12,003,689 and $12,059,932, respectively.

 

Hyatt Place Note

 

On June 3, 2011 (the “Closing Date”), and effective as of May 5, 2011 (the “Effective Date”), the Company acquired a joint venture interest in the Hyatt Place Note pursuant to the transaction described below. The Hyatt Place Note was issued by Moody National HP Grapevine Trust, a Delaware statutory trust (the “Trust”), in favor of Patriot Bank, a Texas banking association (“Patriot Bank”), and is secured by a lien on the Hyatt Place Property. As of the Closing Date, the Hyatt Place Note had an outstanding principal balance of $12,759,199.

 

On the Closing Date, the OP, Moody National Mortgage Corporation (“Moody National Mortgage”), an affiliate of the Sponsor controlled by Brett C. Moody, and certain of the holders of ownership interests in the Trust (collectively, the “Trust Members,” and, together with the OP and Moody National Mortgage, the “Members”), entered into the limited liability company agreement (the “Note Joint Venture Agreement”) of MNHP Note Holder, LLC, a Delaware limited liability company (the “Note Joint Venture”). On the Closing Date, the Note Joint Venture acquired the Hyatt Place Note from Patriot Bank for an aggregate purchase price of $12,759,199, exclusive of closing costs. The Note Joint Venture financed the payment of the purchase price for the Hyatt Place Note with (1) a capital contribution to the Note Joint Venture from the OP and the Trust Members, and (2) the proceeds of a loan from Patriot Bank evidenced by a promissory note in the aggregate principal amount of $11,483,280 (the “Acquisition Note”). For additional information on the terms of the Acquisition Note, see Note 5. As of March 31, 2015, the OP’s membership interest in the Note Joint Venture was 74.5%, the Trust Members’ membership interest in the Note Joint Venture was 11.5% and Moody National Mortgage’s membership interest in the Note Joint Venture was 14%.

 

15
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

On the Closing Date and effective as of the Effective Date, the Note Joint Venture and the Trust entered into a Renewal, Extension and Modification Agreement which extended the maturity date of the Hyatt Place Note and amended the terms of the Hyatt Place Note. The entire unpaid principal balance of the Hyatt Place Note and all accrued and unpaid interest thereon is due and payable in full on February 1, 2018 (the “Maturity Date”). The Hyatt Place Note accrued interest at a fixed rate of 5.15% per annum from the Closing Date through August 21, 2012 (the “First Change Date”). For the period from the First Change Date through August 21, 2015 (the “Second Change Date”), the Hyatt Place Note accrues interest at 5.15%, which is a fixed rate equal to (a) the variable interest rate per annum published in The Wall Street Journal as the “Prime Rate” for the U.S. (the “Prime Rate”) in effect as of the First Change Date, plus (b) 1.90%. For the period from the Second Change Date through the Maturity Date, the Hyatt Place Note will accrue interest at a fixed rate equal to (a) the Prime Rate in effect as of the Second Change Date, plus (b) 1.90%, provided that in no event will the interest rate exceed the maximum interest rate permitted by applicable law. The Prime Rate at March 31, 2015 was 3.25%. The Trust may prepay the Hyatt Place Note, in whole or in part, at any time without penalty or premium.

 

The estimated fair value of the Company’s note receivable as of March 31, 2015 and December 31, 2014 was $12,003,689 and $12,059,932, respectively. The fair value of the note receivable was estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

 

5. Debt

 

The Company’s aggregate borrowings are reviewed by the Company’s board of directors at least quarterly. Under the Company’s Articles of Amendment and Restatement (as amended, the “Charter”), the Company is prohibited from borrowing in excess of 300% of the value of the Company’s net assets. “Net assets” for purposes of this calculation is defined to be the Company’s total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. However, the Company may temporarily borrow in excess of these amounts if such excess is approved by a majority of the Company’s independent directors and disclosed to stockholders in the Company’s next quarterly report, along with an explanation for such excess. As of March 31, 2015, the Company’s debt levels did not exceed 300% of the value of the Company’s net assets, as defined above.

 

As of March 31, 2015 and December 31, 2014, the Company’s notes payable consisted of the following:

 

   Principal
as of
March 31, 2015
  Principal
as of
December 31, 2014
  Interest Rate
at
March 31, 2015
  Maturity Date
Hyatt Place Note Acquisition Note  $10,254,146   $10,340,926    3.00%  May 5, 2018
Woodlands Hotel Loan   9,300,000    6,646,904    4.69%  April 11, 2025
Germantown Hotel Loan   7,565,363    7,599,577    4.30%  May 6, 2023
Charleston Hotel Loan   7,620,834    7,650,037    5.193%  August 1, 2023
Austin Hotel Loan   11,323,078    11,363,375    5.426%  January 6, 2024
Grapevine Hotel Loan   13,087,067    13,134,354    5.250%  April 6, 2024
Silicon Valley Hotel Loan   4,979,959    5,007,932    5.500%  July 6, 2022
Lyndhurst Hotel Loan   31,821,937    31,962,091    5.916%  September 6, 2017
Austin Arboretum Hotel Loan   19,000,000    19,000,000    4.530%  December 11, 2024
Great Valley Hotel Loan   8,200,000        4.700%  April 11, 2025
Total  $123,152,384   $112,705,196         

 

The notes payable are secured by hotel properties or the mortgage note receivable and are payable in monthly installments of principal and interest.

 

16
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Maturities of notes payable as of March 31, 2015 are as follows: 

 

Year ending December 31,   
 2015   $1,402,599 
 2016    1,999,043 
 2017    32,632,477 
 2018    10,765,815 
 Thereafter    76,352,450 
 Total   $123,152,384 

 

The estimated fair value of the Company’s notes payable as of March 31, 2015 and December 31, 2014 was $122,000,000 and $114,000,000, respectively. The fair value of notes payable was estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.

 

6. Equity

 

Capitalization

 

Under the Charter, the Company has the authority to issue 400,000,000 shares of common stock and 50,000,000 shares of preferred stock. All shares of common and preferred stock have a par value of $0.01 per share. As of March 31, 2015, the Company had issued 12,750,709 shares of common stock in the Company’s public offerings, including 301,629 shares issued pursuant to the DRIP. As of March 31, 2015, there were a total of 12,821,681 shares of the Company’s common stock issued and outstanding, including 22,222 shares sold to Sponsor and 48,750 shares of restricted stock discussed in Note 8.

 

The Company’s board of directors is authorized to amend the Charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue.

 

Distributions

 

The Company’s board of directors has authorized and declared a distribution to its stockholders that (1) accrues daily to the Company’s stockholders of record as of the close of business on each day; (2) is payable in cumulative amounts on or before the 15th day of each calendar month; and (3) is calculated at a rate of $0.002192 per share of the Company’s common stock per day, which, if paid each day over a 365-day period, is equivalent to an 8.0% annualized distribution rate based on a purchase price of $10.00 per share of common stock.

 

The following table summarizes distributions paid in cash and pursuant to the DRIP for the three months ended March 31, 2015 and 2014.

  

Period (1)  Cash Distribution (1)  Distribution Paid Pursuant to DRIP (1)(2)  Total Amount of Distribution (1)
First Quarter 2015  $1,348,309   $746,826   $2,095,135 
                
First Quarter 2014  $482,368   $194,592   $676,960 

 

(1)Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 15 days following the end of such month.

 

(2)Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan.

 

17
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Noncontrolling Interests in Consolidated Joint Ventures

 

Noncontrolling interests in consolidated joint ventures at March 31, 2015 was $298,708, which represented ownership interests in the Lyndhurst Joint Venture and the Note Joint Venture, and is reported in equity in the consolidated balance sheets. Income from consolidated joint ventures attributable to these noncontrolling interests was $19,252 and $19,299 for the three months ended March 31, 2015 and 2014, respectively.

 

7. Related Party Arrangements

 

Advisor and certain affiliates of Advisor received fees and compensation in connection with the Company’s public offerings and have received and will continue to receive fees and compensation in connection with the acquisition, management and sale of the Company’s real estate investments.

