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EX-32.1 - EX-32.1 - CONDOR HOSPITALITY TRUST, INC.cdor-20210331xex32_1.htm
EX-31.2 - EX-31.2 - CONDOR HOSPITALITY TRUST, INC.cdor-20210331xex31_2.htm
EX-31.1 - EX-31.1 - CONDOR HOSPITALITY TRUST, INC.cdor-20210331xex31_1.htm

 





 

 

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 March 31, 2021



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)

1800 West Pasewalk Avenue,  Ste. 120,  Norfolk,  NE

(Address of principal executive offices)

Telephone number: (301)  861-3305

 

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







 

 

 

 

Title of each class  

 

Trading symbol

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

CDOR

 

NYSE American



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES        NO 



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  YES     NO 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated file,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.





 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer   

Small reporting company   



Emerging growth company    



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  YES   NO



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 May 7, 2021, there were 12,026,950 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

 



 

 

 



Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

3



 

 



Consolidated Statements of Operations for the Three Months ended March  31, 2021 and 2020

4



 

 



Consolidated Statements of Equity for the Three Months ended March 31, 2021 and 2020

5



 

 



Consolidated Statements of Cash Flows for the Three  Months ended March 31, 2021 and 2020

6



 

 

 



Notes to Consolidated Financial Statements

7



 

 

 

Item 2.

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

29



 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42



 

 

Item 4.

Controls and Procedures

43



 

 

Part II.

OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

43



 

 

Item 1A.

Risk Factors

43



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43



 

 

Item 3.

Defaults Upon Senior Securities

43



 

 

Item 4.

Mine Safety Disclosures

43



 

 

Item 5.

Other Information

43



 

 

Item 6.

Exhibits

44

 



 

2

 


 

PART I.  FINANCIAL INFORMATION

 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

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





 



   



 

 

 

 

 

 



 

As of



 

March 31, 2021

 

December 31, 2020



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in hotel properties, net

 

$

263,506 

 

$

265,831 

Cash and cash equivalents

 

 

3,485 

 

 

3,686 

Restricted cash, property escrows

 

 

4,228 

 

 

3,794 

Accounts receivable, net

 

 

1,092 

 

 

652 

Prepaid expenses and other assets

 

 

956 

 

 

1,230 

Total Assets

 

$

273,267 

 

$

275,193 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

5,945 

 

$

5,372 

Dividends and distributions payable

 

 

924 

 

 

762 

Land option liability

 

 

8,497 

 

 

8,497 

Derivative liabilities, at fair value

 

 

744 

 

 

880 

Convertible debt, at fair value

 

 

15,022 

 

 

16,875 

Long-term debt, net of deferred financing costs

 

 

168,111 

 

 

166,526 

Total Liabilities

 

 

199,243 

 

 

198,912 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Preferred stock, 40,000,000 shares authorized:

 

 

 

 

 

 

6.25% Series E, 925,000 shares authorized, $.01 par value, 925,000 shares outstanding, liquidation preference of $10,174 and  $10,012

 

 

10,050 

 

 

10,050 

Common stock, $.01 par value, 200,000,000 shares authorized; 12,019,769  and 12,014,743 shares outstanding

 

 

120 

 

 

120 

Additional paid-in capital

 

 

233,425 

 

 

233,332 

Accumulated deficit

 

 

(169,613)

 

 

(167,263)

Total Shareholders' Equity

 

 

73,982 

 

 

76,239 

Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $15 and $17

 

 

42 

 

 

42 

Total Equity

 

 

74,024 

 

 

76,281 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

273,267 

 

$

275,193 







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 March 31,



 

2021

 

2020

Revenue

 

 

 

 

 

 

Room rentals and other hotel services

 

$

9,644 

 

$

13,227 

Operating Expenses

 

 

 

 

 

 

Hotel and property operations

 

 

7,679 

 

 

9,815 

Depreciation and amortization

 

 

2,643 

 

 

2,710 

General and administrative

 

 

1,260 

 

 

1,193 

Strategic alternatives, net

 

 

40 

 

 

144 

Total operating expenses

 

 

11,622 

 

 

13,862 

Operating loss

 

 

(1,978)

 

 

(635)

Net loss on disposition of assets

 

 

(3)

 

 

(9)

Equity in earnings of joint venture

 

 

 -

 

 

80 

Net gain (loss) on derivatives and convertible debt

 

 

1,988 

 

 

(759)

Other income (expense), net

 

 

42 

 

 

(28)

Interest expense

 

 

(2,209)

 

 

(1,980)

Loss before income taxes

 

 

(2,160)

 

 

(3,331)

Income tax benefit (expense)

 

 

(27)

 

 

306 

Net loss

 

 

(2,187)

 

 

(3,025)

Loss attributable to noncontrolling interest

 

 

 -

 

 

Net loss attributable to controlling interests

 

 

(2,187)

 

 

(3,024)

Dividends declared and undeclared on preferred stock

 

 

(163)

 

 

(145)

Net loss attributable to common shareholders

 

$

(2,350)

 

$

(3,169)



 

 

 

 

 

 

Earnings (Loss) per Share

 

 

 

 

 

 

Total - Basic Earnings (Loss) per Share

 

$

(0.20)

 

$

(0.27)

Total - Diluted Earnings (Loss) per Share

 

$

(0.20)

 

$

(0.27)



 

 

 

 

 

 

See accompanying notes to consolidated financial statements.



 



 

4

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands, except per share amounts)

















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2020



 

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, 2019

 

 

925 

 

$

10,050 

 

 

11,994 

 

$

120 

 

$

233,189 

 

$

(147,582)

 

$

95,777 

 

$

49 

 

$

95,826 

Stock-based compensation

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

69 

 

 

 -

 

 

69 

 

 

 -

 

 

69 

Dividends and distributions undeclared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series E Preferred

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(145)

 

 

(145)

 

 

 -

 

 

(145)

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,024)

 

 

(3,024)

 

 

(1)

 

 

(3,025)

Balance at March 31, 2020

 

 

925 

 

$

10,050 

 

 

11,996 

 

$

120 

 

$

233,258 

 

$

(150,751)

 

$

92,677 

 

$

48 

 

$

92,725 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2021



 

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, 2020

 

 

925 

 

$

10,050 

 

 

12,015 

 

$

120 

 

$

233,332 

 

$

(167,263)

 

$

76,239 

 

$

42 

 

$

76,281 

Stock-based compensation

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

93 

 

 

 -

 

 

93 

 

 

 -

 

 

93 

Dividends and distributions undeclared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series E Preferred

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(163)

 

 

(163)

 

 

 -

 

 

(163)

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,187)

 

 

(2,187)

 

 

 -

 

 

(2,187)

Balance at March 31, 2021

 

 

925 

 

$

10,050 

 

 

12,020 

 

$

120 

 

$

233,425 

 

$

(169,613)

 

$

73,982 

 

$

42 

 

$

74,024 



See accompanying notes to consolidated financial statements.















 

5

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited – In thousands)

 









 

 

 

 

 

 



 

Three months ended March 31,



 

 

2021

 

 

2020

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(2,187)

 

$

(3,025)

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,643 

 

 

2,710 

Net loss on disposition of assets

 

 

 

 

Net (gain) loss on derivatives and convertible debt

 

 

(1,988)

 

 

759 

Equity in earnings of joint venture

 

 

 -

 

 

(80)

Amortization of deferred financing costs

 

 

227 

 

 

275 

Stock-based compensation expense

 

 

99 

 

 

84 

Provision / benefit for deferred taxes

 

 

 -

 

 

(333)

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in assets

 

 

(164)

 

 

748 

Decrease (increase) in liabilities

 

 

508 

 

 

(12)

Net cash provided by (used in) operating activities

 

 

(859)

 

 

1,135 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to hotel properties

 

 

(260)

 

 

(264)

Distributions in excess of cumulative earnings from joint venture

 

 

 -

 

 

480 

Hotel acquisitions, net of cash acquired

 

 

 -

 

 

(7,175)

Net proceeds from sale of hotel assets

 

 

 -

 

 

Net cash used in investing activities

 

 

(260)

 

 

(6,958)



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Deferred financing costs

 

 

(50)

 

 

(345)

Proceeds from long-term debt

 

 

2,606 

 

 

9,020 

Principal payments on long-term debt

 

 

(1,198)

 

 

(306)

Tax withholdings on stock compensation

 

 

(6)

 

 

(15)

Cash dividends paid to preferred shareholders

 

 

 -

 

 

 -

Other items

 

 

 -

 

 

 -

Net cash provided by financing activities

 

 

1,352 

 

 

8,354 



 

 

 

 

 

 

Increase in cash, cash equivalents, and restricted cash

 

 

233 

 

 

2,531 

Cash, cash equivalents, and restricted cash beginning of period

 

 

7,480 

 

 

8,395 

Cash, cash equivalents, and restricted cash end of period

 

$

7,713 

 

$

10,926 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

1,395 

 

$

1,564 

Income taxes paid, net of refunds

 

$

 

$



 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

Debt assumed in acquisition

 

$

 -

 

$

34,080 

Decrease in accrued liabilities related to insurance premium financing agreement

 

$

(246)

 

$

(77)

Land option liability in acquisition

 

$

 -

 

$

8,497 









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. (“Condor”), a Maryland corporation, 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 March 31,  2021, the Company owned 15 hotels in eight statesReferences to the “Company”, “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.



The Company, through its wholly owned subsidiary Condor Hospitality REIT Trust, owns a controlling interest in Condor Hospitality Limited Partnership (the operating partnership”), for which we serve as general partner.  The operating partnership, including its various subsidiaries, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of all properties held by TRS Leasing, Inc.) and conducts all of its operations. At March 31, 2021, the Company owned 99.9% of the common operating units (“common units”) of the operating partnership with the remaining common units owned by other limited partners.



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, the operating partnership 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. The operating partnership, 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 annually. 



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 the operating partnership and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 



We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. Entities are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (“VIE”) or we maintain control of the asset through our voting interest or other rights in the operation of the entity.  The Company has concluded that our operating partnership meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company consolidates the operating partnership. The Company’s sole significant asset is its investment in the operating partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the operating partnership. All of the Company’s debt is an obligation of the operating partnership.



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 consolidated financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2021 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, 2020.

7

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 



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 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.



The novel coronavirus (COVID-19) has reduced travel significantly and adversely affected the hospitality industry in general.  The actual and threatened spread of COVID-19 globally or in the regions in which we operate, or future widespread outbreak of infectious or contagious disease, can continue to reduce national and international travel in general.  The extent to which the hospitality industry, and thus our business, will be affected by COVID-19 will largely depend on future developments which we cannot accurately predict, and the impact on customer travel, including the duration of the outbreak, the continued spread and treatment of COVID-19, and new information and developments that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.  To the extent that travel activity in the U.S. is and will be materially and adversely affected by COVID-19, business and financial results of the hospitality industry, and thus our business and financial results, could be impacted.



Since late March 2020, similar to the conditions affecting the hospitality industry as a whole, we have experienced occupancy declines at many of our properties which have and will continue to require us to adjust our business operations and will have had and will continue to have an impact on our operating income and may potentially impact future compliance with our debt covenants.



As a result of the above factors, the Company is and has taken actions at the corporate and hotel level, including, but not limited to:

·

Obtaining significant modifications of its debt agreements, including extension of the Key Bank credit facility (the “credit facility”) to January 2, 2023 with an increase in credit availability and modifications and waivers of debt covenants, from the majority of the Company’s lenders.

·

Asset management working with hotel management companies to reduce all hotels operating expenses including, but not limited to, closing off multiple floors, staffing reductions and furloughs, utility consumption reductions, purchasing reductions and eliminations, contract services reductions and  eliminations, food services closures, exercise facilities closures, and certain reduction and elimination of certain marketing expenditures.

·

Seeking potential alternative revenue sources through health care providers, government agencies, universities and airlines.

