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 submitt ed electronically every Interactive Data File requ ired to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer , or an emerging growth company . See definition s of “large accelerated file,” “accelerated filer,” “ smaller reporting company,” and “ emerging growth company” in Rule 12-b2 of the Exchange Act .
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Large accelerated filer ☐ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Small reporting company ☒ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act YES ☐ NO ☐
Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of May 1, 201 9 there were 11,920,775 shares o f common stock, par v alue $.01 per shar e, outstanding.
Condor Hospitality Trust, Inc. and Subsidiaries
Table of Contents
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Part I. |
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Item 1. |
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Co nsolidated Balance Sheets as of March 31 , 2019 and December 31, 201 8 |
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Consolidated Statements of Operations for the Three M onths e nded March 31 , 2019 and 201 8 |
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Co nsolidated Statements of Equity for the Three M onths e nded March 31 , 2019 and 201 8 |
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Consolidated Statements of Cash Flows for the Three M onths e nded March 31 , 2019 and 201 8 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
( Unaudited - I n thousands, except share and per share data)
See accompanying notes to consolidated financial statements .
3
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited - In thousands, except per share data)
4
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited - In thousands , except per share amounts )
See accompanying notes to consolidated financial statements .
5
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited – In thousands )
See accompanying notes to consolidated financial statements .
6
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Condor Hospitality Trust, Inc. (“C ondor” ), a Maryland corporation, is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high -quality select-service, limited- service, extended stay, and comp act full service hotels. As of March 31 , 2019 , the Company owned 1 5 hotels in eight states , including one hotel owned through an 80% interest in an unconsolidated joint venture ( the “ Atlanta JV”). References to the “Company”, “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
The Company , thro ugh its wholly owned subsidiary Condor H ospitality REIT Trust, owns a controlling interest in Condor Hospitality Limi ted Partnership ( the “ operating partnership ”), for which we serve as general partner . The operating partnership , including its various subsidiaries , holds substantially all of the Company’s assets (with the exception of the furniture and equipment of all properties held by TRS Leasing, Inc.) and conducts all of its operations. At March 31, 2019 , the Company owned 99. 5 % of the common operating units (“ common units”) of the operating partnership with the remaining common units owned by other limited partners .
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, the operating partnership and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in turn engages third-party eligible independent contra ctors to manage the hotels. The operating partnership , the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of the operating partnership and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. Entities are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (“VIE ”) or we maintain control of the asset through our voting interest or other rights in the operation of the entity. The Company has c oncluded that our operating partnership meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company consolidates the operating partnership . The Company’s sole significant asset is its investment in the operating partnership , and consequently, substantially all of the Company’s assets and liabilities represent thos e assets and liabilities of the operating partnership . All of the Company ’s debt is an obligation of the operating partnership .
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for t he year ending December 31, 201 9 or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
7
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 .
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 Hotel Properties
At the time of acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures, and equipment, and intangible assets, if any, and the fair value of liabilities assumed, including debt. Acquisition date fair values are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers including discounted cash flows and capitalization rates.
Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business . As such, if substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties. This guidance is applied prospectively. We concluded that all hotel acquisitions completed in 2018 were the acquisition of assets and as such acquisition costs were capitalized as part of these transactions (see Note 3).
The Company’s investments in hotel properties are recorded at cost and are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and improvements and 3 to 12 years for furniture and equipment.
Renovations and/or replacements that improve or extend the life of the hotel properties are capitalized and depreciated over their useful lives. Repairs and maintenance are expensed as incurred.
The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life of the franchise agreements using the straight-line method. Amortization expense is included in depreciation and amortization in the consolidated statements of operations.
On an ongoing basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified. These triggering events include a significant change in the cash flows of 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 estimated fair value.
8
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Investment in Joint Venture
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or through our voting interest in a voting interest entity (“VOE”) and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee. Pursuant to our Atlanta JV agreement, 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.
Distributions received from a joint venture are classified in the consolidated statements of cash flows using the cumulative distributions approach. Distributions are classified as cash inflows from operating activities unless cumulative distributions, including those from prior periods not designated as a return of investment, exceed cumulative recognized equity in earnings of the joint venture. Excess distributions are classified as cash inflows from investing activities as a return of investment.
On an annual basis or at interim periods if events and circumstances indicate that the investment may be impaired, the Company reviews the carrying value of its investment in unconsolidated joint venture to determine if circumstances indicate impairment to the carrying value of the investment that is other than temporary. The investment is considered impaired if its estimated fair value is less than the carrying amount of the investment and that impairment is other than temporary.
Assets Held for Sale 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.
Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results are presented as discontinued o perations . None of the dispositions completed in 2018 or 2019 to date have met this definition, and we anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required. If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the decision not to sell.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents includes cash and highly liquid investments with original maturities of three months or less when acquired, and are carried at costs which approximates fair value.
Restricted cash consists of cash held in escrow for the replacement of furniture and fixtures or for real estate taxes and property insurance as required under certain loan agreements.
9
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Revenue Recognition
Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer's hotel stay at the daily contract rate . Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the contract rate at the point in time or over the time period that goods or services are provided to the customer and the related performance obligations are fulfilled . Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue ba sed upon the gross sales price. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses .
Sales, use, occupancy, and similar taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the consolidated statements of operations.
Hotel operating revenues can be disaggregated into the following categories to demonstrate how economic factors affect the nature, amount, timing, and uncerta inty of revenue and cash flows:
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Three months ended March 31, |
||||
|
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2019 |
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2018 |
||
Rooms |
|
$ |
15,151 |
|
$ |
15,927 |
Food and beverages |
|
|
359 |
|
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375 |
Other |
|
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393 |
|
|
377 |
Total revenue |
|
$ |
15,903 |
|
$ |
16,679 |
Income Taxes
The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended. In general, under such Code provisions, an entity which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed to shareholders. A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the IRS would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.
Taxable income from non-REIT activities managed through the TRS is subject to federal, state, and local income taxes. We account for the federal income taxes of our TRS using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on the consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in 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.
10
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities and equity instruments , to perform impairment assessments, to account for hotel acquisitions, in the valuation of stock-based compensation, a nd for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value are determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or valuation techniques may have a material effect on estimated fair value measurements. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
With the exception of fixed rate debt (see Note 8 ) and other financial instruments carried at fair value, the carrying amounts of the Company’s financial instruments approximates their fair values due to their short-term nature or variable market-based interest rates.
Fair Value Option
Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for the treatment of the Company’s convertible debt entered in to on March 16, 2016 (see Note 7 ).
Recently Adopted 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 serv ices to customers. The ASU replace d most existing revenue recognition guida nce in U.S. GAAP when it became 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 was effective for the Company on January 1, 2018 and was adopted on that date using the modified retrospective transition method. Due to the short-term nature of the Company’s revenue streams, the adoption of this standard had no impact on the Company’s revenue or net income, and therefore, no adjustment was recorded to the Company’s opening accumulated deficit. The adoption of this standard resulted in additional disclosures. Furthermore, for real estate sales to third parties, primarily a result of disposition of real estate in exchange for cash with few contingencies, the standard did not impact the recognition of our accounting for these sales.
In Au gust 2016, the FASB issued ASU 2 016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payment , which clarifies and provides specific guidance on eight cash flow classification issues with an objective to reduce the current diversity in practice. This guidance is effective for the Company for years be ginning after December 15, 2017. The Company has adopted ASU 2016-15 for the year beginning on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
11
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents in the statement of cash flows. This guidance requires companies to show the changes in the total of cash, cash equivalents, and restricted cash equivalents in the statement of cash flows. This guidance is effective for the Company for years beginning after December 15, 2017, including interim periods within those years. The Company has adopted ASU 2016-18 for the year beginning on January 1, 2018. The adoption of ASU No. 2016-18 changed the presentation of the consolidated statements of cash flows for the Company to include changes to cash and cash equivalents and restricted cash for all periods presented .
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or business combinations. As a result of the standard, we anticipate that the majority of our hotel purchases will be considered asset purchases as opposed to business combinations and as such the related acquisition costs will be capitalized. However, the determination will be made on a t ransaction-by-transaction basis. This standard is applied on a prospective basis and, therefore, it does not affect the accounting for any of our previous transactions. This standard was effective for annual periods beginning after December 15, 2017, although early adoption is permitted . The Company has adopted ASU 2017-01 for the year beginning on January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which superseded most existing lease guidance in U.S. GAAP. 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases , to clarify how to apply certain aspects of the new leases standard, and ASU 2018-11, Leases (Topic 842): Targeted Improvements , to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The Company adopted this standard on January 1, 2019. The Company elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for the Company's future obligations under the operating leases for which the Company is the lessee. See Notes 2 and 15 to the accompanying consolidated financial statements for additional disclosures related to the adoption of this standard.
NOTE 2. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consisted of the following at March 31, 2019 and December 31, 2018 :
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As of |
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March 31, 2019 |
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December 31, 2018 |
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Total |
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Held for sale |
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Held for use |
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Total |
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Land |
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$ |
20,201 |
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$ |
2,304 |
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$ |
20,200 |
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$ |
22,504 |
Buildings, improvements, vehicle |
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206,880 |
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4,462 |
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206,821 |
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211,283 |
Furniture and equipment |
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21,399 |
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|
719 |
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20,554 |
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21,273 |
Initial franchise fees |
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1,784 |
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25 |
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1,784 |
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1,809 |
Construction-in-progress |
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|
174 |
|
|
7 |
|
|
323 |
|
|
330 |
Right of use asset |
|
|
289 |
|
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- |
|
|
- |
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- |
Investment in hotel properties |
|
|
250,727 |
|
|
7,517 |
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249,682 |
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257,199 |
Less accumulated depreciation |
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(21,830) |
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(3,425) |
|
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(19,504) |
|
|
(22,929) |
Investment in hotel properties, net |
|
$ |
228,897 |
|
$ |
4,092 |
|
$ |
230,178 |
|
$ |
234,270 |
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|
|
|
|
|
|
|
|
|
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|
On January 1, 2019, the Company adopted ASU 842, Leases, and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently on January 1, 2019, the Company recognized
12
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
right-of-use assets and related liabilities related to its operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used in cremental borrowing rates, with a weighted average rate of 5.19% at March 31, 2019. The right-of-use assets and liabilities are amortized to rent expense, included in either Hotel and property operations expenses or General and administrative expenses depending on the nature of the lease, over the term of the underlying lease agreements. The weighted average remaining life of the Company’s operating leases, including options to extend when it is reasonably certain the Company will exercise such options, was 3.7 years at March 31, 2019.
