Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

20180930 10Q Q3

.

 





 

 

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, 2018



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 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      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 

Small reporting company 



Emerging growth company    



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  YES      NO



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



As of November 9, 2018 there were 11,887,133 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, 2018 and December 31, 2017

3



 

 



Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2018 and 2017

4



 

 



Consolidated Statements of Equity for the Nine  Months ended September 30, 2018 and 2017

5



 

 



Consolidated Statements of Cash Flows for the Nine  Months ended September 30, 2018 and 2017

6



 

 

 



Notes to Consolidated Financial Statements

7



 

 

 

Item 2.

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

30



 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44



 

 

Item 4.

Controls and Procedures

45



 

 

Part II.

OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

45



 

 

Item 1A.

Risk Factors

45



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46



 

 

Item 3.

Defaults Upon Senior Securities

46



 

 

Item 4.

Mine Safety Disclosures

46



 

 

Item 5.

Other Information

46



 

 

Item 6.

Exhibits

46

 



 

2

 


 

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, 2018

 

December 31, 2017



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in hotel properties, net

 

$

232,103 

 

$

201,722 

Investment in unconsolidated joint venture

 

 

6,638 

 

 

7,747 

Cash and cash equivalents

 

 

5,194 

 

 

5,441 

Restricted cash, property escrows

 

 

5,791 

 

 

4,894 

Accounts receivable, net

 

 

2,185 

 

 

1,707 

Prepaid expenses and other assets

 

 

2,502 

 

 

3,220 

Derivative assets, at fair value

 

 

1,090 

 

 

391 

Investment in hotel properties held for sale, net

 

 

4,085 

 

 

17,858 

Total Assets

 

$

259,588 

 

$

242,980 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

7,532 

 

$

7,046 

Dividends and distributions payable

 

 

2,480 

 

 

2,470 

Convertible debt, at fair value

 

 

1,049 

 

 

1,069 

Long-term debt, net of deferred financing costs

 

 

135,690 

 

 

111,097 

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

 

 

1,212 

 

 

9,484 

Total Liabilities

 

 

147,963 

 

 

131,166 



 

 

 

 

 

 

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 $9,395

 

 

10,050 

 

 

10,050 

Common stock, $.01 par value, 200,000,000 shares authorized; 11,883,554 and 11,833,573 shares outstanding

 

 

119 

 

 

118 

Additional paid-in capital

 

 

231,750 

 

 

230,727 

Accumulated deficit

 

 

(131,543)

 

 

(130,489)

Total Shareholders' Equity

 

 

110,376 

 

 

110,406 

Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $824 and $871

 

 

1,249 

 

 

1,408 

Total Equity

 

 

111,625 

 

 

111,814 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

259,588 

 

$

242,980 









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,



 

2018

 

2017

 

2018

 

2017

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Room rentals and other hotel services

 

$

15,462 

 

$

15,562 

 

$

49,975 

 

$

40,175 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Hotel and property operations

 

 

10,148 

 

 

10,269 

 

 

31,318 

 

 

27,106 

Depreciation and amortization

 

 

2,423 

 

 

1,993 

 

 

7,126 

 

 

4,813 

General and administrative

 

 

1,599 

 

 

1,702 

 

 

5,073 

 

 

4,705 

Acquisition and terminated transactions

 

 

96 

 

 

453 

 

 

186 

 

 

1,170 

Equity transactions

 

 

 -

 

 

 -

 

 

 -

 

 

343 

Total operating expenses

 

 

14,266 

 

 

14,417 

 

 

43,703 

 

 

38,137 

Operating income

 

 

1,196 

 

 

1,145 

 

 

6,272 

 

 

2,038 

Net gain (loss) on disposition of assets

 

 

3,716 

 

 

(46)

 

 

5,587 

 

 

4,803 

Equity in earnings (loss) of joint venture

 

 

(41)

 

 

159 

 

 

251 

 

 

295 

Net gain on derivatives and convertible debt

 

 

116 

 

 

14 

 

 

719 

 

 

416 

Other expense, net

 

 

(23)

 

 

(43)

 

 

(57)

 

 

(83)

Interest expense

 

 

(2,154)

 

 

(1,405)

 

 

(6,173)

 

 

(3,468)

Loss on debt extinguishment

 

 

 -

 

 

 -

 

 

 -

 

 

(800)

Impairment (loss) recovery, net

 

 

 -

 

 

(848)

 

 

93 

 

 

(1,598)

Earnings (loss) before income taxes

 

 

2,810 

 

 

(1,024)

 

 

6,692 

 

 

1,603 

Income tax expense

 

 

(132)

