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Section 1: 10-Q (10-Q)

20200331 10Q Q1

 





 

 

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 March 31, 2020



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)

1800 West Pasewalk Avenue,  Ste. 200,  Norfolk,  NE

(Address of principal executive offices)

Telephone number: (301)  861-3305

 

Securities registered pursuant to Section 12(b) of the Act:







 

 

 

 

Title of each class  

 

Trading symbol

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

CDOR

 

NYSE American



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 May 13, 2020 there were 12,003,950 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 March 31, 2020 and December 31, 2019

3



 

 



Consolidated Statements of Operations for the Three Months ended March 31, 2020 and 2019

4



 

 



Consolidated Statements of Equity for the Three Months ended March 31, 2020 and 2019

5



 

 



Consolidated Statements of Cash Flows for the Three  Months ended March 31, 2020 and 2019

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

43



 

 

Item 4.

Controls and Procedures

43



 

 

Part II.

OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

44



 

 

Item 1A.

Risk Factors

44



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45



 

 

Item 3.

Defaults Upon Senior Securities

45



 

 

Item 4.

Mine Safety Disclosures

45



 

 

Item 5.

Other Information

45



 

 

Item 6.

Exhibits

47

 



 

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



 

March 31, 2020

 

December 31, 2019



 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in hotel properties, net

 

$

273,718 

 

$

222,063 

Investment in unconsolidated joint venture

 

 

 -

 

 

4,244 

Cash and cash equivalents

 

 

2,641 

 

 

2,584 

Restricted cash, property and debt service escrows

 

 

8,285 

 

 

5,811 

Accounts receivable, net

 

 

773 

 

 

1,099 

Prepaid expenses and other assets

 

 

881 

 

 

1,118 

Derivative assets, at fair value

 

 

 -

 

 

22 

Total Assets

 

$

286,298 

 

$

236,941 



 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 



 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

5,879 

 

$

5,523 

Dividends and distributions payable

 

 

289 

 

 

145 

Land option liability

 

 

8,497 

 

 

 -

Derivative liabilities, at fair value

 

 

1,143 

 

 

366 

Convertible debt, at fair value

 

 

1,040 

 

 

1,080 

Long-term debt, net of deferred financing costs

 

 

176,725 

 

 

134,001 

Total Liabilities

 

 

193,573 

 

 

141,115 



 

 

 

 

 

 

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 $9,539 and  $9,395

 

 

10,050 

 

 

10,050 

Common stock, $.01 par value, 200,000,000 shares authorized; 11,996,289 and 11,993,608 shares outstanding

 

 

120 

 

 

120 

Additional paid-in capital

 

 

233,258 

 

 

233,189 

Accumulated deficit

 

 

(150,751)

 

 

(147,582)

Total Shareholders' Equity

 

 

92,677 

 

 

95,777 

Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $17 and $47

 

 

48 

 

 

49 

Total Equity

 

 

92,725 

 

 

95,826 



 

 

 

 

 

 

Total Liabilities and Equity

 

$

286,298 

 

$

236,941 

















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 March 31,



 

2020

 

2019

Revenue

 

 

 

 

 

 

Room rentals and other hotel services

 

$

13,227 

 

$

15,903 

Operating Expenses

 

 

 

 

 

 

Hotel and property operations

 

 

9,815 

 

 

9,793 

Depreciation and amortization

 

 

2,710 

 

 

2,362 

General and administrative

 

 

1,193 

 

 

1,663 

Acquisition and terminated transactions

 

 

 -

 

 

Strategic alternatives

 

 

144 

 

 

 -

Total operating expenses

 

 

13,862 

 

 

13,825 

Operating income (loss)

 

 

(635)

 

 

2,078 

Net gain (loss) on disposition of assets

 

 

(9)

 

 

39 

Equity in earnings of joint venture

 

 

80 

 

 

513 

Net loss on derivatives and convertible debt

 

 

(759)

 

 

(237)

Other expense, net

 

 

(28)

 

 

(29)

Interest expense

 

 

(1,980)

 

 

(2,163)

Earnings (loss) before income taxes

 

 

(3,331)

 

 

