Attached files
file | filename |
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EX-31.2 - EX-31.2 - CONDOR HOSPITALITY TRUST, INC. | c545-20150630xex312.htm |
EX-32.1 - EX-32.1 - CONDOR HOSPITALITY TRUST, INC. | c545-20150630xex321.htm |
EX-31.1 - EX-31.1 - CONDOR HOSPITALITY TRUST, INC. | c545-20150630xex311.htm |
XML - IDEA: XBRL DOCUMENT - CONDOR HOSPITALITY TRUST, INC. | R9999.htm |
UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended June 30, 2015 |
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OR |
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ______ to ______. |
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Commission file number: 001-34087 |
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CONDOR HOSPITALITY TRUST, INC. |
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(Exact name of registrant as specified in its charter) |
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Maryland (State or other jurisdiction of incorporation or organization) |
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52-1889548 (IRS Employer Identification Number) |
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1800 W. Pasewalk Ave. Ste. 200, Norfolk, NE 68701 (Address of principal executive offices) Telephone number: (402) 371-2520 Supertel Hospitality, Inc. (Former Name or Former Address, if Changed Since Last Report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☐(Do not check if a smaller reporting company) |
Small reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).YES ☐ NO ☒
As of July 31, 2015 there were 4,932,222 shares of common stock, par value $.01 per share, outstanding.
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CONDOR HOSPITALITY TRUST, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number |
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Part I. |
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Item 1. |
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Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 |
2 |
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Condensed Consolidated Statements of Operations for the Three and Six Months |
3 |
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Condensed Consolidated Statements of Cash Flows for the Six Months |
4 |
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5 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
31 |
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Item 3. |
35 |
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Item 4. |
35 |
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Part II. |
35 |
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Item 5. |
35 |
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Item 6. |
35 |
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDOR HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except per share and share data)
As of |
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June 30, |
December 31, |
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2015 |
2014 |
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(unaudited) |
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ASSETS |
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Investments in hotel properties |
$ |
116,684 |
$ |
116,623 | ||
Less accumulated depreciation |
48,483 | 47,076 | ||||
68,201 | 69,547 | |||||
Cash and cash equivalents |
4,124 | 173 | ||||
Accounts receivable, net of allowance for doubtful accounts of $10 and $25 |
1,542 | 1,190 | ||||
Prepaid expenses and other assets |
5,116 | 4,262 | ||||
Deferred financing costs, net |
1,381 | 1,637 | ||||
Investment in hotel properties, held for sale, net |
51,028 | 69,635 | ||||
$ |
131,392 |
$ |
146,444 | |||
LIABILITIES AND EQUITY |
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LIABILITIES |
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Accounts payable, accrued expenses and other liabilities |
$ |
7,474 |
$ |
6,666 | ||
Derivative liabilities, at fair value |
20,224 | 20,337 | ||||
Debt related to hotel properties held for sale |
27,999 | 41,012 | ||||
Long-term debt |
50,921 | 51,675 | ||||
106,618 | 119,690 | |||||
Redeemable preferred stock |
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10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312 |
7,662 | 7,662 | ||||
EQUITY |
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Shareholders' equity |
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Preferred stock, 40,000,000 shares authorized; |
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8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $8,033 |
8 | 8 | ||||
6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $30,000 |
30 | 30 | ||||
Common stock, $.01 par value, 200,000,000 shares authorized; 4,927,797 and 4,692,965 shares outstanding |
49 | 47 | ||||
Additional paid-in capital |
138,367 | 137,900 | ||||
Accumulated deficit |
(121,429) | (118,983) | ||||
Total shareholders' equity |
17,025 | 19,002 | ||||
Noncontrolling interest |
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Noncontrolling interest in consolidated partnership, redemption value $1,367 and $25 |
87 | 90 | ||||
Total equity |
17,112 | 19,092 | ||||
COMMITMENTS AND CONTINGENCIES |
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$ |
131,392 |
$ |
146,444 | |||
See accompanying notes to consolidated financial statements.
2
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
CONDOR HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - in thousands, except share and per share data)
Three Months Ended |
Six Months Ended |
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June 30, |
June 30, |
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2015 |
2014 |
2015 |
2014 |
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REVENUES |
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Room rentals and other hotel services |
$ |
16,364 |
$ |
16,059 |
$ |
28,710 |
$ |
27,349 | ||||
EXPENSES |
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Hotel and property operations |
11,337 | 11,102 | 21,325 | 20,924 | ||||||||
Depreciation and amortization |
1,257 | 1,617 | 2,737 | 3,219 | ||||||||
General and administrative |
1,347 | 1,092 | 2,732 | 2,077 | ||||||||
Acquisition expense |
17 | 0 | 17 | 0 | ||||||||
Terminated equity transactions |
0 | (3) | 0 | 65 | ||||||||
13,958 | 13,808 | 26,811 | 26,285 | |||||||||
EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES |
2,406 | 2,251 | 1,899 | 1,064 | ||||||||
Net loss on dispositions of assets |
(135) | (1) | (122) | (27) | ||||||||
Unrealized derivative gain (loss) |
(4,710) | (11,718) | 113 | (9,603) | ||||||||
Other income |
31 | 94 | 126 | 125 | ||||||||
Interest expense |
(1,490) | (1,819) | (3,017) | (3,548) | ||||||||
Loss on debt extinguishment |
0 | (94) | (7) | (104) | ||||||||
Impairment (loss) recovery |
(3,053) | 0 | (3,830) | 119 | ||||||||
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
(6,951) | (11,287) | (4,838) | (11,974) | ||||||||
Income tax expense |
0 | 0 | 0 | 0 | ||||||||
LOSS FROM CONTINUING OPERATIONS |
(6,951) | (11,287) | (4,838) | (11,974) | ||||||||
Gain from discontinued operations, net of tax |
1,052 | 829 | 2,389 | 1,011 | ||||||||
NET LOSS |
(5,899) | (10,458) | (2,449) | (10,963) | ||||||||
Loss attributable to noncontrolling interest |
284 | 15 | 3 | 16 | ||||||||
NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS |
(5,615) | (10,443) | (2,446) | (10,947) | ||||||||
Preferred stock dividends - undeclared |
(902) | (858) | (1,793) | (1,704) | ||||||||
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS |
$ |
(6,517) |
$ |
(11,301) |
$ |
(4,239) |
$ |
(12,651) | ||||
NET EARNINGS (LOSS) PER COMMON SHARE- BASIC AND DILUTED |
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EPS from continuing operations - basic and diluted |
$ |
(1.52) |
$ |
(3.69) |
$ |
(1.37) |
$ |
(4.42) | ||||
EPS from discontinued operations - basic and diluted |
$ |
0.20 |
$ |
0.25 |
$ |
0.49 |
$ |
0.33 | ||||
EPS Basic and Diluted - Total |
$ |
(1.32) |
$ |
(3.44) |
$ |
(0.88) |
$ |
(4.09) | ||||
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS |
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Income from continuing operations, net of tax |
$ |
(7,525) |
$ |
(12,129) |
$ |
(6,626) |
$ |
(13,661) | ||||
Discontinued operations, net of tax |
1,008 | 828 | 2,387 | 1,010 | ||||||||
Net loss attributable to common shareholders |
$ |
(6,517) |
$ |
(11,301) |
$ |
(4,239) |
$ |
(12,651) | ||||
See accompanying notes to consolidated financial statements.
3
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
CONDOR HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - in thousands, except share and per share data)
Six Months Ended |
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June 30, |
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2015 |
2014 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ |
(2,449) |
$ |
(10,963) | ||
Adjustments to reconcile net loss to net cash |
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provided by operating activities: |
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Depreciation and amortization |
2,737 | 3,331 | ||||
Amortization of deferred financing costs |
447 | 697 | ||||
Amortization of debt discount |
0 | 38 | ||||
Gain on dispositions of assets |
(1,540) | (608) | ||||
Stock-based compensation expense |
123 | 20 | ||||
Provision for impairment loss |
3,710 | 477 | ||||
Unrealized gain (loss) on derivative instruments |
(113) | 9,603 | ||||
Gain on debt conversion |
0 | (88) | ||||
Amortization of warrant issuance cost |
29 | 29 | ||||
Changes in operating assets and liabilities: |
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Increase in assets |
(1,116) | (2,086) | ||||
Increase in liabilities |
873 | 2,054 | ||||
Net cash provided by operating activities |
2,701 | 2,504 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to hotel properties |
(1,338) | (1,277) | ||||
Proceeds from sale of hotel assets |
16,169 | 9,698 | ||||
Proceeds from insurance |
31 | 36 | ||||
Net cash provided by investing activities |
14,862 | 8,457 | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Deferred financing costs |
(191) | (428) | ||||
Principal payments on long-term debt |
(20,629) | (10,543) | ||||
Proceeds from long term debt |
8,300 | 0 | ||||
Payments on revolving debt |
(19,524) | (14,426) | ||||
Proceeds from revolving debt |
18,086 | 14,333 | ||||
Proceeds from common stock issued |
346 | 860 | ||||
Common stock issuance costs |
0 | (162) | ||||
Purchase treasury stock |
0 | (1) | ||||
Net cash used in financing activities |
(13,612) | (10,367) | ||||
Increase in cash and cash equivalents |
3,951 | 594 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
173 | 45 | ||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ |
4,124 |
$ |
639 | ||
SUPPLEMENTAL CASH FLOW INFORMATION |
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Interest paid, net of amounts capitalized |
$ |
2,926 |
$ |
3,730 | ||
SCHEDULE OF NONCASH FINANCING ACTIVITIES |
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Dividends declared common units |
$ |
0 |
$ |
113 | ||
Unamortized debt discount |
$ |
0 |
$ |
(151) | ||
Convertible loan embedded derivative |
$ |
0 |
$ |
(2,000) | ||
Debt converted to common stock |
$ |
0 |
$ |
1,950 | ||
See accompanying notes to consolidated financial statements.
4
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
General
Condor Hospitality Trust, Inc., formerly Supertel Hospitality, Inc. was incorporated in Virginia on August 23, 1994. We reincorporated in Maryland on November 19, 2014. We are a self-administered real estate investment trust (REIT) for federal income tax purposes. References to “Company” “we”, “our”, and “us”, herein refer to Condor Hospitality Trust, Inc., including as the context requires, its direct and indirect subsidiaries.
The Company, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P Financing Limited Partnership (“E&P LP”). The Company owns 49 properties as follows:
· |
All of the Company’s interests in 40 properties with the exception of furniture, fixtures and equipment on 35 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or indirectly by E&P LP, SLP or Solomon’s Beacon Inn Limited Partnership (SBILP) (collectively, the “Partnerships”). |
· |
The Company’s interests in nine properties are held directly by either SPPR-Hotels, LLC (SHLLC), SPPR-South Bend, LLC (SSBLLC), BMI Alexandria, LLC (BAL) or SPPR-Dowell, LLC (SDLLC). |
The Company, through Supertel Hospitality REIT Trust, is the sole general partner in SLP and at June 30, 2015, owned approximately 93% of the partnership interests in SLP. SLP is the general partner in SBILP. At June 30, 2015, SLP and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), BMI Alexandria Holdings, Inc. (BAHI) and SPPR-Dowell Holdings, Inc. (SDHI). SLP and SPPRHI owned 99% and 1% of SHLLC, respectively, SLP and BAHI owned 99% and 1% of BAL, respectively, SLP owned 100% of SSBLLC and SLP and SDHI owned 99% and 1% of SDLLC, respectively.
As of June 30, 2015, the Company owned 49 limited service hotels, 46 of which are included in continuing operations. All of the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (“TRS”), and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by eligible independent contractors: Hospitality Management Advisors, Inc. (“HMA”), Strand Development Company, LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”) and Cherry Cove Hospitality Management, LLC (“Cherry Cove”).
HMA manages 14 Company hotels in Louisiana, Kentucky, Indiana, Virginia and Florida. Strand manages the Company’s three economy extended-stay hotels in Georgia and South Carolina as well as 12 additional Company hotels located in Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 19 Company hotels in seven states primarily in the Midwest. Cherry Cove manages one Company hotel in Maryland. Each of the management agreements expired on June 30, 2015 and the new agreements were effective on July 1, 2015 under the new terms described below. The management agreements renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days before the end of a term.
During the second quarter of 2015, the Company negotiated new agreements with the existing management companies. Beginning July 1, 2015, each of HMA, Strand, Kinseth, and Cherry Cove will receive a monthly management fee, with respect to the hotels they manage equal to 3.0% of the gross hotel revenue. Incentive fees may be earned for performance above budgeted expectations up to a maximum payout of 2.0% of gross hotel revenues.
5
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
The monthly management fee under the prior agreements was 3.5% of the gross hotel revenue and 2.25% of hotel net operating income (“NOI”). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes).
The management agreements generally require TRS Lessee to fund debt service, working capital needs, capital expenditures and third-party operating expenses for the management companies excluding those expenses not related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.
The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotel located in Florida, which experiences peak demand in the first and fourth quarters of the year.
Consolidated Financial Statements
The Company has prepared the condensed consolidated balance sheet as of June 30, 2015, the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014, and the condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014 without audit, in conformity with U. S. generally accepted accounting principles (GAAP). In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position as of June 30, 2015 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2014 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with GAAP 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 reported period. Actual results could differ from those estimates.
Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results for the full year.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Currently, debt issuance costs are recorded as an asset and amortization of these deferred financing costs is recorded in interest expense. Under the new standard, debt issuance costs will continue to be amortized over the life
6
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
of the debt instrument and amortization will continue to be recorded in interest expense. The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis. The Company is currently evaluating the effect that ASU 2015-03 will have on its consolidated financial statements and related disclosures.
Derivative Liabilities
June 30 |
December 31, |
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2015 |
2014 |
||||
Series C preferred embedded derivative |
$ |
14,209 |
$ |
13,804 | |
Warrant derivative |
6,015 | 6,533 | |||
Derivative liabilities, at fair value |
$ |
20,224 |
$ |
20,337 | |
Series C Convertible Preferred Stock and Warrants
The conversion feature embedded in the Series C convertible preferred stock was evaluated, and it was determined that the conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. In addition the common stock warrants issued with the Series C convertible preferred stock were also determined to be freestanding derivatives.
The amendment to the Company’s articles of incorporation, setting forth the terms of the Series C convertible preferred stock, the host instrument, includes an antidilution provision that requires an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’ original conversion price of $8.00 per share. Accordingly we bifurcated the embedded conversion feature which is shown as a derivative liability recorded at fair value on the accompanying consolidated balance sheets as of June 30, 2015 and December 31, 2014. As a result of a subscription rights offering by the Company which concluded on June 6, 2014, the conversion price of the Series C convertible stock, pursuant to its terms, was adjusted to $1.60, the exercise price of the subscription rights for a share of common stock. The antidilution provision continues to be in effect, and treatment of the embedded conversion feature as a derivative liability remains unchanged.
The agreement setting forth the terms of the common stock warrants issued to the holders of the Series C convertible preferred stock also includes an antidilution provision that requires a reduction in the warrants’ exercise price of $9.60 should the conversion ratio of the Series C convertible preferred stock be adjusted due to antidilution provisions. Accordingly, the warrants do not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on the accompanying consolidated balance sheets as of June 30, 2015 and December 31, 2014. As a result of a subscription rights offering by the Company which concluded on June 6, 2014, the exercise price of the warrants for a share of common stock was adjusted to $1.92, equal to 120% of the adjusted conversion price of the Series C convertible preferred stock. The antidilution provision remains in effect, and treatment of the warrants as a derivative liability remains unchanged.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and
7
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale hotels, and the disclosure of the fair value of our debt.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, as well as inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 nonfinancial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Nonfinancial assets
Nonfinancial asset fair value measurements are discussed below in the note “Impairment Losses.”
Financial instruments
As of June 30, 2015 and December 31, 2014, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.
The fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis as of June 30, 2015 and December 31, 2014 are as follows (in thousands):
Fair Value at |
||||||||||||
June 30, 2015 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Series C preferred embedded derivative |
$ |
14,209 |
$ |
0 |
$ |
0 |
$ |
14,209 | ||||
Warrant derivative |
6,015 | 0 | 0 | 6,015 | ||||||||
Derivative liabilities, at fair value |
$ |
20,224 |
$ |
0 |
$ |
0 |
$ |
20,224 | ||||
Fair Value at |
||||||||||||
December 31, 2014 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Series C preferred embedded derivative |
$ |
13,804 |
$ |
0 |
$ |
0 |
$ |
13,804 | ||||
Warrant derivative |
6,533 | 0 | 0 | 6,533 | ||||||||
Derivative liabilities, at fair value |
$ |
20,337 |
$ |
0 |
$ |
0 |
$ |
20,337 | ||||
8
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
There were no transfers between levels during the six months ended June 30, 2015 and the twelve months ended December 31, 2014.
