Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Small reporting company ☒ |
Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of April 29, 2016 there were 4,941,878 shares of common stock, par v alue $.01 per shar e, outstanding.
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Condor Hospitality Trust, Inc. and Subsidiaries
Table of Contents
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Part I. |
3 |
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Item 1. |
3 |
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Consolidated Balance Sheets as of March 31, 2016 and December 31, 201 5 |
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Consolidated Statements of Operations for the Three Months Ended March 3 1 , 2016 and 2015 |
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Co nsolidated Statements of Equity for the Three Months Ended March 3 1 , 2016 and 2015 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 3 1 , 2016 and 2015 |
6 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
42 |
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Part II. |
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Item 1. |
42 |
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Item 1A. |
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Item 2 . |
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Item 3 . |
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Item 4 . |
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Item 5 . |
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Item 6 . |
44 |
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
( Unaudited - I n thousands, except share and per share data)
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)
4
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited - In thousands)
See accompanying notes to consolidated financial statements .
5
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - In thousands)
6
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”), which until July 15, 2015 was formerly named Supertel Hospitality, Inc., was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels. As of March 31, 2016, the Company owned 38 hotels in 18 states.
CDOR, through its wholly owned subsidiary, Supertel Hospitality REIT Trust, owns a controlling interest in Supertel Limited Partnership (“SLP”). SLP, including its various subsidiary partnerships, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of 30 properties held by TRS Leasing, Inc.) and conducts all of its operations. At March 31, 2016, the Company owned 97.9 % of the partnership operating units (“partnership units”) of SLP with the remaining partnership units owned by other limited partner s and long-term incentive plan unit holders. The Company’s 100% owned E&P Financing Limited Partnership no longer owns any assets or conducts any operations as of March 31, 2016 following the sale of its last remaining property during the three months ended March 31, 2016.
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, SLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. SLP , the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements. References to “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including , as the context requires, its direct and indirect subsidiaries.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year. The results of the hotels acquired in October 2015 (see Note 2), because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. general ly accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of SLP and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2016 or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Estimates, Risks, and Uncertainties
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of
7
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
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.
Assets Held for Sale and Discontinued Operations
A hotel is considered held for sale (a) when a contract for sale is entered into, a substantial, nonrefundable deposit has been committed by the purchaser, and sale is expected to occur within one year, or (b) if management has committed to and is actively engaged in a plan sell the property, the property is available for sale in its current condition, and it is probable the sale will be completed within one year. If a hotel is considered held for sale as of the most recent balance sheet presented or was sold prior to that balance sheet date , the hotel property and the debt it collateralizes are shown as held for sale in all periods presented. Depreciation of our hotels is discontinued at the time they are considered held for sale.
Historically, we have presented the results of operations of hotel properties that have been sold or considered held for sale as discontinued operations. In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . The amendments in ASU 2014-08 changed the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other significant disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results should be presented as discontinued operations subsequent to adoption. The Company adopted this pronouncement on October 1, 2014. As a result of this adoption, only the operations of hotels meeting the criteria to be considered held for sale prior to October 1, 2014 are included in discontinued operations for all periods presented as no individual hotel disposition has a major effect on our operations or financial results.
Impairment Losses
On a quarterly basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified. These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s fair value.
At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required. If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the subsequent decision not to sell.
Income Taxes
The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended. In general, under such Code provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed
8
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
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, which is taxed as a C-Corporation, is subject to federal, state, and local income taxes. We account for the federal income taxes of our TRS using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not (defined as a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, to account for hotel acquisitions, and for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or valuation techniques may have a material effect on estimated fair value measurements. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
With the exception of fixed rate debt (see Note 6) and other financial instruments carried at fair value, the carrying amount s of the Company’s financial instruments approximates their fair values due to their short-term nature or variable interest rates.
9
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Fair Value Option
Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for treatment of the Company’s Convertible Debt entered into on March 16, 2016 (see Note 5).
Recently Adopted Accounting Standards
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity , which clarifies certain of the criteria for determining whether derivative features in a hybrid financial instrument should be separately recognized. ASU 2014-16 is effective for fiscal years beginning after December 15, 2015 and permits either a retrospective or cumulative effect transition method. ASU 2014-16 was adopted by the Company on January 1, 2016 and was utilized in determining the accounting for the Series D Preferred Stock issued in March 2016 (see Note 8).
In February 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis , which amends the current consolidation guidance e ffecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The Company adopted this standard on January 1, 2016 and concluded that SLP now meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company continues to consolidate SLP. The Company’s sole significant asset is its investment in SLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of SLP. All of the Company’s debt is an obligation of SLP.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The Company adopted this standard on January 1, 2016 and presents all debt issuance costs, other than issuance costs related to its revolving credit facility, as a direct deduction from the carrying value of the debt liability. Adoption of this standard was applied retrospectively for all periods presented, effecting only the presentation of the balance sheet. The adoption of this standard did not have a material impact on the Company's financial position and had no impact on the results of operations or cash flows.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The original updated accounting guidance was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016, however, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017. As such, the standard will be effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which supersedes most existing lease guidance in U.S. GAAP when it becomes effective. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability, and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2020. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
10
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Reclassifications
Certain amounts in prior year financial statements have been reclassified to conform to current year presentation.
Beginning in the first quarter of 2016, we have revised the classification of cash payments for debt prepayment or extinguishment penalties in our statements of cash flows from where they were previously presented as operating cash flows to financing cash flows. We have concluded that this classification is preferable as these payments are closely related to other financing cash flows, such as the repayment of debt, and reflect the impact of financing decisions made by management. This revision in classification had the effect of increasing operating cash flows and decreasing financing cash flows by $113 and $7 in the three months ended March 31, 2016 and 2015, respectively.
Liquidity
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our revolving credit agreement with Great Western Bank, and the release of restricted cash upon the satisfaction of usage requirements. At March 31, 2016, the Company had $16,270 of cash and cash equivalents on hand and $2,625 of unused availability under its revolving credit agreement. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code. We expect to invest approximately $3,500 to $5,000 in capital expenditures related to hotel properties we currently own through June 30, 2017.
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.
Our longer-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans. Additionally, the Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use approximately $1,600 of proceeds from a capital infusion in 2012 to pursue hotel acquisitions (see Note 13). Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings and proceeds from public or private issuances of debt or equity securities.
Prior to the consideration of any asset sales or our ability to refinance debt subsequent to March 31, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $13,643 through June 30, 2017, including the February 1, 2017 maturity of one of our GE loans with a balance at March 31, 2016 of $10,683 . Prior to its maturity, the Company anticipates refinancing the GE loan with GE or another lender. As a result of our improved financial condition and the terms of the lending arrangements we have entered into in recent periods, we believe we will be able to refinance this debt on similar or perhaps more favorable terms. However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.
Additionally, at March 31, 2016, we have 13 hotels held for sale which, if sold, we believe will generate approximately $11,000 in net proceeds after debt repayment. Over the last five years, we have sold 72 hotels. Although it is management’s plan to use net proceeds after debt repayment from future asset sales to fund future acquisitions, if necessary the Company believes that cash generated from asset dispositions will be sufficient to fund any shortfalls associated with future debt maturities. However, with respect to future hotel sales, we cannot predict whether we will be able to find buyers for identified assets at prices and other terms acceptable to us,
11
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
whether potential buyers will be able to secure financings, and the length of time needed to find a buyer and to close the sale of a property.
NOTE 2. INVESTMENT IN HOTEL PROPERTIES AND ACQUISITION OF HOTEL PROPERTIES
Investments in hotel properties consisted of the following at March 3 1 , 2016 and December 31, 2015:
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As of |
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March 31, 2016 |
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December 31, 2015 |
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Held for sale |
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Held for use |
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Total |
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Held for sale |
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Held for use |
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Total |
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Land |
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$ |
2,050 |
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$ |
15,550 |
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$ |
17,600 |
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$ |
3,316 |
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$ |
15,551 |
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$ |
18,867 |
Acquired below market lease intangibles |
|
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883 |
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- |
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883 |
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883 |
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- |
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883 |
Buildings, improvements, vehicle |
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25,183 |
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106,229 |
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131,412 |
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32,050 |
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106,056 |
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138,106 |
Furniture and equipment |
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7,643 |
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20,772 |
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28,415 |
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9,876 |
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20,712 |
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30,588 |
Construction-in-progress |
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19 |
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647 |
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666 |
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2 |
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453 |
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455 |
Investment in hotel properties |
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35,778 |
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143,198 |
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178,976 |
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46,127 |
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142,772 |
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188,899 |
Less accumulated depreciation |
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(17,101) |
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(37,553) |
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(54,654) |
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(21,740) |
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(36,460) |
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(58,200) |
Investment in hotel properties, net |
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$ |
18,677 |
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$ |
105,645 |
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$ |
124,322 |
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$ |
24,387 |
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$ |
106,312 |
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$ |
130,699 |
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The Company had no acquisitions during the three months ended March 31, 2016 or 2015.
Pro Forma Results
The Company acquired three hotel properties with a combined purchase price of $42,500 on October 1 and 2, 2015. The following condensed pro forma financial data is presented as if all acquisitions completed in 2015 had been completed on January 1, 2014. The condensed pro forma financial data is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2014, nor do they purport to represent the results of operations for future periods.
12
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 3: DISPOSITIONS OF HOTEL PROPERTIES AND DISCONTINUED OPERATIONS
As of March 31, 2016, the Company had 13 hotels classified as held for sale. At the beginning of 2016, the Company had 1 6 hotels held for sale and during the three months ended March 31, 2016 sold four of these properties and classified one additional hotel as held for sale. None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major e ffect on the entity’s operations and financial results. As a result, only hotels classified as held for sale prior to October 1, 2014, one of which remains unsold at March 31, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended March 31, 2016, the results of 40 hotels were included in continuing operations and the results of two hotel s were included in discontinued operations. For the three months ended March 31, 2015, the results of 46 hotels were included in continuing operations and the results of ten hotel s were included in discontinued operations
In the three months ended March 31, 2016 and 2015, the Company sold four hotels in each period, resulting in total gains of $4,059 and $939 , respectively, of which $ 3,37 8 and $ 0 , respectively, was included in continuing operations.
Two hotels in Alexandria, Virginia, which represent a significant disposition for which results are included in continuing operations , were sold on July 13, 2015. For the quarter ended March 31, 2015, the Alexandria Comfort Inn and Days Inn hotels had a combined net loss of $ 1,101 and loss attributable to noncontrolling interest of $ 121 . These amounts include impairment expense of $862 that was recognized following the hotels classification as held for sale in the first quarter of 2015 .
The Company allocates interest expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of disposal transactions. The following table sets forth the components of discontinued operations for the three months ended March 31, 2016 and 2015:
13
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 4. LONG-TERM DEBT
During the three months ended March 31, 2016, net proceeds from the Company’s hotel sales (see Note 3) were used to pay off the associated loans totaling $5,272 , to reduce the balance of the revolving credit facility with Great Western Bank, and set aside to fund future acquisitions. These dispositions also decreased the total availability under the Great Western Bank revolver from $5,733 at December 31, 2015 to $2,625 at March 31, 2016.