·

Obtaining Paycheck Protection Program (“PPP”) loans authorized under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security (“CARES”) Act totaling $2,299 (see Note 6).

·

Pursuing corporate cost reductions, including staffing reductions, resulting in an approximately 30% decrease in general and administrative expenses compared to historical operations.

·

Capital improvement projects have been suspended except for emergency circumstances and will remain on hold for immediate future, with the potential for the suspension to continue through 2021.

·

The Company determined that it was advisable and the best business practice to cause a temporary closure of two of its hotels, the Solomons Hilton Garden Inn on April 20, 2020 and the Leawood Aloft on April 9, 2020.  These hotels were both reopened on July 1, 2020 and no other hotel closures have been deemed necessary.



We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on the hospitality industry, and thus on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic.  While we cannot assure you that the assumptions used to estimate our future liquidity will be correct, the Company believes it can generate the liquidity required to operate through the crisis through a combination of the continued operation of our portfolio with

8

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

significant cost reduction measures in place, existing availability under our credit facility, and, if necessary, additional debt and equity financings.  However, there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all.



The Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft) were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners, on December 24, 2020 (see Note 6). The Company did not satisfy the financial covenants for these loans as of March 31, 2021 or December 31, 2020, as was the case for the first three quarters of 2020.  The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020).  This default under our loan agreement with OSK X, LLC will not result in a cross-default under our credit facility until a 90-day cure period expires on May 27, 2021The Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



Based on a the current status of the OSK X, LLC loans and the guidance in U.S. GAAP that requires that, in making a determination for the one year period following the date of the financial statements, the Company cannot consider future fundraising activities or the likelihood of obtaining covenant waivers or amendments, all of which are outside of the Company's sole control, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for the one year period after the date the financial statements are issued.  The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.



Investment in Hotel Properties



At the time of acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures, and equipment, and intangible assets, if any, and the fair value of liabilities assumed, including debt. Acquisition date fair values are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers including discounted cash flows and capitalization rates. 



Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business.  As such, if substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.    We concluded that the Company’s purchase of the remaining 20% of the joint venture that owns the Atlanta Aloft property (the “Atlanta JV”), completed in the first quarter of 2020, was the acquisition of assets and as such acquisition costs were capitalized as part of this transaction (see Note 3). 



The Company’s investments in hotel properties are recorded at cost and are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and improvements and 3 to 12 years for furniture and equipment. 



Renovations and/or replacements that improve or extend the life of the hotel properties are capitalized and depreciated over their useful lives. Repairs and maintenance are expensed as incurred.



The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life of the franchise agreements using the straight-line method.  Amortization expense is included in depreciation and amortization in the consolidated statements of operations.



On an ongoing 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

9

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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. In the evaluation of impairment of its hotel properties, the Company makes many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and holding period, future required capital expenditures, and terminal capitalization rates.  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 estimated fair value.



Investment in Joint Venture



If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or through our voting interest in a voting interest entity (“VOE”) and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee. Pursuant to our Atlanta JV agreement, prior to our acquisition of the remaining 20% interest in the Atlanta JV (see Note 3), allocations of the profits and losses of our Atlanta JV were potentially allocated disproportionately to nominal ownership percentages due to specified preferred return rate thresholds.



Distributions received from a joint venture are classified in the consolidated statements of cash flows using the cumulative distributions approach. Distributions are classified as cash inflows from operating activities unless cumulative distributions, including those from prior periods not designated as a return of investment, exceed cumulative recognized equity in earnings of the joint venture. Excess distributions are classified as cash inflows from investing activities as a return of investment.



On an annual basis or at interim periods if events and circumstances indicate that the investment may be impaired, the Company reviews the carrying value of its investment in unconsolidated joint venture to determine if circumstances indicate impairment to the carrying value of the investment that is other than temporary. The investment is considered impaired if its estimated fair value is less than the carrying amount of the investment and that impairment is other than temporary.



Assets Held for Sale



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. 



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 decision not to sell.



10

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Cash and Cash Equivalents and Restricted Cash



Cash and cash equivalents includes cash and highly liquid investments with original maturities of three months or less when acquired, and are carried at costs which approximates fair value.



Restricted cash consists of cash held in escrow for the replacement of furniture and fixtures, real estate taxes, property insurance, and debt service as required under certain loan agreements. 



Revenue Recognition



Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer's hotel stay at the daily contract rate.   Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the contract rate at the point in time or over the time period that goods or services are provided to the customer and the related performance obligations are fulfilled. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price.  Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses.



Sales, use, occupancy, and similar taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the consolidated statements of operations.



Hotel operating revenues can be disaggregated into the following categories to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows:







 

 

 

 

 

 



 

Three months ended March 31,



 

2021

 

2020

Rooms

 

$

9,128 

 

$

12,526 

Food and beverage

 

 

117 

 

 

349 

Other

 

 

399 

 

 

352 

Total revenue

 

$

9,644 

 

$

13,227 



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, an entity 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 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 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 the consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in

11

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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 and equity instruments, to perform impairment assessments, to account for hotel acquisitions, in the valuation of stock-based compensation, 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 are 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 8) 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 the treatment of the Company’s convertible debt entered into on March 16, 2016 and November 19, 2020 (see Note 7).





12

 


 

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



Investment in hotel properties consisted of the following at March 31, 2021 and December 31, 2020:





 

 

 

 

 

 

 



As of



 

March 31, 2021

 

December 31, 2020

Land

 

$

34,928 

 

 

$

34,928 

Buildings, improvements, vehicle

 

 

244,179 

 

 

 

244,041 

Furniture and equipment

 

 

24,731 

 

 

 

24,622 

Initial franchise fees

 

 

1,784 

 

 

 

1,784 

Construction-in-progress

 

 

182 

 

 

 

123 

Right of use asset

 

 

58 

 

 

 

62 

Investment in hotel properties

 

 

305,862 

 

 

 

305,560 

Less accumulated depreciation

 

 

(42,356)

 

 

 

(39,729)

Investment in hotel properties, net

 

$

263,506 

 

 

$

265,831 



 

 

 

 

 

 

 

On January 1, 2019, the Company adopted ASU 842, Leases, and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently, on January 1, 2019, the Company recognized right-of-use assets and related liabilities related to its operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used incremental borrowing rates.  The right-of-use assets and liabilities are amortized to rent expense, included in either Hotel and property operations expenses or General and administrative expenses depending on the nature of the lease, over the term of the underlying lease agreements.  The weighted average remaining life of the Company’s operating leases, including options to extend when it is reasonably certain the Company will exercise such options, was 6.4 years at March 31, 2021.



As of March 31, 2021 and December 31, 2020, the Company's right-of-use assets, net of $58 and $62, respectively, are included in Investment in hotel properties, net and its related lease liabilities of $58 and $62, respectively, are presented in Accounts payable, accrued expenses, and other liabilities in the Company's consolidated balance sheets.







NOTE 3.  ACQUISITION OF HOTEL PROPERTIES



The Company did not acquire any properties during the three months ended March 31, 2021.



On February 14, 2020, the Company purchased the remaining 20% interest in the Atlanta JV from our joint venture partner (see detailed description of the Atlanta JV in Note 4) for $7,300 as allowed by the purchase option included in the original joint venture agreements.  The $7,300 was funded from the Company’s credit facility, and the Company became the primary obligator on the $34,080 New Term Loan (as defined in Note 4) as part of the transaction.  As the Atlanta JV was previously accounted for under the equity method and the acquisition was considered the acquisition of assets, the liabilities assumed as part of the transaction were recorded at fair value while the assets purchased in the transaction were recorded based on a pro-rata fair value allocation of the total available basis, which included the fair value of liabilities assumed, the cash purchase price paid, the balance of the investment in the unconsolidated joint venture at the time of the acquisition, and the acquisition costs incurred.  The purchase was recognized as follows: 







 

 

Cash purchase price

$

7,300 

Investment in unconsolidated joint venture

 

3,844 

Acquisition costs

 

122 

Total investment in net assets

$

11,266 



 

 

Cash

$

125 

Working capital

 

(462)

Land

 

14,728 

Buildings, improvements, and vehicle

 

37,020 

Furniture and equipment

 

2,432 

Debt assumed at acquisition

 

(34,080)

Land option liability (1)

 

(8,497)

13

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Total allocation to net assets

$

11,266 



(1)

The purchase agreement includes a provision which permits the seller to purchase the surface parking lot north of the hotel exercisable for approximately seven years at less than market rates.



Included in the consolidated statements of operations for the three months ended March 31, 2020 are total revenues of $813 and total operating losses of $287 related to the results of operations for Atlanta Aloft hotel since the date of its acquisition.



All purchase price allocations were determined using Level 3 fair value inputs.



NOTE 4.  INVESTMENT IN UNCONSOLIDATED JOINT VENTURE



On August 1, 2016, the Company entered into a joint venture, the Atlanta JV, with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire an Aloft hotel in downtown Atlanta, Georgia.  The Atlanta Aloft acquisition had a total purchase price of $43,550 and closed on August 22, 2016.  Prior to the purchase of the remaining interest in the Atlanta JV on February 14, 2020 (see Note 3), the Company accounted for the Atlanta JV under the equity method.  Condor owned 80% of the Atlanta JV with TWC owning the remaining 20%.  The Atlanta JV was comprised of two companies: Spring Street Hotel Property II LLC, of which the operating partnership indirectly owned an 80% equity interest, and Spring Street Hotel OpCo II LLC, of which our TRS indirectly owned an 80% equity interest.  TWC owned the remaining 20% equity interest in these two companies.



The purchase was partially funded with a $33,750 term loan secured by the property.  On August 9, 2019, the operating partnership and the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, closed on a $34,080 term loan pursuant to a term loan agreement with KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Agent for the Lenders (the “New Term Loan”).  The proceeds of the New Term Loan were used to repay the original term loan, which was terminated following the repayment.  The New Term Loan was included in full on the balance sheet of the Atlanta JV prior to the acquisition of the remaining interest by the Company in 2020.



The New Term Loan matured upon the earlier to occur of (a) consummation of the merger under the Merger Agreement (see Note 1) and (b) May 8, 2020. The New Term Loan was refinanced in May 2020 with the credit facilityThe New Term Loan bore interest, at the Borrower’s option, at either LIBOR plus 2.25% or a base rate plus 1.25%.  The New Term Loan required monthly interest payments and principal is due on the maturity date.  The Borrowers could, at any time, voluntarily prepay the New Term Loan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).  The New Term Loan was secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts and general intangibles.  The New Term Loan was guaranteed by the Company and certain of its subsidiaries.



The Atlanta JV agreement also included buy-sell rights for both members (generally after three years of hotel ownership for Condor and after five years for TWC) and Condor had a purchase option for TWC’s Atlanta JV ownership interest exercisable between the third and fifth anniversary of the hotel closing.



Under the Atlanta JV agreement, the Atlanta JV was managed by TWC in accordance with business plans and budgets approved by both partners.  Major decisions as detailed in the agreement also required joint approval.  Condor could remove TWC as manager of the Atlanta JV and appoint a new manager only upon the occurrence of certain events.  The Atlanta Aloft hotel was managed by Boast Hotel Management Company LLC (“Boast”), an affiliate of TWC.  The Atlanta JV paid to Boast total management fees of $61 during the first quarter of 2020.  The management of the Atlanta Aloft hotel was moved to Aimbridge Hospitality on March 1, 2020 following the acquisition of the remaining interest in the Atlanta JV by Condor.



Net cash flow from the Atlanta JV was distributed each quarter first with a 10% annual preferred return on capital contributions to Condor, second with a 10% annual preferred return on capital contributions to TWC, and third with

14

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

any remainder distributed to the partners based on their pro-rata equity ownership. Profits were allocated in the same proportion as net cash flow. Losses were allocated based on pro-rata equity ownership. Cash distributions totaling $480 were received from the Atlanta JV in the first quarter of 2020 prior to its acquisition by Condor.  



