UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

 

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): August 15, 2018

 

 

PROCACCIANTI HOTEL REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland		333-217578		81-3661609
(State or other jurisdiction of incorporation or organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

1140 Reservoir Avenue

Cranston, Rhode Island 02920-6320

(Address of principal executive offices)

 

(401) 946-4600

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company	x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	x

 

 

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

 

On August 21, 2018, Procaccianti Hotel REIT, Inc. (the “Company”) filed a Current Report on Form 8-K with the Securities and Exchange Commission (the "SEC"), dated August 15, 2018, regarding the completion by a wholly-owned subsidiary of Procaccianti Hotel REIT, L.P., the Company’s operating partnership, of the acquisition of the fee simple interest in a 107-room, approximately 36,411 square foot select-service hotel property located in Traverse City, Michigan (the “Hotel”). With the filing of this Current Report on Form 8-K/A, the Company hereby amends the Current Report on Form 8-K filed with the SEC on August 21, 2018, to provide the financial statements and pro forma financial information required by Item 9.01 related to the acquisition of the Hotel.

 

Item 9.01 Financial Statements and Exhibits.

 

	(a)	Financial Statements of Business Acquired
			Page
		Independent Auditors’ Report	F-1
		Balance Sheets as of December 31, 2017 and 2016	F-3
		Statements of Income for the years ended December 31, 2017 and December 31, 2016	F-4
		Statements of Changes in Members’ Capital for the years ended December 31, 2017 and December 31, 2016	F-5
		Statements of Cash Flows for the years ended December 31, 2017 and December 31, 2016	F-6
		Notes to Financial Statements	F-7
		Balance Sheets as of June 30, 2018 and 2017 (unaudited)	F-12
		Statements of Operations for the six months ended June 30, 2018 and June 30, 2017 (unaudited)	F-13
		Statements of Changes in Members’ Capital for the six months ended June 30, 2018 and June 30, 2017 (unaudited)	F-14
		Statements of Cash Flows for the six months ended June 30, 2018 and June 30, 2017 (unaudited)	F-15
		Notes to Financial Statements (unaudited)	F-16
	(b)	Pro Forma Financial Information
			Page
		Unaudited Pro Forma Condensed Combined Financial Statements	F-18
		Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2018	F-19
		Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2017	F-20
		Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended June 30, 2018	F-21
		Notes to Unaudited Pro Forma Condensed Combined Financial Statements	F-22

 

 

SIGNATURE

 

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 hereunto duly authorized.

 

	Procaccianti Hotel REIT, Inc.
Dated: October 31, 2018	By:	/s/ Gregory Vickowski
	Name:	Gregory Vickowski
	Title:	Chief Financial Officer

 

 

Independent Auditors’ Report

 

The Members

Grand Traverse Hotel Properties, LLC

d/b/a Hotel Indigo

Cranston, Rhode Island

 

We have audited the accompanying financial statements of Grand Traverse Hotel Properties, LLC d/b/a Hotel Indigo, which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, members’ capital and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Grand Traverse Hotel Properties, LLC d/b/a Hotel Indigo as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Blum, Shapiro & Company, P.C.

 

Cranston, Rhode Island

June 27, 2018

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

 

BALANCE SHEETS

DECEMBER 31, 2017 AND 2016

 

		2017				2016
ASSETS
Current Assets
Cash		$	878,025			$	117,280
Restricted cash - tax			266,628				-
Accounts receivable, net			103,853				47,207
Inventory			40,670				1,798
Prepaid expenses			221,546				118,209
Total current assets			1,510,722				284,494
Property and Equipment, Net			16,599,077				17,851,708
Total Assets		$	18,109,799			$	18,136,202
LIABILITIES AND MEMBERS’ CAPITAL
Current Liabilities
Current portion of long-term debt		$	213,618			$	115,712
Accounts payable			135,164				334,161
Accrued payroll and benefits			58,256				52,575
Accrued expenses			48,039				303,799
Related party note payable			60,000				-
Total current liabilities			515,077				806,247
Long-Term Liabilities
Long-term debt, net			8,839,810				9,084,288
Six Continents contingency			374,667				390,667
Total liabilities			9,729,554				10,281,202
Commitments and Contingencies
Members’ Capital			8,380,245				7,855,000
Total Liabilities and Members’ Capital		$	18,109,799			$	18,136,202

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

 

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

		2017				2016
Revenues
Rooms		$	4,979,783			$	3,175,942
Food and beverage			1,555,972				1,021,720
Other operated departments			263,196				176,434
Total revenues			6,798,951				4,374,096
Departmental Expenses
Rooms			1,033,427				608,239
Food and beverage			1,087,109				1,000,709
Other			105,759				66,018
Total departmental expenses			2,226,295				1,674,966
Total Departmental Profit			4,572,656				2,699,130
Undistributed Operating Expenses
Administrative and general			570,415				391,995
Management fees			272,887				206,543
Franchise fees			250,926				158,967
Sales and marketing			254,164				171,275
Utilities			169,671				114,445
Property operation and maintenance			154,463				98,212
Total undistributed operating expenses			1,672,526				1,141,437
Income from Operations			2,900,130				1,557,693
Nonoperating Expenses
Insurance			51,659				23,457
Property taxes			345,950				144,286
Other expenses, net			382,828				130,317
Total nonoperating expenses			780,437				298,060
Income Before Interest and Depreciation			2,119,693				1,259,633
Interest and Depreciation
Interest expense			490,752				393,051
Depreciation			1,300,802				756,962
Total interest and depreciation			1,791,554				1,150,013
Net Income		$	328,139			$	109,620

