Quarterly Report for Quarter Ending June 30, 2023 (Form 10-Q)

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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 June 30, 2023

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 000-56082

LODGING FUND REIT III, INC.

(Exact Name of Registrant as Specified in Its Charter)

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(701) 630-6500

(Registrant's Telephone Number, Including Area Code)

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Securities registered pursuant to Section 12(b) of the Act:

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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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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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. ☐

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 August 23, 2024, there were 9,997,390 outstanding shares of common stock of Lodging Fund REIT III, Inc.

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LODGING FUND REIT III, INC.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LODGING FUND REIT III, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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LODGING FUND REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

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See accompanying notes to unaudited consolidated financial statements.

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LODGING FUND REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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1. ORGANIZATION

Lodging Fund REIT III, Inc. ("LF REIT III"), was formed on April 9, 2018 as a Maryland corporation. LF REIT III, together with its subsidiaries (the "Company"), was formed for the principal purpose of acquiring, through purchase or contribution, direct or indirect ownership interests in a diverse portfolio of limited-service, select-service, full-service and extended stay hotel properties located primarily in "America's Heartland," which the Company defines as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains. LF REIT III has elected to be treated as a real estate investment trust, or REIT, for federal income tax purposes beginning with the taxable year ended December 31, 2018. The Company's business activities are directed and managed by Legendary Capital REIT III, LLC (the "Advisor") and its affiliates, which are related parties through common management, pursuant to the Amended and Restated Advisory Agreement (the "Advisory Agreement"), dated June 1, 2018. The Company has no foreign operations or assets, and its operating structure includes only one operating and reportable segment.

Substantially all of the Company's assets and liabilities are held by, and substantially all of its operations are conducted through, Lodging Fund REIT III OP, LP (the "Operating Partnership," or "OP"), a subsidiary of LF REIT III. The OP has three voting classes of partnership units, Common General Partnership Units ("GP Units"), Interval Units and Common Limited Partnership Units ("Common LP Units"), and four classes of non-voting partnership units, Series B Limited Partnership Units ("Series B LP Units"), Series Growth & Opportunity ("GO") Limited Partnership Units ("Series GO LP Units"), Series Growth & Opportunity II ("GO II") Limited Partner Units ("Series GO II LP Units") and Series T Limited Partnership Units ("Series T LP Units"). LF REIT III was the sole general partner of the OP, as of June 30, 2023 and December 31, 2022. As of June 30, 2023, there were 612,100 outstanding Common LP Units, no outstanding Interval Units, 1,000 outstanding Series B LP Units, all of which were owned by the Advisor, 3,124,503 Series GO LP Units, 41,622 Series GO II LP Units and 5,073,506 Series T LP Units.

On June 1, 2018, the Company commenced a private offering of shares of common stock, $0.01 par value per share, with a maximum offering of $100,000,000, which was increased to $150,000,000 in shares of the Company's common stock in December 2021 (the "Offering"). The Offering is to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. In addition to sales of common shares for cash, the Company has adopted a dividend reinvestment plan ("DRIP"), which permits stockholders to reinvest their distributions back into the Company. As of June 30, 2023, the Company had issued and sold 10,075,447 shares of common stock, including 1,096,196 shares attributable to the DRIP, and received aggregate proceeds of $98.5 million. As of June 30, 2023, the Company had repurchased 287,525 shares, which represents an original investment of $2,858,355 for $2,794,469 under the Company's Share Repurchase Plan. As of June 30, 2023, all of the redemption proceeds have been paid.

On April 29, 2020, the Company classified and designated 7,000,000 shares of authorized but unissued common stock, $0.01 par value per share, as shares of "Interval Common Stock," to be part of the Offering. The offering of the Interval Common Stock was a maximum offering of $30,000,000, which could be increased to $60,000,000 in the sole discretion of the Company's board of directors, (the "Interval Share Offering") to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Company's board of directors allowed the Interval Share Offering to expire on March 31, 2022. The Company did not issue or sell any shares of Interval Common Stock in the Offering.

On June 15, 2020, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO LP Units, with a maximum offering of $20,000,000, which could be increased to $30,000,000 in the sole discretion of LF REIT III as the General Partner of the Operating Partnership, (the "GO Unit Offering") to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO LP Units were being offered until the earlier of (i) the sale of $20,000,000 in Series GO LP Units (which could be increased to $30,000,000 in the Company's sole discretion), (ii) June 14, 2022 or (iii) the Operating Partnership terminates the GO Unit Offering at an earlier date in its sole discretion. The

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Company's board of directors terminated the GO Unit Offering as of February 14, 2022. The Company's board of directors approved and ratified additional sales after February 14, 2022 in the GO Unit Offering for sales which were pending as of that date. As of June 30, 2023, the Operating Partnership had issued and sold 3,124,503 Series GO LP Units and received gross aggregate proceeds of $21.5 million.