 

Selling Commissions and Dealer Manager Fees

 

Moody Securities, LLC (“Moody Securities”), the dealer manager of the Company’s initial public offering and follow-on offering, received a selling commission of up to 6.5% of gross offering proceeds raised in the Company’s public offerings, all or a portion of which could be re-allowed to participating broker-dealers. In addition, the Company paid Moody Securities a dealer manager fee of up to 3.5% of gross offering proceeds raised in the Company’s public offerings, a portion of which could be reallowed to participating broker-dealers. No selling commissions or dealer manager fee are paid for sales pursuant to the DRIP. As of March 31, 2015, the Company had paid Moody Securities $746,368 and $8,633,699 in selling commissions related to the initial and follow-on offerings, respectively, and $190,626 and $2,452,379 in dealer manager fees related to the initial and follow-on offerings, respectively, which has been recorded as a reduction to additional paid-in capital in the consolidated balance sheets. The Company terminated its follow-on offering on February 20, 2015 and therefore will not pay selling commissions or dealer manager fees to Moody Securities on an ongoing basis.

 

Organization and Offering Costs

 

Advisor and its affiliates are reimbursed up to 15.0% of offering proceeds for reimbursement of organization and offering expenses (including selling commissions and the dealer manager fee payable to Moody Securities) not to exceed actual expenses incurred. Advisor will be responsible for the payment of organization and offering expenses, other than selling commissions and dealer manager fees, to the extent they exceed 15% of gross offering proceeds, without recourse against or reimbursement by the Company. As of March 31, 2015, Advisor and its affiliates had incurred organization and offering expenses of $3,214,000 and $2,360,000 related to the Company’s initial and follow-on offerings, respectively.

 

As of March 31, 2015, total offering costs for the follow-on offering were $13,735,268. The Company directly incurred $11,375,281 of offering costs for the follow-on offering and $2,359,987 in offering costs were reimbursable to Advisor for the follow-on offering. As of March 31, 2015, the Company had $203,963 payable to Advisor for offering costs related to the follow-on offering. As of March 31, 2015, offering costs related to the follow-on offering did not exceed 15.0% of the gross offering proceeds from the sale of the Company’s shares of common stock in the follow-on offering. The Company has not reimbursed Advisor any funds for organization costs for the follow-on offering.

 

18
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Advisory Fees and Expense Reimbursement

 

Acquisition Fee

 

Advisor, or its affiliates, receives an acquisition fee equal to 1.5% of (1) the cost of investments the Company acquires or (2) the Company’s allocable cost of investments acquired in a joint venture. With respect to investments in and originations of loans, Advisor will receive an origination fee in lieu of an acquisition fee. The origination fee will equal 1.5% of the amount funded by the Company to invest in or originate such loan. For the three months ended March 31, 2015, the Company paid Advisor an acquisition fee of $165,000 in connection with the acquisition of the Great Valley Hotel. For the three months ended March 31, 2014, the Company paid Advisor an acquisition fee of $307,500 in connection with the acquisition of the Grapevine Hotel. As of March 31, 2015, the Company had not paid any origination fees to Advisor.

 

Debt Financing Fee

 

Advisor will receive a debt financing fee of 1.0% of the amount available under any loan or line of credit made available to the Company. It is anticipated that Advisor will pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for the Company. For the three months ended March 31, 2015, the Company paid $175,000 in debt financing fees to Advisor for financing incurred in connection with the refinancing of the Woodlands Hotel and the acquisition of the Great Valley Hotel. For the three months ended March 31, 2014, the Company paid $132,500 in debt financing fees to Advisor for financing incurred in connection with the acquisition of the Grapevine Hotel.

 

Asset Management Fee

 

The Company pays Advisor a monthly asset management fee of one-twelfth of 1.0% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments held by the Company at month-end. For the three months ended March 31, 2015 and 2014, the Company incurred asset management fees of $404,634 and $156,758, respectively, payable to Advisor which are recorded in corporate general and administrative expenses in the accompanying consolidated statements of operations.

 

Disposition Fee

 

If Advisor provides a substantial amount of services in connection with the sale of a property or other investment, Advisor or its affiliates also will be paid a disposition fee equal to 3.0% of the contract sales price of each property or other investment sold, provided that total real estate commissions, including the disposition fee, do not exceed 6.0% of the contract sales price. As of March 31, 2015, the Company had not paid any disposition fees to Advisor because Advisor waived the disposition fee in connection with the sale of the Residence Inn Property during 2012.

 

Operating Expense Reimbursement

 

The Company will reimburse Advisor for all operating expenses paid or incurred by Advisor in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse Advisor for any amount by which its operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of the Company’s average invested assets, or (2) 25% of the Company’s net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of the Company’s assets for that period (the “2%/25% Limitation”). Notwithstanding the above, the Company may reimburse Advisor for expenses in excess of this limitation if a majority of the independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2015, total operating expenses of the Company were $2,113,054, which included $1,436,686 in operating expenses incurred directly by the Company and $676,368 incurred by Advisor on behalf of the Company. Of the $2,113,054 in total operating expenses incurred during the four fiscal quarters ended March 31, 2015, $0 exceeded the 2%/25% Limitation. The Company reimbursed Advisor $676,000 in operating expenses during the four fiscal quarters ended March 31, 2015. Additionally, Advisor has incurred $4,046,765 in operating expenses on the Company’s behalf prior to the four fiscal quarters ended March 31, 2015. Subject to a future determination by the board of directors, this amount is not reimbursable to Advisor nor an obligation of the Company.

 

Advisor has waived all operating expenses reimbursable to Advisor for each of the 12 prior fiscal quarters ended March 31, 2014 to the extent such expenses had not been previously reimbursed to Advisor. Advisor further agreed that all expenses incurred directly by the Company during the waiver period will be paid by Advisor on behalf of the Company. Total reimbursable expenses so waived or assumed by Advisor were $1,967,721 as of March 31, 2015.

 

19
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Property Management Fees

 

The Company has engaged Moody National Hospitality Management, LLC, an affiliate of the Company (the “Property Manager”), as its property manager. The Company pays Property Manager a market-based property management fee in connection with the operation and management of its properties. For the three months ended March 31, 2015 and 2014, the Company paid the Property Manager property management fees of $293,885 and $105,540, respectively, and accounting fees of $60,000 and $30,000, respectively, pursuant to the terms of hotel management agreements which are included in hotel operating expenses in the accompanying consolidated statements of operations.

 

 Note Joint Venture

 

As discussed in Note 4, as of March 31, 2015, the OP owns a 74.5% membership interest in the Note Joint Venture, Moody National Mortgage owns a 14% membership interest in the Note Joint Venture and the Trust Members own the remaining 11.5% membership interests in the Note Joint Venture. Pursuant to the terms of the Note Joint Venture Agreement, Moody National Mortgage is entitled to receive approximately 14% of all distributions of cash from operations of the Note Joint Venture and the OP and the other Members are entitled to receive the remaining approximately 86% of distributions of cash from operations of the Note Joint Venture in proportion to their respective membership interests in the Note Joint Venture.

 

The Note Joint Venture Agreement provides that cash proceeds from a sale, exchange, refinancing or other disposition of the Hyatt Place Note will be distributed as follows: (1) first, to each Member of the Note Joint Venture in proportion to their respective unreturned capital contributions to the Note Joint Venture until each member’s unreturned capital contributions have been reduced to zero; (2) second, to Moody National Mortgage until Moody National Mortgage has been distributed an amount equal to approximately 14% of all distributions made to all Members (inclusive of all prior distributions); and (3) thereafter, approximately 14% to Moody National Mortgage and approximately 86% to the OP and the Trust Members in proportion to their respective membership interests in the Note Joint Venture. In addition, so long as Moody National Mortgage or Moody National Management has any outstanding guaranty of any indebtedness of the Note Joint Venture, (1) the OP will in good faith consult with Moody National Mortgage and consider any proposals or recommendations of Moody National Mortgage regarding any possible refinancing of indebtedness on the Hyatt Place Note or any sale of the Hyatt Place Note and (2) any sale of the Hyatt Place Note will require the consent of Moody National Mortgage, which consent will not be unreasonably withheld.

 

Grapevine Hotel

 

On March 31, 2014, Moody Grapevine Holding acquired fee simple title to the Grapevine Hotel from Moody National RI Grapevine S, LLC, Moody National RI Grapevine MT, LLC, and Moody National Management, LP, each an affiliate of the Company, for an aggregate purchase price of $20,500,000, excluding acquisition costs.

