PROCACCIANTI HOTEL REIT, INC.

Indebtedness

For a discussion of our indebtedness, see Note 5 — “Mortgage Notes Payable” and Note 7 — “Related Party Transactions”, to the consolidated financial statements that are a part of this Annual Report.

• PHA can resign on 60 days’ notice from its role as advisor, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations and cash flows.
• We are increasingly dependent on information technology, and potential cyber-attacks, security problems or other disruption and expanding social media vehicles present new risks.
• We may face challenges managing rapidly advancing artificial intelligence in our business which could adversely affect our competitive position.
• We face risks associated with natural disasters and the direct and indirect physical effects of climate change, which may include more frequent and more severe storms, hurricanes, flooding, droughts and wildfires, any of which could have a material adverse effect on our hotel properties, operations, cash flows and financing options.
• Risks Related to Our Corporate Structure
• We disclose FFO and modified FFO (“MFFO”), each a non-GAAP financial measure, in future communications with investors, including documents filed with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under GAAP, and you should consider GAAP measures to be more relevant to our operating performance.
• No investor may own more than 9.8% of our stock unless exempted by our board of directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
• Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our holders of K Shares, K-I Shares, K-T Shares, A Shares, and B Shares or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
• We may grant stock-based awards to our directors, employees and consultants pursuant to a long-term incentive plan, which will have a dilutive effect on your investment in us.
• Stockholders will have limited control over changes in our policies and operations, which increases the uncertainty and risks they face as a stockholder.
• We may change our targeted investments without stockholder consent.
• Stockholders may not be able to have their K Shares, K-I Shares or K-T Shares repurchased under the share repurchase program; if stockholders are able to have their K Shares, K-I Shares or K-T Shares repurchased under the share repurchase program, stockholders may not be able to recover the amount of your investment.
• The Estimated Per Share NAV for our K Shares, K-I Shares and K-T Shares are estimates as of a given point in time and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved or completed a merger or other sale of the company.
• Our Estimated Per Share NAV is based upon a number of estimates, assumptions, judgments and opinions that may not be, or may later prove not to be, accurate or complete, which could make the estimated valuations incorrect. As a result, our Estimated Per Share NAV may not reflect the amount that a stockholder might receive for your shares in a market transaction.
• It may be difficult to accurately reflect material events that may impact our Estimated Per Share NAV between valuations, and accordingly we may be repurchasing shares at too high or too low a price.
• Stockholders’ interest in us could be diluted if we issue additional shares, which could reduce the overall value of their investment.
• The potential return to holders of K Shares, K-I Shares and K-T Shares would be limited should we return in excess of 9.84% on their investment.
• Our Service Provider may receive certain distributions as the holder of the B Shares regardless of its performance under the Services Agreement.
• If we were to become internally managed, we would pay substantial fees to PHA prior to holders of K Shares, K-I Shares and K-T Shares receiving their agreed-upon investment returns. In addition, we will pay substantial fees and expenses to our property manager and their affiliates, and will reimburse PHA and its affiliates for expenses, which payments increase the risk that stockholders will not earn a profit on your investment.
• If we internalize our management functions, the percentage of our outstanding capital stock owned by our other stockholders could be reduced, and we could incur other significant costs associated with being self-managed.
• The ongoing need for capital expenditures at our hotel properties may adversely affect our business, financial condition and results of operations and limit our ability to make distributions to our stockholders.
• Our board of directors has opted out of provisions of the Maryland General Corporation Law relating to deterring or defending hostile takeovers. Although we will not currently be afforded this protection, our board of directors could opt into these provisions of Maryland law in the future, which may discourage others from trying to acquire control of us and may prevent stockholders from receiving a premium price for their shares in connection with a business combination.
• There is a risk that you may not receive distributions or that our distributions may not grow over time.
• Our stockholders’ investment return may be reduced if we were to be required to register as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). If we lose our exemption from registration under the 1940 Act, we would not be able to continue our business unless and until we register under the 1940 Act.