The table below provides the components of net earnings, including the Company’s share of the Atlanta JV, for the first quarter of 2020 prior to its acquisition by the Company and for the three months ended March 31, 2020.







 

 

 

 



 

 

For the period of January 1 to February 14,

 



 

2020

 

Revenue

 

 

 

 

Room rentals and other hotel services

 

$

1,522 

 

Operating Expenses

 

 

 

 

Hotel and property operations

 

 

960 

 

Depreciation and amortization

 

 

181 

 

Total operating expenses

 

 

1,141 

 

Operating income

 

 

381 

 

Interest expense

 

 

(281)

 

Net earnings

 

$

100 

 



 

 

 

 

Condor allocated earnings

 

$

80 

 

TWC allocated earnings

 

 

20 

 

Net earnings

 

$

100 

 









NOTE 5.  DISPOSITIONS OF HOTEL PROPERTIES



As of March 31, 2021 and December 31, 2020, the Company had no hotels classified as held for sale. 



During the three months ended March 31, 2021 and 2020, the Company sold no hotels.







NOTE 6.  LONG-TERM DEBT



Long-term debt consisted of the following loans payable at March 31, 2021 and December 31, 2020:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lender

 

 

Balance at March 31, 2021

 

Interest rate at March 31, 2021

 

Maturity

 

Amortization provision

 

Properties encumbered at March 31, 2021

 

Balance at December 31, 2020

Fixed rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18

 

$

8,404 

 

4.54%

 

08/2024

 

25 years

 

 

$

8,454 

OSK X, LLC (1)

 

 

13,199 

 

4.33%

 

12/2023 (5)

 

25 years

 

 

 

13,199 

OSK X, LLC (1)

 

 

822 

 

4.33%

 

12/2023 (5)

 

7 years

 

 -

 

 

880 

Paycheck Protection Program (7)

 

 

2,299 

 

1.00%

 

05/2022

 

(7)

 

 -

 

 

2,299 

Total fixed rate debt

 

 

24,724 

 

 

 

 

 

 

 

 

 

 

24,832 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo

 

 

25,265 

 

2.51% (2)

 

11/2022 (6)

 

30 years

 

 

 

25,386 

KeyBank credit facility (3)

 

 

119,751 

 

4.00% (4)

 

1/2023

 

Interest only

 

10 

 

 

118,114 

Total variable rate debt

 

 

145,016 

 

 

 

 

 

 

 

15 

 

 

143,500 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term debt

 

$

169,740 

 

 

 

 

 

 

 

 

 

$

168,332 

Less: Deferred financing costs

 

 

(1,629)

 

 

 

 

 

 

 

 

 

 

(1,806)

Total long-term debt, net of deferred financing costs

 

$

168,111 

 

 

 

 

 

 

 

 

 

$

166,526 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



(1) Both loans are collateralized by Aloft Leawood.  These loans were formerly held by Great Western Bank prior to being purchased by OSK X, LLC on December 24, 2020.

(2) Variable rate of 30-day LIBOR plus 2.39%,  effectively fixed at 4.44% after giving effect to interest rate swap (see Note 8).

(3) Total available borrowing capacity is $130,000 of which $4,000 is reserved for the payment of interest under the facilityThe ability to borrow under the credit facility is limited to payment of interest and fees under the credit facility and funding any shortfalls to an approved budget.  The commitment fee on unused facility is 0.20% when the usage is over 50% of the total commitment and 0.25% when the usage under 50% of the commitment.  Total unused availability under this credit facility was $10,249 at March 31, 2021, of which $2,418 remains reserved for the payment of interest.

(4) Borrowings under the facility accrue interest, at the Company’s option, at either LIBOR (with a floor of 0.50%) plus a spread of 3.75% or a base rate plus 2.75%, with an increase to the interest rate spreads of 0.25% to occur on October 2, 2021

(5) Term was extended for two additional years on December 2, 2020.

(6) Two one-year extension options subject to the satisfaction of certain conditions.

(7) The PPP loans are made up of three separate loans received in April 2020.  Monthly payments totaling $121 are scheduled to begin October 2021 if the loan or a portion of it is not forgivenThe entire amount of the loans was used for payroll, utilities, and interest, and therefore, management anticipates that the loans will be substantially forgivenThe Company completed and submitted to the Small Business Association (“SBA”) applications for the forgiveness of two of the three PPP loans during the first quarter of 2021 and for the third loan subsequent to quarter end. Two of the loans with balances totaling $614  were forgiven by the SBA subsequent to the end of the quarter.  To the extent that they are not forgiven, the Company would be required to repay that portion at an interest rate of 1.00%.



Aggregate annual principal payments on debt for the remainder of 2021 and thereafter are as follows:







 

 

 



 

Total

Remainder of 2021

 

$

1,187 
2022 

 

 

27,683 
2023 

 

 

133,030 
2024 

 

 

7,840 

Total

 

$

169,740 

16

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 



Financial Covenants



We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility with KeyBank: 

·

Borrowing Base Debt Service Coverage Ratio:  The ratio of adjusted net operating income from borrowing base properties to debt service for the credit facility (assuming a 30 year amortization) must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending September 30, 2021 and December 31, 2021, (b) 1.25 to 1 as of the end of the fiscal quarters ending March 31, 2022 and June 30, 2022 and (c) 1.50 to 1 as of the end of the fiscal quarter ending September 30, 2022 and each fiscal quarter thereafter. For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2022 when the calculation is based on the most recently ended four fiscal quarters.

·

Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA to consolidated fixed charges must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending September 30, 2021 and December 31, 2021, (b) 1.25 to 1 as of the end of the fiscal quarters ending March 31, 2022 and June 30, 2022 and (c) 1.50 to 1 as of the end of the fiscal quarter ending September 30, 2022 and each fiscal quarter thereafter. For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2022 when the calculation is based on the most recently ended four fiscal quarters.

·

Borrowing Base Leverage Ratio:  The ratio of indebtedness outstanding under the credit facility to borrowing base asset value (based on updated as-stabilized appraisals) cannot exceed 65%.  The covenant is first tested on March 31, 2022.

·

Minimum Liquidity:  Liquidity must be greater than or equal to $3,000. In addition, the ninth amendment to the credit facility provided that if liquidity is below $6,000, (a) the agent may engage a financial advisor to advise it with respect to the Company and the credit facility, (b) a $2,000 interest reserve must be maintained, (c) certain reporting must be completed on a weekly basis and (d) advances under the credit facility can only be made and applied pursuant to a cash flow waterfall.



Pursuant to the terms of the ninth amendment to the credit facility, it is an event of default if the convertible notes issued in 2020 (see Note 7) are not either converted to common stock or paid in full by July 1, 2021.  The Company intends to not cause such an event of default by satisfying the convertible notes with the Rights Offering, which has a full backstop commitment (see Note 7), or otherwise satisfying the convertible notes with a sale of equity or negotiating an extension of the July 1, 2021 date with KeyBank.



We are also required to satisfy a debt yield financial covenant within our loan agreement relating to the three properties financed by Wells Fargo Bank.  The loan agreement provides that if the Company fails to satisfy a debt yield (adjusted net cash flow / outstanding principal amount of the loan) of 10% at the end of any fiscal quarter, then a cash trap occurs.  During a cash trap, the revenue generated from the hotels is directed to an account controlled by the lender and used to pay certain hotel expenses and debt service costs and fund certain reserves.  Any excess funds are held by the lender as additional collateral.  Failure to satisfy the debt yield and the occurrence of a cash trap do not constitute a default under the loan agreement.



In connection with the first amendment to the loan agreement entered into in May 2020, measurement of the debt yield was suspended until the measurement date occurring on March 31, 2021.  The Company did not satisfy the debt yield as of March 31, 2021; however, Wells Fargo has advised us by letter that it will not require implementation of the cash trap.  This advice is terminable by Wells Fargo at any time.  Any cash trap will expire when the debt yield is equal to or greater than 10.5%.



We are also required to satisfy various financial covenants within our loan agreement with OSK X, LLC relating to the Leawood, Kansas Aloft, including the following:

·

Property-Specific Pre-Distribution Debt Service Coverage Ratio.  The ratio of adjusted net operating income for the Leawood, Kansas Aloft (before distributions) to debt service for the loans must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending March 31, 2021 and June 30, 2021 and (b) 1.35 to 1 as of the end of the fiscal quarter ending September 30, 2021 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

17

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

·

Property-Specific Post-Distribution Debt Service Coverage Ratio.  The ratio of adjusted net operating income for the Leawood, Kansas Aloft (after distributions) to debt service for the loans must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending March 31, 2021 and June 30, 2021 and (b) 1.35 to 1 as of the end of the fiscal quarter ending September 30, 2021 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Consolidated Debt Service Coverage Ratio.  The ratio of consolidated adjusted net operating income for the Company to consolidated debt service must be equal to or greater than 1.05 to 1.



Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility and loan agreement have the meanings given to them in the credit facility and loan agreement, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.



As a result of the actual and anticipated unprecedented negative impact of the COVID-19 virus on the hotel industry generally, the Company has received waivers of compliance with financial covenants from various lenders (including Great Western Bank with respect to the Leawood, Kansas Aloft) for the first three quarters of 2020.  The Company and certain of its other lenders have also modified various financial covenants by suspending measurements, providing for lower covenants and/or using annualized results (including Great Western Bank with respect to the Leawood, Kansas Aloft).



On December 24, 2020, the Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft), with a March 31, 2021 balance of $14,021, were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners. The Company did not satisfy the financial covenants for these loans as of March 31, 2021 and December 31, 2020, as was the case for the first three quarters of 2020.  The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020).  The Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



The loan documents with OSK X, LLC provide (a) that the Company has a 90-day cure period (ending on May 27, 2021) within which it can cure the defaults and (b) that OSK X, LLC is precluded from accelerating the loans and taking any action to foreclose on the Leawood, Kansas Aloft during the cure period.  The Company also believes that there are serious questions under applicable law about whether OSK X, LLC has the ability to declare a default, accelerate the loans or foreclose on the Leawood, Kansas Aloft due to the impossibility of performance of financial covenants during the COVID-19 pandemic. 



The Company intends to seek any available damages in the event of litigation that may result from the actions of OSK X, LLC.



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 credit facility contains cross-default provisions which would allow the lenders under our credit facility 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 loanThe above-described defaults under our loan agreement with OSK X, LLC will not result in a cross-default under our credit facility until the 90-day cure period expires on May 27, 2021.  As indicated above, the Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



18

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

As of March 31, 2021, other than with respect to our financial covenants with OSK X, LLC (as discussed above), we are not in default of any of our loans.



NOTE 7.  CONVERTIBLE DEBT AT FAIR VALUE



As part of an Exchange Agreement entered into on March 16, 2016 with Real Estate Strategies, L.P. (“RES”, which also includes affiliated entities), the Company issued to RES a Convertible Promissory Note (the “2016 Note”), bearing interest at 6.25% per annum, in the principal amount of $1,012.    The 2016 Note is convertible directly into 97,269 shares of common stock at any time at the option of RES or automatically when the 6.25% Series E Cumulative Convertible Preferred Stock (the “Series E Preferred Stock”) is required to be converted or is redeemed in whole (see Note 10).  The 2016 Note is not convertible to the extent that a conversion would cause RES, together with its affiliates, to beneficially own more than 49% of the voting stock of the Company at the time of the conversion.  Any conversion reduces the principal amount of the 2016 Note proportionally.  Pursuant to the terms of the 2016 Note, interest payments are suspended and accumulate whenever dividends on the Series E Preferred Stock are unpaid and accumulate.  At March 31, 2021, there was $99 accumulated and unpaid interest on the 2016 Note.