Long-term debt, including debt related to hotel properties held for sale, consisted of the following loans payable at March 31, 2016:
(1) Prime rate plus 1%
(2) 90-day LIBOR plus 3.25%
(3) 30-day LIBOR plus 2.25% , fixed at 4.13% after giving e ffect to interest rate swap (see Note 6)
(4) 30-day LIBOR plus 6.25%
(5) $12 monthly payment begins May 2016
(6) Total availability under this revolving credit facility was $2,625 at March 31, 2016; commitment fee on unused facility is 0.25%
14
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of the related hotel properties. Aggregate annual principal payments on debt for the remainder of 2016 and thereafter are as follows:
Financial Covenants
The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage and required loan-to-value and leverage ratios, and place certain restrictions on dividends. As of March 31, 2016, we were in compliance with our financial covenants.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and certain of our GE facilities contain cross-default provisions which would allow Great Western Bank and GE to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan. As of March 31, 2016, we are not in default of any of our loans .
NOTE 5: CONVERTIBLE DEBT AT FAIR VALUE
As part of the Exchange Agreement entered into on March 16, 2016 with RES (see Note 8), the Company issued to RES a Convertible Promissory Note (the “Note”), bearing interest at 6.25% per annum, in the principal amount of $1,012 . If the Series D Preferred Stock is outstanding, RES at its option may at any time elect to convert the Note, in whole or part, by notice delivered to the Company, into a number of shares of Series D Preferred Stock determined by dividing the principal amount of the Note to be converted by $10.00 . Any time the Series D Preferred Stock is required by its terms to be converted into common stock of the Company (see Note 8), the Note will be automatically converted into the number of shares of common stock that RES would have received had RES converted this Note into Series D Preferred Stock immediately prior to the conversion of the Series D Preferred Stock. Any such conversion shall be reduced such that RES, together with its affiliates, does not beneficially own more than 49% of the voting stock of the Company and shall reduce the principal amount of the Note proportionally.
The Company has made an irrevocable election to record this Convertible Debt in its entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gains on derivatives and convertible debt within net earnings each reporting period. The fair value of the Note is determined using a trinomial lattice-based model, which is a generally accepted computational model typically used for pricing options. The fair value of the Note on the date of issuance was determined to be equal to its principal amount. Interest expense related to this Note is recorded separately from other changes in its fair value within interest expense each period .
15
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
The following table represent s the difference between the fair value and the unpaid principal balance of the Note as of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2016 |
|
Unpaid principal balance as of March 31, 2016 |
|
Fair value carrying amount over/(under) unpaid principal |
|||
6.25% Convertible Debt |
$ |
1,399 |
|
$ |
1,012 |
|
$ |
387 |
|
|
|
|
|
|
|
|
|
NOTE 6: FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Our determination of fair value measurements is based on the assumptions that market participants would use in pricing the asset or liability. At March 31, 2016, the Company’s convertible debt (see Note 5) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis. Nonrecurring fair value measurements were utilized in the accounting for the Company’s equity transactions that occurred in March 2016 (see Note 8) and in the valuation of impaired hotels during the three months ended March 31, 2016 and 2015.
Derivative Instruments
C urrently, the Company uses derivatives, such as interest rate swaps and caps, to manage its interest rate risk. The fair value of interest rate positions is determined using the standard market methodology of netting discounted expected future cash receipts and payments. Variable interest rates used in the calculation of projected receipts and payments on the positions are based on expectations of future interest rates derived from observable market interest rate curves and volatilities. Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the agreements. The Company believes it minimizes this credit risk by transacting with major creditworthy financial institutions. These interest rate positions at March 31, 2016 are as follows:
|
(1) |
|
Notional amounts amortize consistently with the principal amortization of the associated loans |
Additionally, prior to the execution of the Exchange Agreement (see Note 8) on March 16, 2016 which extinguished the instrument, the Company was required to bifurcate and include on the balance sheet at fair value the embedded conversion option in the Serie s C Preferred Stock due to the presence of an antidilution provision that required an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instrument’s original conversion price of $8.00 per share.
Similarly, at December 31, 2015, prior to the execution of the Exchange Agreement, the terms of the common stock warrants issued to the holders of the Series C Preferred Stock (see Note 8) also included an antidilution provision that required a reduction in the warrant’s exercise price of $9.60 should the conversion ratio of the Series C Preferred Stock be adjusted due to its antidilution provisions. Accordingly, the warrants did not qualify for equity classification, and, as a result, the fair value of the warrants was shown as a derivative liability on the consolidated balance sheet. With the execution of the Exchange Agreement, this provision of these warrants was effectively eliminated and the conversion price was locked permanently at its current amount on the date of the extinguishment of the Series C Preferred Stock ( $1.92 ). Following this modification of terms, the warrants qualify for equity classification and were reclassified to additional paid in capital at their fair value of $ 611 on the date of the modification.
16
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
The fair value of the derivative liabilities recognized in connection with the Series C Preferred Stock was determined using the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimize standard error.
All derivatives recognized by the Company are reported as derivative liabilities on the consolidated balance sheet s and are adjusted to their fair value at each reporting date. All gains and losses on derivative instruments are included in net gain 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. N et gains of $5,730 and $4,823 were recognized related to derivative instruments for the three months ended March 31, 2016 and 2015, respectivel y.
Recurring Fair Value Measurements
The following tables provide the fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||
Interest rate derivatives |
|
$ |
214 |
|
$ |
- |
|
$ |
214 |
|
$ |
- |
Convertible debt |
|
|
1,399 |
|
|
- |
|
|
- |
|
|
1,399 |
Total |
|
$ |
1,613 |
|
$ |
- |
|
$ |
214 |
|
$ |
1,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between levels during the three months ended March 31, 2016 or 2015.
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 period:
|
(1) |
|
RES warrants were permanently reclassified to additional paid in capital as discussed above |
17
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Fair Value of Long-Term Debt
The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of debt obligations with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy. The carrying value and estimated fair value of the Company’s long-term debt is presented in the table below:
Impaired Hotel Properties
In the performance of impairment analysis for both held for sale and held for use properties, fair value is determined with the assistance of independent real estate brokers and through the use of revenue multiples based on the Company’s experience with hotel sales as well as available industry information. For held for sale properties, estimated selling costs are based on our experience with similar asset sales. These are considered Level 3 inputs. The amount of impairment and recovery of previously recorded impairment recognized in the three months ended March 31, 2016 and 2015 is shown in the table below:
NOTE 7: COMMON STOCK
The Company’s common stock is duly authorized, fully paid, and non-assessable.
18
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
On March 11, 2015, an executive officer exercised a warrant to purchase 227,894 shares at the price of $1.52 per share (see Note 10).
NOTE 8: PREFERRED STOCK
On March 16, 2016, the Company entered into a series of agreements providing for:
|
· |
|
the issuance and sale of Condor’s Series D Cumulative Convertible Preferred Stock (“Series D Preferred Stock”) under a private transaction to SREP III Flight-Investco, L.P. (“SREP”), an affiliate of StepStone Group LP; |
|
· |
|
the exchange of all of Condor’s outstanding Series C Convertible Preferred Stock (“Series C Preferred Stock”) for Series D Preferred Stock; and |
|
· |
|
the cash redemption of all of Condor’s outstanding Series A Preferred Stock and Series B Redeemable Preferred Stock (“Series B Preferred Stock”). |
In connection with these transactions, the Company and SREP entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) pursuant to which Condor issued and sold 3,000,000 shares of Series D Preferred Stock to SREP on the March 16, 2016 for an aggregate purchase price of $30,000 . The Stock Purchase Agreement required that $20,147 of the purchase price be deposited into an escrow account for the purpose of effecting the redemption of the Series A and Series B Preferred Stock and that the remaining amount of the purchase price be delivered to Condor.
Simultaneously, the Company entered into an Agreement (the “Exchange Agreement”) with RES pursuant to which all 3,000,000 outstanding shares of Series C Preferred Stock were exchanged for 3,000,000 shares of Series D Preferred Stock. Under the Exchange Agreement, in lieu of payment of accrued and unpaid dividends in the amount of $4,947 on the Series C Preferred Stock, Condor (a) paid to RES an amount of cash equal to $1,484 , (b) issued to RES 245,156 shares of Series D Preferred Stock (such that RES, IRSA and their affiliates do not beneficially own in excess of 49% of the voting stock of Condor) and (c) issued to RES a convertible promissory note, bearing interest at 6.25% per annum, in the principal amount of $1,012 (see Note 5).
Pursuant to the Stock Purchase Agreement, on March 16, 2016, Condor issued notices to redeem all of the outstanding Series A and Series B Preferred Stock on April 15, 2016 as follows:
|
· |
|
all 803,270 outstanding shares of the Series A preferred stock at the redemption price of $10.00 per share plus $2.084940 per share in accrued and unpaid dividends (plus compounded interest) through the redemption date; and |
|
· |
|
all 332,500 outstanding shares of the Series B preferred stock at the redemption price of $25.00 per share plus $6.354167 per share in accrued and unpaid dividends through the redemption date. |
The effect of these transactions on the Company’s preferred stock and the key terms of the remaining series of the Company’s preferred stock are discussed individually below .
Series A Preferred Stock
On December 30, 2005, the Company offered and sold 1,521,258 shares of 8% Series A Preferred Stock. At March 31, 2016, 803,270 shares of Series A Preferred Stock remained pending redemption as discussed below .
Dividends on the Series A Preferred Stock are cumulative and are payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. The Company may redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time for cash at a redemption price of $10.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series A Preferred Stock to preserve capital and improve liquidity. Unpaid dividends accumulated and bore additional dividends at 8%, compounded monthly. Accumulated but unpaid dividends were $1,452 , or $1.807 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.
19
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
On March 16, 2016, with notice of redemption given and the redemption funds deposited in escrow, all rights of the holders of the Series A Preferred Stock terminated, except the right to receive the redemption price. At this date, the Series A Preferred Stock also became mandatorily redeemable, and as such is classified on the balance sheet as a liability at its redemption value at March 31, 2016 of $9,675 , which includes the redemption price of $10.00 per share plus accrued and unpaid dividends of $1,642 , or $2.045 per share. The difference between the recorded value of the Series A Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series A Preferred Stock at March 31, 2016, a total of $2,288 , was recorded as a reduction of accumulated deficit as the amount is considered a deemed dividend on the Series A Preferred Stock. Of this amount, $836 was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
Series B Redeemable Preferred Stock
At March 31, 2016, there were 332,500 shares of 10.0% Series B Preferred Stock pending redemption as discussed below . The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of $25.00 per share.
Dividends on the Series B Preferred Stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share. The Company may redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Company’s Series B Preferred Stock will be redeemed for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series B Preferred Stock to preserve capital and improve liquidity. Un paid dividends on the Series B Preferred S tock do not bear interest. Unpaid dividends were $1,870 , or $5.625 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.
On March 16, 2016, with notice of redemption given and the redemption funds deposited in escrow, all rights of the holders of the Series B Preferred Stock terminated, except the right to receive the redemption price. At this date, the Series B Preferred Stock also became mandatorily redeemable, and as such is classified on the balance sheet as a liability at its redemption value at March 31, 2016 of $10,391 , which includes the redemption price of $25.00 per share plus accrued and unpaid dividends of $2,078 , or $6.250 per share. The difference between the recorded value of the Series B Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series B Preferred Stock at March 31, 2016, a total of $2,740 , was recorded as a reduction of accumulated deficit as the amount is considered a deemed dividend on the Series B Preferred Stock. Of this amount, $870 was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
Series C Convertible Preferred Stock and Warrants
The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Series C Preferred Stock and warrants under a private transaction with RES. In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to RES of 3,000,000 shares of Series C Preferred Stock and 3,750,000 warrants to purchase shares of common stock. All of the Series C Preferred Stock and related warrants remained outstanding prior to the execution of the Exchange Agreement on March 16, 2016 as discussed above. The conversion price on the Series C Preferred Stock was $1.60 per share on that date and the exercise price of the warrants was $1.92 per share, which is equal to 120% of the adjusted conversion price of the Series C Preferred Stock.