 

Lyndhurst Hotel

 

On September 30, 2014, the OP acquired an interest in the Lyndhurst Hotel from the TIC Owners, the current tenant-in-common owners of the Lyndhurst Hotel, for an aggregate purchase price, exclusive of closing costs, including the assumption of the outstanding debt secured by the Lyndhurst Hotel, of approximately $33,322,000. The TIC Owners acquired their tenant-in-common interests in the Lyndhurst Hotel in a tenant-in-common program sponsored by an affiliate of the Company.

 

20
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited) 

 

Pursuant to the Lyndhurst Joint Venture Agreement, the OP will serve as the sole manager of the Lyndhurst Joint Venture and will manage the business and affairs of the Lyndhurst Joint Venture. Pursuant to the Lyndhurst Joint Venture Agreement, the contributing TIC members, as holders of the Class A Interests (“Class A Holders”), will have no voting or consent rights with respect to the management of the Lyndhurst Joint Venture except as specifically set forth in the Lyndhurst Joint Venture Agreement or as required by applicable law. Pursuant to the Lyndhurst Joint Venture Agreement, cash available for distribution to the members of the Lyndhurst Joint Venture, as determined by the OP in its discretion as the manager, will be distributed as follows: (1) first, 100% to the OP as the holder of the Class B Interests (the “Class B Holder”) until the Class B Holder has received cash distributions equal to a 12% annual, cumulative, non-compounded return on its unreturned capital contributions to the Lyndhurst Joint Venture, (2) second, 100% to the Class B Holder until the Class B Holder has received a return of 100% of its unreturned capital contributions to the Lyndhurst Joint Venture, (3) third, 100% to the Class A Holders until they have received a return of 100% of their unreturned capital contributions to the Lyndhurst Joint Venture (valued at $1,000 in the aggregate), and (4) fourth, 60% to the Class B Holder and 40% to the Class A Holders (in accordance with each Class A Holder’s respective membership interests in the Lyndhurst Joint Venture).

 

Payment from Moody Securities

 

On March 27, 2015, Moody Securities entered into a Notice of Acceptance Letter, Waiver and Consent with the Financial Industry Regulatory Authority, Inc. (“FINRA”) whereby Moody Securities, among other things, agreed to pay the Company $350,000 to be distributed pro rata to the Company’s stockholders in connection with Moody Securities failing to comply with FINRA Rule 2310 and the computation of organization and offering expenses incurred in connection with the Company’s initial public offering under FINRA rules.  The Company has no liability in this matter and the Company’s involvement in this matter is limited to distributing the $350,000 payment from Moody Securities to the Company’s stockholders.

 

8. Incentive Award Plan

 

The Company has adopted an incentive plan (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. Shares of common stock will be authorized and reserved for issuance under the Incentive Award Plan. The Company has also adopted an independent directors compensation plan (the “Independent Directors Compensation Plan”) pursuant to which each of the Company’s then current independent directors were entitled to receive 5,000 shares of restricted common stock when the Company raised the minimum offering amount of $2,000,000 in its initial public offering. Each new independent director that subsequently joins the Company’s board of directors will receive 5,000 shares of restricted stock on the date he or she joins the Company’s board of directors. In addition, on the date of each of the first four annual meetings of the Company’s stockholders at which an independent director is re-elected to the Company’s board of directors, he or she will receive 2,500 restricted shares of common stock. Subject to certain conditions, the non-vested shares of restricted stock granted pursuant to the Independent Directors Compensation Plan will vest and become non-forfeitable in four equal quarterly installments beginning on the first day of the first quarter following the date of grant; provided, however, that the restricted stock will become fully vested on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company. As of March 31, 2015, there were 1,951,250 common shares remaining available for future issuance under the Incentive Award Plan and the Independent Directors Compensation Plan.

 

No shares of restricted stock were granted pursuant to the Independent Directors Compensation Plan during the three months ended March 31, 2015 and 2014. As of March 31, 2015, a total of 48,750 shares of restricted common stock have been issued by the Company to the Company’s independent directors pursuant to the Independent Directors Compensation Plan.

 

The weighted average grant date fair value of the shares of restricted stock issued by the Company pursuant to the Independent Directors Compensation Plan was $10.00 per share based on observable market transactions occurring near the dates of the grants. The Company recorded compensation expense related to such shares of restricted stock ratably from the grant date to the date the shares become fully vested based on the fair market value of such shares at the date they were granted. The Company recorded compensation related to such shares of restricted stock based on the fair market value of such shares at the date they became vested of $20,769 and $20,898 for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there were 3,750 non-vested shares of restricted common stock granted pursuant to the Independent Directors Compensation Plan which were granted on August 11, 2014. The remaining unrecognized compensation expense of $21,231 will be recognized during the second and third quarters of 2015.

 

21
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited) 

 

The following is a summary of activity under the Independent Directors Compensation Plan for the three months ended March 31, 2015 and year ended December 31, 2014: 

 

   Number of Shares  Weighted Average Grant Date Fair Value
 Balance of non-vested shares as of January 1, 2014    8,125   $10.00 
  Shares granted on August 11, 2014    7,500    10.00 
  Shares vested    (10,000)   10.00 
             
 Balance of non-vested shares as of December 31, 2014    5,625    10.00 
  Shares vested    (1,875)   10.00 
 Balance of non-vested shares as of March 31, 2015    3,750   $10.00 

 

9. Subordinated Participation Interest

 

Pursuant to the limited partnership agreement of the OP, the holders of the Special Units will be entitled to distributions from the OP in an amount equal to 15.0% of net sales proceeds received by the OP on dispositions of its assets and dispositions of real properties by joint ventures or partnerships in which the OP owns a partnership interest, after the other holders of common units, including the Company, have received in the aggregate cumulative distributions from operating income, sales proceeds or other sources equal to their capital contributions plus an 8.0% cumulative non-compounded annual pre-tax return thereon. The Special Units will be redeemed for the above amount upon the earliest of: (1) the occurrence of certain events that result in the termination or non-renewal of the Advisory Agreement or (2) a listing of the Company’s common stock on a national securities exchange.

 

10. Commitments and Contingencies

 

Restricted Cash

 

Under certain management and debt agreements existing at March 31, 2015 and December 31, 2014, the Company escrows payments required for insurance, real estate taxes, capital improvements, hotel furniture and fixtures and debt service.

 

The composition of the Company’s restricted cash as of March 31, 2015 and December 31, 2014 are as follows:

 

   March 31, 2015  December 31, 2014
Property improvement plan  $4,180,935   $2,404,527 
Real estate taxes   543,282    812,410 
Insurance   96,338    411,234 
Hotel furniture and fixtures   991,663    1,394,978 
Seasonality   190,053    365,044 
Total restricted cash  $6,002,271   $5,388,193 

 

22
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

Franchise Agreements

 

As of March 31, 2015, all of the Company’s hotel properties are operated under franchise agreements with initial terms ranging from 10 to 20 years. Franchise agreements allow the properties to operate under their respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.5% and 4.3% of room revenue. For the three months ended March 31, 2015 and 2014, the Company incurred franchise fee expense of approximately $646,000 and $283,000, respectively, which is included in hotel operating expense in the accompanying consolidated statements of operations.

 

11. Income Taxes

 

The Company has formed taxable REIT subsidiaries (each a “TRS”) that are C-Corporations for federal income tax purposes and use the consolidated asset and liability method of accounting for income taxes. Tax return positions are recognized in the consolidated financial statements when they are “more-likely-than-not” to be sustained upon examination by the taxing authority. Deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future periods. A valuation allowance may be placed on deferred income tax assets, if it is determined that it is more likely than not that a deferred tax asset may not be realized.

 

No provision for income taxes has been made for the Company (other than each TRS) for the three months ended March 31, 2015 and 2014 as it made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ended December 31, 2011. Prior to January 1, 2011, the Company was subject to federal and state income taxes as it had not elected to be taxed as a REIT.

 

The TRS’s had deferred tax assets of $772,000 and $587,000 as of March 31, 2015 and December 31, 2014.