On November 19, 2020, the Company entered into separate Convertible Promissory Notes and Loan Agreements (the “2020 Notes”) in favor of (a) SREP III Flight—Investco 2, L.P. (“SREP”), an affiliate of StepStone Group LP, for $7,220, and (b) Efanur S.A. (“Efanur”), an affiliate of IRSA Inversiones y Representaciones Sociedad Anónima, for $2,780. Pursuant to the 2020 Notes, the Company borrowed $10,000 from SREP and Efanur and used the proceeds to repay loans outstanding under the credit facility. Each of the 2020 Notes mature upon the earliest to occur of (a) the closing of a Rights Offering (as defined below) or a Non-Rights Offering Conversion (as defined below) in an amount equal to the outstanding principal balance of the respective Note, (b) the acceleration of the respective Note on or after the occurrence of an Event of Default (as defined in the respective Note) and (c) January 2, 2023.  Additionally, there is an event of default under the credit facility if the 2020 Notes are not either converted to common stock or paid in full (subject to the terms of a subordination and standstill agreement in favor of KeyBank) by July 1, 2021.



Each of the 2020 Notes accrues interest at 10.00% per annum (exclusive of any portion of the principal that is used in a Rights Offering and, in the case of the Note in favor of SREP, any backstop commitment), provides for the interest rate to increase to 20% upon an Event of Default or if any amounts under the applicable Note are outstanding after May 31, 2021, provides for the capitalization of interest, and provides for the payment of all accrued and unpaid interest and principal on the maturity date. Each of the Notes also provides, subject to a Make Whole Fee (as defined in the respective Note) payable to SREP and Efanur, as applicable, for the interest rate to increase to 25% upon a determination by the disinterested members of the board of directors of the Company (a) not to proceed with, or to terminate, a Rights Offering, (b) to prohibit a Non-Rights Offering Conversion or (c) not to seek shareholder approval of the transactions contemplated by the Notes, including the issuance of shares of common stock of the Company and the conversion price (“Shareholder Approval”), because the failure to make any such determination would reasonably be expected to constitute a breach of the directors’ duties under Maryland law (a “Board Decision”).  At March 31, 2021, there was $364 accumulated and unpaid interest on the 2020 Notes.



Subject to receipt of Shareholder Approval or a Board Decision, SREP and Efanur may elect to convert the principal due under the applicable Note into common stock of the Company in connection with any future rights offering commenced by the Company for 4,000,000 shares of common stock of the Company at a price of $2.50 per share (a “Rights Offering”). Pursuant to the Note in favor of SREP, the Company has committed to offer to SREP the option  to purchase any shares of common stock of the Company underlying any unexercised rights in any such Rights Offering.



The Company and SREP entered into a backstop commitment agreement related to the Rights Offering on December 7, 2020. Pursuant to the backstop commitment agreement, SREP will backstop the Rights Offering, if commenced, on a standby basis to facilitate the transaction, by the Company selling to SREP pursuant to an exemption from the registration requirements of Section 5 of the Securities Act provided under Section 4(a)(2) thereof and/or Regulation D thereunder and SREP purchasing an aggregate number of shares of common stock equal to (x) $10.0 million, minus (y) the aggregate proceeds of the Rights Offering divided by $2.50, at a price per share equal to $2.50, subject to the terms and conditions of the backstop commitment agreement. The obligations of

19

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

SREP under the backstop commitment agreement are subject to certain conditions, which, among other conditions, include: (1) that the Rights Offering must occur on or prior to May 31, 2021, and (2) that the Company exempts SREP from the ownership limitation set forth in the Company’s articles of incorporation.



If any amounts remain unpaid on the applicable Note after May 31, 2021 (or, if earlier, the termination, rescission or rejection of the Rights Offering), subject to receipt of Shareholder Approval or a Board Decision, SREP and Efanur may elect to convert the principal due under the applicable Note into 4,000,000 shares of common stock of the Company at a price of $2.50 per share (a “Non-Rights Offering Conversion”).



The issuance of shares in a Rights Offering or Non-Rights Offering Conversion received requisite Shareholder Approval at a special meeting of shareholders on January 18, 2021.



In the event of a Board Decision in order to accept an unsolicited cash offer for newly issued common stock or securities convertible into common stock of the Company, then upon consummation of any such sale, the Company is required to pay SREP and Efanur a Make Whole Fee as set forth in their respective Note.



The Company has made an irrevocable election to record these notes in their entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of the notes. As such, gains and losses on the Note are included in net gain (loss) on derivatives and convertible debt within net earnings (loss) each reporting period. Gains related to this Note were recognized totaling $1,853 and $40 during the three months ended March 31, 2021 and 2020The fair value of the 2016 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 2020 Note is based on the value of the note upon conversion due to the high probability associated with that event.  Interest expense related to these notes is recorded separately from other changes in its fair value within interest expense each period.



The following table represents the difference between the fair value and the unpaid principal balance of the Note as of March 31, 2021:







 

 

 

 

 

 

 

 



Fair value as of March 31, 2021

 

Unpaid principal balance as of March 31, 2021

 

Fair value carrying amount over/(under) unpaid principal

2016 Notes

$

1,102 

 

$

1,012 

 

$

90 

2020 Notes

 

13,920 

 

 

10,000 

 

 

3,920 

Total

$

15,022 

 

$

11,012 

 

$

4,010 











NOTE 8. 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 March 31, 2021, the Company’s convertible debt (see Note 7) 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 determination of the fair value of acquired property in 2020 (see Note  3), and in the valuation of the stock-based compensation grants (see Note 12).    No impairments or recoveries of impairment were recognized during the three months ended March 31, 2021 or 2020.



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

20

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

with major creditworthy financial institutions.  These interest rate positions at March 31, 2021 and December 31, 2020 are as follows:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Associated debt

 

Type

 

Terms

 

Effective Date

 

Maturity Date

 

 

Notional amount at March 31, 2021

 

 

Notional amount at December 31, 2020

Wells Fargo

 

Swap

 

Swaps 30-day LIBOR for fixed rate of 2.053%

 

11/2017

 

11/2022

 

$

25,265 (1)

 

$

25,386 (1)



(1)

Notional amount amortizes consistently with the principal amortization of the associated loan.



Additionally, included in the Series E Preferred Stock issued on March 1, 2017 is a redemption right that allows the Company to redeem up to a total of 490,250 shares of Series E Preferred Stock for specific percentages of its liquidation preference (see Note 10).  This option requires bifurcation and as such is treated as a separate derivative instrument.



All derivatives recognized by the Company are reported as derivative assets or 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 gains (losses) of $135 and  ($799)  for the three months ended March 31, 2021 and 2020, respectively were recognized related to derivative instruments.



Recurring Fair Value Measurements



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





 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

 

 

 

 

 

 

 

 



 

March 31, 2021

 

Level 1

 

Level 2

 

Level 3

Interest rate derivatives

 

$

(744)

 

$

 -

 

$

(744)

 

$

 -

Series E Preferred embedded redemption option

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Convertible debt

 

 

(15,022)

 

 

 -

 

 

 -

 

 

(15,022)

Total

 

$

(15,766)

 

$

 -

 

$

(744)

 

$

(15,022)



 

 

 

 

 

 

 

 

 

 

 

 













 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

 

 

 

 

 

 

 

 



 

December 31, 2020

 

Level 1

 

Level 2

 

Level 3

Interest rate derivatives

 

$

(880)

 

$

 -

 

$

(880)

 

$

 -

Series E Preferred embedded redemption option

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Convertible debt

 

 

(16,875)

 

 

 -

 

 

 -

 

 

(16,875)

Total

 

$

(17,755)

 

$

 -

 

$

(880)

 

$

(16,875)



There were no transfers between levels during the three months ended March 31, 2021 or 2020.



21

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

The following table 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 periods:





 

 

 

 

 

 

 

 

 

 

 



Three months ended March 31,



2021

 

2020



Convertible debt

 

Series E Preferred embedded redemption option

 

Convertible debt

 

Total

Fair value, beginning of period

$

(16,875)

 

$

22 

 

$

(1,080)

 

$

(1,058)

Net gains (losses) recognized in earnings

 

1,853 

 

 

(22)

 

 

40 

 

 

18 

Fair value, end of period

$

(15,022)

 

$

 -

 

$

(1,040)

 

$

(1,040)



 

 

 

 

 

 

 

 

 

 

 

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

$

1,853 

 

$

(22)

 

$

40 

 

$

18 



 

 

 

 

 

 

 

 

 

 

 



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 risks. 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. Both the carrying value and estimated fair value of the Company’s long-term debt are presented net of deferred financing costs in the table below:







 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying value as of

 

Estimated fair value as of



 

March 31, 2021

 

December 31, 2020

 

March 31, 2021

 

December 31, 2020

Total

 

$

168,111 

 

$

166,526 

 

$

168,708 

 

$

167,349 



 

 

 

 

 

 

 

 

 

 

 

 













NOTE 9.  COMMON STOCK



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



The Company is prohibited from making dividends on either common or preferred stock under the credit facility; provided, that the Company can (a) make an initial dividend that does not exceed 50% of the funds available for distribution for the prior three fiscal quarters and (b) make subsequent dividends that do not (in the aggregate) exceed 50% of the funds available for distribution for any period of four consecutive fiscal quarters.  Any such dividend is subject to satisfaction of certain conditions, including (a) that no default has occurred and is continuing (or would occur as a result of the dividend), (b) that new appraisals or updates to existing appraisals are obtained with respect to the borrowing base properties, (c) that any preferred dividend must be included in the calculation of fixed charges as if paid in the preceding fiscal quarter, (d) that the Company must maintain at least $10.0 million of liquidity (after the dividend), (e) that the Company must maintain a 1.50 to 1 fixed charge coverage ratio for each of the prior three fiscal quarters and (f) that the Company must maintain a borrowing base leverage ratio of 60% or less.

 

NOTE 10.  PREFERRED STOCK



The Company has 925,000 shares outstanding of Series E Preferred Stock.



The Series E Preferred Stock ranks senior to the Company’s common stock and any other preferred stock issuances and receives preferential cumulative cash dividends at a rate of 6.25% per annum, payable quarterly of the $10.00 face value per share. If the Company fails to pay a dividend then during the period that dividends are not paid, additional dividends accrue at a rate of 9.50% per annum on the unpaid amount. Dividends on the Series E Preferred

22

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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.  Under the terms of the credit facility,  no cash dividends can currently be paid to common or preferred shareholders.  As of March 31, 2021, there are $924 of accrued but unpaid dividends related to the Series E Preferred Stock not yet declared by the Board of Directors.



Each share of Series E Preferred Stock is convertible, at the option of the holder, at any time on or after February 28, 2019, into a number of shares of common stock determined by dividing the conversion price of $13.845 into an amount equal to the $10.00 face value per share plus accrued and unpaid dividends, if any. Upon liquidation, each share of Series E Preferred Stock is entitled to $10.00 per share and accrued and unpaid dividends. The conversion price is subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends. Following a specific equity offering or offerings, from time to time a number of shares of Series E Preferred Stock automatically converts into common stock if the common stock trades at 120% of the conversion price for 60 trading days, and the number of shares converted will be determined by certain trading volumes measures.



The Company has rights to redeem up to 490,250 shares of the Series E Preferred Stock at prices from 110% to 130% of its liquidation value.  The holders have put rights commencing March 16, 2021 to put the Series E Preferred Stock to the Company at 130% of its liquidation preference, which the Company can satisfy with cash or common stock. If the Company uses common stock to satisfy the put rights, the value per share of the common stock used to satisfy the put rights will be the greater of (a) the weighted market sale price average per shares of the common stock for the 30 trading days (or such longer trading period as required to have at least 5 trading days on which trades occurred) preceding the put right notice from or a holder of Series E Preferred Stock, or (b) $4.875 per share of common stock.