Each share of Series C Preferred Stock was entitled to a dividend of $0.625 per year payable in equal quarterly dividends and had a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and
20
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series C Preferred Stock to preserve capital and improve liquidity. Unpaid dividends accumulated and bore additional dividends at 6.25% , compounded quarterly. Accumulated but unpaid dividends were $4,492 , or $1.497 per share, as of December 31, 2015, which were not reflected as an obligation on the balance sheet on that date.
On March 16, 2016, the Series C Preferred Stock was extinguished under the Exchange Agreement discussed above. Upon this extinguishment, the difference between the recorded value of the Series C Preferred Stock prior to the exchange and the fair value of the consideration received in the exchange, a total of $20,366 , was recorded as a reduction of accumulated deficit as the amount is considered a deemed dividend on the Series C Preferred Stock. Of this amount, $15,874 was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
Subsequent to the execution of the Exchange Agreement, the warrants issued to RES simultaneously with the issuance of the Series C Preferred Stock remain outstanding through their original expiration date of January 31, 2017 at an exercise price of $1.92 .
Series D Convertible Preferred Stock
Following the execution of the Stock Purchase Agreement and Exchange Agreement on March 16, 2016, there were 6,245,156 shares of Series D Preferred Stock outstanding.
The Series D Preferred stockholders rank senior to the Company’s common stock and any other preferred stock issuances and receive preferential cumulative cash dividends at a rate of 6.25% per annum, payable quarterly in arrears on each March 31, June 30, September 30 , and December 31, or, if not a business day, the next succeeding business day, of the $10.00 face value per share. Dividends on the Series D Preferred Stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared , and whether or not such dividends are prohibited by agreement. Whenever the dividends on the Series D Preferred Stock are in arrears for four consecutive quarters, then upon notice by holders in the aggregate not less than 40% of the outstanding Series D Preferred Stock, the Company will (a) take all appropriate action reasonably within its means to maximize the assets legally available for paying such dividends and to monetize such assets (for example, but without limiting the generality of the foregoing, by selling or liquidating all of some of the Company’s assets or by selling the Company as a going concern), (b) pay out of all such assets legally available (including any proceeds from any sale or liquidation of such assets) the maximum possible amount of such unpaid dividends, and (c) thereafter, at any time and from time to time when additional assets of the Company (including any proceeds from any sale or liquidation of such assets) become legally available to pay such unpaid dividends, pay such remaining unpaid dividends until all dividends accumulated on the Series D Preferred Stock have been fully paid. Dividends will begin to be paid on June 30, 2016. Accumulated but unpaid dividends were $160 , or $0.026 per share, as of March 31, 2016, which were not reflected as an obligation on the balance sheet on that date.
Each share of Series D Preferred Stock is convertible, at the option of the holder, at any time into a number of shares of common stock determined by dividing the conversion price of $1.60 into an amount equal to the $10.00 face value per share plus accrued and unpaid dividends, if any. The conversion price is subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends. Each outstanding share of Series D Preferred Stock will be converted into a number of shares of common stock determined by dividing the conversion price of $1.60 into the $10.00 face value per share, which is equal to a rate of 6.25 shares of common stock for each share of Series D Preferred Stock, automatically upon closing of a Qualified Offering (defined as a single offering of common stock of at least $50,000 or up to three offerings in the aggregate of at least $75,000 , all with certain minimum prices per share) without any further action by the holders of such shares or the Company.
The Series D Preferred Stock is redeemable by the Company at any time subject to certain restrictions, in whole or in a partial redemption of up to $30,000 , at $12.00 per share on or before March 16, 2019, $13.00 per share from March 16, 2019 to March 16, 2020, and $14.00 per share on or after March 16, 2020, plus all accrued and unpaid
21
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
dividends. If a Qualified Offering has not occurred on or before March 31, 2021, holders that hold in the aggregate not less than 40% of the outstanding shares of the Series D Preferred Stock have the right to elect to have the Company fully liquidate in a commercially reasonable manner as determined by the Board of Directors of the Company to provide for liquidation distributions to the holders of the Series D Preferred Stock in an amount per share of Series D Preferred Stock equal to $14.00 in cash plus accrued and unpaid dividends. Once this right has been exercised and the Company has been notified, the dividend rate on the Series D Preferred Stock after March 31, 2021 will increase from 6.25% per annum to 12.5% per annum. The holders of Series D Preferred Stock vote their Series D Preferred Stock as a single class with the holders of the common stock on all matters submitted to such holders for vote or consent. For each such vote or consent, each share of Series D Preferred Stock entitles the holder to cast one vote for each whole vote (rounded to the nearest whole number) that such holder would be entitled to cast had such holder converted its Series D Preferred Stock into shares of common stock as of the date immediately prior to the record date for determining the shareholders of the Company eligible to vote on any such matter.
The fair value of the Series D Preferred Stock was determined to be equal to its face value on the date of issuance.
I mpact of Preferred Stock on Net E arnings (L oss) Attributable to Common Shareholders
The components of dividends declared and undeclared and in kind dividend s deemed on preferred stock are as follow s :
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
||||
|
|
2016 |
|
2015 |
||
Preferred A dividends accrued at stated rate |
|
$ |
190 |
|
$ |
176 |
Preferred A additional deemed dividends upon notice of redemption |
|
|
646 |
|
|
- |
Preferred B dividends accrued at stated rate |
|
|
208 |
|
|
208 |
Preferred B additional deemed dividends upon notice of redemption |
|
|
662 |
|
|
- |
Preferred C dividends accrued at stated rate |
|
|
455 |
|
|
507 |
Preferred C additional deemed dividends at exchange |
|
|
15,419 |
|
|
- |
Preferred D dividends accrued at stated rate |
|
|
160 |
|
|
- |
Dividends declared and undeclared and in kind dividends deemed on preferred stock |
|
$ |
17,740 |
|
$ |
891 |
|
|
|
|
|
|
|
NOTE 9. NONCONTROLLING INTEREST OF PARTNERSHIP UNITS IN SLP
Noncontrolling interest in SLP represents the limited partners’ proportionate share of the equity in the operating partnership and long-term incentive plan (LTIP) units (see Note 10). Earnings and loss are allocated to noncontrolling interest in accordance with the weighted average percentage ownership of SLP during the period.
Our ownership interest in SLP as of March 31, 2016 was 97.9% and as of December 31, 2015 was 90.1% , which includes consideration of the partnership units of the limited part ners as well as the LTIP units. The Company’s increased ownership interest in SLP during the three months ended March 31, 2016 was a result of the contribution to SLP of the proceeds from the Series D Preferred Stock issuance during the period (see Note 8). At both March 31, 2016 and December 31, 2015, 7,659,039 SLP partnership units owned by minority interest holders were outstanding, which includes 2,395,887 of partnership units held by limited partners and 5,263,152 LTIP units outstanding which were not yet earned. The combined redemption value for the partnership units and LTIP units was $1,838 and $1,197 at March 31, 2016 and December 31, 2015, respectively.
Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her partnership units at any time after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. When a limited partner tenders partnership units for redemption, the Company can, at its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock at a rate of one share of common stock for each eight partnership units redeemed or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited partner would have received if the Company
22
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
chose to purchase the units for common stock. No partnership units were redeemed in the three months ending March 31, 2016 and 2015 .
NOTE 10. STOCK-BASED COMPENSATION
The Company had in place a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock, and stock bonuses for up to 62,500 shares of common stock. The 2006 Stock Plan expired effective December 31, 2015.
Stock-based compensation for awards with a service condition only is measured based on the fair value of the award on the date of grant and recognized as compensation expense on a straight line basis over the service period. The compensation cost related to awards for which vesting is contingent upon achieving a market based criteria is measured at the fair value of the award on the date of grant, including consideration of the market criteria, and amortized on a straight line basis over the performance period. The fair value of the award at grant is measured using either the closing stock price on the date of grant (for vested and unvested share awards), the Black-Scholes model (for options and warrants), or a Monte Carlo simulation (for LTIP awards), as appropriate. Compensation cost is recognized as additional paid-in capital for awards of the Company’s common stock and as noncontrolling interest for LTIP awards of SLP partnership units.
Options and Unvested Share Awards
At March 31, 2016, the Company had a total of 4,583 vested stock options outstanding with a weighted average exercise price of $7.95 per share and 1,042 unvested stock options outstanding with a weighted average exercise price of $8.08 per share. The total unrecognized compensation cost related to un vested stock options at March 31, 2016 was $1 , which is expected to be fully recognized in the remainder of 2016 when the remaining unvested options fully vest.
As of March 31, 2016, the Company had 1,042 unvested shares of common stock outstanding. The total unrecognized compensation cost related to unvested stock awards at March 31, 2016 was $3 , which is expected to be fully recognized in the remainder of 2016 when the remaining unvested shares fully vest.
Warrants
On March 2, 2015, the Company granted a warrant to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The warrant entitled the executive to purchase a total of 657,894 authorized but previously unissued shares of the Company’s common stock at a price of (i) $1.52 per share (the adjusted closing bid price of the common stock on Nasdaq on March 2, 2015) if at least one -third but not more than one -half of the shares were purchased on or prior to March 17, 2015, and (ii) $1.92 per share for shares purchased after that date . The warrant has a three -year term. The executive officer exercised the warrant in part to purchase 227,894 shares on March 11, 2015 at the price of $1.52 per share. The warrant remains exercisable for 430,000 shares at an exercise price of $1.92 per share. As of March 31, 2016, the total unrecognized compensation cost related to these warrants was $189 , which is expected to be recognized over the next 23 months.
LTIP Awards
On March 2, 2015, the Company granted an equity award of 5,263,152 LTIP units, representing profit interests in SLP, to an executive officer of the C ompany. The LTIP units are earned in one -third increments upon the Company’s common stock achieving price per share milestones of $3.50 , $4.50 , and $5.50 respectively. Earned LTIP units vest in March 2018, or earlier upon a change in control of the Company, and upon vesting can be converted into SLP partnership units which can be redeemed at the rate of one share of common stock for each eight earned LTIP units for up to 657,894 common shares. As of March 31, 201 6 , the total unrecognized compensation cost related to these LTIP units was $327 , which is expected to be recognized over the next 23 months.
23
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Investment Committee Share Compensation
Independent directors serving as members of the Investment Committee of the Board of Directors receive their monthly Investment Committee fees in the form of shares of the Company’s common stock if issuance is available under a shareholder approved Stock Plan, priced as the average of the closing price of the stock for the first 20 tra ding days of the calendar year. A total of 2,988 shares were issued to the independent directors of the Investment Committee for the three months ended March 31, 2015. If shareholders approve the 2016 Stock Plan at the annual shareholders’ meeting occurring in June 2016, during the three months ended June 30, 2016 the Company will issue 10,517 shares to the independent directors of the Investment Committee for their service during the three months ended March 31, 2016.
Stock-Based Compensation Expense
The expense recognized in the consolidated financial statements for stock-based compensation, including LTIP units, related to employees and directors for the three months ended March 31, 2016 and 2015 was $69 and $49 , respectively, all of which is included in general and administrative expense .
