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Section 1: 10-Q (10-Q)

20160930_10Q

  23 

 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q

 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2016



OR

 

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ______ to ______.

 



Commission file number: 001-34087

 

CONDOR HOSPITALITY TRUST, INC.



(Exact name of registrant as specified in its charter)

 

Maryland

(State or other jurisdiction of

incorporation or organization)

 

52-1889548

(IRS Employer

Identification Number)



4800 Montgomery Lane Ste. 220, Bethesda, MD 20814

(Address of principal executive offices)

 

Telephone number: (402) 371-2520

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES      NO 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES      NO 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.



 

Large accelerated filer 

Accelerated filer 



 

Non-accelerated filer  (Do not check if a smaller reporting company)

Small reporting company 



Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).YES    NO



As of October 31, 2016 there were 4,956,835 shares of common stock, par value $.01 per share, outstanding.







 

 

 

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Table of Contents

 







 

 

 



 

 

Page

Number



 

 

 

Part I.

FINANCIAL INFORMATION

 



 

 

 

Item 1.

Financial Statements

 



 

 

 



Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

3



 

 



Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2015

4



 

 



Consolidated Statements of Equity for the Nine Months ended September 30, 2016 and 2015

5



 

 



Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015

6



 

 

 



Notes to Consolidated Financial Statements

7



 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

32



 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51



 

 

Item 4.

Controls and Procedures

51



 

 

Part II.

OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

52



 

 

Item 1A.

Risk Factors

52



 

 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52



 

 



Item 3.

Defaults Upon Senior Securities

52



 

 



Item 4.

Mine Safety Disclosures

52



 

 



Item 5.

Other Information

52



 

 

Item 6.

Exhibits

53







 

 

 


 

PART I.  FINANCIAL INFORMATION

 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited - In thousands, except share and per share data)





 



   



 

 

 

 

 

 



 

 

As of



 

September 30,

 

December 31,



 

2016

 

2015



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in hotel properties, net

 

$

92,034 

 

$

93,794 

Investment in unconsolidated joint venture

 

 

9,226 

 

 

 -

Cash and cash equivalents

 

 

11,355 

 

 

4,870 

Restricted cash, property escrows

 

 

3,490 

 

 

3,776 

Accounts receivable, net of allowance for doubtful accounts of $11 and $10

 

 

1,297 

 

 

1,169 

Prepaid expenses and other assets

 

 

2,473 

 

 

1,832 

Investment in hotel properties held for sale, net

 

 

19,089 

 

 

36,905 

Total Assets

 

$

138,964 

 

$

142,346 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

6,796 

 

$

5,419 

Derivative liabilities, at fair value

 

 

190 

 

 

8,759 

Convertible debt, at fair value

 

 

1,236 

 

 

 -

Long-term debt, net of deferred financing costs

 

 

52,683 

 

 

55,776 

Long-term debt related to hotel properties held for sale, net of deferred financing costs

 

 

10,900 

 

 

30,235 

Total Liabilities

 

 

71,805 

 

 

100,189 



 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $10,182 at December 31, 2015

 

 

 -

 

 

7,662 



 

 

 

 

 

 

Equity

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Preferred stock,  40,000,000 shares authorized:

 

 

 

 

 

 

8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $9,485 at December 31, 2015

 

 

 -

 

 

6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $34,492 at December 31, 2015

 

 

 -

 

 

30 

6.25% Series D, 6,700,000 shares authorized, $.01 par value, 6,245,156 shares outstanding, liquidation preference of $62,452 at September 30, 2016

 

 

61,335 

 

 

 -

Common stock, $.01 par value, 200,000,000 shares authorized; 4,952,190 and 4,941,878 shares outstanding

 

 

49 

 

 

49 

Additional paid-in capital

 

 

118,580 

 

 

138,387 

Accumulated deficit

 

 

(115,440)

 

 

(105,858)

Total Shareholders' Equity

 

 

64,524 

 

 

32,616 

Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $1,819 and $1,197

 

 

2,635 

 

 

1,879 

Total Equity

 

 

67,159 

 

 

34,495 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

138,964 

 

$

142,346 

 



See accompanying notes to consolidated financial statements.