 

 

(15)

 

 

(315)

 

 

(50)

Net earnings (loss)

 

 

2,678 

 

 

(1,039)

 

 

6,377 

 

 

1,553 

(Earnings) loss attributable to noncontrolling interest

 

 

(20)

 

 

 

 

(47)

 

 

(10)

Net earnings (loss) attributable to controlling interests

 

 

2,658 

 

 

(1,032)

 

 

6,330 

 

 

1,543 

Dividends declared and in kind dividends deemed on preferred stock

 

 

(145)

 

 

(205)

 

 

(434)

 

 

(12,079)

Net earnings (loss) attributable to common shareholders

 

$

2,513 

 

$

(1,237)

 

$

5,896 

 

$

(10,536)



 

 

 

 

 

 

 

 

 

 

 

 

Earnings(Loss) per Share

 

 

 

 

 

 

 

 

 

 

 

 

Total - Basic Earnings (Loss) per Share

 

$

0.21 

 

$

(0.11)

 

$

0.50 

 

$

(1.21)

Total - Diluted Earnings (Loss) per Share

 

$

0.21 

 

$

(0.11)

 

$

0.49 

 

$

(1.21)



 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.



 



 

4

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited - In thousands, except per share amounts)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 30, 2017



 

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, 2016

 

 

6,245 

 

$

61,333 

 

 

763 

 

$

 

$

118,655 

 

$

(112,024)

 

$

67,972 

 

$

2,827 

 

$

70,799 

Stock-based compensation

 

 

 -

 

 

 -

 

 

90 

 

 

 

 

579 

 

 

 -

 

 

580 

 

 

 -

 

 

580 

Long-term incentive plan

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

85 

 

 

85 

Cancellation of LTIP units

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,941 

 

 

 -

 

 

1,941 

 

 

(1,941)

 

 

 -

Issuance of common stock

 

 

 -

 

 

 -

 

 

4,801 

 

 

47 

 

 

45,893 

 

 

 -

 

 

45,940 

 

 

 -

 

 

45,940 

Issuance of common units

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

435 

 

 

435 

Dividends and distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock ($0.585 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,795)

 

 

(6,795)

 

 

 -

 

 

(6,795)

Series D Preferred Stock

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(650)

 

 

(650)

 

 

 -

 

 

(650)

Series E Preferred Stock

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(339)

 

 

(339)

 

 

 -

 

 

(339)

Fractional common shares settled in reverse stock split

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1)

 

 

 -

 

 

(1)

 

 

 -

 

 

(1)

Conversion of Series D Preferred to common stock and issuance of Series E Preferred

 

 

(5,320)

 

 

(51,283)

 

 

6,005 

 

 

60 

 

 

61,273 

 

 

(11,090)

 

 

(1,040)

 

 

 -

 

 

(1,040)

Warrant exchange

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

289 

 

 

 -

 

 

289 

 

 

 -

 

 

289 

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,543 

 

 

1,543 

 

 

10 

 

 

1,553 

Balance at September 30, 2017

 

 

925 

 

$

10,050 

 

 

11,659 

 

$

116 

 

$

228,629 

 

$

(129,355)

 

$

109,440 

 

$

1,416 

 

$

110,856 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended September 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

 

 

 -

 

 

 -

 

 

22 

 

 

 -

 

 

722 

 

 

 -

 

 

722 

 

 

 -

 

 

722 

Issuance of common stock

 

 

 -

 

 

 -

 

 

28 

 

 

 

 

259 

 

 

 -

 

 

260 

 

 

 -

 

 

260 

Issuance of common units

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

50 

 

 

50 

Dividends and distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock ($0.585 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,950)

 

 

(6,950)

 

 

 -

 

 

(6,950)

Series E Preferred dividends declared

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(434)

 

 

(434)

 

 

 -

 

 

(434)

Common unit distribution declared ($0.011 per unit)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(54)

 

 

(54)

Redemption of common units

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

42 

 

 

 -

 

 

42 

 

 

(202)

 

 

(160)

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

6,330 

 

 

6,330 

 

 

47 

 

 

6,377 

Balance at September 30, 2018

 

 

925 

 

$

10,050 

 

 

11,884 

 

$

119 

 

$

231,750 

 

$

(131,543)

 

$

110,376 

 

$

1,249 

 

$

111,625 



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,



 

 

2018

 

 

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

6,377 

 

$

1,553 

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

 

 

 

 

 

 

Depreciation and amortization expense

 

 

7,126 

 

 

4,813 

Net gain on disposition of assets

 

 

(5,587)

 

 

(4,803)