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

 

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

		2017				2016
Members’ Capital - Beginning of Year		$	7,855,000			$	6,793,337
Net Income			328,139				109,620
Members’ Capital Contributions			197,106				1,150,000
Members’ Capital Distributions			-				(197,957	)
Members’ Capital - End of Year		$	8,380,245			$	7,855,000

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

 

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 

		2017				2016
Cash Flows from Operating Activities
Net income		$	328,139			$	109,620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			1,300,802				756,962
Amortization of deferred finance fees			4,177				-
Accretion of Six Continents contingency			(16,000	)			(9,333	)
Increase in operating assets:
Accounts receivable			(56,646	)			(47,207	)
Inventory			(38,872	)			(1,798	)
Prepaid expenses			(103,337	)			(118,209	)
Restricted cash - tax			(266,628	)			-
Increase (decrease) in operating liabilities:
Accounts payable			(198,997	)			334,161
Accrued payroll and benefits			5,681				52,575
Accrued expenses			(255,760	)			303,799
Net cash provided by operating activities			702,559				1,380,570
Cash Flows from Investing Activities
Capital expenditures			(48,171	)			(1,685,960	)
Net cash used in investing activities			(48,171	)			(1,685,960	)
Cash Flows from Financing Activities
Proceeds from long-term debt			-				210,067
Repayments of long-term debt			(115,712	)			-
Proceeds from franchisor			-				400,000
Proceeds from related party note payable			60,000				-
Deferred finance fees paid			(35,037	)			-
Members’ contributions			197,106				-
Members’ distributions			-				(197,957	)
Net cash provided by financing activities			106,357				412,110
Net Increase in Cash			760,745				106,720
Cash - Beginning of Year			117,280				10,560
Cash - End of Year		$	878,025			$	117,280

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 - NATURE OF BUSINESS

 

Grand Traverse Hotel Properties, LLC (the Company) was organized as a Michigan limited liability company on June 16, 2010, for the purpose of constructing and operating the Hotel Indigo, a 107-room hotel with a restaurant, lounge and meeting space located in Traverse City, Michigan. Construction of the hotel was completed in May 2016, and the hotel formally commenced operations on May 22, 2016.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is generally recognized as services are performed. Hotel revenue represents primarily guest room rental, conference room rental, catering, and food and beverage sales.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at various federally insured financial institutions. The Company’s credit risk with respect to such balances is all amounts on deposit in excess of federally insured limits.

 

Accounts Receivable

 

The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on its history of past write offs, collections and current credit conditions. Accounts are written off based on management’s evaluation of the collectability of each account resulting from collection efforts. Management has determined that no allowance for doubtful accounts is necessary at December 31, 2017 and 2016.

 

Inventories

 

Inventories, consisting of food and beverage, are valued at the lower of cost and net realizable value, based on the FIFO (first-in first-out) method of accounting.

 

Property, Equipment and Depreciation

 

Property and equipment are stated at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful lives of the assets.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets and certain identifiable intangibles with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Deferred Finance Fees

 

Deferred finance fees are bank fees and other costs incurred in obtaining financing that are amortized on a straight-line basis over the term of the related debt. Deferred finance fees are presented as a direct deduction of the carrying amount of the debt. Amortization of deferred finance fees is included in interest expense.

 

Income Taxes

 

The Company is a flow-through entity and, therefore, is not subject to entity-level income taxes, except for certain federal, state and local taxes.  The Company’s income is included in the members’ federal, state and local tax filings.

 

Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service.  The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.  The Company recognizes interest and penalties, if applicable, as a component of undistributed operating expenses.

 

Subsequent Events

 

Subsequent events have been evaluated through June 27, 2018, the date the financial statements are available to be issued.

 

NOTE 3 - RESTRICTED CASH

 

The Company maintains reserves for property taxes and capital improvements as required by the debt agreement (see Note 5). The franchise agreement also requires the Company to reserve an additional amount for capital improvements.

 

The tax reserve is $266,628 at December 31, 2017. The capital improvement reserve was funded after year end with the December 2017 mortgage payment.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment - at cost, less accumulated depreciation at December 31, 2017 and 2016:

 

		2017				2016
Buildings and improvements		$	15,501,394			$	15,480,197
Land and improvements			572,897				572,897
Furniture and fixtures			2,064,576				2,061,299
Machinery and equipment			387,115				363,418
Computer equipment and software			130,859				130,859
			18,656,841				18,608,670
Less accumulated depreciation			2,057,764				756,962
		$	16,599,077			$	17,851,708

 

Depreciation expense charged to operations was $1,300,802 and $756,962 for the years ended December 31, 2017 and 2016, respectively.

 

NOTE 5 - LONG-TERM DEBT

 

Long-term debt consisted of a note payable at December 31, 2017 and 2016, as follows:

 

		2017								2016
		Principal				Unamortized Deferred Finance Fees				Principal				Unamortized Deferred Finance Fees
First mortgage		$	9,084,288			$	30,860			$	9,200,000			$	-
Less current portion			213,618								115,712
Long-term portion			8,870,670								9,084,288
Less unamortized deferred finance fees			30,860								-
Long-Term Debt, Net		$	8,839,810							$	9,084,288

 

On October 16, 2014, the Company entered into a construction loan with a lender with maximum available borrowings of $9,200,000. The note required monthly payments of interest only at 2% plus the Wall Street Journal prime rate (with an interest floor of 5.25%) to be paid until November 1, 2015, at which time the entire unpaid principal balance was due. The Company signed an amendment to the loan agreement extending the loan through April 2017. The interest rate at December 31, 2016 was 5.5%. The note was collateralized by all property and equipment and was guaranteed by related parties.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS

 

On April 28, 2017, the Company refinanced its long-term debt with the lender. The new note had an original principal balance of $9,200,000, and bears interest at 4.5%. The mortgage requires monthly payments of principal and interest of $51,503 through May 2022, when the entire unpaid balance is due. The note is collateralized by all property and equipment and is guaranteed by the members. The note also contains financial covenants, including a debt service coverage ratio.