 

3

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited - In thousands, except per share data)

 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended September 30,

 

Nine months ended September 30,



 

2016

 

2015

 

2016

 

2015

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Room rentals and other hotel services

 

$

13,519 

 

$

15,895 

 

$

40,177 

 

$

45,320 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Hotel and property operations

 

 

9,452 

 

 

11,076 

 

 

29,052 

 

 

32,971 

Depreciation and amortization

 

 

1,398 

 

 

1,099 

 

 

4,096 

 

 

3,836 

General and administrative

 

 

1,367 

 

 

1,451 

 

 

4,092 

 

 

4,183 

Acquisition and terminated transactions

 

 

228 

 

 

177 

 

 

375 

 

 

194 

Terminated equity transactions

 

 

 -

 

 

180 

 

 

 -

 

 

180 

Total operating expenses

 

 

12,445 

 

 

13,983 

 

 

37,615 

 

 

41,364 

Operating income

 

 

1,074 

 

 

1,912 

 

 

2,562 

 

 

3,956 

Net gain on disposition of assets

 

 

3,591 

 

 

2,927 

 

 

15,814 

 

 

2,801 

Equity in loss of joint venture

 

 

(54)

 

 

-

 

 

(54)

 

 

-

Net gain on derivatives and convertible debt

 

 

26 

 

 

7,895 

 

 

6,305 

 

 

8,008 

Other income (expense)

 

 

85 

 

 

(4)

 

 

87 

 

 

122 

Interest expense

 

 

(1,127)

 

 

(1,137)

 

 

(3,704)

 

 

(4,194)

Loss on debt extinguishment

 

 

(399)

 

 

(104)

 

 

(1,548)

 

 

(111)

Impairment recovery (loss)

 

 

(343)

 

 

313 

 

 

(1,257)

 

 

(3,517)

Earnings from continuing operations before income taxes

 

 

2,853 

 

 

11,802 

 

 

18,205 

 

 

7,065 

Income tax expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Earnings from continuing operations

 

 

2,853 

 

 

11,802 

 

 

18,205 

 

 

7,065 

Gain from discontinued operations, net of tax

 

 

 -

 

 

152 

 

 

678 

 

 

2,440 

Net earnings

 

 

2,853 

 

 

11,954 

 

 

18,883 

 

 

9,505 

Earnings attributable to noncontrolling interest

 

 

(61)

 

 

(724)

 

 

(628)

 

 

(721)

Net earnings attributable to controlling interests

 

 

2,792 

 

 

11,230 

 

 

18,255 

 

 

8,784 

Dividends declared and undeclared and in kind dividends deemed on preferred stock

 

 

(976)

 

 

(914)

 

 

(19,773)

 

 

(2,707)

Net earnings (loss) attributable to common shareholders

 

$

1,816 

 

$

10,316 

 

$

(1,518)

 

$

6,077 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Basic

 

$

0.37 

 

$

2.06 

 

$

(0.44)

 

$

0.79 

Discontinued operations - Basic

 

 

 -

 

 

0.03 

 

 

0.13 

 

 

0.46 

Total - Basic Earnings per Share

 

$

0.37 

 

$

2.09 

 

$

(0.31)

 

$

1.25 



 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations - Diluted

 

$

0.06 

 

$

0.12 

 

$

(0.44)

 

$

(0.11)

Discontinued operations - Diluted

 

 

 -

 

 

0.01 

 

 

0.13 

 

 

0.09 

Total - Diluted Earnings per Share

 

$

0.06 

 

$

0.13 

 

$

(0.31)

 

$

(0.02)



 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 













 

4

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands)

 





   





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2015



 

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, 2014

 

 

3,803 

 

$

38 

 

 

4,693 

 

$

47 

 

$

137,900 

 

$

(118,983)

 

$

19,002 

 

$

90 

 

$

19,092 

Stock-based compensation

 

 

 -

 

 

 -

 

 

11 

 

 

 -

 

 

103 

 

 

 -

 

 

103 

 

 

 -

 

 

103 

Long-term incentive plan

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

99 

 

 

99 

Issuance of common stock

 

 

 -

 

 

 -

 

 

228 

 

 

 

 

344 

 

 

 -

 

 

346 

 

 

-

 

 

346 

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,784 

 

 

8,784 

 

 

721 

 

 

9,505 

Balance at September 30, 2015

 

 

3,803 

 

$

38 

 

 

4,932 

 

$

49 

 

$

138,347 

 

$

(110,199)