201 

Income tax benefit (expense)

 

 

306 

 

 

(186)

Net earnings (loss)

 

 

(3,025)

 

 

15 

Loss attributable to noncontrolling interest

 

 

 

 

Net earnings (loss) attributable to controlling interests

 

 

(3,024)

 

 

16 

Dividends declared and undeclared on preferred stock

 

 

(145)

 

 

(145)

Net loss attributable to common shareholders

 

$

(3,169)

 

$

(129)



 

 

 

 

 

 

Earnings (Loss) per Share

 

 

 

 

 

 

Total - Basic Earnings (Loss) per Share

 

$

(0.27)

 

$

(0.01)

Total - Diluted Earnings (Loss) per Share

 

$

(0.27)

 

$

(0.01)



 

 

 

 

 

 

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)

















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2019



 

Shares of Preferred stock

 

Preferred stock

 

Shares of Common stock

 

Common stock

 

Additional paid-in capital

 

Accumulated deficit

 

Total Shareholders' equity

 

Noncontrolling interest

 

Total equity

Balance at December 31, 2018

 

 

925 

 

$

10,050 

 

 

11,886 

 

$

119 

 

$

231,805 

 

$

(134,970)

 

$

107,004 

 

$

848 

 

$

107,852 

Stock-based compensation

 

 

 -

 

 

 -

 

 

32 

 

 

 -

 

 

271 

 

 

 -

 

 

271 

 

 

 -

 

 

271 

Dividends and distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series E Preferred dividends declared

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(145)

 

 

(145)

 

 

 -

 

 

(145)

Common Stock ($0.195 per share)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,324)

 

 

(2,324)

 

 

 -

 

 

(2,324)

Common unit distribution declared ($0.00375 per unit)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(11)

 

 

(11)

Redemption of common units

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 

 

(48)

 

 

(42)

Net earnings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

16 

 

 

16 

 

 

(1)

 

 

15 

Balance at March 31, 2019

 

 

925 

 

$

10,050 

 

 

11,918 

 

$

119 

 

$

232,082 

 

$

(137,423)

 

$

104,828 

 

$

788 

 

$

105,616 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31, 2020



 

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, 2019

 

 

925 

 

$

10,050 

 

 

11,994 

 

$

120 

 

$

233,189 

 

$

(147,582)

 

$

95,777 

 

$

49 

 

$

95,826 

Stock-based compensation

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

69 

 

 

 -

 

 

69 

 

 

 -

 

 

69 

Dividends and distributions declared and undeclared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series E Preferred dividends undeclared

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(145)

 

 

(145)

 

 

 -

 

 

(145)

Net loss

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,024)

 

 

(3,024)

 

 

(1)

 

 

(3,025)

Balance at March 31, 2020

 

 

925 

 

$

10,050 

 

 

11,996 

 

$

120 

 

$

233,258 

 

$

(150,751)

 

$

92,677 

 

$

48 

 

$

92,725 











See accompanying notes to consolidated financial statements.



 

5

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited – In thousands)

 









 

 

 

 

 

 



 

Three months ended March 31,



 

 

2020

 

 

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

(3,025)

 

$

15 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,710 

 

 

2,362 

Net (gain) loss on disposition of assets

 

 

 

 

(39)

Net loss on derivatives and convertible debt

 

 

759 

 

 

237 

Equity in earnings of joint venture

 

 

(80)

 

 

(513)

Amortization of deferred financing costs

 

 

275 

 

 

373 

Stock-based compensation expense

 

 

84 

 

 

336 

Provision for deferred taxes

 

 

(333)

 

 

180 

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in assets

 

 

748 

 

 

(838)

Increase (decrease) in liabilities

 

 

(12)

 

 

959 

Net cash provided by operating activities

 

 

1,135 

 

 

3,072 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to hotel properties

 

 

(264)

 

 

(791)

Distributions in excess of cumulative earnings from joint venture

 

 

480 

 

 

200 

Hotel acquisitions, net of cash acquired

 

 

(7,175)

 

 

 -

Net proceeds from sale of hotel assets

 

 

 

 

4,189 

Net cash provided by (used in) investing activities

 