The following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized (gains) losses recorded in the Consolidated Statement of Operations in Derivative gain (loss) for each of the three and six months ending June 30, 2015 (in thousands):
Three Months Ending |
Three Months Ending |
|||||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
|||||||||||||||||||||||
Series C |
Convertible |
Series C |
Convertible |
|||||||||||||||||||||
preferred |
loan |
preferred |
loan |
|||||||||||||||||||||
embedded |
Warrant |
embedded |
embedded |
Warrant |
embedded |
|||||||||||||||||||
derivative |
derivative |
derivative |
Total |
derivative |
derivative |
derivative |
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
10,921 |
$ |
4,593 |
$ |
0 |
$ |
15,514 |
$ |
2,551 |
$ |
1,241 |
$ |
151 |
$ |
3,943 | ||||||||
Net unrealized (gains) losses on derivatives |
3,288 | 1,422 | 0 | 4,710 | 7,746 | 3,972 | 0 | 11,718 | ||||||||||||||||
Purchases and issuances |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Sales and settlements, included in derivative gain (loss) |
0 | 0 | 0 | 0 | 0 | 0 | (151) | (151) | ||||||||||||||||
Gross transfers in |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Gross transfers out |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Fair value, end of period |
$ |
14,209 |
$ |
6,015 |
$ |
0 |
$ |
20,224 |
$ |
10,297 |
$ |
5,213 |
$ |
0 |
$ |
15,510 | ||||||||
Changes in realized losses, included in income on instruments held at end of period |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 | ||||||||
Changes in unrealized losses, included in income on instruments held at end of period |
$ |
3,288 |
$ |
1,422 |
$ |
0 |
$ |
4,710 |
$ |
7,746 |
$ |
3,972 |
$ |
0 |
$ |
11,718 | ||||||||
9
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Six months ended |
Six months ended |
|||||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
|||||||||||||||||||||||
Series C |
Convertible |
Series C |
Convertible |
|||||||||||||||||||||
preferred |
loan |
preferred |
loan |
|||||||||||||||||||||
embedded |
Warrant |
embedded |
embedded |
Warrant |
embedded |
|||||||||||||||||||
derivative |
derivative |
derivative |
Total |
derivative |
derivative |
derivative |
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
13,804 |
$ |
6,533 |
$ |
0 |
$ |
20,337 |
$ |
3,761 |
$ |
2,146 |
$ |
0 |
$ |
5,907 | ||||||||
Net unrealized (gains) losses on derivatives |
405 | (518) | 0 | (113) | 6,536 | 3,067 | 0 | 9,603 | ||||||||||||||||
Purchases and issuances |
0 | 0 | 0 | 0 | 0 | 0 | 151 | 151 | ||||||||||||||||
Sales and settlements, included in derivative gain (loss) |
0 | 0 | 0 | 0 | 0 | 0 | (151) | (151) | ||||||||||||||||
Gross transfers in |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Gross transfers out |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Fair value, end of period |
$ |
14,209 |
$ |
6,015 |
$ |
0 |
$ |
20,224 |
$ |
10,297 |
$ |
5,213 |
$ |
0 |
$ |
15,510 | ||||||||
Changes in realized (gains) losses, included in income on instruments held at end of period |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 | ||||||||
Changes in unrealized (gains) losses, included in income on instruments held at end of period |
$ |
405 |
$ |
(518) |
$ |
0 |
$ |
(113) |
$ |
6,536 |
$ |
3,067 |
$ |
0 |
$ |
9,603 | ||||||||
The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the hierarchy. The carrying value and estimated fair value of the Company’s debt as of June 30, 2015 and December 31, 2014 are presented in the table below (in thousands):
Carrying Value |
Estimated Fair Value |
|||||||||||
June 30, |
December 31, |
June 30, |
December 31, |
|||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Held for use |
$ |
50,921 |
$ |
51,675 |
$ |
50,427 |
$ |
51,610 | ||||
Held for sale |
27,999 | 41,012 | 27,881 | 40,728 | ||||||||
Total |
$ |
78,920 |
$ |
92,687 |
$ |
78,308 |
$ |
92,338 | ||||
10
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Hotel Dispositions
Effective October 1, 2014, the Company adopted ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations. This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result of the adoption of ASU Update No. 2014-08, we anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this description.
For transactions that have been classified as held for sale or as discontinued operations for periods prior to adoption of ASU 2014-08, the Company will continue to present the operating results as discontinued operations in the statements of operations for all applicable periods presented.
At March 31, 2015, the Company had ten hotels identified as held for sale. During the three months ending June 30, 2015, three of those hotels were sold. The Company has made a decision to accelerate our disposition strategy, and as a result an additional eleven non-core hotels were reclassified as held for sale during the second quarter of 2015. A total of eighteen hotels are held for sale as of June 30, 2015.
Sold Hotels - Continuing Operations
On March 19, 2015 the Company closed on the sale of a Sleep Inn in Omaha, Nebraska, to an unaffiliated buyer for a gross sales price of $2.9 million, with no gain on the sale and reduction of the Company’s mortgage debt of $2.5 million. The operating results of this hotel are included in earnings from continuing operations.
Sold Hotels - Discontinued Operations
The operating results of the six hotels below which were sold are included in gain/loss from discontinued operations, net of tax as shown in the condensed consolidated statement of operations for the three and six months ended June 30, 2015 and 2014.
On January 15, 2015 the Company closed on the sale of a Super 8 in West Plains, Missouri to an unaffiliated buyer for a gross sales price of $1.5 million, with a gain on sale of $0.9 million and reduction of the Company’s mortgage debt of $1.4 million.
On January 29, 2015 the Company closed on the sale of a Super 8 in Green Bay, Wisconsin, to an unaffiliated buyer for a gross sales price of $2.2 million, with no gain on the sale and reduction of the Company’s mortgage debt of $1.5 million.
On March 16, 2015 the Company closed on the sale of a Super 8 in Columbus, Georgia, to an unaffiliated buyer for a gross sales price of $0.9 million, with no gain on the sale and reduction of the Company’s mortgage debt of $0.9 million.
On April 1, 2015, the Company closed on the sale of two Savannah Suites hotels to an unaffiliated buyer. The hotel in Chamblee, Georgia sold for $4.4 million, and the hotel in Augusta, Georgia sold for $3.4 million, with no gain on either sale. Partial proceeds of $4.1 million were applied to the associated debt with GE, with the remainder going to cash.
On April 30, 2015, the Company closed on the sale of a Super 8 in Batesville, Arkansas, to an unaffiliated buyer for a gross sales price of $1.5 million, with a gain on sale of $0.7 million. Partial proceeds of $1.3 million were applied to the revolving credit facility with Great Western Bank, reducing the outstanding revolver balance by $1.3 million and the revolver limit from $12.5 million to $11.2 million. The remainder of the proceeds went to cash.
11
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Hotels Held For Sale
The two hotels classified as held for sale in the first quarter of 2015 are the Comfort Inn and the Days Inn in Alexandria, Virginia. These hotels represent a significant disposition; therefore, their operating results are included below.
The operating results of the Comfort Inn and Days Inn hotels are $0.3 million and $(0.3) million for the three months ended June 30, 2015 and $0.1 million and $0.1 million for June 30, 2014. For the six months ending June 30, 2015, operating results for the Comfort Inn and Days Inn hotels are $0.2 million and $(1.2) million, respectively. For the same period of 2014, the Comfort Inn and Days Inn had operating results of $(0.1) million and $(0.1) million. The Days Inn operating results for the six months ending June 30, 2015 include an impairment expense of $1.3 million, of which $0.9 million was recognized as of March 31, 2015 upon the hotel’s classification as held for sale. Earnings attributable to noncontrolling interest from the two hotels for the three months ended June 30, 2015 and 2014 were approximately $(3,000) and $0, respectively. Earnings attributable to noncontrolling interest for the six months ending June 30, 2015 and 2014 were approximately $1,000 and $0, respectively.
A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the Internal Revenue Service would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.
Assets held for sale consisted of the following as of June 30, 2015 and December 31, 2014:
2015 |
2014 |
||||||||||||||||
Continuing Operations |
Discontinued Operations |
Total |
Continuing Operations |
Discontinued Operations |
Total |
||||||||||||
Land |
$ |
8,263 |
$ |
1,009 |
$ |
9,272 |
$ |
9,149 |
$ |
3,791 |
$ |
12,940 | |||||
Acquired below market lease intangibles |
0 | 883 | 883 | 0 | 883 | 883 | |||||||||||
Buildings, improvements, vehicles |
48,311 | 5,327 | 53,638 | 53,536 | 15,918 | 69,454 | |||||||||||
Furniture and Equipment |
10,651 | 1,095 | 11,746 | 11,183 | 3,182 | 14,365 | |||||||||||
Construction-in-progress |
13 | 0 | 13 | 320 | (1) | 319 | |||||||||||
Assets Held For Sale |
$ |
67,238 |
$ |
8,314 |
$ |
75,552 |
$ |
74,188 |
$ |
23,773 |
$ |
97,961 | |||||
Accumulated depreciation |
(23,391) | (1,133) | (24,524) | (23,239) | (5,087) | (28,326) | |||||||||||
Investment in hotel properties, net |
$ |
43,847 |
$ |
7,181 |
$ |
51,028 |
$ |
50,949 |
$ |
18,686 |
$ |
69,635 | |||||
The following table sets forth the components of discontinued operations for the three and six months ended June 30, 2015 and 2014. The table includes the results of operations for hotels sold and classified in discontinued operations in 2014 and the first two quarters of 2015 (which were held for sale at December 31, 2014).
12
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Three Months Ended |
Six Months Ended |
|||||||||||
June 30, |
June 30, |
|||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Revenues |
$ |
962 |
$ |
4,739 |
$ |
2,714 |
$ |
8,987 | ||||
Hotel and property operations expenses |
(656) | (3,484) | (1,907) | (7,104) | ||||||||
Interest expense |
(54) | (348) | (200) | (799) | ||||||||
Depreciation expense |
0 | (38) | 0 | (112) | ||||||||
Net gain on disposition of assets |
725 | 466 | 1,662 | 635 | ||||||||
Impairment (loss) recovery |
75 | (506) | 120 | (596) | ||||||||
Gain from discontinued operations, net of tax |
$ |
1,052 |
$ |
829 |
$ |
2,389 |
$ |
1,011 | ||||
Loss attributable to noncontrolling interest |
145 | 0 | (2) | 0 | ||||||||
Net earnings attributable to controlling interests |
$ |
1,197 |
$ |
829 |
$ |
2,387 |
$ |
1,011 | ||||
Capital Expenditures |
$ |
17 |
$ |
166 |
$ |
44 |
$ |
259 | ||||
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of dilutive potential common shares outstanding during the period, if any. The effects include adjustments to the numerator for any change in fair market value attributed to the derivative liabilities (related to the Series C convertible preferred stock and warrants, and the convertible loan) during the period the convertible securities are dilutive. The computation of basic and diluted earnings per common share is presented below:
13
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Three months ended |
Six months ended |
|||||||||||
(dollars in thousands, except per share data) |
June 30, |
June 30, |
||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Basic and Diluted Earnings per Share |
||||||||||||
Calculation: * |
||||||||||||
Numerator: basic and diluted |
||||||||||||
Net loss attributable to common shareholders: |
||||||||||||
Continuing operations |
$ |
(7,525) |
$ |
(12,129) |
$ |
(6,626) |
$ |
(13,661) | ||||
Discontinued operations |
1,008 | 828 | 2,387 | 1,010 | ||||||||
Net loss attributable to common shareholders - total basic and diluted |
$ |
(6,517) |
$ |
(11,301) |
$ |
(4,239) |
$ |
(12,651) | ||||
Weighted average number of common shares - basic and diluted |
4,925,714 | 3,287,401 | 4,836,856 | 3,091,713 | ||||||||
Basic and Diluted Earnings |
||||||||||||
Per Common Share: |
||||||||||||
Net earnings (loss) attributable to common shareholders |
||||||||||||
per weighted average common share: |
||||||||||||
Continuing operations - basic and diluted |
$ |
(1.52) |
$ |
(3.69) |
$ |
(1.37) |
$ |
(4.42) | ||||
Discontinued operations - basic and diluted |
0.20 | 0.25 | 0.49 | 0.33 | ||||||||
Total - Basic and Diluted EPS |
$ |
(1.32) |
$ |
(3.44) |
$ |
(0.88) |
$ |
(4.09) | ||||
* The loss (earnings) attributable to noncontrolling interest is allocated between continuing and discontinued operations for the purpose of the EPS calculation. Long Term Incentive Plan (“LTIP”) and common operating units of SLP have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact.
Potentially dilutive common shares, if any, have been excluded from the denominator if they are antidilutive to net loss attributable to common shareholders. The number of weighted average shares of common stock for the three and six months ended June 30, 2015 is significantly higher than the outstanding shares at June 30, 2014 due to the issuance of common stock from the rights offering during the last month of the second quarter of 2014.
The following table summarizes the weighted average of potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:
14
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Three months ended |
Six months ended |
||||||
June 30, |
June 30, |
||||||
2015 |
2014 |
2015 |
2014 |
||||
Outstanding stock options |
8,750 | 17,563 | 8,750 | 17,563 | |||
Unvested stock awards outstanding |
1,284 | 11,049 | 225 | 1,555 | |||
Warrants - Employees |
430,000 | 0 | 287,459 | 0 | |||
Common operating units * |
12,126 | 12,126 | 12,126 | 12,126 | |||
LTIP Units * |
657,894 | 0 | 439,809 | 0 | |||
Warrants |
3,750,000 | 3,750,000 | 3,750,000 | 3,750,000 | |||
Series C preferred stock |
18,750,000 | 7,046,703 | 18,750,000 | 5,407,459 | |||
Convertible debt |
0 | 975,275 | 0 | 1,111,878 | |||
Total potentially dilutive securities excluded from the denominator |
23,610,054 | 11,812,716 | 23,248,369 | 10,300,581 | |||
* LTIP and common operating units of SLP have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact.
Debt Financing
A summary of the Company’s long term debt as of June 30, 2015 is as follows (dollars in thousands):
15
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Interest |
||||||
Fixed Rate Debt |
Balance |
Rate |
Maturity |
|||
Lender |
||||||
GE Capital Franchise Finance LLC |
$ |
3,507 | 7.17 |
% |
12/2015 |
|
Citigroup Global Markets Realty Corp |
11,652 | 5.97 |
% |
11/2015 |
||
GE Capital Franchise Finance LLC |
3,960 | 4.75 |
% |
2/2018 |
||
Frontier Bank |
8,300 | 6.00 |
% |
5/2016 |
||
GE Capital Franchise Finance LLC |
11,080 | 7.17 |
% |
2/2017 |
||
Cantor |
5,882 | 4.25 |
% |
11/2017 |
||
Morgan Stanley |
28,091 | 5.83 |
% |
12/2017 |
||
Total fixed rate debt |
$ |
72,472 | ||||
Variable Rate Debt |
||||||
Great Western Bank |
$ |
6,448 | 4.25 |
% |
6/2018 |
|
Total variable rate debt |
$ |
6,448 | ||||
Total Debt |
$ |
78,920 | ||||
Less: debt associated with hotel properties held for sale |
27,999 | |||||
Total long-term debt |
$ |
50,921 | ||||
On January 15, 2015, the Company sold a Super 8 in West Plains, Missouri (49 rooms) for gross sale proceeds of $1.5 million. Net proceeds were used to pay off the associated loan with Great Western Bank.
On January 29, 2015, the Company sold a Super 8 in Green Bay, Wisconsin (83 rooms) for gross sale proceeds of $2.2 million. Net proceeds were used to pay off the associated debt with GE and reduce the balance of the revolving credit facility with Great Western Bank.
On February 17, 2015, the maturity date of the Company’s $7.8 million GE loan was extended to December 15, 2015. A required principal payment of $0.3 million was paid on the loan in February 2015.
On March 16, 2015, the Company sold a Super 8 in Columbus, Georgia (74 rooms) for gross sale proceeds of $0.9 million. Net proceeds were used to pay off the associated loan with GE.
On March 19, 2015, the Company sold a Sleep Inn in Omaha, Nebraska (90 rooms) for gross sale proceeds of $2.9 million. Net proceeds were used to pay off the associated loan with Elkhorn Valley Bank.
On April 1, 2015, the Company sold a Savannah Suites in Chamblee, Georgia (120 rooms) for gross sale proceeds of $4.4 million, and a Savannah Suites in Augusta, Georgia (172 rooms) for gross sale proceeds of $3.4 million. Partial proceeds of $4.1 million were applied to the associated debt with GE, with the remainder going to cash.