 

Interest incurred for the years ended December 31, 2017 and 2016, was $490,752 and $393,051, respectively.

 

Interest paid for the years ended December 31, 2017 and 2016, was $494,945 and $349,479, respectively.

 

At December 31, 2017, long-term debt maturities for each year through the maturity date of the note are as follows:

 

Year Ending December 31,		Amount
2018		$	213,618
2019			223,432
2020			233,696
2021			244,432
2022			8,169,110
		$	9,084,288

 

NOTE 6 - SIX CONTINENTS CONTINGENCY

 

In connection with the Company’s construction of the hotel, the Company entered into a note with Six Continents Hotel, Inc., on March 14, 2016 in the amount of $400,000 to be used for the construction. The agreement provides for a credit to be earned equal to $1,333 for each month the hotel remains in operation as Hotel Indigo in accordance with the related franchise agreement. If the franchise agreement is terminated prior to March 2041, the end of the franchise agreement, or if the hotel changes ownership, the $400,000, net of credits earned, will be payable to Six Continents Hotel, Inc. The accretion of the Six Continents contingency, which is included in other income, net, was $16,000 and $9,333 for the years ended December 31, 2017 and 2016, respectively.

 

NOTE 7 - Related Party Loan

 

In May 2017, the Company entered into a loan agreement with a member. The loan bears interest at 7% and is due on demand. The principal balance was $60,000 at December 31, 2017.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

The Company entered into a management agreement with GCH Global Management, LLC, to operate and manage the hotel. GCH Global Management, LLC, is related to Grand Traverse Hotel Properties, LLC, through common ownership. The term of the agreement is 10 years beginning with the opening of the hotel, in May 2016. GCH Global Management, LLC, was paid a base management fee equal to 4% of the hotel’s gross revenues. On May 15, 2017 the Company signed a new management agreement with GCH Global Management, LLC, that reduced the management fee to 3% and extended the term to May 2027. Management fees to GCH Global Management, LLC, for the years ended December 31, 2017 and 2016, were $204,126 and $172,883, respectively.

 

In addition, the Company entered into an asset management agreement with Hadidi Capital, LLC. Hadidi Capital, LLC, is related to Grand Traverse Hotel Properties, LLC, through common ownership. The agreement has no set term and is automatically renewed unless written notice is received with 30 days notice. Hadidi Capital, LLC, was paid a base asset management fee equal to 1% of the hotel’s gross revenues. Management fees to Hadidi Capital, LLC, for the years ended December 31, 2017 and 2016, were $68,761 and $33,660, respectively.

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

The Company has entered into a franchise agreement with Holiday Hospitality Franchising, Inc., ending March 2041. In accordance with the terms of the agreement, the Company is required to pay franchise fees monthly based on 5% of gross room sales. The Company shall also pay 3.5% of gross room sales for marketing fees. Gross room sales are defined as all sales and receipts of every kind from guest room rentals (not including sales taxes). In addition, the Company is required to pay certain fees for marketing, software support and other support as specified in the agreement.

 

The Company has entered into a management agreement with GCH Global Management, LLC, to manage the hotel (see Note 8), and an asset management agreement with Hadidi Capital, LLC, to manage the assets of the hotel (see Note 8).

 

The Company periodically is a defendant in litigation arising in the normal course of business. Management does not believe the outcome of any such litigation will have a material adverse effect on the financial position or results of operations of the Company.

 

The Company is regularly the subject of state and local sales and use tax audits. Management does not believe the outcome of any such audits will have a material adverse effect on the financial position or results of operations of the Company.

 

NOTE 10 - SUPPLEMENTAL DISCLOSURES TO STATEMENT OF CASH FLOWS

 

Noncash investing and financing activities during the year ended December 31, 2016 included capital contributions for construction management services rendered of $1,150,000.

 

NOTE 11 - Subsequent Event

 

On March 8, 2018, the Company entered into a purchase and sale agreement with a third party to sell the property and operations of Hotel Indigo for $26,050,000.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

BALANCE SHEETS (unaudited)

JUNE 30, 2018 AND 2017

 

		2018				2017
ASSETS
Current Assets
Cash		$	681,041			$	494,682
Restricted cash - tax			447,564				310,578
Accounts receivable, net			112,130				146,289
Inventory			79,538				47,522
Prepaid expenses			76,179				-
Total current assets			1,396,452				999,071
Property and Equipment, Net			15,947,803				17,250,352
Total Assets		$	17,344,255			$	18,249,423
LIABILITIES AND MEMBERS’ CAPITAL
Current Liabilities
Current portion of long-term debt		$	218,470			$	208,874
Accounts payable			397,243				531,099
Accrued payroll and benefits			98,815				85,185
Accrued expenses			50,513				376,634
Related party note payable			-				180,000
Total current liabilities			765,041				1,381,792
Long-Term Liabilities
Long-term debt, net			8,718,444				8,924,341
Six Continents contingency			366,667				382,667
Total liabilities			9,850,152				10,688,800
Commitments and Contingencies
Members’ Capital			7,494,103				7,560,623
Total Liabilities and Members’ Capital		$	17,344,255			$	18,249,423

