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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 T NO £

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required 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 T 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 definitions of “large accelerated file,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.

Large accelerated filer  £	Accelerated filer £
Non-accelerated filer  T	Small reporting company  T
	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 T

As of October 29, 2021, there were 14,722,527 shares of common stock, par value $0.01 per share, outstanding.

 

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PART I. FINANCIAL INFORMATION

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

   

See accompanying notes to consolidated financial statements.

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Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited - In thousands, except per share data)

 

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Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands, except per share amounts)

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)

See accompanying notes to consolidated financial statements.

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Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited – In thousands)

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. (“Condor”), 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 September 30, 2021, the Company owned 15 hotels in eight states. 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, through its wholly owned subsidiary Condor Hospitality REIT Trust, owns a controlling interest in Condor Hospitality Limited 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 September 30, 2021, the Company owned 99.9% 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 contractors 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.

Hotel Purchase and Sale Agreement

On June 21, 2021, the Company announced that its board of directors is evaluating strategic alternatives to enhance shareholder value. On September 23, 2021, the Company announced that the Company and B9 Cowboy Mezz A LLC, a Delaware limited liability company and affiliate of Blackstone Real Estate Partners (the “Buyer”), entered into a Hotel Purchase and Sale Agreement (the “Purchase Agreement”). The Purchase Agreement provides that, upon the terms and subject to the conditions set forth therein, the Buyer will acquire Company’s portfolio of 15 hotels (the “Portfolio”) for a cash purchase price of $305,000 (the “Portfolio Sale”). The Portfolio Sale and the other transactions contemplated by the Purchase Agreement were unanimously approved by the Company’s board of directors. The Buyer deposited $15,000 of the purchase price in escrow (the “Deposit”) within one business day of signing the Purchase Agreement.

The consummation of the Portfolio Sale is subject to certain customary closing conditions, including, among others, approval of the Portfolio Sale (the “Portfolio Sale Proposal”) by the affirmative vote of the holders of at least 50% of the outstanding shares of Company common stock entitled to vote on the matter (the “Company Shareholder Approval”). The Purchase Agreement requires the Company to convene a shareholders’ meeting (the “Shareholder Meeting”) for purposes of obtaining the Company Shareholder Approval. The Company has scheduled the Shareholder Meeting for November 12, 2021.

The Purchase Agreement may be terminated under certain circumstances by the Company, including prior to obtaining the Company Shareholder Approval and after following certain procedures and adhering to certain restrictions, if the Company concurrently enters into a definitive agreement providing for the implementation of a Superior Proposal and pays a termination fee to the Buyer as described below. Upon a termination of the Purchase Agreement, under certain circumstances, the Company will be required to pay a termination fee to the Buyer of

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$5,000. In certain other circumstances, the Company may terminate the Purchase Agreement and receive the Deposit from escrow.

Plan of Liquidation

On September 20, 2021 the Company Board unanimously approved a plan of complete liquidation and dissolution (the “Plan of Liquidation”) pursuant to which the Company would be liquidated and dissolved, subject to approval of the Plan of Liquidation (the “Liquidation Proposal”), including the liquidation and dissolution of the Company pursuant thereto, by the Company’s shareholders at the Shareholder Meeting. Shareholder approval of the Plan of Liquidation gives to the Company Board the power to direct the sale of (or, in certain cases, otherwise dispose of) all of the Company assets on such terms and in such manner as determined by the Company Board in its discretion. The Company will not be required to obtain any further shareholder approval with respect to specific terms of any particular sales or other dispositions of assets approved by the Company Board.

The Company anticipates making a distribution of a portion of the net proceeds of the Portfolio Sale and certain of its other cash on hand after the consummation and, depending on the timing of, the Portfolio Sale and expects the final liquidating distribution, if any, to be made on or before a date that is within 24 months after shareholder approval of the Plan of Liquidation.

The Company estimates that if the Plan of Liquidation is approved by shareholders and if it is able to successfully implement the Portfolio Sale and the Plan of Liquidation, then after the sale of all or substantially all of the Company’s assets and the payment of all of the Company’s outstanding liabilities, the Company will have total distributions to shareholders of approximately $7.35 to $7.85 per share of Company Common Shares. These estimates are based upon market, economic, financial and other circumstances and conditions existing as of the date of this report, and any changes in such circumstances and conditions during the period under which the Company implements the Plan of Liquidation could have a material effect on the ultimate amount of proceeds received by shareholders.

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 concluded 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 those 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 the year ending December 31, 2021 or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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Estimates, Risks, and Uncertainties

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as revenue and expenses recognized during the reporting period. Actual results could differ from those estimates. Because the state of the economy and the real estate market can significantly impact hotel operating performance and the estimated fair value of our assets, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change.

