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 October 31 , 2016 there were 4,956,835 shares of common stock, par v alue $.01 per shar e, outstanding.



 

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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
		September 30,			December 31,
		2016			2015

Assets
Investment in hotel properties, net		$	92,034		$	93,794
Investment in unconsolidated joint venture			9,226			-
Cash and cash equivalents			11,355			4,870
Restricted cash, property escrows			3,490			3,776
Accounts receivable, net of allowance for doubtful accounts of $11 and $10			1,297			1,169
Prepaid expenses and other assets			2,473			1,832
Investment in hotel properties held for sale, net			19,089			36,905
Total Assets		$	138,964		$	142,346

Liabilities and Equity

Liabilities
Accounts payable, accrued expenses, and other liabilities		$	6,796		$	5,419
Derivative liabilities, at fair value			190			8,759
Convertible debt, at fair value			1,236			-
Long-term debt, net of deferred financing costs			52,683			55,776
Long-term debt related to hotel properties held for sale, net of deferred financing costs			10,900			30,235
Total Liabilities			71,805			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 $62,452 at September 30, 2016			61,335			-
Common stock, $.01 par value, 200,000,000 shares authorized; 4,952,190 and 4,941,878 shares outstanding			49			49
Additional paid-in capital			118,580			138,387
Accumulated deficit			(115,440)			(105,858)
Total Shareholders' Equity			64,524			32,616
Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $1,819 and $1,197			2,635			1,879
Total Equity			67,159			34,495

Total Liabilities and Equity		$	138,964		$	142,346

 



See accompanying notes to consolidated financial statements .



 

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See accompanying notes to consolidated financial statements .

 

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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 September 30, 2016, the Company owned 28 hotels in 14 states, including one hotel owned through an 80% interest in an unconsolidated joint venture (“ Atlanta JV”).



Condor, through its wholly owned subsidiary, Condor Hospitality REIT Trust (formerly Supertel Hospitality REIT Trust), owns a controlling interest in Condor Hospitality Limited Partnership (“CHLP”) (formerly Supertel Limited Partnership).  CHLP, including its various subsidiary partnerships, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of 20 properties held by TRS Leasing, Inc.) and conducts all of its operations. At September 30, 2016, the Company owned 97.9% of the partnership operating units (“partnership units”) of CHLP with the remaining partnership units owned by other limited partners and long-term incentive plan unit holders. The Company’s 100% owned E&P Financing Limited Partnership no longer owns any assets or conducts any operations following the sale of its last remaining property in January 2016.



In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels.  Therefore, CHLP 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. CHLP, 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 annually .  The results of the hotels acquired in October 2015 and through our Atlanta JV in August 2016 (see Notes 2 and 3), because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.



Basis of Presentation



The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of CHLP 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.



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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.



Investment in Joint Venture



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



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



Assets Held for Sale and Discontinued Operations



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



Historically, we have presented the results of operations of hotel properties that have been sold or are considered held for sale as discontinued operations in all periods presented.  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 represents a strategic shift in operations or 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

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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 valu e at the date of the 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 the 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.    

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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 7) and other financial instruments carried at fair value, the carrying amounts of the Company’s financial instruments approximates their fair values due to their short-term nature or variable market-based interest rates.



Fair Value Option



Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings.  This option was elected for the treatment of the Company’s convertible debt entered into on March 16, 2016 (see Note 6).



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 6.25%   Series D Cumulative Convertible Preferred Stock (“Series D Preferred Stock”) issued in March 2016 (see Note 9).



In February 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis , which amends the current consolidation guidance effecting both the VIE and 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 CHLP now meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company continues to consolidate CHLP. The Company’s sole significant asset is its investment in CHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of CHLP. All of the Company’s debt is an obligation of CHLP.  This ASU was also used in the determination of the accounting for the Atlanta JV entered into in August 2016 (see Note 3).



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.  For the amounts of the reclassification, see Note 5.



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 effec t transition

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method. The Company has begun to evaluate each of its revenue streams under the new model.  Based on preliminary assessments, the Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements and related disclosures.



