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EX-31.1 - EX-31.1 - CONDOR HOSPITALITY TRUST, INC.c545-20160630xex31_1.htm
EX-10.8 - EX-10.8 - CONDOR HOSPITALITY TRUST, INC.c545-20160630xex10_8.htm
EX-10.7 - EX-10.7 - CONDOR HOSPITALITY TRUST, INC.c545-20160630xex10_7.htm

  23 

 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

 

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

For the Quarterly Period Ended June 30, 2016



OR

 

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



For the transition period from ______ to ______.

 



Commission file number: 001-34087

 

CONDOR HOSPITALITY TRUST, INC.



(Exact name of registrant as specified in its charter)

 

Maryland

(State or other jurisdiction of

incorporation or organization)

 

52-1889548

(IRS Employer

Identification Number)



4800 Montgomery Lane Ste. 220, Bethesda, MD 20814

(Address of principal executive offices)

 

Telephone number: (402) 371-2520

 

3 Bethesda Metro Center Ste. 700, Bethesda, MD 20814

 (Former Address)

 

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 



 

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, 2016 there were 4,952,190 shares of common stock, par value $.01 per share, outstanding.







 

 

 

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Table of Contents

 







 

 

 



 

 

Page

Number



 

 

 

Part I.

FINANCIAL INFORMATION

 



 

 

 

Item 1.

Financial Statements

3



 

 

 



Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3



 

 



Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015

4



 

 



Consolidated Statements of Equity for the Six Months Ended June 30, 2016 and 2015

5



 

 



Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

6



 

 

 



Notes to Consolidated Financial Statements

7



 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

31



 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45



 

 

Item 4.

Controls and Procedures

46



 

 

Part II.

OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

46



 

 

Item 1A.

Risk Factors

46



 

 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46



 

 



Item 3.

Defaults Upon Senior Securities

46



 

 



Item 4.

Mine Safety Disclosures

47



Item 5.

Other Information

47



 

 

Item 6.

Exhibits

48







 

 

 


 

PART I.  FINANCIAL INFORMATION

 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited - In thousands, except share and per share data)





 



   



 

 

 

 

 

 



 

 

As of



 

June 30,

 

December 31,



 

2016

 

2015



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in hotel properties, net

 

$

88,336 

 

$

89,023 

Cash and cash equivalents

 

 

18,999 

 

 

4,870 

Restricted cash, property escrows

 

 

3,294 

 

 

3,776 

Accounts receivable, net of allowance for doubtful accounts of $7 and $10

 

 

1,450 

 

 

1,169 

Prepaid expenses and other assets

 

 

2,459 

 

 

1,832 

Investment in hotel properties held for sale, net

 

 

28,531 

 

 

41,676 

Total Assets

 

$

143,069 

 

$

142,346 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

6,940 

 

$

5,419 

Derivative liabilities, at fair value

 

 

260 

 

 

8,759 

Convertible debt, at fair value

 

 

1,191 

 

 

 -

Long-term debt, net of deferred financing costs

 

 

52,922 

 

 

54,105 

Long-term debt related to hotel properties held for sale, net of deferred financing costs

 

 

16,319 

 

 

31,906 

Total Liabilities

 

 

77,632 

 

 

100,189 



 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $10,182 at December 31, 2015

 

 

 -

 

 

7,662 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Preferred stock,  40,000,000 shares authorized:

 

 

 

 

 

 

8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $9,485 at December 31, 2015

 

 

 -

 

 

6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $34,492 at December 31, 2015

 

 

 -

 

 

30 

6.25% Series D, 6,700,000 shares authorized, $.01 par value, 6,245,156 shares outstanding, liquidation preference of $62,452 at June 30, 2016

 

 

61,381 

 

 

 -

Common stock, $.01 par value, 200,000,000 shares authorized; 4,941,878 shares outstanding

 

 

49 

 

 

49 

Additional paid-in capital

 

 

118,534 

 

 

138,387 

Accumulated deficit

 

 

(117,058)

 

 

(105,858)

Total Shareholders' Equity

 

 

62,906 

 

 

32,616 

Noncontrolling interest in consolidated partnership, redemption value of $1,474 and $1,197

 

 

2,531 

 

 

1,879 

Total Equity

 

 

65,437 

 

 

34,495 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

143,069 

 

$

142,346 

 



See accompanying notes to consolidated financial statements.



 

3

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited - In thousands, except per share data)

 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2016

 

2015

 

2016

 

2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Room rentals and other hotel services

 

$

13,815 

 

$

16,364 

 

$

25,991 

 

$

28,710 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Hotel and property operations

 

 

9,571 

 

 

11,337 

 

 

18,978 

 

 

21,325 

Depreciation and amortization

 

 

1,289 

 

 

1,257 

 

 

2,698 

 

 

2,737 

General and administrative

 

 

1,277 

 

 

1,347 

 

 

2,725 

 

 

2,732 

Acquisition and terminated transactions

 

 

53 

 

 

17 

 

 

147 

 

 

17 

Total operating expenses

 

 

12,190 

 

 

13,958 

 

 

24,548 

 

 

26,811 

Operating income

 

 

1,625 

 

 

2,406 

 

 

1,443 

 

 

1,899 

Net gain (loss) on disposition of assets

 

 

8,858 

 

 

(135)

 

 

12,226 

 

 

(122)

Net gain (loss) on derivatives and convertible debt

 

 

162 

 

 

(4,710)

 

 

6,279 

 

 

113 

Other income

 

 

23 

 

 

31 

 

 

 

 

126 

Interest expense

 

 

(1,228)

 

 

(1,490)

 

 

(2,536)

 

 

(3,017)

Loss on debt extinguishment

 

 

(976)

 

 

-

 

 

(1,149)

 

 

(7)

Impairment loss

 

 

(121)

 

 

(3,053)

 

 

(914)

 

 

(3,830)

Earnings (loss) from continuing operations before income taxes

 

 

8,343 

 

 

(6,951)

 

 

15,351 

 

 

(4,838)

Income tax expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Earnings (loss) from continuing operations

 

 

8,343 

 

 

(6,951)

 

 

15,351 

 

 

(4,838)

Gain from discontinued operations, net of tax

 

 

 -

 

 

1,052 

 

 

679 

 

 

2,389 

Net earnings (loss)

 

 

8,343 

 

 

(5,899)

 

 

16,030 

 

 

(2,449)

Loss (earnings) attributable to noncontrolling interest

 

 

(178)

 

 

284 

 

 

(567)

 

 

Net earnings attributable to controlling interests

 

 

8,165 

 

 

(5,615)

 

 

15,463 

 

 

(2,446)

Dividends declared and undeclared and in kind dividends deemed on preferred stock

 

 

(1,057)

 

 

(902)

 

 

(18,797)

 

 

(1,793)

Net earnings (loss) attributable to common shareholders

 

$

7,108 

 

$

(6,517)

 

$

(3,334)

 

$

(4,239)



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Basic

 

$

1.44 

 

$

(1.52)

 

$

(0.81)

 

$

(1.37)

Discontinued operations - Basic

 

 

 -

 

 

0.20 

 

 

0.13 

 

 

0.49 

Total - Basic Earnings per Share

 

$

1.44 

 

$

(1.32)

 

$

(0.68)

 

$

(0.88)



 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Diluted

 

$

0.18 

 

$

(1.52)

 

$

(0.81)

 

$

(1.37)

Discontinued operations - Diluted

 

 

 -

 

 

0.20 

 

 

0.13 

 

 

0.49 

Total - Diluted Earnings per Share

 

$

0.18 

 

$

(1.32)

 

$

(0.68)

 

$

(0.88)



 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 











 

4

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands)

 





   





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six months ended June 30, 2015



 

Shares of preferred stock

 

Preferred stock

 

Shares of common stock

 

Common stock

 

Additional paid-in capital

 

Accumulated deficit

 

Total shareholders' equity

 

Noncontrolling interest

 

Total equity

Balance at December 31, 2014

 

 

3,803 

 

$

38 

 

 

4,693 

 

$

47 

 

$

137,900 

 

$

(118,983)

 

$

19,002 

 

$

90 

 

$

19,092 

Stock-based compensation

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

66 

 

 

 -

 

 

66 

 

 

 -

 

 

66 

Long-term incentive plan

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

57 

 

 

57 

Issuance of common stock

 

 

 -

 

 

 -

 

 

228 

 

 

 

 

344 

 

 

 -

 

 

346 

 

 

 -

 

 

346 

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,446)

 

 

(2,446)

 

 

(3)

 

 

(2,449)

Balance at June 30, 2015

 

 

3,803 

 

$

38 

 

 

4,928 

 

$

49 

 

$

138,310 

 

$

(121,429)

 

$

16,968 

 

$

144 

 

$

17,112 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six months ended June 30, 2016



 

Shares of preferred stock

 

Preferred stock

 

Shares of common stock

 

Common stock

 

Additional paid-in capital

 

Accumulated deficit

 

Total shareholders' equity

 

Noncontrolling interest

 

Total equity

Balance at December 31, 2015

 

 

3,803 

 

$

38 

 

 

4,942 

 

$

49 

 

$

138,387 

 

$

(105,858)

 

$

32,616 

 

$

1,879 

 

$

34,495 

Stock-based compensation

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

54 

 

 

 -

 

 

54 

 

 

 -

 

 

54 

Long-term incentive plan

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

85 

 

 

85 

Series D Preferred dividends declared

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,139)

 

 

(1,139)

 

 

 -

 

 

(1,139)

Redemption of Series A and B Preferred Stock

 

 

(803)

 

 

(8)

 

 

 -

 

 

 -

 

 

(7,390)

 

 

(5,107)

 

 

(12,505)

 

 

 -

 

 

(12,505)

Exchange of Series C Preferred and issuance of Series D Preferred Stock

 

 

3,245 

 

 

61,351 

 

 

 -

 

 

 -

 

 

(12,517)

 

 

(20,417)

 

 

28,417 

 

 

 -

 

 

28,417 

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,463 

 

 

15,463 

 

 

567 

 

 

16,030 

Balance at June 30, 2016

 

 

6,245 

 

$

61,381 

 

 

4,942 

 

$

49 

 

$

118,534 

 

$

(117,058)

 

$

62,906 

 

$

2,531 

 

$

65,437 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to consolidated financial statements.

 

5

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 









 

 

 

 

 

 



 

Six months ended June 30,



 

 

2016

 

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

16,030 

 

$

(2,449)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,698 

 

 

2,737 

Net gain on disposition of assets

 

 

(12,904)

 

 

(1,540)

Net gain on derivatives and convertible debt

 

 

(6,279)

 

 

(113)

Amortization of deferred financing costs

 

 

349 

 

 

447 

Loss on extinguishment of debt

 

 

1,149 

 

 

Impairment loss

 

 

914 

 

 

3,710 

Stock-based compensation and long term incentive plan expense

 

 

139 

 

 

123 

Amortization of warrant issuance cost

 

 

12 

 

 

29 

Changes in operating assets and liabilities:

 

 

 -

 

 

 -

Increase in assets

 

 

(1,150)

 

 

(1,116)

Increase in liabilities

 

 

1,283 

 

 

873 

Net cash provided by operating activities

 

 

2,241 

 

 

2,708 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to hotel properties

 

 

(1,890)

 

 

(1,270)

Proceeds from sale of hotel assets

 

 

24,957 

 

 

16,200 

Net changes in capital expenditure escrows

 

 

920 

 

 

(68)

Net cash provided by investing activities

 

 

23,987 

 

 

14,862 



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Deferred financing costs

 

 

(21)

 

 

(198)

Principal payments on long-term debt

 

 

(17,166)

 

 

(20,629)

Proceeds from long-term debt

 

 

 -

 

 

8,300 

Payments on revolving debt

 

 

(10,147)

 

 

(19,524)

Proceeds from revolving debt

 

 

10,040 

 

 

18,086 

Debt early extinguishment penalties

 

 

(939)

 

 

 -

Series D Preferred Stock issuance

 

 

28,930 

 

 

 -

Purchase of interest rate cap

 

 

(6)

 

 

 -

Series A and B Preferred Stock redemption, including accumulated dividends

 

 

(20,167)

 

 

 -

Cash dividends paid to Series C and D Preferred shareholders

 

 

(2,623)

 

 

 -

Proceeds from common stock issued in rights offering

 

 

 -

 

 

346 

Net cash used in financing activities

 

 

(12,099)

 

 

(13,619)



 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

14,129 

 

 

3,951 

Cash and cash equivalents, beginning of period

 

 

4,870 

 

 

173 

Cash and cash equivalents, end of period

 

$

18,999 

 

$

4,124 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

2,279 

 

$

2,926 



 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

In kind dividends deemed on preferred stock

 

$

20,218 

 

$

 -



 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 



 

 

 

 

 

 

 



 

6

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 





NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of Business



Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”), which until July 15, 2015 was formerly named Supertel Hospitality, Inc., was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels.  As of June 30, 2016, the Company owned 31 hotels in 16 states.



CDOR, through its wholly owned subsidiary, Supertel Hospitality REIT Trust, owns a controlling interest in Supertel Limited Partnership (“SLP”).  SLP, including its various subsidiary partnerships, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of 23 properties held by TRS Leasing, Inc.) and conducts all of its operations. At June 30, 2016, the Company owned 97.9% of the partnership operating units (“partnership units”) of SLP with the remaining partnership units owned by other limited partners and long-term incentive plan unit holders. The Company’s 100% owned E&P Financing Limited Partnership no longer owns any assets or conducts any operations following the sale of its last remaining property in January 2016.



In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels.  Therefore, SLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. SLP, the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements. References to “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.



Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature.  Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year.  The results of the hotels acquired in October 2015 (see Note 2), because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.



Basis of Presentation



The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of SLP and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 



The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2016 or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.



Estimates, Risks, and Uncertainties



The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as revenue and expenses

7

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

recognized during the reporting period.  Actual results could differ from those estimates.  Because the state of the economy and the real estate market can significantly impact hotel operating performance and the estimated fair value of our assets, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change.