The novel coronavirus (COVID-19) has reduced travel significantly and adversely affected the hospitality industry in general. The actual and threatened spread of COVID-19 globally or in the regions in which we operate, or future widespread outbreak of infectious or contagious disease, can continue to reduce national and international travel in general. The extent to which the hospitality industry, and thus our business, will be affected by COVID-19 will largely depend on future developments which we cannot accurately predict, and the impact on customer travel, including the duration of the outbreak, the continued spread and treatment of COVID-19, the impact of new virus variants, the pace of vaccination, and new information and developments that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. To the extent that travel activity in the U.S. is and will be materially and adversely affected by COVID-19, business and financial results of the hospitality industry, and thus our business and financial results, could be impacted.

Since late March 2020, similar to the conditions affecting the hospitality industry as a whole, we have experienced occupancy declines at many of our properties which have and will continue to require us to adjust our business operations and will have had and will continue to have an impact on our operating income and may potentially impact future compliance with our debt covenants.

As a result of the above factors, the Company is and has taken actions at the corporate and hotel level, including, but not limited to:

Obtaining significant modifications of its debt agreements, including extension of the Key Bank credit facility (the “credit facility”) to January 2, 2023 with an increase in credit availability and modifications and waivers of debt covenants, from the majority of the Company’s lenders.

Asset management working with hotel management companies to reduce all hotels operating expenses including, but not limited to, closing off multiple floors, staffing reductions and furloughs, utility consumption reductions, purchasing reductions and eliminations, contract services reductions and eliminations, food services closures, exercise facilities closures, and certain reduction and elimination of certain marketing expenditures.

Seeking potential alternative revenue sources through health care providers, government agencies, universities and airlines.

Obtaining Paycheck Protection Program (“PPP”) loans authorized under the congressionally approved Coronavirus Aid, Relief, and Economic Security (“CARES”) Act totaling $2,299 (see Note 6), all of which was forgiven by the Small Business Administration (“SBA”) during the second quarter of 2021.

Pursuing corporate cost reductions, including staffing reductions, resulting in an approximately 30% decrease in general and administrative expenses compared to historical operations.

Capital improvement projects have been suspended except for emergency circumstances and will remain on hold for immediate future, with the potential for the suspension to continue through 2021.

The Company determined that it was advisable and the best business practice to cause a temporary closure of two of its hotels, the Solomons Hilton Garden Inn on April 20, 2020 and the Leawood Aloft on April 9, 2020. These hotels were both reopened on July 1, 2020 and no other hotel closures have been deemed necessary.

We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on the hospitality industry, and thus on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic. While we cannot assure you that the assumptions used to estimate our future liquidity will be correct, the Company believes it can generate the liquidity required to operate through the crisis through a combination of the continued operation of our portfolio with

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significant cost reduction measures in place, existing availability under our credit facility, and, if necessary, additional debt and equity financings. However, there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all.

The Company’s loans with Great Western Bank (financing the Leawood, Kansas Aloft) were purchased by OSK X, LLC, an equity fund affiliate of O’Brien Staley Partners, on December 24, 2020 (see Note 6). The Company did not satisfy the financial covenants for these loans as of September 30, 2021, June 30, 2021, March 31, 2021, or December 31, 2020, as was the case for the first three quarters of 2020. The Company has been advised by OSK X, LLC that it is in default for failure to comply with the financial covenants as of December 31, 2020 (unlike Great Western Bank that waived the covenants for the first three quarters of 2020). Under the loan documents with OSK X, LLC, (a) the 90-day cure period (ended on May 27, 2021) within which the Company could cure the defaults has expired, (b) default interest at the rate of 8.33% began to accrue on May 27, 2021 and (c) OSK X, LLC is entitled to accelerate the loans and foreclose on the Leawood, Kansas Aloft. However, the Company believes that there are serious questions under applicable law about whether OSK X, LLC has the ability to declare a default, assess interest at the default rate, accelerate the loans or foreclose on the Leawood, Kansas Aloft due to the impossibility of performance of financial covenants during the COVID-19 pandemic. The Company intends to seek any available damages in the event of litigation that may result from the actions of OSK X, LLC.

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. The above-described defaults under our loan agreement with OSK X, LLC resulted in a cross-default under our credit facility as of May 27, 2021. Pursuant to the terms of the tenth amendment to the credit facility (see Note 6), the lenders will not declare a default, accelerate our indebtedness or otherwise take enforcement action on or before November 1, 2021 (which was extended to November 30, 2021 on October 15, 2021) as a result of the cross-default that occurred as of May 27, 2021 due to the above-described defaults under our loan agreement with OSK X, LLC, subject to the continuing satisfaction of certain conditions, including no breach or default of certain agreements, active pursuit of good faith defenses, the absence of certain legal proceedings or bankruptcy events and the maintenance of $6,000 of liquidity.

Based on a the current status of the OSK X, LLC loans and the guidance in U.S. GAAP that requires that, in making a determination for the one year period following the date of the financial statements, the Company cannot consider future fundraising activities or the likelihood of obtaining covenant waivers or amendments, all of which are outside of the Company's sole control, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for the one year period after the date the financial statements are issued. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

In the event the Portfolio Sale occurs, the Company intends to use the proceeds to pay its liabilities, including the amounts owed under its debt agreements.

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. We concluded that the Company’s purchase of the remaining 20% of the joint venture that owns the Atlanta Aloft property (the “Atlanta