 

$

28,235 

 

$

910 

 

$

29,145 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2016



 

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, 2015

 

 

3,803 

 

$

38 

 

 

4,942 

 

$

49 

 

$

138,387 

 

$

(105,858)

 

$

32,616 

 

$

1,879 

 

$

34,495 

Stock-based compensation

 

 

 -

 

 

 -

 

 

10 

 

 

 -

 

 

100 

 

 

 -

 

 

100 

 

 

 -

 

 

100 

Long-term incentive plan

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

128 

 

 

128 

Common stock dividends declared ($0.04 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(198)

 

 

(198)

 

 

 -

 

 

(198)

Series D Preferred dividends declared

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,115)

 

 

(2,115)

 

 

 -

 

 

(2,115)

Redemption of Series A and B Preferred Stock

 

 

(803)

 

 

(8)

 

 

 -

 

 

 -

 

 

(7,390)

 

 

(5,107)

 

 

(12,505)

 

 

 -

 

 

(12,505)

Exchange of Series C Preferred and issuance of Series D Preferred Stock

 

 

3,245 

 

 

61,305 

 

 

 -

 

 

 -

 

 

(12,517)

 

 

(20,417)

 

 

28,371 

 

 

 -

 

 

28,371 

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,255 

 

 

18,255 

 

 

628 

 

 

18,883 

Balance at September 30, 2016

 

 

6,245 

 

$

61,335 

 

 

4,952 

 

$

49 

 

$

118,580 

 

$

(115,440)

 

$

64,524 

 

$

2,635 

 

$

67,159 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to consolidated financial statements.

 

5

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 









 

 

 

 

 

 



 

Nine months ended September 30,



 

 

2016

 

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

18,883 

 

$

9,505 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 -

Depreciation and amortization expense

 

 

4,096 

 

 

3,836 

Net gain on disposition of assets

 

 

(16,495)

 

 

(4,466)

Net gain on derivatives and convertible debt

 

 

(6,305)

 

 

(8,008)

Equity in loss of joint venture

 

 

54 

 

 

 -

Amortization of deferred financing costs

 

 

492 

 

 

600 

Loss on extinguishment of debt

 

 

1,548 

 

 

111 

Impairment loss

 

 

1,257 

 

 

3,397 

Stock-based compensation and long term incentive plan expense

 

 

228 

 

 

202 

Amortization of warrant issuance cost

 

 

12 

 

 

43 

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in assets

 

 

(687)

 

 

16 

Increase in liabilities

 

 

1,038 

 

 

887 

Net cash provided by operating activities

 

 

4,121 

 

 

6,123 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to hotel properties

 

 

(2,784)

 

 

(2,912)

Investment in joint venture

 

 

(9,280)

 

 

 -

Deposits for franchise fees and hotel acquisitions

 

 

(288)

 

 

(370)

Proceeds from sale of hotel assets

 

 

33,374 

 

 

39,828 

Net changes in capital expenditure escrows

 

 

709 

 

 

(206)

Net cash provided by investing activities

 

 

21,731 

 

 

36,340 



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Deferred financing costs

 

 

(29)

 

 

(512)

Principal payments on long-term debt

 

 

(23,026)

 

 

(30,854)

Proceeds from long-term debt

 

 

 -

 

 

8,300 

Payments on revolving debt

 

 

(10,238)

 

 

(30,796)

Proceeds from revolving debt

 

 

10,131 

 

 

25,803 

Debt early extinguishment penalties

 

 

(1,268)

 

 

 -

Series D Preferred Stock issuance

 

 

28,884 

 

 

 -

Series A and B Preferred Stock redemption, including accumulated dividends

 

 

(20,167)

 

 

 -

Cash dividends paid to common shareholders

 

 

(49)

 

 

 -

Cash dividends paid to Series C and D Preferred shareholders

 

 

(3,598)

 

 

 -

Proceeds from common stock issued in rights offering

 

 

 -

 

 

346 

Other items

 

 

(7)

 

 

 -

Net cash used in financing activities

 

 

(19,367)

 

 

(27,713)



 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

6,485 

 

 

14,750 

Cash and cash equivalents, beginning of period

 

 

4,870 

 

 

173 

Cash and cash equivalents, end of period

 

$

11,355 

 

$

14,923 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

3,312 

 

$

3,941 



 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

In kind dividends deemed on preferred stock

 

$

20,218 

 

$

 -



 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 



 

 

 

 

 

 

 



 

6

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 





NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of Business



Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”), which until July 15, 2015 was formerly named Supertel Hospitality, Inc., was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels.  As of September 30, 2016, the Company owned 28 hotels in 14 states, including one hotel owned through an 80% interest in an unconsolidated joint venture (“Atlanta JV”).