 

As of March 31, 2015, the Company had operating loss carry-forwards of $183,000 expiring in 2033 and 2034.

 

The income tax expense (benefit) for the three months ended March 31, 2015 and 2014 consisted of the following: 

 

    Three months ended March 31,
    2015   2014
Current expense   $ 178,400     $ 52,900  
Deferred benefit     (185,000 )      
Total income tax expense (benefit)   $ (6,600 )   $ 52,900  
                 
Federal   $ 9,000     $ 52,000  
State     (15,600 )     900  
Total income tax expense (benefit)   $ (6,600 )   $ 52,900  

 

Income tax expense recognized is based on the taxable income of the Company’s TRS and not the taxable income of the Company.

 

The reconciliation of income tax expense (benefit) to the expected amount computed by applying federal statutory rate to income before income taxes is as follows:

 

23
 

 

Moody National REIT I, Inc.

 

Notes to Consolidated Financial Statements

 

March 31, 2015

 

(unaudited)

 

   Three months ended March 31,
   2014  2013
Expected federal tax benefit at statutory rate  $(437,000)  $(140,000)
Tax impact of REIT election   446,000    192,500 
Expected tax expense at TRS entities   9,000    52,000 
State income tax expense (benefit), net of federal tax benefit   (15,600)   900 
Income tax expense (benefit)  $(6,600)  $52,900 

 

12. Subsequent Events

 

Distributions Declared

 

On March 31, 2015, the Company declared a distribution in the aggregate amount of $868,625, of which $545,318 was paid in cash on April 15, 2015 and $323,307 was paid pursuant to the DRIP in the form of additional shares of the Company’s common stock. On April 30, 2015, the Company declared a distribution in the aggregate amount of $844,706 which is scheduled to be paid in cash and through the DRIP in the form of additional shares of the Company’s common stock on May 15, 2015.

 

Potential Acquisitions

 

Embassy Suites Nashville

 

On April 24, 2015, the Company entered into a Purchase and Sale Agreement for the acquisition of a hotel property located in Nashville, Tennessee commonly known as the Embassy Suites Nashville Vanderbilt University (the “Embassy Suites Nashville”), from the current tenant-in-common owners and an affiliate of the Advisor for an aggregate purchase price of $66,300,000, excluding acquisition costs. The Company intends to finance the acquisition of the Embassy Suites Nashville with a portion of the remaining proceeds from its follow-on offering and financing secured by the Embassy Suites Nashville.

 

Hampton Inn Boston

 

On May 5, 2015, the Company entered into a Purchase and Sale Agreement for the acquisition of a hotel property located in Boston, Massachusetts commonly known as the Hampton Inn Boston Logan Airport (the “Hampton Inn Boston”), from third party for an aggregate purchase price of $57,000,000, excluding acquisition costs. The Company intends to finance the acquisition of the Hampton Inn Boston with a portion of the remaining proceeds from its follow-on offering and financing secured by the Hampton Inn Boston.

 

Residence Inn Austin

 

On May 11, 2015, the Company entered into an Agreement of Purchase and Sale for the acquisition of a hotel property located in Austin, Texas commonly known as the Residence Inn Austin (the “Residence Inn Austin”), from a third party for an aggregate purchase price of $25,500,000, excluding acquisition costs. The Company intends to finance the acquisition of the Residence Inn Austin with a portion of the remaining proceeds from its public offering and financing secured by the Residence Inn Austin.

 

Moody Project 149

 

On May 14, 2015, the Company entered into a Purchase and Sale Agreement for the acquisition of a 149-hotel portfolio of properties located throughout the U.S., commonly known as the Moody Project 149, from a third party for an aggregate purchase price of $1,725,000,000, excluding acquisition costs. The Company intends to finance the acquisition of the Moody Project 149 with a portion of the remaining proceeds from its public offering and financing secured by the Moody Project 149.

 

The acquisition of these hotels is subject to substantial conditions to closing, including: (1) the Company’s ability to obtain appropriate financing secured by the these hotels; and (2) the absence of material adverse changes to the hotels prior to their dates of acquisition. There is no assurance that the Company will close the acquisition of the Embassy Suites Nashville, the Hampton Inn Boston, the Residence Inn Austin or the Moody Project 149 on the terms described above or at all.

 

24
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Moody National REIT I, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Moody National REIT I Inc., a Maryland corporation, and, as required by context, Moody National Operating Partnership I, L.P., a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

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

 

our ability to effectively deploy the remaining proceeds raised in our public offering;

 

our ability to obtain financing on acceptable terms;

 

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

 

our ability to identify and acquire real estate and real estate-related assets on terms that are favorable to us;

 

risks inherent in the real estate business, including the lack of liquidity of real estate and real estate-related assets;

 

adverse developments affecting our sponsor and its affiliates;

 

a decrease in the level of participation in our distribution reinvestment plan;

 

the availability of cash flow from operating activities for distributions;

 

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

 

conflicts of interest arising out of our relationship with our advisor and its affiliates;

 

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

 

the availability of capital; and

 

interest rates.

 

25
 

 

Any of the assumptions underlying the forward-looking statements included herein could be inaccurate, and undue reliance should not be placed upon any forward-looking statements included herein. All forward-looking statements are made as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, or the SEC, and the risk that actual results will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements made herein, whether as a result of new information, future events, changed circumstances or any other reason.

 

All forward-looking statements included in this report should be read in light of the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015.

 

Overview 

 

We were formed as a Maryland corporation on January 15, 2008 to invest in a diversified portfolio of real estate investments. We have elected to qualify as a real estate investment trust, or REIT, commencing with the taxable year ended December 31, 2011.

 

As of March 31, 2015, our portfolio consisted of ten investments: (1) the Woodlands Hotel, a 91-suite hotel property in The Woodlands, Texas, (2) the Germantown Hotel, a 127-guestroom hotel property located in Germantown, Tennessee, (3) the Charleston Hotel, a 113-guestroom hotel property located in North Charleston, South Carolina, (4) the Austin Hotel, a 123-suite hotel property located in Austin, Texas, (5) the Grapevine Hotel, a 133-suite hotel property located in Grapevine, Texas, (6) the Silicon Valley Hotel, a 127-suite hotel property located in Newark, California, (7) our joint venture interest in the Lyndhurst Hotel, a 227-guestroom hotel property located in, Lyndhurst, New Jersey, (8) the Austin Arboretum Hotel, a 138-guestroom hotel property located in Austin, Texas, (9) the Great Valley Hotel, a 125-guestroom hotel property located in Frazer, Pennsylvania, and (10) a 74.5% joint venture interest in the Hyatt Place Note, a mortgage note secured by a hotel property located in Grapevine, Texas, commonly known as Hyatt Place hotel. For more information on our real estate portfolio, see Notes 3 and 4 to the consolidated financial statements included in this quarterly report.

 

On April 15, 2009, we commenced an initial public offering of up to $1,000,000,000 in shares of our common stock to the public in our primary offering at $10.00 per share and up to $100,000,000 in shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at $9.50 per share. On October 12, 2012, we terminated our initial public offering and commenced our follow-on public offering (discussed below). As of the termination of our initial public offering, we had accepted subscriptions for, and issued, 1,126,253 shares of our common stock in our initial public offering, including 29,582 shares of our common stock pursuant to our distribution reinvestment plan, resulting in offering proceeds of $10,966,713.

 

On October 12, 2012, we commenced our follow-on public offering, or our “follow-on offering,” of up to $1,000,000,000 in shares of our common stock, comprised of up to $900,000,000 in shares offered to the public at $10.00 per share and up to $100,000,000 in shares offered to our stockholders pursuant to our distribution reinvestment plan, or the DRIP, at $9.50 per share. Effective February 20, 2015, we terminated the offer and sale of shares of our common stock to the public in our follow-on offering. We had accepted investors’ subscriptions for, and issued, 11,624,456 shares of our common stock in our follow-on offering, including 272,047 shares of our common stock issued pursuant to the DRIP, resulting in aggregate gross offering proceeds of $113,524,081. As of March 31, 2015, we had accepted subscriptions for, and issued, 12,750,709 shares of common stock in our initial public offering and follow-on offering, including 301,629 shares of common stock issued pursuant to the DRIP, resulting in aggregate gross offering proceeds of $124,490,794. We continue to offer shares of common stock pursuant to the DRIP and intend to continue to do so until as late as October 12, 2015. As March 31, 2015, 10,254,269 shares of our common stock remained available for sale pursuant to the DRIP.