NOTE 11. INCOME TAXES
We have provided a full valuation allowance against our net deferred tax asset during all periods presented due to the uncertainty of realization resulting from past operating losses which results in $0 tax expense for the three months ended March 31, 2016 and 2015. The TRS’s net operating loss carryforward at March 31, 2016 as determined for federal income tax purposes was $18,295 . The availability of the loss carryforwards will expire from 2022 through 2035 .
24
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
The following is a reconciliation of basic and diluted earnings per common share (“EPS”):
|
(1) |
|
|
25
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept 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:
|
(1) |
|
LTIP and partnership units of SLP have been omitted from the denominator for the purpose of computing diluted EPS since the effect of including these amounts in the numerator and denominator would have no impact on calculated EPS . |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Management Agreements
Our TRS engages eligible independent contractors as property managers for each of our hotels in accordance with the requirements for qualification as a REIT. The hotel management agreements provide that the management companies have control of all operational aspects of the hotels, including employee-related matters. The management companies must generally maintain each hotel under their management in good repair and condition and perform routine maintenance, repairs, and minor alterations. Additionally, the management companies must operate the hotels in accordance with the national franchise agreements that cover the hotels, which includes, as applicable, using franchisor sales and reservation systems as well as abiding by franchisors’ marketing standards. The management agreements generally require the TRS to fund debt service, working capital needs, and capital expenditures and to reimburse the management companies for all operating costs and expenses incurred in the operation of the hotels. The TRS also is responsible for obtaining and maintaining certain insurance policies with respect to the hotels.
Each of the management companies employed by the TRS at March 31, 2016 receives a base monthly management fee of 3.0% to 3.5% of gross hotel revenue plus incentive fees capped at 1.5% to 2.0% of gross hotel revenue, earned when actual hotel results exceed either budgeted results o r specific return metrics. During the second quarter of 2015, the Company negotiated new agreements with our existing management companies. Prior to the renegotiation, management fees were calculated as 3.5% of gross hotel revenue plus 2.5% of the hotel operating income controlled by the management companies, with no incentive fees available. For the three months ended March 31, 2016 and 2015, base management fees incurred totaled $399 and $593 , respectively, of which $389 and $515 , respectively, was included in continuing operations as hotel an d property operations expense. For the three months ended March 31, 2016, incentive management fees, included in continuing operations in their entirety, totaled $ 6 .
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 upon payment of a termination fee equal to 50% of the management fee paid with respect to the hotel during the prior 12 months. The management agreements terminate with respect to a hotel upon sale of the hotel, subject to certain notice requirements.
26
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Franchise Agreements
As of March 31, 2016, 36 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 $759 and $872 , respectively, for the three months ended March 31, 2016 and 2015, of which $759 and $846 , respectively, was included in continuing operations as hotel and property operations expense. The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life of the franchise agreements.
Leases
The Company assumed land lease agreements at the time of purchase related to three hotels owned at March 31, 2016. One lease requires monthly payments of the greater of $2 or 5% of room revenue and is associated with a property held for sale at March 31, 2016. The second lease requires annual payments of $34 , with approximately $3 increases every five years throughout 12 optional renewal periods. The third lease requires annual lease payments of $13 and is associated with a property held for sale at March 31, 2016. Land lease expense totaled $23 for the three months ended March 31, 2016 and 2015, of which $19 is included in continuing operations as hotel and property operations expense in both periods .
The Company entered into office lease agreements in May of 2010 and December of 2011, each of which matures in 2016 with the option to renew an additional five years. In March 2016, the Company entered into a new office lease to replace one of these expiring office leases; the lease is a five year lease with rent not significantly different than that of the expiring lease. Office lease expense totaled $46 and $40 in the three months ended March 31, 2016 and 2015, respectively, and is included in general and administrative expense.
Obligation to RES
The Company has an obligation to RES to use $25,000 of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions (see Note 8). There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions, but the Company is obligated to replace these funds promptly as it has the ability to do so. Following the completion of the three hotel acquisitions in 2015, the Company believes it has satisfied all but approximately $1,600 of this obligation.
Litigation
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. We are not currently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us. The Company has insurance to cover potential material losses and we believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.
NOTE 14. SUBSEQUENT EVENTS
Subsequent Property Activity
Subsequent to March 31, 2016, the Company has sold tw o hotel properties , the 72 -room Super 8 in O’Neill , Nebraska on April 22, 2016 for gross proceeds of $1,725 and the 49 - room Quality Inn in Culpeper, Virginia on May 10, 2016 for gross proceeds of $2,200 . After repayment of the associated loans, proceeds from these sales will be used to fund future acquisitions and for general corporate purposes.
27
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Subsequent to March 31, 2016, one additional hotel property met the criteria to be considered held for sale. Investment in hotel property, net of $1,771 and debt of $1,341 related to this property remain classified in the March 31, 2016 balance sheet as held for use.
Subsequent Equity Transactions
On April 15, 2016, the Company completed the cash redemption of all of its outstanding Series A and Series B Preferred Stock, including all accrued and unpaid dividends (see Note 8). The Series A Preferred Stock was redeemed for a total of $9,707 , or $12.085 per share, which includes the liquidation preference of $10.00 per share plus accrued and unpaid dividends. The Series B Preferred Stock was redeemed for a total of $10,425 , or $31.354 per share, which includes the liquidation preference of $25.00 per share plus accrued and unpaid dividends. The aggregate redemption price was funded with restricted cash included on the March 31, 2016 balance sheet as set aside per the terms of the Stock Purchase Agreement .
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, 2015 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.
References to “we,” “our,” “us,” and “Company” refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
Certain information both included and incorporated by reference in this Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.
Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies , and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, risks associated with debt financing, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas, policies and guidelines applicable to real estate investment trusts, and other risks and uncertainties described herein, and in our filings with the Securities and Exchange Commission (“ SEC ”) from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report which speak only as of the date of this report.
Background
Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”), which until July 15, 2015 was formerly named Supertel Hospitality, Inc., was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administere d 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, 2016, the Company owned 38 hotels, representing
3,0 7 8 rooms, in 18 states.
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, Supertel Limited Partnership and its subsidiaries (“SLP”), for which we serve as general partner. As of March 31, 2016, we owned an approximate 9 7.9 % ownership interest in SLP. In the future, SLP may issue limited partnership interests to third parties from time to time in connection with our acquisition of hotel properties or the raising of capital.
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, SLP and its subsidiaries lease our hotel
29
properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (“the TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. SLP and the TRS and their respective subsidiaries are consolidated into the Company’s financial statements.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year. The results of the hotels acquired in October 2015, because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.
Overview
The Company continues to make significant progress on its strategic repositioning. In the first quarter of 2016, the Company successfully closed on a $30.0 million capital raise that enabled the Company to significantly advance its goal of improving the quality of and simplifying the structure of its balance sheet. Additionally, the Company continued to dispose of legacy assets at attractive valuations, successfully closing on four legacy dispositions in the first quarter. Both of these important accomplishments are further detailed below.
Capital Raise . On March 16, 2016, the Company announced that it had raised $30.0 million in a private placement transaction with StepStone Real Estate (“StepStone”), an affiliate of the StepStone Group. The investment, structured as a new Series D Preferred Stock, includes a 6.25% coupon rate, payable quarterly, and may be converted under certain circumstances into shares of the Company’s common stock at a conversion price of $1.60 per share. Subsequent to the close of the first quarter, the Company used a portion of the proceeds from the $30.0 million Series D raise to redeem for cash all outstanding Series A and Series B Preferred Stock, including all unpaid accrued dividends. Excess proceeds will be utilized by the Company to accelerate the strategic repositioning of its portfolio to high quality select service, limited service, extended stay, and compact full service hotels. This investment capacity is in addition to the proceeds expected to be recycled from the planned dispos ition of legacy assets in 2016. Simultaneously with StepStone’s Series D investment, the Company’s outstanding Series C Preferred Stock, all of which was held by Real Estate Strategies L.P. (“RES”), was also exchanged for the newly created Series D Preferred Stock, resulting in one class of preferred stock for which the Company can require conversion entirely into common stock upon the occurrence of defined capital events.
Dispositions. In the first quarter of 2016, the Company continued to successfully dispose of legacy assets at attractive valuations. On January 8, 2016, the Company announced the sale of three legacy assets for gross proceeds of $7.0 million. On March 30, 2016, the Company announced the sale of an additional legacy asset with gross proceeds of $2.4 million. The Company expects to market up to 27 legacy hotels in 2016, including the four closed dispositions aforementioned. At a minimum, the Company anticipates disposing of 20 legacy hotels in 2016 and plans to utilize the net proceeds to continue to strategically reposition the portfolio.
The Company remains positive on the general economic landscape and lodging sector in the U.S. despite a mixed bag of economic signals in the first quarter of 2016. Positively, consumer confidence remains strong and unemployment remains low at the start of 2016. Conversely, corporate profits disappointed expectations in the first quarter and estimates for U.S. gross domestic product growth for 2016 have been lowered. The lodging sector experienced positive Revenue per Available Room (“RevPAR”) growth of 2.7% in the first quarter, well below the growth experienced in the fourth quarter of 2015. Additionally, for the first time this cycle, occupancy exceeded its peak level in the previous cycle, which may enable increases to Average Daily Rate (“ADR”) in 2016. In short, the Company believes that there is still some runway left for additional positive improvement in lodging fundamentals in 2016, although at more moderate levels than experienced in 2015.
The Company details factors that are outside of its control and that may negatively effect its performance in the “Risk Factors” section of its Annual Report on Form 10-K for the year ended December 31, 2015 and other documents that may be filed with the S EC in the future. We encourage our investors to become familiar with these risk factors. The Company continues to closely monitor lodging industry fundamentals, the performance of its portfolio, its third-party managers, and its general performance, in an effort to accomplish its stated mission of providing attractive total returns in the lodging sector to its investors.
30
Hotel Property Portfolio and Activity
The following table sets forth certain information with respect to the hotels owned by us as of March 31, 2016:
|
(1) |
|
This property is subject to a long-term ground lease. |
|
(2) |
|
This property is considered held for sale at March 31, 2016 . |
|
(3) |
|
This property was newly acquired in the fourth quarter of 2015. |
31
All of our properties are encumbered by either our revolving credit agreement or by mortgage debt at March 31, 2016.
Consistent with our strategic repositioning , the following hotel sales were executed in the three months ended March 31, 2016:
|
|
|
|
|
|
Condor |
|
Number of |
|
|
Gross proceeds |
Date of sale |
|
Location |
|
Brand |
|
lender |
|
rooms |
|
|
(in thousands) |
01/04/16 |
|
Kirksville, MO |
|
Super 8 |
|
Great Western |
|
61 |
|
$ |
1,525 |
01/07/16 |
|
Lincoln, NE |
|
Super 8 |
|
Great Western |
|
133 |
|
|
2,800 |
01/08/16 |
|
Greenville, SC |
|
Savannah Suites |
|
GE Capital |
|
170 |
|
|
2,700 |
03/30/16 |
|
Portage, WI |
|
Super 8 |
|
Morgan Stanley |
|
61 |
|
|
2,375 |
|
|
|
|
|
|
Total |
|
425 |
|
$ |
9,400 |
Net proceeds, after expenses and debt repayment, totaled $ 3.7 million in the three months ended March 31, 2016. In the three months ended March 31, 2015, four hotels with 296 rooms were sold for gross proceeds of $7.5 million, and net proceeds, after expenses and debt repayment, of $ 0.9 million
Based on the criteria discussed in the footnotes to the consolidated financial statements, as of March 31, 2016, the Company had 13 hotel s classified as held for sale. 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. At the begin ning of 2016, the Company had 16 hotels held for sale and during the three months ended March 31, 2016 sold four of these properties and classified one additional hotel as held for sale.