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

STATEMENTS OF OPERATIONS (unaudited)

FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017

 

		2018				2017
Revenues
Rooms		$	2,035,707			$	1,714,167
Food and beverage			793,986				548,467
Other operated departments			145,908				109,829
Total revenues			2,975,601				2,372,463
Departmental Expenses
Rooms			622,955				529,897
Food and beverage			590,696				473,554
Other			37,981				51,662
Total departmental expenses			1,251,632				1,055,113
Total Departmental Profit			1,723,969				1,317,350
Undistributed Operating Expenses
Administrative and general			249,656				248,050
Management fees			157,038				95,953
Franchise fees			101,398				87,533
Sales and marketing			145,193				66,501
Utilities			102,228				89,040
Property operation and maintenance			80,634				79,600
Total undistributed operating expenses			836,147				666,677
Income from Operations			887,822				650,673
Nonoperating Expenses
Insurance			18,498				33,161
Property taxes			201,602				145,717
Other (income) expenses, net			(308,629	)			18,078
Total nonoperating (income) expenses			(88,529	)			196,956
Income Before Interest and Depreciation			976,351				453,717
Interest and Depreciation
Interest expense			244,010				295,673
Depreciation			651,274				649,527
Total interest and depreciation			895,284				945,200
Net Income (Loss)		$	81,067			$	(491,483	)

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (unaudited)

FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017

 

		2018				2017
Members’ Capital - Beginning of Year		$	8,380,245			$	7,855,000
Net Income (Loss)			81,067				(491,483	)
Members’ Capital Contributions			60,000				197,106
Members’ Capital Distributions			(1,027,209	)			-
Members’ Capital - End of Year		$	7,494,103			$	7,560,623

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

D/B/A HOTEL INDIGO

STATEMENTS OF CASH FLOWS (unaudited)

FOR THE PERIOD FROM JANUARY 1 TO JUNE 30, 2018 AND 2017

 

		2018				2017
Cash Flows from Operating Activities
Net income (loss)		$	81,067			$	(491,483	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			651,274				649,527
Amortization of deferred finance fees			3,504				1,168
Accretion of Six Continents contingency			(8,000	)			(8,000	)
(Increase) decrease in operating assets:
Accounts receivable			(8,277	)			(99,082	)
Inventory			(38,868	)			(45,724	)
Prepaid expenses			145,367				118,209
Restricted cash - tax			(180,936	)			(310,578	)
Increase (decrease) in operating liabilities:
Accounts payable			262,079				196,938
Accrued payroll and benefits			40,559				32,610
Accrued expenses			2,474				72,835
Net cash provided by operating activities			950,243				116,420
Cash Flows from Investing Activities
Capital expenditures			-				(48,171	)
Net cash used in investing activities			-				(48,171	)
Cash Flows from Financing Activities
Repayments of long-term debt			(120,018	)			(32,916	)
Proceeds from related party note payable			-				180,000
Repayments of related party note payable			(60,000	)			-
Deferred finance fees paid			-				(35,037	)
Members’ contributions			60,000				197,106
Members’ distributions			(1,027,209	)			-
Net cash provided by (used by) financing activities			(1,147,227	)			309,153
Net Increase (Decrease) in Cash			(196,984	)			377,402
Cash - Beginning of Period			878,025				117,280
Cash - End of Period		$	681,041			$	494,682

 

The accompanying notes are an integral part of the financial statements

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 - NATURE OF BUSINESS

 

Grand Traverse Hotel Properties, LLC (the Company) was organized as a Michigan limited liability company on June 16, 2010, for the purpose of constructing and operating the Hotel Indigo, a 107-room hotel with a restaurant, lounge and meeting space located in Traverse City, Michigan. Construction of the hotel was completed in May 2016, and the hotel formally commenced operations on May 22, 2016.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is generally recognized as services are performed. Hotel revenue represents primarily guest room rental, conference room rental, catering, and food and beverage sales.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at various federally insured financial institutions. The Company’s credit risk with respect to such balances is all amounts on deposit in excess of federally insured limits.

 

Accounts Receivable

 

The Company carries its accounts receivable at cost. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, when deemed necessary, based on its history of past write offs, collections and current credit conditions. Accounts are written off based on management’s evaluation of the collectability of each account resulting from collection efforts. Management has determined that no allowance for doubtful accounts is necessary at June 30, 2018 and 2017.

 

Inventories

 

Inventories, consisting of food and beverage, are valued at the lower of cost and net realizable value, based on the FIFO (first-in first-out) method of accounting.

 

Property, Equipment and Depreciation

 

Property and equipment are stated at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful lives of the assets.

 

 

GRAND TRAVERSE HOTEL PROPERTIES, LLC

d/b/a HOTEL INDIGO

NOTES TO FINANCIAL STATEMENTS (unaudited)

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets and certain identifiable intangibles with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Deferred Finance Fees

 

Deferred finance fees are bank fees and other costs incurred in obtaining financing that are amortized on a straight-line basis over the term of the related debt. Deferred finance fees are presented as a direct deduction of the carrying amount of the debt. Amortization of deferred finance fees is included in interest expense.

 

Income Taxes

 

The Company is a flow-through entity and, therefore, is not subject to entity-level income taxes, except for certain federal, state and local taxes.  The Company’s income is included in the members’ federal, state and local tax filings.

 

Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service.  The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.  The Company recognizes interest and penalties, if applicable, as a component of undistributed operating expenses.