On April 30, 2015, the Company sold a Super 8 in Batesville, Arkansas (49 rooms) for gross sale proceeds of $1.5 million. Partial proceeds of $1.3 million were applied to the revolving credit facility with Great Western
16
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Bank, reducing the outstanding revolver balance by $1.3 million, and the revolver limit from $12.5 million to $11.2 million. The remainder of the proceeds went to cash.
On May 28, 2015, the $8.3 million mortgage loan previously held by Middle Patent Capital, LLC was, through the Company’s efforts, sold to Frontier Bank. The interest rate was reduced from 12.5 percent to 6.0 percent and the maturity date was extended from June 6, 2015 to May 1, 2016.
On June 5, 2015, the Company amended its revolving credit facility with Great Western Bank to, among other things, extend the maturity date to June 30, 2018, reduce the interest rate from 4.5 percent annually to the prime rate plus 1.0 percent annually (currently 4.25 percent annually) and remove the 2.0 percent prepayment penalty required with refinancing with another financial institution.
At June 30, 2015, the Company had long-term debt of $50.9 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 1.9 years and a weighted average interest rate of 5.9%. The weighted average fixed rate was 5.9%. None of the held for use debt has a variable rate. Debt is classified as held for use if the properties collateralizing it are not held for sale. Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below as due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2015 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):
Held For Sale |
Held For Use |
TOTAL |
|||||||
Remainder of 2015 |
$ |
27,999 |
$ |
11,077 |
$ |
39,076 | |||
2016 |
0 | 2,144 | 2,144 | ||||||
2017 |
0 | 37,700 | 37,700 | ||||||
2018 |
0 | 0 | 0 | ||||||
2019 |
0 | 0 | 0 | ||||||
Thereafter |
0 | 0 | 0 | ||||||
$ |
27,999 |
$ |
50,921 |
$ |
78,920 | ||||
At June 30, 2015, the Company had $39.1 million of principal due in 2015. Of this amount, $16.2 million of principal is due in 2015 pursuant to the notes and mortgages evidencing such debt. The remaining $22.9 million is associated with loans on assets held for sale and is not contractually due in 2015 unless the related assets are sold. The maturities comprising the $16.2 million consist of:
· |
a $3.5 million balance on a mortgage loan with GE Capital Franchise Finance LLC (“GE”); |
· |
an $11.7 million balance on a mortgage loan with Citigroup Global Markets Realty Corp.; and |
· |
approximately $1.0 million of principal amortization on mortgage loans. |
All of the GE loans are cross collateralized and the eleven assets securing the loans outstanding at June 30, 2015 are treated as a pool. As of June 30, 2015, the Company had seven GE hotel assets classified as held for sale. The required principal payment upon the sale of these seven hotels is approximately $15.2 million. Upon sale the Company believes the net proceeds from the sale of these hotels will be sufficient to satisfy the debt with GE maturing in 2015. In July of 2015, after the close of the second quarter of 2015, the Company sold one of the GE encumbered assets that were held for sale and $1.3 million of the sales proceeds were applied to the balance of the
17
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
$3.5 million loan, reducing the loan to $2.2 million. If the remaining hotels are not sold, the Company will attempt to refinance the debt with GE.
The $8.3 million loan with Middle Patent Capital, LLC, which was due in June of 2015 was, through the Company’s efforts, sold to Frontier Bank on May 28, 2015. In connection with the sale, the maturity date was extended to May 1, 2016. The two properties securing the loan were sold subsequent to June 30, 2015, and the loan was paid in full.
The Company’s plan is to refinance the other debt maturing in 2015 with current or future lenders.
We are required to comply with certain financial covenants for some of our lenders. As of June 30, 2015, we were in compliance with our financial covenants. As a result, we are not in default of any of our loans.
Stock-Based Compensation
Non Vested Share Awards
On July 15, 2013, the Company granted share awards and stock options to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The share awards total 3,125 authorized but previously unissued shares of the Company’s common stock with a grant date price of $7.28. The shares vest based on continued employment of the executive, and the restrictions lapse in 33.3% increments on each of the first, second and third anniversaries of issuance. There were 2,084 and 3,125 unvested awards as of June 30, 2015 and 2014, respectively. The stock options entitle the executive to purchase 3,125 authorized but previously unissued shares of the Company’s common stock at an exercise price of $8.08 per share. The stock options have a four-year term and vest in equal one-third increments on each of the first, second and third anniversaries of issuance provided that the executive is employed by the Company on each such vesting date. The stock options and share awards will become fully vested in the event of a change of control of the company or upon the executive’s death or disability.
On March 2, 2015, the Company granted a warrant to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The warrant entitles the executive to purchase a total of 657,894 authorized but previously unissued shares of the Company’s common stock with a grant date price at (i) $1.52 per share (the adjusted closing bid price of the common stock on NASDAQ on March 2, 2015) if at least one-third but not more than one-half of the shares are purchased on or prior to March 17, 2015, and (ii) $1.92 per share for shares purchased after. The warrant has a three-year term. The executive officer exercised the warrant in part to purchase 227,894 shares on March 11, 2015 at the price of $1.52 per share. The warrant remains exercisable for 430,000 shares at an exercise price of $1.92 per share. As of June 30, 2015, the total unrecognized compensation cost related to the warrants awarded on March 2, 2015 was $263,000, which is expected to be recognized over the next 32 months.
The Company records compensation expense for warrants based on the estimated fair value of the warrants on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data among other factors to estimate the expected price volatility, the expected warrant life, the dividend rate and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the warrant. The following table summarizes the estimates used in the Black-Scholes option-pricing model related to the warrant grant and exercise prices of $1.52 and $1.92 grants:
18
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
$1.52 Grant |
$1.92 Grant |
|||||
March 2, 2015 |
March 2, 2015 |
|||||
Volatility |
53.10 |
% |
78.60 |
% |
||
Expected dividend yield |
0.00 |
% |
0.00 |
% |
||
Expected term (in days/years) |
15 |
days |
3.00 |
years |
||
Risk free interest rate |
0.02 |
% |
1.06 |
% |
||
On March 2, 2015, the Company granted an equity award of 5,263,152 long-term incentive plan units (“LTIP Units”) to an executive officer, representing profit interests in the Company’s operating partnership. The LTIP Units are earned on one-third increments upon the Company’s common stock achieving price per share milestones of $3.50, $4.50 and $5.50 respectively. Earned LTIP Units vest in March 2018, or earlier upon a change in control of the Company, and can be redeemed at the rate of one share of common stock for each eight earned LTIP Units for up to 657,894 of common shares.
As of June 30, 2015, the total unrecognized compensation cost related to the LTIP Units was $455,000, which is expected to be recognized over the next 32 months.
The Company records compensation expense for the LTIP based on the estimated fair value of the LTIP on the date of grant using the Monte Carlo simulation model. The Company uses historical data among other factors to estimate the expected price volatility, the expected LTIP life, volume weighted average price and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the LTIP. The following table summarizes the estimates used in the Monte Carlo option-pricing model related to the LTIP grant:
Grant Date |
||||
March 2, 2015 |
||||
Volatility |
75.5 |
% |
||
Weighted Average Price |
$ |
1.53 | ||
Expected term (in years) |
3.0 | |||
Risk free interest rate |
1.06 |
% |
Investment Committee Share Compensation
The independent directors serving as members of the Investment Committee receive their monthly Investment Committee fees in the form of shares of the Company’s common stock issued quarterly under the 2006 Stock Plan, priced as the average of the closing price of the stock for the first 20 trading days for the calendar year. The number of shares issued to the committee members for the three months ended June 30, 2015 and 2014 were 3,950 and 2,988, respectively, and 6,938 and 3,735 shares were issued for the six months ended June 30, 2015 and 2014, respectively.
Share-Based Compensation Expense
The expense recognized in the condensed consolidated financial statements for the three months ended June 30, 2015 and 2014 for share-based compensation related to employees and directors was approximately $74,000 and $11,000, respectively. The expense recognized for the six months ended June 30, 2015 and 2014 was approximately $123,000 and $20,000, respectively.
19
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Impairment
Held for use
In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall – Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.
Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:
· |
Holding periods range from three to five years for non-core assets, and ten years for those assets considered as core. |
· |
Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth rates on cash flows as part of its step one analysis. |
· |
A revenue multiplier for the terminal value based on an average of historical sales from leading industry brokers of like properties was applied according to the assigned holding period. |
During the three and six months ended June 30, 2015 no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. The Company did record $0.1 million of recovery of previously recorded impairment loss on one hotel that was moved from held for sale to held for use at the end of the first quarter of 2014.
Held for sale
Level 3 inputs were used to determine impairment losses on properties held for sale. At June 30, 2015, there were 18 hotel properties that met the criteria for classification as held for sale. In accordance with ASU 2014-08 Presentation of Financial Statements and Property, Plant and Equipment Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity, in the Consolidated Statements of Operations, 15 of the held for sale hotels are reflected in continuing operations and three of the hotels are reflected in discontinued operations. The amount of impairment and recovery of previously recorded impairment recorded in the quarters ended June 30, 2015 and 2014 on properties classified as held for sale and sold is shown in the table below (in thousands):
20
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
For the three months ending June 30, |
For the three months ending June 30, |
|||||||||
2015 |
2014 |
|||||||||
Number of hotels |
Impairment (loss) recovery |
Number of hotels |
Impairment (loss) recovery |
|||||||
Continuing Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 0 | 0 | ||||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Sold Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Continuing Operations |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Discontinued Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 6 | (1,397) | ||||||
Recovery of Impairment |
2 | 75 | 5 | 891 | ||||||
Subtotal Sold Hotels |
2 |
$ |
75 | 11 |
$ |
(506) | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Discontinued Operations |
2 |
$ |
75 | 11 |
$ |
(506) | ||||
Total Net Impairment: |
7 |
$ |
(2,978) | 11 |
$ |
(506) | ||||
21
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
For the six months ending June 30, |
For the six months ending June 30, |
|||||||||
2015 |
2014 |
|||||||||
Number of hotels |
Impairment (loss) recovery |
Number of hotels |
Impairment (loss) recovery |
|||||||
Continuing Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
5 |
$ |
(3,915) | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 1 | 119 | ||||||
Subtotal Held for Sale Hotels |
5 |
$ |
(3,915) | 1 |
$ |
119 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 0 | 0 | ||||||
Recovery of Impairment |
1 | 85 | 0 | 0 | ||||||
Subtotal Sold Hotels |
1 |
$ |
85 | 0 |
$ |
0 | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Continuing Operations |
6 |
$ |
(3,830) | 1 |
$ |
119 | ||||
Discontinued Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
1 | (117) | 9 | (1,430) | ||||||
Recovery of Impairment |
3 | 237 | 4 | 834 | ||||||
Subtotal Sold Hotels |
4 |
$ |
120 | 13 |
$ |
(596) | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Discontinued Operations |
4 |
$ |
120 | 13 |
$ |
(596) | ||||
Total Net Impairment: |
10 |
$ |
(3,710) | 14 |
$ |
(477) | ||||
In accordance with ASC 360-10-35 Property Plant and Equipment-Overall-Subsequent Measurement, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.
Income Taxes
We have provided a full valuation allowance against our deferred tax asset at June 30, 2015 and 2014, that results in no net deferred tax asset at June 30, 2015 and 2014 due to the uncertainty of realization (because of historical operating losses). The TRS Lessee has estimated its income tax benefit using a combined federal and state rate of approximately 38%. The TRS net operating loss carryforward from June 30, 2015 as determined for federal
22
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
income tax purposes was approximately $19.2 million. The availability of such loss carryforward will begin to expire in 2022 through 2034.
The Company is completing an evaluation of the impact, of its recently completed subscription rights offering on its ability to fully utilize all of the net operating loss carryforwards. The Company believes the results of this analysis will likely indicate that a change in control event (as defined for tax purposes) occurred, and the Company will be limited in the use of its net operating loss carryforwards.
Noncontrolling Interest of Common Units in SLP
Noncontrolling interest in SLP represents the common units’ (“common units”) proportionate share of the equity in the operating partnership. The common units represent both the common operating units and the LTIP units. As of June 30, 2015 and 2014, the limited partners of SLP held 97,008 common operating units, representing approximately 0.1% of the partnership interest in SLP. In March 2015, the Company issued 5,263,152 of LTIP Units, which represent approximately 7.0% of the partnership interest in SLP.
Equity Reconciliation of Parent and Noncontrolling Interest
(dollars in thousands)
Common |
||
Noncontrolling |
||
Interest |
||
Balance at December 31, 2014 |
$ |
90 |
Common operating units |
(3) | |
Balance at June 30, 2015 |
$ |
87 |
(dollars in thousands) |
||||||||||||||||||||||||
Series A preferred stock par value |
Series C convertible stock par value |
Common stock par value |
Additional paid-in capital |
Accumulated deficit |
Net shareholders' equity |
Noncontrolling interest in consolidated partnerships |
Total equity |
|||||||||||||||||
Balance at December 31, 2014 |
$ |
8 |
$ |
30 |
$ |
47 |
$ |
137,900 |
$ |
(118,983) |
$ |
19,002 |
$ |
90 |
$ |
19,092 | ||||||||
Stock-based compensation |
0 | 0 | 0 | 123 | 0 | 123 | 0 | 123 | ||||||||||||||||
Issuance of common stock |
0 | 0 | 2 | 344 | 0 | 346 | 0 | 346 | ||||||||||||||||
Net loss |
0 | 0 | 0 | 0 | (2,446) | (2,446) | (3) | (2,449) | ||||||||||||||||
Balance at June 30, 2015 |
$ |
8 |
$ |
30 |
$ |
49 |
$ |
138,367 |
$ |
(121,429) |
$ |
17,025 |
$ |
87 |
$ |
17,112 |
23
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Subscription Rights Offering
The Company concluded a subscription rights offering on June 6, 2014. Each subscription right entitled its holder to purchase one share of common stock of the Company for $1.60 per share. Subscription rights to purchase 1,787,204 shares of common stock were exercised for $2,859,526, of which $2,000,000 was paid by conversion of a loan owed by the Company to RES. The Company incurred issuance costs of $217,852.
Series B Redeemable Preferred Stock
At June 30, 2015 there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of $25.00 per share.
Dividends on the Series B preferred stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share. Dividends on the Series B preferred stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared and whether or not such dividends are prohibited by agreement. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series B preferred stock to preserve capital and improve liquidity. Accumulated but unpaid dividends on the Series B preferred stock will not bear interest. Accumulated but unpaid dividends are $1.5 million or $4.375 per share as of June 30, 2015. These dividends are not reflected as an obligation on the balance sheet. Holders of the Series B preferred stock generally have no voting rights. However, if the dividends on the Series B preferred stock are in arrears for six or more quarterly periods (whether or not consecutive), holders of the Series B preferred stock, voting together as a single class with all series of preferred stock for which like voting rights are exercisable, will be entitled to elect two directors. At the Company’s annual meeting on June 10, 2015, holders of Series A preferred stock and Series B preferred stock, voting as one class, elected two directors. The terms of such directors will end up to twelve months after all dividend arrearages have been paid.
The Series B preferred stock will, with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, rank: (a) senior to the Company’s common stock, (b) senior to all classes or series of preferred stock issued by the Company and ranking junior to the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up, (c) on a parity with the Company’s Series A preferred stock and Series C convertible preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up and (d) junior to all of the Company’s existing and future indebtedness.
The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series B preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption (except as described below).
The Series B preferred stock was not redeemable prior to June 3, 2013, except in certain limited circumstances relating to the maintenance of the Company’s ability to qualify as a REIT as provided in the Company’s articles of incorporation or a change of control (as defined in the Company’s amendment to its articles of incorporation establishing the Series B preferred stock). The Company may redeem the Series B preferred stock, in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Company’s Series B preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all
24
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
accrued and unpaid dividends. At June 30, 2015, no events have occurred that would lead the Company to believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is probable.
Series A Preferred Stock
On December 30, 2005, the Company offered and sold 1,521,258 shares of 8% Series A preferred stock. At June 30, 2015, 803,270 shares of Series A preferred stock remained outstanding. Dividends on the Series A preferred stock are cumulative and are payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. The Company may redeem the Series A preferred stock, in whole or in part, at any time or from time to time for cash at a redemption price of $10.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series A preferred stock to preserve capital and improve liquidity. Unpaid dividends will accumulate and bear additional dividends at 8%, compounded monthly. Accumulated but unpaid dividends are $1.1 million, or $1.35 per share, as of June 30, 2015. These dividends are not reflected as an obligation on the balance sheet. Holders of the Series A preferred stock generally have no voting rights. However, if dividends on the Series A preferred stock are in arrears for six consecutive months or nine months (whether or not consecutive) in any twelve-month period, holders of the Series A preferred stock, voting together as a single class with all series of preferred stock for which like voting rights are exercisable, will be entitled to elect two directors. At the Company’s annual meeting on June 10, 2015, holders of the Series A preferred stock and Series B preferred stock, voting as one class, elected two directors. The terms of such directors will end up to twelve months after all dividend arrearages have been paid.