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 o f 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 revised policy is also consistent with the ASU 2016-15, Statement of Cash Flows , which was issued in August 2016 and becomes effective for the Company on January 1, 2018.  This revision in classification had the effect of increasing operating cash flows and decreasing financing cash flows by $1,268 and   $111 during the nine months ended September 30, 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 September 30, 2016, the Company had $11,355 of cash and cash equivalents on hand and $1,566 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 and as required in connection with our Series D Preferred Stock. We presently expect to invest approximately $4,500 to $6,000   in capital expenditures related to hotel properties we currently own through December 31, 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 requirement s consist primarily of the cost of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made related to our hotel properties, and scheduled debt payments, including maturing loans.  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 September 30, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $26,939 through

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December 31, 2017, including the February 1, 2017 maturity of one of our Western Alliance Bank (“WAB”) loans with a balance at September 30, 2016 of $10,409 , the November 6, 2017 maturity of our Cantor Commercial Real Estate Lending   loan with a balance at September 30, 2016 of $5,742 , and the December 1, 2017 maturity of our Morgan Stanley Mortgage Capital Holdings, LLC loan with a balance at September 30, 2016 of $9,600 .   Prior to these maturities, the Company anticipates refinancing these loans with the existing lenders 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 , even if interest rates increase as a result of future Federal Reserve actions . However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.



Additionally, at September 30, 2016, we have 11 hotels held for sale which, if sold, we believe will generate approximately $14,900 in net proceeds after debt repayment.  Since December 1, 2008, we have sold 102 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 September 30, 2016 and December 31, 2015:




		As of
		September 30, 2016									December 31, 2015
		Held for sale			Held for use			Total			Held for sale			Held for use			Total
Land		$	2,797		$	12,787		$	15,584		$	6,078		$	12,789		$	18,867
Acquired below market lease intangibles			-			883			883			-			883			883
Buildings, improvements, vehicle			24,865			88,052			112,917			50,571			87,535			138,106
Furniture and equipment			6,833			14,931			21,764			14,656			15,932			30,588
Construction-in-progress			46			625			671			171			284			455
Investment in hotel properties			34,541			117,278			151,819			71,476			117,423			188,899
Less accumulated depreciation			(15,452)			(25,244)			(40,696)			(34,571)			(23,629)			(58,200)
Investment in hotel properties, net		$	19,089		$	92,034		$	111,123		$	36,905		$	93,794		$	130,699


The Company had no acquisitions of wholly owned properties during the three or nine months ended September 30, 2016 or 2015.  On August 1, 2016, the Company entered into the   80% owned   Atlanta JV , which then acquired   one hotel (see Note 3).



On August 29, 2016, the Company entered into a hotel purchase agree ment to purchase an Aloft hotel in L eawood, Kansas, for $22,500 .  As of September 30, 2016, $225 of restricted cash has been deposited into an escrow account as earnest money against the purchase price.  The closing of the acquisition is subject to customary closing conditions including accuracy of representations and warranties and compliance with covenants and obligations and is expected to occur in the fourth quarter of 2016.

 

Pro Forma Results



The Company acquired three hotel properties with a combined purchase price of $42,500 on October 1 and 2, 2015 and entered into the Atlanta JV which then acquired one hotel in August of 2016 (see Note 3) .  The following condensed pro forma financial data is presented as if all acquisitions completed in 2015 had been completed on January 1, 2014 and as if the JV entered into in August 2016 had been entered into as of January 1, 2015 .  Supplemental pro forma earnings were adjusted to exclude all acquisition expense recognized in the periods presented as if these acquisition costs had been incurred in prior periods, including acquisition expenses totaling $280 incurred by the Atlanta JV during the three months ended September 30, 2016.     Results for periods prior to the Company’s ownership are based on information provided by the prior owners, adjusted for differences in interest expense, depreciation expense, and management fees following the Company’s ownership.  The condensed pro

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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: INVESTMENT IN UNCONSOLIDATED JOINT VENTURE



On August 1, 2016, the Company entered into a joint venture with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire a 254 -room Aloft hotel in downtown Atlanta, Georgia.  The Company accounts for the Atlanta JV under the equity method.  Condor owns 80% of the Atlanta JV with TWC owning the remaining 20% .  The Atlanta JV is comprised of two companies: Spring Street Hotel Property II LLC, of which CHLP indirectly owns an 80% equity interest, and Spring Street Hotel OpCo II LLC, of which our TRS indirectly owns an 80% equity interest.  TWC owns the remaining 20% equity interest in these two companies.