As discussed in the footnotes to the consolidated financial statements, as of October 1, 2014 we adopted ASU 2014-08 which changes the criteria for reporting a discontinued operation such that only disposals representing a strategic shift in operations should be presented as discontinued operations subsequent to adoption. None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. As a result, only hotels classified as held for sale prior to October 1, 2014, one of which remains unsold at March 31, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended March 31, 2016, the results of 40 hotels were included in continuing operations and the results of two hotels were included in discontinued operations. For the three months ended March 31, 2015, the results of 46 hotels were included in continuing operations and the results of ten hotels were included in discontinued operations .
32
Operating Performance Metrics
The following table presents our RevPAR , ADR , and occupancy for our same store operations. The comparisons for same store operations include all of our hotels owned as of March 31, 2016 with the exception of the three hotels we acquired in October 2015 (35 hotels included in same store results, 22 of which are considered held for use (“HFU”) and 13 of which are considered held for sale (“HFS”)). All hotels included in same store operations were owned throughout each of the periods presented. The performance metrics for three hotels acquired in 2015 represent post-acquisition operations only and are separately presented.
|
Three months ended March 31, |
||||||||||
|
2016 |
|
2015 |
||||||||
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
Same store HFU |
53.50% |
$ |
76.43 |
$ |
40.89 |
|
60.48% |
$ |
71.41 |
$ |
43.19 |
Same store HFS |
50.39% |
$ |
53.84 |
$ |
27.13 |
|
56.19% |
$ |
51.46 |
$ |
28.19 |
Total same store |
52.28% |
$ |
67.94 |
$ |
35.52 |
|
58.81% |
$ |
63.99 |
$ |
37.63 |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
76.82% |
$ |
112.09 |
$ |
86.10 |
|
- |
$ |
- |
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
I n the same store HFU portfolio of hotels, 2016 RevPAR decreased 5.3% from 2015, driven by a decrease in occupancy of 11.5% which was partially offset by an increase in ADR of 7 .0 %. The decrease in occupancy between the periods was driven by market challenges facing our legacy hotels as a result of declines in the oil and gas, rail, and fracking industries. Occupancy was also negatively impacted by a decrease in construction projects in these markets from the same period in 2015 where the rate of these projects was higher than typica l . Despite these occupancy challenges, in the latter half of 2015 and in 2016, the Company has focused on increasing ADR in light of an improving economy and increasing leisure and transient travel.
Results of Operations
Comparison of the three months ended March 31, 2016 to the three months end ed March 31, 2015 (in thousands )
33
Revenue
Revenue from continuing operations between the periods remained reasonably stable, decreasing by $170, or 1.4%, between the periods. Revenue from newly acquired properties in the three months ended March 31, 2016 totaled $3,229 and revenue from our other held for use assets decreased by $321 which was the result of the decrease in same store RevPAR for held for use hotels discussed above . Revenue from held for sale and sold properties included in continuing operations decreased by $3,078 driven by property sales during and between the periods presented.
Expenses
Hotel and property operations expense from continuing operations decreased by $581, which was driven by decreased expenses from held for sale or sold properties included in continuing operations of $2,638 between the periods which was partially offset by expenses from newly acquired properties of $2,023 in the three months ended March 31, 2016. Hotel and property operations expenses on other held for use assets remained relatively stable, increasing $34. In totality, the decrease in these expenses outpaced the decrease in revenue because of increases in ADR and because the legacy hotels that remain in our portfolio and our 2015 acquisitions have higher operating margins than the hotels that were sold during and between the periods.
Interest expense from continuing operations and depreciation expense from continuing operations decreased by $219 and $71, respectively, between the periods as a result of a net decrease in the size of the Company’s hotel portfolio. Additionally, interest expense was favorably impacted by a decrease in the weighted average interest rate on total long-term debt outstanding between the periods, from 6.50 % at March 31, 2015 to 5.24 % at March 31, 2016, as a result of debt repaid upon the sale of properties and debt refinancings between the periods.
The $63 increase in general and administrative expense was driven by increased compensation expense resulting from compensation arrangements put into place with the new management team in 2015.
Acquisition and terminated transaction costs will fluctuate period to period based on our acquisition activities. Acquisition costs typically consist of transfer taxes, legal fees, and other costs associated with acquiring a hotel property as well as transactions that were terminated during the year. The increase in these expenses in 2016 was a result of expenses incurred during the period related to the final accounting for and valuation of the three acquisitions consummated in the fourth quarter of 2015 as well as increased activity by management to review potential future transactions.
Dispositions
In the three months ended March 31, 2016, four hotels were sold with gains totalin g $4,059 . In the three mo nths ended March 31, 2015, one hotel was sold with a gain of $939 and three hotels were sold that had been previously impaired and as such had no gain s .
Net Gain on Derivatives and Convertible Debt
The change in gain (loss) on derivatives and convertible debt was driven by change s in the fair value of the derivative liabilities between the periods. In both periods, decreases in fair value of derivatives were primarily a result of a decreases in the Company’s stock price, which in turn decreased the value assigned to the conversion feature of the Series C Preferred S tock and the outstanding common stock warrants. In the three months ended March 31, 2016, this gain was part ially offset by a loss of $387 on the fair value of the convertible d ebt entered into on March 16, 2016 due to an increase in stock price from the date that note was entered into to March 31, 2016.
Loss on Extinguishment of Debt
The loss on the extinguishment of debt increased between the periods as a result of significant prepayment penalties
34
incurred in March 2016 upon the disposal of a property encumbered by the Company’s Morgan Stanley debt.
Impairment Losses
In the three months ended March 31, 2016, we incurred $793 of impairment losses, all of which was included in continuing operations. In the three months ended March 31, 2015, we incurred impairment losses totaling $732, of which $777 was in continuing operations and a recovery of $45 was in discontinued operations. All impairments recognized in both periods related either to hotels held for sale or sold at some point during the periods .
Income Tax Expense
As of March 31, 2016 and 2015 and throughout the three months then ended, a full valuation allowance was recorded against the Company’s net deferred tax asset due to the uncertainty of realization because of historical operating losses. As such, no income tax expense or benefit was recorded in the three months ended March 31, 2016 or 2015. Management believes the combined federal and state income tax rate for the TRS will be approximately 38% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.
Non-GAAP Financial Measures
Non-GAAP financial measures are measures of our historical financial performance that are different from measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We report Funds from Operations (“FFO”), Adjusted FFO (“AFFO”), Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), Adjusted EBITDA, and Property Operating Income (“POI”) as non-GAAP measures that we believe are useful to investors as key measures of our operating results and which management uses to facilitate a periodic evaluation of our operating results relative to those of our peers. Our non-GAAP measures should not be considered as an alternative to U.S. GAAP net earnings or operating income (loss) 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 computed in accordance with GAAP, excluding gains or losses from sales of real estate assets, impairment, and the depreciation and amortization of real estate assets. FFO is calculated both for the Company in total and as FFO attributable to common shareholders, which is FFO excluding earnings attributable to noncontrolling interests and preferred stock dividends. AFFO is FFO attributable to common shareholders adjusted to exclude items we do not believe are representative of the results from our core operations, such as non-cash gains or l osses on derivative liabilities and convertible debt and cash charges for acquisition costs. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.
We consider FFO and AFFO to be useful additional measures of performance for an equity REIT because they facilitate an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO and AFFO provide a meaningful indication of our performance.
35
The following tab le reconciles net earnings to FFO and AFFO for the three months ended March 31, 2016 and 2015 (in thousands). All amounts presented include both continuing and discontinued operations.
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA
We calculate EBITDA and Adjusted EBITDA by adding back to net earnings 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 interest expense, loss on debt extinguishment, income tax expense, and depreci ation and amortization expense. In calculating Adjusted EBITDA, we adjust EBITDA to add back net gain on disposition of assets and acquisition and t erminated transactions expense, which are cash charg es. We also add back impairment and gain or lo ss on derivatives and convertible debt, which are non-cash charges. Our current calculation of EBITDA varies from that presented in previous filings as EBITDA was historically calcula ted based on net earnings attributable to common shareholders with preferred dividends and noncontrolling interest added back only to Adjusted EBITDA. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
We believe EBITDA and Adjusted EBITDA to be useful additional measures of our operating performance, excluding the impact of our capital structure (primarily interest expense), our asset base (primarily depreciation and amortization expense), and other items we do not believe are representative of the results from our core operations.
36
The following table reconciles net earnings to EBITDA and Adjusted EBITDA for the three months ended March 31, 2016 and 2015 (in thousands). All amounts presented include both continui ng and discontinued operations.
Property Operating Income (“POI”)
We calculate POI as room rentals and other hotel services revenue less hotel and property operating expenses. We believe POI is helpful to investors as it better communicates the comparability of our hotels’ operating results for all of the Company’s hotel properties. POI as presented below includes both continuing and discontinued operations.
The following table reconciles operating income (loss) to POI for the three months ended March 31, 2016 and 2015 (in thousands). All amounts presented include only continuing operations unless otherwise noted.
Liquidity and Capital Resources
Liquidity Requirements
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our revolving credit agreement with Great Western Bank, and the release of restricted cash upon the satisfaction of usage requirements. At March 31, 2016, the Company had $ 16.3 million of cash and cash equivalents on hand and $ 2.6 million of unused availability under its revolving credit agreement. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code . We expect to invest approximately $ 3.5 million to $ 5.0 million in capital expenditures related to hotel properties we currently own through June 30, 2017.
37
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.
Our longer-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans. Additionally, the Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use approximately $1.6 million of proceeds from a capital infusion in 2012 to pursue hotel acquisitions. Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings and proceeds from public or private issuances of debt or equity securities.
Prior to the consideration of any asset sales or our ability to refinance debt subsequent to March 31, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $ 13.6 million through June 30, 2017, including the February 1, 2017 maturity of one of our GE loans with a balance at March 31, 2016 of $ 10.7 millio n. Prior to its maturity, the C ompany anticipates refinancing the GE loan with GE or another lender. As a result of our improved financial condition and the terms of the lending arrangements we have entered into in recent periods, we believe we will be able to refinance this debt on similar or perhaps more favorable terms. However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.
Additionally, at March 31, 2016, we have 13 hotels held for sale which, if sold, we believe will generate approximately $ 11.0 million in net proceeds after debt repayment. Over the last five years, we have sold 72 hotels. Although it is management’s plan to use net proceeds after debt repayment from future asset sales to fund future acquisitions, if necessary the Company believes that cash generated from asset dispositions will be sufficient to fund any shortfalls associated with future debt maturities. However, with respect to future hotel sales, we cannot predict whether we will be able to find buyers for identified assets at prices and other terms acceptable to us, whether potential buyers will be able to secure financings, and the length of time needed to find a buyer and to close the sale of a property.
Sources and Uses of Cash
Cash provided by Operating Activities. Our cash provided by operations was $0.9 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. The increase in operating cash flows was driven primarily by differences in the changes in operating assets and liabilities between the periods, none of which were individually significant.
Cash provided by Investing Activities . Our cash provided by investing activities was $9.3 million and $6.6 million for the three months ended March 31, 2016 and 2015, respectively. The increase in these cash flows in 2016 was the result of increased proceeds from the sale of properties of $1.7 million and a net increase in cash received from capital expenditure escrows of $1.1 million.
