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 .





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 August 1, 201 9 there were 11,915,484   shares of common stock, par value $.01 per share, outstanding.



 



 

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PART I.  FINANCIAL INFORMATION

 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

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





 



    


		As of
		June 30, 2019			December 31, 2018

Assets
Investment in hotel properties, net		$	226,692		$	230,178
Investment in unconsolidated joint venture			5,693			5,866
Cash and cash equivalents			3,179			4,151
Restricted cash, property escrows			5,702			5,005
Accounts receivable, net			1,874			1,290
Prepaid expenses and other assets			3,940			2,227
Derivative assets, at fair value			398			639
Investment in hotel properties held for sale, net			-			4,092
Total Assets		$	247,478		$	253,448

Liabilities and Equity

Liabilities
Accounts payable, accrued expenses, and other liabilities		$	7,335		$	5,336
Dividends and distributions payable			2,479			2,330
Derivative liabilities, at fair value			372			-
Convertible debt, at fair value			1,072			1,000
Long-term debt, net of deferred financing costs			134,029			135,810
Long-term debt related to hotel properties held for sale, net of deferred financing costs			-			1,120
Total Liabilities			145,287			145,596

Equity
Shareholders' Equity
Preferred stock, 40,000,000 shares authorized:
6.25% Series E, 925,000 shares authorized, $.01 par value, 925,000 shares outstanding, liquidation preference of $9,394 and  $9,250			10,050			10,050
Common stock, $.01 par value, 200,000,000 shares authorized; 11,910,936 and 11,886,003 shares outstanding			119			119
Additional paid-in capital			232,405			231,805
Accumulated deficit			(141,154)			(134,970)
Total Shareholders' Equity			101,420			107,004
Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $527  a nd $435			771			848
Total Equity			102,191			107,852

Total Liabilities and Equity		$	247,478		$	253,448













See accompanying notes to consolidated financial statements .



 

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See accompanying notes to consolidated financial statements .



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Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands , except per share amounts )





		Six months ended June 30, 2018
		Shares of Preferred stock			Preferred stock			Shares of Common stock			Common stock			Additional paid-in capital			Accumulated deficit			Total Shareholders' equity			Noncontrolling interest			Total equity
Balance at December 31, 2017			925		$	10,050			11,834		$	118		$	230,727		$	(130,489)		$	110,406		$	1,408		$	111,814
Stock-based compensation			-			-			20			1			490			-			491			-			491
Issuance of common stock			-			-			28			-			257			-			257			-			257
Issuance of common units			-			-			-			-			-			-			-			50			50
Dividends and distributions declared
Common Stock ( $0.39 per share)			-			-			-			-			-			(4,633)			(4,633)			-			(4,633)
Series E Preferred Stock			-			-			-			-			-			(289)			(289)			-			(289)
Common Units ( $0.0075 per unit)			-			-			-			-			-			-			-			(36)			(36)
Net earnings			-			-			-			-			-			3,672			3,672			27			3,699
Balance at June 30, 2018			925		$	10,050			11,882		$	119		$	231,474		$	(131,739)		$	109,904		$	1,449		$	111,353







		Six months ended June 30, 2019
		Shares of Preferred stock			Preferred stock			Shares of Common stock			Common stock			Additional paid-in capital			Accumulated deficit			Total Shareholders' equity			Noncontrolling interest			Total equity
Balance at December 31, 2018			925		$	10,050			11,886		$	119		$	231,805		$	(134,970)		$	107,004		$	848		$	107,852
Stock-based compensation			-			-			25			-			594			-			594			-			594
Dividends and distributions declared
Common Stock ( $0.39 per share)			-			-			-			-			-			(4,647)			(4,647)			-			(4,647)
Series E Preferred Stock			-			-			-			-			-			(289)			(289)			-			(289)
Common Units ( $0.0075 per unit)			-			-			-			-			-			-			-			(22)			(22)
Redemption of common units			-			-			-			-			6			-			6			(48)			(42)
Net loss			-			-			-			-			-			(1,248)			(1,248)			(7)			(1,255)
Balance at June 30, 2019			925		$	10,050			11,911		$	119		$	232,405		$	(141,154)		$	101,420		$	771		$	102,191



See accompanying notes to consolidated financial statements .

 

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See accompanying notes to consolidated financial statements .



 

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NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of Business



Condor Hospitality Trust, Inc. (“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 June 30 ,   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 June 30 , 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

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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.