 

NOTE 3 - COMMITMENTS AND CONTINGENCIES

 

The Company periodically is a defendant in litigation arising in the normal course of business. Management does not believe the outcome of any such litigation will have a material adverse effect on the financial position or results of operations of the Company.

 

The Company is regularly the subject of state and local sales and use tax audits. Management does not believe the outcome of any such audits will have a material adverse effect on the financial position or results of operations of the Company.

 

NOTE 4 - Subsequent Event

 

On August 15, 2018, the Company sold the property and operations of Hotel Indigo. The proceeds of the sale were utilized to repay the note payable. The sale price of the hotel was $26,050,000.

 

 

Procaccianti Hotel REIT, Inc.

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed combined financial statements represent the pro forma effects of multiple transactions, each of which is described in the following paragraphs. This pro forma information should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations and the financial statements and notes of the Company included in the Company’s Registration Statement on Form S-11 for the fiscal year ended December 31, 2017 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, as filed with the SEC on September 25, 2018.

 

The PCF Acquisition

 

On March 29, 2018, Procaccianti Hotel REIT, Inc. (the “Company”) acquired a 51% membership interest in the Procaccianti Convertible Fund, LLC and its predecessor company, Bayboro Hoteliers, LLC (together, “PCF”). The Company acquired its investment in PCF for total cash consideration of $8,029,519 and $427,358 of transaction costs, on March 29, 2018. The Company financed the acquisition of PCF with proceeds from the sale of shares of Class K and Class A common stock in the Company’s private offering exempt from registration pursuant to Regulation D promulgated under the Securities Act (the “Private Offering”). Hereinafter, this transaction is referred to as the “PCF Acquisition”. The unaudited pro forma condensed combined financial information is based on the historical financial information of PCF.

 

PCF was formed on April 21, 2017 to acquire, own and operate two hotels. PCF acquired the Staybridge Suites St. Petersburg Downtown located in St. Petersburg, FL (“St. Pete Hotel”) from Bayboro Hoteliers, LLC on June 29, 2017 for $20,500,000. PCF acquired the Springhill Suites Wilmington Mayfaire located in Wilmington, NC (“Wilmington Hotel”) on May 24, 2017 for $18,000,000. PCF financed the hotel property acquisitions through equity and aggregate mortgage debt of $24,593,000.

 

The TCI Acquisition

 

On August 15, 2018, the Company, through a wholly owned subsidiary of the Company’s operating partnership, acquired a 107-room, select-service hotel property, Hotel Indigo, located in Traverse City, Michigan (“TCI”) for a purchase price of $26,050,000, exclusive of closing costs and typical hotel closing date adjustments. The acquisition was funded with a combination of equity proceeds and aggregate mortgage debt. Hereinafter, this transaction is referred to as the “TCI Acquisition”. The unaudited pro forma condensed combined financial information is based on the historical financial information of Grand Traverse Hotel Properties, LLC (“GTHP”).

 

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and six months ended June 30, 2018 give effect to the acquisition of PCF by the Company, PCF’s acquisition and financing transactions and the acquisition of TCI and related financing transactions as if all of these transactions had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the acquisition of TCI and related financing transactions as if they had occurred on June 30, 2018.

 

The unaudited pro forma condensed combined financial statements contained herein are based upon the respective historical consolidated financial statements of the Company, PCF and GTHP, and should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements included in this filing.

 

 

Procaccianti Hotel REIT, Inc.

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

 

As of June 30, 2018

 

										Pro Forma
										Adjustments
						GTHP				for TCI
		Company				Historical				Acquisition						Pro Forma
		Historical				Note 2				Note 4						Combined
Assets
Property and equipment, net		$	39,091,558			$	15,947,803			$	10,295,638			4(a)		$	65,334,999
Cash			2,900,046				681,041				(2,123,643	)		4(b)			1,457,444
Restricted cash			806,190				447,564				540,858			4(c)			1,794,612
Accounts receivable			350,790				112,130				(112,130	)		4(d)			350,790
Due from related parties			287,687				-				-						287,687
Prepaid expenses and other assets, net			356,689				155,717				(24,058	)		4(e)			488,348
Total assets			43,792,960				17,344,255				8,576,665						69,713,880
Liabilities and Equity
Long term debt			24,420,105				9,303,581				15,273,339			4(f)			48,997,025
Accounts payable, accrued expenses and other			1,103,523				546,571				100,871			4(g)			1,750,965
Due to related parties			261,621				-				-						261,621
Total liabilities			25,785,249				9,850,152				15,374,210						51,009,611
Commitments and Contingencies
Redeemable common stock			50,305				-				-						50,305
Equity
Stockholders' equity			10,409,826				7,494,103				(6,797,545	)		4(h)			11,106,384
Noncontrolling interests in consolidated subsidiaries			7,547,580				-				-						7,547,580
Total equity			17,957,406				7,494,103				(6,797,545	)					18,653,964
Total liabilities and equity		$	43,792,960			$	17,344,255			$	8,576,665					$	69,713,880

 

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.

 

 

Procaccianti Hotel REIT, Inc.