On August 22, 2016, the Atlanta JV closed on the acquisition of the Atlanta Aloft for a purchase price of $43,550 , subject to working capital and similar adjustments.  The purchase price was allocated by the Atlanta JV based on fair value, which was determined using Level 3 fair value inputs, as documented in the table below.  The process for valuing and recording the assets and liabilities obtained in this transaction is not yet complete.  As such, these values are currently preliminary and subject to adjustment througho ut the completion of the measurement period, which will be completed within one year of closing the transaction.









The purchase price for the Atlanta Aloft was paid with $9,800 in cash, of which $7,840 was contributed by Condor and $1,960 was contributed by TWC, and $33,750 of proceeds from a term loan secured by the property.  Condor additionally contributed $1,440 and TWC additionally contributed $360 to the Atlanta JV to cover acquisition costs and to provide working capital to the entity.  The term loan, obtained from LoanCore Capital Credit REIT LLC, has an initial term of 24 months with three   12 -month extension periods which may be exercised at the Atlanta JV’s option subject to certain conditions and fees.  The interest rate is a floating rate calculated on the one-month LIBOR plus 5.0% , and as a condition to closing, the Atlanta JV purchased a LIBOR cap of 3.0% .  The current interest rate on the loan is 5.31% .  The loan is non-recourse to the Atlanta JV, subject to specified exceptions.  The loan is also non-recourse to Condor, except for certain customary carve-outs which are guaranteed by the Company.



Under the Atlanta JV agreement, the Atlanta JV is managed by TWC in accordance with business plans and budgets approved by both partners.  Major decisions as detailed in the agreement also require joint approval.  Condor may

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remove TWC as manager of the Atlanta JV and appoint a new manager only upon the occurrence of certain events.  The Atlanta Aloft hotel is managed by Boast Hotel Management Company LLC (“Boast”), an affiliate of TWC.  The Atlanta JV paid to Boast total management fees of $46 for the three and nine months ended September 30, 2016.



Net cash flow and profits from the Atlanta JV will be distributed each fiscal year first with a 10% preferred return on capital contributions to Condor, second with a 10% preferred return on capital contributions to TWC, and third with any remainder distributed to the partners based on their pro-rata equity ownership. Losses are allocated based on pro-rata equity ownership. The Atlanta JV agreement also includes buy-sell rights for both members (generally after three years of hotel ownership for Condor and after five years for TWC) and Condor has a purchase option for TWC’s Atlanta JV ownership interest exercisable between the third and fifth anniversary of the hotel closing.



The following tables represent the total assets, liabilities, equity, and components of net income (loss), including the Company’s share, of the Atlanta JV as of and for the three and nine months ended September 30, 2016:









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NOTE 4 : DISPOSITIONS OF HOTEL PROPERTIES AND DISCONTINUED OPERATIONS



As of September 30, 2016, the Company had 11 hotels classified as held for sale. At June 30, 2016, the Company had 17 hotels held for sale and during the three months ended September 30, 2016 sold four properties, classified two additional hotels as held for sale, and reclassified four properties into held for use. At December 31, 2015, the Company had 16 hotels held for sale and during the nine months ended September 30, 2016 sold 15 properties, classified 12 additional hotels as held for sale, and reclassified two properties into held for use.  The properties that were reclassified into held for use during the periods presented were done so due to changes in market conditions as well as ongoing consideration given to the operating results of the held for sale properties versus their expected selling prices.



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 (excluding those subsequently reclassified as held for use) ,   none of which remain unsold at September 30, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended September 30, 2016 and 2015, the results of 31 and 47 hotels, respectively, were included in continuing operations and the results of no hotels a nd two hotels, respectively, were included in discontinued operations.  For the nine months ended September 30, 2016 and 2015, the results of 41 and 47 hotels, respectively, were included in continuing operations and the results of one hotel and nine hotels, respectively, were included in discontinued operations.