The Series A preferred stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, ranks senior to all classes or series of the Company’s common stock, senior or on parity with all other classes or series of preferred stock and junior to all of the Company’s existing and future indebtedness. Upon liquidation all Series A preferred stock will be entitled to $10.00 per share plus accumulated but undeclared dividends. The Company will not pay any distribution, or set aside any funds for the payment of distributions, on its common shares unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The outstanding preferred shares do not have any maturity date, and are not subject to mandatory redemption.
The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series A preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption.
Series C Convertible Preferred Stock and Warrants
The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Series C convertible preferred stock and warrants under a private transaction to RES. On January 31, 2012 at a special meeting, the shareholders of the Company, by the requisite vote, approved the issuance and sale of up to 3,000,000 shares of the Series C convertible preferred stock, shares of common stock which may be issued upon conversion of the Series C convertible preferred stock, and warrants to purchase additional shares of common stock, to RES pursuant to the Purchase Agreement. In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to RES of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase shares of common stock.
Each of the 3,000,000 shares of Series C convertible preferred stock is convertible, in whole or in part, at RES’s option, at any time, but subject to RES’s beneficial ownership limitation, into the number of shares of
25
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
common stock equal to the $10.00 per share liquidation preference, divided by the conversion price then in effect. As a result of the subscription rights offering concluded on June 6, 2014, the conversion price was adjusted downward from $8.00 to $1.60, equal to the public offering price of our common stock in the subscription rights offering. Pursuant to the terms of warrants held by RES to purchase up to 3,750,000 shares of common stock, the exercise price of the warrants was adjusted downward from $9.60 to $1.92 per share, equal to 120% of the adjusted conversion price of the Series C convertible preferred stock.
Each share of Series C convertible preferred stock is entitled to a dividend of $0.625 per year payable in equal quarterly dividends. Each share of Series C convertible preferred stock has a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and unpaid dividends. With respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, the Series C convertible preferred stock ranks: (a) on a parity with the Series A preferred stock and Series B preferred stock and other future series of preferred stock designated to rank on a parity, and (b) senior to the common stock and other future series of preferred stock designated to rank junior, and (c) junior to the Company’s existing and future indebtedness. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series C cumulative preferred stock to preserve capital and improve liquidity. Unpaid dividends will accumulate and bear additional dividends at 6.25%, compounded quarterly. Accumulated but unpaid dividends are $3.4 million, or $1.15 per share, as of June 30, 2015. These dividends are not reflected as an obligation on the balance sheet.
The Series C convertible preferred stock, at the option of the holder, is convertible at any time into common stock at a conversion price of $1.60 for each share of common stock, which is equal to the rate of 6.25 shares of common stock for each share of Series C convertible preferred stock. A holder of Series C convertible preferred stock will not have conversion rights to the extent the conversion would cause the holder and its affiliates to beneficially own more than 34% of voting stock (the “Beneficial Ownership Limitation”). “Voting stock” means capital stock having the power to vote generally for the election of directors of the Company. A holder of warrants would similarly not have exercise rights to the extent the exercise of a warrant would cause the holder and its affiliates to own capital stock in an amount exceeding the Beneficial Ownership Limitation.
The Series C convertible preferred stock will vote with the common stock as one class, subject to certain voting limitations. For any vote, the voting power of the Series C convertible preferred stock will be equal to the lesser of: (a) 0.78625 vote per share or (b) an amount of votes per share such that the vote of all shares of Series C convertible preferred stock in the aggregate equal 34% of the combined voting power of all the Company voting stock, minus an amount equal to the number of votes represented by the other shares of voting stock beneficially owned by RES and its affiliates.
As long as RES has the right to designate two or more directors to the Company Board of Directors pursuant to the Directors Designation Agreement, the following requires the approval of RES and IRSA Inversiones y Representaciones Sociedad Anonima (“IRSA”):
· |
the merger, consolidation, liquidation or sale of substantially all of the assets of the Company; |
· |
the sale by the Company of common stock or securities convertible into common stock equal to 20% or more of the outstanding common stock or voting stock; or |
· |
any Company transaction of more than $120,000 in which any of its directors or executive officers or any member of their immediate family will have a material interest, exclusive of employment compensation and interests arising solely from the ownership of the Company equity securities if all holders of that class of equity securities receive the same benefit on a pro rata basis. |
Commitments and Contingencies
Litigation
26
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal proceedings should not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Liquidity
The following disclosure and analysis is pursuant to ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires the Company to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. To satisfy the requirements of the new standard, the Company’s evaluation considered a 13 month period beginning June 30, 2015.
The Company performs a liquidity analysis to determine if expected hotel operating cash flow is sufficient to cover all of the Company’s obligations as they become due, in this case, beginning on June 30, 2015 and ending on July 31, 2016. Our initial analysis considered only available cash and operating cash inflows without consideration of cash inflows from transactions that are in process, but were not yet finalized, such as proceeds on asset dispositions that are not yet closed or proceeds from financing transactions.
The Company believes the cash and available revolver of $4.1 million and $4.8 million, respectively, at June 30, 2015, cash generated from the operations of the hotels as well as the approximate $10.6 million of net cash proceeds from the sale of three hotels in July of 2015 will be sufficient to cover $5.7 million of corporate overhead, $0.6 million of recurring monthly debt service, $5.2 million of anticipated capital improvements, as well as the $13.9 million of remaining loans maturing in 2015 (there are no loans maturing in 2016).
Although, as noted above, the funds are available to satisfy the maturing debt, management plans to use the available cash after operational needs to provide the equity to transition to upper midscale, upscale and upper upscale hotels and to satisfy the loan obligations through refinancing and the use of a portion of the excess proceeds from asset sales. The Company has entered into agreements to purchase three hotels for $42.5 million and plans to pursue other acquisitions funded with excess proceeds from future hotel sales and other funding sources. The execution of the Company’s long term plan is dependent upon future hotel sales and the availability to refinance existing maturing debt which cannot be assured.
We are disposing of assets that are not generating yields consistent with our investment objectives or reinvestment alternatives and we are targeting acquisitions that we believe will be accretive. In the second quarter of 2015 we accelerated our divestiture program and added 11 hotels to our held for sale listing and we entered into three hotel purchase agreements in furtherance of our long term plan to transition to upper midscale, upscale and upper upscale hotels.
Maturing debt
At December 31, 2014 we had $46.9 million of debt maturing in 2015 (no debt matures in 2016). As of June 30, 2015, we have reduced that obligation to $15.2 million through refinancing, amortization and repayment using the proceeds from hotel sales. Since the end of the second quarter of 2015 through the date of our filing the obligation was further reduced to $13.9 million; the company applied an additional $1.3 million to debt using a portion of the proceeds from the sale of one of our GE encumbered hotel assets. The $13.9 million of maturing debt consists of the following:
27
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
· |
a $2.2 million balance on a mortgage loan with GE Capital Franchise Finance LLC (“GE”) maturing December 15, 2015; and |
· |
an $11.7 million balance on a mortgage loan with Citigroup Global Markets Realty Corp. maturing November 11, 2015. |
The Company anticipates that the net proceeds on the sale of GE encumbered assets classified as Held for Sale will be sufficient to repay the maturing GE loan. The Company plans to meet the obligations at maturity on the Citigroup Global Markets Realty Corp. mortgage loan by using a combination of refinancing and the proceeds from dispositions of one hotel held for sale. Over the past two years the lending market has experienced increased liquidity and a relaxing of underwriting standards and as such, we believe we will be able to refinance on similar or perhaps more favorable terms. However, notwithstanding our perception that the lending market has improved somewhat, we may not be successful in our efforts to refinance or repay our maturing debt. As of June 30, 2015 we are not in default under the terms of any of our loans. However on November 12, 2014, the Company received a waiver from Great Western Bank for non-compliance with respect to the consolidated leverage ratio, and on November 20, 2014 the credit facilities were amended to modify the consolidated leverage ratio. The Company believes that we will be compliant under the terms of all of our loans in 2015.
Disposition plan
Our ability to dispose of assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. At June 30, 2015, we have 18 hotels held for sale, in July 2015 we sold three of these hotels generating an estimated $10.6 million of cash, leaving 15 held for sale hotels which, if sold, we believe will generate $12.4 million in net proceeds after debt repayment available for reinvestment. Over the last five years, we have sold 64 hotels. However, with respect to future hotel sales, we cannot predict:
· |
whether we will be able to find buyers for identified assets at prices and /or other terms acceptable to us: |
· |
whether potential buyers will be able to secure financings: and |
· |
the length of time needed to find a buyer and to close the sale of a property. |
The Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use $25 million of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions. In February 2012, the Company issued 3.0 million shares of Series C convertible preferred stock to Real Estate Strategies, L.P. which provided $28.6 million of net proceeds. As of June 30, 2015, we have used $9.1 million for debt repayment and $3.6 million for operational funds from the proceeds committed to hospitality acquisitions. There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions. The Company is obligated to replace these funds promptly as it has the ability to do so. The Company is exploring opportunities to satisfy its long term capital needs as well as replenish the acquisition fund. There can be no assurance that the Company will be able to obtain the funding to replace these funds; however, the Company believes the growth of the Company is in the best interest of all shareholders.
The Company did not declare a common stock dividend during the first two quarters of 2015 or the years 2014, 2013 or 2012. In December 2013, the Company announced the suspension of the regular dividends on its outstanding preferred stock to preserve capital and improve liquidity. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy.
Possible sources of liquidity to fund the longer-term liquidity needs, pay the preferred dividends, and satisfy the commitment to RES, include additional secured or unsecured debt financings, and /or proceeds from public or private issuances of debt or equity securities.
28
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
The Company has had recurring losses from operations and had a substantial amount of debt maturing in 2015 for which the Company did not have committed funding sources. Significant progress has been made bringing the total obligation down from $46.9 million at December 31, 2014 to $13.9 million as of July 30, 2015. In addition the Company liquidity has improved significantly. The execution of the Company’s long term plan, as described above, is dependent upon future hotel sales and the ability to refinance existing maturing debt which cannot be assured.
Our ability to continue as a going concern is dependent on many factors, including among other things, improvements in our operations results, our ability to sell properties and our ability to refinance maturing debt. While, as described above, the Company has plans to address these liquidity needs, there can be no assurance that the Company will be successful in those efforts. Consequently, these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements have been issued.
Subsequent Events
On July 1, 2015 the Company closed on the sale of a Days Inn in Ashland, Kentucky (63 rooms) to an unaffiliated buyer for a gross sales price of $2.2 million. Partial proceeds of $1.3 million were applied to the associated debt with GE, with the remainder going to cash.
On July 13, 2015, the Company closed on the sale of two hotels in Alexandria, Virginia with a combined gross sale price of $19.0 million. Partial net proceeds of $8.3 million were applied to the associated debt with Frontier Bank, and the remaining net proceeds went to cash.
On July 14, 2015, the Company entered into definitive agreements to acquire from unrelated parties three hotels containing an aggregate of 378 rooms for contractual purchase prices aggregating to approximately $42.5 million, subject to closing fees and adjustments. Deposits totaling $212,500 were made on the purchase price on July 15, 2015.
In connection with the purchase of the three hotels, as partial consideration for the purchase price of the hotels, Supertel Limited Partnership will issue, to each of the sellers, limited partnership units, with an aggregate dollar value of between $150,000 and $250,000.
On July 15, 2015, we changed our name from Supertel Hospitality, Inc. to Condor Hospitality Trust, Inc. The Company will continue to trade on the NASDAQ under its new ticker, CDOR.
On July 23, 2015, RES, IRSA and the Company executed a written agreement on the rights and obligations agreed to in connection with a potential exchange offer by the Company of common stock for the Series A preferred stock and Series B preferred stock and conversion of Series C convertible preferred stock. As described on the Company’s Form 8-K dated July 23, 2015, RES and the Company, among other things, have agreed that if the Company achieves an acceptance of a minimum of 80% of the shares of Series A preferred stock and the Series B preferred stock in an exchange offer then RES will convert a minimum of an equivalent percentage of Series C convertible preferred stock into common stock pursuant to the terms of the Series C convertible preferred stock, subject to RES retaining a minimum beneficial ownership of 1,000 shares of Series C convertible preferred stock.
On August 6, 2015, the Company sent a proxy statement to shareholders in connection with a special meeting of shareholders to be held on September 3, 2015. At the special meeting, shareholders will consider approval of proposals to permit the exchange of common stock for Series A preferred stock and Series B preferred stock in an exchange offer. The Company commenced the exchange offer on August 6, 2015 pursuant to which it
29
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. FINANCIAL STATEMENTS, CONTINUED:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2015 and 2014
(Unaudited)
could issue up to 11,664,615 shares of common stock in exchange for Series A preferred stock and Series B preferred stock, on terms and subject to conditions as set forth in the Company’s Offer to Exchange dated August 6, 2015 as filed with the SEC on that date. The Company cannot provide assurance that the exchange offer will be successful.
30
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Certain information both included and incorporated by reference in this management’s discussion and analysis and other sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.
Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions, generally, and the real estate market specifically; legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts); availability of capital; risks associated with debt financing, interest rates; competition; supply and demand for hotel rooms in our current and proposed market areas; and policies and guidelines applicable to real estate investment trusts and other risks and uncertainties described herein and in our filings with the SEC from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report that speak only as of the date of this report.
Following is management’s discussion and analysis of our operating results as well as liquidity and capital resources which should be read together with our financial statements and related notes contained in this report and with the financial statements and management’s discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Results for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be attained in the future.
References to “we”, “our”, “us”, “Company”, and “Condor Hospitality” refer to Condor Hospitality Trust, Inc., including as the context requires, its direct and indirect subsidiaries.
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make certain estimates and judgments that affect our financial position and results of operations. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2014.
Overview
We are a self-administered real estate investment trust, and through our subsidiaries, as of June 30, 2015 we owned 49 hotels in 19 states. Our hotels operate under several national and independent brands.
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 93% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership.
31
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
In order to maintain our REIT qualification under the tax laws, the hotels are leased to our wholly owned taxable REIT subsidiaries and independently managed. We refer to our entire portfolio as select service hotels, which we further describe as upscale, upper midscale, midscale, economy and extended stay hotels.
Hotel Dispositions
In accordance with FASB ASC 205-20 Presentation of Financial Statements – Discontinued Operations, the results of operations for 18 properties classified as held for sale at June 30, 2015 as well as all properties that have been sold during 2015 and prior years are included in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2015 and 2014. Additionally, in accordance with ASU 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, fifteen properties in continuing operations which are classified as held for sale at June 30, 2015 are also included in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2015 and 2014.
The assets held for sale at June 30, 2015 and 2014 are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of June 30, 2015 remain properly classified in accordance with ASC 205-20.
Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the carrying value and recorded an impairment charge. Impairment charges are discussed below under “Fair Value of Financial Instruments.”
Properties are classified as held for sale as the result of management’s strategy to reevaluate its hotels as well as the length of the period in which the company anticipates holding its properties based on new and more stringent criteria. These criteria include strategic review of debt service capability, estimated return on investment, and local market conditions.
Our held for use hotels reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria in ASC 205-20. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.
General
The discussion that follows is based primarily on the condensed consolidated financial statements of the three and six months ended June 30, 2015 and 2014, and should be read along with the condensed consolidated financial statements and notes.
The comparisons below reflect revenues and expenses of the company’s 49 and 63 hotels as of June 30, 2015 and 2014, respectively. There were 46 hotels in continuing operations at June 30, 2015.