The Series E Preferred Stock votes as a class on matters generally affecting the Series E Preferred Stock, and as long as 434,750 shares of Series E Preferred Stock (47% of the originally issued shares of Series E Preferred Stock) remain outstanding, then 75% approval of the Series E Preferred Stock will be required to approve merger, consolidation, liquidation or winding up of Condor, related party transactions exceeding $120, payment of dividends on common stock except from funds from operations or to maintain REIT status, the grant of exemptions from Condor’s charter limitation on ownership of 9.9% of any class or series of its securities (exclusive of persons currently holding exemptions), issuance of preferred stock or commitment or agreement to do any of the foregoing.



The Series E Preferred Stock was determined to have a fair value of $9,900 on the date of issuance as measured using a trinomial lattice-based model.  From this value, the embedded redemption option (see Note 8), which was determined to be an asset with a fair value on the date of issuance of $150 using the same model, was bifurcated and will be accounted for at fair value at each period end.  These are considered Level 3 fair value measurements. 

 

NOTE 11.  NONCONTROLLING INTEREST IN THE OPERATING PARTNERSHIP



Noncontrolling interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership.  Earnings and loss are allocated to noncontrolling interest in accordance with the weighted average percentage ownership of the operating partnership during the period. 



Our ownership interest in the operating partnership was 99.9% as of March 31, 2021 and December 31, 2020, with 219,183 common units owned by limited partners were outstanding at both datesThe total redemption value for the common units was $15 and $17 at March 31, 2021 and December 31, 2020, respectively.



Each limited partner of the operating partnership may, subject to certain limitations, require that the operating partnership redeem all or a portion of his or her common units at any time after a specified period following the date the units were acquired, by delivering a redemption notice to the operating partnership. When a limited partner tenders common 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 52 common 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. 



23

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

No common units were redeemed during the three months ended March 31, 2021 or 2020.



NOTE 12.  STOCK-BASED COMPENSATION



The Company currently has in place 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 761,538 following an amendment to the plan to increase the number of available shares by 300,000 that was approved by shareholders on May 17, 2018 at the annual meeting of shareholders.  As of March 31, 2021, there were 475,711 common shares available for issuance under the 2016 Stock Plan.



Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the requisite service period. Stock-based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is determined to be probable. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of our stock, expected dividend yield, expected term, and assumptions of whether these awards will achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management at the point of measurement. Compensation cost is recognized as additional paid-in capital for awards of the Company’s common stock.  The Company has elected to account for forfeitures of stock-based compensation as they occur.



Service Condition Share Awards



From time to time, the Company awards restricted shares of common stock to employees, officers, and members of the Board of Directors under the 2016 Stock Plan.  These shares generally vest ratably over five years for employees and officers and three years for members of the Board of Directors based on continued service or employment.  Dividends paid on these restricted shares during the vesting period are not forfeited in the event that the shares fail to vest. The following table presents a summary of the service condition unvested share activity for the three months ended March 31, 2021 and 2020:







 

 

 

 

 

 

 

 

 

 



 

For the Three months ended March 31,



 

2021

 

2020



 

Shares

 

Weighted-average grant date fair value

 

Shares

 

Weighted-average grant date fair value

Unvested at December 31

 

28,928 

 

$

9.58 

 

46,682 

 

$

10.16 

Granted

 

1,092 

 

$

3.94 

 

1,216 

 

$

11.04 

Vested

 

(5,667)

 

$

9.65 

 

(5,547)

 

$

10.03 

Unvested at March 31

 

24,353 

 

$

9.31 

 

42,351 

 

$

10.20 



The fair value of the service condition unvested share awards was determined based on the closing price of the Company’s common stock on the grant date. 



24

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Market Based Share Awards



Pursuant to an amendment of an employment agreement on June 28, 2017, an executive officer may earn shares of common stock if certain market share prices of common stock are attained.  Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan.  The executive officer will earn and be issued 36,692 common shares each time stock market price targets of $11.00 to $18.00 (in one dollar increments) per common share are first achieved prior to March 31, 2022 based on the weighted-average common stock price for 60 consecutive trading days.  Additionally, the shares vest to the extent of the value received per share of common stock in connection with a change in control, with the payout in such case to be prorated for the portion of the value above a stock market price target but below the next stock market price target. The $11.00 tranche of this award vested on November 22, 2019.



The compensation cost related to awards that are contingent upon achieving a market based criteria is measured at the fair value of the award on the date of grant using the Monte Carlo simulation, including consideration of the market criteria, and amortized on a straight line basis over the derived performance period which is also estimated using this model.    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.  The total grant date fair value of this market based share award, including additional value assessed at the time of subsequent amendment of the award, was $1,380. 



Performance Based Share Awards



Pursuant to an amendment of an employment agreement on June 28, 2017, an executive officer may earn shares of common stock if certain operating results of the Company are obtained.  Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan.  For each of the Company’s fiscal years 2017 through 2021, if the Company achieves between 85% and 101% of budgeted Funds from Operations (“FFO”) as approved by the Board of Directors, the executive shall earn and be issued between 11,741 and 19,569 shares of common stock, determined on a straight-line basis based on the percentage of budgeted FFO achieved.  In addition, for any fiscal year in which the Company achieves in excess of 101% of budgeted FFO, an additional 391 shares of common stock will be earned for each two percent actual FFO exceeds 101% of budgeted FFO, up to a total of 3,910 additional shares of common stock per year.



The fair value of the performance based share awards is based on the closing price of the Company’s common stock on the grant date, discounted for estimated common stock dividends to be declared prior to the shares being issued.  The grant date occurs on an annual basis when budgeted FFO is approved by the Board of Directors.  During the three months ended March 31, 2021 and 2020,  there were no shares issued related to performance-based share awards.



Director Fully Vested 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. Certain independent directors also elect to receive a portion of their director fees in the form of shares of the Company’s common stock.



A total of 5,273 and 3,162 shares during the three months ended March 31, 2021 and 2020, respectively,  were issued to independent directors under the 2016 Stock Plan with respect to these fees.



25

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Stock-Based Compensation Expense



The expense recognized in the consolidated financial statements for stock-based compensation related to employees and directors for the three months ended March 31, 2020 and 2020 was $99 and $84, respectively, all of which is included in general and administrative expense. Total unrecognized compensation cost related to all awards at March 31, 2021 was $273, which is expected to be recognized over a weighted-average remaining service period of 1.5 years.

 

NOTE 13.  INCOME TAXES



During the three months ended March 31, 2021 and 2020, income tax benefit (expense) totaling ($27) and $306, respectively, was recognized primarily related to income (loss) earned by the TRS and certain state and local taxes at CHLP.  Management believes the combined federal and state income tax rate for the TRS will be approximately 24%.



After consideration of limitations related to a change in control as defined under Code Section 382, the TRS’s net operating loss carryforward at March 31, 2021 as determined for federal income tax purposes was $10,839.  The availability of the loss carryforwards will expire from 2027 through 2034, with an indefinite carryforward for losses arising after December 31, 2017.    In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers projected reversals of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of this analysis, the Company believes that a full valuation allowance against the net deferred tax asset position was necessary at March 31, 2021, which requires a valuation allowance of $1,862 as of that date.



NOTE 14.   EARNINGS PER SHARE



The two-class method is utilized to compute earnings per common share (“EPS”) as our unvested restricted stock awards with non-forfeitable dividends are considered participating securities.  Under the two-class method, losses are allocated only to those securities that have a contractual obligation to share in the losses of the Company.  Our unvested restricted stock is not obligated to absorb Company losses and accordingly is not allocated losses.  The following is a reconciliation of basic and diluted EPS:







 

 

 

 

 

 



 

Three months ended March 31,



 

2021

 

2020

Numerator: Basic

 

 

 

 

 

 

Net loss attributable to common shareholders

 

$

(2,350)

 

$

(3,169)

Less: Allocation to participating securities

 

 

 -

 

 

 -

Net loss attributable to common shareholders, net of amount allocated to participating securities

 

$

(2,350)

 

$

(3,169)



 

 

 

 

 

 

Numerator: Diluted

 

 

 

 

 

 

Net loss attributable to common shareholders, net of amount allocated to participating securities

 

$

(2,350)

 

$

(3,169)



 

 

 

 

 

 

Denominator

 

 

 

 

 

 

Weighted average number of common shares - Basic and Diluted

 

 

11,992,361 

 

 

11,951,413 



 

 

 

 

 

 

Earnings (Loss) per Share

 

 

 

 

 

 

Basic Earnings (Loss) per Share

 

$

(0.20)

 

$

(0.27)

Diluted Earnings (Loss) per Share

 

$

(0.20)

 

$

(0.27)



 

 

 

 

 

 

26

 


 

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 March 31,



2021

 

2020

Unvested restricted stock

26,641 

 

45,173 

Series E Preferred Stock

668,111 

 

668,111 

2016 Convertible debt

97,269 

 

97,269 

2020 Convertible debt

4,000,000 

 

 -

Operating partnership common units (1)

4,215 

 

4,215 

Total potentially dilutive securities excluded from the denominator

4,796,236 

 

814,768 



(1)

Common units of the operating partnership 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 15.  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 and abiding by the franchisors’ marketing standards.  The management agreements generally require the TRS to fund debt service, working capital needs, and capital expenditures and to fund the management companies third-party operating expenses, except those expenses not related to 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 March 31, 2021 receives a base monthly management fee of 3.0% to 3.5% of hotel revenue, with incentives for performance, which increase such fee to a maximum of 5.0% of hotel revenue. Base management fees totaled $289 and $396, respectively, for the three months ended March 31, 2021 and 2020,  all of which was included as hotel and property operations expense.  There were $28 and $0 of  incentive management fees recognized for the three months ended March 30, 2021 and 2020, respectively.



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 Company may also terminate a management agreement with respect to a hotel at any time without reason, either with or without payment of a termination fee (depending on the agreement). The management agreements terminate with respect to a hotel upon sale of the hotel, subject to certain notice requirements.



27

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Franchise Agreements



As of March 31, 2021,  all 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 $734 and $982 for the three months ended March 31, 2021 and 2020, all of which was included as hotel and property operations expense.



The franchisor of two of our hotels advised us in 2019 that both of the hotels have dropped below the required level for guest satisfaction surveys, and that if the hotels do not achieve compliance, it reserves the right to elect to terminate the relevant franchise agreement.  While the Company believes that it has corrected all deficiencies, the franchisor has informed us that they are not reassessing the accountability status of any properties until at the earliest July 2021.



Leases



The Company has no land lease agreements in place related to properties owned at March 31, 2021.

 

The Company currently leases only one office space on a month-to-month basis. Office lease expense totaled $5 and $13 in the three months ended March 31, 2021 and 2020, respectively,  and is included in general and administrative expense.  The Company also has in place operating leases for miscellaneous equipment at its hotel properties.



The maturity of the lease liabilities for the Company’s operating leases is as follows:





 

 

Maturity of lease liabilities

 

 

Year ended December 31,

 

 

Remainder of 2021

$

15 

2022

 

20 

2023

 

2024

 

2025

 

Thereafter

 

22 

Total lease payments

$

69 

Less: Imputed interest

 

(11)

Present value of lease liabilities

$

58 



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.





 

28

 


 

 

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, 2020 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.



References to “we,” “our,” “us,” and the “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-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.



Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors 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, risks related to uncertainty and disruption in global economic markets as a result of COVID-19 (commonly referred to as the coronavirus), 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. (“Condor” or the “Company”), a Maryland corporation, 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 March 31, 2021, the Company owned 15 hotels, representing 1,908 rooms, in eight states.

 

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, Condor Hospitality Limited Partnership and its subsidiaries (the “operating partnership”), for which we serve as general partner. As of March 31, 2021, we owned approximately 99.9% of the common operating units (“common units”) in the operating partnership.  In the future, the operating partnership 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, the operating partnership and its subsidiaries

29

 


 

 

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.  The operating partnership, 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 annually. 