As of March 31, 2019, the Company's right-of-use assets , net of $ 289 are included in Investment in hotel p roperties , net and its related lease liabilities of $296 are presented in Accounts payable, accrued expenses, and other liabilities in the Company's consolidated balance sheets. The adoption of this standard had minimal impact on the Company's statements of operations.
NOTE 3. ACQUISITION OF HOTEL PROPERTIES
During the three months ended March 31, 2018 , the Company acquired two wholly owned hotel properties. The allocation of the purch ase price based on fair value was as follows:
|
(1) |
|
Contractual purchase price of $ 19,750 and $ 16,325 for Austin TownePla ce S uites and Summerville Hom e 2 Suites, respectively. |
|
(2) |
|
All debt was drawn from the $150,000 secured revolving credit facility ( the “ credit facility”) at acquisition . |
|
(3) |
|
Total issuance of 259,685 common units . Common units may be redeemed at a rate of one common share for 52 common units (see Note 11). |
I ncluded in the consolidated statement of operation s for the three months en ded March 31 , 2018 are total revenues of $ 1, 4 13 and total operating income of $ 529 related to the results of operations for the two hotels acquired in 2018 since the date of acquis ition.
All purchase price allocations were determined using Level 3 fair value inputs.
Pro Forma Results
The following condensed pro forma financial data is presented as if the two acquisitions completed in 2018 w ere completed on January 1, 2017 . Supplemental pro forma earnings were adjusted to exclude all acquisition expense s recognized in the periods presented as if these acquisition costs had been incurred in prior periods but were not adjusted to remove the results of hotels sold during and between the periods. 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 and have not been audited or reviewed by our independent auditors . All hotels were in operation for all of the periods presented .
The condensed pro forma financial data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the acquisitions had bee n consummated on January 1, 2017 , nor do they purport to represent the results of operations for future periods.
13
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On August 1, 2016, the Company entered into a joint venture , the Atlanta JV, with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire an Aloft hotel i n downtown Atlanta, Georgia . The Atlanta Aloft acquisition had a total purchase price of $43,550 and closed on August 22, 2016. 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 Hote l Property II LLC, of which the operating partnership 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.
The purchase was partially funded with a $33,750 term loan secured by the property. 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 first of these extension options was exercised by the Atlanta JV on September 9, 2018. The interest rate is a floating rate calculated on the one-month LIBOR plus 5.0% , and as a condition at the time of the extension , the Atlanta JV purchased a LIBOR cap of 3.0% . The term loan remains outstanding at March 31, 2019 and has a current interest rate of 7.50 % . 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 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 $ 116 and $ 98 for the three months ended March 31, 2019 and 2018 , respectively .
Net cash flow from the Atlanta JV is distributed each quarter first with a 10% annual preferred return on capital contributions to Condor, second with a 10% annual preferred return on capital contributions to TWC, and third with any remainder distributed to the partners based on their pro-rata equity ownership. Profits are allocated in the same proportion as net cash flow. Losses are allocated based on pro-rata equity ownership. Cash distributions totaling $ 200 and $ 360 in the three months ended March 31, 2019 and 2018 , respectively , were received by the Company from the Atlanta JV . 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 table represent s the tot al assets, liabilities, and equity , including the Company’s share, of the Atlanta JV as of March 31, 2019 and December 31, 2018 :
14
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
The table below provides the c omponents of net earnings , including the Company’s share of the Atlanta JV , for the three months ended March 31 , 2019 and 2018 .
NOTE 5. DISPOSITIONS OF HOTEL PROPER TIES
As of March 31, 2019 , the Company had no hotels classified as held for sale. At December 31, 2018 , the Company had one hotel held for sale . During the three months ended March 31, 2019 and 2018 , the Company sold one hotel and two hotels, respectively , resulting in total gains of $ 62 and $ 37 , respectively . One of the hotels sold during the first quarter of 2018 had been previously impaired and a recovery of impairment totaling $93 was recognized upon the sale.
NOTE 6 . LONG-TERM DEBT
Long-term debt related to wholly owned properties , including debt related to hotel properties held for sale, consisted of the following loans payable at March 31, 2019 and December 31, 2018 :
15
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender |
|
|
Balance at March 31, 2019 |
|
Interest rate at March 31, 2019 |
|
Maturity |
|
Amortization provision |
|
Properties encumbered at March 31, 2019 |
|
Balance at December 31, 2018 |
|
Fixed rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18 |
|
$ |
8,772 |
|
4.54% |
|
08/2024 |
|
25 years |
|
1 |
|
$ |
8,817 |
Great Western Bank (1) |
|
|
13,556 |
|
4.33% |
|
12/2021 (5) |
|
25 years |
|
1 |
|
|
13,615 |
Great Western Bank (1) |
|
|
1,135 |
|
4.33% |
|
12/2021 (5) |
|
7 years |
|
- |
|
|
1,171 |
Total fixed rate debt |
|
|
23,463 |
|
|
|
|
|
|
|
|
|
|
23,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo |
|
|
25,937 |
|
4.88% (2) |
|
11/2022 (6) |
|
30 years |
|
3 |
|
|
26,048 |
KeyBank credit facility (3) |
|
|
86,845 |
|
5.49% (4) |
|
04/2020 (7) |
|
Interest only |
|
9 |
|
|
89,487 |
Total variable rate debt |
|
|
112,782 |
|
|
|
|
|
|
|
14 |
|
|
115,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
136,245 |
|
|
|
|
|
|
|
|
|
$ |
139,138 |
Less: Deferred financing costs |
|
|
(2,118) |
|
|
|
|
|
|
|
|
|
|
(2,208) |
Total long-term debt, net of deferred financing costs |
|
|
134,127 |
|
|
|
|
|
|
|
|
|
|
136,930 |
Less: Long-term debt related to hotel properties held for sale, net of deferred financing costs of $0 and $18 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
(1,120) |
Long-term debt related to hotel properties held for use, net of deferred financing costs of $2,118 and $2,190 |
|
$ |
134,127 |
|
|
|
|
|
|
|
|
|
$ |
135,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Both loans are collateralized by Aloft Leawood.
(2) Variable rate of 30-day LIBOR plus 2.39% , effectively fixed at 4.44% after giving effect to interest rate swap (see Note 8).
(3) $150,000 credit facility that includes an accordion feature that would allow the credit facility to be increased to $400,000 with additional lender commitments. Available borrowing capacity under the credit facility is based on a borrowing base formula for the pool of hotel properties securing the facility. Total unused availability under this credit facility was $10,164 at March 31 , 201 9 . The commitment fee on unused facility is 0.20%.
(4) Borrowings under the facility accrue interest based on a leverage-based pricing grid, at the Company’s option, at either LIBOR plus a spread ranging from 2.25% to 3.00% (depending on leverage) or a base rate plus a spread ranging from 1.25% to 2.00% (depending on leverage) .
(5) Term may be extended for additional two years subject to interest rate adjustments.
(6) Two one -year extension options subject to the satisfaction of certain conditions.
(7) The maturity of the credit facility was extended to October 1, 2020 on May 3 , 2019, subsequent to quarter end. Two extension options , extending the maturity of the credit facility to March 1, 2021 and March 1, 2022 , are available subject to certain conditions including the completion of specific capital achievements.
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 p roperties. Aggregate annual principal payments o n debt for the remainder of 2019 and thereafter are as follows:
|
|
|
|
|
|
Total |
|
Remainder of 2019 |
|
$ |
885 |
2020 |
|
|
88,076 |
2021 |
|
|
14,344 |
2022 |
|
|
24,886 |
2023 |
|
|
214 |
Thereafter |
|
|
7,840 |
Total |
|
$ |
136,245 |
16
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Financial Covenants
We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility:
|
· |
|
Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed 60% . Commencing on April 1, 2020 , the foregoing leverage ratio will no longer be applicable, and in lieu thereof, the ratio of consolidated total indebtedness to adjusted consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the most recently ended four fiscal quarters cannot exceed 6.25 to 1. |
|
· |
|
Secured Leverage Ratio: The ratio of consolidated secured indebtedness (excluding the credit facility) to consolidated total asset value cannot exceed 40% . |
|
· |
|
Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA for the most recently ended four fiscal quarters to consolidated fixed charges for the most recently ended four fiscal quarters cannot be less than 1.50 to 1. |
|
· |
|
Tangible Net Worth: Consolidated tangible net worth cannot be less than $55 million plus 80% of net offering proceeds. |
|
· |
|
Unhedged Variable Rate Debt: Consolidated unhedged variable rate debt cannot exceed 25% of consolidated total asset value. |
|
· |
|
Distributions: The Company is permitted to make distributions during any period of four fiscal quarters in an aggregate amount of up to 95% of funds available for distribution. |
Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility have the meanings given to them in the credit facility, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our credit facility contains cross-default provisions which would allow the lenders under our credit facility to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan.
As of March 31, 2019 , we are not in default of any of our loan s.
As a result of ongoing renovations at the Aloft Leawood property, the Company did not satisfy the required pre-dividend debt service coverage ratio on that property-specific debt at March 31, 2019. On March 8, 2019, Great Western Bank waived the required debt service coverage ratio for the Leawood Aloft for March 31, 2019 and modified the required ratio for subsequent periods.