 

26
 

 

We intend to use substantially all of the remaining net proceeds from our follow-on offering and the proceeds from any other offering of our shares that we may conduct in the future to continue to invest in a diversified portfolio of real properties, real estate securities and debt-related investments. To date, all of our investments have been in hotel properties or loans secured by hotel properties, and we anticipate that our portfolio will continue to consist primarily of hotel properties located in the United States and Canada that we own exclusively or in joint ventures or other co-ownership arrangements with other persons. We may also invest in other property types consisting of multifamily, office, retail and industrial assets located in the United States and Canada as well as securities of real estate companies and debt-related investments. We may also make opportunistic investments in properties that may be under-developed or newly constructed and in properties that we believe are undervalued.

 

Subject to certain restrictions and limitations, our business is externally managed by Moody National Advisor I, LLC, our external advisor, pursuant to an advisory agreement. We refer to Moody National Advisor I, LLC as our “advisor.” Our advisor conducts our operations and manages our portfolio of real estate investments.

 

We believe that we have sufficient capital to meet our existing debt service and other operating obligations for the current year and that we have adequate resources to fund our cash needs until we reach sustainable profitable operations. However, our operations are subject to a variety of risks, including, but not limited to, our ability to raise additional funds in future offerings of securities, changes in national economic conditions, the restricted availability of financing, changes in demographic trends and interest rates, declining real estate valuations and downward pressure on room rates for hotels. As a result of these uncertainties, there can be no assurance that we will meet our investment objectives or that the risks described above will not have an adverse effect on our properties or results of operations.

 

We made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, of the Internal Revenue Code, commencing with the taxable year ended December 31, 2011. As a REIT, we generally are not subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year after the taxable year in which we initially elect to be taxed as a REIT, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Failing to qualify as a REIT could materially and adversely affect our net income.

 

Market Outlook

 

The recession from 2007 to 2009 in the United States impacted the real estate and credit markets, primarily in the form of escalating default rates on mortgages, declining home values and increasing inventory of properties nationwide. The constraints on available credit resulted in illiquidity and volatility in the markets for corporate bonds, asset-backed securities and commercial real estate bonds and loans. During the downturn, economic conditions negatively impacted the commercial real estate sector, resulting in lower occupancy, lower rental rates and declining values. The economy in the United States is currently improving; however, there is no assurance that economic conditions will continue to improve or will not worsen in the future. We believe that as the economic environment continues to improve, we will have unique investment opportunities, particularly in the hospitality sector. We believe that the hospitality sector has the greatest supply-demand imbalance among all real estate asset classes at this time. As the economy continues to improve, room rates for hotels should increase due to the fact that increased demand for hotel rooms is generally correlated with growth in the U.S. gross domestic product (GDP). Demand growth, combined with the current undersupply of hotel rooms, should result in improved fundamentals in the hospitality space, particularly upward pressure on room rates. The ability of hotels to adjust room rates quickly should allow hotel property owners to take advantage of this anticipated trend.

 

Liquidity and Capital Resources

 

Our principal demand for funds will be for the acquisition of real estate assets, the payment of operating expenses, principal and interest payments on our outstanding indebtedness and the payment of distributions to our stockholders. Over time, we intend to generally fund our cash needs for items other than asset acquisitions from operations. Our cash needs for acquisitions and investments will be funded primarily from the remaining proceeds from the sale of shares of our common stock in our follow-on offering, the sale of shares pursuant to the DRIP and assumption and origination of debt.

 

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There may be a delay between the sale of shares of our common stock during our follow-on offering and our purchase of assets, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our advisor, subject to the oversight of our investment committee and board of directors, will evaluate potential acquisitions and will engage in negotiations with sellers and lenders on our behalf. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

 

We may, but are not required to, establish working capital reserves out of cash flow generated by our real estate assets or out of proceeds from the sale of our real estate assets. We do not anticipate establishing a general working capital reserve; however, we may establish working capital reserves with respect to particular investments. We also may, but are not required to, establish reserves out of cash flow generated by our real estate assets or out of net sale proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. Our lenders also may require working capital reserves.

 

To the extent that any working capital reserve we establish is insufficient to satisfy our cash requirements, additional funds may be provided from cash generated from operations, short-term borrowing, equity capital from joint venture partners, or the proceeds of additional public or private offerings of our shares or interests in our operating partnership. In addition, subject to certain limitations, we may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financing or refinancing in additional properties. There can be no assurance that we will be able to obtain such capital or financing on favorable terms, if at all.

 

Net Cash Provided by (Used in) Operating Activities

 

As of March 31, 2015, we owned nine hotel properties. Net cash provided by (used in) operating activities for the three months ended March 31, 2015 and 2014 was $1,387,814 and $(142,284), respectively. The increase in cash provided by operating activities for the three months ended March 31, 2015 was primarily due to an increase in accounts payable and accrued expenses and a decrease in restricted cash related to operating activities.

 

Net Cash Used In Investing Activities

 

Our cash used in investing activities varied based on how quickly we raised funds in our public offering and how quickly we invest those funds towards acquisitions of real estate and real-estate related investments. Net cash used in investing activities for the three months ended March 31, 2015 and 2014 was $13,518,662 and $22,107,192, respectively. The decrease in cash used in investing activities for the three months ended March 31, 2015 was primarily due to the decrease in acquisitions of hotel properties to $11,000,000 for the three months ended March 31, 2015 from $20,500,000 for the three months ended March 31, 2014.

 

Net Cash Provided by Financing Activities

 

Our cash flows from financing activities consist primarily of proceeds from our public offering and newly originated notes payable, net of distributions paid to our stockholders. Net cash provided by financing activities for the three months ended March 31, 2015 and 2014 was $32,222,283 and $20,012,161, respectively. The increase in cash provided by financing activities for the three months ended March 31, 2015, was primarily due to an increase in gross offering proceeds to $27,196,047 for the three months ended March 31, 2015 from $8,783,004 for the three months ended March 31, 2014.

 

Cash and Cash Equivalents

 

As of March 31, 2015, we had cash on hand of $43,935,507.

 

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Debt

 

We use, and intend to use in the future, secured and unsecured debt as a means of providing additional funds for the acquisition of real property, securities and debt-related investments. By operating on a leveraged basis, we expect that we will have more funds available for investments. This will generally allow us to make more investments than would otherwise be possible, potentially resulting in enhanced investment returns and a more diversified portfolio. However, our use of leverage increases the risk of default on loan payments and the resulting foreclosure on a particular asset. In addition, lenders may have recourse to assets other than those specifically securing the repayment of the indebtedness. When debt financing is unattractive due to high interest rates or other reasons, or when financing is otherwise unavailable on a timely basis, we may purchase certain assets for cash with the intention of obtaining debt financing at a later time.

 

As of March 31, 2015, our outstanding indebtedness totaled $123,152,384. Our aggregate borrowings are reviewed by our board of directors at least quarterly. Under our Articles of Amendment and Restatement, or our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets. “Net assets” for purposes of this calculation is defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. However, we may temporarily borrow in excess of these amounts if such excess is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with an explanation for such excess. As of March 31, 2015 and 2014, our debt levels did not exceed 300% of the value of our net assets.

 

Contractual Commitments and Contingencies

 

The following is a summary of our contractual obligations as of March 31, 2015:

 

      Payments Due By Period   
Contractual Obligations  Total  2015  2016-2017  2018-2019  Thereafter
                
Long-term debt obligations(1)  $123,152,384   $1,402,599   $34,631,520   $12,338,623   $74,779,642 
Interest payments on outstanding debt obligations(2)   39,586,671    4,670,170    11,734,183    7,702,876    15,479,442 
Total  $162,739,055   $6,072,769   $46,365,703   $20,041,499   $90,259,084 

  

(1)Amounts include principal payments only.

(2)Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates at March 31, 2015.