Results of Operations
Comparison of the three months ended June 30, 2015 to the three months ended June 30, 2014
Operating results are summarized as follows (in thousands):
32
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Three months ended |
Three months ended |
||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
Continuing |
|||||||||||||||||||
Continuing |
Discontinued |
Continuing |
Discontinued |
Operations |
|||||||||||||||||
Operations |
Operations |
Total |
Operations |
Operations |
Total |
Variance |
|||||||||||||||
Revenues |
$ |
16,364 |
$ |
962 |
$ |
17,326 |
$ |
16,059 |
$ |
4,739 |
$ |
20,798 |
$ |
305 | |||||||
Hotel and property operations expenses |
(11,337) | (656) | (11,993) | (11,102) | (3,484) | (14,586) | (235) | ||||||||||||||
Interest expense |
(1,490) | (54) | (1,544) | (1,819) | (348) | (2,167) | 329 | ||||||||||||||
Loss on debt extinguishment |
0 | 0 | 0 | (94) | 0 | (94) | 94 | ||||||||||||||
Depreciation and amortization |
(1,257) | 0 | (1,257) | (1,617) | (38) | (1,655) | 360 | ||||||||||||||
General and administrative |
(1,347) | 0 | (1,347) | (1,092) | 0 | (1,092) | (255) | ||||||||||||||
Net gain (loss) on dispositions of assets |
(135) | 725 | 590 | (1) | 466 | 465 | (134) | ||||||||||||||
Derivative gain (loss) |
(4,710) | 0 | (4,710) | (11,718) | 0 | (11,718) | 7,008 | ||||||||||||||
Other income (loss) |
31 | 0 | 31 | 94 | 0 | 94 | (63) | ||||||||||||||
Impairment loss |
(3,053) | 75 | (2,978) | 0 | (506) | (506) | (3,053) | ||||||||||||||
Acquisition expense |
(17) | 0 | (17) | 0 | 0 | 0 | (17) | ||||||||||||||
Terminated equity transactions |
0 | 0 | 0 | 3 | 0 | 3 | (3) | ||||||||||||||
Net earnings (loss) |
$ |
(6,951) |
$ |
1,052 |
$ |
(5,899) |
$ |
(11,287) |
$ |
829 |
$ |
(10,458) |
$ |
4,336 | |||||||
The statistics as noted below are on a same store basis and exclude one hotel in continuing operations which was sold in March of 2015. Occupancy for the same store portfolio fell 1.7% from the prior year, while average daily rate (“ADR”) rose 6.1%. The overall result was a 4.3% increase in revenue per available room (“RevPAR”). Rate management and increased business from construction and special projects has added revenue throughout the portfolio. Results for our same store portfolio are presented below under “Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy”.
Revenues and Operating Expenses
Revenues from continuing operations for the three months ended June 30, 2015 increased 1.9% compared to the same period in 2014.
During the second quarter of 2015, hotel and property operations expenses from continuing operations increased $0.2 million compared to the second quarter of 2014. The main cause of the variance was a property tax refund received in 2014.
Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense
There was a decrease in interest expense in the same store portfolio of approximately $0.4 million, due to lower debt balances, the result of amortization as well as a reduction in GE loan balances. When GE encumbered assets are sold, the payoff/release prices are generally greater than the allocated loan amounts. Depreciation and amortization expense from continuing operations decreased $0.4 million for the second quarter of 2015 compared with 2014. The general and administrative expense for the 2015 second quarter increased $0.3 million because of increased costs of legal and compensation costs associated with the change in executive officers.
Derivative gain (loss)
33
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
The change in derivative gains is a result of the change in fair value of the derivative liabilities for the quarter ended June 30, 2015 compared to the quarter ended June 30, 2014. The fair value of the derivative liabilities increased by an aggregate of $4.7 million and $11.6 million during the second quarter of 2015 and 2014, respectively. The increase in fair value in the second quarter of 2015, which created a derivative loss on the income statement, is primarily due to changes in the common stock price. The $11.6 million increase in fair value in the second quarter of 2014 is due to a change in exercise price of the related warrants adjusted downward from $9.60 to $1.92, and to a change in the conversion price of the Series C Preferred Stock from $8.00 to $1.60, the public offering price of the common stock in the Company’s subscription rights offering concluded on June 6, 2014. These changes in fair value are recorded as derivative losses on the income statement.
Impairment loss
For the second quarter of 2015, impairment charges of $3.1 million were recorded on five hotels classified as held for sale as of June 30, 2015 in continuing operations. Recovery of $0.1 million of previously recorded impairment was taken on two hotels in discontinued operations at the time of sale. For the three months ended June 30, 2014 impairment charges of $1.4 million were taken on six properties which have been sold. Recovery of $0.9 million was recorded on five properties which have been sold.
Dispositions
In the second quarter of 2015, three properties were sold. There was a gain of $0.7 million at the time of sale on one of the properties. Five hotels were sold in the second quarter of 2014. A gain of $0.5 million was recognized on two of the properties.
Income tax
At June 30, 2015 and 2014, a full valuation allowance was recorded against the deferred tax asset due to the uncertainty of realization because of historical operating losses. Due to the full deferred tax valuation allowance, no income tax expense or benefit was recorded for the quarters ended June 30, 2015 and 2014.
Management believes the federal and state income tax rate for the TRS Lessee will be approximately 38%. The income tax benefit /expense will vary based on the taxable earnings or loss of the TRS Lessee, a C corporation.
34
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Six months ended |
Six months ended |
||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
Continuing |
|||||||||||||||||||
Continuing |
Discontinued |
Continuing |
Discontinued |
Operations |
|||||||||||||||||
Operations |
Operations |
Total |
Operations |
Operations |
Total |
Variance |
|||||||||||||||
Revenues |
$ |
28,710 |
$ |
2,714 |
$ |
31,424 |
$ |
27,349 |
$ |
8,987 |
$ |
36,336 |
$ |
1,361 | |||||||
Hotel and property operations expenses |
(21,325) | (1,907) | (23,232) | (20,924) | (7,104) | (28,028) | (401) | ||||||||||||||
Interest expense |
(3,017) | (200) | (3,217) | (3,548) | (799) | (4,347) | 531 | ||||||||||||||
Loss on debt extinguishment |
(7) | 0 | (7) | (104) | 0 | (104) | 97 | ||||||||||||||
Depreciation and amortization |
(2,737) | 0 | (2,737) | (3,219) | (112) | (3,331) | 482 | ||||||||||||||
General and administrative |
(2,732) | 0 | (2,732) | (2,077) | 0 | (2,077) | (655) | ||||||||||||||
Net gain (loss) on dispositions of assets |
(122) | 1,662 | 1,540 | (27) | 635 | 608 | (95) | ||||||||||||||
Derivative gain (loss) |
113 | 0 | 113 | (9,603) | 0 | (9,603) | 9,716 | ||||||||||||||
Other income (loss) |
126 | 0 | 126 | 125 | 0 | 125 | 1 | ||||||||||||||
Impairment loss |
(3,830) | 120 | (3,710) | 119 | (596) | (477) | (3,949) | ||||||||||||||
Acquisition expense |
(17) | 0 | (17) | 0 | 0 | 0 | (17) | ||||||||||||||
Terminated equity transactions |
0 | 0 | 0 | (65) | 0 | (65) | 65 | ||||||||||||||
Net earnings (loss) |
$ |
(4,838) |
$ |
2,389 |
$ |
(2,449) |
$ |
(11,974) |
$ |
1,011 |
$ |
(10,963) |
$ |
7,136 | |||||||
The statistics as noted below are on a same store basis and exclude one hotel in continuing operations which was sold in March of 2015. Occupancy for the same store portfolio rose 1.1% from the prior year, while ADR increased 5.3%. The overall result was a 6.6% rise in RevPAR. Rate management and increased business from construction and special projects has added revenue throughout the portfolio. Results for our same store portfolio are presented below under “Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy.”
Revenues and Operating Expenses
Revenues from continuing operations for the six months ended June 30, 2015, increased 5.0% compared to the same period in 2014.
During the six months ended June 30, 2015, hotel and property operations expenses from continuing operations increased $0.4 million compared with the six months ended of 2014. The majority of the increase was from franchise related expense.
Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense
There was a decrease in interest expense in the same store portfolio of approximately $0.6 million, caused by a decreased rate on debt refinanced in May, decreased borrowing from the Great Western revolver, and fewer costs associated with GE loan modification. Depreciation and amortization expense from continuing operations decreased $0.5 million for the six months ended June 30, 2015 compared to the year ago period. The $0.7 million increase in general and administrative expense resulted from employee recruiting fees, an increase in the cost of Director and Officer insurance, increased legal fees and additional compensation associated with the change in executive officers.
Derivative gain (loss)
The change in other income/expense is a result of the change in fair value of the derivative liabilities for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The derivatives were revalued at June 30, 2015 and 2014. The fair value of the derivative liabilities decreased by an aggregate of $0.1 million and
35
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
increased by an aggregate of $9.5 million during the first six months of 2015 and 2014, respectively. The increase in fair value in the six months ended June 30, 2014 is due to the change in exercise price of the related warrants adjusted downward from $9.60 to $1.92, and to a change in the conversion price of the Series C Preferred Stock from $8.00 to $1.60, the public offering price of the common stock in the Company’s subscription rights offering concluded on June 6, 2014. These changes in fair value are recorded as derivative losses on the income statement.
Impairment loss
During the six months ended June 30, 2015, we recognized impairment charges of $3.9 million on five hotels held for sale in continuing operations. There was $0.1 million of recovery recorded on one hotel in continuing operations which was sold. Impairment of $0.1 million was taken on a property in discontinued operations at the time of sale, and recovery of $0.2 million was recorded on three properties in discontinued operations at the time of sale. During the six months ended June 30, 2014, we recorded impairment recovery of $0.1 million on a held for use hotel and $1.5 million of impairment on eight hotels that were sold. Recovery of $0.9 million was recorded on five hotels that were sold.
Dispositions
During the six months ending June 30, 2015, seven hotels were sold. Gains of $1.7 million were recognized on two of the hotels. During the six months ending June 30, 2014, the Company sold its interests in six hotels, recognizing gains of approximately $0.5 million on two properties.
Income tax
At June 30, 2015 and 2014, the company provided a full valuation allowance against our deferred tax asset due to the uncertainty of realization because of historical operating losses. Due to the full deferred tax valuation allowance, no income tax expense or benefit was recorded for the six months ending June 30, 2015. Management believes the federal and state income tax rate for the TRS Lessee will be approximately 38%. The income tax benefit /expense will vary based on the taxable earnings or loss of the TRS Lessee, a C corporation.
Liquidity and Capital Resources
The following disclosure and analysis is pursuant to ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires the Company to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. To satisfy the requirements of the new standard, the Company’s evaluation considered a 13 month period beginning June 30, 2015.
The Company performs a liquidity analysis to determine if expected hotel operating cash flow is sufficient to cover all of the Company’s obligations as they become due, in this case, beginning on June 30, 2015 and ending on July 31, 2016. Our initial analysis considered only available cash and operating cash inflows without consideration of cash inflows from transactions that are in process, but were not yet finalized, such as proceeds on asset dispositions that are not yet closed or proceeds from financing transactions.
The Company believes the cash and available revolver of $4.1 million and $4.8 million, respectively, at June 30, 2015, cash generated from the operations of the hotels as well as the approximate $10.6 million of net cash proceeds from the sale of three hotels in July of 2015 will be sufficient to cover $5.7 million of corporate overhead, $0.6 million of recurring monthly debt service, $5.2 million of anticipated capital improvements as well as the $13.9 million of remaining loans maturing in 2015 (there are no loans maturing in 2016).
Although, as noted above, the funds are available to satisfy the maturing debt, management plans to use the available cash after operational needs to provide the equity to transition to upper midscale, upscale and upper upscale hotels and to satisfy the loan obligation through refinancing and the use of a portion of the excess proceeds
36
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
from asset sales. The Company has entered into agreements to purchase three hotels for $42.5 million and plans to pursue other acquisitions funded with excess proceeds from future hotels sales and other funding sources. The execution of the Company’s long term plan is dependent upon future hotel sales and the availability to refinance existing maturing debt which cannot be assured.
We are disposing of assets that are not generating yields consistent with our investment objectives or reinvestment alternatives and we are targeting acquisitions that we believe will be accretive. In the second quarter of 2015 we accelerated our divestiture program and added 11 hotels to our held for sale listing and we entered into three hotel purchase agreements in furtherance of our long term plan to transition to upper midscale, upscale and upper upscale hotels.
Maturing debt
At December 31, 2014 we had $46.9 million of debt maturing in 2015 (no debt matures in 2016). As of June 30, 2015, we have reduced that obligation to $15.2 million through refinancing, amortization and repayment using the proceeds from hotel sales. Since the end of the second quarter of 2015 through the date of our filing the obligation was further reduced to $13.9 million; the company applied $1.3 million to debt using a portion of the proceeds from the sale of one of our GE encumbered hotel assets. The $13.9 million of maturing debt consists of the following:
· |
a $2.2 million balance on a mortgage loan with GE Capital Franchise Finance LLC (“GE”) maturing December 15, 2015; and |
· |
an $11.7 million balance on a mortgage loan with Citigroup Global Markets Realty Corp. maturing November 11, 2015. |
The Company anticipates that the net proceeds on the sale of GE encumbered assets classified as Held for Sale will be sufficient to repay the maturing GE loan. The Company plans to meet the obligations at maturity on the Citigroup Global Markets Realty Corp. mortgage loan by using a combination of refinancing and the proceeds from dispositions of one hotel held for sale. Over the past two years the lending market has experienced increased liquidity and a relaxing of underwriting standards and as such, we believe we will be able to refinance on similar or perhaps more favorable terms. However, notwithstanding our perception that the lending market has improved somewhat, we may not be successful in our efforts to refinance or repay our maturing debt. As of June 30, 2015 we are not in default under the terms of any of our loans. However on November 12, 2014, the Company received a waiver from Great Western Bank for non-compliance with respect to the consolidated leverage ratio, and on November 20, 2014 the credit facilities were amended to modify the consolidated leverage ratio. The Company believes that we will be compliant under the terms of all of our loans in 2015.
Disposition plan
Our ability to dispose of assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. At June 30, 2015, we have 18 hotels held for sale, in July 2015 we sold three of these hotels generating an estimated $10.6 million of cash, leaving 15 held for sale hotels which, if sold, we believe will generate $12.4 million in net proceeds after debt repayment available for reinvestment. Over the last five years, we have sold 64 hotels. However, with respect to future hotel sales, we cannot predict:
· |
whether we will be able to find buyers for identified assets at prices and /or other terms acceptable to us: |
· |
whether potential buyers will be able to secure financings: and |
· |
the length of time needed to find a buyer and to close the sale of a property. |
The Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use $25 million of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions. In February 2012, the Company issued 3.0 million shares of Series C convertible preferred stock to Real Estate Strategies, L.P. which provided $28.6 million of net
37
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
proceeds. As of June 30, 2015, we have used $9.1 million for debt repayment and $3.6 million for operational funds from the proceeds committed to hospitality acquisitions. There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions. The Company is obligated to replace these funds promptly as it has the ability to do so. The Company is exploring opportunities to satisfy its long term capital needs as well as replenish the acquisition fund. There can be no assurance that the Company will be able to obtain the funding to replace these funds; however, the Company believes the growth of the Company is in the best interest of all shareholders.
The Company did not declare a common stock dividend during the first or second quarter of 2015 or the years 2014, 2013 or 2012. In December 2013, the Company announced the suspension of the regular dividends on its outstanding preferred stock to preserve capital and improve liquidity. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy.
Possible sources of liquidity to fund the longer-term liquidity needs, pay the preferred dividends, and satisfy the commitment to RES, include additional secured or unsecured debt financings, and /or proceeds from public or private issuances of debt or equity securities.
The Company has had recurring losses from operations and had a substantial amount of debt maturing in 2015 for which the Company did not have committed funding sources. Significant progress has been made bringing the total obligation down from $46.9 million at December 31, 2014 to $13.9 million as of July 30, 2015. In addition the Company liquidity has improved significantly. The execution of the Company’s long term plan, as described above, is dependent upon future hotel sales and the ability to refinance existing maturing debt which cannot be assured.
Our ability to continue as a going concern is dependent on many factors, including among other things, improvements in our operations results, our ability to sell properties and our ability to refinance maturing debt. While, as described above, the Company has plans to address these liquidity needs, there can be no assurance that the Company will be successful in those efforts. Consequently, these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements have been issued.
Financing
Exchange Offer
On July 23, 2015, RES, IRSA and the Company executed a written agreement on the rights and obligations agreed to in connection with a potential exchange offer by the Company of common stock for the Series A preferred stock and Series B preferred stock and conversion of Series C convertible preferred stock. As described on the Company’s Form 8-K dated July 23, 2015, RES and the Company, among other things, have agreed that if the Company achieves an acceptance of a minimum of 80% of the shares of Series A preferred stock and the Series B preferred stock in an exchange offer then RES will convert a minimum of an equivalent percentage of Series C convertible preferred stock into common stock pursuant to the terms of the Series C convertible preferred stock, subject to RES retaining a minimum beneficial ownership of 1,000 shares of Series C convertible preferred stock.
On August 6, 2015, the Company sent a proxy statement to shareholders in connection with a special meeting of shareholders to be held on September 3, 2015. At the special meeting, shareholders will consider approval of proposals to permit the exchange of common stock for Series A preferred stock and Series B preferred stock in an exchange offer. The Company commenced the exchange offer on August 6, 2015 pursuant to which it could issue up to 11,664,615 shares of common stock in exchange for Series A preferred stock and Series B preferred stock, on terms and subject to conditions as set forth in the Company’s Offer to Exchange dated August 6, 2015 as filed with the SEC on that date. The Company cannot provide assurance that the exchange offer will be successful.