NOTE 7. CONVERTIBLE DEBT AT FAIR VALUE
As part of an Exchange A greement entered into on March 16, 2016 with Real Estate Strate gies, L.P. (“RES”, which also includes affiliated entities) , 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 . The Note is convertible directly into 97,269 shares of common stock at any time at the option of RES or automatically when the Series E Cumulative Convertible Preferred Stock (“Series E Preferred Stock”) is required to be converted or is redeemed in whole (see Note 10). The Note is not convertible to the extent that a conversion would cause RES, together with its affiliates, to beneficially own more than 49% of the voting stock of the Company at the time of the conversion. Any conversion reduce s the principal amount of the Note proportionally.
The Company has made an irrev ocable election to record this convertible d ebt in its entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gain on derivatives and convertible debt within net
17
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
earnings each reporting period. Gains (losses) related to this Note were recognized totaling ( $ 48) and $ 20 during the three months ended March 31 , 201 9 and 2018 , respectively . The fair value of the Note i s 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, 2019 :
|
|
|
|
|
|
|
|
|
|
Fair value as of March 31, 2019 |
|
Unpaid principal balance as of March 31, 2019 |
|
Fair value carrying amount over/(under) unpaid principal |
|||
6.25% Convertible Debt |
$ |
1,048 |
|
$ |
1,012 |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
NOTE 8. FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Our determination of fair value measurements is based on the assumptions that market participants would use in pricing the asset or liability. At March 31, 2019 , the Compan y’s convertible debt (see Note 7 ) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis. Nonrecurring fair value measurements were utilized in the determination of the fair valu e of acquired properties in 2018 (se e Note 3 ) , in the valuation of the stock-based compensation grants (see Note 12) , and in the assessment of impaired and potentially impaired hotels during the three months ended March 31, 2019 and 2018 .
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, 2019 and /or December 31, 2018 are as follows:
|
(1) |
|
Notional amount amortize s consistently with the principal amor tization of the associated loan . |
Additionally, included in the Series E Preferred Stock issued on March 1, 2017 is a redemption right that allows the Company to redeem up to a total of 490,250 shares of Series E Preferred Stock for specific percentages of its liquidation preference (see Note 10). This option requires bifurcation and as such is treated as a separate derivative instrument.
All derivatives recognized by the Company are reported as derivative assets 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
18
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
(losses) of ( $ 1 89) and $ 4 2 7 for the three months ended March 31, 2019 and 2018 , respectively , were recognized related to derivative instruments.
Recurring Fair Value Measurements
The following tables provide the fair value of the Company’s financial assets and ( liabilities ) carried at fair value and measured on a recurring basis:
There were no transfers between levels during the three months ended March 31, 2019 or 2018 .
The following table present s 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 obligati ons with similar credit risks . Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the fair value hierarchy. Both t he carrying value and estimated fair value of the Company’s long-term debt are presented net of deferred financing costs in the table below:
19
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of |
|
Estimated fair value as of |
||||||||
|
|
March 31, 2019 |
|
December 31, 2018 |
|
March 31, 2019 |
|
December 31, 2018 |
||||
Held for use |
|
$ |
134,127 |
|
$ |
135,810 |
|
$ |
133,491 |
|
$ |
134,773 |
Held for sale |
|
|
- |
|
|
1,120 |
|
|
- |
|
|
1,120 |
Total |
|
$ |
134,127 |
|
$ |
136,930 |
|
$ |
133,491 |
|
$ |
135,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 operating results and 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 co nsidered Level 3 measurements . The amount of impairment and recovery of previously recorded impairment recognized in the three months ended March 31 , 2018 is shown in the table below:
|
|
|
|
|
|
Three months ended March 31, 2018 |
|||
|
Number of hotels |
|
|
Impairment recovery |
Sold hotels: |
|
|
|
|
Impairment recovery |
1 |
|
$ |
93 |
NOTE 9. COMMON STOCK
The Company’s common stock is duly authorized, fully paid, and non-assessable.
On September 20, 2017, the Company entered into an equity distribution agreement with KeyBanc Capital Markets Inc. and BMO Capital Markets Corp. (collectively, the “Sales Agents”), pursuant to which we may sell, from time to time, up to an aggregate sales price of $50,000 , subject to decrease in compliance with General Instruction I.B.6 of Registration Statement on Form S-3, of shares of our common stock pursuant to a prospectus supplement we filed with the Securities and Exchange Commission (“SEC”) through the Sales Agents acting as sales agent and/or principal, through an at-the-market offering program (our “ATM program”). Pursuant to Instruction I.B.6 to Registration Statement on Form S-3, we may not sell more than the equivalent of one-third of our public float during any 12 consecutive months so long as our public float is less than $75,000 .
There were no sales of common stock under the ATM program during the three months ended March 31, 2019. During the three months ended March 31, 2018, we sold 12,334 shares of common stock under the ATM program at an average sales price of $10.40 per share for gross proceeds totaling $128 and net proceeds totaling $103 . Since the inception of the ATM program, we have sold 1 97 ,478 shares of common stock at an average sales price of $10.1 8 per share for gross proceeds totaling $ 2,01 1 and net proceeds totaling $1, 87 9 .
NOTE 10. PREFERRED STOCK
Series E Redeemable Convertible Preferred Stock
The Company has 925,000 shares outstanding of Series E Preferred Stock.
The Series E Preferred Stock ranks senior to the Company’s common stock and any other preferred stock issuances and receives preferential cumulative cash dividends at a rate of 6.25% per annum , payable quarterly of the $10.00 face value per share. If the Company fails to pay a dividend then during the period that dividends are not paid, the dividend rate increases to 9.50% per annum. Dividends on the Series E Preferr ed 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.
20
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
Each share of Series E Preferred Stock is convertible, at the option of the holder, at any time on or after February 28, 2019, into a number of shares of common stock determined by dividing the conversion price of $13.845 into an amount equal to the $10.00 face value per share plus accrued and unpaid dividends, if any. Upon liquidation, each share of Series E Preferred Stock is entitled to $10.00 per share and accrued and unpaid dividends. The conversion price is subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends. Following a specific equity offering or offerings, from time to time a number of shares of Series E Preferred Stock automatically converts into common stock if the common stock trades at 120% of the conversion price for 60 trading days, and the number of shares converted will be determined by certain trading volumes measures.
The Company has rights to redeem up to 490,250 shares of the Series E Preferred Stock at prices from 110% to 130% of its liquidation value. The holders have put rights commencing March 16, 2021 to put the Series E Preferred Stock to the Company at 130% of its liquidation preference, which the Company can satisfy with cash or common stock. The Series E Preferred Stock votes as a class on matters generally affecting the Series E Preferred Stock, and as long as 434,750 shares of Series E Preferred Stock ( 47% of the originally issued shares of Series E Preferred Stock) remain outstanding, then 75% approval of the Series E Preferred Stock will be required to approve merger, consolidation, liquidation or winding up of Condor, related party transactions exceeding $120 , payment of dividends on common stock except from funds from operations or to maintain REIT status, the grant of exemptions from Condor’s charter limitation on ownership of 9.9% of any class or series of its securities (exclusive of persons currently holding exemptions), issuance of preferred stock or commitment or agreement to do any of the foregoing.
The Series E Preferred Stock was determined to have a fair value of $9,900 on the date of issuance as measured using a trinomial lattice-based model. From this value, the embedded redemption option (see Note 8), which was determined to be an asset with a fair value on the date of issuance of $150 using the same model, was bifurcated and will be accounted for at fair value at each period end. These are considered Level 3 fair value measurements.
NOTE 11 . NONCONTROLLING INTEREST IN THE OPERATING PARTNERSHIP
Noncontrolling interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Earnings and loss are allocated to noncontrolling interest in accordance with the weighted a v erage percentage ownership of the operating partnership during the period.
Our ownership interest in the operating partnership was 99.5 % as of March 31, 2019 and December 31, 2018 . At March 31, 2019 and December 31, 2018 , 3,021,439 and 3,281,124 common units owned by minority interest holders were outstanding, all of which were held by limited partners . The total redemption value for the common units was $ 523 and $ 435 at March 31 , 2019 and December 31, 2018 , respectively.
Each limited partner of the operating partnership may, subject to cer t ain limitations, require that the operating partnership redeem all or a portion of his or her common units at any time after a specified period following the date the units were acquired, by delivering a redempt ion notice to the operating partnership . When a limited partner tenders common units for redemption, the Company can, at its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock at a rate of one shar e of common stock for each 52 common units redeemed or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited partner would have received if the Company chose to purch ase the units for common stock.
During the three months ended March 31, 2019, 2 5 9,685 common units were redeemed for cash totaling $42 . No common units were redeemed during the three months ended March 31, 2018.
NOTE 12. STOCK-BASED COMPENSATION
The Company currently has in place the Condor 2016 Stock Plan, which was approved by the Company’s shareholders at the annual shareholders meeting on June 15, 2016. The 2016 Stock Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, deferred stock units, and other forms of stock-based compensation. The maximum number of shares of the Company’s common stock that may be issued under the 2016 Stock Plan is 7 61,538 following an amendment to the plan to increase the number of available shares by 300,000 that was approved by shareholders on May 17, 2018 at the annual meeting of
21
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
shareholders . As of March 31, 2019 , there were 562,515 common shares available for issuance under the 2016 Stock Plan.
Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basi s over the requisite service period. Stock -based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is determined to be probable. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of our stock, expected dividend yield, expected term, and assumptions of whether these awards will achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management at the point of measurement. Compensation cost is recognized as additional paid-in capital for awards of the Company’s common stock . The Company has elected to account for forfeitures of stock-based compensation as they occur.