• Fees and expenses may adversely impact our ability to pay distributions.
• Our rights and the rights of our stockholders to recover claims against our directors are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.
• Risks Related to Conflicts of Interest
• There are significant potential conflicts of interest that could affect our investment returns.
• PHA, Sponsor, property manager and their officers and employees and certain of our executive officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
• PHA faces conflicts of interest relating to the terms under our Advisory Agreement and under our charter, which could result in actions that are not necessarily in the long-term best interests of our stockholders, including required payments if we terminate our Advisory Agreement under certain circumstances.
• The Advisory Agreement with PHA was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
• PHA’s liability will be limited under the Advisory Agreement, and we have agreed to indemnify PHA against certain liabilities, which may lead PHA to act in a riskier manner on our behalf than it would when acting for its own account.
• PHA and our property manager are affiliates, which might cause PHA to decline to pursue certain property investments.
• Our fiduciary duties as the general partner of our operating partnership could create conflicts of interest, which may impede business decisions that could benefit our stockholders.
• PHA faces conflicts of interest relating to joint ventures with its affiliates, which could result in a disproportionate benefit to the other venture partners at our expense.
• General Risks Related to Investments in Real Estate
• Economic, market and regulatory changes that impact the real estate market generally may cause our operating results to suffer and decrease the value of our properties.
• We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our properties, which could adversely affect our financial condition and ability to make distributions to you.
• Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to you.
• We may be required to indemnify the purchasers of our investments.
• We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets.
• We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties, which could have an adverse effect on your investment.
• There is refinancing risk associated with our debt.
• We may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so, limiting our ability to pay cash distributions to our stockholders.
• We may experience underinsured or uninsured losses.
• We may be subject to contingent or unknown liabilities related to properties that we may acquire for which we may have limited or no recourse against the sellers.
• Actions of joint venture partners could reduce the returns on our joint venture investments and decrease your overall return.
• Costs imposed pursuant to governmental laws and regulations may reduce our net income and the cash available for distributions to you.
• The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to you.
• We may face risks relating to asbestos.
• We may face risks relating to lead paint.
• We may face risks relating to chemical vapors and subsurface contamination.
• We may face risks relating to mold growth.
• Costs associated with complying with the ADA may decrease cash available for distributions.
• To the extent we engage in a strategy for acquiring value-enhancement hotel properties, such a strategy involves greater risks than more conservative investment strategies.
• Acquiring properties from distressed sellers involves a higher risk of loss than would a strategy of investing in other properties.
• Risks Related to Hotel Investments
• We compete with other hotels for guests, which could adversely affect the occupancy levels and rental revenues at our properties.
• We will also compete with alternative lodging products for guests. Certain companies, including Airbnb and VRBO, offer vacation and overnight lodging to the public. This competition could reduce occupancy levels and rental revenues at our properties, which would adversely affect our profitability and impede our growth.
• As a REIT, we cannot directly operate our hotel properties, and rely principally on our property manager to operate our hotel properties.
• Our leases with TRSs will subject us to the risk of increased hotel operating expenses.
• Unanticipated expenses and insufficient demand for hotel properties in new geographic markets could adversely affect our profitability and our ability to make distributions to our stockholders.
• We are subject to general risks associated with operating hotel properties.
• Difficult economic conditions may continue to adversely affect the hotel industry.
• The hotel industry is seasonal, which will affect our results of operations from quarter to quarter.
• The cyclical nature of the hotel industry may result in fluctuations in our operating performance, which could have a material adverse effect on our business and operating results.
• Many of our real estate-related costs are fixed, and will not decrease even if revenues from our hotel properties decrease.
• Our operating expenses may increase in the future, which could cause us to raise our room rates, which may deplete room occupancy, or cause us to realize lower net operating income as a result of increased expenses that are not offset by increased room rates, in either case decreasing our cash flow and our operating results.