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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. 



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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:







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.



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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 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.



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

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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 June 30 , 2019 and December 31, 2018 :




	As of
		June 30, 2019			December 31, 2018
		Total			Held for sale			Held for use			Total
Land		$	20,201		$	2,304		$	20,200		$	22,504
Buildings, improvements, vehicle			206,931			4,462			206,821			211,283
Furniture and equipment			21,531			719			20,554			21,273
Initial franchise fees			1,784			25			1,784			1,809
Construction-in-progress			175			7			323			330
Right of use asset			251			-			-			-
Investment in hotel properties			250,873			7,517			249,682			257,199
Less accumulated depreciation			(24,181)			(3,425)			(19,504)			(22,929)
Investment in hotel properties, net		$	226,692		$	4,092		$	230,178		$	234,270




On January 1, 2019, the Company adopted ASU 842,  Leases,  and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently on January 1, 2019, the Company recognized right-of-use assets and related liabilities related to its operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used in cremental borrowing rates, with a weighted average rate of 5.2 0 % at June 30 , 2019.  The right-of-use assets and liabilities are amortized to rent expense, included in either Hotel and

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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 3.8 years at June 30 , 2019.



As of  June 30 , 2019, the Company's right-of-use assets , net of  $ 251 are included in Investment in hotel p roperties , net and its related lease liabilities of  $ 257  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 consolidated statements of operations.







NOTE 3.  ACQUISITION OF HOTEL PROPERTIES



During the six months ended   June 30 , 2018 , the Company acquired two wholly owned hotel properties , each of which was acquired in the first quarter of 2018 .  The allocation of the purch ase price based on fair value was as follows:  







I ncluded in the consolidated statement s of operation s for the three and six   months en ded June 30 , 2018 are total revenues of $2, 161 and $3 , 574 , respectively, and total operating income of $ 639 and $1,167 , respectively,   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.





 

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   June 30 , 2019 and has a current interest rate of 7 . 44 % .   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   $ 96 and   $ 9 3   for   the three months ended June 30 , 2019 and 2018 , respectively , and $ 212 and $191 for the six months ended June 30, 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 $ 653   and $ 600   in the three months ended June 30 , 2019 and 2018 , respectively , and $ 853 and $960 in the six months ended June 30, 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 June 30 , 2019 and December 31, 2018 :

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The table below provides the c omponents of net earnings ,   including the Company’s share of the Atlanta JV , for the three and six months ended   June 30 ,   2019 and 2018 .















NOTE 5.     DISPOSITIONS OF HOTEL PROPER TIES



As of June 30 , 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 June 30 , 2019 , the Company sold no hotels.  During the three months ended June 30, 2018 , the Company sold one hotel resulting in a total gain of $ 1,947 .     During the six months ended June 30, 2019 and 2018 , the Company sold one hotel and three hotels, respectively, resulting in total gains of $62 and $ 1,984 ,   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. 







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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 June 30 , 2019 and December 31, 2018 :



(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 $ 9,020 at June 30 , 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) .  30-day LIBOR for $30,000 notional capped at 3.35% after giving effect to market rate cap (see Note 8).

(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.  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:







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Financial Covenants



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



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 June 30 , 2019 , we are not in default of any of our loan s.



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 earnings each reporting period. Gains (losses) related to this Note were recognized totaling ( $ 24 ) and ( $ 1 ) duri ng the three months ended June 30 , 201 9 and 2018 , respectively , and totaling ( $ 72 ) and $ 19 during the six months ended

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June 30, 2019 and 2018, respectively .  The fair value of the Note is determined using a trinomial lattice -based model, which is a generally accepted computational model typically used for pricing options. The fair value of the Note on the date of issuance was determined to be equal to its principal amount. Interest expense related to this Note is recorded separately from other changes in its fair value within interest expense each period .



The following table represent s the difference between the fair value and the unpaid principal balance of the Note as of June 30 , 2019 :









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 June 30 , 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 and six   months ended   June 30 , 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 June 30 , 2019 and /or December 31, 2018 are as follows:





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  

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(losses)   of ( $ 432 ) and $ 15 7 for the th ree months ended June 30 , 2019 and 2018 , respectively , and ( $ 621 ) and $584 for the six months ended June 30, 2019, 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   or six months   ended June 30 , 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:





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 six   months ended June 30 , 2018 is shown in the table below:













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 or six months ended June 30 , 2019.  During the three months and six months ended  June 30 , 2018, we sold  16, 140 and 28,474  shares , respectively, of common stock under the ATM program at an average sales price of  $10.40   per share in both periods for gross proceeds totaling  $1 6 8 and $296 , r espectively,  and net proceeds totaling $ 15 4 and $257 , respectively.  Since the

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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.