Service Condition Share Awards
From time to time, the Company awards restricted shares of common stock to employees, officers, and members of the Board of Directors under the 2016 Stock Plan. These shares generally vest ratably over five years for employees and officers and three years for members of the Board of Directors based on continued service or employment. Dividends paid on these restricted shares during the vesting period are not forfeited in the event that the shares fail to vest. The following table presents a summary of the service condition unvested share activity for the three months ended March 31, 2019 and 2018 :
The fair value of the service co ndition unvested share awards was determined based on the closing price of the Company’s common stock on the grant date.
Market Based Share Awards
Pursuant to an amendment of an employment agreement o n June 28, 2017, an executive officer may earn shares of common stock if certain market share prices of common stock are attained. Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan. The executive officer will earn and be issued 36,692 common shares each time stock market price targets of $11.00 to $18.00 (in one dollar increments) per common share are first achieved prior to March 31, 2022 based on the weighted-average common stock price for 60 consecutive trading days. Additionally, the shares vest to the extent of the value received per share of common stock in connection with a change in control, with the payout in such case to be prorated for the portion of the value above a stock market price target but below the next stock market price target.
The compensation cost related to awards that are contingent upon achieving a market based criteria is measured at the fair value of the award on the date of gran t using the Monte Carlo simulation, including consideration of the market criteria, and amortized on a straight line basis over the derived performance period which is also estimated using this model. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock
22
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
prices of the Company and its peer group and mini mize standard error. The total grant date fair value of this market based share award , including additional value assessed at the time of subsequent amendment of the award, was $1,3 80 .
Performance Based Share Awards
Pursuant to an amendment of an employment agreement on June 28, 2017, an executive officer may earn shares of common stock if certain operating results of the Company are obtained . Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan . For each of the Company’s fiscal years 2017 through 2021 , if the Company achieves between 85% and 101% of budgeted Funds from Operations (“FFO”) as approved by the Board of Directors, the executive shall earn and be issued between 11,741 and 19,569 shares of common stock, determined on a straight-line basis based on the percentage of budgeted FFO achieved. In addition, for any fiscal year in which the Company achieves in excess of 101% of budgeted FFO, an additional 391 shares of common stock will be earned for each two percent actual FFO exceeds 101% of budgeted FFO, up to a total of 3,910 additional shares of common stock per year.
The fair value of the performance based share awards is based on the closing price of the Company’s common stock on the grant date, discounted for estimated common stock dividends to be declared prior to the shares being issued. The grant date occurs on an annual basis when budgeted FFO is approved by the Board of Directors. Du ring the first quarter of 2019, 13,778 shares with a grant date fair value totaling $ 122 were awarded to the executive based on 2018 FFO. Simultaneously , 2,550 fully vested shares were issued to the executive with a fair value of $22 as a discretionary grant. During the first quarter of 2018 , 21,133 shares with a grant date fair value totaling $212 were awarded to the executive based on 2017 FFO. T he total g rant date fair value of the 2019 portion of this performance based share award, assuming that 100% of budgeted FFO is achieved, was $ 147 .
Warrants
On March 2, 2015, the Company granted a warrant to an executive officer of the Company as an inducement material to the executive’s acceptance of employment. The Black-Scholes option pricing model was utilized at issuance for the determination of the fair value of the award. The warrant entitled the executive to purchase a total of 101,213 authorized but previously unissued shares of the Company’s common stock at a price of (i) $9.88 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) $12.48 per share for shares purchased after that date. The warrant had a three -year term. The executive officer exercised the warrant in part to purchase 35,060 shares on March 11, 2015 at the price of $9.88 per share. The remaining warrant expired unexercised on March 2, 2018.
Director Fully Vested Share Compensation
Independent directors serving as members of the Investment Committee of the Board of Directors receive their monthly Investment Committee fees in the form of shares of the Company’s common stock. Certain independent directors also elect to receive a portion of their director fees in the form of shares of the Company’s common stock.
A total of 4,409 and 2,922 shares were issued during the three months ended March 31, 2019 and 2018, respectively, to independent directors under the 2016 Stock Plan with respect to these fees .
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, 2019 and 2018 was $ 336 and $ 402 , respectively , all of which is included in general and administrative expense. Total unrecognized compensation cost related to all awards at March 31, 2019 was $1,157 , which is expected to be recognized over a weighted-average remaining service period of 3.1 years.
23
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 13. INCOME TAXES
During the three months ended March 31, 2019 and 2018 , income tax expense totaling $ 186 and $ 129 , respectively, was recognized primarily related to income earned by the TRS. Management believes the combined federal and state effective income tax rate for the TRS will be approximately 26% .
After consideration of limitations related to a change in control as defined under Code Section 382 , the TRS’s net operating loss carryforward at March 31, 2019 as determined for federal income tax purposes was $ 4 ,8 30 . The availability of the loss carryforwards will expire from 202 7 through 203 4 , with an indefinite carryforward for losses arising after December 31, 2017 .
The two-class method is utilized to compute earnings per common share (“EPS”) as our unvested restricted stock awards with non-forfeitable dividends are considered participating securities. Under the two-class method, losses are allocated only to those securities that have a contractual obligation to share in the losses of the Company. Our unvested restricted stock is not obligated to absorb Company losses and accordingly is not allocated losses. The following is a reconciliation of basic and dilu ted 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:
|
(1) |
|
Common units of the operating partnership have been omitted from the denominator for the purpose of computing diluted EPS since the effect of including these amounts in the numerator and denominator would have no impact on calculated EPS. |
|
(2) |
|
Amounts above are weighted average amounts outstanding for the periods presented . These instrument s were no longer outstanding at March 31, 2019 . |
24
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
NOTE 15 . COMMITMENTS AND CONTINGENCIES
Management Agreements
Our TRS engages eligible independent contractors as property managers for each of our hotels in accordance with the requirements for qualification as a REIT. The hotel management agreements provide that the management companies have control of all operational aspects of the hotels, including employee-related matters. The management companies must generally maintain each hotel under their management in good repair and condition and perform routine maintenance, repairs, and minor alterations. Additionally, the management companies must operate the hotels in accordance with the national franchise agreements that cover the hotels, which includes, as applicable, using franchisor sales 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 March 31 , 2019 receive s a base monthly management fee of 3.0% to 3.5% of hotel revenue, with incentives for performance , which increase such fee to a maximum of 5.0% of hotel revenue . Base management fees totaled $ 474 and $ 4 95 , respectively, for the three months ended March 31, 2019 and 2018 , all of which was included as hotel an d property operations expense. Incentive management fees totaled $ 44 and $ 65 , respectively, for the three months ended March 31 , 201 9 and 201 8.
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. 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, 2019 , all of our properties operate under franchise licenses from national hotel companies. Under our franchise agreements, we are required to pay franchise fees generally between 3.3% and 5.5% of room revenue , plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenue. The franchise agreements typically have 10 to 25 year terms although certain agreements may be terminated by either party on certain anniversary dates specified in the agreements. Further, each agreement provides for early termination fees in the event the agreement is term inated before the stated term. Franchise fee expense totaled $ 1,227 and $ 1, 22 2 for the three months ended March 31, 2019 and 2018 , respectively , and all of which was included as hotel and property operations expense.
The franchisor of two of our hotels advised us in February 2019 that both of the hotels have dropped below the required level for guest satisfaction surveys, and that if the hotels do not achieve compliance, it reserves the right to elect to terminate the relevant franchise agreement. The Company is actively addressing the matter relating to the surveys and has plans in place which it believes will resolve these issues.
Leases
The C ompany has no land lease agreement s in place related to properties owned at March 31, 2019.
The Company entered into three new office lease agreements in 2016, replacing all existing office lease agreements . These leases expire in 2019 through 2021 and have combined rent expense of approximately $15 4 annually. Office lease expense totaled $ 39 in both the three months ended March 31, 2019 and 2018 , and is included in gen eral and
25
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e xcept share and per share data)
administrative expense. The Company also has in place operating leases for miscellaneous equipment at its hotel properties.
The maturity of the lease liabilities for the Company’s operating leases is as follows:
Remainder of 2019 |
$ |
102 |
2020 |
|
91 |
2021 |
|
81 |
2022 |
|
20 |
2023 |
|
4 |
Thereafter |
|
30 |
Total lease payments |
$ |
328 |
Less: Imputed interest |
|
(32) |
Present value of lease liabilities |
$ |
296 |
As of December 31, 2018, prior to adoption of ASC 842, the future minimum lease payments applicable to non- cancellable operating leases were as follows:
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.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.
References to “we,” “our,” “us,” and the “Company” refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
Certain information both included and incorporate d by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.
Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies , and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and in the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, risks associated with debt financing, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas, policies and guidelines applicable to real estate investment trusts, and other risks and uncertainties described herein, and in our filings with the Securities and Exchange Commission (“ SEC ”) from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements inclu ded in this report which speak only as of the date of this report.
Background
Condor Hospitality Trust, Inc. (“Condor” or the “Company”), a Maryland corporation, is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels. As of March 31, 2019 , the Company owned 15 hotels, representing 1,908 rooms, in eight states, including one hotel owned through an 80% interest in an unconsolidated joint venture (“Atlanta JV”).
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, Condor Hospitality Limited Part nership and its subsidiaries (the “operating partnership ”), for which we serve as general partner. As of March 31, 2019 , we owned approximate ly 99. 5 % of the common operating units (“common units”) in the operating partnership. In the future, the operating partnership may issue limited partnership interests to third parties from time to time in connection with our acquisition of hotel properties or the raising of capital.
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, the operating partnership and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its
27
wholly owned subsidiaries ( the “ TRS”). The TRS in turn engages third-party eligible independent cont ractors to manage the hotels. The operating partnership, the TRS , and their respective subsidiaries are consolidated into the Company’s financial statements.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually.