Net gain on derivatives and convertible debt

 

 

(719)

 

 

(416)

Equity in earnings of joint venture

 

 

(251)

 

 

(295)

Distributions from cumulative earnings of joint venture

 

 

187 

 

 

51 

Amortization of deferred financing costs

 

 

1,080 

 

 

726 

Loss on extinguishment of debt

 

 

 -

 

 

800 

Impairment (recovery) loss, net

 

 

(93)

 

 

1,598 

Stock-based compensation and long-term incentive plan expense

 

 

912 

 

 

665 

Warrant issuance cost

 

 

 -

 

 

289 

Provision for deferred taxes

 

 

294 

 

 

 -

Changes in operating assets and liabilities:

 

 

 

 

 

 

Increase in assets

 

 

(623)

 

 

(954)

Increase in liabilities

 

 

532 

 

 

3,603 

Net cash provided by operating activities

 

 

9,235 

 

 

7,630 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to hotel properties

 

 

(1,527)

 

 

(2,245)

Deposit on hotel property and franchise fees

 

 

 -

 

 

(475)

Distributions in excess of cumulative earnings from joint venture

 

 

1,173 

 

 

628 

Hotel acquisitions

 

 

(35,643)

 

 

(122,269)

Net proceeds from sale of hotel assets

 

 

19,690 

 

 

23,167 

Net cash used in investing activities

 

 

(16,307)

 

 

(101,194)



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Deferred financing costs

 

 

(147)

 

 

(3,611)

Proceeds from long-term debt

 

 

35,318 

 

 

147,500 

Principal payments on long-term debt

 

 

(19,930)

 

 

(91,091)

Debt early extinguishment penalties

 

 

 -

 

 

(454)

Proceeds from common stock issuance

 

 

260 

 

 

45,879 

Series E Preferred Stock issuance costs

 

 

 -

 

 

(1,190)

Redemption of common units

 

 

(160)

 

 

 -

Tax withholdings on stock compensation

 

 

(190)

 

 

 -

Cash dividends paid to common shareholders

 

 

(6,941)

 

 

(4,669)

Cash dividends paid to common unit holders

 

 

(54)

 

 

 -

Cash dividends paid to preferred shareholders

 

 

(434)

 

 

(1,821)

Other items

 

 

 -

 

 

(59)

Net cash provided by financing activities

 

 

7,722 

 

 

90,484 



 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents, and restricted cash

 

 

650 

 

 

(3,080)

Cash, cash equivalents, and restricted cash beginning of period

 

 

10,335 

 

 

13,676 

Cash, cash equivalents, and restricted cash end of period

 

$

10,985 

 

$

10,596 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

5,052 

 

$

2,652 

Income taxes paid, net of refunds

 

$

66 

 

$

88 



 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

Fair value of operating partnership common units issued in acquisitions

 

$

50 

 

$

435 

In kind dividends deemed on preferred stock

 

$

 -

 

$

9,900 

Debt assumed in acquisition

 

$

 -

 

$

9,096 









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. (“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,  2018, the Company owned 16 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, 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, 2018, the Company owned 99.4% 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. 



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.



Effective on March 15, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1-for-6.5.  No fractional shares of common stock were issued as fractional shares were settled in cash. Impacted amounts and share information included in the consolidated financial statements and notes thereto have been adjusted for the stock split as if such stock split occurred on the first day of the periods presented. Certain amounts in the notes to the consolidated financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.



7

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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, 2018 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, 2017.



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 through the third quarter were the acquisition of assets and as such acquisition costs were capitalized as part of these transactions (see Note 3). 



Prior to January 1, 2018, hotel acquisitions were considered business combinations and acquisition costs, such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees, were expensed as incurred.  These types of costs continue to be expensed if they are related to potential acquisitions that are not completed.



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

8

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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.



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. 



In accordance with FASB 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, 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 operations.  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.



9

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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. 



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 as the Company’s performance obligations are fulfilled at the end of each day that the customer is provided a room.   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 based 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 uncertainty of revenue and cash flows:







 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended September 30,

 

Nine months ended September 30,



 

2018

 

2017

 

2018

 

2017

Rooms

 

$

14,710 

 

$

14,791 

 

$

47,598 

 

$

37,943 

Food and beverages

 

 

352 

 

 

390 

 

 

1,138 

 

 

1,153 

Other

 

 

400 

 

 

381 

 

 

1,239 

 

 

1,079 

Total revenue

 

$

15,462 

 

$

15,562 

 

$

49,975 

 

$

40,175 



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

10

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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 and equity instruments, to perform impairment assessments, to account for hotel acquisitions, in the valuation of stock-based compensation, 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.    