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 June 30 , 2019   and   December 31, 2018 .   At June 30 , 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 $ 52 7   and $ 435 at June 30 , 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

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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. 



No common units were redeemed during the three months ended June 30, 2019.  During t he six months ended June 30 , 2019,  2 5 9,685  common units were redeemed for cash totaling $42 .  No common units were redeemed during the three or six months ended June 30 , 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 shareholders .  As of June 30 , 2019 , there were   557 , 606 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 six months ended June 30 , 2019 and 2018 :







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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 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.    

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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 3,693 and 3,090 shares were issued during the three months ended June 30 , 2019 and 2018, respectively, and 8,102 and 6,012 were issued during the six months ended June 30, 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 June 30 , 2019 and 2018 was $ 424 and $ 263 , respectively ,   and for the six months ended June 30, 2019 and 2018 was $760 and $665 , respectively, all of which is included in general and administrative expense. Total unrecognized compensation cost related to all awards at June 30 , 2019 was $ 709 , which is expected to be recognized over a weighted-average remaining service period of 2. 7 years.

 

NOTE 13.  INCOME TAXES



During the three   months ended June 30 , 2019 and 2018 , income tax expense totaling $ 4 61 and $ 54 , respectively, was recognized primarily related to income earned by the TRS.  During the six months ended June 30, 2019 and 2018, income tax expense totaled $ 647 and $ 183 , respectively.  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 June 30 , 2019 as determined for federal income tax purposes was $3, 208 .     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.



NOTE 14 .     EARNINGS PER SHARE



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









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 June 30 , 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   $ 47 2   and $ 524 ,   respectively, for the three months ended June 30 , 2019 and 2018 , and $946 and $ 1,019 , respectively, for the six months ended June 30, 2019 and 2018,   all of which was included as hotel an d property operations expense. Incentive management fees totaled $ 33 and $ 116 , respectively, for the three months ended June 30 , 201 9 and 201 8, and $ 77 and $181 , respectively, for the six months ended June 30, 2019 and 2018.



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

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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 June 30 , 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 $ 1,2 46 and $ 1, 2 95   for the three months ended June 30 , 2019 and 2018 , respectively ,   and $2,473 and $2,517 for the six months ended June 30, 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 June 30 , 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 June 30 , 2019 and 2018 ,   and $78 in both the six months ended June 30, 2019 and 2018, and is included in gen eral and administrative expense.  The Company also has in place operating leases for miscellaneous equipment at its hotel properties.



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





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.

 

NOTE 1 6 .  SUBSEQUENT EVENTS



Agreement and Plan of Merger



On July 19, 2019, the Company, the operating partnership ,   NHT Operating Partnership, LLC (“Parent”), NHT REIT Merger Sub, LLC (“Merger Sub”) and NHT Operating Partnership II, LLC (“Merger OP , ” and together with Parent and Merger Sub, the “Parent Parties” ), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger O P will merge with and into the operating p artnership (the “Partnership Merger”), and, Merger Sub will merge with and into the Company (the “Company Merger” and, together with the Partnership Merger, the “Mergers”). Upon completion of the Partnership Merger, Merger OP will survive and the separate existence of the o p erating p artnership will cease. Upon completion of the Company Merger, the Company will survive and the separate existence of Merger Sub will cease. The Mergers and the other transactions contemplated by the Merger Agreement were unanimously approved by the Company’s Board of Directors (the “Company Board”).    



Pursuant to the terms and conditions in the Merger Agreement, upon completion of the Company Merger , each share of the Company’s common stock  ( other than treasury shares and shares held by the Parent Parties, which will be cancelled and retired and will cease to exist with no considerati on being delivered in exchange therefor) , par value $0.01 per share (the “Company common stock”) ,   will be conv erted into the right to receive $11.10 per share in cash, and each share of Series E Preferred Stock   will be converted into the right to receive $10.00   in cash, each without interest and less any applicable withholding taxes.  Upon completion of the Partnership Merger, each comm on unit of partnership interest in the operating partnership (excluding operating partnership common units held by the general partner of the operating partnership) will be converted into the right to receive $0.21346 in cash , witho ut interest and less any applicable withholding taxes.