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



In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels.  Therefore, CHLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. CHLP, the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements. References to “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.



Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature.  Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually.  The results of the hotels acquired in October 2015 and through our Atlanta JV in August 2016 (see Notes 2 and 3), because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.



Basis of Presentation



The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of CHLP and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 



The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2016 or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.



7

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

Estimates, Risks, and Uncertainties



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



Investment in Joint Venture



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



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



Assets Held for Sale and Discontinued Operations



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



Historically, we have presented the results of operations of hotel properties that have been sold or are considered held for sale as discontinued operations in all periods presented.  In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 changed the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other significant disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results should be presented as discontinued operations subsequent to adoption. The Company adopted this pronouncement on October 1, 2014.  As a result of this adoption, only the operations of hotels meeting the criteria to be considered held for sale prior to October 1, 2014 are included in discontinued operations for all periods presented as no individual hotel disposition represents a strategic shift in operations or has a major effect on our operations or financial results.



Impairment Losses



On a quarterly basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified.  These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel.  If facts or circumstances support the possibility

8

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s fair value.



At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss.  Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required.  If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the decision not to sell.



Income Taxes



The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended.  In general, under such Code provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed to shareholders.  A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the IRS would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.



Taxable income from non-REIT activities managed through the TRS, which is taxed as a C-Corporation, is subject to federal, state, and local income taxes.  We account for the federal income taxes of our TRS using the asset and liability method.  Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled.  However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on the consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible.  In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not (defined as a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.



Fair Value Measurements



Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, to account for hotel acquisitions, and for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:



Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.



Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.



Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.    

9

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 



Our estimates of fair value were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions or valuation techniques may have a material effect on estimated fair value measurements.  We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.



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



Fair Value Option



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



Recently Adopted Accounting Standards



In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity, which clarifies certain of the criteria for determining whether derivative features in a hybrid financial instrument should be separately recognized.  ASU 2014-16 is effective for fiscal years beginning after December 15, 2015 and permits either a retrospective or cumulative effect transition method.  ASU 2014-16 was adopted by the Company on January 1, 2016 and was utilized in determining the accounting for the 6.25% Series D Cumulative Convertible Preferred Stock (“Series D Preferred Stock”) issued in March 2016 (see Note 9).



In February 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance effecting both the VIE and VOE consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The Company adopted this standard on January 1, 2016 and concluded that CHLP now meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company continues to consolidate CHLP. The Company’s sole significant asset is its investment in CHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of CHLP. All of the Company’s debt is an obligation of CHLP.  This ASU was also used in the determination of the accounting for the Atlanta JV entered into in August 2016 (see Note 3).



In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  The Company adopted this standard on January 1, 2016 and presents all debt issuance costs, other than issuance costs related to its revolving credit facility, as a direct deduction from the carrying value of the debt liability. Adoption of this standard was applied retrospectively for all periods presented, effecting only the presentation of the balance sheet. The adoption of this standard did not have a material impact on the Company's financial position and had no impact on the results of operations or cash flows.  For the amounts of the reclassification, see Note 5.



Recently Issued Accounting Standards



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The original updated accounting guidance was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016, however, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017.  As such, the standard will be effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition

10

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

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



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes most existing lease guidance in U.S. GAAP when it becomes effective. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2019, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2020. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.



Reclassifications



Certain amounts in prior year financial statements have been reclassified to conform to current year presentation.



Beginning in the first quarter of 2016, we have revised the classification of cash payments for debt prepayment or extinguishment penalties in our statements of cash flows from where they were previously presented as operating cash flows to financing cash flows.  We have concluded that this classification is preferable as these payments are closely related to other financing cash flows, such as the repayment of debt, and reflect the impact of financing decisions made by management.  This revised policy is also consistent with the ASU 2016-15, Statement of Cash Flows, which was issued in August 2016 and becomes effective for the Company on January 1, 2018.  This revision in classification had the effect of increasing operating cash flows and decreasing financing cash flows by $1,268 and $111 during the nine months ended September 30, 2016 and 2015, respectively.