Cash provided by / used in Financing Activities . Our cash provided by/(used in) financing activities was $1.2 million and ($ 6.7 ) million for the three months ended March 31, 2016 and 2015, respectively. This increase in cash flows was primarily related to cash received in the first quarter of 2016 related to the Series D Preferred Stock issuance less cash put into escrow to redeem the Series A and B Preferred Stock and cash dividends paid simultaneously , which together had a net impact to financing cash flows of $ 7.4 million. Principal payments on long-term debt also decreased by $1.6 million between the periods primarily as a result of decreased debt repayments required upon the sale of hotel properties.
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Outstanding Indebtedness
During the three months ended March 31, 2016, net proceeds from the Company’s four hotel sales were used to pay off the associated loans totaling $ 5.3 million, to reduce the balance of the revolving credit facility with Great Western Bank, and set aside to fund future acquisitions. These dispositions also decreased the total availability under the Great Western Bank revolver from $ 5.7 million at December 31, 2015 to $ 2. 6 million at Mar ch 31, 2016.
At March 31, 2016, we had long-term debt of $6 7.5 million associated with assets held for use with a weighted average term to maturity of 2.7 years and a weighted average interest rate of 5. 15 %. Of this t otal, at March 31, 2016, $31.4 million was fixed rate debt with a weighted av erage term to maturity of 1.5 years and a weighte d average interest rate of 5.95% and $36.1 million was variable rate debt with a weighted average term to maturity of 3.8 years and a weighte d average interest rate of 4.44 %. At December 31, 2015, we had long-term debt of $68.7 million associated with assets held for use with a weighted average term to maturity of 3 .0 years and a weighted average interest rate of 4.87 %. Of this total, at December 31, 2015, $ 31.4 million was fixed rate debt with a weighted average term to maturity of 1.8 years and a weighted average interest rate of 5.63 % and $ 37.3 million was variable rate debt with a weighted average term to maturity of 4.0 years and a weighted average interest rate of 4.23 %.
Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of the related hotel properties. Aggregate annual principa l payments on debt for the remainder of 2016 and thereafter are as follows:
Financial Covenants
The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage and required loan-to-value and leverage ratios, and place certain restrictions on dividends. As of March 31, 2016, we were in compliance with our financial covenants.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness , and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and certain of our GE facilities contain cross-default provisions which would allow Great Western Bank and GE to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan. As of March 31, 2016, we are not in default of any of our loans.
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Contractual Obligations
Below is a summary of certain obligations that will require capital as of March 31, 2016 (in thousands):
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Interest rate payments on our variable rate debt have been estimated using interest rates in effect at March 31, 2016 , after giving consideration to our interest rate swaps. |
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Primarily ground leases and corporate office leases. |
The column titled “ Remainder of Year 1” represents payments due for the remainder of 2016. Long-term debt and land lease pay ments above include only amounts related to properties classified as held for use. Future debt payments, including interest, related to the 13 held for sale properties that are expected to be sold in the next 12 months of $15.3 million and future obligations on two land leases related to held for sale properties totaling $ 2.7 million are not included in the table above .
We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. We also have management agreements in place for the management and operation of our hotel properties.
Off Balance Sheet Financing Transactions
We have not entered into any off balance sheet financing transactions.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Recent Accounting Standards
See Note 1, Organization and Summary of Significant Accounting Policies , to our consolidated interim financial statements for additional information relating to recently adopted and recently issued accounting pronouncements.
ITEM 3. QUA NTITATIVE AND QUALITATIVE DISCLOSU RES 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, 2016, our market risk arises primarily from interest rate risk relating to variable rate borrowings and the market risk related to our convertible debt that fair value will fluctuate following changes in the Company’s common stock price or changes in interest rates.
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Interest Rate Sensitivity
There has been no material change in our market risk exposure subsequent to December 31, 2015. At March 31, 2016, we have an interest rate swap in place which effectively locks the variable interest rate on our Huntington Bank debt (balance of $ 9.9 million) at 4.13% and an interest rate cap in place which caps the 30-day LIBOR interest rate on our Latitude debt (balance of $ 11.2 million) at 1% . We do not intend to enter into derivative or interest rate transactions for speculative purposes.
At March 31, 2016, approximately 61 % of our outstanding debt, excluding debt related to hotel properties held for sale, is subject to fixed interest rates or effectively locked with an interest rate swap, while 39 % of our debt is subject to floating rates. Assuming no increase in the level of our variable debt outstanding at March 31, 2016 and after giving effect to our interest rate swap, if interest rates increased by 1.0% our cash flow related to hotel properties held for use would decrease by approximately $ 0.3 million per year.
ITEM 4. C ONTROLS AND PROCED URES
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, 2016, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (a) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures and (b) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting during our most recent fiscal quarter that have materially effected, or are reasonably likely to materially effect, our internal controls over financial reporting.
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.
There have been no material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None .
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable .
On November 9, 2015, the Company received notification from the Nasdaq Listings Qualification Department of the Nasdaq Stock Market LLC (the “Nasdaq”) that for the previous 30 consecutive business days, the market value of publicly held shares (“MVPHS”) of the Company’s common stock had closed below the minimum $5.0 million requirement for continued inclusion on the Nasdaq Global Market pursuant to Nasdaq Listing Rule 5450(b)(1)(C). The Company was provided 180 calendar days, or until May 9, 2016, to regain compliance with the minimum MVPHS requirement. In accordance with Nasdaq Listing Rule 5810(c)(3)(D), the Company could regain compliance if at any time during the 180-day period the closing MVPHS was at least $5 million for a minimum of 10 consecutive business days.
As discussed in the Company’s Current Report on F or m 8-K dated April 12, 2016 , on that date the Company received notification from the Nasdaq that the Company had regained compliance with the MVPHS requirement of $5.0 million for a minimum of 10 consecutive business days a nd the Nasdaq has advised us that it considers this matter closed.
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* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Condor Hospitality Trust, Inc. |
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May 10, 2016 |
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/s/ J. William Blackham |
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J. William Blackham |
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Chief Executive Officer |
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/s/ Jonathan Gantt |
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Jonathan Gantt |
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Senior Vice President and Chief Financial Officer |
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DIRECTOR AND OFFICER INDEMNIFICATION AGREEMENT
This Director and Officer Indemnification Agreement, dated as of [____________], 20__ (this “ Agreement ”), is made by and between Condor Hospitality Trust, Inc., a Maryland corporation (the “ Company ”), and ________________ (“ Indemnitee ”).
RECITALS:
A. Section 2-401 of the Maryland General Corporation Law provides that the business and affairs of a corporation shall be managed by or under the direction of its board of directors.
B. Pursuant to Section 2-414 of the Maryland General Corporation Law, officers of a corporation have authority in management of the assets and affairs of the Company.
C. By virtue of the managerial prerogatives vested in the directors and officers of a Maryland corporation, directors and officers act as fiduciaries of the corporation and its stockholders.
D. Thus, it is critically important to the Company and its stockholders that the Company be able to attract and retain the most capable persons reasonably available to serve as directors and officers of the Company.
E. In recognition of the need for corporations to be able to induce capable and responsible persons to accept positions in corporate management, Maryland law authorizes (and in some instances requires) corporations to indemnify their directors and officers, and further authorizes corporations to purchase and maintain insurance for the benefit of their directors and officers.
F. Indemnification by a corporation serves the dual policies of (1) allowing corporate officials to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation and (2) encouraging capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity.
G. The number of lawsuits challenging the judgment and actions of directors and officers of Maryland corporations, the costs of defending those lawsuits, and the threat to directors’ and officers’ personal assets have all materially increased over the past several years, chilling the willingness of capable women and men to undertake the responsibilities imposed on corporate directors and officers.
H. Recent federal legislation and rules adopted by the Securities and Exchange Commission and the national securities exchanges have imposed additional disclosure and corporate governance obligations on directors and officers of public companies and have exposed such directors and officers to new and substantially broadened civil liabilities.
I. These legislative and regulatory initiatives have also exposed directors and officers of public companies to a significantly greater risk of criminal proceedings, with attendant defense costs and potential criminal fines and penalties.
J. Indemnitee is a director or officer of the Company and his or her willingness to serve in such capacity is predicated, in substantial part, upon the Company’s willingness to indemnify him or her in accordance with the principles reflected above, to the fullest extent permitted by the laws of the State of Maryland, and upon the other undertakings set forth in this Agreement.
K. Therefore, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitee’s continued service as a director or officer of the Company and to enhance Indemnitee’s ability to serve the Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable irrespective of, among other things, any amendment to the Company’s certificate of incorporation or bylaws (together, the “ Constituent Documents ”), any change in the composition of the Company’s Board of Directors (the “ Board ”) or any change-in-control or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancement of Expenses (as defined in Section 1(f)) to Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.
L. In light of the considerations referred to in the preceding recitals, it is the Company’s intention and desire that the provisions of this Agreement be construed liberally, subject to their express terms, to maximize the protections to be provided to Indemnitee hereunder.