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

For the Year Ended December 31, 2017

 

																		Pro Forma										Pro Forma
										PCF								Adjustments										Adjustments
		Company				PCF				Predecessor				PCF				for PCF						GTHP				for TCI
		Historical				Historical				Historical				Acquisition				Acquisition						Historical				Acquisition						Pro Forma
		Note 1				Note 2				Note 2				Note 2				Note 3						Note 2				Note 4						Combined
Revenues:
Rooms		$	-			$	4,603,801			$	2,636,821			$	1,286,580			$	-					$	4,979,783			$	-					$	13,506,985
Other			-			$	218,445			$	144,084				53,939				-						1,819,168				-						2,235,636
Total revenues			-				4,822,246				2,780,905				1,340,519				-						6,798,951				-						15,742,621
																																			-
Expenses:																																			-
Rooms and other property expenses			-				2,189,953				1,145,580				583,399				-						3,147,305				-						7,066,237
General and administrative expenses			614,829				1,347,536				439,631				284,562				-						1,259,066				-						3,945,624
Management fees to affiliates			-				144,651				139,045				51,593				80,268			3(a),(b)			272,887				128,065			4(i)			816,509
Depreciation and amortization			-				731,255				268,910				69,538				366,648			3(c)			1,300,802				(614,287	)		4(j)(k)			2,122,866
Total operating expenses			614,829				4,413,395				1,993,166				989,092				446,916						5,980,060				(486,222	)					13,951,236
Operating income (loss) before interest expense			(614,829	)			408,851				787,739				351,427				(446,916	)					818,891				486,222						1,791,385
Interest income (expense)			1,481				(643,019	)			(172,423	)			(140,912	)			(156,845	)		3(d),(e)			(490,752	)			(727,723	)		4(l)			(2,330,193	)
Income (loss) from continuing operations before noncontrolling interest and income taxes			(613,348	)			(234,168	)			615,316				210,515				(603,761	)					328,139				(241,501	)					(538,808	)
Income attributable to noncontrolling interest			-				-				-				-				129,991			3(f)			-				-						129,991
Income (loss) available to common stockholders		$	(613,348	)		$	(234,168	)		$	615,316			$	210,515			$	(733,752	)				$	328,139			$	(241,501	)				$	(668,799	)
Loss per share available to common stockholders – basic and diluted:
Class K common stock		$	(1.22	)																														$	(0.35	)
Class K-I common stock		$	-																															$	(0.40	)
Class K-T common stock		$	-																															$	(0.40	)
Class A common stock		$	(1.22	)																														$	(0.35	)
Class B common stock		$	(1.82	)																														$	(0.95	)
Weighted average common shares outstanding – basic and diluted:
Class K common stock			156,250																686,037			3(g)							395,331			4(m)			1,237,618
Class K-I common stock			-																10			3(g)							-			4(m)			10
Class K-T common stock			-																10			3(g)							-			4(m)			10
Class A common stock			160,219																146,191			3(g)							8,000			4(m)			314,410
Class B common stock			125,000																-										-						125,000

 

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.

 

 

Procaccianti Hotel REIT, Inc. 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

 

For the Six Months Ended June 30, 2018

 

										Pro Forma										Pro Forma
										Adjustments										Adjustments
		Company				PCF				for PCF						GTHP				for TCI
		Historical				Historical				Acquisition						Historical				Acquisition						Pro Forma
		Note 1				Note 2				Note 3						Note 2				Note 4						Combined
Revenues:
Rooms		$	2,527,373			$	2,046,551			$	-					$	2,035,707			$	-					$	6,609,631
Other			128,660				121,084				-						939,894				-						1,189,638
Total revenues			2,656,033				2,167,635				-						2,975,601				-						7,799,269
																											-
Expenses:																											-
Rooms and other property expenses			1,094,918				960,103				-						1,737,494				-						3,792,515
General and administrative expenses			827,634				319,500				-						104,718				-						1,251,852
Management fees to affiliates			79,699				64,996				-						157,038				-						301,733
Other fees to affiliates			163,607				-				(89,376	)		3(b)(h)			-				68,657			4(i)			142,888
Acquisition costs			302,380				-				(302,380	)		3(h)			-				-						-
Depreciation and amortization			349,364				329,843				24,447			3(c)			651,274				(297,660	)		4(j)(k)			1,057,268
Total operating expenses			2,817,602				1,674,442				(367,309	)					2,650,524				(229,003	)					6,546,256
Operating income (loss) before interest expense			(161,569	)			493,193				367,309						325,077				229,003						1,253,013
Interest expense			(294,409	)			(261,724	)			(7,240	)		3(d)			(244,010	)			(365,228	)		4(l)			(1,172,611	)
Gain on acquisition			42,026				-				(42,026	)		3(i)			-				-						-
Income (loss) from continuing operations before noncontrolling interest and income taxes			(413,952	)			231,469				318,043						81,067				(136,225	)					80,402
Income tax provision			(86,540	)			-				-						-				-						(86,540	)
Income attributable to noncontrolling interest			215,642				-				113,420			3(f)			-				-						329,062
Income (loss) available to common stockholders		$	(716,134	)		$	231,469			$	204,623					$	81,067			$	(136,225	)				$	(335,200	)
Loss per share available to common stockholders – basic and diluted:
Class K common stock		$	(0.54	)																						$	(0.16	)
Class K-I common stock		$	(0.54	)																						$	(0.24	)
Class K-T common stock		$	(0.54	)																						$	(0.24	)
Class A common stock		$	(0.54	)																						$	(0.24	)
Class B common stock		$	(0.84	)																						$	(0.54	)
Weighted average common shares outstanding – basic and diluted:
Class K common stock			841,106								1,181			3(g)							395,331			4(m)			1,237,618
Class K-I common stock			7								3			3(g)							-			4(m)			10
Class K-T common stock			7								3			3(g)							-			4(m)			10
Class A common stock			287,796								18,614			3(g)							8,000			4(m)			314,410
Class B common stock			125,000								-										-						125,000

 

The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements

 

 

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

1.