In the three months ended September 30, 2016 and 2015, the Company sold four   hotels in each period , resulting in total gains of $3,632 and $ 2,966 ,   respectively, all of which were included in continuing operations.  In the nine months ended September 30, 2016 and 2015, the Company sold 15 and 11 hotels, respectively, resulting in total gains of $16,577 and $4,633 , respectively, of which $15,896 and $2,966 , respectively, was included in continuing operations.



Two hotels in Alexandria, Virginia, which , based on their size, represent a significant disposition for which results are included in continuing operations, were sold on Ju ly 13, 2015.  For the three and nine months ended September 30, 2015, the Alexandria Comfort Inn and Days Inn hotels had a combined net earnings (loss) of $ 198 and ($ 821 ) , respectively, and earnings (loss) attributable to noncontrolling interest of $ 14 and ($ 846 ) , respectively. These amounts include impairment expense (recovery) of ($289) and $1,020 that was recognize d in the three and nine months ended September 30, 2015, respectively, following the hotels ’ classification as held for sale in the fi rst quarter of 2015.



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





 





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NOTE 5 .  LONG-TERM DEBT



During the three and nine   months ended September 30, 2016 , net proceeds from the Com pany’s hotel sales (see Note 4 ) were used to pay off the associated loans totaling $ 5,293 and $21,149 , respectively , to reduce the balance of the revolving credit facility with Great Western Bank, and set aside to fund future acquisitions. These dispositions, as well as adjustments required to remain in compliance with the required debt service coverage ratio, decreased the total availability under the Great Western Bank revolver from $5,733 at December 31, 2015 to $ 1,566 at September 30, 2016.  



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





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

(2 ) Prime rate plus 1%

(3 )   90-day LIBOR plus 3.25%

(4 )   30-day LIBOR plus 2.25% , fixed at 4.13% after giving e ffect to interest rate swap (see N ote 7 )

(5 )   30-day LIBOR plus 6.25% ,   30-day LIBOR capped at 1% after giv ing effect to market rate cap (see N ote 7 )

(6 ) $12 monthly payment began May 2016

(7 ) Total availability under this revolving credit facility w as $1,566 at   September 30, 2016 ; commitment fee on unused facility is 0.25%



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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 September 30, 2016 , we were in compliance with our financial covenants.



If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and certain of our WAB facilities contain cross-default provisions which would allow Great Western Bank and WAB to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan. As of September 30, 2016 , we are not in default of any of our loans .

 

NOTE 6 : CONVERTIBLE DEBT AT FAIR VALUE



As part of an agreement entered into on March 16, 2016 (the “Exchange Agreement”) with Real Estate Strategies, L.P. (“ RES ”) (see Note 9 ), 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 9 ), 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 th e Note are included in net gain on derivatives and convertible debt within net earnings each reporting period.   Losses related to this Note were recognized totaling $45 and $224  d uring the three and nine months ended September 30, 2016, respectively.  T he fair value of the Note is determined using a   Monte Carlo simulation model.  The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimize standard error. The 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 .

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The following table represent s the difference between the fair value and the unpaid principal balance of the Note as of September 30, 2016 :





NOTE 7 : 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 September 30, 2016 , the Compan y’s convertible debt (see Note 6 ) 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 oc curred in March 2016 (see Note 9 ) , in the acquisition accounting performed by the Atlanta JV in the third quarter of 2016 (see Note 3), and in the valuation of impaired hotels during the three and nine months ended September 30, 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 September 30, 2016 are as follows:







Additionally, prior to the execution of th e Exchange Agreement (see Note 9 ) 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 6.25%   Serie s C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) due to the presence of an antidilution provision that required an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instrument’s original conversion price of $8.00 per share.



Similarly, at December 31, 2015, prior to the execution of the Exchange Agreement, the terms of the common stock warrants issued to the holders of the Seri es C Preferred Stock (see Note 9 ) 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

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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.



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. Net gains of $ 71   and   $ 7,895 were recognized related to derivative instruments for the three months ended September 30, 2016 and 2015, respectively. Net gains of $ 6,529 and $ 8,008 were recognized related to derivative instruments for the nine months ended September 30, 2016 and 2015 , respectively .