Overview
Financial Highlights
Revenue in the three months ended March 31, 2019 totaled $15.9 million, a decrease of 4.7 % fr om the comparable period in 2018 . Between these quarters, same-store Revenue per Available Room (“RevPAR”) increased by 3.9%. In the same periods, net earnings (loss) attributable to common shareholders de c reased to ($0.1 million ) , or ($0.0 1 ) per diluted s hare, compared to $0.6 million, $0.05 per diluted share, in the prior year. Adjusted Funds from Operations (“AFFO”) was $3.5 million, or $0.29 per diluted s hare, a 0.4% decrease from $3.5 million , also $0.29 per diluted share, in prior year, and hotel Earnings Before Interest, Taxes, Depreciation, and Amortizat ion (“EBITDA”) increased to $7.5 million from $7.4 million, an in crease of 2.0%.
Portfolio Activity
The Company’s investment strategy is to assemble a portfolio of premium-branded, select-service hotels in the top 100 Metropolitan Statistical Areas (“MSAs”) with a particular focus on MSAs ranked between 20 to 60. Since restarting its portfolio transformation in 2015, the Company has acquired 14 high-quality select-service hotels representing 1,808 rooms in its target markets for a total purchase price of $276.6 million. Additionally, during th is time, the Company has sold 55 legacy assets for a total gros s sales price of $169.9 million.
During the first quarter of 20 19 , the Company sold the Quality Inn in Solomons, MD for $4.3 million. Net proceeds from the sale were applied to outstanding debt on the Company’s $150 .0 million secured credit facility.
Balance Sheet Activity
As of March 31, 2019 , the Company had cash and cash equivalents (inc luding restricted cash) of $10.2 million and available revolver borrowing capacity of $ 10.2 million. As of March 31, 2019 , the Company had total outs tanding long-term debt of $136.2 million , all of which was associated with assets held for use , with a weighted average maturity of 1.9 years and a weight ed average interest rate of 5.19 %.
Dividends
On March 4, 2019 , the Board of Directors declared a quarterly cash common stock dividend of $0.195 per share for the first quarter of 2019 . The common stock dividend represented an ann ualized yield of approximately 9 .5% based on the closing price of the Company’s common shares on March 4, 2019 . The first quarter dividend was paid on April 2, 2019 to shareholders of record as of March 15, 2019 .
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Hotel Property Portfolio and Activity
Hotel Property Portfolio
The following table sets forth certain information with respect to the hotels owned by us as of March 31, 2019 :
|
(1) |
|
This property is owned through an 80% interest in our unconsolidated Atlanta JV . |
All of our properties are encumbered by either our $150.0 million secured revolving credit facility (the “ credit facility ”) or by mortgage debt at March 31, 2019 .
Dispositions
Consistent with our strategic repositioning , the following hotel sales were executed in the three months ended March 31, 2019 :
|
|
|
|
|
|
|
|
|
|
|
|
Date of sale |
|
Location |
|
Brand |
|
Condor lender |
|
Number of rooms |
|
Gross proceeds (in thousands) |
|
03/22/2019 |
|
Solomons, MD |
|
Quality Inn |
|
Credit facility |
|
59 |
|
$ |
4,320 |
|
|
|
|
|
|
Total |
|
59 |
|
$ |
4,320 |
The net proceeds, after the payment of related expenses, from this disposition totaled $ 4.2 million. All net proceeds were used to repay borrowings und er the credit facility.
Based on the criteria discussed in the footnotes to the consolidated financial statements, at December 31, 2018, the Company had one hotel held for sale. As of March 31 , 2019, subsequent to the sale of the Solomons Quality Inn, the Company had no hotel s classified as held for sale.
Operating Performance Metrics
The following table s present our same-store occupancy , average daily rate (“ ADR ”) , and RevPAR for all our hotels owned at March 31, 2019 . Same-store occupancy, ADR, and RevPAR reflect the performance of hotels during the entire period, regardless of our ownership during the period presented. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us or audited or reviewed by our independent auditors. The performance metrics for the hotel acquired through our Atlanta JV, also presented below, reflect 100% of the operating results of the property, including our interest and the interest of our partner.
29
Total sa me-store RevPAR in creased by 3.9 % in the first quarter of 2019 , driven by an increase in ADR of 4.5 % which was partially of f set by a decrease in occupancy of 0.6 %.
The largest RevPAR increases relates to the Tallahassee Home2 Suites (increase of 15.6%), the Southaven Home2 Suites (increase of 9.9%), the El Paso Fairfield Inn (increase of 16.7%), and the Atlanta Aloft (JV) (increase of 19.2%). These increases were partially offset by a decr ease in RevPAR of 21.7% at the Austin TownePlace Suites. At the Tallahassee Home 2 Suites, the increase in RevPAR , which was driven by a 12.7% increase in occupancy, was primarily due to extended stay Federal Emergency Management Agency (“FEMA”) business following the hurricanes that struck Florida in 2018. At the Southaven Home2 Suites, the increase, also driven by a 9.2% increase in occupancy, was due to an uptick in corporate transient business following strong sales efforts. At the El Paso Fairfield Inn, the increase in RevPAR was driven by both increases in occupancy (11.3%) and ADR (4.8%) resulting from increased business in the market due to border and immigration issues and increased activity at Fort Bliss. The performance of the Atlanta Aloft, which was almost entirely due to an increase in ADR of 18.2%, resulted from the 2019 Super Bowl in the market. At the Austin TownePlace Suite, the decrease in RevPAR was due to both decreased occupancy (17.5%) and ADR (5.0%) and was attributable to the loss of FEMA business in the market in 2018 following the 2017 hurricanes that hit Texas.
Results of Operations
Comparison of the three months ended March 31, 2019 to the three months ended March 31 , 2018 (in thousands)
Revenue
Revenue between the periods decreased by a tota l of $776, or 4.7 %. Revenue from properties acq uired during the first quarter of 2018 increased by $382 during the three months ended March 31, 2019 , while revenue decreas ed between the periods by $ 1,597 as a result of decreased revenue from held for sale and sold properties. Revenue related to new investment platform prope rties owned throughout both pe riods decreased in total by $ 439 as a result of the changes in RevPAR discussed above.
Operating Expenses and Interest Expense
Hotel and property operat ions expense also de creased between the periods by $621 . Hotel and property operations expenses increased by $ 381 as a result of increased expenses from properties acquired dur ing the first quarter of 2018 which were offset by decreased expenses from held for sa le and sold properties of $1,236 between the periods.
30
In total, hotel and property operations expenses decreased as a per centage of total revenue to 61.6% from 62.4 % for the three months ended March 31, 2019 and 2018 , respectively.
Deprec iation expense increased by $103 between the periods as a result of an increase in the carrying value of the Company’s held for use hotel property portfolio between the periods , largely due to the two hotel acquisitions completed in the first quarter of 2018 . Interest expense also increa sed by $235 between the periods as a result of incre ased debt balances largely due to an increase in the weighted average interest rate on total debt outstanding due to changing market conditions (fro m 4.36 % at March 31, 2018 to 5.19 % at March 31, 2019 ).
General and adminis t rative expense decreased by $206 between the periods largely as a result of decreased professional fees as a result of decreased transactional activity.
Net Gain (Loss) on Disposition of Assets and Impairment Recovery, net
During the three months ended March 31, 2019 , the Company sold one hotel and two hotels, respectively, re sulting in total gains of $62 and $37 , respectively. The net gains (losses) appearing in the financial statements also include net losses on disposals due to repairs, replacements, and other renovations. One of the properties sold in the first quarter of 2018 had been previously impaired and a recovery of impairment of $93 was recognized upon the sale .
Equity in Earnings of Joint Venture
The increase in equity in earnings of joint venture was due to the significantly increased operating performance of the Atlanta Aloft hotel in the first quarter of 2019, which, as previously discussed, was largely due to the 2019 Super Bowl being held in the market.
Net Gain (Loss) on Derivatives and Convertible Debt
The change in net gain (loss) on derivatives and convertible debt was driven by changes in value of the Company’s interest rate swap on its Wells Fargo debt which is adjusted to fair market value each period. Due to differences in the interest rate environment, during the first quarter of 2018, the Company recognized an unrealized gain of $455 on this instrument while in the first quarter of 2019, an unrealized loss of $255 was recognized.
Non-GAAP Financial Measures
Non-GAAP financial measures are measures of our historical financial performance that are different from measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We report Funds from Operations (“FFO”), Adjusted FFO (“AFFO”), Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), EBITDA for real estate (“EBITDA re ”), Adjusted EBITDA re , and Hotel EBITDA as non-GAAP measures that we believe are useful to investors as key measures of our operating results and which management uses to facilitate a periodic evaluation of our operating results relative to those of our peers. Our non-GAAP measures should not be considered as an alternative to U.S. GAAP net earnings as an indication of financial performance or to U.S. GAAP cash flows from operating activities as a measure of liquidity. Additionally, these measures are not indicative of funds available to fund cash needs or our ability to make cash distributions as they have not been adjusted to consider cash requirements for capital expenditures, property acquisitions, debt service obligations, or other commitments.
Funds from Operations (“FFO”) & Adjusted FFO (“AFFO”)
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net earnings or loss computed in accordance with GAAP, excluding gains or losses from sales of real estate assets, impairment, and the depreciation and amortization of real estate assets. FFO is calculated both for the Company in total and as FFO attributable to common shares and common units, which is FFO reduced by preferred stock dividends. AFFO is FFO attributable to common shares and common units adjusted to exclude items we do not believe are representative of the results from our core operations, including non-cash gains or losses on derivatives and convertible debt, stock-based compensation expense, amortization of certain fees, losses on debt extinguishment, and in-kind dividends above stated rates, and
31
cash charges for acquisition and equity transaction costs. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.
We consider FFO to be a useful additional measure of performance for an equity REIT because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance. We believe that AFFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net earnings and FFO, is beneficial to an investor’s understanding of our operating performance.
The following tab le reconciles net earnings to FFO and AFFO for the three months ended March 31, 2019 and 201 8 (in thousands). All amounts presented include our portion of the results of our unconsolidated Atlanta JV .