Basis of presentation

 

The unaudited pro forma condensed combined financial statements of the Company were prepared in accordance with Article 11 of SEC Regulation S-X. The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the acquisitions.

 

The PCF Acquisition was accounted for as a business combination under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations and ASC Topic 810, Consolidation. The TCI Acquisition was accounted for as an asset acquisition in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of the assets acquired and liabilities assumed from PCF and TCI and conformed the accounting policies of PCF and TCI to its own accounting policies.

 

The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the TCI Acquisition as if the transaction consummated on June 30, 2018. The PCF Acquisition is reflected in the Company’s balance sheet as of June 30, 2018 included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and for the six months ended June 30, 2018 give effect to the PCF Acquisition and TCI Acquisition as if the transactions took place as of January 1, 2017, and combine the historical results of the Company, PCF and TCI.

 

The pro forma condensed combined financial statements do not necessarily reflect what the combined Company’s results of operations would have been had the acquisitions occurred on the date indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined Company. The actual financial results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

The pro forma condensed combined financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of PCF and TCI as a result of restructuring activities and other planned cost savings initiatives following the completion of the acquisitions.

 

2.

Description of the Transactions

 

PCF Acquisition

 

On March 29, 2018, the Company acquired a 51% interest in the outstanding equity of PCF pursuant to the terms of the option agreement between the Company and PCF for total cash consideration of $8,029,519 and $427,358 in transaction costs. The Company financed the acquisition with proceeds from the Private Offering and cash on hand as of March 29, 2018. Subsequent to December 31, 2017 and through March 31, 2018, the Company received aggregate gross proceeds of $3,752,839 from the issuance of shares of common stock in the Private Offering, including 293,196 shares of Class K common stock for gross proceeds of $2,912,839, at a weighted average of $9.93 per share, and 84,000 shares of Class A common stock to investors for gross proceeds of $840,000, at a weighted average of $10.00 per share. Proceeds from the Private Offering equal to $3,002,839 were available to fund the PCF Acquisition.

 

 

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

PCF was formed on April 21, 2017 and, as of March 29, 2018, owned two hotels – the St. Pete Hotel and the Wilmington Hotel. Each hotel was acquired by PCF in 2017 and accounted for as an asset acquisition in accordance with ASU 2017-01, Clarifying the Definition of a Business and ASC Topic 805, Business Combinations. Therefore, the total purchase price, including transaction costs, was allocated to the assets acquired based on their relative fair values.

 

The PCF Historical operations for the year ended December 31, 2017 include the operations of the St. Pete Hotel and Wilmington Hotel from the date of PCF’s acquisition, or June 29, 2017 and May 24, 2017, respectively, through December 31, 2017.

 

PCF Predecessor Historical includes the historical operations of the St. Pete Hotel for the period January 1, 2017 through June 28, 2017.

 

PCF Acquisition includes the historical operations of the Wilmington Hotel for the period January 1, 2017 through May 23, 2017.

 

TCI Acquisition

 

On August 15, 2018, the Company acquired TCI pursuant to the purchase and sale agreement between the Company and GTHP for a purchase price of $26,050,000 adjusted for a $41,000 purchase price credit, $234,441 of capitalized acquisition costs and net liabilities assumed of $232,771. The acquisition was funded with a combination of (1) proceeds from a first mortgage loan on TCI in the principal amount of $17,836,000; (2) proceeds from a loan made to the Company on August 15, 2018, by Procaccianti Companies, Inc., an affiliate of the Company, in the principal amount of $6,600,000; and (3) cash on hand as of August 15, 2018 from operations and proceeds from the sale of shares of Class K and Class A common stock of the Company in the Private Offering. Subsequent to June 30, 2018 and through August 15, 2018, the Company received aggregate gross proceeds of $1,344,000 from the issuance of shares of common stock in the Private Offering, including 131,399 shares of Class K common stock for gross proceeds of $1,304,000, at a weighted average of $9.92 per share, and 4,000 shares of Class A common stock to investors for gross proceeds of $40,000, at a weighted average of $10.00 per share. Proceeds from the Private Offering equal to $3,395,900 were available to fund the TCI Acquisition.

 

3.

Pro forma adjustments (PCF Acquisition)

 

The unaudited pro forma condensed combined financial statements include pro forma adjustments to give effect to the transactions as if the acquisition of PCF by the Company and PCF’s hotel property acquisitions and financing transactions had occurred on January 1, 2017.

 

(a)

Represents a $66,995 reduction in management fees as the result of PCF entering into new management agreements upon completion of the hotel acquisitions. PCF signed new management agreements with affiliates of the Company to manage the hotels for a management fee of 3.0% of revenue of each hotel. Pre-acquisition management fees were 5.00% and 3.85% for the St. Pete Hotel and the Wilmington Hotel, respectively.

 

(b)

Represents $147,263 and $35,602 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of annual asset management fees under the Company’s Advisory Agreement with Procaccianti Hotel Advisors, LLC (the “Advisor”) equal to 0.75% of asset cost.

 

 

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

(c)

Represents $366,648 and $24,447 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of additional depreciation for the hotels based on the allocation of the Company’s purchase price.

 

(d)

Represents $28,961 and $7,240 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of amortization of intangible assets as the result of recording the mortgages acquired at fair value.

 

(e)

Represents adjustment to reflect $127,884 increase of interest expense under the mortgages for the St. Pete Hotel and the Wilmington Hotel at PCF’s mortgage’s interest rates.

 

(f)

Represents allocation of income of $129,991 and $113,420 to noncontrolling interests within the statement of operations, which is 49% of the pro forma PCF net income for the year ended December 31, 2017 and six months ended June 30, 2018, respectively.