Recurring Fair Value Measurements



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













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



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The following table s present 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 s :











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 , net of deferred financing costs, and estimated fair value of the Company’s long-term debt is presented in the table below:







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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.  All impairment in the table below related to held for use properties relates to impairments taken when those properties were previously held for sale or upon th eir reclassified to held for use . The amount of impairment and recovery of previously recorded impairment recognized in the three and nine months ended September 30, 2016 and 2015 is shown in the table s below:





















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NOTE 8 : 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   common shares at the price of $1.52 per share (see Note 11 ).

 

NOTE 9 :  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”) dated March 16, 2016 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 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 6 ).



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



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 Series A Preferred Stock.  At December 31, 2015 ,   803,270 shares of Series A Preferred Stock remained outstanding until the completion of the redemption on April 15, 2016 .



Dividends on the Series A Preferred Stock were cumulative and payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. The Company was able to redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time for cash , at a redemption price of $10.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended the payment of dividends on its Series A Preferred Stock to preserve capital and improve liquidity. Unpaid dividends accumulated and bore

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additional dividends at 8%, compounded monthly. Accumulated but unpaid dividends were $1,452 , or $1.807 per share , as of December 31, 2015, and were not reflected as an obligation on the balance sheet on that date.



The difference between the recorded value of the Series A Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series A Preferred Stock plus related expenses , a total of $2,326 , was recorded as a reduction of accumulated deficit during the nine months ended September 30, 2016 as the amount is considered a deemed dividend on the Series A Preferred Stock. Of this amount ,   $874 for the nine months ended September 30, 2016 was recorded as a reduction of net earnings attributable to common shar eholders as the portion of this deemed dividend s that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.



Series B Redeemable Preferred Stock



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



Dividends on the Series B Preferred Stock were cumulative and payable quarterly in arrears on each  March 31,   June 30,  September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50  per share.  The Company was able to redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Company’s Series B Preferred Stock would be redeemed for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series B Preferred Stock to preserve capital and improve liquidity. Un paid dividends on the Series B Preferred Stock did not bear interest. Unpaid dividends were $1,870 , or $5.625 per share , as of December 31, 2015, and were not reflected as an obligation on the balance sheet on that date.



The difference between the recorded value of the Series B Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series B Preferred Stock, a total $2,781 ,   was recorded as a reduction of accumulated defic it during the nine months ended September 30, 2016 as the amount is considered a deemed dividend on the Series B Preferred Stock.  Of th is amount ,   $911 for the nine months ended September 30, 2016 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, and were not reflected as an obligation on the balance sheet on that date.



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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 expiratio n date of January 31, 2017 at a fixed exercise price of $1.92 .



Series D Convertible Preferred Stock



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



The Series D Preferred stockholders rank senior to the Company’s common stock and any other preferred stock issuances and receive preferential cumulative cash dividends at a rate of 6.25% per annum, payable quarterly in arrears on each March 31,   June 30,  September 30 , and December 31, or, if not a business day, the next succeeding business day, of the $10.00 face value per share.  Dividends on the Series D Preferred Stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared , and whether or not such dividends are prohibited by agreement. Whenever the dividends on the Series D Preferred Stock are in arrears for four consecutive quarters, then upon notice by holders of 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 were paid on June 30, 2016 and September 30, 2016 which included all amounts due through those dates.



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 and a potential make whole payment required in certain scenarios ) 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 September 30, 2021, holders that hold in the aggregate not less than 40% of the outstanding shares of the Series D Preferred Stock have the right to elect to have the Company fully liquidate in a commercially reasonable manner as determined by the Board of Directors of the Company to provide for liquidation distributions to the holders of the Series D Preferred Stock in an amount per sh are 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 September 30, 2021 will increase

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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 :





 

NOTE 10 .  NONCONTROLLING INTEREST OF PARTNERSHIP UNITS IN CH LP



Noncontrolling interest in CH LP represents the limited partners’ proportionate share of the equity in the operating partnership and long-term incentiv e plan ( “ LTIP ” ) units (see Note 11 ).  Earnings and loss are allocated to noncontrolling interest in accordance with the weighted a verage percentage ownership of CH LP during the period. 