COVID-19 Pandemic



The novel coronavirus (COVID-19) has reduced travel significantly and adversely affected the hospitality industry in general.  The actual and threatened spread of COVID-19 globally or in the regions in which we operate, or future widespread outbreak of infectious or contagious disease, can continue to reduce national and international travel in general.  The extent to which the hospitality industry, and thus our business, will be affected by COVID-19 will largely depend on future developments which we cannot accurately predict, and the impact on customer travel, including the duration of the outbreak, the continued spread and treatment of COVID-19, and new information and developments that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.  To the extent that travel activity in the U.S. is and will be materially and adversely affected by COVID-19, business and financial results of the hospitality industry, and thus our business and financial results, could be impacted.



Since late March 2020, similar to the conditions affecting the hospitality industry as a whole, we have experienced occupancy declines at many of our properties which have and will continue to require us to adjust our business operations and will have had and will continue to have an impact on our operating income and may potentially impact future compliance with our debt covenants.



As a result of the above factors, the Company is and has taken actions at the corporate and hotel level, including, but not limited to:

·

Obtaining significant modifications of its debt agreements, including extension of the credit facility to January 2, 2023 with an increase in credit availability and modifications and waivers of debt covenants, from the majority of the Company’s lenders.

·

Asset management working with hotel management companies to reduce all hotels operating expenses including, but not limited to, closing off multiple floors, staffing reductions and furloughs, utility consumption reductions, purchasing reductions and eliminations, contract services reductions and eliminations, food services closures, exercise facilities closures, and certain reduction and elimination of certain marketing expenditures.

·

Seeking potential alternative revenue sources through health care providers, government agencies, universities and airlines.

·

Obtaining Paycheck Protection Program (“PPP”) loans authorized under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security (“CARES”) Act totaling $2.3 millionThe entire amount of the loans was used for payroll, utilities, and interest, and therefore, management anticipates that the loans will be substantially forgiven.  The Company completed and submitted to the Small Business Association (“SBA”) applications for the forgiveness of two of the three PPP loans during the first quarter of 2021 and for the third loan subsequent to quarter endTwo of the loans with balances totaling $0.6 million was forgiven by the SBA subsequent to the end of the quarter.

·

Pursuing corporate cost reductions, including staffing reductions, resulting in an approximately 30% decrease in general and administrative expenses compared to historical operations.

·

Capital improvement projects have been suspended except for emergency circumstances and will remain on hold for immediate future, with the potential for the suspension to continue through 2021.

·

The Company determined that it was advisable and the best business practice to cause a temporary closure of two of its hotels, the Solomons Hilton Garden Inn on April 20, 2020 and the Leawood Aloft on April 9, 2020.  These hotels were both reopened on July 1, 2020 and no other hotel closures have been deemed necessary.

30

 


 

 



We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on the hospitality industry, and thus on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic.  While we cannot assure you that the assumptions used to estimate our future liquidity will be correct, the Company believes it can generate the liquidity required to operate through the crisis through a combination of the continued operation of our portfolio with significant cost reduction measures in place, existing availability under our credit facility, and, if necessary, additional debt and equity financings.  However, there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all.



The Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft) were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners, on December 24, 2020 (see discussion in Financial Covenants below). The Company did not satisfy the financial covenants for these loans as of March 31, 2021 or December 31, 2020, as was the case for the first three quarters of 2020.  The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020).  This default under our loan agreement with OSK X, LLC will not result in a cross-default under our credit facility until a 90-day cure period expires on May 27, 2021.  The Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



Based on a the current status of the OSK X, LLC loans and the guidance in U.S. GAAP that requires that, in making a determination for the one year period following the date of the financial statements, the Company cannot consider future fundraising activities or the likelihood of obtaining covenant waivers or amendments, all of which are outside of the Company's sole control, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for the one year period after the date the financial statements are issued.  The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.



Portfolio Activity

 

The Company’s investment strategy is to assemble a portfolio of premium-branded, select-service hotels in the top 100 Metropolitan Statistical Areas (“MSAs”) with a particular focus on MSAs ranked between 20 to 60. Since restarting its portfolio transformation in 2015, the Company has acquired 14 high-quality select-service hotels representing 1,808 rooms in its target markets for a total purchase price of $276.6 million. Additionally, during this time, the Company has sold 55 legacy assets for a total gross sales price of $169.9 million.    Additionally, on February 14, 2020, the Company purchased our joint venture partner’s 20% interest in the joint venture owning the Atlanta Aloft property (the “Atlanta JV”) for $7.3 million.  The purchase price was funded with cash drawn from the credit facility.



31

 


 

 

Hotel Property Portfolio and Activity



Hotel Property Portfolio



The following table sets forth certain information with respect to the hotels owned by us as of March 31, 2021:







 

 

 

 

 

 

 

 

 

 

Hotel Name

 

City

 

State

 

Rooms

 

Acquisition Date

 

Purchase Price
(in thousands)

Hilton Garden Inn

 

Dowell/Solomons

 

MD

 

100 

 

05/25/2012

 

$11,500 

SpringHill Suites

 

San Antonio

 

TX

 

116 

 

10/01/2015

 

$17,500 

Courtyard by Marriott

 

Jacksonville

 

FL

 

120 

 

10/02/2015

 

$14,000 

Hotel Indigo

 

College Park

 

GA

 

142 

 

10/02/2015

 

$11,000 

Aloft (1)

 

Atlanta

 

GA

 

254 

 

08/22/2016

 

$43,550 

Aloft

 

Leawood

 

KS

 

156 

 

12/14/2016

 

$22,500 

Home2 Suites

 

Lexington

 

KY

 

103 

 

03/24/2017

 

$16,500 

Home2 Suites

 

Round Rock

 

TX

 

91 

 

03/24/2017

 

$16,750 

Home2 Suites

 

Tallahassee

 

FL

 

132 

 

03/24/2017

 

$21,500 

Home2 Suites

 

Southaven

 

MS

 

105 

 

04/14/2017

 

$19,000 

Hampton Inn & Suites

 

Lake Mary

 

FL

 

130 

 

06/19/2017

 

$19,250 

Fairfield Inn & Suites

 

El Paso

 

TX

 

124 

 

08/31/2017

 

$16,400 

Residence Inn

 

Austin

 

TX

 

120 

 

08/31/2017

 

$22,400 

TownePlace Suites

 

Austin

 

TX

 

122 

 

01/18/2018

 

$19,750 

Home2 Suites

 

Summerville

 

SC

 

93 

 

02/21/2018

 

$16,325 



 

 

 

 

 

 

 

 

 

 



 

Totals

 

 

 

1,908 

 

 

 

$287,925 



 

 

 

 

 

 

 

 

 

 

(1)

Represents the purchase statistics from the purchase of this hotel by the originally 80% owned unconsolidated Atlanta JV.  The Company purchased the remaining 20% interest in the Atlanta JV from our joint venture partner on February 14, 2020 for $7.3 million.



All of our properties are encumbered by either our credit facility or by mortgage debt at March 31, 2021.



Acquisitions



On February 14, 2020, the Company purchased the remaining 20% interest in the Atlanta JV from our joint venture partner for $7.3 million as allowed by the purchase option included in the original joint venture agreements.  The $7.3 million was funded from the Company’s credit facility, and the Company became the primary obligator on the $34.08 million New Term Loan (defined below) as part of the transaction. 



The New Term Loan matured upon the earlier to occur of (a) consummation of the merger under the Merger Agreement (see Note 1) and (b) May 8, 2020.  The New Term Loan was refinanced in May 2020 through use of the credit facility.  The New Term Loan bore interest, at the Borrower’s option, at either LIBOR plus 2.25% or a base rate plus 1.25% and required monthly interest payments and principal is due on the maturity date.  The Borrowers could, at any time, voluntarily prepay the New Term Loan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).  The New Term Loan was secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts and general intangibles and was guaranteed by the Company and certain of its subsidiaries.



As the Atlanta JV was previously accounted for under the equity method and the acquisition was considered the acquisition of assets, the liabilities assumed as part of the transaction were recorded at fair value while the assets purchased in the transaction were recorded based on a pro-rata fair value allocation of the total available basis, which included the fair value of liabilities assumed, the cash purchase price paid, the balance of the investment in unconsolidated joint venture at the time of the acquisition, and the acquisition costs incurred.  The purchase was recognized as follows (in thousands):  

32

 


 

 







 

 

Cash purchase price

$

7,300 

Investment in unconsolidated joint venture

 

3,844 

Acquisition costs

 

122 

Total investment in net assets

$

11,266 



 

 

Cash

$

125 

Working capital

 

(462)

Land

 

14,728 

Buildings, improvements, and vehicle

 

37,020 

Furniture and equipment

 

2,432 

Debt assumed at acquisition

 

(34,080)

Land option liability (1)

 

(8,497)

Total allocation to net assets

$

11,266 



(1)

The purchase agreement includes a provision which permits the seller to purchase the surface parking lot north of the hotel exercisable for approximately seven years at less than market rates.



Dispositions



There were no dispositions during the three months ended March 31, 2021.



Operating Performance Metrics



The following tables present our same-store occupancy,  average daily rate (“ADR”), and RevPAR for all our hotels owned on March 31, 2021The statistics for the Company’s two hotels that were temporarily closed due to the effects of COVID-19, the Solomons Hilton Garden Inn, which was closed on April 2, 2020 and reopened on July 1, 2020, and the Leawood Aloft, which was closed on April 9, 2020 and reopened on July 1, 2020, include only the periods that the properties were operational.  With the exception of these COVID-19 related closures, same-store occupancy, ADR, and RevPAR reflect the performance of hotels during the entire period, regardless of our ownership during the period presented, including 100% of the operating results of the property owned by the Atlanta JV in which the Company had an 80% interest prior to the purchase of the remaining 20% interest on February 14, 2020.  Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us or audited or reviewed by our independent auditors. 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three months ended March 31,



2021

 

2020



Occupancy

 

ADR

 

RevPAR

 

Occupancy

 

ADR

 

RevPAR

Total Same-Store Portfolio

59.46% 

 

$

89.41 

 

$

53.16 

 

63.97% 

 

$

124.28 

 

$

79.50 





Total same-store RevPAR decreased by 33.1% in the first quarter of 2021, driven by both a decline in occupancy of 7.05% and a decline in ADR of 28.06% caused by the larger impact of the COVID-19 pandemic during the first quarter of 2021.  The Company’s largest declines in RevPAR were at the Leawood Aloft (56.7%), the San Antonio SpringHill Suites (52.6%), and the Atlanta Aloft (49.8%).  The least impacted hotels included the Southaven Home2 Suites (4.5%), the Tallahassee Home2 Suites (12.6%), the Lexington Home2 Suites (16.2%), and the Austin TownePlace Suites (16.8%).



33

 


 

 

Results of Operations



Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020 (in thousands)







 

 

 

 

 

 

 

 



Three months ended March 31,



2021

 

2020

 

Change

Revenue

$

9,644 

 

$

13,227 

 

$

(3,583)

Hotel and property operations expense

 

(7,679)

 

 

(9,815)

 

 

2,136 

Depreciation and amortization expense

 

(2,643)

 

 

(2,710)

 

 

67 

General and administrative expense

 

(1,260)

 

 

(1,193)

 

 

(67)

Strategic alternatives, net

 

(40)

 

 

(144)

 

 

104 

Net loss on disposition of assets

 

(3)

 

 

(9)

 

 

Equity in loss of joint venture

 

 -

 

 

80 

 

 

(80)

Net gain (loss) on derivatives and convertible debt

 

1,988 

 

 

(759)

 

 

2,747 

Other income (expense), net

 

42 

 

 

(28)

 

 

70 

Interest expense

 

(2,209)

 

 

(1,980)

 

 

(229)

Income tax (expense) benefit

 

(27)

 

 

306 

 

 

(333)

Net loss

$

(2,187)

 

$

(3,025)

 

$

838 



Revenue



Revenue decreased by a total of $3,583, or 27.1%, as a result of the decreases in RevPAR resulting from the COVID-19 pandemic as discussed above, partially offset by $356 in increased revenue resulting from the acquisition of the remaining interest in the Atlanta JV in the first quarter of 2020. 