Assets Held for Sale and Discontinued Operations



A hotel is considered held for sale (a) when a contract for sale is entered into, a substantial, nonrefundable deposit has been committed by the purchaser, and sale is expected to occur within one year, or (b) if management has committed to and is actively engaged in a plan to sell the property, the property is available for sale in its current condition, and it is probable the sale will be completed within one year.  If a hotel is considered held for sale as of the most recent balance sheet presented or was sold prior to that balance sheet date, the hotel property and the debt it collateralizes are shown as held for sale in all periods presented. Depreciation of our hotels is discontinued at the time they are considered held for sale. 



Historically, we have presented the results of operations of hotel properties that have been sold or considered held for sale as discontinued operations.  In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 changed the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other significant disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results should be presented as discontinued operations subsequent to adoption. The Company adopted this pronouncement on October 1, 2014.  As a result of this adoption, only the operations of hotels meeting the criteria to be considered held for sale prior to October 1, 2014 are included in discontinued operations for all periods presented as no individual hotel disposition has a major effect on our operations or financial results.



Impairment Losses



On a quarterly basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified.  These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel.  If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s fair value.



At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss.  Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required.  If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the subsequent decision not to sell.



Income Taxes



The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended.  In general, under such Code provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed to shareholders.  A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property

8

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

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 IRS 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.



Taxable income from non-REIT activities managed through the TRS, which is taxed as a C-Corporation, is subject to federal, state, and local income taxes.  We account for the federal income taxes of our TRS using the asset and liability method.  Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled.  However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not (defined as a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.



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, to account for hotel acquisitions, and for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:



Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.



Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. 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, and model-derived valuations whose inputs are observable.



Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.    



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



With the exception of fixed rate debt (see Note 6) and other financial instruments carried at fair value, the carrying amounts of the Company’s financial instruments approximates their fair values due to their short-term nature or variable market-based interest rates.



Fair Value Option



Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings.  This option was elected for treatment of the Company’s convertible debt entered into on March 16, 2016 (see Note 5).



Recently Adopted Accounting Standards



In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to

9

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Equity, which clarifies certain of the criteria for determining whether derivative features in a hybrid financial instrument should be separately recognized.  ASU 2014-16 is effective for fiscal years beginning after December 15, 2015 and permits either a retrospective or cumulative effect transition method.  ASU 2014-16 was adopted by the Company on January 1, 2016 and was utilized in determining the accounting for the Series D Preferred Stock issued in March 2016 (see Note 8).



In February 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance effecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The Company adopted this standard on January 1, 2016 and concluded that SLP now meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company continues to consolidate SLP. The Company’s sole significant asset is its investment in SLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of SLP. All of the Company’s debt is an obligation of SLP.



In April 2015, the FASB issued ASU 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.  The Company adopted this standard on January 1, 2016 and presents all debt issuance costs, other than issuance costs related to its revolving credit facility, as a direct deduction from the carrying value of the debt liability. Adoption of this standard was applied retrospectively for all periods presented, effecting only the presentation of the balance sheet. The adoption of this standard did not have a material impact on the Company's financial position and had no impact on the results of operations or cash flows.



Recently Issued Accounting Standards



In May 2014, the FASB issued ASU 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 U.S. GAAP when it becomes effective.  The original updated accounting guidance was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016, however, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017.  As such, the standard will be effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes most existing lease guidance in U.S. GAAP when it becomes effective. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2020. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.



Reclassifications



Certain amounts in prior year financial statements have been reclassified to conform to current year presentation.



Beginning in the first quarter of 2016, we have revised the classification of cash payments for debt prepayment or extinguishment penalties in our statements of cash flows from where they were previously presented as operating cash flows to financing cash flows.  We have concluded that this classification is preferable as these payments are closely related to other financing cash flows, such as the repayment of debt, and reflect the impact of financing decisions made by management.  This revision in classification had the effect of increasing operating cash flows and decreasing financing cash flows by $939 and $7 during the six months ended June 30, 2016 and 2015, respectively.

10

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Liquidity



We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our revolving credit agreement with Great Western Bank, and the release of restricted cash upon the satisfaction of usage requirements.  At June 30, 2016, the Company had $18,999 of cash and cash equivalents on hand and $2,406 of unused availability under its revolving credit agreement.  Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code. We expect to invest approximately $3,500 to $5,000 in capital expenditures related to hotel properties we currently own through September 30, 2017.



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 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.



Our longer-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans.  Additionally, the Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use approximately $1,600 of proceeds from a capital infusion in 2012 to pursue hotel acquisitions (see Note 13).  Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings and proceeds from public or private issuances of debt or equity securities. 



Prior to the consideration of any asset sales or our ability to refinance debt subsequent to June 30, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $12,870 through September 30, 2017, including the February 1, 2017 maturity of one of our WAB loans with a balance at June 30, 2016 of $10,547. This and certain of our other loans, previously owned by GE Capital Franchise Finance Corporation (“GE”), were sold to Western Alliance Bank (“WAB”) in April 2016 and we now refer to them as our WAB loans.  Prior to its maturity, the Company anticipates refinancing the WAB loan with the existing lender or another lender. As a result of our improved financial condition and the terms of the lending arrangements we have entered into in recent periods, we believe we will be able to refinance this debt on similar or perhaps more favorable terms. However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.



Additionally, at June 30, 2016, we have 17 hotels held for sale which, if sold, we believe will generate approximately $20,000 in net proceeds after debt repayment.  Over the last five years, we have sold 76 hotels. Although it is management’s plan to use net proceeds after debt repayment from future asset sales to fund future acquisitions, if necessary the Company believes that cash generated from asset dispositions will be sufficient to fund any shortfalls associated with future debt maturities.  However, with respect to future hotel sales, we cannot predict whether we will be able to find buyers for identified assets at prices and 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.

11

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

NOTE 2.  INVESTMENT IN HOTEL PROPERTIES AND ACQUISITION OF HOTEL PROPERTIES



Investments in hotel properties consisted of the following at June 30, 2016 and December 31, 2015:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of



 

June 30, 2016

 

December 31, 2015



 

Held for sale

 

Held for use

 

Total

 

Held for sale

 

Held for use

 

Total

Land

 

$

3,438 

 

$

13,049 

 

$

16,487 

 

$

5,818 

 

$

13,049 

 

$

18,867 

Acquired below market lease intangibles

 

 

883 

 

 

 -

 

 

883 

 

 

883 

 

 

 -

 

 

883 

Buildings, improvements, vehicle

 

 

36,641 

 

 

83,448 

 

 

120,089 

 

 

55,220 

 

 

82,886 

 

 

138,106 

Furniture and equipment

 

 

10,620 

 

 

14,242 

 

 

24,862 

 

 

16,558 

 

 

14,030 

 

 

30,588 

Construction-in-progress

 

 

65 

 

 

622 

 

 

687 

 

 

118 

 

 

337 

 

 

455 

Investment in hotel properties

 

 

51,647 

 

 

111,361 

 

 

163,008 

 

 

78,597 

 

 

110,302 

 

 

188,899 

Less accumulated depreciation

 

 

(23,116)

 

 

(23,025)

 

 

(46,141)

 

 

(36,921)

 

 

(21,279)

 

 

(58,200)

Investment in hotel properties, net

 

$

28,531 

 

$

88,336 

 

$

116,867 

 

$

41,676 

 

$

89,023 

 

$

130,699 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company had no acquisitions during the three or six months ended June 30, 2016 or 2015.



Pro Forma Results



The Company acquired three hotel properties with a combined purchase price of $42,500 on October 1 and 2, 2015.  The following condensed pro forma financial data is presented as if all acquisitions completed in 2015 had been completed on January 1, 2014.  The condensed pro forma financial data is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2014, nor do they purport to represent the results of operations for future periods.







 

 

 

 

 



Three months ended

 

Six months ended



June 30, 2015

 

June 30, 2015

Total revenue

$

19,214 

 

$

34,517 

Operating income

$

3,639 

 

$

3,693 

Net earnings (loss)  attributable to common shareholders

$

(4,565)

 

$

(2,183)

Net earnings (loss) per share attributable to common shareholders - Basic

$

(0.93)

 

$

(0.45)

Net earnings (loss) per share attributable to common shareholders - Diluted

$

(0.93)

 

$

(0.45)

 





12

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

NOTE 3: DISPOSITIONS OF HOTEL PROPERTIES AND DISCONTINUED OPERATIONS



As of June 30, 2016, the Company had 17 hotels classified as held for sale. At March 31, 2016, the Company had 13 hotels held for sale and during the three months ended June 30, 2016 sold seven properties and classified 11 additional hotels as held for sale. At December 31, 2015, the Company had 16 hotels held for sale and during the six months ended June 30, 2016 sold 11 properties and classified 12 additional hotels as held for sale.  None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results.  As a result, only hotels classified as held for sale prior to October 1, 2014, one of which remains unsold at June 30, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended June 30, 2016 and 2015, the results of 37 and 46 hotels, respectively, were included in continuing operations and the results of one and six hotels, respectively, were included in discontinued operations.  For the six months ended June 30, 2016 and 2015, the results of 40 and 46 hotels, respectively, were included in continuing operations and the results of two and 10 hotels, respectively, were included in discontinued operations.



In the three months ended June 30, 2016 and 2015, the Company sold seven  and  three hotels, respectively, resulting in total gains of $8,886 and $727, respectively, of which $8,886 and $0, respectively, was included in continuing operations.  In the six months ended June 30, 2016 and 2015, the Company sold 11 and seven hotels, respectively, resulting in total gains of $12,945 and $1,666, respectively, of which $12,264 and $0, respectively, was included in continuing operations.



Two hotels in Alexandria, Virginia, which represent a significant disposition for which results are included in continuing operations, were sold on July 13, 2015.  For the three and six months ended June 30, 2015, the Alexandria Comfort Inn and Days Inn hotels had a combined net earnings (loss) of $81 and ($1,020), respectively, and earnings (loss) attributable to noncontrolling interest of $4 and $(117), respectively. These amounts include impairment expense of $447 and $1,309 that was recognized, in the three and six months ended June 30, 2015, respectively, following the hotels classification as held for sale in the first quarter of 2015.



The Company allocates interest expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of disposal transactions. The following table sets forth the components of discontinued operations for the three and six months ended June 30, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2016

 

2015

 

2016

 

2015

Revenue

 

$

339 

 

$

962 

 

$

673 

 

$

2,714 

Hotel and property operations expense

 

 

(316)

 

 

(656)

 

 

(626)

 

 

(1,907)

Net gain on disposition of assets

 

 

(2)

 

 

725 

 

 

678 

 

 

1,662 

Interest expense

 

 

(21)

 

 

(54)

 

 

(46)

 

 

(200)

Impairment (loss) recovery

 

 

 -

 

 

75 

 

 

 -

 

 

120 

Gain from discontinued operations, net of tax

 

$

 -

 

$

1,052 

 

$

679 

 

$

2,389 



 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

 

$

17 

 

$

 

$

44 

 





13

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

NOTE 4.  LONG-TERM DEBT



During the three and six months ended June 30, 2016, net proceeds from the Company’s hotel sales (see Note 3) were used to pay off the associated loans totaling $10,584 and $15,856, respectively, to reduce the balance of the revolving credit facility with Great Western Bank, and set aside to fund future acquisitions. These dispositions, as well as adjustments required to remain in compliance with the required debt service coverage ratio, decreased the total availability under the Great Western Bank revolver from $5,733 at December 31, 2015 to $2,406 at June 30, 2016. 



Long-term debt, including debt related to hotel properties held for sale, consisted of the following loans payable at June 30, 2016 and December 31, 2015:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lender

 

 

Balance at June 30, 2016

 

Interest rate at June 30, 2016

 

Maturity

 

Amortization provision

 

Properties encumbered at June 30, 2016

 

 

Balance at December 31, 2015

Fixed rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Western Alliance Bank (1)

 

$

10,547 

 

7.17%

 

02/2017

 

15 years

 

 

$

10,819 

Western Alliance Bank (1)

 

 

2,924 

 

4.75%

 

02/2018

 

15 years

 

 

 

3,864 

Cantor Commercial Real Estate Lending

 

 

5,771 

 

4.25%

 

11/2017

 

30 years

 

 

 

5,826 

Morgan Stanley Mortgage Capital Holdings, LLC

 

 

15,059 

 

5.83%

 

12/2017

 

25 years

 

14 

 

 

27,542 

Total fixed rate debt

 

 

34,301 

 

 

 

 

 

 

 

 

 

 

48,051 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Great Western Bank (7)

 

 

 -

 

4.50% (2)

 

06/2018

 

Interest only

 

 

 

3,215 

Western Alliance Bank (1)

 

 

4,934 

 

3.94% (3)

 

11/2020

 

25 years

 

 

 

4,990 

Western Alliance Bank (1)

 

 

9,967 

 

3.94% (3)

 

11/2020

 

25 years

 

 

 

10,079 

The Huntington National Bank

 

 

9,865 

 

2.71% (4)

 

11/2020

 

25 years

 

 

 

9,981 

LMREC 2015 - CREI, Inc. (Latitude)

 

 

11,196 

 

6.75% (5)

 

05/2018

 

$12 monthly (6)

 

 

 

11,220 

Total variable rate debt

 

 

35,962 

 

 

 

 

 

 

 

31 

 

 

39,485 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Long-term debt

 

$

70,263 

 

 

 

 

 

 

 

 

 

$

87,536 

Less: Deferred financing costs

 

 

(1,022)

 

 

 

 

 

 

 

 

 

 

(1,525)

Total long-term debt, net of deferred financing costs

 

 

69,241 

 

 

 

 

 

 

 

 

 

 

86,011 

Less: Long-term debt related to hotel properties held for sale, net of deferred financing costs of $225 and $542

 

 

(16,319)

 

 

 

 

 

 

 

 

 

 

(31,906)

Long-term debt related to hotel properties held for use, net of deferred financing costs of $797 and $983

 

$

52,922 

 

 

 

 

 

 

 

 

 

$

54,105 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) This debt, previously owned by GE Capital Franchise Finance Corporation, was sold to Western Alliance Bank in April 2016

(2) Prime rate plus 1%

(3)  90-day LIBOR plus 3.25%

(4)  30-day LIBOR plus 2.25%, fixed at 4.13% after giving effect to interest rate swap (see Note 6)

(5)  30-day LIBOR plus 6.25%,  30-day LIBOR capped at 1% after giving effect to market rate cap (see Note 6)

(6) $12 monthly payment began May 2016

(7) Total availability under this revolving credit facility was $2,406 at June 30, 2016; commitment fee on unused facility is 0.25%



14

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

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 based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of the related hotel properties.  Aggregate annual principal payments on debt for the remainder of 2016 and thereafter are as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Held for sale

 

Held for use

 

Total

Remainder of 2016

 

$

439 

 

$

755 

 

$

1,194 
2017 

 

 

11,413 

 

 

20,221 

 

 

31,634 
2018 

 

 

2,609 

 

 

11,528 

 

 

14,137 
2019 

 

 

60 

 

 

571 

 

 

631 
2020 

 

 

2,023 

 

 

20,644 

 

 

22,667 

Total

 

$

16,544 

 

$

53,719 

 

$

70,263 



 

 

 

 

 

 

 

 

 

Financial Covenants



The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage and required loan-to-value and leverage ratios, and place certain restrictions on dividends.  As of June 30, 2016, we were in compliance with our financial covenants.