Our ownership interest in CH LP as of September 30, 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 owne rship interest in CH LP during the nine months ended September 30, 2016 was a result of the contribution to CH LP of the proceeds from the Series D Preferred Stock issuanc e during the first quarter of 2016 which was partially offset by the proceeds used to redeem the Series A and B Preferred St ock, which were withdrawn from CH LP, in the second quarter of 2016 .  At both September 30, 2016 and December 31, 2015, 7,659,039 CH LP 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, 81 9   and $1,197 at September 30, 2016 and December 31, 2015, respectively.



Each limited partner of CH LP may, subject to cer tain limitations, require that CH LP 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 redempt ion notice to CH LP. 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

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market value of the number of shares of Company common stock the limited partner would have received if the Company chose to purchase the units for common stock. No   partnership units were redeemed during the three or nine months ended   September 30, 2016 or 2015 .

 

NOTE 11 .  STOCK-BASED COMPENSATION



The Company previously had in place a 2006 Stock Plan which had been approved by the Company’s shareholders. The 2006 Stock Plan authorized the grant of stock options, stock appreciation rights, restric ted stock, and stock bonuses of up to 62,500 shares of common stock. The 2006 Stock Plan expi red on December 31, 2015.  As a replacement for the 2006 Stock Plan, the Board of Directors adopted the Condor 2016 Stock Plan, which was approved by the Company’s shareholders at the annual shareholders meeting on June 15, 2016.  The 2016 Stock Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, deferred stock units, and other forms of stock-based compensation.  The maximum number of shares of the Company’s common stock that may be issued under the 2016 Stock Plan is 3,000,000 , provided, however, that awards under this plan may not exceed 250,000 share s of common stock prior to the conversion into common stock of all shares of Seri es D Preferred Stock (see Note 9).  During the three months ended September 30, 2016, 10,704 shares of common stock were issued to members of the Investment Committee of the Board of Directors under the 2016 Stock Plan.



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 noncontroll ing interest for LTIP awards of CH LP partnership units.



Options and Unvested Share Awards



At September 30, 2016 , the Company had a total of 5,625  v ested stock options with a weighted average exercise price of $ 7.53 per share outstanding under the 2006 Stock Plan and no unvested s tock options or share awards.  



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 September 30, 2016 , the total unrecognized compensation cost related to these warrants was $ 1 40 , which is expected to be recognized over the next 17 months.



Long-Term Incentive Plan Awards



On March 2, 2015, the Company granted an equity award of 5,263,152 LTIP units, re presenting profit interests in CH LP, 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 CH LP 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 September 30, 2016 , the total unrecognized

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compensation cost related to these LTIP units was $ 242 , which is expected to be recognized over the next 17 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 availabl e under a shareholder approved stock p lan, 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   4,828 and   11,766   shares , respectively, were issued to the independent directors of the Investment Committee for the three and nine months ended September 30,   2015.   Following shareholders’ approval   of the 2016 Stock Plan as discussed above ,   on July 15 , 2016 the Company issue d   10,704 shares of common stock to the independent directors of the Investment Com mittee for their service during the   nine months ended September 30, 2016 .



Stock-Based Compensation Expense



The expense recognized in the consolidated financial statements for stock-based compensation, including LTIP units, related to employees and directors for the three months ended September 30, 2016 and 2015 was $ 89 and $ 79 , respectively, and for the nine months ended September 30, 2016 and 2015 was $ 228 and $ 202 , respectively,   all of which is included in general and administrative expense .

 

NOTE 12 .  INCOME TAXES



We have provided a full valuation allowance against our net deferred tax asset during all periods presented due to the uncertainty of realization resulting from past operating losses which results in no tax expense or benefit for the three and nine months ended September 30, 2016 and 2015. After consideration of limitations related to a change in control as defined under Internal Revenue Code Section 382 following the Company’s 2012 transactions with RES (see Note 9) , the TRS’s net operating loss carryforward at September 30, 2016 as determined for federal income tax purposes was $ 5,237 .  The availability of the loss carryforwards will expire from 2022 through 2035 .

 

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NOTE 13 . EARNINGS PER SHARE



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





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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 14 .  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 an d reservation systems and abiding by the franchisors’ marketing standards.  The management agreements generally require the TRS to fund debt service, working capital needs, and capital expenditures and to fund the management companies ’   third-party operating expenses , except those expenses not related to the operation of the hotels. The TRS also is responsible for obtaining and maintaining certain insurance policies with respect to the hotels.