38
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Subscription Rights Offering
The Company concluded a subscription rights offering on June 6, 2014. Each subscription right entitled its holder to purchase one share of common stock of the Company for $1.60 per share. Subscription rights to purchase 1,787,204 shares of common stock were exercised for $2,859,526, of which $2,000,000 was paid by conversion of a loan owed by the Company to RES. The Company incurred issuance costs of $217,852.
Debt Repayments
At June 30, 2015, the Company had long-term debt of $50.9 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 1.9 years and a weighted average fixed interest rate of 5.9%. The weighted average fixed rate was 5.9%. None of the held for use debt has a variable rate. Debt is classified as held for use if the properties collateralizing it are not held for sale. Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below as due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2015 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):
Held For Sale |
Held For Use |
TOTAL |
|||||||
Remainder of 2015 |
$ |
27,999 |
$ |
11,077 |
$ |
39,076 | |||
2016 |
0 | 2,144 | 2,144 | ||||||
2017 |
0 | 37,700 | 37,700 | ||||||
2018 |
0 | 0 | 0 | ||||||
2019 |
0 | 0 | 0 | ||||||
Thereafter |
0 | 0 | 0 | ||||||
$ |
27,999 |
$ |
50,921 |
$ |
78,920 | ||||
At June 30, 2015, the Company had $39.1 million of principal due in 2015. Of this amount, $16.2 million of principal is due in 2015 pursuant to the notes and mortgages evidencing such debt. The remaining $22.9 million is associated with loans on assets held for sale and is not contractually due in 2015 unless the related assets are sold. The maturities comprising the $16.2 million consist of:
· |
a $3.5 million balance on a mortgage loan with GE Capital Franchise Finance LLC (“GE”); |
· |
an $11.7 million balance on a mortgage loan with Citigroup Global Markets Realty Corp.; and |
· |
approximately $1.0 million of principal amortization on mortgage loans. |
All of the GE loans are cross collateralized and the eleven assets securing the loans outstanding at June 30, 2015 are treated as a pool. As of June 30, 2015, the Company had seven GE hotel assets classified as held for sale. The required principal payment upon the sale of these seven hotels is approximately $15.2 million. Upon sale the Company believes the net proceeds from the sale of these hotels will be sufficient to satisfy the debt with GE maturing in 2015. In July of 2015, after the close of the second quarter of 2015, the Company sold one of the GE encumbered assets that were held for sale and $1.3 million of the sales proceeds were applied to the balance of the $3.5 million loan, reducing the loan to $2.2 million. If the remaining hotels are not sold, the Company will attempt to refinance the debt with GE.
The $8.3 million loan with Middle Patent Capital, LLC which was due in June 2015 was, through the Company’s efforts, sold to Frontier Bank on May 28, 2015. In connection with the sale, the maturity date was extended to May 1, 2016 The two properties securing the loan were sold subsequent to June 30, 2015, and the loan was paid in full.
The Company’s plan is to refinance the other debt maturing in 2015 with current or future lenders.
39
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Financial Covenants
The key financial covenants for certain of our loan agreements and compliance calculations as of June 30, 2015 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of June 30, 2015, we were in compliance with our financial covenants. As a result, as of June 30, 2015, we are not in default of any of our loans.
(Dollars in thousands) |
June 30, |
June 30, |
||
Great Western Bank Covenants |
2015 |
2015 |
||
Requirement |
Calculation |
|||
Consolidated debt service coverage ratio calculated as follows: * |
≥1.05:1 |
|||
Adjusted NOI (A) / Debt service (B) |
||||
Net loss per financial statements |
$ |
(7,745) | ||
Net adjustments per loan agreement |
23,259 | |||
Adjusted NOI per loan agreement (A) |
$ |
15,514 | ||
Interest expense per financial statements - continuing operations |
6,448 | |||
Interest expense per financial statements - discontinued operations |
1,191 | |||
Total interest expense per financial statements |
$ |
7,639 | ||
Net adjustments per loan agreement |
39 | |||
Debt service per loan agreement (B) |
$ |
7,678 | ||
Consolidated debt service coverage ratio |
2.02 : 1 |
|||
* Calculations based on prior four quarters |
||||
(Dollars in thousands) |
June 30, |
June 30, |
||
Great Western Bank Covenants |
2015 |
2015 |
||
Requirement |
Calculation |
|||
Loan-specific debt service coverage ratio calculated as follows: * |
≥1.20:1 |
|||
Adjusted NOI (A) / Debt service (B) |
||||
Net loss per financial statements |
$ |
(7,745) | ||
Net adjustments per loan agreement |
9,369 | |||
Adjusted NOI per loan agreement (A) |
$ |
1,624 | ||
Interest expense per financial statements - continuing operations |
6,448 | |||
Interest expense per financial statements - discontinued operations |
1,191 | |||
Total interest expense per financial statements |
$ |
7,639 | ||
Net adjustments per loan agreement |
(6,807) | |||
Debt service per loan agreement (B) |
$ |
832 | ||
Loan-specific debt service coverage ratio |
1.95 : 1 |
|||
* Calculations based on prior four quarters |
||||
40
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
(Dollars in thousands) |
June 30, |
June 30, |
||
Great Western Bank Covenants |
2015 |
2015 |
||
Requirement |
Calculation |
|||
Consolidated leverage ratio calculated as follows: |
≤ 3.50 |
|||
Total liabilities (A) / Tangible net worth (B) |
||||
Total liabilities per financial statements |
$ |
106,618 | ||
Net adjustments per loan agreement |
(20,224) | |||
Total liabilities per loan agreement (A) |
86,394 | |||
Total assets per financial statements |
131,392 | |||
Total liabilities per financial statements |
106,618 | |||
Net adjustments per loan agreement |
$ |
(20,224) | ||
Total liabilities per loan agreement |
$ |
86,394 | ||
Tangible net worth per loan agreement (B) |
$ |
44,998 | ||
Consolidated Leverage Ratio |
1.92 |
The revolving credit facility with Great Western Bank also requires maintenance of consolidated and loan-specific loan to value ratios that do not exceed 70% and 65%, respectively, tested annually, and that we not pay dividends in excess of 75% of our funds from operations per year. The revolving credit facility provides for maximum availability of $11.2 million from June 5, 2015 through June 30, 2016, $10.2 million from July 1, 2016 through June 30, 2017 and $9.2 million from July 1, 2017 through the maturity date of the revolving credit facility; provided, that at no time will the loans available through the revolving credit facility exceed the lesser of (a) an amount equal to 65% of the total appraised value of the hotels securing the revolving credit facility or (b) $11.2 million minus the aggregate amount of principal prepayments required to be made on the revolving credit facility (on or after July 1, 2015) in connection with the sale of hotels securing the revolving credit facility. At June 30, 2015, the revolving credit facility was fully available and the outstanding balance was $6.4 million.
(Dollars in thousands) |
June 30, |
June 30, |
||
GE Covenants |
2015 |
2015 |
||
Requirement |
Calculation |
|||
Loan-specific fixed charge coverage ratio calculated as follows: * |
≥ 1.20:1 |
|||
Adjusted EBITDA (A) / Fixed charges (B) |
||||
Net loss per financial statements |
$ |
(7,745) | ||
Net adjustments per loan agreement |
11,488 | |||
Adjusted EBITDA per loan agreement (A) |
$ |
3,743 | ||
Interest expense per financial statements - continuing operations |
6,448 | |||
Interest expense per financial statements - discontinued operations |
1,191 | |||
Total interest expense per financial statements |
$ |
7,639 | ||
Net adjustments per loan agreement |
(5,430) | |||
Fixed charges per loan agreement (B) |
$ |
2,209 | ||
Loan-specific fixed charge coverage ratio |
1.69 : 1 |
|||
* Calculations based on prior four quarters |
||||
41
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
(Dollars in thousands) |
June 30, |
June 30, |
|||
GE Covenants |
2015 |
2015 |
|||
Requirement |
Calculation |
||||
Loan-specific loan to value ratio calculated as follows: |
≤ 60.0% |
||||
Loan balance (A) / Value (B) |
|||||
Loan balance (A) |
$ |
18,547 | |||
Value (B) |
$ |
34,580 | |||
Loan-specific loan to value ratio |
53.6 |
% |
|||
The financial covenants under our loan facilities with GE also require that, through the term of the loans, we maintain: (a) a minimum before dividend consolidated fixed charge coverage ratio (FCCR) (based on a rolling 12-month period) of 1.00:1 as of June 30, 2015 and thereafter; and (b) a minimum after dividend consolidated FCCR (based on a rolling 12-month period) of 1.00:1 as of June 30, 2015 and thereafter. However, the consolidated FCCRs are not required to be tested as of the end of any fiscal quarter if the loan to value ratio with respect to our GE-encumbered properties is 60% or less.
As of June 30, 2015 our loan to value ratio with respect to our GE encumbered properties was 53.6%. As a result, our consolidated FCCRs are not required to be tested as of June 30, 2015.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and GE facilities contain cross-default provisions which would allow Great Western Bank and GE to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. We are not in default of any of our loans.
A summary of the Company’s long term debt as of June 30, 2015 is as follows (dollars in thousands):
42
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Interest |
||||||
Fixed Rate Debt |
Balance |
Rate |
Maturity |
|||
Lender |
||||||
GE Capital Franchise Finance LLC |
$ |
3,507 | 7.17 |
% |
12/2015 |
|
Citigroup Global Markets Realty Corp |
11,652 | 5.97 |
% |
11/2015 |
||
GE Capital Franchise Finance LLC |
3,960 | 4.75 |
% |
2/2018 |
||
Frontier Bank |
8,300 | 6.00 |
% |
5/2016 |
||
GE Capital Franchise Finance LLC |
11,080 | 7.17 |
% |
2/2017 |
||
Cantor |
5,882 | 4.25 |
% |
11/2017 |
||
Morgan Stanley |
28,091 | 5.83 |
% |
12/2017 |
||
Total fixed rate debt |
$ |
72,472 | ||||
Variable Rate Debt |
||||||
Great Western Bank |
$ |
6,448 | 4.25 |
% |
6/2018 |
|
Total variable rate debt |
$ |
6,448 | ||||
Total Debt |
$ |
78,920 | ||||
Less: debt associated with hotel properties held for sale |
27,999 | |||||
Total long-term debt |
$ |
50,921 | ||||
On February 17, 2015, the maturity date of the Company’s $7.8 million GE loan was extended to December 15, 2015. A required principal payment of $0.3 million was paid on the loan in February 2015.
On May 28, 2015, the $8.3 million mortgage loan previously held by Middle Patent Capital, LLC was, through the Company’s efforts, sold to Frontier Bank. The interest rate was reduced from 12.5 percent to 6.0 percent and the maturity date was extended from June 6, 2015 to May 1, 2016.
On June 5, 2015, the Company amended its revolving credit facility with Great Western Bank to, among other things, extend the maturity date to June 30, 2018, reduce the interest rate from 4.5 percent annually to the prime rate plus 1.0 percent annually (currently 4.25 percent annually) and remove the 2.0 percent prepayment penalty required with refinancing with another financial institution.
Hotels Sold
On January 15, 2015, the Company sold a Super 8 in West Plains, Missouri (49 rooms) for gross sale proceeds of $1.5 million. Net proceeds were used to pay off the associated loan with Great Western Bank.
On January 29, 2015, the Company sold a Super 8 in Green Bay, Wisconsin (83 rooms) for gross sale proceeds of $2.2 million. Net proceeds were used to pay off the associated debt with GE and reduce the balance of the revolving credit facility with Great Western Bank.
On March 16, 2015, the Company sold a Super 8 in Columbus, Georgia (74 rooms) for gross sale proceeds of $0.9 million. Net proceeds were used to pay off the associated loan with GE.
On March 19, 2015, the Company sold a Sleep Inn in Omaha, Nebraska (90 rooms) for gross sale proceeds of $2.9 million. Net proceeds were used to pay off the associated loan with Elkhorn Valley Bank.
43
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
On April 1, 2015, the Company sold both a Savannah Suites in Chamblee, Georgia (120 rooms) for gross sale proceeds of $4.4 million, and a Savannah Suites in Augusta, Georgia (172 rooms) for gross sale proceeds of $3.4 million. Partial proceeds of $4.1 million were applied to the associated debt with GE, with the remainder going to cash.
On April 30, 2015, the Company sold a Super 8 in Batesville, Arkansas (49 rooms) for gross sale proceeds of $1.5 million. Partial proceeds of $1.3 million were applied to the revolving credit facility with Great Western Bank, reducing the outstanding revolver balance by $1.3 million, and the revolver limit from $12.5 million to $11.2 million. The remainder of the proceeds went to cash.
Contractual Commitments
Below is a summary of certain obligations that will require capital as of June 30, 2015 (in thousands):
Payments Due by Period |
|||||||||||||||
Remainder |
More than |
||||||||||||||
Contractual Obligations |
Total |
of Year 1 |
Years 2-3 |
Years 4-5 |
5 years |
||||||||||
Long-term debt including interest |
$ |
56,480 |
$ |
12,523 |
$ |
43,957 |
$ |
0 |
$ |
0 | |||||
Land leases |
4,136 | 114 | 276 | 127 | 3,619 | ||||||||||
Total contractual obligations |
$ |
60,616 |
$ |
12,637 |
$ |
44,233 |
$ |
127 |
$ |
3,619 | |||||
The column titled “Remainder of Year 1” represents payments due for the balance of 2015. Long-term debt includes debt on properties classified as held for use. The debt related to the three held for sale properties in discontinued operations and the fifteen held for sale properties in continuing operations (which are expected to be sold in the next 12 months, with the respective debt paid) of $28.0 million is not included in the table above.
We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. The land leases reflected in the table above represent continuing operations. In addition, the Company has one land lease associated with properties in discontinued operations. This property is expected to be sold in the next 12 months. The annual lease payments of $13,200 are not included in the table above. We also have management agreements with HMA, Strand, Kinseth, and Cherry Cove for the management and operation of our hotel properties.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale and impaired held for use hotels, and the disclosure of the fair value of our debt.
The Company’s financial instruments, the derivative liabilities, and the non financial assets, our held for sale hotels, are measured using inputs from Level 3 of the fair value hierarchy.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
44
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, as well as inputs other than quoted prices that are observable for the asset or liability such as interest rate yield curves that are observable at commonly quoted intervals.
Level 3 nonfinancial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Nonfinancial assets
The amount of impairment and recovery of previously recorded impairment recorded for the three and six months ending June 30, 2015 and 2014 on properties classified as held for sale and sold is shown in the tables below:
45
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
For the three months ending June 30, |
For the three months ending June 30, |
|||||||||
2015 |
2014 |
|||||||||
Number of hotels |
Impairment (loss) recovery |
Number of hotels |
Impairment (loss) recovery |
|||||||
Continuing Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 0 | 0 | ||||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Sold Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Continuing Operations |
5 |
$ |
(3,053) | 0 |
$ |
0 | ||||
Discontinued Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 6 | (1,397) | ||||||
Recovery of Impairment |
2 | 75 | 5 | 891 | ||||||
Subtotal Sold Hotels |
2 |
$ |
75 | 11 |
$ |
(506) | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Discontinued Operations |
2 |
$ |
75 | 11 |
$ |
(506) | ||||
Total Net Impairment: |
7 |
$ |
(2,978) | 11 |
$ |
(506) | ||||
46
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
For the six months ending June 30, |
For the six months ending June 30, |
|||||||||
2015 |
2014 |
|||||||||
Number of hotels |
Impairment (loss) recovery |
Number of hotels |
Impairment (loss) recovery |
|||||||
Continuing Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
5 |
$ |
(3,915) | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 1 | 119 | ||||||
Subtotal Held for Sale Hotels |
5 |
$ |
(3,915) | 1 |
$ |
119 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
0 | 0 | 0 | 0 | ||||||
Recovery of Impairment |
1 | 85 | 0 | 0 | ||||||
Subtotal Sold Hotels |
1 |
$ |
85 | 0 |
$ |
0 | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Continuing Operations |
6 |
$ |
(3,830) | 1 |
$ |
119 | ||||
Discontinued Operations: |
||||||||||
Held for Sale Hotels: |
||||||||||
Impairment loss |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Recovery of Impairment |
0 | 0 | 0 | 0 | ||||||
Subtotal Held for Sale Hotels |
0 |
$ |
0 | 0 |
$ |
0 | ||||
Sold Hotels: |
||||||||||
Impairment loss |
1 | (117) | 9 | (1,430) | ||||||
Recovery of Impairment |
3 | 237 | 4 | 834 | ||||||
Subtotal Sold Hotels |
4 |
$ |
120 | 13 |
$ |
(596) | ||||
Net Impairment loss on Held for Sale and Sold Hotels Reported in Discontinued Operations |
4 |
$ |
120 | 13 |
$ |
(596) | ||||
Total Net Impairment: |
10 |
$ |
(3,710) | 14 |
$ |
(477) | ||||
No impairment was recorded on properties held for use for the quarter or six months ended June 30, 2015. Recovery of $0.1 million was recorded on one held for use property for the six months ended June 30, 2014.