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 certain of our WAB facilities contain cross-default provisions which would allow Great Western Bank and WAB 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. As of June 30, 2016, we are not in default of any of our loans.

 

NOTE 5: CONVERTIBLE DEBT AT FAIR VALUE



As part of the Exchange Agreement entered into on March 16, 2016 with RES (see Note 8), the Company issued to RES a Convertible Promissory Note (the “Note”), bearing interest at 6.25% per annum, in the principal amount of $1,012.  If the Series D Preferred Stock is outstanding, RES at its option may at any time elect to convert the Note, in whole or part, by notice delivered to the Company, into a number of shares of Series D Preferred Stock determined by dividing the principal amount of the Note to be converted by $10.00.  Any time the Series D Preferred Stock is required by its terms to be converted into common stock of the Company (see Note 8), the Note will be automatically converted into the number of shares of common stock that RES would have received had RES converted this Note into Series D Preferred Stock immediately prior to the conversion of the Series D Preferred Stock.  Any such conversion shall be reduced such that RES, together with its affiliates, does not beneficially own more than 49% of the voting stock of the Company and shall reduce the principal amount of the Note proportionally. 



The Company has made an irrevocable election to record this Convertible Debt in its entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gain (loss) on derivatives and convertible debt within net earnings each reporting period. Gains (losses) related to this Note were recognized totaling $208 and ($179) during the three and six months ended June 30, 2016, respectively.  The fair value of the Note is determined using a trinomial lattice-based model, which is a generally accepted computational model typically used for pricing options. The fair value of the Note on the date of issuance was determined to be equal to its principal amount. Interest expense related to this Note is recorded separately from other changes in its fair value within interest expense each period.

15

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

The following table represents the difference between the fair value and the unpaid principal balance of the Note as of June 30, 2016:





 

 

 

 

 

 

 

 



Fair value as of June 30, 2016

 

Unpaid principal balance as of June 30, 2016

 

Fair value carrying amount over/(under) unpaid principal

6.25% Convertible Debt

$

1,191 

 

$

1,012 

 

$

179 



 

 

 

 

 

 

 

 





NOTE 6: FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS



Our determination of fair value measurements is based on the assumptions that market participants would use in pricing the asset or liability. At June 30, 2016, the Company’s convertible debt (see Note 5) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis.  Nonrecurring fair value measurements were utilized in the accounting for the Company’s equity transactions that occurred in March 2016 (see Note 8) and in the valuation of impaired hotels during the three and six months ended June 30, 2016 and 2015.



Derivative Instruments



Currently, the Company uses derivatives, such as interest rate swaps and caps, to manage its interest rate risk.  The fair value of interest rate positions is determined using the standard market methodology of netting discounted expected future cash receipts and payments. Variable interest rates used in the calculation of projected receipts and payments on the positions are based on expectations of future interest rates derived from observable market interest rate curves and volatilities.  Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the agreements.  The Company believes it minimizes this credit risk by transacting with major creditworthy financial institutions.  These interest rate positions at June 30, 2016 are as follows:



 

 

 

 

 

 

 

 

 

 

 

Associated debt

 

Type

 

Terms

 

Effective date

 

Maturity date

 

 

Notional amount at June 30, 2016

Huntington

 

Swap

 

Swaps 30-day  LIBOR + 2.25%  for  fixed rate of

 

11/2015

 

11/2020

 

$

9,865 (1)



 

 

 

 4.13 % cancellable at Company option anytime

 

 

 

 

 

 

 



 

 

 

after 11/01/2018 without penalty

 

 

 

 

 

 

 

Latitude

 

Cap

 

Caps 30-day LIBOR at 1.00%

 

03/2016

 

06/2017

 

$

11,196 (1)



 

 

 

 

 

 

 

 

 

 

 



(1)

Notional amounts amortize consistently with the principal amortization of the associated loans



Additionally, prior to the execution of the Exchange Agreement (see Note 8) on March 16, 2016 which extinguished the instrument, the Company was required to bifurcate and include on the balance sheet at fair value the embedded conversion option in the Series C Preferred Stock due to the presence of an antidilution provision that required an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instrument’s original conversion price of $8.00 per share.



Similarly, at December 31, 2015, prior to the execution of the Exchange Agreement, the terms of the common stock warrants issued to the holders of the Series C Preferred Stock (see Note 8) also included an antidilution provision that required a reduction in the warrant’s exercise price of $9.60 should the conversion ratio of the Series C Preferred Stock be adjusted due to its antidilution provisions. Accordingly, the warrants did not qualify for equity classification, and, as a result, the fair value of the warrants was shown as a derivative liability on the consolidated balance sheet.  With the execution of the Exchange Agreement, this provision of these warrants was effectively eliminated and the conversion price was locked permanently at its current amount on the date of the extinguishment of the Series C Preferred Stock ($1.92).  Following this modification of terms, the warrants qualify for equity classification and were reclassified to additional paid in capital at their fair value of $611 on the date of the modification.



16

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

The fair value of the derivative liabilities recognized in connection with the Series C Preferred Stock was determined using 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 minimize standard error.



All derivatives recognized by the Company are reported as derivative liabilities on the consolidated balance sheets and are adjusted to their fair value at each reporting date. All gains and losses on derivative instruments are included in net gain (loss) on derivatives and convertible debt and with the exception of realized gains and losses related to the interest rate instruments, which are included in interest expense on the consolidated statements of operations. Net loss of $46 and $4,710 were recognized related to derivative instruments for the three months ended June 30, 2016 and 2015, respectively. Net gains of $6,458 and $113 were recognized related to derivative instruments for the six months ended June 30, 2016 and 2015, respectively.



Recurring Fair Value Measurements



The following tables provide the fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis:







 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

 

 

 

 

 

 

 

 



 

June 30, 2016

 

Level 1

 

Level 2

 

Level 3

Interest rate derivatives

 

$

260 

 

$

 -

 

$

260 

 

$

 -

Convertible debt

 

 

1,191 

 

 

 -

 

 

 -

 

 

1,191 

Total

 

$

1,451 

 

$

 -

 

$

260 

 

$

1,191 



 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

 

 

 

 

 

 

 

 



 

December 31, 2015

 

Level 1

 

Level 2

 

Level 3

Series C Preferred embedded derivative

 

$

6,271 

 

$

-

 

$

-

 

$

6,271 

RES warrant derivative

 

 

2,411 

 

 

-

 

 

-

 

 

2,411 

Interest rate derivatives

 

 

77 

 

 

-

 

 

77 

 

 

-

Total

 

$

8,759 

 

$

-

 

$

77 

 

$

8,682 



There were no transfers between levels during the three or six months ended June 30, 2016 or 2015.



17

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

The following tables presents a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that use significant unobservable inputs (Level 3) and the related gains and losses recorded in the consolidated statements of operations during the period:





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three months ended June 30,



 

 

2016

 

 

2015



 

 

Convertible debt

 

Series C Preferred embedded derivative

 

RES warrant derivative

 

Total

Fair value, beginning of period

 

 

$

1,399 

 

$

10,921 

 

$

4,593 

 

$

15,514 

Net (gains) losses recognized in earnings

 

 

 

(208)

 

 

3,288 

 

 

1,422 

 

 

4,710 

Purchase and issuances

 

 

 

-

 

 

 -

 

 

 -

 

 

 -

Sales and settlements

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Gross transfers into Level 3

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Gross transfers out of Level 3

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Fair value, end of period

 

 

$

1,191 

 

$

14,209 

 

$

6,015 

 

$

20,224 



 

 

 

 

 

 

 

 

 

 

 

 

 

Total unrealized (gains) losses during the period included in earnings related to instruments held at end of period

 

 

$

(208)

 

$

3,288 

 

$

1,422 

 

$

4,710 



 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six months ended June 30,



 

 

2016

 

 

2015



 

Series C Preferred embedded derivative

 

RES warrant derivative

 

Convertible debt

 

Total

 

Series C Preferred embedded derivative

 

RES warrant derivative

 

Total

Fair value, beginning of period

 

$

6,271 

 

$

2,411 

 

$

 -

 

$

8,682 

 

$

13,804 

 

$

6,533 

 

$

20,337 

Net (gains) losses recognized in earnings

 

 

(4,848)

 

 

(1,800)

 

 

179 

 

 

(6,469)

 

 

405 

 

 

(518)

 

 

(113)

Purchase and issuances

 

 

 -

 

 

 -

 

 

1,012 

 

 

1,012 

 

 

 -

 

 

 -

 

 

 -

Sales and settlements

 

 

(1,423)

 

 

 -

 

 

 -

 

 

(1,423)

 

 

 -

 

 

 -

 

 

 -

Gross transfers into Level 3

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Gross transfers out of Level 3

 

 

 -

 

 

(611) (1)

 

 

 -

 

 

(611)

 

 

 -

 

 

 -

 

 

 -

Fair value, end of period

 

$

 -

 

$

 -

 

$

1,191 

 

$

1,191 

 

$

14,209 

 

$

6,015 

 

$

20,224 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total unrealized (gains) losses during the period included in earnings related to instruments held at end of period

 

$

 -

 

$

 -

 

$

179 

 

$

 -

 

$

405 

 

$

(518)

 

$

(113)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

RES warrants were permanently reclassified to additional paid in capital as discussed above



Fair Value of Long-Term Debt



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 debt obligations 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 fair value hierarchy. The carrying value and estimated fair value of the Company’s long-term debt is presented in the table below:







 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying value as of

 

Estimated fair value as of



 

June 30, 2016

 

December 31, 2015

 

June 30, 2016

 

December 31, 2015

Held for use

 

$

52,922 

 

$

54,105 

 

$

54,138 

 

$

55,753 

Held for sale

 

 

16,319 

 

 

31,906 

 

 

16,932 

 

 

33,526 

Total

 

$

69,241 

 

$

86,011 

 

$

71,070 

 

$

89,279 



 

 

 

 

 

 

 

 

 

 

 

 



18

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Impaired Hotel Properties



In the performance of impairment analysis for both held for sale and held for use properties, fair value is determined with the assistance of independent real estate brokers and through the use of revenue multiples based on the Company’s experience with hotel sales as well as available industry information.  For held for sale properties, estimated selling costs are based on our experience with similar asset sales.  These are considered Level 3 inputs. The amount of impairment and recovery of previously recorded impairment recognized in the three and six months ended June 30, 2016 and 2015 is shown in the tables below:







 

 

 

 

 

 

 

 

 



Three months ended June 30,



2016

 

2015



Number of hotels

 

 

Impairment (loss) recovery

 

Number of hotels

 

 

Impairment (loss) recovery

Continuing Operations:

 

 

 

 

 

 

 

 

 

Held for sale hotels:

 

 

 

 

 

 

 

 

 

Impairment loss

 

$

(121)

 

 

$

(1,989)

Sold hotels:

 

 

 

 

 

 

 

 

 

Impairment loss

 -

 

 

 -

 

 

 

(1,064)

Net impairment loss reported in continuing operations

 

$

(121)

 

 

$

(3,053)



 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

Sold hotels:

 

 

 

 

 

 

 

 

 

Recovery of impairment

 -

 

 

 -

 

 

 

75 

Total net impairment:

 

$

(121)

 

 

$

(2,978)



 

 

 

 

 

 

 

 

 

19

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

 





 

 

 

 

 

 

 

 

 



Six months ended June 30,



2016

 

2015



Number of hotels

 

 

Impairment (loss) recovery

 

Number of hotels

 

 

Impairment (loss) recovery

Continuing Operations:

 

 

 

 

 

 

 

 

 

Held for sale hotels:

 

 

 

 

 

 

 

 

 

Impairment loss

 

$

(914)

 

 

$

(1,989)

Sold hotels:

 

 

 

 

 

 

 

 

 

Impairment loss

 -

 

 

 -

 

 

 

(1,926)

Recovery of impairment

 -

 

 

 -

 

 

 

85 

Subtotal sold hotels

 -

 

 

 -

 

 

 

(1,841)

Net impairment loss reported in continuing operations

 

$

(914)

 

 

$

(3,830)



 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

Sold hotels:

 

 

 

 

 

 

 

 

 

Impairment loss

 -

 

$

 -

 

 

$

(117)

Recovery of impairment

 -

 

 

 -

 

 

 

237 

Net impairment recovery reported in discontinued operations

 -

 

$

 -

 

 

$

120 

Total net impairment:

 

$

(914)

 

10 

 

$

(3,710)











NOTE 7: COMMON STOCK



The Company’s common stock is duly authorized, fully paid, and non-assessable. 



On March 11, 2015, an executive officer exercised a warrant to purchase 227,894 shares at the price of $1.52 per share (see Note 10).

 

NOTE 8:  PREFERRED STOCK



On March 16, 2016, the Company entered into a series of agreements providing for:

·

the issuance and sale of Condor’s Series D Cumulative Convertible Preferred Stock (“Series D Preferred Stock”) under a private transaction to SREP III Flight-Investco, L.P. (“SREP”), an affiliate of StepStone Group LP;

·

the exchange of all of Condor’s outstanding Series C Convertible Preferred Stock (“Series C Preferred Stock”) for Series D Preferred Stock; and

·

the cash redemption of all of Condor’s outstanding Series A Preferred Stock and Series B Redeemable Preferred Stock (“Series B Preferred Stock”).