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 into 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 services to customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP when it became effective.  The original updated accounting guidance was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016, however, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017.  As such, the standard was effective for the Company on January 1, 2018 and was adopted on that date using the modified retrospective transition method.  Due to the short-term nature of the Company’s revenue streams, the adoption of this standard had no impact on the Company’s revenue or net income, and therefore, no adjustment was recorded to the Company’s opening accumulated deficit.  The adoption of this standard resulted in additional disclosures.  Furthermore, for real estate sales to third parties,

11

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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 August 2016, the FASB issued ASU 2016-15, 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 beginning 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 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 transaction-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.



Recently Issued Accounting Standards



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, 2018, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2019. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.



NOTE 2.  INVESTMENT IN HOTEL PROPERTIES



Investment in hotel properties consisted of the following at September 30, 2018 and December 31, 2017:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of



 

September 30, 2018

 

December 31, 2017



 

Held for sale

 

Held for use

 

Total

 

Held for sale

 

Held for use

 

Total

Land

 

$

2,304 

 

$

20,201 

 

$

22,505 

 

$

4,083 

 

$

17,766 

 

$

21,849 

Buildings, improvements, vehicle

 

 

4,462 

 

 

206,667 

 

 

211,129 

 

 

19,718 

 

 

176,334 

 

 

196,052 

Furniture and equipment

 

 

719 

 

 

20,455 

 

 

21,174 

 

 

5,177 

 

 

16,126 

 

 

21,303 

Initial franchise fees

 

 

25 

 

 

1,784 

 

 

1,809 

 

 

162 

 

 

1,484 

 

 

1,646 

Construction-in-progress

 

 

 -

 

 

166 

 

 

166 

 

 

52 

 

 

226 

 

 

278 

Investment in hotel properties

 

 

7,510 

 

 

249,273 

 

 

256,783 

 

 

29,192 

 

 

211,936 

 

 

241,128 

Less accumulated depreciation

 

 

(3,425)

 

 

(17,170)

 

 

(20,595)

 

 

(11,334)

 

 

(10,214)

 

 

(21,548)

Investment in hotel properties, net

 

$

4,085 

 

$

232,103 

 

$

236,188 

 

$

17,858 

 

$

201,722 

 

$

219,580 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





12

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

NOTE 3.  ACQUISITION OF HOTEL PROPERTIES



During the nine months ended September 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 purchase price based on fair value was as follows: 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Date of acquisition

 

Land

 

Buildings, improvements, and vehicle

 

Furniture and equipment

 

Intangible asset

 

Total purchase price & acquisition costs (1)

 

Debt at acquisition (2)

 

Issuance of  common units (3)

 

Net cash paid

TownePlace Suites

01/18/2018

 

$

1,435 

 

$

16,459 

 

$

1,729 

 

$

190 

 

$

19,813 

 

$

19,813 

 

$

 -

 

$

 -

Austin, TX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home2 Suites

02/21/2018

 

 

998 

 

 

13,485 

 

 

1,854 

 

 

53 

 

 

16,390 

 

 

14,818 

 

 

50 

 

 

1,522 

Summerville, SC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

2,433 

 

$

29,944 

 

$

3,583 

 

$

243 

 

$

36,203 

 

$

34,631 

 

$

50 

 

$

1,522 



(1)

Contractual purchase price of $19,750 and $16,325 for Austin TownePlace Suites and Summerville Home2 Suites, respectively.

(2)

All debt was drawn from the $150,000 secured revolving credit facility  (the credit facility”) at acquisition.

(3)

Total issuance of 259,685 common units.  Common units may be redeemed at a rate of one common share for 52 common units (see Note 11).



Included in the consolidated statements of operations for the three and nine months ended September 30, 2018 are total revenues of $1,761 and $5,335, respectively, and total operating income of $253 and $1,420, respectively, which represent the results of operations for the two hotels acquired in 2018 since the date of acquisition.



During the nine months ended September 30, 2017, the Company acquired seven wholly owned hotel properties.  The allocation of the purchase price based on fair value was as follows:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Date of acquisition

 

Land

 

Buildings, improvements, and vehicle

 

Furniture and equipment

 

Intangible asset

 

Estimated earn out (1)

 

Total purchase price

 

Debt at acquisition (2)

 

Issuance of common units (3)

 

Net cash paid

Home2 Suites

03/24/2017

 

$

905 

 

$

14,204 

 

$

1,351 

 

$

40 

 

$

 -

 

$

16,500 

 

$

16,455 

 

$

45 

 

$

 -

Lexington, KY