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
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1. Certain Definitions . In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: |
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(a) “ Change in Control ” means the occurrence after the date of this Agreement of any of the following events: |
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(i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “ Person ”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the combined voting power of the then-outstanding Voting Stock of the Company; provided, however , that: |
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(A) for purposes of this Section l(a)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition of Voting Stock of the Company directly from the Company that is approved by a majority of the Incumbent Directors, (2) any acquisition of Voting Stock of the Company by the Company or any Subsidiary, (3) any acquisition
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of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, and (4) any acquisition of Voting Stock of the Company by any Person pursuant to a Business Combination that complies with clauses (A), (B) and (C) of Section 1 (a)(iii) below; |
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(B) if any Person acquires beneficial ownership of 20% or more of the combined voting power of the then-outstanding Voting Stock of the Company as a result of a transaction described in clause (A)(l) of Section l(a)(i) and such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock of the Company representing 1% or more of the then-outstanding Voting Stock of the Company, other than in an acquisition directly from the Company that is approved by a majority of the Incumbent Directors or other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Voting Stock are treated equally, such subsequent acquisition shall be deemed to constitute a Change in Control; |
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(C) a Change in Control will not be deemed to have occurred if a Person acquires beneficial ownership of 20% or more of the Voting Stock of the Company as a result of a reduction in the number of shares of Voting Stock of the Company outstanding unless and until such Person thereafter becomes the beneficial owner of any additional shares of Voting Stock of the Company representing 1% or more of the then-outstanding Voting Stock of the Company, other than in an acquisition directly from the Company that is approved by a majority of the Incumbent Directors or other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Voting Stock are treated equally; and |
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(D) if at least a majority of the Incumbent Directors determine in good faith that a Person has acquired beneficial ownership of 20% or more of the Voting Stock of the Company inadvertently, and such Person divests as promptly as practicable a sufficient number of shares so that such Person beneficially owns less than 20% of the Voting Stock of the Company, then no Change in Control shall have occurred as a result of such Person’s acquisition; or |
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(ii) a majority of the Directors are not Incumbent Directors; or |
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(iii) the consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets of another corporation, or other transaction (each, a “ Business Combination ”), unless, in each case, immediately following such Business Combination (A) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (other than the Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (C) at least a majority of the members of the board of directors of the
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entity resulting from such Business Combination were Incumbent Directors at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or |
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(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clauses (A), (B) and (C) of Section l(a)(iii). |
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(v) For purposes of this Section l(a) and as used elsewhere in this Agreement, the following terms shall have the following meanings: |
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(A) “ Exchange Act ” shall mean the Securities Exchange Act of 1934. |
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(B) “ Incumbent Directors ” means the individuals who, as of the date hereof, are Directors of the Company and any individual becoming a Director subsequent to the date hereof whose election, nomination for election by the Company’s stockholders, or appointment, was approved by a vote of at least two-thirds of the then Incumbent Directors (either by a specific vote, by agreement approved by the Incumbent Directors, or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination); provided, however , that an individual shall not be an Incumbent Director if such individual’s election or appointment to the Board occurs as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Exchange Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. |
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(C) “ Subsidiary ” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. |
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(D) “ Voting Stock ” means securities entitled to vote generally in the election of directors (or similar governing bodies). |
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(b) “ Claim ” means (i) any threatened, asserted, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative, arbitrative, investigative or other (including, without limitation, any subpoena or search warrant issued in connection with any of the foregoing), and whether made pursuant to federal, state or other law; and (ii) any threatened, pending or completed inquiry or investigation, whether made, instituted or conducted by the Company or any other person, including without limitation any federal, state or other governmental entity, that Indemnitee determines might lead to the institution of any such claim, demand, action, suit or proceeding. |
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(c) “ Controlled Affiliate ” means any corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, that is directly or indirectly controlled by the Company. For purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of an entity or enterprise, whether through the ownership of voting securities, through other voting rights, by contract or otherwise; provided that direct or indirect beneficial ownership of capital stock or other interests in an entity or enterprise entitling the holder to cast 20% or more
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of the total number of votes generally entitled to be cast in the election of directors (or persons performing comparable functions) of such entity or enterprise shall be deemed to constitute control for purposes of this definition. |
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(d) “ Disinterested Director ” means a director of the Company who is not and was not a party to the Claim in respect of which indemnification is sought by Indemnitee. |
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(e) “ ERISA Losses ” means any taxes, penalties, or other liabilities under the Employee Retirement Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986, as amended. |
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(f) “ Expenses ” means attorneys’ and experts’ fees and expenses and all other costs and expenses paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in (including on appeal), any Claim. |
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(g) “ Indemnifiable Claim ” means any Claim based upon, arising out of or resulting from (i) any actual, alleged or suspected act or failure to act by Indemnitee in his or her capacity as a director, officer, employee, inspector, or agent of the Company or as a director, officer, employee, member, manager, trustee or agent of any other corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit (including any employee benefit plan or related trust), as to which Indemnitee is or was serving at the request of the Company as a director, officer, employee, member, manager, trustee or agent, (ii) any actual, alleged or suspected act or failure to act by Indemnitee in respect of any business, transaction, communication, filing, disclosure or other activity of the Company or any other entity or enterprise referred to in clause (i) of this sentence, or (iii) Indemnitee’s status as a current or former director, officer, employee or agent of the Company or as a current or former director, officer, employee, member, manager, trustee or agent of the Company or any other entity or enterprise referred to in clause (i) of this sentence or any actual, alleged or suspected act or failure to act by Indemnitee in connection with any obligation or restriction imposed upon Indemnitee by reason of such status. In addition to any service at the actual request of the Company, for purposes of this Agreement, Indemnitee shall be deemed to be serving or to have served at the request of the Company as a director, officer, employee, member, manager, trustee or agent of another entity or enterprise if Indemnitee is or was serving as a director, officer, employee, member, manager, trustee or agent of such entity or enterprise and (i) such entity or enterprise is or at the time of such service was a Controlled Affiliate, (ii) such entity or enterprise is or at the time of such service was an employee benefit plan (or related trust) sponsored or maintained by the Company or a Controlled Affiliate, or (iii) the Company or a Controlled Affiliate directly or indirectly caused Indemnitee to be nominated, elected, appointed, designated, employed, engaged or selected to serve in such capacity. |
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(h) “ Indemnifiable Losses ” means any and all Losses relating to, arising out of, or resulting from any Indemnifiable Claim. |
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(i) “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company (or any Subsidiary) or Indemnitee in any matter
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material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other named (or, as to a threatened matter, reasonably likely to be named) party to the Indemnifiable Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. |
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(j) “ Losses ” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other), ERISA Losses and amounts paid in settlement, including without limitation all interest, assessments and other charges paid or payable in connection with or in respect of any of the foregoing. |
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2. Indemnification Obligation . Subject to Section 7, the Company shall indemnify, defend and hold harmless Indemnitee, to the fullest extent permitted or required by the laws of the State of Maryland in effect on the date hereof or as such laws may from time to time hereafter be amended to increase the scope of such permitted or required indemnification, against any and all Indemnifiable Claims and Indemnifiable Losses; provided, however , that (a) except as provided in Sections 4 and 20, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim and (b) no repeal or amendment of any law of the State of Maryland shall in any way diminish or adversely affect the rights of Indemnitee pursuant to this Agreement in respect of any occurrence or matter arising prior to any such repeal or amendment. |
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3. Advancement of Expenses . Indemnitee shall have the right to advancement by the Company prior to the final disposition of any Indemnifiable Claim of any and all Expenses relating to, arising out of or resulting from any Indemnifiable Claim paid or incurred by Indemnitee or which Indemnitee determines are reasonably likely to be paid or incurred by Indemnitee. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct and is not conditioned upon any prior determination that Indemnitee is entitled to indemnification under this Agreement with respect to the Indemnifiable Claim or the absence of any prior determination to the contrary. Without limiting the generality or effect of the foregoing, within five business days after any request by Indemnitee, the Company shall, in accordance with such request (but without duplication), (a) pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such Expenses; provided that Indemnitee shall repay, without interest any amounts actually advanced to Indemnitee that, at the final disposition of the Indemnifiable Claim to which the advance related, were in excess of amounts paid or payable by Indemnitee in respect of Expenses relating to, arising out of or resulting from such Indemnifiable Claim. In connection with any such payment, advancement or reimbursement, Indemnitee shall execute and deliver to the Company an undertaking in the form attached hereto as Exhibit A (subject to Indemnitee filling in the blanks therein and selecting from among the bracketed alternatives therein), which need not be secured and shall be accepted without reference to Indemnitee’s ability to repay the Expenses. In no event shall Indemnitee’s right to the payment, advancement or reimbursement of Expenses pursuant to this Section 3 be conditioned upon any undertaking that is less favorable to Indemnitee than, or that is in addition to, the undertaking set forth in Exhibit A . |
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4. Indemnification for Additional Expenses . Without limiting the generality or effect of the foregoing, the Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all Expenses paid or incurred by Indemnitee or which Indemnitee determines are reasonably likely to be paid or incurred by Indemnitee in connection with any Claim made, instituted or conducted by Indemnitee for (a) indemnification or payment, advancement or reimbursement of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of the Constituent Documents now or hereafter in effect relating to Indemnifiable Claims, and/or (b) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless in each case of whether Indemnitee ultimately is determined to be entitled to such indemnification, reimbursement, advance or insurance recovery, as the case may be; provided, however , that Indemnitee shall return, without interest, any such advance of Expenses (or portion thereof) which remains unspent at the final disposition of the Claim to which the advance related. |
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5. Partial Indemnity . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Indemnifiable Loss, but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. |
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6. Procedure for Notification . To obtain indemnification under this Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee shall submit to the Company a written request therefor, including a brief description (based upon information then available to Indemnitee) of such Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of such request, the Company has directors’ and officers’ liability insurance in effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss is potentially available, the Company shall give prompt written notice of such Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in accordance with the procedures set forth in the applicable policies. The Company shall provide to Indemnitee a copy of such notice delivered to the applicable insurers, and copies of all subsequent correspondence between the Company and such insurers regarding the Indemnifiable Claim or Indemnifiable Loss, in each case substantially concurrently with the delivery or receipt thereof by the Company. The failure by Indemnitee to timely notify the Company of any Indemnifiable Claim or Indemnifiable Loss shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of such Indemnifiable Claim or Indemnifiable Loss and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage. |
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7. Determination of Right to Indemnification . |
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(a) To the extent that Indemnitee shall have been successful on the merits or otherwise in defense of any Indemnifiable Claim or any portion thereof or in defense of any issue or matter therein, including without limitation dismissal without prejudice, Indemnitee shall be indemnified against Indemnifiable Losses relating to, arising out of or resulting from such Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct Determination (as defined in Section 7(b)) shall be required. |
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(b) To the extent that the provisions of Section 7(a) are inapplicable to an Indemnifiable Claim that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable standard of conduct under Maryland law that is a legally required condition precedent to indemnification of Indemnitee hereunder against Indemnifiable Losses relating to, arising out of or resulting from such Indemnifiable Claim (a “ Standard of Conduct Determination ”) shall be made as follows: (i) if a Change in Control shall not have occurred, or if a Change in Control shall have occurred but Indemnitee shall have requested that the Standard of Conduct Determination be made pursuant to this clause (i), (A) by a majority vote of the Disinterested Directors, even if less than a quorum of the Board, (B) if such Disinterested Directors so direct, by a majority vote of a committee of Disinterested Directors designated by a majority vote of all Disinterested Directors, or (C) if there are no such Disinterested Directors, by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control shall have occurred and Indemnitee shall not have requested that the Standard of Conduct Determination be made pursuant to clause (i), by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee. Indemnitee will cooperate with the person or persons making such Standard of Conduct Determination, including providing to such person or persons, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all costs and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by Indemnitee in so cooperating with the person or persons making such Standard of Conduct Determination. |
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(c) The Company shall use its reasonable best efforts to cause any Standard of Conduct Determination required under Section 7(b) to be made as promptly as practicable. If (i) the person or persons empowered or selected under Section 7 to make the Standard of Conduct Determination shall not have made a determination within 30 days after the later of (A) receipt by the Company of written notice from Indemnitee advising the Company of the final disposition of the applicable Indemnifiable Claim (the date of such receipt being the “ Notification Date ”) and (B) the selection of an Independent Counsel, if such determination is to be made by Independent Counsel, that is permitted under the provisions of Section 7(e) to make such determination and (ii) Indemnitee shall have fulfilled his or her obligations set forth in the second sentence of Section 7(b), then Indemnitee shall be deemed to have satisfied the applicable standard of conduct; provided that such 30-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person or persons making such determination in good faith requires such additional time for the obtaining or evaluation or documentation and/or information relating thereto. |
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(d) If (i) Indemnitee shall be entitled to indemnification hereunder against any Indemnifiable Losses pursuant to Section 7(a), (ii) no determination of whether Indemnitee has satisfied any applicable standard of conduct under Maryland law is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has been determined or deemed pursuant to Section 7(b) or (c) to have satisfied any applicable standard of conduct under Maryland law which is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, then the Company