 

Organization and Offering Costs

 

Pursuant to our advisory agreement with our advisor, we are obligated to reimburse our advisor and its affiliates, as applicable, for organization and offering costs incurred on our behalf associated with our public offering, but only to the extent that such reimbursements do not exceed actual expenses incurred by our advisor and would not cause sales commissions, the dealer manager fee and other organization and offering costs borne by us in a public offering to exceed 15.0% of gross offering proceeds from the sale of our shares in such public offering as of the date of reimbursement. Our advisor is obligated to reimburse us to the extent organization and offering costs (including sales commissions and dealer manager fees) incurred by us in a public offering exceed 15.0% of the gross offering proceeds from the sale of our shares of common stock in such public offering.

 

As of March 31, 2015, total offering costs for our follow-on offering were $13,735,268. We directly incurred $11,375,281 of offering costs for our follow-on offering and $2,359,987 in offering costs reimbursable to our advisor for our follow-on offering. As of March 31, 2015, we had $203,963 payable to our advisor for offering costs related to our follow-on offering. As of March 31, 2015, offering costs related to our follow-on offering did not exceed 15.0% of the gross offering proceeds from the sale of our shares of common stock in our follow-on offering. We have not reimbursed our advisor any funds for organization costs for our follow-on offering.

 

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Operating Expenses

 

Pursuant to our charter, we will reimburse our advisor for all operating expenses paid or incurred by our advisor in connection with the services provided to us, subject to the limitation that we will not reimburse our advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (1) 2% of our average invested assets, or (2) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period, which we refer to as the “2%/25% Limitation.” Notwithstanding the above, we may reimburse our advisor for expenses in excess of this limitation if a majority of the independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2015, our total operating expenses were $2,113,054, which included $1,436,686 in operating expenses incurred directly by us and $676,368 incurred by our advisor on our behalf. Of the $2,113,054 in total operating expenses incurred during the four fiscal quarters ended March 31, 2015, $0 exceeded the 2%/25% Limitation. We reimbursed our advisor $676,000 in operating expenses during the four fiscal quarters ended March 31, 2015. Additionally, our advisor has incurred $4,046,765 in operating expenses on our behalf prior to the four fiscal quarters ended March 31, 2015. Subject to a future determination by the board of directors, this amount is not reimbursable to our advisor and is not our obligation.

 

Our advisor has waived all operating expenses reimbursable to our advisor for each of the 12 prior fiscal quarters ended March 31, 2014, which we refer to as the “Waiver Period,” to the extent such expenses had not been previously reimbursed to our advisor. Our advisor further agreed that all expenses incurred directly by us during the waiver period will be paid by our advisor on our behalf. Total reimbursable expenses so waived or assumed by our advisor were $1,967,721 as of March 31, 2015.

 

Results of Operations

 

As of March 31, 2014, we owned five hotel properties and a joint venture interest in the Hyatt Place note. As of March 31, 2015, we owned nine hotel properties and a joint venture interest in the Hyatt Place note. Because we acquired four hotel properties since March 31, 2014, our results of operations for the three months ended March 31, 2015 are not directly comparable to those for the three months ended March 31, 2014. In general, we expect that our income and expenses related to our investment portfolio will increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

 

Comparison of the three months ended March 31, 2015 versus the three months ended March 31, 2014

 

Revenue

 

Total revenue increased to $10,006,848 for the three months ended March 31, 2015 from $3,675,582 for the three months ended March 31, 2014. Total hotel revenue increased to $9,851,997 for the quarter ended March 31, 2015 from $3,518,011 the quarter ended March 31, 2014. The increase in hotel revenue was primarily due to the fact that we owned nine hotel properties at March 31, 2015 compared to five hotel properties at March 31, 2014. Interest income from real estate loan receivable related to the Hyatt Place note decreased to $154,851 for the quarter ended March 31, 2015 from $157,571 for the quarter ended March 31, 2014. We expect that room revenue, other hotel revenue and total revenue will each increase in future periods as a result of anticipated future acquisitions of real estate assets and owning the Great Valley hotel for the entire reporting period.

 

A comparison of hotel revenues for those hotels owned continuously for the three months ended March 31, 2015 and 2014 follows:

  

    Three months ended March 31,
    2015   2014   Increase
Woodlands Hotel   $ 1,053,272     $ 881,271     $ 172,001  
Germantown Hotel     884,596       848,654       35,942  
Charleston Hotel     774,245       711,108       63,137  
Austin Hotel     1,299,981       1,058,846       241,135  
Totals   $ 4,012,094     $ 3,499,879     $ 512,215  

  

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Hotel Operating Expenses

 

Hotel operating expenses increased to $5,987,264 for the three months ended March 31, 2015 from $2,021,383 for the three months ended March 31, 2014. The increase in hotel operating expenses was primarily due to the fact that we owned nine hotel properties at March 31, 2015 compared to five hotel properties at March 31, 2014.

 

Property Taxes, Insurance and Other

 

Property taxes, insurance and other increased to $627,046 for the three months ended March 31, 2015 from $262,830 for the three months ended March 31, 2014. This increase was due to the fact that we owned nine hotel properties at March 31, 2015 compared to five hotel properties at March 31, 2014.

 

Depreciation and Amortization

 

Depreciation expense increased to $1,901,081 for the three months ended March 31, 2015 from $597,710 for the three months ended March 31, 2014. The increase in depreciation and amortization expense was primarily due to the fact that we owned nine hotel properties at March 31, 2015 compared to five hotel properties at March 31, 2014.

 

Property Acquisition Expenses

 

Property acquisition expenses decreased to $376,440 for the three months ended March 31, 2015 from $448,616 for the three months ended March 31, 2014. The decrease was due to the fact that the acquisition of the one property acquired during the first quarter of 2015 was smaller than the acquisition of the one property acquired during the first quarter 2014.

 

Corporate General and Administrative Expenses

 

Corporate general and administrative expenses increased to $755,298 for the three months ended March 31, 2015 from $198,837 for the three months ended March 31, 2014. These general and administrative expenses consisted primarily of asset management fees, restricted stock compensation, directors’ fees and professional fees. Asset management fees increased during the three months ended March 31, 2015 from the three months ended March 31, 2014 because we owned more hotel properties. We expect corporate general and administrative expenses to increase in future periods as a result of anticipated future acquisitions, but to decrease as a percentage of total revenue.

 

Interest Expense and Amortization of Deferred Loan Costs

 

Interest expense increased to $1,572,760 for the three months ended March 31, 2015 from $536,375 for the three months ended March 31, 2014. This increase in interest expense was due to the fact that we incurred additional indebtedness related to four hotel property acquisitions since March 31, 2014. In future periods our interest expense will vary based on the amount of our borrowings, which will depend on the availability and cost of borrowings, the amount of proceeds from other financing source to acquire assets and our ability to identify and acquire real estate and real estate-related assets that meet our investment objectives.

 

Income Tax Expense (Benefit)

 

Income tax expense (benefit) for the three months ended March 31, 2015 was $(6,600) compared to $52,900 for the three months ended March 31, 2014.

 

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Net Income

 

We had a net loss of $1,206,441 for the three months ended March 31, 2015 compared to net loss of $443,069 for the three months ended March 31, 2014. Excluding income attributable to a noncontrolling interests in consolidated joint ventures of $19,252 and $19,299 and loss attributable to a noncontrolling interest in common operating partnership units of $4 and $5, net loss attributable to us was $1,225,689 and $462,363 for the three months ended March 31, 2015 and 2014, respectively.

 

Critical Accounting Policies 

 

Our accounting policies have been established to conform with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to use its judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies will be applied or different amounts of assets, liabilities, revenues and expenses will be recorded, resulting in a different presentation of the financial statements or different amounts reported in the financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 31, 2015. There have been no significant changes to our policies during 2015.

 

Recent Accounting Pronouncements

 

There are no new unimplemented accounting pronouncements that are expected to have a material impact on our results of operations, financial position or cash flows.

 

Inflation

 

As of March 31, 2015, our investments consisted of ownership interests in nine hotel properties and our 74.5% joint venture interest in the Hyatt Place note. Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. We are currently not experiencing any material impact from inflation.

 

REIT Compliance 

 

To qualify as a REIT for tax purposes, we will be required to distribute at least 90% of our REIT taxable income to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following the taxable year in which we initially elect to be taxed as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which our REIT qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.