Each of the management companies employed by the TRS at September 30, 2016 receive a base monthly management fee of 3.0% to 3.5% of gross hotel revenue, with incentives for performance which increase such fee to a maximum of 5.0% . For the three months ended September 30, 2016 and 2015, base management fees incurred totaled $ 434   and $5 1 7 , respectively, of which $ 434 and $ 50 1 , respectively, was included in continuing operations as hotel a nd property operations expense.  Incentive management fees, included in continuing operations in their entirety, totaled $0 and $143, respectively, for the three months ended September 30, 2016 and 2015 .  For the nine months ended September 30, 2016 and 2015, base management fees incurred totaled $ 1,285 and $1, 877 , respectively, of which $ 1,285 and $ 1, 770 , respectively, was included in continuing operations as hotel and property operations expense. For the nine months ended September 30, 2016 and 2015 , incentive management fees, included in continuing operations in their entirety, totaled $21 and $143 , respectively.



The management agreements generally have initial terms of one to three years and renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days before the end of a term. The Company may terminate a management agreement, subject to cure rights, if certain performance metrics tied to both individual hotel and total managed portfolio performance are not met. The Company may also terminate a management agreement with respect to a hotel at any time without reason upon

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payment of a termination fee. The management agreements terminate with respect to a hotel upon sale of the hotel, subject to certain notice requirements.



Franchise Agreements



As of September 30, 2016, 2 6 of our 27 wholly owned 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 $ 856 and $1 ,068 ,   for the three months ended September 30, 2016 and 2015 , respectively ,   all of which was included in continuing operations as hotel and property operations expense. Franchise fee expense totaled $ 2,499 and $ 3,040 , respectively, for the nine months ended September 30, 2016 and 2015, of which $ 2,499 and $ 3,010 , 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 September 30, 2016 .   One lease requires monthly payments of the greater of $2 or 5% of room revenue . The second lease requires annual payments of $34 , with approximately $3 increases every five years throughout 12 optional renewal periods and is associated with a held for sale property at September 30, 2016 . The third lease requires annual lease payments of $13 .  Land lease expense totaled $3 1 and $2 7 , respectively, for the three months ended September 30, 2016 and 2015 , all of which was included in continuing operations as hotel and property operations expense. Land lease expense totaled $ 84 and $ 78 , respectively, for the nine months ended September 30, 2016 and 2015, all of which was included in continuing operations as hotel and property operations expense.



The Company entered into office lease agreements in May of 2010 and December of 2011, each of which matures in 2016 with the option to renew an additional five years.  In March 2016, the Company entered into a new office lease to replace one of these expiring office leases; the lease is a five year lease with rent not significantly different than that of the expiring lease.  Effective June 1, 2016, the Company also entered into an additional new office lease with a 39 month lease term and monthly payments averaging $6 .  Office lease expense totaled $ 51 and $40 in the three months ended September 30, 2016 and 2015, respectively, and $ 145 and $ 120 in the nine months ended September 30, 2016 and 2015, respectively, and is included in general and administrative expense.  



Obligation to RES



The Company had an obligation to RES to use $25,000 of the proceeds from its capital infusion in 2012 to pursu e hotel acquisitions (see Note 9 ). There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions, but the Company was obligated to replac e these funds promptly as it had the ability to do so. Following the completion of the three hotel acquisitions in 2015 (see Note 2) and the acquisition made through the Atlanta JV in August 2016 (see Note 3) , the Company believes it has satisfied 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.

 

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NOTE 15. SUBSEQUENT EVENTS



Disposit ions



The Company sold the 60 -room Comfort Inn in Glasgow, Kentucky on October 14, 2016 for gross proceeds of $2,400 ,   the 86 -room Days Inn in Sioux Falls, South Dakota on November 4, 2016 for gross proceeds of $2,095, and the 76-room Comfort Inn in Shelby, North Carolina on November 7, 2016 for gross proceeds of $ 4,090 . After repayment of the associated loans, proceeds from these sales will be used to fund future acquisitions and for general corporate purposes.



Dividends Paid



On September 15, 2016 , the Board of Directors declared a common stock dividend of $0.03 per share.  This dividend was paid on October 12, 2016 to shareholders of record on   September 29, 2016 .