The Operating Partnership may issue Series T LP Units from time to time to persons who contribute direct or indirect interests in real estate to the Operating Partnership. The Series T LP Units will have allocations and distributions that are dictated by the Partnership Agreement of the Operating Partnership and the applicable contribution agreement for the real estate. Certain Series T LP Units may have different allocations and distributions than other Series T LP Units. The amount of the allocations and distributions will be determined by the General Partner in its sole discretion at the time of issuance of the Series T LP Units and any future distributions are dependent on the financial performance of the contributed real estate based on a mathematical formula. The Series T LP Units are eligible for conversion into Common LP Units beginning either 24 or 36 months, or longer in some instances, after their issuance and will automatically convert into Common LP Units upon other events as described in the Partnership Agreement of the Operating Partnership. The conversion of Series T LP Units into Common LP Units may vary with each issuance and is generally based on a formula that applies an applicable capitalization rate to the then-current trailing twelve months net operating income of the hotel property less the loan balance outstanding as of the contribution date as assumed by the Operating Partnership, and less other amounts incurred by the Operating Partnership including but not limited to certain closing costs, loan assumption fees and defeasance costs, property improvement plan ("PIP") and capital expenditures, operating cash infused by the Operating Partnership, and any shortfall of certain minimum cumulative investment yield. There is no guarantee that the future financial performance of the contributed hotel property will be sufficient to result in the issuance of Common LP Units resulting from the application of the conversion formula applicable to the issuance of Series T LP Units at the time of the conversion. As of June 30, 2023, the Company had recorded an aggregate value of $45.7 million to the Series T LP Units in connection with such property contributions.

On December 3, 2021, the Operating Partnership commenced a private placement offering of its Common LP Units. As of June 30, 2023, the Operating Partnership had issued and sold 612,100 Common LP Units, with a then-current value of $10.57 per unit, in connection with property contributions.

On April 7, 2023, the Operating Partnership commenced a private offering of limited partnership units in the OP, designated as Series GO II LP Units, with a maximum offering of $30,000,000, which could be increased to $60,000,000 in the sole discretion of LF REIT III as the General Partner of the Operating Partnership, (the "GO II Unit Offering") to accredited investors only, pursuant to a confidential private placement memorandum exempt from registration under the Securities Act of 1933, as amended. The Series GO II LP Units are offered at a purchase price equal to 75% of the NAV of the Company's common stock. The Series GO II LP Units are being offered until the earlier of (i) the sale of $30,000,000 in Series GO II LP Units (which could be increased to $60,000,000 in the Company's sole discretion), (ii) March 31, 2024, which date may be extended for two1-yearextensions until March 31, 2026 in the sole discretion of the Operating Partnership or (iii) the Operating Partnership terminates the GO II Unit Offering at an earlier date in its sole discretion. As of June 30, 2023, the Operating Partnership had issued and sold 41,622 Series GO II LP Units and received gross aggregate proceeds of $0.3 million. See Note 11 "Subsequent Events" of the notes to the consolidated financial statements included as part of this Quarterly Report on Form 10-Q for information regarding the extension of the GO II Unit Offering.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation- The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the SEC applicable to annual financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022. The consolidated financial statements include the accounts of LF REIT III, the OP, its wholly-owned subsidiaries and entities in which the Company has a controlling financial interest, including variable interest entities ("VIEs") where the Company is the primary beneficiary. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of the rights held by other

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interests. If the entity is considered to be a VIE, the Company determines whether the Company is the primary beneficiary, and then consolidates those VIEs for which the Company has determined that the Company is the primary beneficiary. If the entity in which the Company holds an interest does not meet the definition of a VIE, the Company evaluates whether the Company has a controlling financial interest through the Company's voting interest in the entity. The Company consolidates entities when the Company owns more than 50 percent of the voting shares of a company or otherwise has a controlling financial interest. References in these financial statements to the net (loss) income attributable to stockholders do not include non-controlling interests, which represent the outside ownership interests of the Company's consolidated, non-wholly owned entities and are presented separately in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates-The preparation of the Company's consolidated financial statements and the accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition-Revenues consist of amounts derived from hotel operations, including room sales and other hotel revenues, and are presented on a disaggregated basis in the Company's consolidated statements of operations. These revenues are recorded net of any sales and occupancy taxes collected from the hotel guests. All revenues are recorded on an accrual basis as they are earned. Any cash received prior to a guest's arrival is recorded as an advance deposit from the guest and recognized as revenue at the time of the guest's occupancy at the hotel property.