Pursuant to the terms and cond itions of the Merger Agreement , each of the outstanding awards granted pursuant to the Company’s equity incentive plans will automatically become fully vested and all restrictions thereon will laps e, and thereafter, all Company c ommon stock represented thereby will be considered outstanding for all purposes under the Merger Agreement and will only have the right to receive an amount equal to $11.10 in cash, without interest and less any applicable withholding taxes.



Pursuant to the terms of the Merger Agreement, the Company has agreed to exercise its right to acquire the remaining 20% equity interest of the Atlanta JV that it does not own, pursuant to the terms of the Atlanta JV organizational documents, with the purchased financed from the Company’s line of credit under the credit facility.



The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to in all material respects carry on its business in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by Parent, Merger Sub or Merger OP.



The consummation of the Mergers is subject to certain customary closing conditions, including, among others, adoption and approval of the Merger Agreement , as it may be amended from time to time, and the transactions

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Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, e xcept share and per share data)

 

contemplated by the Merger Agreement, including, without limitation, the Company Merger (collectively, the “Merger Proposal”) by the affirmative vote of (1) a majority of the votes en titled to be cast by the holders of the Company common stock, and (2) the holders of 75% of the outstanding Series E preferred stock, voting as separate classes (the “Company Shareholder Approval”). The Merger Agreement requires the Company to convene a shareholders’ meeting for purposes of obtaining the Company Shareholder Approval.



The Merger Agreement restricts the Company’s ability to solicit other acquisition proposals (as defined in the Merger Agreement), or to provide information to or engage in discussions with third parties regarding other acquisition proposals. Subject to certain conditions, the Company board of directors is permitted to change its recommendation with respect to the Merger Proposal in response to a superior proposal (as defined in the Merger Agreement) and, upon payment of a $9,540 termination fee, the Company is permitted to terminate the Merger Agreement and enter into an agreement with respect to a superior proposal; provided such superior proposal must occur no later than August 18, 2019.



Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termina tion fee to Parent of $9,540 . In certain other circumstances, Parent will be required to pay the Company a termination fee of $11,925 upon termination of the Merger Agreement.



The closing of the Mergers may not occur prior to October 1, 2019 without the consent of the parties.  If the Company notifies Parent that it is prepared to close and all conditions to Parent’s obligations to close are met, then Parent, at its option, may extend the closing time for a 30-day period (or such shorter period so as not to extend beyond December 31, 2019), provided, that no Parent Party is then in breach of the merger agreement in any material respect.  Parent may exercise an extension up to three times during the term of the Merger Agreement.



During the term of the Merger Agreement, the Company may not pay cash dividends to holders of the Company common stock or the Series E Preferred Stock, except the Company is permitted to declare and pay a dividend to shareholders during the month in which an extension option for the closing of the transactions contemplated by the Merger Agreement is exercised by the Parent, subject to limitations as set forth in the Merger Agreement and the disclosure schedule delivered therewith on amount and our prior month adjusted funds from operations.  The holders of the Series E Preferred Stock have agreed to waive accrual of any unpaid dividends between signing and closing.



Aloft Atlanta JV Refinancing



On August 9, 2019, the operating partnership and the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, closed on a $34,080 term loan pursuant to a term loan agreement with KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Agent for the L enders (the “New Term Loan ”).



The proceeds of the New Term L oan were used to repay $33,750 of indebtedness outstanding under a term loan agreement dated August 22, 2016 between the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, and LoanCore Capital Credit REIT LLC, as Lender, which indebtedness was secured by the Aloft Atlanta hotel.  In connection with the repayment of this term loan on August 9, 2019, the term loan agreement and related loan documents were terminated.



The New Term L oan matures upon the earlier to occur of (a) consummation of the merger under the Merger Agreement and (b) February 9, 2020 .  The New Term L oan bears interest, at the Borrower’s option, at either LIBOR plus 2.25%  o r a base rate plus 1.25% .  The New Term L oan requires monthly interest payments and principal is due on the maturity date.  The Borrowers may, at an y time, voluntarily prepay the New Term L oan in whole or in part without premium or penalty (other than customary LIBOR breakage costs). 



The New Term L oan is secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts and general intangibles.  The New Term L oan is guaranteed by the Company and certain of its subsidiaries.