Operating Expenses and Interest Expense



Hotel and property operations expense decreased by $2,136.  Increased operating expenses of $221 from the acquisition of the remaining interest in the Atlanta JV in the first quarter of 2020 were more than offset by decreased operating expenses due to decreased revenue and occupancy as discussed above.  Decreases in operating expenses did not keep pace the declines in revenue caused by the COVID-19 pandemic, with operating expenses in total equaling 79.6% of revenue in the first quarter of 2021 and 74.2% of revenue in the first quarter of 2020.



Depreciation and amortization expense and general and administrative expense remained relatively consistent between the first quarter of 2020 and the first quarter of 2021, decreasing by $67 and increasing by $67 between the periods, respectively.



Interest expense increased in total by $229 largely as a result of the issuance of the $10,000 face value 2020 Convertible Notes in November of 2020.



Equity in Loss of Joint Venture



Equity in loss of joint venture decreased by $80 between the periods, to $0 in the first quarter of 2021, as a result of the acquisition of the remaining interest in the Atlanta JV during the first quarter of 2020, after which point the results from the Atlanta JV were fully consolidated and no longer recorded as an equity method investment.



Net Gain / Loss on Derivatives and Convertible Debt



The change in the gain/loss on derivatives and convertible debt was driven by differences in the value of the Company’s 2020 Convertible Notes, which were issued during the fourth quarter of 2020.  These liability-classified notes saw a decrease in their fair value of $1,840 during the first quarter of 2021.



Income Tax Benefit (Expense)



Income tax expense in both periods was driven primarily by income (loss) earned by the TRS as well as miscellaneous state taxes owed by the Company.  Management believes the combined federal and state income tax rate for the TRS will be approximately 24%.  Beginning with the second quarter of 2020 and continuing through

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September 30, 2020, after an assessment of the realizability of deferred tax assets based on projected reversals of deferred income tax liabilities, projected future taxable income, and tax planning strategies, the Company recognized a full valuation allowance against net deferred tax assets,  leading to minimal tax expense or benefit being recognized through the first quarter of 2021.



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 (“U.S. GAAP”).  We report Funds from Operations (“FFO”), Adjusted FFO (“AFFO”), Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), EBITDA for real estate (“EBITDAre”), Adjusted EBITDAre, and Hotel EBITDA 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 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 or 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 shares and common units, which is FFO reduced by preferred stock dividends.  AFFO is FFO attributable to common shares and common units adjusted to exclude items we do not believe are representative of the results from our core operations, including non-cash gains or losses on derivatives and convertible debt, stock-based compensation expense, amortization of certain fees, losses on debt extinguishment, and in-kind dividends above stated rates, and cash charges for acquisition and terminated transaction and strategic alternatives costs, net of related receipts. 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 to be a useful additional measure of performance for an equity REIT because it facilitates 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 provides a meaningful indication of our performance.  We believe that AFFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net earnings and FFO, is beneficial to an investor’s understanding of our operating performance.



35

 


 

 

The following table reconciles net earnings (loss) to FFO and AFFO for the three months ended March  31, 2021 and 2020 (in thousands). All amounts presented include only our portion of the results of our unconsolidated Atlanta JV prior to our acquisition of the remaining 20% interest from our joint venture partner on February 14, 2020.







 

 

 

 

 



Three months ended March 31,

Reconciliation of Net loss to FFO and AFFO

2021

 

2020

Net loss

$

(2,187)

 

$

(3,025)

Depreciation and amortization expense

 

2,643 

 

 

2,710 

Depreciation and amortization expense from JV

 

 -

 

 

145 

Net loss on disposition of assets

 

 

 

FFO

 

459 

 

 

(161)

Dividends declared and undeclared on preferred stock

 

(163)

 

 

(145)

FFO attributable to common shares and common units

 

296 

 

 

(306)

Net (gain) loss on derivatives and convertible debt

 

(1,988)

 

 

759 

Strategic alternatives expense, net

 

40 

 

 

144 

Stock-based compensation expense

 

99 

 

 

84 

Amortization of deferred financing fees

 

227 

 

 

275 

Amortization of deferred financing fees from JV

 

 -

 

 

93 

AFFO attributable to common shares and common units

$

(1,326)

 

$

1,049 



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



We calculate EBITDA, EBITDAre, and Adjusted EBITDAre by adding back to net earnings or 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 or loss interest expense, loss on debt extinguishment, income tax expense, and depreciation and amortization expense.  NAREIT adopted EBITDAre in order to promote an industry-wide measure of REIT operating performance.  We adjust EBITDA by adding back net gain/loss on disposition of assets and impairment charges to calculate EBITDAre.  To calculate Adjusted EBITDAre, we adjust EBITDAre to add back acquisition and terminated transactions expense and strategic alternatives expense, net of related receipts, which are cash charges. We also add back stock-based compensation expense and gain/loss on derivatives and convertible debt, which are non-cash charges.  EBITDA, EBITDAre, and Adjusted EBITDAre, as presented, may not be comparable to similarly titled measures of other companies.



We believe EBITDA, EBITDAre, and Adjusted EBITDAre 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.



The Company further excludes general and administrative expenses, other non-operating income or expense, and certain hotel and property operations expenses that are not allocated to individual properties in assessing hotel performance (primarily certain general liability and other insurance costs and office and banking fees) from Adjusted EBITDAre to calculate Hotel EBITDA.  Hotel EBITDA, as presented, may not be comparable to similarly titled measures of other companies.    



Hotel EBITDA is intended to isolate property level operational performance over which the Company’s hotel operators have direct control.  We believe Hotel EBITDA is helpful to investors as it better communicates the comparability of our hotels’ operating results for all of the Company’s hotel properties and is used by management to measure the performance of the Company’s hotels and the effectiveness of the operators of the hotels.



The following table reconciles net earnings (loss) to EBITDA, EBITDAre, Adjusted EBITDAre, and Hotel EBITDA for the three months ended March 31, 2021 and 2020 (in thousands). All amounts presented include only

36

 


 

 

our portion of the results of our unconsolidated Atlanta JV prior to our acquisition of the remaining 20% interest from our joint venture partner on February 14, 2020.







 

 

 

 

 



Three months ended March 31,

Reconciliation of Net loss to EBITDA, EBITDAre, Adjusted EBITDAre, and Hotel EBITDA

2021

 

2020

Net loss

$

(2,187)

 

$

(3,025)

Interest expense

 

2,209 

 

 

1,980 

Interest expense from JV

 

 -

 

 

225 

Income tax expense (benefit)

 

27 

 

 

(306)

Depreciation and amortization expense

 

2,643 

 

 

2,710 

Depreciation and amortization expense from JV

 

 -

 

 

145 

EBITDA

 

2,692 

 

 

1,729 

Net loss on disposition of assets

 

 

 

EBITDAre

 

2,695 

 

 

1,738 

Net loss (gain) on derivatives and convertible debt

 

(1,988)

 

 

759 

Stock-based compensation expense

 

99 

 

 

84 

Strategic alternatives expense, net

 

40 

 

 

144 

Adjusted EBITDAre

 

846 

 

 

2,725 

General and administrative expense, excluding stock compensation expense

 

1,161 

 

 

1,109 

Other (income) expense, net

 

(42)

 

 

28 

Unallocated hotel and property operations expense

 

31 

 

 

94 

Hotel EBITDA

$

1,996 

 

$

3,956 



 

 

 

 

 

Revenue

$

9,644 

 

$

13,227 

JV revenue

 

 -

 

 

1,218 

Condor and JV revenue

$

9,644 

 

$

14,445 

Hotel EBITDA as a percentage of revenue

 

20.7% 

 

 

27.4% 



Liquidity, Capital Resources, and Equity Transactions



Rights Offering



On December 7, 2020, the Company filed a registration statement with the SEC with respect to the Rights Offering.  The registration statement has not become effective and the Company has not commenced the Rights Offering.



The Company and SREP entered into a backstop commitment agreement on December 7, 2020. Pursuant to the backstop commitment agreement, SREP will backstop the Rights Offering, if commenced, on a standby basis to facilitate the transaction, by the Company selling to SREP pursuant to an exemption from the registration requirements of Section 5 of the Securities Act provided under Section 4(a)(2) thereof and/or Regulation D thereunder and SREP purchasing an aggregate number of shares of common stock equal to (x) $10.0 million, minus (y) the aggregate proceeds of the Rights Offering divided by $2.50, at a price per share equal to $2.50, subject to the terms and conditions of the backstop commitment agreement. The obligations of SREP under the backstop commitment agreement are subject to certain conditions, which, among other conditions, include: (1) that the Rights Offering must occur on or prior to May 31, 2021, and (2) that the Company exempts SREP from the ownership limitation set forth in the Company’s articles of incorporation.



Liquidity Requirements



As previously discussed, due to the COVID-19 pandemic, the hospitality industry has experienced significant drops in demand.  We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on the hospitality industry, and thus on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic.  While we cannot assure you that the assumptions used to estimate our future liquidity will be correct, the Company believes it can generate the liquidity required to operate through the crisis through a combination of the continued operation of our portfolio with significant cost reduction measures in place, existing availability under our credit facility, and, if necessary, additional debt and equity financings.  However, there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all.



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At March 31, 2021, the Company had $3.5 million of cash and cash equivalents, $4.2 million of restricted cash on hand, and $10.2 million of unused availability under its credit facility, of which $2.4 million is available for use only to pay interest on the credit facility.  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 and as required in connection with our Series E Preferred Stock.  We also presently expect to invest approximately $0.5 million to $1.5 million in capital expenditures related to hotel properties we currently own through June 30, 2022.  As of March 31, 2021, contractual principal payments on our debt outstanding, including normal amortization, totaled $3.7 million through June 30, 2022.



Pursuant to the terms of the ninth amendment to the  credit facility, it is an event of default if the convertible notes issued in 2020 (see discussion of 2020 Convertible Promissory Notes below) are not either converted to common stock or paid in full by July 1, 2021.  The Company intends to not cause such an event of default by satisfying the convertible notes with the Rights Offering, which has a full backstop commitment (see discussion of Rights Offering above), or otherwise satisfying the convertible notes with a sale of equity or negotiating an extension of the July 1, 2021 date with KeyBank.



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.



Additionally, as of March 31, 2021, as discussed in depth in Financial Covenants below, the Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft) were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners, on December 24, 2020. The Company did not satisfy the financial covenants for these loans as of March 31, 2021 and December 31, 2020, as was the case for the first three quarters of 2020.  The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020).  This default under our loan agreement with OSK X, LLC will not result in a cross-default under our credit facility until a 90-day cure period expires on May 27, 2021.  The Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



Based on a the current status of the OSK X, LLC loans and the guidance in U.S. GAAP that requires that, in making a determination for the one year period following the date of the financial statements, the Company cannot consider future fundraising activities or the likelihood of obtaining covenant waivers or amendments, all of which are outside of the Company's sole control, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for the one year period after the date the financial statements are issued.  The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.



Sources and Uses of Cash



Cash provided by (used in) Operating Activities.   Cash related to operations was ($0.9 million) and $1.1 million for the three months ended March 31, 2021 and 2020, respectively.  The decrease in operating cash flows was the result of a decrease in net income, after adjustment for non-cash items, of $1.6 million due to the increased impact of the COVID-19 epidemic on the first quarter of 2021 versus the first quarter of 2020.  Changes in operating assets and liabilities between the periods were individually insignificant.



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Cash used in Investing ActivitiesCash flows used by investing activities were $0.3 million and $7.0 million for the  three months ended March 31, 2021 and 2020, respectively.  The decrease in these outflows in 2021 was driven by the $7.2 million in cash, net, spent in the first quarter of 2020 to acquire the remaining interest in the Atlanta JV, partially offset by dividends received from the Atlanta JV before its purchase of $0.5 million during the period.