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), EBITDAre, Adjusted EBITDA re, and Hotel EBITDA
We calculate EBITDA , EBITDA re, and Adjusted EBITDA re by adding back to net earnings or loss certain non-operating expenses and certain non-cash charges which are based on historical cost accounting that we believe may be of limited significance in evaluating current performance. We believe these adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods. In calculating EBITDA, we add back to net earnings or loss interest expense, loss on debt extinguishment, income tax expense, and deprec iation and amortization expense. NAREIT adopted EBITDA re in order to promote an industry-wide measure of REIT operating performance. We adjust EBITDA by adding back net gain/loss on disposition of assets and impairment charges to calculate EBITDA re. To calculate Adjusted EBITDA re , we adjust EBITDA re to add back acquisit ion and terminated transactions expe nse and equity transactions expense, which are cash charges. We also add back stock –based compensation expense and gain/ loss on derivatives and convertible debt, which are non-cash charges. EBITDA , EBITDA re, and Adjusted EBITDA re , as presented, may not be comparable to similarly titled measures of other companies.
We believe EBITDA , EBITDA re, and Adjusted EBITDA re to be useful additional measures of our operating performance, excluding the impact of our capital structure (primarily interest expense), our asset base (primarily depreciation and amortization expense), and other items we do not believe are representative of the results from our core operations.
The Company further excludes general and administrative expenses, other non-operating income or expense, and certain hotel and property operations expenses that are not allocated to individual properties in assessing hotel performance (primarily certain general liability and other insurance costs, land lease costs, and office and banking
32
fees) from Adjusted EBITDA re to calculate Hotel EBITDA. Hotel EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
Hotel EBITDA is intended to isolate property level operational performance over which the Company’s hotel operators have direct control. We believe Hotel EBITDA is helpful to investors as it better communicates the comparability of our hotels’ operating results for all of the Company’s hotel properties and is used by management to measure the performance of the Company’s hotels and the effectiveness of the operators of the hotels.
The following table reconciles net earnings to EBITDA, EBITDA re, Adjusted EBITDA re , and Hotel EBITDA for the three months ended March 31, 2019 and 2018 (in thousands). All amounts presented our portion of the results of our unconsolidated Atlanta JV .
Liquidity, Capital Resources , and Equity Transactions
Liquidity Requirements
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our credit facility, and the release of restricted cash upon the satisfaction of usage requirements. At March 31, 2019 , the Company had $ 4.6 million of cash and cash equivalents and $ 5.6 million of restricted cash on hand and $ 10.2 million of unused availability under its credit facility. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code and as required in connection with our 6.25% Series E Cumulative Convertible Preferred Stock (“Series E Preferred Stock”). Subsequent to an amendment to t he credit facility dated May 3 , 2019 which extends its maturity to October 1, 2020, and prior to the consideration of any asset sales or our ability to refinance debt subsequent to March 31, 2019 , contractual principal payments on our debt outstanding, which include only normal amortization, total $0.9 million through June 30 , 2020. Prior to its current October 1, 2020 maturity, the Company anticipates refinancing the credit facility with its existing lenders or other lenders. We believe we will be
33
able to refinance this debt on similar terms, however, we cannot guarantee we will be successful in our efforts to refinance or repay our maturing debt. We also presently expect to invest approximately $ 2.5 million to $ 3.5 million in capital expenditures related to hotel properties we currently own through June 30, 2020 .
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 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, proceeds from public or private issuances of debt or equity securities, and additional borrowings under our existing credit facility.
Sources and Uses of Cash
Cash provided by Operating Activities. Our cash provided by operations was $3.1 million and $2.9 mil lion for the three months ended March 31, 2019 and 2018 , respectively. The increase in operating cash flows was the net result of a decrease in net income, after adjustm ents for non-cash items, of $0.2 million , offset by differences in the changes in operating assets and liabilities between the periods that increased cash by $0.4 million , none of which were individually significant.
Cash provided by ( used in ) Investing Activities . Our cash flows related to i nvesting activities were $3.6 million and ($28.0 million ) for the three months ended March 31, 2019 and 2018, respectively. The in crease in these cash flows in 2019 was driven by decreased cash spen t on hotel acquisitions of $35.6 million , partially offset by a decrease in net procee ds from the sale of hotels of $3 . 7 million between the periods.
Cash provided by (used in) Financing Activities . Our cash flows provided by (used in) financing activities were ($5.6 million ) and $24.4 million for the three months ended March 31, 2019 and 2018 , respectively. This decrease was primarily the result of decreased net cash inflo ws from debt activities of $30.1 million, resulting primarily from the lack of property acquisitions during the first quarter of 2019 .
Outstanding Indebtedness
Significant Debt Transactions
Subsequent to December 31, 2018 , net proceeds from the Com pany’s hotel sale were used to pay down a total of $ 4.2 million on the credit facility and an additional $ 1 .5 million was drawn under the facility for corporate purposes. Available borrowing capacity under the credit facility is based on a borrowing base formula for the pool of hotel pr operties securing the facility. As of March 31, 2019 , the collateral pool consisted of nine hotel properties and total available borrowing capacity under the credit facility w as $ 10.2 million . At March 31, 2019 , $ 86.8 million was outstanding under the credit facility.
On March 8, 2019, the credit facility was amended to extend its maturity from March 1, 2020 to April 1, 2020. Subsequent to quarter end, on May 3 , 2019 , the maturity of the credit facility was further extended to October 1, 2020. Two extension options, extending the maturity of the credit facility to Marc h 1, 2021 and March 1, 2022, remain available subject to certain conditions including the completion of specific capital achievements.
34
Outstanding Debt
At March 31, 2019 , we had long-term debt of $ 136.2 million , all of which was associated with assets held for use , with a weighted average term to maturity of 1.9 years and a weight ed average interest rate of 5.19 %. Of this total, at March 31, 2019 , $ 23.5 million was fixed rate debt with a weighted average term to maturity of 1.8 years and a weight ed average interest rate of 4.41 % and $ 112.8 million was variable rate debt with a weighted average term to maturity of 2.6 years and a weight ed average interest rate of 5.35 %. At December 31, 2018, we had long-term debt of $138.0 million associated with assets held for use with a weighted average term to maturity of 2.1 years and a weighted average interest rate of 5.15%. Of this total, at December 31, 2018, $23.6 million was fixed rate debt with a weighted average term to maturity of 1.9 years and a weighted average interest rate of 4.41% and $114.4 million was variable rate debt with a weighted average term to maturity of 2.9 years and a weighted average interest rate of 5.30%.
Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of the related hotel properties. Aggregate annual principa l payments o n debt for the remainder of 2019 and thereafter are as follows (in thousands) :
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|
|
|
|
Total |
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Remainder of 2019 |
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$ |
885 |
2020 |
|
|
88,076 |
2021 |
|
|
14,344 |
2022 |
|
|
24,886 |
2023 |
|
|
214 |
Thereafter |
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|
7,840 |
Total |
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$ |
136,245 |
Financial Covenants
We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility:
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· |
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Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed 60%. Commencing on April 1, 2020 , the foregoing leverage ratio will no longer be applicable, and in lieu thereof, the ratio of consolidated total indebtedness to adjusted consolidated EBITDA for the most recently ended four fiscal quarters cannot exceed 6.25 to 1. |
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· |
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Secured Leverage Ratio: The ratio of consolidated secured indebtedness (excluding the credit facility) to consolidated total asset value cannot exceed 40%. |
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· |
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Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA for the most recently ended four fiscal quarters to consolidated fixed charges for the most recently ended four fiscal quarters cannot be less than 1.50 to 1. |
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· |
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Tangible Net Worth: Consolidated tangible net worth cannot be less than $55 million plus 80% of net offering proceeds. |
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· |
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Unhedged Variable Rate Debt: Consolidated unhedged variable rate debt cannot exceed 25% of consolidated total asset value. |
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· |
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Distributio ns: The Company is permitted to make distributions during any period of four fiscal quarters in an aggregate amount of up to 95% of funds available for distribution. |
Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility have the meanings given to them in the credit facility, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.
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
35
sources of financing with acceptable terms. Our credit facility contains cross-default provisions which would allow the lenders under our credit facility to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan.
As of March 31, 2019 , we are not in default of any of our loan s.
As a result of ongoing renovations at the Aloft Leawood property, the Company did not satisfy the required pre-dividend debt service coverage ratio on that property-specific debt at March 31, 2019. On March 8, 2019, Great Western Bank waived the required debt service coverage ratio for the Leawood Aloft for March 31, 2019 and modified the required ratio for subsequent periods.
Contractual Obligations
Below is a summary of our contractual obligations as of March 31, 2019 and the effect such obligations are expected to have on our future liquidity and cash flows (in thousands):
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(1) |
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Interest rate payments on our variable rate debt have been estimated us i ng interest rates in effect at March 31, 2019 . |
We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. We also have management agreements in place for the management and operation of our hotel properties.
Off Balance Sheet Financing Transactions
We have not entered into any off balance sheet financing transactions.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances.
Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for t he year ended December 31, 2018.
Recent Accounting Standards
See Note 1, Organization and Summary of Significant Accounting Policies , to our consolidated interim financial
36
statements for additional information relating to recently adopted and recently issued accounting pronouncements.
ITEM 3. QUA NTITATIVE AND QUALITATIVE DISCLOSU RES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that effect market-sen sitive instruments. At March 31, 2019 , our market risk arises primarily from interest rate risk relating to variable rate borrowings and the market risk related to our convertible debt and the embedded redemption right in the Series E Preferred Stock that fair value will fluctuate following changes in the Company’s common stock price or changes in interest rates.
Interest Rate Sensitivity
We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging agreements. At March 31, 2019 , we have an interest rate swap in place which effectively locks the variable interest rate on our Wells Fargo debt ( March 31, 2019 balance of $ 25.9 million) at 4.44%. We do not intend to enter into derivative or interest rate transact ions for speculative purposes.