In connection with these transactions, the Company and SREP entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) pursuant to which Condor issued and sold 3,000,000 shares of Series D Preferred Stock to SREP on the March 16, 2016 for an aggregate purchase price of $30,000. The Stock Purchase Agreement required that $20,147 of the purchase price be deposited into an escrow account for the purpose of effecting the redemption of the Series A and Series B Preferred Stock and that the remaining amount of the purchase price be delivered to Condor. 



Simultaneously, the Company entered into an Agreement (the “Exchange Agreement”) with RES pursuant to which all 3,000,000 outstanding shares of Series C Preferred Stock were exchanged for 3,000,000 shares of Series D Preferred Stock. Under the Exchange Agreement, in lieu of payment of accrued and unpaid dividends in the amount of $4,947 on the Series C Preferred Stock, Condor (a) paid to RES an amount of cash equal to $1,484, (b) issued to RES 245,156 shares of Series D Preferred Stock (such that RES, IRSA and their affiliates do not beneficially own in excess of 49% of the voting stock of Condor) and (c) issued to RES a convertible promissory note, bearing interest at 6.25% per annum, in the principal amount of $1,012 (see Note 5).



20

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Pursuant to the Stock Purchase Agreement, on April 15, 2016, Condor redeemed all of the outstanding Series A and Series B Preferred Stock, in accordance with redemption notices issued on March 16, 2016, as follows:

·

all 803,270 outstanding shares of the Series A preferred stock at the redemption price of $10.00 per share plus $2.084940 per share in accrued and unpaid dividends (plus compounded interest) through the redemption date for a total redemption price of $9,707; and

·

all 332,500 outstanding shares of the Series B preferred stock at the redemption price of $25.00 per share plus $6.354167 per share in accrued and unpaid dividends through the redemption date for a total redemption price of $10,425.



The effect of these transactions on the Company’s preferred stock and the key terms of the remaining series of the Company’s preferred stock are discussed individually below.



Series A Preferred Stock



On December 30, 2005, the Company offered and sold 1,521,258 shares of 8% Series A Preferred Stock.  At December 31, 2015,  803,270 shares of Series A Preferred Stock remained outstanding until the completion of the redemption on April 15, 2016.



Dividends on the Series A Preferred Stock were cumulative and 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 was able to 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 accumulated and bore additional dividends at 8%, compounded monthly. Accumulated but unpaid dividends were $1,452, or $1.807 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.



The difference between the recorded value of the Series A Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series A Preferred Stock plus related expenses, a total of $2,326, was recorded as a reduction of accumulated deficit during the six months ended June 30, 2016 as the amount is considered a deemed dividend on the Series A Preferred Stock.  $2,288 of this amount was recorded during the three months ended March 30, 2016 upon the Series A Preferred Stock becoming mandatorily redeemable and liability classified prior to its redemption.  Of these amounts,  $38 and $874 for the three and six months ended June 30, 2016, respectively, was recorded as a reduction of net earnings attributable to common shareholders as the portion of deemed dividends that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.



Series B Redeemable Preferred Stock



At December 31, 2015, there were 332,500 shares of 10.0% Series B Preferred Stock, originally sold on June 3, 2008, which remained outstanding until the completion of the redemption on April 15, 2016.



Dividends on the Series B Preferred Stock were cumulative and 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.  The Company was able to redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time 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 would be redeemed for cash at a redemption price of $25.00 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 B Preferred Stock to preserve capital and improve liquidity. Unpaid dividends on the Series B Preferred Stock did not bear interest. Unpaid dividends were $1,870, or $5.625 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.



21

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

The difference between the recorded value of the Series B Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series B Preferred Stock, a total $2,781,  was recorded as a reduction of accumulated deficit during the six months ended June 30, 2016 as the amount is considered a deemed dividend on the Series B Preferred Stock. $2,740 of this amount was recorded during the three months ended March 30, 2016 upon the Series B Preferred Stock becoming mandatorily redeemable and liability classified prior to its redemption.  Of these amounts, $41 and $911 for the three and six months ended June 30, 2016, respectively, was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.



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 Preferred Stock and warrants under a private transaction with RES. 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 Preferred Stock and 3,750,000 warrants to purchase shares of common stock.  All of the Series C Preferred Stock and related warrants remained outstanding prior to the execution of the Exchange Agreement on March 16, 2016 as discussed above.  The conversion price on the Series C Preferred Stock was $1.60 per share on that date and the exercise price of the warrants was $1.92 per share, which is equal to 120% of the adjusted conversion price of the Series C Preferred Stock.



Each share of Series C Preferred Stock was entitled to a dividend of $0.625 per year payable in equal quarterly dividends and had a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and unpaid dividends.  Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series C Preferred Stock to preserve capital and improve liquidity. Unpaid dividends accumulated and bore additional dividends at 6.25%, compounded quarterly. Accumulated but unpaid dividends were $4,492, or $1.497 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.



On March 16, 2016, the Series C Preferred Stock was extinguished under the Exchange Agreement discussed above.  Upon this extinguishment, the difference between the recorded value of the Series C Preferred Stock prior to the exchange and the fair value of the consideration received in the exchange, a total of $20,366, was recorded as a reduction of accumulated deficit as the amount is considered a deemed dividend on the Series C Preferred Stock.  Of this amount, $15,874 was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.



Subsequent to the execution of the Exchange Agreement, the warrants issued to RES simultaneously with the issuance of the Series C Preferred Stock remain outstanding through their original expiration date of January 31, 2017 at a fixed exercise price of $1.92.



Series D Convertible Preferred Stock



Following the execution of the Stock Purchase Agreement and Exchange Agreement on March 16, 2016, there were 6,245,156 shares of Series D Preferred Stock outstanding. 



The Series D Preferred stockholders rank senior to the Company’s common stock and any other preferred stock issuances and receive preferential cumulative cash dividends at a rate of 6.25% per annum, 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, of the $10.00 face value per share.  Dividends on the Series D 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. Whenever the dividends on the Series D Preferred Stock are in arrears for four consecutive quarters, then upon notice by holders in the aggregate not less than 40% of the outstanding Series D Preferred Stock, the Company will (a) take all appropriate action reasonably within its means to maximize the assets legally available for paying such

22

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

dividends and to monetize such assets (for example, but without limiting the generality of the foregoing, by selling or liquidating all of some of the Company’s assets or by selling the Company as a going concern), (b) pay out of all such assets legally available (including any proceeds from any sale or liquidation of such assets) the maximum possible amount of such unpaid dividends, and (c) thereafter, at any time and from time to time when additional assets of the Company (including any proceeds from any sale or liquidation of such assets) become legally available to pay such unpaid dividends, pay such remaining unpaid dividends until all dividends accumulated on the Series D Preferred Stock have been fully paid.  Dividends were paid on June 30, 2016 which included all amounts due through that date.



Each share of Series D Preferred Stock is convertible, at the option of the holder, at any time into a number of shares of common stock determined by dividing the conversion price of $1.60 into an amount equal to the $10.00 face value per share plus accrued and unpaid dividends, if any. The conversion price is subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends.  Each outstanding share of Series D Preferred Stock will be converted into a number of shares of common stock determined by dividing the conversion price of $1.60 into the $10.00 face value per share, which is equal to a rate of 6.25 shares of common stock for each share of Series D Preferred Stock, automatically upon closing of a Qualified Offering (defined as a single offering of common stock of at least $50,000 or up to three offerings in the aggregate of at least $75,000, all with certain minimum prices per share) without any further action by the holders of such shares or the Company.



The Series D Preferred Stock is redeemable by the Company at any time subject to certain restrictions, in whole or in a partial redemption of up to $30,000, at $12.00 per share on or before March 16, 2019, $13.00 per share from March 16, 2019 to March 16, 2020, and $14.00 per share on or after March 16, 2020, plus all accrued and unpaid dividends.  If a Qualified Offering has not occurred on or before June 30, 2021, holders that hold in the aggregate not less than 40% of the outstanding shares of the Series D Preferred Stock have the right to elect to have the Company fully liquidate in a commercially reasonable manner as determined by the Board of Directors of the Company to provide for liquidation distributions to the holders of the Series D Preferred Stock in an amount per share of Series D Preferred Stock equal to $14.00 in cash plus accrued and unpaid dividends.  Once this right has been exercised and the Company has been notified, the dividend rate on the Series D Preferred Stock after June 30, 2021 will increase from 6.25% per annum to 12.5% per annum. The holders of Series D Preferred Stock vote their Series D Preferred Stock as a single class with the holders of the common stock on all matters submitted to such holders for vote or consent. For each such vote or consent, each share of Series D Preferred Stock entitles the holder to cast one vote for each whole vote (rounded to the nearest whole number) that such holder would be entitled to cast had such holder converted its Series D Preferred Stock into shares of common stock as of the date immediately prior to the record date for determining the shareholders of the Company eligible to vote on any such matter.



The fair value of the Series D Preferred Stock was determined to be equal to its face value on the date of issuance.



Impact of Preferred Stock on Net Earnings (Loss) Attributable to Common Shareholders



The components of dividends declared and undeclared and in kind dividends deemed on preferred stock are as follows:

23

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 







 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2016

 

2015

 

2016

 

2015

Preferred A dividends accrued at stated rate

 

$

32 

 

$

180 

 

$

222 

 

$

356 

Preferred A additional deemed dividends upon redemption

 

 

 

 

 -

 

 

652 

 

 

 -

Preferred B dividends accrued at stated rate

 

 

35 

 

 

208 

 

 

243 

 

 

416 

Preferred B additional deemed dividends upon redemption

 

 

 

 

 -

 

 

668 

 

 

 -

Preferred C dividends accrued at stated rate

 

 

 -

 

 

514 

 

 

455 

 

 

1,021 

Preferred C additional deemed dividends at exchange

 

 

 -

 

 

 -

 

 

15,419 

 

 

 -

Preferred D dividends accrued at stated rate

 

 

978 

 

 

 -

 

 

1,138 

 

 

 -

Dividends declared and undeclared and in kind dividends deemed on preferred stock

 

$

1,057 

 

$

902 

 

$

18,797 

 

$

1,793 



 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 9.  NONCONTROLLING INTEREST OF PARTNERSHIP UNITS IN SLP



Noncontrolling interest in SLP represents the limited partners’ proportionate share of the equity in the operating partnership and long-term incentive plan (LTIP) units (see Note 10).  Earnings and loss are allocated to noncontrolling interest in accordance with the weighted average percentage ownership of SLP during the period. 



Our ownership interest in SLP as of June 30, 2016 was 97.9% and as of December 31, 2015 was 90.1%, which includes consideration of the partnership units of the limited partners as well as the LTIP units. The Company’s increased ownership interest in SLP during the six months ended June 30, 2016 was a result of the contribution to SLP of the proceeds from the Series D Preferred Stock issuance during the first quarter of 2016 which was partially offset by the proceeds used to redeem the Series A and B Preferred Stock, which were withdrawn from SLP, in the second quarter of 2016 At both June 30, 2016 and December 31, 2015, 7,659,039 SLP partnership units owned by minority interest holders were outstanding, which includes 2,395,887 of partnership units held by limited partners and 5,263,152 LTIP units outstanding which were not yet earned. The combined redemption value for the partnership units and LTIP units was $1,474 and $1,197 at June 30, 2016 and December 31, 2015, respectively.



Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her partnership units at any time after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. When a limited partner tenders partnership units for redemption, the Company can, at its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock at a rate of one share of common stock for each eight partnership units redeemed or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited partner would have received if the Company chose to purchase the units for common stock. No partnership units were redeemed during the three or six months ended June 30, 2016 or 2015.

 

NOTE 10.  STOCK-BASED COMPENSATION



The Company had in place a 2006 Stock Plan which has been approved by the Company’s shareholders. The 2006 Stock Plan authorized the grant of stock options, stock appreciation rights, restricted stock, and stock bonuses for up to 62,500 shares of common stock. The 2006 Stock Plan expired effective December 31, 2015.  As a replacement for the 2006 Stock Plan, the Board of Directors adopted the Condor 2016 Stock Plan, which was approved by the Company’s shareholders at the annual shareholders meeting on June 15, 2016.  The 2016 Stock Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, deferred stock units, and other forms of stock-based compensation.  The maximum number of shares of the Company’s common stock that may be issued under the 2016 Stock Plan is 3,000,000, provided, however, that awards under this plan may not exceed 250,000 shares of common stock prior to the conversion into common stock

24

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

of all shares of Series D Preferred Stock (see Note 8). No shares had been issued under the 2016 Stock Plan at June 30, 2016.



Stock-based compensation for awards with a service condition only is measured based on the fair value of the award on the date of grant and recognized as compensation expense on a straight line basis over the service period.  The compensation cost related to awards for which vesting is contingent upon achieving a market based criteria is measured at the fair value of the award on the date of grant, including consideration of the market criteria, and amortized on a straight line basis over the performance period. The fair value of the award at grant is measured using either the closing stock price on the date of grant (for vested and unvested share awards), the Black-Scholes model (for options and warrants), or a Monte Carlo simulation (for LTIP awards), as appropriate. Compensation cost is recognized as additional paid-in capital for awards of the Company’s common stock and as noncontrolling interest for LTIP awards of SLP partnership units.



Options and Unvested Share Awards



At June 30, 2016, the Company had a total of 4,583 vested stock options outstanding with a weighted average exercise price of $7.95 per share and 1,042 unvested stock options outstanding with a weighted average exercise price of $8.08 per share under the 2006 Stock Plan.  The total unrecognized compensation cost related to unvested stock options at June 30, 2016 was $1, which is expected to be fully recognized in the third quarter of 2016 when the remaining unvested options fully vest.



As of June 30, 2016, the Company had 1,042 unvested shares of common stock outstanding under the 2006 Stock Plan. The total unrecognized compensation cost related to unvested stock awards at June 30, 2016 was $1, which is expected to be fully recognized in the third quarter of 2016 when the remaining unvested shares fully vest.