Investment in Hotel Properties-The Company evaluates whether each hotel property acquisition should be accounted for as an asset acquisition or a business combination. If substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, then the transaction is considered to be an asset acquisition. All of the Company's acquisitions since inception have been determined to be asset acquisitions. Transaction costs associated with asset acquisitions are capitalized and transaction costs associated with business combinations would be expensed as incurred.

The Company's acquisitions generally consist of land, land improvements, buildings, building improvements, and furniture, fixtures and equipment ("FF&E"). The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, debt, and advanced bookings. For transactions determined to be asset acquisitions, the Company allocates the purchase price among the assets acquired and the liabilities assumed on a relative fair value basis at the date of acquisition. The Company determines the fair value of assets acquired and liabilities assumed with the assistance of third-party valuation specialists, using cash flow analysis as well as available market and cost data. The determination of fair value includes making numerous estimates and assumptions.

The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to interest expense over the remaining term of the debt assumed. The valuation of assumed debt liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

The Company's investments in hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives of 15 yearsfor land improvements, 40 yearsfor buildings and building improvements and 3to 7 yearsfor FF&E. Maintenance and repair costs are expensed in the period incurred and major renewals or improvements to the hotel properties are capitalized.

The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the property to the estimated future undiscounted cash flows of the property, which take into account current market conditions, and the Company's intent with respect to holding or disposing of the hotel properties. If the Company's analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.

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The use of projected future cash flows is based on assumptions that are consistent with a market participant's future expectations for the industry and the economy in general and the Company's expected use of the underlying hotel properties. The assumptions and estimates related to the future cash flows and the capitalization rates are complex and subjective in nature. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and the Company's ultimate use of the hotel property could impact the assumptions and result in future impairment losses to the hotel properties.

Advertising Costs-The Company expenses advertising costs as incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and expenses that are directly attributable to advertising and promotion. Advertising expense was $1,259,019 and $608,779 for the six months ended June 30, 2023 and 2022, respectively, and was $716,966 and $370,757 for the three months ended June 30, 2023 and 2022, respectively, and is included in sales and marketing in the consolidated statements of operations.

Non-controlling Interest-Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the Company. Non-controlling interests are reported in the consolidated balance sheets within equity, separate from stockholders' equity. Revenue and expenses attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations, with net income or loss attributable to non-controlling interests reported separately from net income or loss attributable to the Company.

Cash and Cash Equivalents-Cash and cash equivalents include cash in bank accounts as well as highly liquid investments with an original maturity of three months or less. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to an insurance limit of $250,000. At times, the Company's cash and cash equivalents may exceed FDIC insured levels.

Restricted Cash-Restricted cash primarily consists of earnest money deposits related to hotel property acquisitions, as well as certain funds maintained in escrow accounts to fund future payments for insurance, property tax obligations, and reserves for future capital expenditures, as required by our debt agreements.

Accounts Receivable-Accounts receivable consist primarily of receivables due from hotel guests for room stays and meeting and banquet room rentals, which are uncollateralized customer obligations. Management determines the likelihood of collectability of receivables on an individual customer basis, based on the amount of time the balance has been outstanding, likelihood of collecting, and the customer's current economic status. The carrying amount of the accounts receivables is reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected.

Deferred Financing Costs-Deferred financing costs represent origination fees, legal fees, and other costs associated with obtaining financing. Deferred financing costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability. These costs are amortized to interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method. The Company expenses unamortized deferred financing costs when the associated financing agreement is refinanced or repaid before maturity unless certain criteria are met that would allow for the carryover of such costs to the refinanced agreement. Costs incurred in connection with potential financial transactions that are not completed are expensed in the period in which it is determined the financing will not be completed.

Offering Costs-The Company has incurred certain costs related directly to the Company's private offerings consisting of, among other costs, commissions, legal, due diligence costs, printing, marketing, filing fees, postage, data processing fees, and other offering related costs. These costs are capitalized and recorded as a reduction of equity proceeds on the accompanying consolidated balance sheets.

Property Operations Expenses-Property operations expenses consist of expenses related to room rental, food and beverage sales, telephone usage, and other miscellaneous service costs, as well as all costs of operating the Company's hotel properties such as building repairs, maintenance, property taxes, utilities, and other related costs.