Cash provided by Financing ActivitiesCash flows provided by financing activities were $1.4 million and $8.4 million for the three months ended March 31, 2021  and 2020, respectively.  This decrease was primarily the result of cash drawn under the credit facility to acquire the remaining interest in the Atlanta JV during the first quarter of 2020.



Outstanding Indebtedness



Subsequent to the end of the quarter, two of the Company’s PPP loans with balances totaling $0.6 million  were forgiven by the SBA.



Outstanding Debt

At March 31, 2021, we had long-term debt of $169.7 million, with a weighted average term to maturity of 1.9 years and a weighted average interest rate of 3.79%.  Of this total, at March 31, 2021, $24.7 million was fixed rate debt with a weighted average term to maturity of 2.1 years and a weighted average interest rate of 4.09% and $145.0 million was variable rate debt with a weighted average term to maturity of 1.7 years and a weighted average interest rate of 3.74%. At December 31, 2020, excluding the Company’s two issuances of outstanding convertible debt (the 2020 issuance of which is discussed in depth in 2020 Convertible Promissory Notes below) we had long-term debt of $168.3 million with a weighted average term to maturity of 2.1 years and a weighted average interest rate of 3.79%.  Of this total, at December 31, 2020, $24.8 million was fixed rate debt with a weighted average term to maturity of 2.3 years and a weighted average interest rate of 4.09% and $143.5 million was variable rate debt with a weighted average term to maturity of 2.0 years and a weighted average interest rate of 3.74%. 



Aggregate annual principal payments on debt for the remainder of 2021 and thereafter are as follows (in thousands):



 

 

 



 

Total

Remainder of 2021

 

$

1,187 
2022 

 

 

27,683 
2023 

 

 

133,030 
2024 

 

 

7,840 

Total

 

$

169,740 



Financial Covenants



We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility with KeyBank: 

·

Borrowing Base Debt Service Coverage Ratio:  The ratio of adjusted net operating income from borrowing base properties to debt service for the credit facility (assuming a 30 year amortization) must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending September 30, 2021 and December 31, 2021, (b) 1.25 to 1 as of the end of the fiscal quarters ending March 31, 2022 and June 30, 2022 and (c) 1.50 to 1 as of the end of the fiscal quarter ending September 30, 2022 and each fiscal quarter thereafter. For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2022 when the calculation is based on the most recently ended four fiscal quarters.

·

Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA to consolidated fixed charges must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending September 30, 2021 and December 31, 2021, (b) 1.25 to 1 as of the end of the fiscal quarters ending March 31, 2022 and June 30, 2022 and (c) 1.50 to 1 as of the end of the fiscal quarter ending September 30, 2022 and each fiscal quarter thereafter. For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2022 when the calculation is based on the most recently ended four fiscal quarters.

39

 


 

 

·

Borrowing Base Leverage Ratio:  The ratio of indebtedness outstanding under the credit facility to borrowing base asset value (based on updated as-stabilized appraisals) cannot exceed 65%.  The covenant is first tested on March 31, 2022.

·

Minimum Liquidity:  Liquidity must be greater than or equal to $3.0 million. In addition, the ninth amendment to the credit facility provided that if liquidity is below $6.0 million, (a) the agent may engage a financial advisor to advise it with respect to the Company and the credit facility, (b) a $2.0 million interest reserve must be maintained, (c) certain reporting must be completed on a weekly basis and (d) advances under the credit facility can only be made and applied pursuant to a cash flow waterfall.



Pursuant to the terms of the ninth amendment to the credit facility, it is an event of default if the convertible notes issued in 2020 (as discussed above) are not either converted to common stock or paid in full by July 1, 2021.  The Company intends to not cause such an event of default by satisfying the convertible notes with the Rights Offering, which has a full backstop commitment (as discussed above), or otherwise satisfying the convertible notes with a sale of equity or negotiating an extension of the July 1, 2021 date with KeyBank.



We are also required to satisfy a debt yield financial covenant within our loan agreement relating to the three properties financed by Wells Fargo Bank.  The loan agreement provides that if the Company fails to satisfy a debt yield (adjusted net cash flow / outstanding principal amount of the loan) of 10% at the end of any fiscal quarter, then a cash trap occurs.  During a cash trap, the revenue generated from the hotels is directed to an account controlled by the lender and used to pay certain hotel expenses and debt service costs and fund certain reserves.  Any excess funds are held by the lender as additional collateral.  Failure to satisfy the debt yield and the occurrence of a cash trap do not constitute a default under the loan agreement.



In connection with the first amendment to the loan agreement entered into in May 2020, measurement of the debt yield was suspended until the measurement date occurring on March 31, 2021.  The Company did not satisfy the debt yield as of March 31, 2021; however, Wells Fargo has advised us by letter that it will not require implementation of the cash trap.  This advice is terminable by Wells Fargo at any time.  Any cash trap will expire when the debt yield is equal to or greater than 10.5%.



We are also required to satisfy various financial covenants within our loan agreement with OSK X, LLC relating to the Leawood, Kansas Aloft, including the following:

·

Property-Specific Pre-Distribution Debt Service Coverage Ratio.  The ratio of adjusted net operating income for the Leawood, Kansas Aloft (before distributions) to debt service for the loans must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending March 31, 2021 and June 30, 2021 and (b) 1.35 to 1 as of the end of the fiscal quarter ending September 30, 2021 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Property-Specific Post-Distribution Debt Service Coverage Ratio.  The ratio of adjusted net operating income for the Leawood, Kansas Aloft (after distributions) to debt service for the loans must be equal to or greater than (a) 1.00 to 1 as of the end of the fiscal quarters ending March 31, 2021 and June 30, 2021 and (b) 1.35 to 1 as of the end of the fiscal quarter ending September 30, 2021 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Consolidated Debt Service Coverage Ratio.  The ratio of consolidated adjusted net operating income for the Company to consolidated debt service must be equal to or greater than 1.05 to 1.



Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility and loan agreement have the meanings given to them in the credit facility and loan agreement, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.



As a result of the actual and anticipated unprecedented negative impact of the COVID-19 virus on the hotel industry generally, the Company has received waivers of compliance with financial covenants from various lenders (including Great Western Bank with respect to the Leawood, Kansas Aloft) for the first three quarters of 2020.  The Company and certain of its other lenders have also modified various financial covenants by suspending

40

 


 

 

measurements, providing for lower covenants and/or using annualized results (including Great Western Bank with respect to the Leawood, Kansas Aloft).



On December 24, 2020, the Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft), with a March 31, 2021 balance of $14.0 million, were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners. The Company did not satisfy the financial covenants for these loans as of March 31, 2021 and December 31, 2020, as was the case for the first three quarters of 2020.  The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020).  The Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



The loan documents with OSK X, LLC provide (a) that the Company has a 90-day cure period (ending on May 27, 2021) within which it can cure the defaults and (b) that OSK X, LLC is precluded from accelerating the loans and taking any action to foreclose on the Leawood, Kansas Aloft during the cure period.  The Company also believes that there are serious questions under applicable law about whether OSK X, LLC has the ability to declare a default, accelerate the loans or foreclose on the Leawood, Kansas Aloft due to the impossibility of performance of financial covenants during the COVID-19 pandemic. 



The Company intends to seek any available damages in the event of litigation that may result from the actions of OSK X, LLC.



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 credit facility contains cross-default provisions which would allow the lenders under our credit facility 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 loanThe above-described defaults under our loan agreement with OSK X, LLC will not result in a cross-default under our credit facility until the 90-day cure period expires on May 27, 2021.  As indicated above, the Company intends to pursue negotiations with OSK X, LLC to obtain waivers, and if waivers are unable to be obtained, the Company plans to refinance the debt with existing or new lenders which the Company believes it can successfully complete.  However, waivers and the ability to refinance are at the discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers or refinancing on acceptable terms or at all.



As of March 31, 2021, other than with respect to our financial covenants with OSK X, LLC (as discussed above), we are not in default of any of our loans.



Contractual Obligations



Below is a summary of our contractual obligations as of March 31, 2021 and the effect such obligations are expected to have on our future liquidity and cash flows (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Payments due by period

Contractual obligations

 

Total

 

Remainder of  2021

 

2022-2023

 

2024-2025

 

2026 and After

Long-term debt including interest (1)

 

$

182,926 

 

$

6,398 

 

$

168,449 

 

$

8,079 

 

 

 -

Equipment leases

 

 

69 

 

 

15 

 

 

24 

 

 

 

 

22 

Total contractual obligations

 

$

182,995 

 

$

6,413 

 

$

168,473 

 

$

8,087 

 

$

22 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Interest rate payments on our variable rate debt have been estimated using interest rates in effect at March 31, 2021.



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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.



Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments.  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, 2020.



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 March 31, 2021, our market risk arises primarily from interest rate risk relating to variable rate borrowings and the market risk related to our convertible debt and the embedded redemption right in the 6.25% Series E Cumulative Convertible Preferred Stock (the “Series E Preferred Stock”) that fair value will fluctuate following changes in the Company’s common stock price or changes in interest rates.



Interest Rate Sensitivity



We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous.  From time to time, we may enter into interest rate swap agreements or other interest rate hedging agreements.  At March 31, 2021, we have an interest rate swap in place which effectively locks the variable interest rate on our Wells Fargo debt (March 31, 2021 balance of $25.3 million) at 4.44%We do not intend to enter into derivative or interest rate transactions for speculative purposes.



The table below provides information about financial instruments that are sensitive to changes in interest rates.  The table presents scheduled maturities, including the amortization of principal and related weighted-average interest rates for the debt maturing in each specified period (dollars in thousands) as of March 31, 2021.  For the purposes of this presentation, the Wells Fargo debt is considered fixed rate debt as the variable interest rate is effectively locked with the previously discussed interest rate swap.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



2021

 

2022

 

2023

 

2024

 

2025

 

Total

Fixed rate debt

$

1,187 

 

 

$

27,683 

 

 

$

13,279 

 

 

$

7,840 

 

 

$

 -

 

 

$

49,989 

 

Average fixed interest rate

 

3.39 

%

 

 

4.20 

%

 

 

4.33 

%

 

 

4.54 

%

 

 

 -

%

 

 

4.27 

%

Variable rate debt

$

 -

 

 

$

 -

 

 

$

119,751 

 

 

$

 -

 

 

$

 -

 

 

$

119,751 

 

Average variable interest rate

 

 -

%

 

 

 -

%

 

 

%

 

 

 -

%

 

 

 -

%

 

 

4.00 

%

Total debt

$

1,187 

 

 

$

27,683 

 

 

$

133,030 

 

 

$

7,840 

 

 

$

 -

 

 

$

169,740 

 

Total average interest rate

 

3.39 

%

 

 

4.20 

%

 

 

4.03 

%

 

 

4.54 

%

 

 

 -

%

 

 

4.08 

%

42

 


 

 



At March 31, 2021, approximately 29% of our outstanding debt is subject to fixed interest rates or effectively locked with an interest rate swap, while 71% of our debt is subject to floating rates.  Assuming no increase in the level of our variable debt outstanding at March 31, 2021 and after giving effect to our interest rate swap, if interest rates increased by 1.0% our cash flow related to hotel properties would decrease by approximately $1.2 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 March 31, 2021, 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, 2020.



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



None.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4.  MINE SAFETY DISCLOSURES



Not applicable.



ITEM 5.  OTHER INFORMATION



None.

43

 


 

 

ITEM 6.  EXHIBITS



31.1*

 

Section 302 Certificate of Chief Executive Office

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 March 31, 2021, 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

44

 


 

 

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.

 

 

 



May 10, 2021

 

 

 

 

 



 

 

/s/ J. William Blackham

 

 

 



 

 

J. William Blackham

 

 

 



 

 

Chief Executive Officer

 

 

 



 

 

 

 

 

 



 

 

/s/ Jill Burger

 

 

 



 

 

Jill Burger

 

 

 



 

 

Chief Financial Officer and Chief Accounting Officer

 

 

 











45