Warrants



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 entitled the executive to purchase a total of 657,894 authorized but previously unissued shares of the Company’s common stock at a price of (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 were purchased on or prior to March 17, 2015, and (ii) $1.92 per share for shares purchased after that date. 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, 2016, the total unrecognized compensation cost related to these warrants was $165, which is expected to be recognized over the next 20 months.



LTIP Awards



On March 2, 2015, the Company granted an equity award of 5,263,152 LTIP units, representing profit interests in SLP, to an executive officer of the Company. The LTIP units are earned in 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 upon vesting can be converted into SLP partnership units which can be redeemed at the rate of one share of common stock for each eight earned LTIP units for up to 657,894 common shares. As of June 30, 2016, the total unrecognized compensation cost related to these LTIP units was $284, which is expected to be recognized over the next 20 months. 



25

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Investment Committee Share Compensation



Independent directors serving as members of the Investment Committee of the Board of Directors receive their monthly Investment Committee fees in the form of shares of the Company’s common stock if issuance is available under a shareholder approved Stock Plan, priced as the average of the closing price of the stock for the first 20 trading days of the calendar year. A total of 3,950 and 6,938 shares, respectively, were issued to the independent directors of the Investment Committee for the three and six months ended June 30, 2015. Following shareholders’ approval of the 2016 Stock Plan as discussed above,  on July 15, 2016 the Company issued 11,944 shares of common stock to the independent directors of the Investment Committee for their service during the six months ended June 30, 2016.



Stock-Based Compensation Expense



The expense recognized in the consolidated financial statements for stock-based compensation, including LTIP units, related to employees and directors for the three months ended June 30, 2016 and 2015 was $70 and $74, respectively, and for the six months ended June 30, 2016 and 2015 was $139 and $123, respectively, and all of which is included in general and administrative expense.

 

NOTE 11.  INCOME TAXES



We have provided a full valuation allowance against our net deferred tax asset during all periods presented due to the uncertainty of realization resulting from past operating losses which results in no tax expense or benefit for the three and six months ended June 30, 2016 and 2015. After consideration of limitations related to a change in control as defined under Internal Revenue Code Section 382, the TRS’s net operating loss carryforward at June 30, 2016 as determined for federal income tax purposes was $6,091.  The availability of the loss carryforwards will expire from 2022 through 2035.

 

26

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

NOTE 12. EARNINGS PER SHARE



The following is a reconciliation of basic and diluted earnings per common share (“EPS”):



(1)





 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2016

 

2015

 

2016

 

2015

Numerator: Basic (1)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Basic

 

$

7,108 

 

$

(7,525)

 

$

(3,989)

 

$

(6,626)

Discontinued operations - Basic

 

 

 -

 

 

1,008 

 

 

655 

 

 

2,387 

Total Basic

 

$

7,108 

 

$

(6,517)

 

$

(3,334)

 

$

(4,239)



 

 

 

 

 

 

 

 

 

 

 

 

Numerator: Diluted (1)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to common shareholders from continuing operations

 

$

7,108 

 

$

(7,525)

 

$

(3,989)

 

$

(6,626)

Dividends on Series D Preferred Stock

 

 

978 

 

 

 -

 

 

 -

 

 

 -

Interest and fair value adjustment on Convertible Debt

 

 

(192)

 

 

 -

 

 

 -

 

 

 -

Continuing operations - Diluted

 

 

7,894 

 

 

(7,525)

 

 

(3,989)

 

 

(6,626)

Discontinued operations - Diluted

 

 

-

 

 

1,008 

 

 

655 

 

 

2,387 

Total Diluted

 

$

7,894 

 

$

(6,517)

 

$

(3,334)

 

$

(4,239)



 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares - Basic

 

 

4,940,836 

 

 

4,925,714 

 

 

4,940,836 

 

 

4,836,856 

Unvested stock

 

 

724 

 

 

 -

 

 

 -

 

 

 -

Series D Preferred Stock

 

 

39,032,225 

 

 

 -

 

 

 -

 

 

 -

Warrants - RES

 

 

131,910 

 

 

 -

 

 

 -

 

 

 -

Convertible Debt

 

 

632,249 

 

 

 -

 

 

 -

 

 

 -

Weighted average number of common shares - Diluted

 

 

44,737,944 

 

 

4,925,714 

 

 

4,940,836 

 

 

4,836,856 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Basic

 

$

1.44 

 

$

(1.52)

 

$

(0.81)

 

$

(1.37)

Discontinued operations - Basic

 

 

 -

 

 

0.20 

 

 

0.13 

 

 

0.49 

Total - Basic Earnings per Share

 

$

1.44 

 

$

(1.32)

 

$

(0.68)

 

$

(0.88)



 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Diluted

 

$

0.18 

 

$

(1.52)

 

$

(0.81)

 

$

(1.37)

Discontinued operations - Diluted

 

 

0.00 

 

 

0.20 

 

 

0.13 

 

 

0.49 

Total - Diluted Earnings per Share

 

$

0.18 

 

$

(1.32)

 

$

(0.68)

 

$

(0.88)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

(1)

The loss (earnings) attributable to noncontrolling interest is allocated between continuing and discontinued operations for the purpose of the EPS calculation.

27

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

The following table summarizes the weighted average number of potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted EPS as they are antidilutive:







 

 

 

 

 

 

 



Three months ended June 30,

 

Six months ended June 30,



2016

 

2015

 

2016

 

2015

Outstanding stock options

5,625 

 

8,750 

 

5,625 

 

8,750 

Unvested stock awards

 -

 

1,284 

 

1,042 

 

225 

Warrants - RES

 -

 

3,750,000 

 

3,750,000 

 

3,750,000 

Warrants - Employees

430,000 

 

430,000 

 

430,000 

 

287,459 

Series C Preferred Stock

 -

 

18,750,000 

 

7,829,670 

 

18,750,000 

Convertible debt

 -

 

 -

 

371,707 

 

 -

LTIP partnership units (1)

657,894 

 

657,894 

 

657,894 

 

439,809 

SLP partnership units (1)

299,486 

 

12,126 

 

299,486 

 

12,126 

Total potentially dilutive securities excluded from the denominator

1,393,005 

 

23,610,054 

 

13,345,424 

 

23,248,369 



(1)

LTIP and partnership units of SLP have been omitted from the denominator for the purpose of computing diluted EPS since the effect of including these amounts in the numerator and denominator would have no impact on calculated EPS.





NOTE 13.  COMMITMENTS AND CONTINGENCIES



Management Agreements



Our TRS engages eligible independent contractors as property managers for each of our hotels in accordance with the requirements for qualification as a REIT.  The hotel management agreements provide that the management companies have control of all operational aspects of the hotels, including employee-related matters. The management companies must generally maintain each hotel under their management in good repair and condition and perform routine maintenance, repairs, and minor alterations. Additionally, the management companies must operate the hotels in accordance with the national franchise agreements that cover the hotels, which includes, as applicable, using franchisor sales and reservation systems as well as abiding by franchisors’ marketing standards.  The management agreements generally require the TRS to fund debt service, working capital needs, and capital expenditures and to reimburse the management companies for all operating costs and expenses incurred in the operation of the hotels. The TRS also is responsible for obtaining and maintaining certain insurance policies with respect to the hotels.



Each of the management companies employed by the TRS at June 30, 2016 receives a base monthly management fee of 3.0% to 3.5% of gross hotel revenue plus incentive fees capped at 1.5% to 2.0% of gross hotel revenue, earned when actual hotel results exceed either budgeted results or specific return metrics. During the second quarter of 2015, the Company negotiated new agreements with our existing management companies. Prior to the renegotiation, management fees were calculated as 3.5% of gross hotel revenue plus 2.5% of the hotel operating income controlled by the management companies, with no incentive fees available. For the three months ended June 30, 2016 and 2015, base management fees incurred totaled $452 and $507, respectively, of which $442 and $453, respectively, was included in continuing operations as hotel and property operations expense. For the three months ended June 30, 2016, incentive management fees, included in continuing operations in their entirety, totaled $0.  For the six months ended June 30, 2016 and 2015, base management fees incurred totaled $851 and $1,100, respectively, of which $831 and $968, respectively, was included in continuing operations as hotel and property operations expense. For the six months ended June 30, 2016, incentive management fees, included in continuing operations in their entirety, totaled $21.



The management agreements generally have initial terms of one to three years and 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. The Company may terminate a management agreement, subject to cure rights, if certain performance metrics tied to both individual hotel and total managed portfolio performance are not met. The

28

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Company may also terminate a management agreement with respect to a hotel at any time without reason upon payment of a termination fee equal to 50% of the management fee paid with respect to the hotel during the prior 12 months. The management agreements terminate with respect to a hotel upon sale of the hotel, subject to certain notice requirements.



Franchise Agreements



As of June 30, 2016,  30 of our properties operate under franchise licenses from national hotel companies.  Under our franchise agreements, we are required to pay franchise fees generally between 3.3% and 5.5% of room revenue, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenue. The franchise agreements typically have 10 to 25 year terms although certain agreements may be terminated by either party on certain anniversary dates specified in the agreements.  Further, each agreement provides for early termination fees in the event the agreement is terminated before the stated term.  Franchise fee expense totaled $884 and $1,100, respectively, for the three months ended June 30, 2016 and 2015, of which $884 and $1,096, respectively, was included in continuing operations as hotel and property operations expense. Franchise fee expense totaled $1,643 and $1,972, respectively, for the six months ended June 30, 2016 and 2015, of which $1,643 and $1,096, respectively, was included in continuing operations as hotel and property operations expense. The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life of the franchise agreements.



Leases



The Company assumed land lease agreements at the time of purchase related to three hotels owned at June 30, 2016.  One lease requires monthly payments of the greater of $2 or 5% of room revenue and is associated with a property held for sale at June 30, 2016. The second lease requires annual payments of $34, with approximately $3 increases every five years throughout 12 optional renewal periods. The third lease requires annual lease payments of $13 and is associated with a property held for sale at June 30, 2016.  Land lease expense totaled $30 and $28, respectively, for the three months ended June 30, 2016 and 2015, of which $26 and $24 was included in continuing operations as hotel and property operations expense.    Land lease expense totaled $53 and $51, respectively, for the six months ended June 30, 2016 and 2015, of which $45 and $43 was included in continuing operations as hotel and property operations expense.



The Company entered into office lease agreements in May of 2010 and December of 2011, each of which matures in 2016 with the option to renew an additional five years.  In March 2016, the Company entered into a new office lease to replace one of these expiring office leases; the lease is a five year lease with rent not significantly different than that of the expiring lease.  Effective June 1, 2016, the Company also entered into an additional new office lease with a 39 month lease term and monthly payments averaging $6Office lease expense totaled $48 and $40 in the three months ended June 30, 2016 and 2015, respectively, and $94 and $80 in the six months ended June 30, 2016 and 2015, respectively, and is included in general and administrative expense.



Obligation to RES



The Company has an obligation to RES to use $25,000 of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions (see Note 8). There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions, but the Company is obligated to replace these funds promptly as it has the ability to do so. Following the completion of the three hotel acquisitions in 2015, the Company believes it has satisfied all but approximately $1,600 of this obligation.



Litigation



Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties.  We are not currently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us.  The Company has insurance to cover potential material losses and we believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.

29

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

 

NOTE 14. SUBSEQUENT EVENTS



Acquisitions



As discussed in the Company’s Current Report on Form 8-K dated July 26, 2016, on that date the Company entered into a joint venture to acquire a 254-room Aloft hotel in downtown Atlanta, Georgia.  Condor owns 80% of the joint venture, and its joint venture partner, Three Wall Capital LLC (“TWC”), owns the remaining 20% of the joint venture.  The purchase price for the hotel is $43,550.  The name of the joint venture is Spring Street Hotel Property II LLC (“Spring Street JV”).



The Company contributed $1,000 to Spring Street JV on July 26, 2016 and will contribute approximately $7,600 to Spring Street JV upon the closing of the acquisition of the hotel, in exchange for an 80% equity interest in Spring Street JV.  TWC contributed $250 to Spring Street JV and will contribute approximately $1,900 to Spring Street JV upon the closing of the acquisition of the hotel, in exchange for a 20% equity interest in Spring Street JV. The Company anticipates that approximately $33,750 of the purchase price will be finished with a mortgage loan.



The closing of the acquisition of the hotel is subject to customary closing conditions including accuracy of representations and warranties and compliance with covenants and obligations. The closing is expected to occur in the third quarter of 2016.   



Dispositions



The Company sold the 64-room Super 8 in Pittsburgh, Kansas on August 5, 2016 for gross proceeds of $1,620. After repayment of the associated loan, proceeds from this sale will be used to fund future acquisitions and for general corporate purposes.



Dividends Declared



On July 11, 2016, the Board of Directors declared a common stock dividend of $0.01 per share.  This dividend was paid on August 3, 2016 to shareholders of record on July 22, 2016.  This represents the first common stock dividend declared by the Company since 2009.







 

30

 


 

 

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



Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.



References to “we,” “our,” “us,” and “Company” refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.



Forward-Looking Statements



Certain information both included and incorporated by reference in this Form 10-K 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 which 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, policies and guidelines applicable to real estate investment trusts, and other risks and uncertainties described herein, and in our filings with the Securities and Exchange Commission (“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 which speak only as of the date of this report.



Background



Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”), which until July 15, 2015 was formerly named Supertel Hospitality, Inc., was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014.  CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels.  As of June 30, 2016, the Company owned 31 hotels, representing

2,631 rooms, in 16 states.



We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, Supertel Limited Partnership and its subsidiaries (“SLP”), for which we serve as general partner. As of June 30, 2016, we owned an approximate 97.9% ownership interest in SLP.  In the future, SLP may issue limited partnership interests to third parties from time to time in connection with our acquisition of hotel properties or the raising of capital.



In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels.  Therefore, SLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned

31

 


 

 

subsidiaries (“the TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels.  SLP and the TRS and their respective subsidiaries are consolidated into the Company’s financial statements. 



Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature.  Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year.  The results of the hotels acquired in October 2015, because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.