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Property Management Fees-Property management fees include expenses incurred for management services provided for the day-to-day operations of our hotel properties, which are generally charged at a rate of 4% of gross revenues. Property management fees also include asset management fees, which may be charged at an annual rate of up to 0.75% of gross assets and are paid to the Advisor.

Franchise Fees-The Company pays initial fees related to hotel franchise rights prior to acquiring a hotel property. The fees are included in prepaid expenses and other assets until the time the related hotel property is acquired. Initial franchise fees related to hotel properties that are acquired are amortized on a straight-line basis over the life of the agreement. Initial franchise fees related to hotel properties that are not acquired are refunded to the Company, net of any associated fees, and any fees are expensed as incurred. Franchise fees on the accompanying consolidated statements of operations include the amortization of initial franchise fees, as well as monthly fees paid to franchisors for royalty, marketing, and reservation fees and other related costs.

Acquisition Costs-The Company incurs costs during the review of potential hotel property acquisitions including legal fees, environmental reviews, market studies, financial advisory services, and other professional service fees. If the Company does complete a property acquisition, an acquisition fee of up to 1.4% is charged by the Advisor, based on the purchase price of the property plus any estimated PIP costs. For transactions determined to be asset acquisitions, these costs are capitalized as part of the overall cost of the project. For transactions determined to be business combinations, these costs would be expensed in the period incurred. Acquisition-related and acquisition due diligence costs that relate to a property that is not acquired, are expensed and included in acquisition costs on the accompanying consolidated statements of operations. Prior to the ultimate determination of whether a property will be acquired or not, acquisition-related and acquisition due diligence costs are recorded as, and included in, prepaid expenses and other assets on the accompanying consolidated balance sheets.

Stock-Based Compensation-During 2022, the Company began compensating its independent directors with stock-based compensation as approved by and administered under the supervision of our Board of Directors. The awards are fully vested at issuance and the Company recognizes stock-based compensation expense based on the award's fair value at the grant date. Compensation expense related to stock awards is determined on the grant date based on the offering price of our common stock and is charged to earnings when issued. Stock-based compensation expense was $21,140 and $30,000 for the six months ended June 30, 2023 and 2022, respectively, and was $10,570 and $15,000 for the three months ended June 30, 2023 and 2022, respectively, and is included in general and administrative expense in the consolidated statements of operations.

Net Loss Per Share of Common Stock-Basic net loss per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net loss per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net loss per common share were the same for the periods presented.

Income Taxes-The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to stockholders. The Company's intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.

As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to stockholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates and it may not be able to qualify as a REIT for foursubsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to U.S. federal income and excise taxes on undistributed taxable income. Taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary ("TRS") is subject to U.S. federal, state, and local income taxes at the applicable rates.

The TRS accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial

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statement carrying amounts of existing assets and liabilities and their respective income tax basis, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company performs periodic reviews for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements.

Fair Value Measurement-The Company establishes fair value measures based on the fair value definition and hierarchy levels established by GAAP. These fair values are based on 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.

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

Recent Accounting Pronouncements-The Company, as an emerging growth company, has elected to use the extended transition period which allows us to defer the adoption of new or revised accounting standards. This allows the Company to adopt new or revised accounting standards as of the effective date for non-public business entities.

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, "Leases" ("ASU No. 2016-02") (Topic 842), which replaces Leases (Topic 840), and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance under Leases (Topic 840), for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The Company adopted this standard effective January 1, 2022, electing to recognize and measure its leases prospectively at the beginning of the period of adoption, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company's historical accounting policy.

At adoption of the new standard, the Company recorded a right-of-use asset and lease liability for its Sheraton Northbrook, Illinois hotel property (the "Northbrook Property") ground lease measured at the estimated present value of the remaining minimum lease payments under the lease. The Company's ground lease is classified as a financing lease under Topic 842. For this finance lease, effective January 1, 2022, the Company began recognizing depreciation and amortization expense and interest expense in the Company's consolidated statements of operations instead of ground lease rent expense. While the total expense recognized over the life of a lease is unchanged, the timing of expense recognition for finance leases results in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. In addition to recording operating and financing right-of-use assets and lease liabilities, the Company also

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reclassified at adoption its intangible liability for its above market ground lease to the beginning right-of-use asset. See Note 3 for more information regarding the Company's lease assets and liabilities.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU No. 2016-13"), which requires that entities use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU No. 2016-13 using the modified retrospective approach and the adoption did not have a material impact on the Company's consolidated financial statements.

3. INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties as of June 30, 2023 and December 31, 2022 consisted of the following:

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