 

(g)

Represents adjustment to the weighted average shares outstanding based on the assumption that the financing transactions that occurred on various dates from inception to March 31, 2018 would have been completed on or prior to completion of the pro forma acquisition date of January 1, 2017, in order to fund the PCF Acquisition.

 

		Shares Issued and Outstanding				Pro-Forma Weighted Average Shares
		March 31, 2018				Year ended December 31, 2017				Six months ended June 30, 2018
Class K common shares			842,287				842,287				842,287
Class K-I common shares			10				10				10
Class K-T common shares			10				10				10
Class A common shares			306,410				306,410				306,410
Class B common shares			125,000				125,000				125,000

 

(h)

Represents elimination of nonrecurring items. Transaction costs incurred during the six months ended June 30, 2018 were $427,358 and include $302,380 of third party costs and $124,978 of fees payable to affiliates. Transaction costs were expensed by the Company in accordance with ASC Topic 810, Consolidation, as the transaction was determined to be an asset acquisition under the variable interest entity (“VIE”) model.

 

(i)

The gain on acquisition of $42,026 recorded by the Company as the result of the PCF acquisition representing an asset acquisition under the VIE model has been excluded as it is a nonrecurring item directly related to the transaction.

 

  

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

4.

Pro forma adjustments (TCI Acquisition)

 

The unaudited pro forma condensed combined statements of operations include pro forma adjustments to give effect to the transactions as if the acquisition of TCI by the Company had occurred on January 1, 2017 and the unaudited pro forma condensed combined balance sheet includes pro forma adjustments to give effect to the transaction as if the acquisition had occurred on June 30, 2018.

 

(a)

Represents allocation of purchase price of $10,295,638 to the acquired property and equipment.

 

(b)

To reflect the purchase price, cash received for net liabilities assumed, elimination of TCI’s historical cash balance, cash reserved for property improvement plan and proceeds from new debt issuance and shares sold.

 

Purchase price		$	(26,050,000	)
Purchase price credit			41,000
Acquisition costs			(234,441	)
Purchase price consideration			(26,243,441	)
Net liabilities assumed			232,771
Elimination of TCI's historic cash balance			(681,041	)
Reserve for property improvement plan			(988,422	)
Issuance of new promissory note and mortgage, net of debt issuance costs of  $223,510			24,212,490
Equity proceeds from the issuance of 131,399 shares of Class K common stock and 4,000 shares of Class A common stock			1,344,000
Pro forma adjustment to cash and cash equivalents		$	(2,123,643	)

 

(c)

Represents net adjustment by the Company to record restricted cash of $988,422 reserved for the TCI property improvement plan.

 

(d)

Represents elimination of TCI’s net accounts receivable of $112,130, which were not acquired.

 

(e)

Represents the net adjustment by the Company to record $131,659 of prepayments for taxes and services.

 

(f)

Reflects the new debt of $24,212,490, net of costs of $223,510, incurred to finance the TCI acquisition and the elimination of TCI historical debt of $9,303,581 not assumed as part of the acquisition.

 

(g)

Represents the adjustment to eliminate TCI’s historical accounts payable and other liabilities not assumed in the acquisition and record nonrecurring acquisition costs and acquisition fee incurred that are directly related to the TCI Acquisition.

 

  

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

Elimination of TCI's historic accounts payable and other liabilities		$	(546,571	)
Acquisition cost			234,441
Acquisition fee			413,001
Pro forma adjustment to accounts payable, accrued expenses and other		$	100,871

 

(h)

Represents the adjustment to eliminate TCI’s historical stockholders’ equity and record additional shares issued by the Company less nonrecurring transaction costs and acquisition fee incurred.

 

Elimination of TCI's historical stockholders equity		$	(7,494,103	)
Equity proceeds from the issuance of 131,399 shares of Class K common stock and 4,000 shares of Class A common stock			1,344,000
Acquisition cost			(234,441	)
Acquisition fee			(413,001	)
Pro forma adjustment to stockholders' equity		$	(6,797,545	)

 

(i)

Represents increase in annual management fees of $128,065 and $68,657 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, under the Advisory Agreement with the Advisor equal to 0.75% of asset cost. Pre-acquisition asset management fees were 1.00% of gross revenues.

 

(j)

Represents $612,510 and $295,356 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of decrease in depreciation for the hotels based on the allocation of the Company’s purchase price and assignment of useful lives.

 

(k)

Represents $1,777 and $2,304 in the year ended December 31, 2017 and the six months ended June 30, 2018, respectively, of decrease in amortization of the franchise fee.

 

(l)

Represents adjustments to reflect interest expense under debt issued by the Company to fund the TCI Acquisition. The LIBOR rate assumed for purposes of preparing this pro forma financial information is 2.06%, the one-month LIBOR rate as of August 15, 2018.

 

(m)

Represents adjustment to the weighted average shares outstanding based on the assumption that the financing transactions that occurred on various dates from inception to August 15, 2018 would have been completed on or prior to completion of the pro forma acquisition date of January 1, 2017, in order to fund the TCI Acquisition.

 

  

Procaccianti Hotel REIT, Inc. 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

		Shares Issued and Outstanding				Pro-Forma Weighted Average Shares
		August 15, 2018				Year ended December 31, 2017				Six months ended June 30, 2018
Class K common shares			1,237,618				1,237,618				1,237,618
Class K-I common shares			10				10				10
Class K-T common shares			10				10				10
Class A common shares			314,410				314,410				314,410
Class B common shares			125,000				125,000				125,000