Overview



The Company continues to make significant progress on its strategic repositioning.  In the second quarter of 2016, the Company completed the redemption of its Series A and Series B Preferred Stock, closed on the disposition of seven non-core hotels, declared a common dividend, and announced a joint venture to acquire the Aloft Atlanta in downtown Atlanta, Georgia.  These important accomplishments are further detailed below.



Preferred Stock Redemption: On April 15, 2016, the Company used a portion of the proceeds from the $30.0 million Series D capital raise completed in the first quarter of 2016 to redeem for cash all outstanding Series A and Series B Preferred Stock, including all unpaid accrued dividends.  The aggregate redemption price was approximately $20.2 million.  The Company plans to use the remaining $8.8 million of net proceeds from the capital raise to acquire high-quality, premium branded select service hotels.



7 Non-Core Assets Sold: In the second quarter of 2016, the Company continued to successfully dispose of legacy assets at attractive valuations.  In addition to the four hotels sold in the first quarter of 2016 with gross proceeds totaling $9.4 million, the Company sold one legacy asset in April 2016 for gross proceeds of $1.725 million, five legacy assets in May 2016 for gross proceeds totaling $12.759 million, and one legacy asset in June 2016 for gross proceeds of $2.15 million.  The Company plans to dispose of 20 legacy hotels, including the 11 closed dispositions aforementioned, in 2016 and will to utilize the net proceeds to continue to strategically reposition the portfolio.

Common Dividend Declared: On July 11, 2016, the Board of Directors declared a common stock dividend of $0.01 per share.  This dividend was paid on August 3, 2016 to shareholders of record on July 22, 2016.  This represents the first common stock dividend declared by the Company since 2009.

Joint Venture Announced:  Subsequent to the second quarter end, on July 26, 2016, the Company entered into a joint venture to acquire a 254-room Aloft hotel in downtown Atlanta, Georgia.  Condor will own 80% of the joint venture, and its joint venture partner, Three Wall Capital LLC (“TWC”), will own the remaining 20% of the joint venture.  The purchase price for the hotel is $43.55 million.  The closing of the acquisition of the hotel is subject to customary closing conditions including accuracy of representations and warranties and compliance with covenants and obligations. 

As expected, the U.S. lodging industry exhibited continued stabilization and improvement in the second quarter of 2016, albeit at more modest growth levels as compared to 2015.  Industry-wide occupancy has exceeded the peak occupancy levels in the previous cycle, which may enable hotel operators to increase ADR.  Gains in ADR and stable occupancy levels will lead to continued growth in RevPAR.  While we remain optimistic on the strength of lodging fundamentals, the volatile global economy, weaker corporate profit outlooks, slowing job gains, and an unpredictable U.S. political environment give us concern on the potential impact these factors may have on the continued strength of the lodging industry.  That being said, we remain confident in our ability to continue to achieve the strategic turnaround of the Company and remain encouraged by our many successes year-to-date.  We are especially proud of our ability to declare and pay a dividend to our common shareholders for the first time since 2009.   

The Company details factors that are outside of its control and that may negatively effect its performance in the “Risk Factors” section of its Annual Report on Form 10-K for the year ended December 31, 2015 and other documents that may be filed with the SEC in the future.  We encourage our investors to become familiar with these risk factors.  The Company continues to closely monitor lodging industry fundamentals, the performance of its

32

 


 

 

portfolio, its third-party managers, and its general performance, in an effort to accomplish its stated mission of providing attractive total returns in the lodging sector to its investors    



The Company details factors that are outside of its control and that may negatively effect its performance in the “Risk Factors” section of its Annual Report on Form 10-K for the year ended December 31, 2015 and other documents that may be filed with the SEC in the future.  We encourage our investors to become familiar with these risk factors.  The Company continues to closely monitor lodging industry fundamentals, the performance of its portfolio, its third-party managers, and its general performance, in an effort to accomplish its stated mission of providing attractive total returns in the lodging sector to its investors.



33

 


 

 

Hotel Property Portfolio and Activity



The following table sets forth certain information with respect to the hotels owned by us as of June 30, 2016:





 

 

 

 

 

 



 

 

 

 

 

 

Location

 

Rooms

 

Location

 

Rooms

Florida

 

 

 

Maryland

 

 

Key Largo, Key West Inns 

 

40 

 

Dowell, Hilton Garden Inn

 

100 

Jacksonville, Courtyard by Marriott  (3)

 

120 

 

Solomons, Quality Inn

 

59 



 

 

 

 

 

 

Georgia

 

 

 

Montana

 

 

Atlanta, Savannah Suites (1) (2)

 

164 

 

Billings, Super 8

 

106 

Atlanta, Hotel Indigo  (3)

 

142 

 

 

 

 



 

 

 

North Carolina

 

 

Indiana

 

 

 

Shelby, Comfort Inn (2)

 

76 

Fort Wayne, Comfort Suites

 

127 

 

 

 

 

Lafayette, Comfort Suites

 

62 

 

Pennsylvania

 

 

Marion, Comfort Suites (2)

 

62 

 

New Castle, Comfort Inn (2)

 

79 

South Bend, Comfort Suites

 

135 

 

 

 

 

Warsaw, Comfort Inn & Suites

 

71 

 

South Dakota

 

 



 

 

 

Sioux Falls (Airport), Days Inn (1) (2)

 

86 

Iowa

 

 

 

 

 

 

Burlington, Super 8  (2)

 

62 

 

Texas

 

 

Creston, Super 8  (2)

 

121 

 

San Antonio, SpringHill Suites (3)

 

116 

Creston, Supertel Inn (2)

 

41 

 

 

 

 

Mt. Pleasant, Super 8 (2)

 

55 

 

Virginia

 

 



 

 

 

Farmville, Comfort Inn

 

51 

Kansas

 

 

 

Farmville, Days Inn (2)

 

59 

Pittsburg, Super 8 (2)

 

64 

 

Rocky Mount, Comfort Inn (2)

 

61 



 

 

 

 

 

 

Kentucky

 

 

 

West Virginia

 

 

Danville, Quality Inn (2)

 

63 

 

Morgantown, Quality Inn

 

81 

Glasgow, Comfort Inn (2)

 

60 

 

Princeton, Quality Inn

 

50 

Harlan, Comfort Inn  (1) (2)

 

61 

 

 

 

 



 

 

 

Wisconsin

 

 

Louisiana

 

 

 

Menomonie, Super 8  (2)

 

81 

Bossier City, Days Inn (2)

 

176 

 

 

 

 



 

 

 

Total Rooms

 

2,631 



(1)

This property is subject to a long-term ground lease.

(2)

This property is considered held for sale at June 30, 2016. 

(3)

This property was newly acquired in the fourth quarter of 2015.



34

 


 

 

All of our properties are encumbered by either our revolving credit agreement or by mortgage debt at June 30, 2016.



Consistent with our strategic repositioning, the following hotel sales were executed in the six months ended June 30, 2016:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Condor

 

Number of

 

Gross proceeds

Date of sale

 

Location

 

Brand

 

lender

 

rooms

 

(in thousands)

01/04/16

 

Kirksville, MO

 

Super 8

 

Great Western

 

61 

 

$

1,525 

01/07/16

 

Lincoln, NE

 

Super 8

 

Great Western

 

133 

 

 

2,800 

01/08/16

 

Greenville, SC

 

Savannah Suites

 

GE Capital

 

170 

 

 

2,700 

03/30/16

 

Portage, WI

 

Super 8

 

Morgan Stanley

 

61 

 

 

2,375 

04/22/16

 

O'Neill, NE

 

Super 8

 

Morgan Stanley

 

72 

 

 

1,725 

05/10/16

 

Culpeper, VA

 

Quality Inn

 

Morgan Stanley

 

49 

 

 

2,200 

05/19/16

 

Storm Lake, IA

 

Super 8

 

Morgan Stanley

 

59 

 

 

2,800 

05/24/16

 

Cleveland, TN

 

Clarion

 

Morgan Stanley

 

59 

 

 

2,231 

05/26/16

 

Iowa City, IA

 

Super 8

 

Morgan Stanley

 

84 

 

 

3,375 

05/27/16

 

Keokuk, IA

 

Super 8

 

Morgan Stanley

 

61 

 

 

2,153 

06/06/16

 

Chambersburg, PA

 

Comfort Inn

 

Morgan Stanley

 

63 

 

 

2,150 



 

 

 

 

 

Total

 

872 

 

$

26,034 



Net proceeds, after expenses and debt repayment, totaled $4.6 million and $8.4 million in the three and six months ended June 30, 2016, respectively. In the three months ended June 30, 2015, 3 hotels with 341 rooms were sold for gross proceeds of $9.3 million, and net proceeds, after expenses and debt repayment, of $3.5 million.  In the six months ended June 30, 2015, 7 hotels with 637 rooms were sold for gross proceeds of $16.8 million, and net proceeds, after expenses and debt repayment, of $4.4 million



Based on the criteria discussed in the footnotes to the consolidated financial statements, as of June 30, 2016, the Company had 17 hotels classified as held for sale. At March 31, 2016, the Company had 13 hotels held for sale and during the three months ended June 30, 2016 sold seven properties and classified 11 additional hotels as held for sale. At December 31, 2015, the Company had 16 hotels held for sale and during the six months ended June 30, 2016 sold 11 properties and classified 12 additional hotels as held for sale. 



As discussed in the footnotes to the consolidated financial statements, as of October 1, 2014 we adopted ASU 2014-08 which changes the criteria for reporting a discontinued operation such that only disposals representing a strategic shift in operations should be presented as discontinued operations subsequent to adoption.  None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results.  As a result, only hotels classified as held for sale prior to October 1, 2014, one of which remains unsold at June 30, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended June 30, 2016 and 2015, the results of 37 and 46 hotels, respectively, were included in continuing operations and the results of one and six hotels, respectively, were included in discontinued operations.  For the six months ended June 30, 2016 and 2015, the results of 40 and 46 hotels, respectively, were included in continuing operations and the results of two and 10 hotels, respectively, were included in discontinued operations.

 



35

 


 

 

Operating Performance Metrics



The following table presents our RevPAR,  ADR, and occupancy for our same store operations.  The comparisons for same store operations include all of our hotels owned as of June 30, 2016 with the exception of the three hotels we acquired in October 2015 (28 hotels included in same store results, 11 of which are considered held for use (“HFU”) and 17 of which are considered held for sale (“HFS”).  All hotels included in same store operations were owned throughout each of the periods presented.  The performance metrics for three hotels acquired in 2015 represent post-acquisition operations only and are separately presented.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three months ended June 30,



2016

 

2015



Occupancy

 

ADR

 

RevPAR

 

Occupancy

 

ADR

 

RevPAR

Same store HFU

65.86% 

 

$

85.69 

 

$

56.44 

 

66.84% 

 

$

85.95 

 

$

57.45 

Same store HFS

64.45% 

 

$

62.47 

 

$

40.26 

 

70.12% 

 

$

59.74 

 

$

41.89 

Total same store

65.00% 

 

$

71.70 

 

$

46.60 

 

68.84% 

 

$

69.71 

 

$

47.98 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

74.75% 

 

$

116.15 

 

$

86.82 

 

 -

 

$

 -

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Six months ended June 30,



2016

 

2015



Occupancy

 

ADR

 

RevPAR

 

Occupancy

 

ADR

 

RevPAR

Same store HFU

60.69% 

 

$

85.84 

 

$

52.09 

 

63.90% 

 

$

82.85 

 

$

52.94 

Same store HFS

58.15% 

 

$

60.41 

 

$

35.12 

 

65.47% 

 

$

57.66 

 

$

37.75 

Total same store

59.14% 

 

$

70.60 

 

$

41.75 

 

64.85% 

 

$

67.38 

 

$

43.70 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

75.78% 

 

$

114.22 

 

$

86.56 

 

 -

 

$

 -

 

$

 -







In the same store HFU portfolio of hotels, RevPAR decreased 1.8% from the second quarter of 2015 to the second quarter of 2016, driven by a decrease in occupancy of 1.5% and a slight decrease in ADR of 0.3%.  In this same portfolio, RevPar decreased 1.6% between the year to date periods ended June 30, 2016 and 2015, also driven by a decrease in occupancy of 5.0% which was partially offset by an increase in ADR of 3.6%.  In our legacy hotel portfolio, the decreases in occupancy between the periods were driven by market challenges facing these hotels as a result of declines in the oil and gas, rail, and fracking industries. This decrease in occupancy is most pronounced in the year to date results as the summer travel season, with its increased leisure, transient, and construction travel, favorably impacts our hotels beginning in the second quarter annually. Despite these occupancy challenges, in the latter half of 2015 and in 2016, the Company has focused on increasing ADR as is evident in the year to date ADR increase.



36

 


 

 

Results of Operations



Comparison of the three months ended June 30, 2016 to the three months ended June 30, 2015 (in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three months ended June 30,



2016

 

2015

 

 



Continuing operations

 

Discontinued operations

 

Total

 

Continuing operations

 

Discontinued operations

 

Total

 

Continuing operations variance

Revenue

$

13,815 

 

$

339 

 

$

14,154 

 

$

16,364 

 

$

962 

 

$

17,326 

 

$

(2,549)

Hotel and property operations expense

 

(9,571)

 

 

(316)

 

 

(9,887)

 

 

(11,337)

 

 

(656)

 

 

(11,993)

 

 

1,766 

Depreciation and amortization expense

 

(1,289)

 

 

 -

 

 

(1,289)

 

 

(1,257)

 

 

 -

 

 

(1,257)

 

 

(32)

General and administrative expense

 

(1,277)

 

 

 -

 

 

(1,277)

 

 

(1,347)

 

 

 -

 

 

(1,347)

 

 

70 

Acquisition and terminated transactions expense

 

(53)

 

 

 -

 

 

(53)

 

 

(17)

 

 

 -

 

 

(17)

 

 

(36)

Net gain (loss) on disposition of assets

 

8,858 

 

 

(2)

 

 

8,856 

 

 

(135)

 

 

725 

 

 

590 

 

 

8,993 

Net gain (loss) on derivatives and convertible debt

 

162 

 

 

 -

 

 

162 

 

 

(4,710)

 

 

 -

 

 

(4,710)

 

 

4,872 

Other income

 

23 

 

 

 -

 

 

23 

 

 

31 

 

 

 -

 

 

31 

 

 

(8)

Interest expense

 

(1,228)

 

 

(21)

 

 

(1,249)

 

 

(1,490)

 

 

(54)

 

 

(1,544)

 

 

262 

Loss on extinguishment of debt

 

(976)

 

 

 -

 

 

(976)

 

 

 -

 

 

 -

 

 

 -

 

 

(976)

Impairment (loss) recovery

 

(121)

 

 

 -

 

 

(121)

 

 

(3,053)

 

 

75 

 

 

(2,978)

 

 

2,932 

Income tax expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net earnings (loss)

$

8,343 

 

$

 -

 

$

8,343 

 

$

(6,951)

 

$

1,052 

 

$

(5,899)

 

$

15,294 



Revenue



Revenue from continuing operations between the periods decreased by $2,549, or 15.6%, between the periods.  Revenue from newly acquired properties in the three months ended June 30, 2016 totaled $3,277 while revenue decreased by $5,693 as a result of decreased revenue from held for sale and sold properties included in continuing operations between the periods.  Revenue related to held for use properties decreased by $133 as a result of the decreased RevPAR on these properties discussed above.