Liquidity



We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our revolving credit agreement with Great Western Bank, and the release of restricted cash upon the satisfaction of usage requirements.  At September 30, 2016, the Company had $11,355 of cash and cash equivalents on hand and $1,566 of unused availability under its revolving credit agreement.  Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code and as required in connection with our Series D Preferred Stock. We presently expect to invest approximately $4,500 to $6,000 in capital expenditures related to hotel properties we currently own through December 31, 2017.



To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually.  In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws.  We have a general dividend policy of paying out approximately 100% of annual REIT taxable income.  The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.



Our longer-term liquidity requirements consist primarily of the cost of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made related to our hotel properties, and scheduled debt payments, including maturing loans.  Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings and proceeds from public or private issuances of debt or equity securities. 



Prior to the consideration of any asset sales or our ability to refinance debt subsequent to September 30, 2016, contractual principal payments on our debt outstanding, including normal amortization, total $26,939 through

11

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

December 31, 2017, including the February 1, 2017 maturity of one of our Western Alliance Bank (“WAB”) loans with a balance at September 30, 2016 of $10,409, the November 6, 2017 maturity of our Cantor Commercial Real Estate Lending loan with a balance at September 30, 2016 of $5,742, and the December 1, 2017 maturity of our Morgan Stanley Mortgage Capital Holdings, LLC loan with a balance at September 30, 2016 of $9,600.  Prior to these maturities, the Company anticipates refinancing these loans with the existing lenders or another lender. As a result of our improved financial condition and the terms of the lending arrangements we have entered into in recent periods, we believe we will be able to refinance this debt on similar or perhaps more favorable terms, even if interest rates increase as a result of future Federal Reserve actions. However, notwithstanding our perception, we may not be successful in our efforts to refinance or repay our maturing debt.



Additionally, at September 30, 2016, we have 11 hotels held for sale which, if sold, we believe will generate approximately $14,900 in net proceeds after debt repayment.  Since December 1, 2008, we have sold 102 hotels. Although it is management’s plan to use net proceeds after debt repayment from future asset sales to fund future acquisitions, if necessary the Company believes that cash generated from asset dispositions will be sufficient to fund any shortfalls associated with future debt maturities.  However, with respect to future hotel sales, we cannot predict whether we will be able to find buyers for identified assets at prices and other terms acceptable to us, whether potential buyers will be able to secure financings, and the length of time needed to find a buyer and to close the sale of a property.



NOTE 2.  INVESTMENT IN HOTEL PROPERTIES AND ACQUISITION OF HOTEL PROPERTIES



Investments in hotel properties consisted of the following at September 30, 2016 and December 31, 2015:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of



 

September 30, 2016

 

December 31, 2015



 

Held for sale

 

Held for use

 

Total

 

Held for sale

 

Held for use

 

Total

Land

 

$

2,797 

 

$

12,787 

 

$

15,584 

 

$

6,078 

 

$

12,789 

 

$

18,867 

Acquired below market lease intangibles

 

 

 -

 

 

883 

 

 

883 

 

 

 -

 

 

883 

 

 

883 

Buildings, improvements, vehicle

 

 

24,865 

 

 

88,052 

 

 

112,917 

 

 

50,571 

 

 

87,535 

 

 

138,106 

Furniture and equipment

 

 

6,833 

 

 

14,931 

 

 

21,764 

 

 

14,656 

 

 

15,932 

 

 

30,588 

Construction-in-progress

 

 

46 

 

 

625 

 

 

671 

 

 

171 

 

 

284 

 

 

455 

Investment in hotel properties

 

 

34,541 

 

 

117,278 

 

 

151,819 

 

 

71,476 

 

 

117,423 

 

 

188,899 

Less accumulated depreciation

 

 

(15,452)

 

 

(25,244)

 

 

(40,696)

 

 

(34,571)

 

 

(23,629)

 

 

(58,200)

Investment in hotel properties, net

 

$

19,089 

 

$

92,034 

 

$

111,123 

 

$

36,905 

 

$

93,794 

 

$

130,699 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



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

 

Pro Forma Results



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

12

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

forma financial data is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2014, nor do they purport to represent the results of operations for future periods.