In accordance with ASC 360-10-36 Property Plant and Equipment – Overall – Subsequent Measurements, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.
Financial instruments
As of June 30, 2015 and December 31, 2014, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.
47
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
The company entered into a $2.0 million convertible loan on January 9, 2014. The fair value of the convertible loan embedded derivative was determined using a discounted cash flows method. This embedded derivative is measured at fair value at the end of each reporting period or termination of the instrument with the change in fair value recorded to earnings. The loan agreement was valued assuming the conversion would occur using a rights offering as that was the most beneficial of the conversion feature options. The loan was converted to 1,250,000 common shares on June 11, 2014.
The following tables provide the fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis (in thousands):
Fair Value at |
||||||||||||
June 30, 2015 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Series C preferred embedded derivative |
$ |
14,209 |
$ |
0 |
$ |
0 |
$ |
14,209 | ||||
Warrant derivative |
6,015 | 0 | 0 | 6,015 | ||||||||
Derivative liabilities, at fair value |
$ |
20,224 |
$ |
0 |
$ |
0 |
$ |
20,224 | ||||
Fair Value at |
||||||||||||
December 31, 2014 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Series C preferred embedded derivative |
$ |
13,804 |
$ |
0 |
$ |
0 |
$ |
13,804 | ||||
Warrant derivative |
6,533 | 0 | 0 | 6,533 | ||||||||
Derivative liabilities, at fair value |
$ |
20,337 |
$ |
0 |
$ |
0 |
$ |
20,337 | ||||
There were no transfers between levels during the six months ended June 30, 2015 and the twelve months ended December 31, 2014.
The following table presents a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized (gains) losses recorded in the Consolidated Statement of Operations in Derivative gain (loss) during the period (in thousands):
48
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Three Months Ending |
Three Months Ending |
|||||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
|||||||||||||||||||||||
Series C |
Convertible |
Series C |
Convertible |
|||||||||||||||||||||
preferred |
loan |
preferred |
loan |
|||||||||||||||||||||
embedded |
Warrant |
embedded |
embedded |
Warrant |
embedded |
|||||||||||||||||||
derivative |
derivative |
derivative |
Total |
derivative |
derivative |
derivative |
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
10,921 |
$ |
4,593 |
$ |
0 |
$ |
15,514 |
$ |
2,551 |
$ |
1,241 |
$ |
151 |
$ |
3,943 | ||||||||
Net unrealized (gains) losses on derivatives |
3,288 | 1,422 | 0 | 4,710 | 7,746 | 3,972 | 0 | 11,718 | ||||||||||||||||
Purchases and issuances |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Sales and settlements, included in derivative gain (loss) |
0 | 0 | 0 | 0 | 0 | 0 | (151) | (151) | ||||||||||||||||
Gross transfers in |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Gross transfers out |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Fair value, end of period |
$ |
14,209 |
$ |
6,015 |
$ |
0 |
$ |
20,224 |
$ |
10,297 |
$ |
5,213 |
$ |
0 |
$ |
15,510 | ||||||||
Changes in realized losses, included in income on instruments held at end of period |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 | ||||||||
Changes in unrealized losses, included in income on instruments held at end of period |
$ |
3,288 |
$ |
1,422 |
$ |
0 |
$ |
4,710 |
$ |
7,746 |
$ |
3,972 |
$ |
0 |
$ |
11,718 | ||||||||
49
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Six months ended |
Six months ended |
|||||||||||||||||||||||
June 30, 2015 |
June 30, 2014 |
|||||||||||||||||||||||
Series C |
Convertible |
Series C |
Convertible |
|||||||||||||||||||||
preferred |
loan |
preferred |
loan |
|||||||||||||||||||||
embedded |
Warrant |
embedded |
embedded |
Warrant |
embedded |
|||||||||||||||||||
derivative |
derivative |
derivative |
Total |
derivative |
derivative |
derivative |
Total |
|||||||||||||||||
Fair value, beginning of period |
$ |
13,804 |
$ |
6,533 |
$ |
0 |
$ |
20,337 |
$ |
3,761 |
$ |
2,146 |
$ |
0 |
$ |
5,907 | ||||||||
Net unrealized (gains) losses on derivatives |
405 | (518) | 0 | (113) | 6,536 | 3,067 | 0 | 9,603 | ||||||||||||||||
Purchases and issuances |
0 | 0 | 0 | 0 | 0 | 0 | 151 | 151 | ||||||||||||||||
Sales and settlements, included in derivative gain (loss) |
0 | 0 | 0 | 0 | 0 | 0 | (151) | (151) | ||||||||||||||||
Gross transfers in |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Gross transfers out |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||
Fair value, end of period |
$ |
14,209 |
$ |
6,015 |
$ |
0 |
$ |
20,224 |
$ |
10,297 |
$ |
5,213 |
$ |
0 |
$ |
15,510 | ||||||||
Changes in realized (gains) losses, included in income on instruments held at end of period |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 |
$ |
0 | ||||||||
Changes in unrealized (gains) losses, included in income on instruments held at end of period |
$ |
405 |
$ |
(518) |
$ |
0 |
$ |
(113) |
$ |
6,536 |
$ |
3,067 |
$ |
0 |
$ |
9,603 | ||||||||
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The carrying value and estimated fair value of the Company’s debt as of June 30, 2015, and December 31, 2014 are presented in the table below (in thousands):
Carrying Value |
Estimated Fair Value |
|||||||||||
June 30, |
December 31, |
June 30, |
December 31, |
|||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Held for use |
$ |
50,921 |
$ |
51,675 |
$ |
50,427 |
$ |
51,610 | ||||
Held for sale |
27,999 | 41,012 | 27,881 | 40,728 | ||||||||
Total |
$ |
78,920 |
$ |
92,687 |
$ |
78,308 |
$ |
92,338 | ||||
Other
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We
50
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors deems relevant.
A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the Internal Revenue Service would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.
Off Balance Sheet Financing Transactions
We have not entered into any off balance sheet financing transactions.
Key Performance Indicators
Earnings Before Interest, Taxes, Depreciation, Amortization, Noncontrolling Interest and Preferred Stock Dividends
The Company’s Adjusted EBITDA for the three and six months ended June 30, 2015 was $4.0 million and $5.6 million, respectively. The Company’s Adjusted EBITDA for the three and six months ended June 30, 2014, was $5.1 million and $6.3 million, respectively. Adjusted EBITDA is reconciled to net loss as follows (in thousands):
Three months |
Six months |
|||||||||||||||
ended June 30, |
ended June 30, |
|||||||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||||||
RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA |
||||||||||||||||
Net loss attributable to common shareholders |
$ |
(6,517) |
$ |
(11,301) |
$ |
(4,239) |
$ |
(12,651) | ||||||||
Interest expense, including discontinued operations |
1,544 | 2,167 | 3,217 | 4,347 | ||||||||||||
Loss on debt extinguishment |
0 | 94 | 7 | 104 | ||||||||||||
Depreciation and amortization, including discontinued operations |
1,257 | 1,655 | 2,737 | 3,331 | ||||||||||||
EBITDA |
(3,716) | (7,385) | 1,722 | (4,869) | ||||||||||||
Noncontrolling interest |
(284) | (15) | (3) | (16) | ||||||||||||
Net gain on disposition of assets |
(590) | (465) | (1,540) | (608) | ||||||||||||
Impairment |
2,978 | 506 | 3,710 | 477 | ||||||||||||
Preferred stock dividends declared and undeclared |
902 | 858 | 1,793 | 1,704 | ||||||||||||
Unrealized gain on derivatives |
4,710 | 11,718 | (113) | 9,603 | ||||||||||||
Gain on debt conversion |
0 | (88) | 0 | (88) | ||||||||||||
Acquisition expense |
17 | 0 | 17 | 0 | ||||||||||||
Terminated equity transactions |
0 | (3) | 0 | 65 | ||||||||||||
ADJUSTED EBITDA |
$ |
4,017 |
$ |
5,126 |
$ |
5,586 |
$ |
6,268 | ||||||||
51
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We calculate EBITDA and Adjusted EBITDA by adding back to net earnings (loss) available to common shareholders certain non-operating expenses and non-cash charges which are based on historical cost accounting and we believe may be of limited significance in evaluating current performance. We believe these adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods, even though EBITDA and Adjusted EBITDA also do not represent amounts that accrue directly to common shareholders. In calculating Adjusted EBITDA, we add back noncontrolling interest, net (gain) loss on disposition of assets, preferred stock dividends, acquisition and termination expenses and terminated equity transactions expense, which are cash charges. We also add back impairment, gain on debt conversion and unrealized gain or loss on derivatives, which are non-cash charges.
EBITDA and Adjusted EBITDA do not represent cash generated from operating activities determined by GAAP and should not be considered as alternatives to net earnings, cash flow from operations or any other operating performance measure prescribed by GAAP. EBITDA and Adjusted EBITDA are not measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. Neither do the measurements reflect cash expenditures for long-term assets and other items that have been and will be incurred. EBITDA and Adjusted EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of our operating performance. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
Funds from Operations
The Company’s diluted Adjusted funds from operations (“Adjusted FFO”) for the three and six months ended June 30, 2015 was $2.1 million and $1.6 million, respectively. The Company’s Adjusted FFO for the three and six months ended June 30, 2014 was $2.6 million and $0.1 million, respectively.
The weighted average number of shares outstanding for the calculation of FFO basic was 5,595,734 and 5,288,791 for the three and six months ended June 30, 2015, respectively. The weighted average number of shares outstanding for the calculation of Adjusted FFO diluted was 28,096,534 and 27,796,395 for the three and six months ended June 30, 2014. FFO is reconciled to net loss as follows (in thousands except per share data):
52
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Three months |
Six Months |
|||||||||||
ended June 30 |
ended June 30, |
|||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
RECONCILIATION OF NET LOSS TO FFO AND ADJUSTED FFO |
||||||||||||
Numerator: |
||||||||||||
Adjusted FFO |
||||||||||||
Net loss attributable to common shareholders |
$ |
(6,517) |
$ |
(11,301) |
$ |
(4,239) |
$ |
(12,651) | ||||
Depreciation and amortization |
1,257 | 1,655 | 2,737 | 3,331 | ||||||||
Net gain on disposition of assets |
(590) | (465) | (1,540) | (608) | ||||||||
Noncontrolling interest |
(284) | (15) | (3) | (16) | ||||||||
Impairment |
2,978 | 506 | 3,710 | 477 | ||||||||
FFO available to common shareholders |
$ |
(3,156) |
$ |
(9,620) |
$ |
665 |
$ |
(9,467) | ||||
Unrealized gain on derivatives |
4,710 | 11,718 | (113) | 9,603 | ||||||||
Gain on debt conversion |
0 | (88) | 0 | (88) | ||||||||
Acquisition expense |
17 | 0 | 17 | 0 | ||||||||
Terminated equity transactions |
0 | (3) | 0 | 65 | ||||||||
Adjusted FFO |
$ |
1,571 |
$ |
2,007 |
$ |
569 |
$ |
113 | ||||
Preferred stock dividends declared and undeclared |
514 | 608 | 1,021 | 0 | ||||||||
Adjusted FFO - diluted |
$ |
2,085 |
$ |
2,615 |
$ |
1,590 |
$ |
113 | ||||
Diluted FFO |
||||||||||||
FFO attributable to common shareholders-basic |
$ |
(3,156) |
$ |
(9,620) |
$ |
665 |
$ |
(9,467) | ||||
Preferred stock dividends declared and undeclared |
0 | 0 | 1,021 | 0 | ||||||||
FFO attributable to common shareholders-diluted |
$ |
(3,156) |
$ |
(9,620) |
$ |
1,686 |
$ |
(9,467) | ||||
Denominator (Weighted Average Common Shares): |
||||||||||||
Basic FFO |
5,596 | 3,300 | 5,289 | 3,104 | ||||||||
Warrants - Employees |
0 | 0 | 6 | 0 | ||||||||
Restricted stock |
0 | 0 | 2 | 0 | ||||||||
Preferred stock |
0 | 0 | 18,750 | 0 | ||||||||
Warrants |
0 | 0 | 3,750 | 0 | ||||||||
Diluted FFO |
5,596 | 3,300 | 27,797 | 3,104 | ||||||||
FFO per share - basic |
$ |
(0.56) |
$ |
(2.92) |
$ |
0.13 |
$ |
(3.05) | ||||
Adjusted FFO per share - basic |
$ |
0.28 |
$ |
0.61 |
$ |
0.11 |
$ |
0.04 | ||||
FFO per share - diluted |
$ |
(0.56) |
$ |
(2.92) |
$ |
0.06 |
$ |
(3.05) | ||||
Adjusted FFO per share - diluted |
$ |
0.07 |
$ |
0.17 |
$ |
0.06 |
$ |
0.04 | ||||
FFO and Adjusted FFO (“AFFO”) are non-GAAP financial measures. We consider FFO and AFFO to be market accepted measures of an equity REIT’s operating performance, which are necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net earnings computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets and impairment, plus depreciation and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. Our interpretation of the NAREIT definition is that noncontrolling interest in net (loss) earnings should be added back to (deducted from) net earnings (loss) as part of reconciling net earnings (loss) to FFO. AFFO is FFO adjusted to exclude either gains or losses on derivative liabilities and gain on debt conversion, which are non-cash charges against earnings and which
53
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
do not represent results from our core operations. AFFO also adds back acquisition and termination expense and terminated equity transactions expense. FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and AFFO should not be considered as alternatives to net earnings (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.
We use FFO and AFFO as performance measures to facilitate a periodic evaluation of our operating results relative to those of our peers. We consider FFO and AFFO to be useful additional measures of performance for an equity REIT because they facilitate an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO and AFFO provide a meaningful indication of our performance.
Net Operating Income
Net operating income (“NOI”) is one of the performance indicators the Company uses to assess and measure operating results. The Company believes that NOI is a useful additional measure of operating performance of its hotels because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI is also an important performance measure used along with revenue to determine the amount of the management fees paid by the Company to the operators of its hotels.
NOI is a non-GAAP measure, and is not necessarily indicative of available earnings and should not be considered an alternative to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes. NOI is reconciled to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes as follows (in thousands):
Three months ended |
Six months ended |
|||||||||||
June 30, |
June 30, |
|||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Earnings Before Net Loss On Dispositions of Assets, Other Income, Interest Expense, and Income Taxes |
$ |
2,406 |
$ |
2,251 |
$ |
1,899 |
$ |
1,064 | ||||
Add back: |
||||||||||||
Terminated equity transactions |
0 | (3) | 0 | 65 | ||||||||
General and administrative |
1,347 | 1,092 | 2,732 | 2,077 | ||||||||
Depreciation and amortization |
1,257 | 1,617 | 2,737 | 3,219 | ||||||||
Hotel operating revenue - discontinued |
962 | 4,739 | 2,714 | 8,987 | ||||||||
Hotel operating expenses - discontinued |
(656) | (3,484) | (1,907) | (7,104) | ||||||||
Other expenses * |
1,842 | 1,906 | 3,391 | 3,796 | ||||||||
NOI |
$ |
7,158 |
$ |
8,118 |
$ |
11,566 |
$ |
12,104 | ||||
*Other expenses include both continuing and discontinued operations for management fees, bonus wages, insurance, real estate and personal property taxes, and miscellaneous expenses.
Property Operating Income
Property operating income (“POI”) is a non-GAAP financial measure, and should not be considered as an alternative to loss from continuing operations or loss from discontinued operations, net of tax. The Company believes that the presentation of hotel property operating results (POI) is helpful to investors, and represents a more
54
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
useful description of its core operations, as it better communicates the comparability of its hotels’ operating results for all of the company’s hotel properties.