The table below provides information about financial instruments that are sensitive to changes in interest rates. The table presents scheduled maturities, including the amortization of principal and related weighted-average interest rates for the debt maturing in each specified period (dollars in thousands). For the purposes of this presentation, the Wells Fargo debt is considered fixed rate debt as the variable interest rate is effectively locked with the previously discussed interest rate swap.
At March 31, 2019 , approximately 36.3 % of our outstanding debt, excluding debt related to hotel properties held for sale, is subject to fixed interest rates or effectively locked with an interest rate swap, while 63.7 % of our debt is subject to floating rates. Assuming no increase in the level of our variable debt outstanding at March 31, 2019 and after giving effect to our interest rate swap, if interest rates increased by 1.0% our cash flow related to hotel properties held for use would decrease by approximately $ 0.9 million per year.
ITEM 4. C ONTROLS AND PROCED URES
Disclosure Controls and Procedures
An evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2019 , the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (a) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures and (b) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
37
Changes in Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting during our most recent fiscal quarter that have materially effected, or are reasonably likely to materially effect, our internal controls over financial reporting.
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. We are not currently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us. The Company has insurance to cover potential material losses and we believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.
There have been no material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None .
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable .
Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the information below is being disclosed under this Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement) of Form 8-K.
On May 3 , 2019, the Company entered into a Fourth Amendment to Credit Agreement among the operating partnership, as borrower, the Company and the subsidiary guarantors party thereto, as guarantors, KeyBank National Association and the other lenders party thereto, as lenders, and KeyBank National Association, as administrative agent (the “Fourth Amendment”). The Fourth Amendment amends the Credit Agreement dated as of March 1, 2017, as amended by the First Amendment dated as of May 11, 2017, Second Amendment dated as of December 13, 2017 and Third Amendment dated as of March 8, 2019 (collectively, the “Credit Agreement”). The Credit Agreement is described in the Company’s Current Reports on Form 8-K dat ed March 1, 2017, May 11, 2017, December 13, 2017 and March 5, 2019 and is incorporated herein by reference.
The Fourth Amendment, among other things, extends the maturity date of the credit facility provided under the Credit Agreement to October 1, 2020.
Some of the lenders in the Credit Agreement and / or their affiliates have other business relationships with the Company involving the provision of financial and bank-related services, including cash management and treasury services, and have participated in the Company’s prior debt financings and sales of securities.
38
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10 |
10.1 |
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10.2 |
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10.3 * |
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31.1* |
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31.2* |
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32.1* |
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer |
101.1* |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 , formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements. |
* Filed herewith
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Condor Hospitality Trust, Inc. |
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May 3, 2019 |
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/s/ J. William Blackham |
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J. William Blackham |
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Chief Executive Officer |
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/s/ Jonathan J. Gantt |
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Jonathan J. Gantt |
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Senior Vice President and Chief Financial Officer |
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40
Exhibit 10.3
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this “ Amendment ”), dated as of May 3 , 2019, effective as of May 3 , 2019, by and among CONDOR HOSPITALITY LIMITED PARTNERSHIP , a Virginia limited partnership (“ Borrower ”), the undersigned parties to this Amendment executing as “Guarantors” (hereinafter referred to individually as “ Guarantor ” and collectively as “ Guarantors ”), KEYBANK NATIONAL ASSOCIATION (“ KeyBank ”), THE HUNTINGTON NATIONAL BANK (“Huntington”), BMO HARRIS BANK N.A. (“ BMO ”; KeyBank, Huntington and BMO collectively, the “ Lenders ”), and KeyBank as Agent for itself and the other Lenders from time to time a party to the Credit Agreement (as hereinafter defined) (KeyBank, in its capacity as Agent, is hereinafter referred to as “ Agent ”).
W I T N E S S E T H:
WHEREAS, the Borrower, Agent, KeyBank and the lenders party thereto are parties to that certain Credit Agreement dated as of March 1, 2017, as amended by that certain First Amendment to Credit Agreement and Other Loan Documents dated as of May 11, 2017 (the “ First Amendment ”), as amended by that certain Second Amendment to Credit Agreement dated as of December 13, 2017 (the “ Second Amendment ”), and as amended by that certain Third Amendment to Credit Agreement dated as of March 8, 2019 (the “Third Amendment”) (as such Credit Agreement, as amended by the First Amendment, the Second Amendment and the Third Amendment, may be further varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time, the “ Credit Agreement ”);
WHEREAS, certain of the Guarantors executed and delivered to Agent that certain Unconditional Guaranty of Payment and Performance dated as of March 1, 2017, as amended by the First Amendment (as such Guaranty, as amended by the First Amendment, may be further varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time, the “ Guaranty ”);
WHEREAS, Borrower and certain of the Guarantors executed and delivered to Agent that certain Cash Collateral Account Agreement dated as of March 1, 2017, as amended by that certain First Amendment to Cash Collateral Account Agreement dated as of March 24, 2017, as amended by the First Amendment, as amended by that certain Second Amendment to Cash Collateral Account Agreement dated as of June 21, 2017, as amended by that certain Third Amendment to Cash Collateral Account Agreement dated as of August 31, 2017, as amended by that certain Fourth Amendment to Cash Collateral Account Agreement dated as of January 18, 2018, and as amended by that certain Fifth Amendment to Cash Collateral Account Agreement dated as of February 21, 2018 (as the same may be further varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time, the “ Cash Collateral Agreement ”);
WHEREAS, CDOR TLH Magnolia, LLC, TRS TLH Magnolia, LLC, CDOR LEX Lowry, LLC, TRS LEX Lowry, LLC, CDOR AUS Louis, LLC and TRS AUS Louis, LLC have become a party to the Guaranty and the Cash Collateral Agreement pursuant to that certain Joinder Agreement dated March 24, 2017; and
110803043\V-5
WHEREAS CDOR MCO Village, LLC and TRS MCO Village, LLC have become a party to the Guaranty and the Cash Collateral Agreement pursuant to that certain Joinder Agreement dated June 21, 2017; and
WHEREAS, CDOR ELP Edge, LLC, TRS ELP Edge, LLC, CDOR AUS Casey, LLC and TRS AUS Casey, LLC have become a party to the Guaranty and the Cash Collateral Agreement pursuant to that certain Joinder Agreement dated August 31, 2017; and
WHEREAS, CDOR AUS Tech, LLC and TRS AUS Tech, LLC have become a party to the Guaranty and the Cash Collateral Agreement pursuant to that certain Joinder Agreement dated January 17, 2018; and
WHEREAS, CDOR CHS Holiday, LLC and TRS CHS Holiday, LLC have become a party to the Guaranty and the Cash Collateral Agreement pursuant to that certain Joinder Agreement dated February 21, 2018; and
WHEREAS, the Borrower and the Guarantors have requested that the Agent and the Lenders make certain modifications to the Credit Agreement and Agent and the undersigned Lenders have consented to such modifications, subject to the execution and delivery of this Amendment.
NOW, THEREFORE, for and in consideration of the sum of TEN and NO/100 DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby covenant and agree as follows:
Definitions. Capitalized terms used in this Amendment, but which are not otherwise expressly defined in this Amendment, shall have the respective meanings given thereto in the Credit Agreement.
Modifications of the Credit Agreement. The Borrower, Agent and the Lenders do hereby modify and amend the Credit Agreement as follows:
(a) By deleting in their entirety the definitions of “Maturity Date” and “Mortgage Collateral Requirement” appearing in §1.1 of the Credit Agreement and inserting in lieu thereof the following:
“ Maturity Date . October 1, 2020, as the same may be extended as provided in §2.12, or such earlier date on which the Loans shall become due and payable pursuant to the terms hereof.
Mortgage Collateral Requirement . The Mortgage Collateral Requirement shall be deemed to be satisfied the first time that (a) there are twelve (12) Tier I Properties that are Borrowing Base Properties included in the calculation of Borrowing Base Availability that are encumbered by Mortgages and (b) notwithstanding the preceding clause (a), Borrower has also obtained the written approval of all of the Lenders to the Mortgage Collateral Requirement occurring.”
(b) By deleting in its entirety the first (1 st ) sentence of §2.11(a) of the Credit Agreement, and inserting in lieu thereof the following:
2
110803043\V-5
“Provided that no Default or Event of Default has occurred and is continuing and Borrower has obtained the prior written approval of all of the Lenders to increase the Total Commitment, subject to the terms and conditions set forth in this §2.11, the Borrower shall have the option at any time and from time to time prior to the Maturity Date to request an increase in the Total Commitment to not more than $400,000,000.00 by giving written notice to the Agent (an “Increase Notice”; and the amount of such requested increase is the “Commitment Increase”), provided that any such individual increase must be in a minimum amount of $10,000,000.00 and increments of $5,000,000.00 in excess thereof.”
(c) By deleting the word “or” appearing at the end of clause (k) of §27 of the Credit Agreement, by deleting the period appearing at the end of clause (l) of §27 of the Credit Agreement and inserting in lieu thereof the following: “, or (m) an amendment of the definition of Change of Control or waiver of any Change of Control.”
References to Credit Agreement. All references in the Loan Documents to the Credit Agreement shall be deemed a reference to the Credit Agreement as modified and amended herein.
Consent of Guarantors. By execution of this Amendment, Guarantors hereby expressly consent to the modifications and amendments relating to the Credit Agreement as set forth herein and the execution and delivery of and any other agreements contemplated hereby, and Borrower and Guarantors hereby acknowledge, represent and agree that the Credit Agreement, as modified and amended herein, and the other Loan Documents, as the same may be modified in connection with this Amendment, remain in full force and effect and constitute the valid and legally binding obligation of Borrower and Guarantors, respectively, enforceable against such Persons in accordance with their respective terms, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights and the effect of general principles of equity, and that the Guaranty extends to and applies to the foregoing documents as modified and amended.