Expenses



Hotel and property operations expense from continuing operations decreased by $1,766, which was driven by decreased expenses from held for sale or sold properties included in continuing operations of $3,750 between the periods which was partially offset by expenses from newly acquired properties of $2,036 in the three months ended June 30, 2016.  Hotel and property operations expenses on other held for use assets remained relatively stable, decreasing by $52.  In totality, hotel and operations expenses from continuing operations remained a consistent percentage of total revenue at 69.3% between the periods, with the higher margins we are earning on our 2015 acquisitions being offset by lower margins earned on our legacy hotels due largely to wage increases resulting from current labor market conditions that took effect in the last half of 2015.



Interest expense from continuing operations decreased by $262 between the periods as a result of a net decrease in the size of the Company’s hotel portfolio which was encumbered by debt.  Additionally, interest expense was favorably impacted by a decrease in the weighted average interest rate on total long-term debt outstanding between the periods, from 5.82% at June 30, 2015 to 5.16% at June 30, 2016, as a result of debt repaid upon the sale of properties and debt refinancings between the periods.  Depreciation expense from continuing operations remain stable between the periods, increasing by $32, with depreciation on our newly acquired properties offsetting decreases in depreciation resulting from sold and held for sale properties.



The $70 decrease in general and administrative expense was driven by one-time costs incurred in the second quarter of 2015 related to legal and compensation costs associated with a change in executive officers.



Acquisition and terminated transaction costs will fluctuate period to period based on our acquisition activities.  Acquisition costs typically consist of transfer taxes, legal fees, and other costs associated with acquiring a

37

 


 

 

hotel property as well as transactions that were terminated during the year.  The increase in these expenses in 2016 of $36 was a result of increased activity by management to review potential future transactions.



Dispositions



In the three months ended June 30, 2016, seven hotels were sold with gains totaling $8,886. In the three months ended June 30, 2015, one hotel was sold with a gain of $727 and two hotels were sold that had been previously impaired and as such had no gains.



Net Gain (Loss) on Derivatives and Convertible Debt



In the three months ended June 30, 2016, the gain on derivatives and convertible debt was driven by a $208 decrease in the value attributed to the convertible debt entered into on March 16, 2016 due to a decrease in stock price from the prior quarter end.  In the three months ended June 30, 2015, the loss on derivatives and convertible debt were driven by a decrease in fair value of derivatives that was primarily a result of a decrease in the Company’s stock price, which in turn decreased the value assigned to the conversion feature of the Series C Preferred Stock and the outstanding common stock warrants.



Loss on Extinguishment of Debt



The loss on the extinguishment of debt increased between the periods as a result of significant prepayment penalties incurred in 2016 upon the disposal of a properties encumbered by the Company’s Morgan Stanley debt.



Impairment Losses



In the three months ended June 30, 2016, we incurred $121 of impairment losses, all of which was included in continuing operations. In the three months ended June 30, 2015, we incurred impairment losses totaling $2,978, of which $3,053 was in continuing operations and a recovery of $75 was in discontinued operations.  All impairments recognized in both periods related either to hotels held for sale or sold at some point during the periods.



Income Tax Expense



As of June 30, 2016 and 2015 and throughout the three months then ended, a full valuation allowance was recorded against the Company’s net deferred tax asset due to the uncertainty of realization because of historical operating losses. As such, no income tax expense or benefit was recorded in the three months ended June 30, 2016 or 2015.  Management believes the combined federal and state income tax rate for the TRS will be approximately 38% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.





38

 


 

 

Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015 (in thousands)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Six months ended June 30,



2016

 

2015

 

 



Continuing operations

 

Discontinued operations

 

Total

 

Continuing operations

 

Discontinued operations

 

Total

 

Continuing operations variance

Revenue

$

25,991 

 

$

673 

 

$

26,664 

 

$

28,710 

 

$

2,714 

 

$

31,424 

 

$

(2,719)

Hotel and property operations expense

 

(18,978)

 

 

(626)

 

 

(19,604)

 

 

(21,325)

 

 

(1,907)

 

 

(23,232)

 

 

2,347 

Depreciation and amortization expense

 

(2,698)

 

 

 -

 

 

(2,698)

 

 

(2,737)

 

 

 -

 

 

(2,737)

 

 

39 

General and administrative expense

 

(2,725)

 

 

 -

 

 

(2,725)

 

 

(2,732)

 

 

 -

 

 

(2,732)

 

 

Acquisition and terminated transactions expense

 

(147)

 

 

 -

 

 

(147)

 

 

(17)

 

 

 -

 

 

(17)

 

 

(130)

Net gain (loss) on disposition of assets

 

12,226 

 

 

678 

 

 

12,904 

 

 

(122)

 

 

1,662 

 

 

1,540 

 

 

12,348 

Net gain (loss) on derivatives and convertible debt

 

6,279 

 

 

 -

 

 

6,279 

 

 

113 

 

 

 -

 

 

113 

 

 

6,166 

Other income

 

 

 

 -

 

 

 

 

126 

 

 

 -

 

 

126 

 

 

(124)

Interest expense

 

(2,536)

 

 

(46)

 

 

(2,582)

 

 

(3,017)

 

 

(200)

 

 

(3,217)

 

 

481 

Loss on extinguishment of debt

 

(1,149)

 

 

 -

 

 

(1,149)

 

 

(7)

 

 

 -

 

 

(7)

 

 

(1,142)

Impairment (loss) recovery

 

(914)

 

 

 -

 

 

(914)

 

 

(3,830)

 

 

120 

 

 

(3,710)

 

 

2,916 

Income tax expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net earnings (loss)

$

15,351 

 

$

679 

 

$

16,030 

 

$

(4,838)

 

$

2,389 

 

$

(2,449)

 

$

20,189 



Revenue



Revenue from continuing operations decreased by $2,719, or 9.5%, between the periods.  Revenue from newly acquired properties in the six months ended June 30, 2016 totaled $6,514 and revenue from our other held for use assets decreased by $194 which was the result of the decrease in same store RevPAR for held for use hotels discussed above.  Revenue from held for sale and sold properties included in continuing operations decreased by $9,039 driven by property sales during and between the periods presented.



Expenses



Hotel and property operations expense from continuing operations decreased by $2,347, which was driven by decreased expenses from held for sale or sold properties included in continuing operations of $6,688 between the periods which was partially offset by expenses from newly acquired properties of $4,083 in the six months ended June 30, 2016.  Hotel and property operations expenses on other held for use assets remained relatively stable, increasing $258.  In totality, hotel and operations expenses from continuing operations decreased as a percentage of revenue by 1.3% between the periods because the legacy hotels that remain in our portfolio and our 2015 acquisitions have higher operating margins than the hotels that were sold during and between the periods.



Interest expense from continuing operations and depreciation expense from continuing operations decreased by $481 and $39, respectively, between the periods as a result of a net decrease in the size of the Company’s hotel portfolio.  Additionally, interest expense was favorably impacted by a decrease in the weighted average interest rate on total long-term debt outstanding between the periods, from 5.82% at June 30, 2015 to 5.16% at June 30, 2016, as a result of debt repaid upon the sale of properties and debt refinancings between the periods.



The general and administrative expense was stable between the periods, decreasing in totality by $7.



Acquisition and terminated transaction costs will fluctuate period to period based on our acquisition activities.  Acquisition costs typically consist of transfer taxes, legal fees, and other costs associated with acquiring a hotel property as well as transactions that were terminated during the year.  The increase in these expenses in 2016 was a result of expenses incurred during the period related to the final accounting for and valuation of the three acquisitions consummated in the fourth quarter of 2015 as well as increased activity by management to review potential future transactions.









39

 


 

 

Dispositions



In the six months ended June 30, 2016, 11 hotels were sold with gains totaling $12,945. In the six months ended June 30, 2015, two hotels were sold with gains totaling $1,666 and five hotels were sold that had been previously impaired and as such had no gains.



Net Gain on Derivatives and Convertible Debt



The change in gain (loss) on derivatives and convertible debt was driven by changes in the fair value of the derivative liabilities between the periods. In both periods, decreases in fair value of derivatives were primarily a result of a decreases in the Company’s stock price, which in turn decreased the value assigned to the conversion feature of the Series C Preferred Stock and the outstanding common stock warrants.  In the six months ended June 30, 2016, this gain was partially offset by a loss of $179 on the fair value of the convertible debt entered into on March 16, 2016 due to an increase in stock price from the date that note was entered into to June 30, 2016.



Loss on Extinguishment of Debt



The loss on the extinguishment of debt increased between the periods as a result of significant prepayment penalties incurred upon the disposal of properties encumbered by the Company’s Morgan Stanley debt.



Impairment Losses



In the six months ended June 30, 2016, we incurred $914 of impairment losses, all of which was included in continuing operations. In the six months ended June 30, 2015, we incurred impairment losses totaling $3,710, of which $3,830 was in continuing operations and a recovery of $120 was in discontinued operations.  All impairments recognized in both periods related either to hotels held for sale or sold at some point during the periods.



Income Tax Expense



As of June 30, 2016 and 2015 and throughout the three months then ended, a full valuation allowance was recorded against the Company’s net deferred tax asset due to the uncertainty of realization because of historical operating losses. As such, no income tax expense or benefit was recorded in the three months ended June 30, 2016 or 2015.  Management believes the combined federal and state income tax rate for the TRS will be approximately 38% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.



Non-GAAP Financial Measures



Non-GAAP financial measures are measures of our historical financial performance that are different from measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We report Funds from Operations (“FFO”), Adjusted FFO (“AFFO”), Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), Adjusted EBITDA, and Property Operating Income (“POI”) as non-GAAP measures that we believe are useful to investors as key measures of our operating results and which management uses to facilitate a periodic evaluation of our operating results relative to those of our peers.  Our non-GAAP measures should not be considered as an alternative to U.S. GAAP net earnings (loss) or operating income as an indication of financial performance or to U.S. GAAP cash flows from operating activities as a measure of liquidity.  Additionally, these measures are not indicative of funds available to fund cash needs or our ability to make cash distributions as they have not been adjusted to consider cash requirements for capital expenditures, property acquisitions, debt service obligations, or other commitments.



Funds from Operations (“FFO”) & Adjusted FFO (“AFFO”)



We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net earnings (loss) computed in accordance with GAAP, excluding gains or losses from sales of real estate assets, impairment, and the depreciation and amortization of real estate assets.  FFO is calculated both for the Company in total and as FFO attributable to common shareholders, which is FFO excluding earnings or loss attributable to noncontrolling interests and preferred stock dividends. 

40

 


 

 

AFFO is FFO attributable to common shareholders adjusted to exclude items we do not believe are representative of the results from our core operations, such as non-cash gains or losses on derivative liabilities and convertible debt and cash charges for acquisition costs. 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 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 assumes 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.



The following table reconciles net earnings (loss) to FFO and AFFO for the three and six months ended June 30, 2016 and 2015 (in thousands). All amounts presented include both continuing and discontinued operations.







 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,

Reconciliation of Net earnings (loss) to FFO and AFFO

2016

 

2015

 

2016

 

2015

Net earnings (loss)

$

8,343 

 

$

(5,899)

 

$

16,030 

 

$

(2,449)

Depreciation and amortization expense

 

1,289 

 

 

1,257 

 

 

2,698 

 

 

2,737 

Net gain on disposition of assets

 

(8,856)

 

 

(590)

 

 

(12,904)

 

 

(1,540)

Impairment loss

 

121 

 

 

2,978 

 

 

914 

 

 

3,710 

FFO

 

897 

 

 

(2,254)

 

 

6,738 

 

 

2,458 

(Loss) earnings attributable to noncontrolling interests

 

(178)

 

 

284 

 

 

(567)

 

 

Dividends declared and undeclared and in kind dividends deemed on preferred stock

 

(1,057)

 

 

(902)

 

 

(18,797)

 

 

(1,793)

FFO available to common shareholders

 

(338)

 

 

(2,872)

 

 

(12,626)

 

 

668 

Net (gain) loss on derivatives and convertible debt

 

(162)

 

 

4,710 

 

 

(6,279)

 

 

(113)

Acquisition and terminated transactions expense

 

53 

 

 

17 

 

 

147 

 

 

17 

AFFO available to common shareholders

$

(447)

 

$

1,855 

 

$

(18,758)

 

$

572 



Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA



We calculate EBITDA and Adjusted EBITDA by adding back to net earnings (loss) certain non-operating expenses and certain non-cash charges which are based on historical cost accounting that 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. In calculating EBITDA, we add back to net earnings (loss) interest expense, loss on debt extinguishment, income tax expense, and depreciation and amortization expense. In calculating Adjusted EBITDA, we adjust EBITDA to add back net gain/loss on disposition of assets and acquisition and terminated transactions expense, which are cash charges. We also add back impairment and gain or loss on derivatives and convertible debt, which are non-cash charges. Our current calculation of EBITDA varies from that presented in filings prior to the December 31, 2015 Form 10-K as EBITDA was historically calculated based on net earnings (loss) attributable to common shareholders with preferred dividends and noncontrolling interest added back only to Adjusted EBITDA.  EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.