POI from continuing operations is reconciled to net loss as follows (in thousands):
Three months |
Six months |
|||||||||||||||
ended June 30, |
ended June 30, |
|||||||||||||||
RECONCILIATION OF NET LOSS FROM |
2015 |
2014 |
2015 |
2014 |
||||||||||||
Net loss from continuing operations |
$ |
(6,951) |
$ |
(11,287) |
$ |
(4,838) |
$ |
(11,974) | ||||||||
Depreciation and amortization |
1,257 | 1,617 | 2,737 | 3,219 | ||||||||||||
Net loss on disposition of assets |
135 | 1 | 122 | 27 | ||||||||||||
Derivative (gain) loss |
4,710 | 11,718 | (113) | 9,603 | ||||||||||||
Other income |
(31) | (94) | (126) | (125) | ||||||||||||
Interest expense |
1,490 | 1,819 | 3,017 | 3,548 | ||||||||||||
Loss on debt extinguishment |
0 | 94 | 7 | 104 | ||||||||||||
General and administrative expense |
1,347 | 1,092 | 2,732 | 2,077 | ||||||||||||
Acquisition expense |
17 | 0 | 17 | 0 | ||||||||||||
Terminated equity transactions |
0 | (3) | 0 | 65 | ||||||||||||
Impairment expense |
3,053 | 0 | 3,830 | (119) | ||||||||||||
POI - continuing operations |
$ |
5,027 |
$ |
4,957 |
$ |
7,385 |
$ |
6,425 | ||||||||
POI from discontinued operations is reconciled to loss from discontinued operations, net of tax, as follows (in thousands):
Three months |
Six months |
|||||||||||
ended June 30, |
ended June 30, |
|||||||||||
2015 |
2014 |
2015 |
2014 |
|||||||||
Gain from discontinued operations, net of tax |
$ |
1,052 |
$ |
829 |
$ |
2,389 |
$ |
1,011 | ||||
Depreciation and amortization from discontinued operations |
0 | 38 | 0 | 112 | ||||||||
Net gain on disposition of assets from discontinued operations |
(725) | (466) | (1,662) | (635) | ||||||||
Interest expense from discontinued operations |
54 | 348 | 200 | 799 | ||||||||
Impairment losses from discontinued operations |
(75) | 506 | (120) | 596 | ||||||||
POI - discontinued operations |
$ |
306 |
$ |
1,255 |
$ |
807 |
$ |
1,883 | ||||
Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy
The following table presents our RevPAR, ADR and occupancy, by region, for the three months ended June 30, 2015 and 2014, respectively. The comparisons of same store operations are for 46 hotels owned as of April 1, 2014, which includes 31 held for use hotels and fifteen held for sale hotels that are classified in continuing operations as a result of the adoption of ASU 2014-08. Same store calculations exclude three properties which are held for sale and included in discontinued operations as well as properties which have been sold.
55
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Three months ended June 30, 2015 |
Three months ended June 30, 2014 |
|||||||||||||||||||||
Room |
Room |
|||||||||||||||||||||
Region |
Count |
RevPAR |
Occupancy |
ADR |
Count |
RevPAR |
Occupancy |
ADR |
||||||||||||||
Mountain |
106 |
$ |
44.24 | 73.5 |
% |
$ |
60.21 | 106 |
$ |
47.14 | 79.6 |
% |
$ |
59.26 | ||||||||
West North Central |
1,060 | 41.19 | 72.6 |
% |
56.74 | 1,060 | 38.04 | 71.7 |
% |
53.06 | ||||||||||||
East North Central |
723 | 48.24 | 64.2 |
% |
75.11 | 723 | 47.80 | 68.5 |
% |
69.78 | ||||||||||||
Middle Atlantic |
142 | 47.75 | 71.3 |
% |
66.93 | 142 | 48.48 | 78.0 |
% |
62.18 | ||||||||||||
South Atlantic |
1,096 | 56.23 | 69.1 |
% |
81.36 | 1,096 | 53.82 | 70.2 |
% |
76.62 | ||||||||||||
East South Central |
364 | 48.86 | 70.6 |
% |
69.22 | 364 | 45.28 | 67.4 |
% |
67.14 | ||||||||||||
West South Central |
176 | 20.88 | 54.2 |
% |
38.51 | 176 | 21.58 | 58.1 |
% |
37.12 | ||||||||||||
Total Continuing Operations |
3,667 |
$ |
47.21 | 68.8 |
% |
$ |
68.61 | 3,667 |
$ |
45.28 | 70.0 |
% |
$ |
64.66 | ||||||||
States included in the Regions |
||||||||||||||||||||||
Mountain |
Montana |
|||||||||||||||||||||
West North Central |
Iowa, Kansas, Missouri, Nebraska and South Dakota |
|||||||||||||||||||||
East North Central |
Indiana and Wisconsin |
|||||||||||||||||||||
Middle Atlantic |
Pennsylvania |
|||||||||||||||||||||
South Atlantic |
Florida, Maryland, North Carolina, Virginia and West Virginia |
|||||||||||||||||||||
East South Central |
Kentucky and Tennessee |
|||||||||||||||||||||
West South Central |
Louisiana |
|||||||||||||||||||||
Our RevPAR, ADR, and occupancy, by franchise affiliation, for the three months ended June 30, 2015 and 2014, were as follows:
Three months ended June 30, 2015 |
Three months ended June 30, 2014 |
|||||||||||||||||||||
Room |
Room |
|||||||||||||||||||||
Brand |
Count |
RevPAR |
Occupancy |
ADR |
Count |
RevPAR |
Occupancy |
ADR |
||||||||||||||
Select Service |
||||||||||||||||||||||
Upscale |
||||||||||||||||||||||
Hilton Garden Inn |
100 |
$ |
92.49 | 79.2 |
% |
$ |
116.85 | 100 |
$ |
85.19 | 73.4 |
% |
$ |
116.03 | ||||||||
Total Upscale |
100 |
$ |
92.49 | 79.2 |
% |
$ |
116.85 | 100 |
$ |
85.19 | 73.4 |
% |
$ |
116.03 | ||||||||
Upper Midscale |
||||||||||||||||||||||
Comfort Inn / Suites |
1,248 | 54.79 | 66.9 |
% |
81.86 | 1,248 | 54.11 | 71.9 |
% |
75.28 | ||||||||||||
Clarion |
59 | 46.45 | 77.7 |
% |
59.75 | 59 | 34.29 | 50.5 |
% |
67.83 | ||||||||||||
Total Upper Midscale |
1,307 |
$ |
54.42 | 67.4 |
% |
$ |
80.75 | 1,307 |
$ |
53.25 | 71.0 |
% |
$ |
75.04 | ||||||||
Midscale |
||||||||||||||||||||||
Quality Inn |
171 | 44.21 | 56.8 |
% |
77.79 | 171 | 40.26 | 56.2 |
% |
71.65 | ||||||||||||
Total Midscale |
171 |
$ |
44.21 | 56.8 |
% |
$ |
77.79 | 171 |
$ |
40.26 | 56.2 |
% |
$ |
71.65 | ||||||||
Economy |
||||||||||||||||||||||
Days Inn |
642 | 39.59 | 69.9 |
% |
56.62 | 642 | 35.86 | 66.3 |
% |
54.08 | ||||||||||||
Super 8 |
1,246 | 40.24 | 72.0 |
% |
55.91 | 1,246 | 37.95 | 72.1 |
% |
52.64 | ||||||||||||
Other Economy (1) |
201 | 45.28 | 57.1 |
% |
79.30 | 201 | 50.18 | 69.5 |
% |
72.23 | ||||||||||||
Total Economy |
2,089 |
$ |
40.53 | 69.9 |
% |
$ |
57.96 | 2,089 |
$ |
38.48 | 70.1 |
% |
$ |
54.93 | ||||||||
Total Continuing Operations |
3,667 |
$ |
47.21 | 68.8 |
% |
$ |
68.61 | 3,667 |
$ |
45.28 | 70.0 |
% |
$ |
64.66 | ||||||||
(1) |
Includes Rodeway Inn and Independent Brands |
|||||||||||||||||||||
56
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
The following table presents our RevPAR, ADR and occupancy, by region, for the six months ended June
30, 2015 and 2014, respectively. The comparisons of same store operations (excluding held for sale hotels) are for
46 hotels owned as of January 1, 2014. Same store calculations exclude three properties which are held for sale and included in discontinued operations as well as properties which have been sold.
Six months ended June 30, 2015 |
Six months ended June 30, 2014 |
|||||||||||||||||||||
Room |
Room |
|||||||||||||||||||||
Region |
Count |
RevPAR |
Occupancy |
ADR |
Count |
RevPAR |
Occupancy |
ADR |
||||||||||||||
Mountain |
106 |
$ |
37.50 | 65.7 |
% |
$ |
57.10 | 106 |
$ |
39.90 | 70.1 |
% |
$ |
56.90 | ||||||||
West North Central |
1,060 | 35.40 | 64.6 |
% |
54.77 | 1,060 | 32.15 | 62.5 |
% |
51.45 | ||||||||||||
East North Central |
723 | 43.29 | 60.6 |
% |
71.49 | 723 | 42.04 | 62.0 |
% |
67.85 | ||||||||||||
Middle Atlantic |
142 | 41.88 | 65.8 |
% |
63.66 | 142 | 40.78 | 69.2 |
% |
58.91 | ||||||||||||
South Atlantic |
1,096 | 48.70 | 62.1 |
% |
78.46 | 1,096 | 45.69 | 61.5 |
% |
74.30 | ||||||||||||
East South Central |
364 | 42.55 | 63.9 |
% |
66.57 | 364 | 37.45 | 57.5 |
% |
65.11 | ||||||||||||
West South Central |
176 | 20.35 | 53.4 |
% |
38.10 | 176 | 20.86 | 56.0 |
% |
37.26 | ||||||||||||
Total Same Store |
3,667 |
$ |
41.23 | 62.5 |
% |
$ |
65.94 | 3,667 |
$ |
38.69 | 61.8 |
% |
$ |
62.64 | ||||||||
States included in the Regions |
||||||||||||||||||||||
Mountain |
Montana |
|||||||||||||||||||||
West North Central |
Iowa, Kansas, Missouri, Nebraska and South Dakota |
|||||||||||||||||||||
East North Central |
Indiana and Wisconsin |
|||||||||||||||||||||
Middle Atlantic |
Pennsylvania |
|||||||||||||||||||||
South Atlantic |
Florida, Maryland, North Carolina, Virginia and West Virginia |
|||||||||||||||||||||
East South Central |
Kentucky and Tennessee |
|||||||||||||||||||||
West South Central |
Louisiana |
|||||||||||||||||||||
Our RevPAR, ADR, and occupancy, by franchise affiliation, for the six months ended June 30, 2015 and
2014, were as follows:
57
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
Six months ended June 30, 2015 |
Six months ended June 30, 2014 |
|||||||||||||||||||||
Room |
Room |
|||||||||||||||||||||
Brand |
Count |
RevPAR |
Occupancy |
ADR |
Count |
RevPAR |
Occupancy |
ADR |
||||||||||||||
Select Service |
||||||||||||||||||||||
Upscale |
||||||||||||||||||||||
Hilton Garden Inn |
100 |
$ |
83.78 | 74.5 |
% |
$ |
112.39 | 100 |
$ |
73.26 | 65.7 |
% |
$ |
111.58 | ||||||||
Total Upscale |
100 |
$ |
83.78 | 74.5 |
% |
$ |
112.39 | 100 |
$ |
73.26 | 65.7 |
% |
$ |
111.58 | ||||||||
Upper Midscale |
||||||||||||||||||||||
Comfort Inn / Suites |
1,248 |
$ |
48.09 | 62.0 |
% |
$ |
77.54 | 1,248 |
$ |
45.79 | 63.4 |
% |
$ |
72.25 | ||||||||
Clarion |
59 | 40.83 | 70.3 |
% |
58.10 | 59 | 31.18 | 47.0 |
% |
66.30 | ||||||||||||
Total Upper Midscale |
1,307 |
$ |
47.77 | 62.4 |
% |
$ |
76.59 | 1,307 |
$ |
45.16 | 62.7 |
% |
$ |
72.06 | ||||||||
Midscale |
||||||||||||||||||||||
Quality Inn |
171 | 34.57 | 47.5 |
% |
72.76 | 171 | 31.99 | 46.8 |
% |
68.38 | ||||||||||||
Total Midscale |
171 |
$ |
34.57 | 47.5 |
% |
$ |
72.76 | 171 |
$ |
31.99 | 46.8 |
% |
$ |
68.38 | ||||||||
Economy |
||||||||||||||||||||||
Days Inn |
642 | 33.63 | 62.6 |
% |
53.76 | 642 | 30.79 | 59.4 |
% |
51.81 | ||||||||||||
Super 8 |
1,246 | 34.53 | 64.2 |
% |
53.77 | 1,246 | 31.81 | 62.6 |
% |
50.80 | ||||||||||||
Other Economy (1) |
201 | 45.81 | 56.2 |
% |
81.51 | 201 | 49.78 | 64.9 |
% |
76.64 | ||||||||||||
Total Economy |
2,089 |
$ |
35.34 | 62.9 |
% |
$ |
56.15 | 2,089 |
$ |
33.22 | 61.9 |
% |
$ |
53.71 | ||||||||
Total Continuing Operations |
3,667 |
$ |
41.23 | 62.5 |
% |
$ |
65.94 | 3,667 |
$ |
38.69 | 61.8 |
% |
$ |
62.64 | ||||||||
(1) |
Includes Rodeway Inn and Independent Brands |
|||||||||||||||||||||
58
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our market risk exposure subsequent to December 31, 2014.
Item 4. CONTROLS AND PROCEDURES
Evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, due to the material weaknesses described below, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Other than discussed below, no changes in the Company’s internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim annual financial statements will not be prevented or detected.
In connection with management’s assessment of internal control over financial reporting, we have identified the following deficiencies in our internal control over financial reporting that we deemed to be material weaknesses.
The Company has experienced a reduction in staffing in 2014, which has affected the process for accounting for technical transactions, including hotel property impairment analysis, rights offering, statement of cash flows, insurance proceeds, and severance agreements, whereby the Chief Financial Officer is responsible for performing the accounting analysis for the transaction and there is no effective review performed over the accounting determination.
The Company engages a third party valuation firm to assist it in valuing its embedded derivative and warrants liability. Management did not adequately review the valuation report received from the third party valuation firm. Management’s review failed to detect that the third party valuation firm had used an inappropriate risk-free rate of return. This deficiency resulted in a material misstatement to derivative liabilities in the preliminary consolidated financial statements, which was corrected by management prior to the issuance of the consolidated financial statements.
On April 13, 2015, the Company entered into an agreement to sell two hotels. The sale of the two non-core hotel properties, a 150 room Comfort Inn and a 200 room Days Inn, both in Alexandria, Virginia, closed on July 13, 2015, and generated net cash proceeds of approximately $10.0 million for the Company after the repayment of the $8.3 million of the associated mortgage debt.
59
Item 6. Exhibits
Exhibit No. |
Description |
|
10.1 |
Thirteenth Amendment to Amended and Restated Loan Agreement dated June 5, 2015 by and between the Company and Great Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 5, 2015). |
|
10.2 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC and Kinseth Hotel Corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.3 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC and Strand Development Company, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.4 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC, SPPR TRS Subsidiary, LLC, BMI Alexandria TRS Subsidiary, LLC, and Hospitality Management Advisors, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.5 |
Hotel Management Agreement dated June 19, 2015 by and between SPPR-Dowell TRS Subsidiary LLC and Cherry Cove Hospitality Management, LLC (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
31.1 |
Section 302 Certificate of Chief Executive Officer |
|
31.2 |
Section 302 Certificate of Chief Financial Officer |
|
32.1 |
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer |
|
101.1 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements. |
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CONDOR HOSPITALITY TRUST, INC.
By: |
/s/ J. William Blackham |
|
J. William Blackham |
|
Chief Executive Officer |
Dated this 13th day of August, 2015
By: |
/s/ Corrine L. Scarpello |
|
Corrine L. Scarpello |
|
Chief Financial Officer and Secretary |
Dated this 13th day of August, 2015
62
Exhibits
Exhibit No. |
Description |
|
10.1 |
Thirteenth Amendment to Amended and Restated Loan Agreement dated June 5, 2015 by and between the Company and Great Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 5, 2015). |
|
10.2 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC and Kinseth Hotel Corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.3 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC and Strand Development Company, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.4 |
Hotel Management Agreement dated June 19, 2015 by and between TRS Leasing, Inc., TRS Subsidiary, LLC, SPPR TRS Subsidiary, LLC, BMI Alexandria TRS Subsidiary, LLC, and Hospitality Management Advisors, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
10.5 |
Hotel Management Agreement dated June 19, 2015 by and between SPPR-Dowell TRS Subsidiary LLC and Cherry Cove Hospitality Management, LLC (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated June 19, 2015). |
|
31.1 |
Section 302 Certificate of Chief Executive Officer |
|
31.2 |
Section 302 Certificate of Chief Financial Officer |
|
32.1 |
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer |
|
101.1 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements. |
63