  

Distributions

  

Our board of directors has authorized distributions to our stockholders that (1) accrue daily to our stockholders of record on each day; (2) are payable in cumulative amounts on or before the 15th day of each calendar month; and (3) are calculated at a rate of $0.002192 per share of our common stock per day, which, if paid each day over a 365-day period, is equivalent to an 8.0% annualized distribution rate based on a purchase price of $10.00 per share of our common stock.

 

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The following table summarizes distributions paid in cash and pursuant to our distribution reinvestment plan for the three months ended March 31, 2015 and 2014:

 

     Distributions Paid (1)
     
Period     Cash     DRIP (2)     Total  
             
First Quarter 2015   $ 1,348,309     $ 746,826     $ 2,095,135  
                         
First Quarter 2014   $ 482,368     $ 194,592     $ 676,960  

 

(1) Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 15 days following the end of such month.

(2)Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan.

 

We paid $2,095,135 in aggregate distributions in the first quarter of 2015 which was comprised of $1,348,309 in cash distributions and $746,826 in shares issued pursuant to the DRIP. We paid $676,960 in aggregate distributions for the first quarter of 2014, which was comprised of $482,368 in cash distributions and $194,592 shares issued pursuant to our distribution reinvestment plan. For the three months ended March 31, 2015 and 2014, we had cash provided by (used in) operating activities of $1,387,814 and $(142,284), respectively. Approximately 66% of distributions paid during the first quarter of 2015 were paid from cash provided by operating activities and approximately 34% were paid from offering proceeds.

 

Funds from Operations and Modified Funds from Operations 

 

One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. Cash generated from operations is not equivalent to net income as determined under GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, an industry trade group, or NAREIT, has promulgated a standard known as Funds from Operations, or FFO for short, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition for computing FFO because, in our view, FFO is a meaningful supplemental performance measure in conjunction with net income.

 

Changes in the accounting and reporting rules under GAAP that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted a significant increase in the magnitude of non-cash and non-operating items included in FFO, as defined. As a result, in addition to FFO, we also calculate modified funds from operations, or MFFO, a non-GAAP supplemental financial performance measure that our management uses in evaluating our operating performance. Similar to FFO, MFFO excludes items such as depreciation and amortization. However, MFFO excludes non-cash and non-operating items included in FFO, such as amortization of certain in-place lease intangible assets and liabilities and the amortization of certain tenant incentives. Our calculation of MFFO will exclude these items, as well as the effects of straight-line rent revenue recognition, fair value adjustments to derivative instruments that do not qualify for hedge accounting treatment, non-cash impairment charges and certain other items, when applicable. Our calculation of MFFO will also include, when applicable, items such as master lease rental receipts, which are excluded from net income (loss) and FFO, but which we consider in the evaluation of the operating performance of our real estate investments.

 

We believe that MFFO reflects the overall impact on the performance of our real estate investments of occupancy rates, rental rates, property operating costs and development activities, as well as general and administrative expenses and interest costs, which is not immediately apparent from net income (loss). As such, we believe MFFO, in addition to net income (loss) as defined by GAAP, is a meaningful supplemental performance measure which is used by our management to evaluate our operating performance and determine our operating, financing and dividend policies.

 

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Please see the limitations listed below associated with the use of MFFO as compared to net income (loss):

 

Our calculation of MFFO will exclude any gains (losses) related to changes in estimated values of derivative instruments related to any interest rate swaps which we hold. Although we expect to hold these instruments to maturity, if we were to settle these instruments prior to maturity, it would have an impact on our operations. We do not currently hold any such derivate instruments and thus our calculation of MFFO set forth in the table below does not reflect any such exclusion.

 

Our calculation of MFFO will exclude any impairment charges related to long-lived assets that have been written down to current market valuations. Although these losses will be included in the calculation of net income (loss), we will exclude them from MFFO because we believe doing so will more appropriately present the operating performance of our real estate investments on a comparative basis. We have not recognized any such impairment charges and thus our calculation of MFFO set forth in the table below does not reflect any such exclusion.

 

Our calculation of MFFO will exclude organizational and acquisition expenses payable to our advisor. Although these amounts reduce net income, we fund such costs with proceeds from our offering and acquisition-related indebtedness and do not consider these expenses in the evaluation of our operating performance and determining MFFO. Our calculation of MFFO set forth in the table below reflects such exclusions.

 

We believe MFFO is useful to investors in evaluating how our portfolio might perform after our offering and acquisition stage has been completed and, as a result, may provide an indication of the sustainability of our distributions in the future. However, as described in greater detail below, MFFO should not be considered as an alternative to net income (loss) or as an indication of our liquidity. Many of the adjustments to MFFO are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities. MFFO is also more comparable in evaluating our performance over time and as compared to other real estate companies, which may not be as involved in acquisition activities or as affected by impairments and other non-operating charges.

 

MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO. Investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and given the relatively limited term of our operations, it could be difficult to recover any impairment charges.

  

The calculation of FFO and MFFO may vary from entity to entity because capitalization and expense policies tend to vary from entity to entity. Consequently, our presentation of FFO and MFFO may not be comparable to other similarly titled measures presented by other REITs. In addition, FFO and MFFO should not be considered as an alternative to net income (loss) or to cash flows from operating activities and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs. In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments which are increases to MFFO are, and may continue to be, a significant use of cash. MFFO also excludes impairment charges, rental revenue adjustments and unrealized gains and losses related to certain other fair value adjustments. Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements.

 

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 The table below summarizes our calculation of FFO and MFFO for the three months ended March 31, 2015 and 2014 and a reconciliation of such non-GAAP financial performance measures to our net income (loss).

  

   Three months ended March 31,
   2015  2014
Net Loss  $(1,206,441)  $(443,069)
Adjustments:          
Depreciation of real estate assets and amortization of deferred costs   1,901,081    597,710 
Adjustments for noncontrolling interests   (19,251)   (19,299)
Funds from Operations   675,389    135,342 
Adjustments:          
Stock/unit-based compensation   20,769    20,898 
Amortization of deferred loan costs   133,404    13,963 
Property acquisition expense   376,440    448,616 
Adjustments for noncontrolling interests   (678)   (678)
Modified Funds from Operations  $1,205,324   $618,141 

  

Off-Balance Sheet Arrangements

  

As of March 31, 2015, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

  

Related-Party Transactions and Agreements

 

We have entered into agreements with our advisor and its affiliates whereby we have paid, and will continue to pay, certain fees to, or reimburse certain expenses of, our advisor or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs. Additionally, we have entered into joint venture arrangements with affiliates of our advisor in connection with the acquisition of the Hyatt Place note. We also acquired the Grapevine Hotel from an affiliate of ours. See Note 7 (Related Party Arrangements) to the consolidated financial statements included in this quarterly report for a discussion of the various related-party transactions, agreements and fees.

 

Subsequent Events

 

Distributions Declared

 

On March 31, 2015, we declared a distribution in the aggregate amount of $868,625, of which $545,318 was paid in cash on April 15, 2015 and $323,307 was paid pursuant to our DRIP in the form of additional shares of our common stock. On April 30, 2015, we declared a distribution in the aggregate amount of $844,706, which is scheduled to be paid in cash and through our distribution reinvestment plan in the form of additional shares on May 15, 2015.

 

Potential Property Acquisitions

 

Embassy Suites Nashville

 

On April 24, 2015, we entered into an Agreement of Purchase and Sale for the acquisition of a hotel property located in Nashville, Tennessee, commonly known as the Embassy Suites Nashville Vanderbilt University, or the Embassy Suites Nashville, from the current tenant-in-common owners and an affiliate of our advisor for an aggregate purchase price of $66,300,000, excluding acquisition costs. We intend to finance the acquisition of the Embassy Suites Nashville with a portion of the remaining proceeds from our public offering and financing secured by the Embassy Suites Nashville.

 

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Hampton Inn Boston

 

On May 27, 2015, we entered into a Purchase and Sale Agreement for the acquisition of a hotel property located in Boston, Massachusetts, commonly known as the Hampton Inn Boston Logan Airport, or the Hampton Inn Boston, from a third party for an aggregate purchase price of $57,000,000, excluding acquisition costs. We intend to finance the acquisition of the Hampton Inn Boston with a portion of the remaining proceeds from our public offering and financing secured by the Hampton Inn Boston.