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shall pay to Indemnitee, within five business days after the later of (x) the Notification Date in respect of the Indemnifiable Claim or portion thereof to which such Indemnifiable Losses are related, out of which such Indemnifiable Losses arose or from which such Indemnifiable Losses resulted and (y) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) above shall have been satisfied, an amount equal to the amount of such Indemnifiable Losses. |
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(e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(i), the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within five business days after receiving written notice of selection from the other, deliver to the other a written objection to such selection; provided, however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy the criteria set forth in the definition of “Independent Counsel” in Section l(i), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person or firm so selected shall act as Independent Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit and (ii) the non objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the two immediately preceding sentences and clause (i) of this sentence shall apply to such subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no Independent Counsel that is permitted under the foregoing provisions of this Section 7(e) to make the Standard of Conduct Determination shall have been selected within 30 days after the Company gives its initial notice pursuant to the first sentence of this Section 7(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 7(e), as the case may be, either the Company or Indemnitee may petition the Court of Chancery of the State of Maryland for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person or firm selected by the Court or by such other person as the Court shall designate, and the person or firm with respect to whom all objections are so resolved or the person or firm so appointed will act as Independent Counsel. In all events, the Company shall pay all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s determination pursuant to Section 7(b). |
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8. Presumption of Entitlement . |
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(a) In making any Standard of Conduct Determination, the person or persons making such determination shall presume that Indemnitee has satisfied the applicable standard of conduct, and the Company may overcome such presumption only by its adducing clear and convincing evidence to the contrary. Any Standard of Conduct Determination that is adverse to Indemnitee may be challenged by Indemnitee in the courts of the State of Maryland. No
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determination by the Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct shall be a defense to any Claim by Indemnitee for indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that Indemnitee has not met any applicable standard of conduct. |
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(b) Without limiting the generality or effect of Section 8(a), (i) to the extent that any Indemnifiable Claim relates to any entity or enterprise referred to in clause (i) of the first sentence of the definition of “Indemnifiable Claim,” Indemnitee shall be deemed to have satisfied the applicable standard of conduct if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the interests of such entity or enterprise (or the owners or beneficiaries thereof, including in the case of any employee benefit plan the participants and beneficiaries thereof) and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful, and (ii) in all cases, any belief of Indemnitee that is based on the records or books of account of the Company, including financial statements, or on information supplied to Indemnitee by the directors or officers of the Company in the course of their duties, or on the advice of legal counsel for the Company, its Board, any committee of the Board or any director, or on information or records given or reports made to the Company, its Board, any committee of the Board or any director by an independent certified public accountant or by an appraiser or other expert selected by or on behalf of the Company, its Board, any committee of the Board or any director shall be deemed to be reasonable. |
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9. No Adverse Presumption . For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not create a presumption that Indemnitee did not meet any applicable standard of conduct or that indemnification hereunder is otherwise not permitted. |
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10. Non-Exclusivity . The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Constituent Documents, or the substantive laws of the Company’s jurisdiction of incorporation, any other contract or otherwise (collectively, “ Other Indemnity Provisions ”); provided, however , that (a) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right hereunder and (b) to the extent that any change is made to any Other Indemnity Provision which permits any greater right to indemnification than that provided under this Agreement as of the date hereof, Indemnitee will be deemed to have such greater right hereunder. The Company will not adopt any amendment to any of the Constituent Documents the effect of which would be to deny, diminish or encumber Indemnitee’s right to indemnification under this Agreement or any Other Indemnity Provision. |
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11. Liability Insurance and Funding . For the duration of Indemnitee’s service as a director and/or officer of the Company, and thereafter for so long as Indemnitee shall be subject to any pending or possible Indemnifiable Claim, the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’
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liability insurance. Upon request, the Company shall provide Indemnitee with a copy of all directors’ and officers’ liability insurance applications, binders, policies, declarations, endorsements and other related materials, and shall provide Indemnitee with a reasonable opportunity to review and comment on the same. Without limiting the generality or effect of the two immediately preceding sentences, the Company shall not discontinue or significantly reduce the scope or amount of coverage from one policy period to the next (i) without the prior approval thereof by a majority vote of the Incumbent Directors, even if less than a quorum, or (ii) if at the time that any such discontinuation or significant reduction in the scope or amount of coverage is proposed there are no Incumbent Directors, without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld or delayed). In all policies of directors’ and officers’ liability insurance obtained by the Company, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company’s directors and officers most favorably insured by such policy. The Company may, but shall not be required to, create a trust fund, grant a security interest or use other means, including without limitation a letter of credit, to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnity and advance expenses pursuant to this Agreement. |
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12. Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities (other than Indemnitee’s successors), including any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(g). Indemnitee shall execute all papers reasonably required to evidence such rights (all of Indemnitee’s reasonable Expenses, including attorneys’ fees and charges, related thereto to be reimbursed by or, at the option of Indemnitee, advanced by the Company). |
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13. No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment to Indemnitee in respect of any Indemnifiable Losses to the extent Indemnitee has otherwise actually received payment (net of Expenses incurred in connection therewith) under any insurance policy, the Constituent Documents and Other Indemnity Provisions or otherwise (including from any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(g)) in respect of such Indemnifiable Losses otherwise indemnifiable hereunder. |
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14. Defense of Claims . The Company shall be entitled to participate in the defense of any Indemnifiable Claim or to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such Indemnifiable Claim (including any impleaded parties) include both the Company and Indemnitee and Indemnitee shall conclude that there may be one or more legal defenses available to him or her that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Indemnifiable Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending Indemnifiable Claim
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effected without the Company’s prior written consent. The Company shall not, without the prior written consent of Indemnitee, effect any settlement of any threatened or pending Indemnifiable Claim to which Indemnitee is, or could have been, a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of Indemnitee from all liability on any claims that are the subject matter of such Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement. |
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15. Successors and Binding Agreement . |
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(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “ Company ” for purposes of this Agreement), but shall not otherwise be assignable or delegatable by the Company. |
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(b) This Agreement shall inure to the benefit of and be enforceable by Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors. |
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(c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 15(a) and 15(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 15(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred. |
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16. Notices . For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid or one business day after having been sent for next-day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) and to Indemnitee at the applicable address shown on the signature page hereto, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. |
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17. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State
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of Maryland, without giving effect to the principles of conflict of laws of such State. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Maryland for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in a court of the State of Maryland. |
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18. Validity . If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent, and only to the extent, necessary to make it enforceable, valid or legal. In the event that any court or other adjudicative body shall decline to reform any provision of this Agreement held to be invalid, unenforceable or otherwise illegal as contemplated by the immediately preceding sentence, the parties thereto shall take all such action as may be necessary or appropriate to replace the provision so held to be invalid, unenforceable or otherwise illegal with one or more alternative provisions that effectuate the purpose and intent of the original provisions of this Agreement as fully as possible without being invalid, unenforceable or otherwise illegal. |
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19. Miscellaneous . No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. |
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20. Legal Fees and Expenses; Interest . |
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(a) It is the intent of the Company that Indemnitee not be required to incur legal fees and/or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, without limiting the generality or effect of any other provision hereof, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under this Agreement (including its obligations under Section 3) or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes Indemnitee from time to time to retain counsel of Indemnitee’s choice, at the expense of the Company as hereafter provided, to advise and represent Indemnitee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the
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Company and such counsel, the Company irrevocably consents to Indemnitee’s entering into an attorney-client relationship with such counsel, and in that connection the Company and Indemnitee agree that a confidential relationship shall exist between Indemnitee and such counsel. Without respect to whether Indemnitee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys’ and related fees and expenses incurred by Indemnitee in connection with any of the foregoing. |
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(b) Any amount due to Indemnitee under this Agreement that is not paid by the Company by the date on which it is due will accrue interest at the maximum legal rate under Maryland law from the date on which such amount is due to the date on which such amount is paid to Indemnitee. |
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21. Certain Interpretive Matters . Unless the context of this Agreement otherwise requires, (a) “it” or “its” or words of any gender include each other gender, (b) words using the singular or plural number also include the plural or singular number, respectively, (c) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement, (d) the terms “Article,” “Section,” “Annex” or “Exhibit” refer to the specified Article, Section, Annex or Exhibit of or to this Agreement, (e) the terms “include,” “includes” and “including” will be deemed to be followed by the words ‘‘without limitation” (whether or not so expressed), and (f) the word “or” is disjunctive but not exclusive. Whenever this Agreement refers to a number of days, such number will refer to calendar days unless business days are specified and whenever action must be taken (including the giving of notice or the delivery of documents) under this Agreement during a certain period of time or by a particular date that ends or occurs on a non-business day, then such period or date will be extended until the immediately following business day. As used herein, “business day” means any day other than Saturday, Sunday or a United States federal holiday. |
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22. Counterparts . This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, Indemnitee has executed and the Company has caused its duly authorized representative to execute this Agreement as of the date first above written.
Condor Hospitality Trust, Inc.
By: _________________________________________________________________________________________________________________
Name: J. William Blackham
Title: President and Chief Executive Officer
INDEMNITEE
_____________________________________________________________________________________________________________________
EXHIBIT A
UNDERTAKING
This Undertaking is submitted pursuant to the Director and Officer Indemnification Agreement, dated as of [____________], 2016 (the “ Indemnification Agreement ”), by and between Condor Hospitality Trust, Inc., a Maryland corporation (the “ Company ”), and the undersigned. Capitalized terms used and not otherwise defined herein have the meanings ascribed to such terms in the Indemnification Agreement.
The undersigned hereby requests [payment] , [advancement] , [reimbursement] by the Company of Expenses which the undersigned [has incurred] [reasonably expects to incur] in connection with ____________________ (the “ Indemnifiable Claim ”).
The undersigned hereby undertakes to repay the [payment] , [advancement] , [reimbursement] of Expenses made by the Company to or on behalf of the undersigned in response to the foregoing request if it is determined, following the final disposition of the Indemnifiable Claim and in accordance with Section 7 of the Indemnification Agreement, that the undersigned is not entitled to indemnification by the Company under the Indemnification Agreement with respect to the Indemnifiable Claim.
IN WITNESS WHEREOF, the undersigned has executed this Undertaking as of this _____ day of ____________, 2016.
_____________________________________________________________________________________________________________________
[Indemnitee]
Condor Hospitality Trust, Inc
Omaha, Nebraska
Ladies and Gentlemen:
We have been furnished with a copy of the quarterly report on Form 10-Q of Condor Hospitality Trust, Inc. (the Company) for the three months ended March 31, 2016, and have read the Company's statements contained in Note 1 to the consolidated financial statements included therein. As stated in Note 1, the Company changed its method of accounting for cash payments for early extinguishment penalties related to debt repayment from operating cash outflows to financing cash outflows and stated that the newly adopted accounting principle is preferable in the circumstances because the penalties are closely related to other financing cash flows, such as the repayment of debt, and reflect financing decisions made by management. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based.
We have not audited any financial statements of the Company as of any date or for any period subsequent to December 31, 2015, nor have we audited the information set forth in the aforementioned Note 1 to the consolidated financial statements; accordingly, we do not express an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances.
Very truly yours,
(signed) KPMG LLP
CERTIFICATIONS
I, J. William Blackham, certify that:
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1. |
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I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2016 of Condor Hospitality Trust, Inc .; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 10, 2016 |
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/s/ J. William Blackham |
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J. William Blackham |
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Chief Executive Officer |
CERTIFICATIONS
I, Jonathan Gantt, certify that:
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I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2016 of Condor Hospitality Trust, Inc .; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 10, 2016 |
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/s/ Jonathan Gantt |
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Jonathan Gantt |
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Chief Financial Officer |
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Condor Hospitality Trust, Inc. on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission (the “Report”), I, J. William Blackham, Chief Executive Officer of Condor Hospitality Trust Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Condor Hospitality Trust, Inc. at the dates and for the periods indicated. |
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May 10, 2016 |
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/s/ J. William Blackham |
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J. William Blackham |
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Chief Executive Officer |
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Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Condor Hospitality Trust, Inc., on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission (the “Report”), I, Jonathan Gantt, Chief Financial Officer of Condor Hospitality Trust, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Condor Hospitality Trust, Inc. at the dates and for the periods indicated. |
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May 10, 2016 |
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/s/ Jonathan Gantt |
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Jonathan Gantt |
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Chief Financial Officer |
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