 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30,

 

Nine months ended September 30,



 

2016

 

2015

 

2016

 

2015

Total revenue

 

$

13,519 

 

$

18,775 

 

$

40,177 

 

$

54,007 

Operating income

 

$

1,302 

 

$

2,520 

 

$

2,937 

 

$

5,586 

Net earnings (loss)  attributable to common shareholders

 

$

2,342 

 

$

10,766 

 

$

(215)

 

$

7,481 

Net earnings (loss) per share attributable to common shareholders - Basic

 

$

0.47 

 

$

2.18 

 

$

(0.04)

 

$

1.54 

Net earnings (loss) per share attributable to common shareholders - Diluted

 

$

0.08 

 

$

0.15 

 

$

(0.04)

 

$

0.04 

 

NOTE 3: INVESTMENT IN UNCONSOLIDATED JOINT VENTURE



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



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

Buildings, improvements, and vehicle

 

Furniture and equipment

 

Land option (1)

 

 

Total purchase price

 

 

Debt originated at acquisition

 

Net cash



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,025 

 

$

34,048 

 

$

2,667 

 

$

(6,190)

 

$

43,550 

 

$

33,750 

 

$

9,800 



(1)

The purchase agreement includes a provision which permits the seller to purchase the surface parking lot north of the hotel exercisable for ten years at less than market rates



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



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

13

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

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



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



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







 

 

 



 

As of



 

September 30, 2016

Investment in hotel properties, net

 

$

49,659 

Cash and cash equivalents

 

 

1,377 

Restricted cash, property escrows

 

 

648 

Accounts receivable, prepaid expenses,  and other assets

 

 

462 

Total Assets

 

$

52,146 

Accounts payable, accrued expenses, and other liabilities

 

$

1,318 

Land option liability

 

 

6,190 

Long-term debt, net of deferred financing costs

 

 

33,105 

Total Liabilities

 

 

40,613 

Condor equity

 

 

9,226 

TWC equity

 

 

2,307 

Total Equity

 

 

11,533 

Total Liabilities and Equity

 

$

52,146 



 

 

 





 

 

 



 

For the three and nine months ended September 30, 2016

Revenue

 

 

 

Room rentals and other hotel services

 

$

1,310 

Operating Expenses

 

 

 

Hotel and property operations

 

 

739 

Depreciation and amortization

 

 

118 

Acquisition and terminated transactions

 

 

280 

Total operating expenses

 

$

1,137 

Operating income

 

 

173 

Other expense

 

 

(1)

Interest expense

 

 

(239)

Net loss

 

$

(67)



 

 

 

Condor allocated loss

 

$

(54)

TWC allocated loss

 

 

(13)

Net loss

 

$

(67)



14

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 



NOTE 4: DISPOSITIONS OF HOTEL PROPERTIES AND DISCONTINUED OPERATIONS



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



None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results.  As a result, only hotels classified as held for sale prior to October 1, 2014 (excluding those subsequently reclassified as held for use),  none of which remain unsold at September 30, 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations. For the three months ended September 30, 2016 and 2015, the results of 31 and 47 hotels, respectively, were included in continuing operations and the results of no hotels and two hotels, respectively, were included in discontinued operations.  For the nine months ended September 30, 2016 and 2015, the results of 41 and 47 hotels, respectively, were included in continuing operations and the results of one hotel and nine hotels, respectively, were included in discontinued operations.



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



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



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







 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30,

 

Nine months ended September 30,



 

2016

 

2015

 

2016

 

2015

Revenue

 

$

 -

 

$

526 

 

$

 

$

2,526 

Hotel and property operations expense

 

 

 -

 

 

(341)

 

 

(4)

 

 

(1,679)

Net gain (loss) on disposition of assets

 

 

 -

 

 

(1)

 

 

681 

 

 

1,665 

Interest expense

 

 

 -

 

 

(32)

 

 

(5)

 

 

(192)

Impairment recovery

 

 

 -

 

 

 -

 

 

 -

 

 

120 

Gain from discontinued operations, net of tax

 

$

 -

 

$

152 

 

$

678 

 

$

2,440 



 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

 -

 

$

 -

 

$

 -

 

$

58 

 





15

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited – In thousands, except share and per share data)

 

NOTE 5.  LONG-TERM DEBT



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



Long-term debt relate