Representations. Borrower and Guarantors represent and warrant to Agent and the Lenders as follows as of the date of this Amendment:
Authorization. The execution, delivery and performance by the Borrower and the Guarantors of this Amendment and any other agreements contemplated hereby and the transactions contemplated hereby and thereby (i) are within the authority of Borrower and Guarantors, (ii) have been duly authorized by all necessary proceedings on the part of such Persons, (iii) do not and will not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which any of such Persons is subject or any judgment, order, writ, injunction, license or permit applicable to such Persons, (iv) do not and will not conflict with or constitute a default (whether with the passage of time or the giving of notice, or both) under any provision of the partnership agreement, operating agreement, articles of incorporation or other charter documents or bylaws of, or any agreement or other instrument binding upon, any of such Persons or any of its properties, (v) do not and will not result in or require the imposition of any lien or other encumbrance on any of the properties, assets or rights of such Persons other than the liens and encumbrances in favor of the Agent contemplated by this Amendment and the other Loan Documents, and (vi) do not require any approval or consent of any Person other than those already obtained and delivered to the Agent.
3
110803043\V-5
Enforceability
. This Amendment and each other document executed and delivered in connection with this Amendment are the valid and legally binding obligations of Borrower and Guarantors, enforceable in accordance with the respective terms and provisions hereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights and the effect of general principles of equity.
Approvals. The execution, delivery and performance by the Borrower and the Guarantors of this Amendment and any other agreements contemplated hereby and the transactions contemplated hereby and thereby do not require the approval or consent of, or filing or registration with, or the giving of any notice to, any court, department, board, governmental agency or authority other than those already obtained.
Reaffirmation. Each of the representations and warranties made by or on behalf of Borrower, Guarantors or any of their respective Subsidiaries contained in this Amendment, the Credit Agreement, the other Loan Documents or in any document or instrument delivered pursuant to or in connection with the Credit Agreement or this Amendment are true in all material respects as of the date as of which they were made and are true in all material respects as of the date hereof, with the same effect as if made at and as of that time, except to the extent of changes resulting from transactions permitted by the Loan Documents (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct only as of such specified date).
No Default . By execution hereof, the Borrower and Guarantors certify that the Borrower and Guarantors are and will be in compliance with all covenants under the Loan Documents immediately after the execution and delivery of this Amendment and the other documents executed in connection herewith, and that no Default or Event of Default has occurred and is continuing.
Waiver of Claims. Borrower and Guarantors acknowledge, represent and agree that Borrower and Guarantors as of the date hereof have no defenses, setoffs, claims, counterclaims or causes of action of any kind or nature whatsoever with respect to the Loan Documents, the administration or funding of the Loans or Letters of Credit or with respect to any acts or omissions of Agent or any Lender, or any past or present officers, agents or employees of Agent or any Lender, and each of Borrower and Guarantors does hereby expressly waive, release and relinquish any and all such defenses, setoffs, claims, counterclaims and causes of action, if any.
Ratification. Except as hereinabove set forth, all terms, covenants and provisions of the Credit Agreement and the other Loan Documents remain unaltered and in full force and effect, and the parties hereto do hereby expressly ratify and confirm the Credit Agreement and the other Loan Documents. Nothing in this Amendment or any other document executed in connection herewith shall be deemed or construed to constitute, and there has not otherwise occurred, a novation, cancellation, satisfaction, release, extinguishment or substitution of the indebtedness evidenced by the Notes or the other obligations of Borrower and Guarantors under the Loan Documents (including without limitation the Guaranty). This Amendment shall constitute a Loan Document.
4
110803043\V-5
Counterparts
. This Amendment may be executed in any number of counterparts which shall together constitute but one and the same agreement.
Miscellaneous. THIS AMENDMENT SHALL, PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401, BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors, successors-in-title and assigns as provided in the Credit Agreement.
Amendments of Other Loan Documents. The Lenders authorized Agent to execute and deliver amendments to the other Loan Documents as Agent deems appropriate contemporaneously with the execution and delivery of this Amendment.
Effective Date. This Amendment shall be deemed effective and in full force and effect (the “ Effective Date ”) upon confirmation by the Agent of the satisfaction of the following conditions:
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(a) the execution and delivery of this Amendment by Borrower, Guarantors, Agent, and all Lenders; |
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(b) Borrower shall have paid to Agent for the account of the Lenders in immediately available funds a fee in the amount of seven and one-half (7.5) basis points on each Lender’s Commitment with respect to this Amendment and the extension of the Maturity Date; |
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(c) receipt by Agent of such other resolutions, certificates, documents, instruments and agreements as the Agent may reasonably request; and |
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(d) the Borrower shall have paid the reasonable fees and expenses of Agent in connection with this Amendment and the transactions contemplated hereby. |
[CONTINUED ON NEXT PAGE]
5
110803043\V-5
Exhibit 10.3
IN WITNESS WHEREOF , the parties hereto, acting by and through their respective duly authorized officers and/or other representatives, have duly executed this Amendment under seal as of the day and year first above written.
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BORROWER : |
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CONDOR HOSPITALITY LIMITED PARTNERSHIP , a Virginia limited partnership By: Condor Hospitality REIT Trust, a Maryland real estate investment trust, its general partner
By:
/s/ Jonathan J. Gantt
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GUARANTORS : |
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CONDOR HOSPITALITY REIT TRUST
, a
By:
/s/ Jonathan J. Gantt
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CONDOR HOSPITALITY TRUST, INC.
, a
By:
/s/ Jonathan J. Gantt
Title: Senior Vice President & Chief Financial Officer
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TRS LEASING, INC. , a Virginia corporation
By:
/s/ Jonathan J. Gantt
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
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SPPR-SOUTH BEND, LLC
, a Delaware limited
By:
Condor Hospitality Limited Partnership, a
By:
Condor Hospitality REIT Trust, a Maryland
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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SPPR-DOWELL, LLC
, a Delaware limited liability
By:
SPPR-Dowell Holdings, Inc., a Delaware
By:
/s/ Jonathan J. Gantt
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SPPR-DOWELL HOLDINGS, INC.
, a Delaware
By:
/s/ Jonathan J. Gantt
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
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SPPR-DOWELL TRS SUBSIDIARY, LLC
, a
By:
Condor Hospitality REIT Trust, a Maryland real
By:
/s/ Jonathan J. Gantt
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SOLOMONS BEACON INN LIMITED
By:
Solomons GP, LLC, a Delaware limited liability
By:
/s/ Jonathan J. Gantt
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SOLOMONS GP, LLC
, a Delaware limited liability
By:
/s/ Jonathan J. Gantt
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TRS SUBSIDIARY, LLC
, a Delaware limited
By:
/s/ Jonathan J. Gantt
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
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SPPR-HOTELS, LLC
, a Delaware limited liability
By: SPPR Holdings, Inc., a Delaware corporation, its manager
By:
/s/ Jonathan J. Gantt
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SPPR HOLDINGS, INC. , a Delaware corporation
By:
/s/ Jonathan J. Gantt
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
Exhibit 10.3
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SPPR TRS SUBSIDIARY, LLC
, a Delaware
By: TRS Leasing, Inc., a Virginia corporation, its manager
By:
/s/ Jonathan J. Gantt
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CDOR AUS LOUIS, LLC, a Delaware limited liability company By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President |
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CDOR LEX LOWRY, LLC, a Delaware limited liability company By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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CDOR TLH MAGNOLIA, LLC, a Delaware limited liability company By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS AUS LOUIS, LLC, a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
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TRS LEX LOWRY, LLC, a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS TLH MAGNOLIA, LLC, a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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CDOR MCO VILLAGE, LLC,
a Delaware
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS MCO VILLAGE, LLC
, a Delaware
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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CDOR ELP EDGE, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS ELP EDGE, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
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CDOR AUS CASEY, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS AUS CASEY, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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CDOR AUS TECH, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS AUS TECH, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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CDOR CHS HOLIDAY, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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TRS CHS HOLIDAY, LLC , a Delaware limited liability company
By: /s/ Jonathan J. Gantt Name: Jonathan J. Gantt Title: Vice President
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(Signatures Continued On Next Page)
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
Exhibit 10.3
LENDERS :
KEYBANK NATIONAL ASSOCIATION , individually and as Agent
By:
/s/
Thomas Z. Schmitt
Name:
Thomas Z. Schmitt
Title:
Assistant
Vice President
THE HUNTINGTON NATIONAL BANK
By:
/s/
Lauren D. Baltic
Name:
Lauren D. Baltic
Title:
AVP
BMO HARRIS BANK N.A.
By:
/s/
Gwendolyn Gatz
Name:
Gwendolyn Gatz
Title:
Director
Signature Page to Fourth Amendment to Credit Agreement - KeyBank/Condor
CERTIFICATIONS
I, J. William Blackham, certify that:
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I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2019 of Condor Hospitality Trust, Inc .; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 3 , 2019 |
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/s/ J. William Blackham |
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J. William Blackham |
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Chief Executive Officer |
CERTIFICATIONS
I, Jonathan Gantt, certify that:
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I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2019 of Condor Hospitality Trust, Inc .; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 3 , 2019 |
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/s/ Jonathan Gantt |
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Jonathan Gantt |
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Chief Financial Officer |
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Condor Hospitality Trust, Inc. on Form 10-Q for the period ended March 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, J. William Blackham, Chief Executive Officer of Condor Hospitality Trust Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Condor Hospitality Trust, Inc. at the dates and for the periods indicated. |
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May 3 , 2019 |
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/s/ J. William Blackha m |
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J. William Blackham |
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Chief Executive Officer |
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Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Condor Hospitality Trust, Inc., on Form 10-Q for the period ended March 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Jonathan Gantt, Chief Financial Officer of Condor Hospitality Trust, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Condor Hospitality Trust, Inc. at the dates and for the periods indicated. |
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May 3 , 2019 |
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/s/ Jonathan Gantt |
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Jonathan Gantt |
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Chief Financial Officer |
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