We believe EBITDA and Adjusted EBITDA to be useful additional measures of our operating performance, excluding the impact of our capital structure (primarily interest expense), our asset base (primarily depreciation and amortization expense), and other items we do not believe are representative of the results from our core operations.



41

 


 

 

The following table reconciles net earnings (loss) to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2016 and 2015 (in thousands). All amounts presented include both continuing and discontinued operations.







 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,

Reconciliation of Net earnings (loss) to EBITDA and Adjusted EBITDA

2016

 

2015

 

2016

 

2015

Net earnings (loss)

$

8,343 

 

$

(5,899)

 

$

16,030 

 

$

(2,449)

Interest expense

 

1,249 

 

 

1,544 

 

 

2,582 

 

 

3,217 

Loss on debt extinguishment

 

976 

 

 

 -

 

 

1,149 

 

 

Income tax expense

 

 -

 

 

 -

 

 

 -

 

 

 -

Depreciation and amortization expense

 

1,289 

 

 

1,257 

 

 

2,698 

 

 

2,737 

EBITDA

 

11,857 

 

 

(3,098)

 

$

22,459 

 

$

3,512 

Net gain on disposition of assets

 

(8,856)

 

 

(590)

 

 

(12,904)

 

 

(1,540)

Impairment loss

 

121 

 

 

2,978 

 

 

914 

 

 

3,710 

Net (gain) loss on derivatives and convertible debt

 

(162)

 

 

4,710 

 

 

(6,279)

 

 

(113)

Acquisition and terminated transactions expense

 

53 

 

 

17 

 

 

147 

 

 

17 

Adjusted EBITDA

$

3,013 

 

$

4,017 

 

$

4,337 

 

$

5,586 



Property Operating Income (“POI”)



We calculate POI as room rentals and other hotel services revenue less hotel and property operating expenses.  We believe POI is helpful to investors as it better communicates the comparability of our hotels’ operating results for all of the Company’s hotel properties.  POI as presented below includes both continuing and discontinued operations.



The following table reconciles operating income to POI for the three and six months ended June 30, 2016 and 2015 (in thousands). All amounts presented include only continuing operations unless otherwise noted.









 

 

 

 

 

 

 

 

 

 

 



Three months ended

 

Six months ended



June 30,

 

June 30,

Reconciliation of Operating income to POI 

2016

 

2015

 

2016

 

2015

Operating income

$

1,625 

 

$

2,406 

 

$

1,443 

 

$

1,899 

Depreciation and amortization expense

 

1,289 

 

 

1,257 

 

 

2,698 

 

 

2,737 

General and administrative expense

 

1,277 

 

 

1,347 

 

 

2,725 

 

 

2,732 

Acquisition and terminated transactions expense

 

53 

 

 

17 

 

 

147 

 

 

17 

Room rentals and property operations revenue, discontinued operations

 

339 

 

 

962 

 

 

673 

 

 

2,714 

Hotel and property operating expense, discontinued operations

 

(316)

 

 

(656)

 

 

(626)

 

 

(1,907)

POI

$

4,267 

 

$

5,333 

 

$

7,060 

 

$

8,192 



Liquidity and Capital Resources



Liquidity Requirements



We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our revolving credit agreement with Great Western Bank, and the release of restricted cash upon the satisfaction of usage requirements.  At June 30, 2016, the Company had $19.0 million of cash and cash equivalents on hand and $2.4 million of unused availability under its revolving credit agreement.  Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on

42

 


 

 

outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code. We expect to invest approximately $3.5 million to $5.0 million in capital expenditures related to hotel properties we currently own through September 30, 2017.



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 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.



Our longer-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans.  Additionally, the Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use approximately $1.6 million of proceeds from a capital infusion in 2012 to pursue hotel acquisitions.  Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings and proceeds from public or private issuances of debt or equity securities. 



Prior to the consideration of any asset sales or our ability to refinance debt subsequent to June 30, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $12.9 million through September 30, 2017, including the February 1, 2017 maturity of one of our WAB loans with a balance at June 30, 2016 of $10.6 million. This and certain of our other loans, previously owned by GE Capital Franchise Finance Corporation (“GE”), were sold to Western Alliance Bank (“WAB”) in April 2016 and we now refer to them as our WAB loans.  Prior to its maturity, the Company anticipates refinancing the WAB loan with the existing lender or another lender. As a result of our improved financial condition and the terms of the lending arrangements we have entered into in recent periods, we believe we will be able to refinance this debt on similar or perhaps more favorable terms. However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.



Additionally, at June 30, 2016, we have 17 hotels held for sale which, if sold, we believe will generate approximately $20.0 million in net proceeds after debt repayment.  Over the last five years, we have sold 76 hotels. Although it is management’s plan to use net proceeds after debt repayment from future asset sales to fund future acquisitions, if necessary the Company believes that cash generated from asset dispositions will be sufficient to fund any shortfalls associated with future debt maturities.  However, with respect to future hotel sales, we cannot predict whether we will be able to find buyers for identified assets at prices and 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.



Sources and Uses of Cash



Cash provided by Operating Activities.  Our cash provided by operations was $2.2 million and $2.7 million for the six months ended June 30, 2016 and 2015, respectively.  The decrease in operating cash flows was driven by a decrease in cash basis net income of $0.8 million which was partially offset by differences in the changes in operating assets and liabilities between the periods, none of which were individually significant.



Cash provided by Investing Activities.  Our cash provided by investing activities was $24.0 million and $14.9 million for the six months ended June 30, 2016 and 2015, respectively.  The increase in these cash flows in 2016 was the result of increased proceeds from the sale of properties of $8.8 million and a net increase in cash received from capital expenditure escrows of $1.0 million.



Cash used in Financing Activities.  Our cash used in financing activities was $12.1 million and $13.6 million for the six months ended June 30, 2016 and 2015, respectively.  This increase in cash flows was primarily related to cash received in the first quarter of 2016 related to the Series D Preferred Stock issuance less cash used to redeem the Series A and B Preferred Stock and cash dividends paid on the Series C and Series D Preferred Stock, which together had a net impact to financing cash flows of $6.1 million. This increase was partially offset by increased

43

 


 

 

principal payments on long-term and revolving debt of $3.5 million between the periods primarily as a result of increased debt repayments required upon the sale of hotel properties and prepayment penalties of $0.9 million paid in 2016 upon the sale of properties encumbered by a specific loan.



Outstanding Indebtedness



During the three and six months ended June 30, 2016, net proceeds from the Company’s seven and 11 hotel sales, respectively, were used to pay off the associated loans totaling $10.6 million and $15.9 million, respectively, to reduce the balance of the revolving credit facility with Great Western Bank, and set aside to fund future acquisitions.  These dispositions, as well as adjustments required to remain in compliance with the required debt service ratio, decreased the total availability under the Great Western Bank revolver from $5.7 million at December 31, 2015 to $2.4 million at June 30, 2016.



At June 30, 2016, we had long-term debt of $53.7 million associated with assets held for use with a weighted average term to maturity of 2.6 years and a weighted average interest rate of 5.09%.  Of this total, at June 30, 2016, $20.0 million was fixed rate debt with a weighted average term to maturity of 1.1 years and a weighted average interest rate of 5.94% and $33.7 million was variable rate debt with a weighted average term to maturity of 3.5 years and a weighted average interest rate of 4.59%.  At December 31, 2015, we had long-term debt of $55.1 million associated with assets held for use with a weighted average term to maturity of 3.1 years and a weighted average interest rate of 5.17%. Of this total, at December 31, 2015, $21.1 million was fixed rate debt with a weighted average term to maturity of 1.6 years and a weighted average interest rate of 5.91% and $34.0 million was variable rate debt with a weighted average term to maturity of 4.0 years and a weighted average interest rate of 4.71%. 



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 based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of the related hotel properties. Aggregate annual principal payments on debt for the remainder of 2016 and thereafter are as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Held for sale

 

Held for use

 

Total

Remainder of 2016

 

$

439 

 

$

755 

 

$

1,194 
2017 

 

 

11,413 

 

 

20,221 

 

 

31,634 
2018 

 

 

2,609 

 

 

11,528 

 

 

14,137 
2019 

 

 

60 

 

 

571 

 

 

631 
2020 

 

 

2,023 

 

 

20,644 

 

 

22,667 

Total

 

$

16,544 

 

$

53,719 

 

$

70,263 



 

 

 

 

 

 

 

 

 



Financial Covenants



The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage and required loan-to-value and leverage ratios, and place certain restrictions on dividends.  As of June 30, 2016, we were in compliance with our financial covenants.



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 certain of our WAB facilities contain cross-default provisions which would allow Great Western Bank and WAB 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. As of June 30, 2016, we are not in default of any of our loans.



44

 


 

 

Contractual Obligations



Below is a summary of certain obligations that will require capital as of June 30, 2016 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Payments due by period

Contractual obligations

 

Total

 

Remainder of  Year 1

 

Years 2-3

 

Years 4-5

 

More than 5 years

Long-term debt including interest

 

$

59,732 

 

$

2,138 

 

$

34,959 

 

$

22,635 

 

$

 -

Land and office leases

 

 

474 

 

 

102 

 

 

214 

 

 

127 

 

 

31 

Total contractual obligations

 

$

60,206 

 

$

2,240 

 

$

35,173 

 

$

22,762 

 

$

31 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Interest rate payments on our variable rate debt have been estimated using interest rates in effect at June 30, 2016.

(2)

Primarily ground leases and corporate office leases.



The column titled “Remainder of Year 1” represents payments due for the remainder of 2016.  Long-term debt and land lease payments above include only amounts related to properties classified as held for use.  Future debt payments, including interest, related to the 17 held for sale properties that are expected to be sold in the next 12 months of $17.9 million and future obligations on three land leases related to held for sale properties totaling $4.7 million are 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.  We also have management agreements in place for the management and operation of our hotel properties.



Off Balance Sheet Financing Transactions



We have not entered into any off balance sheet financing transactions.



Critical Accounting Policies



Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.



Recent Accounting Standards



See Note 1, Organization and Summary of Significant Accounting Policies, to our consolidated interim financial statements for additional information relating to recently adopted and recently issued accounting pronouncements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that effect market-sensitive instruments.  At June 30, 2016, our market risk arises primarily from interest rate risk relating to variable rate borrowings and the market risk related to our convertible debt that fair value will fluctuate following changes in the Company’s common stock price or changes in interest rates.



45

 


 

 

Interest Rate Sensitivity



There has been no material change in our market risk exposure subsequent to December 31, 2015.  At June 30, 2016, we have an interest rate swap in place which effectively locks the variable interest rate on our Huntington Bank debt (balance of $9.9 million) at 4.13% and an interest rate cap in place which caps the 30-day LIBOR interest rate on our Latitude debt (balance of $11.2 million) at 1%. We do not intend to enter into derivative or interest rate transactions for speculative purposes.



At June 30, 2016, approximately 51% of our outstanding debt, excluding debt related to hotel properties held for sale, is subject to fixed interest rates or effectively locked with an interest rate swap, while 49% of our debt is subject to floating rates.  Assuming no increase in the level of our variable debt outstanding at June 30, 2016 and after giving effect to our interest rate swap, if interest rates increased by 1.0% our cash flow related to hotel properties held for use would decrease by approximately $0.3 million per year.



ITEM 4. CONTROLS AND PROCEDURES



Disclosure Controls and Procedures



An 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 June 30, 2016, the Company’s disclosure controls and procedures were 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 (a) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures and (b) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.



Changes in Internal Control Over Financial Reporting



There have been no changes to our internal control over financial reporting during our most recent fiscal quarter that have materially effected, or are reasonably likely to materially effect, our internal controls over financial reporting.



PART II.  OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS



Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties.  We are not currently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us.  The Company has insurance to cover potential material losses and we believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.



ITEM 1A.  RISK FACTORS



There have been no material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015.



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



None.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



None.

46

 


 

 

ITEM 4.  MINE SAFETY DISCLOSURES



Not applicable.



ITEM 5.  OTHER INFORMATION



None.

47

 


 

 

ITEM 6.  EXHIBITS





 

 

Exhibit No.

 

Description



 

 

3.1

 

Amended and Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (Commission file number 001-34087) dated June 21, 2016).



 

 

10.1

 

Company 2016 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (Commission file number 001-34087) dated June 15, 2016).



 

 

10.2

 

Hotel Management Agreement, dated June 29, 2016, 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 (Commission file number 001-34087) dated June 29, 2016)



 

 

10.3

 

Hotel Management Agreement, dated June 29, 2016, by and between TRS Leasing, Inc., TRS Subsidiary, LLC and K Partners Hospitality Group LP (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (Commission file number 001-34087) dated June 29, 2016)



 

 

10.4

 

Hotel Management Agreement, dated June 29, 2016, by and between TRS Leasing, Inc., TRS Subsidiary, LLC, SPPR TRS Subsidiary, LLC, BMI Alexandria IRS 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 (Commission file number 001-34087) dated June 29, 2016).



 

 

10.5

 

Hotel Management Agreement, dated June 29, 2016, 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 (Commission file number 001-34087) dated June 29, 2016).



 

 

10.6

 

Hotel Management Agreement, dated June 29, 2016, by and among TRS Leasing, Inc., TRS Subsidiary, LLC and Strand Development Company, LLC (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K (Commission file number 001-34087) dated June 29, 2016).



 

 

10.7*

 

Second Amendment to Loan Agreement, dated as of April 15, 2016, between Solomons Beacon Inn Limited Partnership, TRS Subsidiary, LLC and U.S. Bank National Association, as Trustee for Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7, Commercial Mortgage Pass-Through Certificates, Series 2013-C7.

10.8*

 

Limited Liability Company Agreement of Spring Street Hotel Property II LLC dated as of July 26, 2016

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, 2016, 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.

* Filed herewith

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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 



August 8, 2016

 

 

 

 

 



 

 

/s/ J. William Blackham

 

 

 



 

 

J. William Blackham

 

 

 



 

 

Chief Executive Officer

 

 

 



 

 

 

 

 

 



 

 

/s/ Jonathan Gantt

 

 

 



 

 

Jonathan Gantt

 

 

 



 

 

Senior Vice President and Chief Financial Officer

 

 

 









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