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.



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.



 

---

 











 

---

 

PART I.  FINANCIAL INFORMATION

 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

( Unaudited - I n thousands, except share and per share data)





 





    


			As of
		March 31,				December 31,
		2016				2015

Assets
Investment in hotel properties, net		$	105,645			$	106,312
Cash and cash equivalents			16,270				4,870
Restricted cash, property escrows			2,940				3,776
Restricted cash, Series A and B Preferred redemption escrow			20,147				-
Accounts receivable, net of allowance for doubtful accounts of $8 and $10			1,326				1,169
Prepaid expenses and other assets			2,117				1,832
Investment in hotel properties held for sale, net			18,677				24,387
Total Assets		$	167,122			$	142,346

Liabilities and Equity

Liabilities
Accounts payable, accrued expenses, and other liabilities		$	6,940			$	5,419
Derivative liabilities, at fair value			214				8,759
Convertible debt, at fair value			1,399				-
Long-term debt, net of deferred financing costs			66,446				67,503
Long-term debt related to hotel properties held for sale, net of deferred financing costs			13,746				18,508
Mandatorily redeemable preferred stock, at redemption value:
8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding			9,675				-
10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding			10,391				-
Total Liabilities			108,811				100,189

Redeemable preferred stock:
10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $10,182 at December 31, 2015			-				7,662

Equity
Shareholders' equity
Preferred stock,  40,000,000 shares authorized:
8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $9,485 at December 31, 2015			-				8
6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $34,492 at December 31, 2015			-				30
6.25% Series D, 6,700,000 shares authorized, $.01 par value, 6,245,156 shares outstanding, liquidation preference of $62,612 at March 31, 2016			61,449				-
Common stock, $.01 par value, 200,000,000 shares authorized; 4,941,878 shares outstanding			49				49
Additional paid-in capital			118,507				138,387
Accumulated deficit			(124,004)				(105,858)
Total Shareholders' Equity			56,001				32,616
Noncontrolling interest in consolidated partnership, redemption value of $1,838 and $1,197			2,310				1,879
Total Equity			58,311				34,495

Total Liabilities and Equity		$	167,122			$	142,346

 



See accompanying notes to consolidated financial statements



 

---

 















 

---

 





   









See accompanying notes to consolidated financial statements .

 

---

 





     

 



 

---

 





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

---

 

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

---

 

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.



---

 

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.



---

 

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,

---

 

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:




		As of
		March 31, 2016									December 31, 2015
		Held for sale			Held for use			Total			Held for sale			Held for use			Total
Land		$	2,050		$	15,550		$	17,600		$	3,316		$	15,551		$	18,867
Acquired below market lease intangibles			883			-			883			883			-			883
Buildings, improvements, vehicle			25,183			106,229			131,412			32,050			106,056			138,106
Furniture and equipment			7,643			20,772			28,415			9,876			20,712			30,588
Construction-in-progress			19			647			666			2			453			455
Investment in hotel properties			35,778			143,198			178,976			46,127			142,772			188,899
Less accumulated depreciation			(17,101)			(37,553)			(54,654)			(21,740)			(36,460)			(58,200)
Investment in hotel properties, net		$	18,677		$	105,645		$	124,322		$	24,387		$	106,312		$	130,699


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.



 





---

 

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:





 





---

 

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%



---

 

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 .

---

 

The following table represent s the difference between the fair value and the unpaid principal balance of the Note as of March 31, 2016:





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:





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.



---

 

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:













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:



---

 



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. 



---

 

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:



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:



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.



---

 

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

---

 

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

---

 

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

---

 

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.  



---

 

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 .

 

---

 

NOTE 12. EARNINGS PER SHARE



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





---

 

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:









 

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.

---

 

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 .