 

Residence Inn Austin

 

On May 11, 2015, we entered into an Agreement of Purchase and Sale for the acquisition of a hotel property located in Austin, Texas commonly known as the Residence Inn Austin (the “Residence Inn Austin”), from a third party for an aggregate purchase price of $25,500,000, excluding acquisition costs. We intend to finance the acquisition of the Residence Inn Austin with a portion of the remaining proceeds from our public offering and financing secured by the Residence Inn Austin.

 

Moody Project 149

 

On May 14, 2015, we entered into a Purchase and Sale Agreement for the acquisition of a 149-hotel portfolio located throughout the U.S. commonly known as the Moody Project 149, from a third party for an aggregate purchase price of $1,725,000,000, excluding acquisition costs. We intend to finance the acquisition of the Moody Project 149 with a portion of the remaining proceeds from our public offering and financing secured by the Moody Project 149.

 

The acquisition of these hotels is subject to substantial conditions to closing, including: (1) our ability to obtain appropriate financing secured by these hotels; and (2) the absence of material adverse changes to the hotels prior to their dates of acquisition. There is no assurance that we will close the acquisition of the Embassy Suites Nashville, the Hampton Inn Boston, the Residence Inn Austin or the Moody Project 149 on the terms described above or at all.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

  

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund capital expenditures and expand our real estate investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We will seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

 

With regard to variable rate financing, our advisor will assess our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our advisor will maintain risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy will be designed to minimize the impact on our net income and funds from operations from changes in interest rates, the overall returns on your investment may be reduced.

 

As of March 31, 2015, all of our outstanding indebtedness accrued interest at a fixed rate and therefore an increase or decrease in interest rates would have no effect on our interest expense. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.

  

The fair value of our debt was approximately $122,000,000 as of March 31, 2015. All of our debt has a fixed interest rate and the rates approximate market interest rates.

 

We are also exposed to interest rate risk and credit risk with respect to our joint venture interest in the Hyatt Place note. The Hyatt Place note bears interest at a fixed rate that resets twice during the term of the note. Interest rate changes may affect the fair value of the Hyatt Place note. As of March 31, 2015, the carrying value of the Hyatt Place note approximated the fair value. Additionally, each reset of the interest rate of the Hyatt Place note may affect our future earnings or cash flow.

 

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We will also be exposed to credit risk with respect to any derivative contracts we enter into. Credit risk is the failure of the counterparty to perform under the terms of a derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. We did not hold any derivative contracts in the quarters ended March 31, 2015 and 2014.

 

ITEM 4. CONTROLS AND PROCEDURES.

  

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this quarterly report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 13d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based upon, and as of the date of, the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS.

  

None.

  

ITEM 1A.  RISK FACTORS.

  

None.

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

  

During the three months ended March 31, 2015, we did not repurchase any of our securities.

 

During the three months ended March 31, 2015, we did not sell any equity securities which were not registered under the Securities Act of 1933, as amended.

 

On October 12, 2012, our Registration Statement on Form S-11 (File No. 333-179521) registering our follow-on public offering of up to $1,000,000,000 in shares of our common stock, was declared effective by the SEC and our initial public offering automatically terminated. In our follow-on offering we offered up to $900,000,000 in shares of our common stock to the public at $10.00 per share and up to $100,000,000 in shares of our common stock to our stockholders pursuant to the DRIP at $9.50 per share. We terminated our follow-on public offering effective February 20, 2015.

 

We accepted subscriptions for, and issued, 11,624,456 shares of our common stock in our follow-on offering, including 272,047 shares of our common stock pursuant to our distribution reinvestment plan, resulting in gross offering proceeds from our follow-on offering of $113,524,081.

 

We incurred selling commissions, dealer manager fees and organization and other offering costs in our follow-on offering in the amounts set forth in the table below. Moody Securities, LLC, our dealer manager, reallowed all of the selling commissions and a portion of the dealer manager fees to participating broker-dealers.

  

Type of Expense   Amount     Estimated/Actual  
Selling commissions and dealer manager fees   $ 11,086,078     Actual  
Finders’ fees          
Expenses paid to or for underwriters          
Other organization and offering costs     2,649,190     Actual  
Total expenses   $ 13,735,268        

  

The net offering proceeds to us from our follow-on offering, after deducting the total expenses incurred as described above, were approximately $99,788,812, excluding $2,584,451 in offering proceeds from shares of our common stock issued pursuant to the DRIP.

 

As of March 31, 2015, we had used $38,447,507 of the net proceeds from our follow-on offering to acquire the Germantown hotel; $4,000,000 to acquire the Charleston hotel; $3,850,000 to acquire the Austin hotel; $7,250,000 to acquire the Grapevine hotel; $4,939,507 to acquire the Silicon Valley Hotel; $5,358,000 to acquire the joint venture interest in the Lyndhurst Hotel; $10,250,000 to acquire the Austin Arboretum Hotel; and $2,800,000 to acquire the Great Valley Hotel. For more information regarding how we used our net offering proceeds through March 31, 2015, see our financial statements included in this quarterly report.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

  

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ITEM 4. MINE SAFTEY DISCLOSURES.

  

Not applicable.

  

ITEM 5. OTHER INFORMATION.

  

None

 

ITEM 6. EXHIBITS.

 

3.1   Articles of Amendment and Restatement of Moody National REIT I, Inc. (filed as Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
3.2   Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
3.3   Amendment No. 1 to Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.3 to Pre-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
4.1   Form of Account Update Form (included as Appendix B to prospectus included in Post-Effective Amendment No. 8 to the Company’s Registration Statement on Form S-11 (No. 333-179521) and incorporated by reference herein)    
     
4.2   Moody National REIT I, Inc. Distribution Reinvestment Plan (included as Appendix C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-150612))    
     
10.1   Purchase and Sale Agreement, effective as of January 16, 2015, by and among Moody National Hospitality Philly Great Valley II, LLC, Moody National REIT I, Inc. and the seller parties thereto (incorporated by reference to Exhibit 10.115 to the Registrant’s Post-Effective Amendment No. 7 to Registration Statement on Form S-11 (No. 333-179521)    
     
10.2   Agreement of Purchase and Sale, effective as of April 24, 2015, by and among Moody National REIT I, Inc., Moody National Nashville MT, LLC and the other parties named therein (incorporated by reference to Exhibit 10.116 to the Registrant’s Post-Effective Amendment No. 8 to Registration Statement on Form S-11 (No. 333-179521)    
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  MOODY NATIONAL REIT I, INC.
     
Date: May 15, 2015 By: /s/ Brett C. Moody
    Brett C. Moody
    Chairman of the Board, Chief Executive Officer and President
    (Principal Executive Officer)

 

Date: May 15, 2015 By: /s/ Robert W. Engel
    Robert W. Engel
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)

 

 

 

EXHIBIT INDEX

 

3.1   Articles of Amendment and Restatement of Moody National REIT I, Inc. (filed as Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
3.2   Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
3.3   Amendment No. 1 to Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.3 to Pre-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11 (No. 333-150612) and incorporated herein by reference)    
     
4.1   Form of Account Update Form (included as Appendix B to prospectus included in Post-Effective Amendment No. 8 to the Company’s Registration Statement on Form S-11 (No. 333-179521) and incorporated by reference herein)    
     
4.2   Moody National REIT I, Inc. Distribution Reinvestment Plan (included as Appendix C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-150612))    
     
10.1   Purchase and Sale Agreement, effective as of January 16, 2015, by and among Moody National Hospitality Philly Great Valley II, LLC, Moody National REIT I, Inc. and the seller parties thereto (incorporated by reference to Exhibit 10.115 to the Registrant’s Post-Effective Amendment No. 7 to Registration Statement on Form S-11 (No. 333-179521)    
     
10.2   Agreement of Purchase and Sale, effective as of April 24, 2015, by and among Moody National REIT I, Inc., Moody National Nashville MT, LLC and the other parties named therein(incorporated by reference to Exhibit 10.116 to the Registrant’s Post-Effective Amendment No. 8 to Registration Statement on Form S-11 (No. 333-179521)    
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002