 

(6,958)

 

 

3,598 



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Deferred financing costs

 

 

(345)

 

 

(283)

Proceeds from long-term debt

 

 

9,020 

 

 

1,500 

Principal payments on long-term debt

 

 

(306)

 

 

(4,393)

Redemption of common units

 

 

 -

 

 

(42)

Tax withholdings on stock compensation

 

 

(15)

 

 

(65)

Cash dividends paid to common shareholders

 

 

 -

 

 

(2,318)

Cash dividends paid to common unit holders

 

 

 -

 

 

(12)

Net cash provided by (used in) financing activities

 

 

8,354 

 

 

(5,613)



 

 

 

 

 

 

Increase in cash, cash equivalents, and restricted cash

 

 

2,531 

 

 

1,057 

Cash, cash equivalents, and restricted cash beginning of period

 

 

8,395 

 

 

9,156 

Cash, cash equivalents, and restricted cash end of period

 

$

10,926 

 

$

10,213 



 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

 

$

1,564 

 

$

1,690 

Income taxes paid, net of refunds

 

$

 

$

66 



 

 

 

 

 

 

Schedule of noncash investing and financing activities:

 

 

 

 

 

 

Debt assumed in acquisition

 

$

34,080 

 

$

 -

Land option liability in acquisition

 

$

8,497 

 

$

 -





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 March 31,  2020, the Company owned 15 hotels in eight statesReferences 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 March 31, 2020, the Company owned 99.9% of the common operating units (“common units”) of the operating partnership with the remaining common units owned by other limited partners.



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



Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature.  Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually. 



Agreement and Plan of Merger



On July 19, 2019, the Company, the operating partnership (the Company and operating partnership, the “Company Parties”), NHT Operating Partnership, LLC (“NHT Parent”), NHT REIT Merger Sub, LLC (“NHT Merger Sub”) and NHT Operating Partnership II, LLC (“NHT Merger OP,” and together with NHT Parent and NHT Merger Sub, the “NHT Parent Parties”), entered into an Agreement and Plan of Merger (as amended from time to time, the “Merger Agreement”).   



Closing of the acquisition did not occur on March 23, 2020, the contemplated closing date of the acquisition, and has not occurred as of the time of this filing. The Company Parties and the NHT Parties are in discussions concerning potential amendments to restructure the transaction, which will be disclosed if and when such amendments are agreed.  There can be no assurance with respect to the outcome of such discussions, and the Company continues reviewing its options and reserves all rights and remedies under the Merger Agreement.



The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger OP will merge with and into the operating partnership (the “Partnership Merger”), and, Merger Sub will merge with and into the Company (the “Company Merger” and, together with the Partnership Merger, the “Mergers”). Upon completion of the Partnership Merger, Merger OP will survive and the separate existence of the operating partnership will cease. Upon completion of the Company Merger, the Company will survive and the separate existence of Merger Sub will cease. The Mergers and the other transactions contemplated by the Merger Agreement were unanimously approved by the Company’s Board of Directors (the “Company Board”, and subsequently approved by the holders of the Company’s common stock (the “Company common stock”) and 6.25% Series E Cumulative Convertible Preferred Stock (the “Series E Preferred Stock”) at a special meeting of shareholders held on September 23, 2019.



7

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Pursuant to the terms and conditions in the Merger Agreement, if the Company Merger is consummated, each share of the Company common stock (other than treasury shares and shares held by the NHT Parent Parties, which will be cancelled and retired and will cease to exist with no consideration being delivered in exchange therefor), will be converted into the right to receive $11.10 per share in cash, and each share of Series E Preferred Stock will be converted into the right to receive $10.00 in cash, each without interest and less any applicable withholding taxes.  If the Partnership Merger consummated, each common unit of partnership interest in the operating partnership (excluding operating partnership common units held by the general partner of the operating partnership) will be converted into the right to receive $0.21346 in cash, without interest and less any applicable withholding taxes.



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



Pursuant to the terms of the Merger Agreement, the Company exercised its right to acquire the remaining 20% equity interest of the Atlanta JV that it did not own.



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



Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termination fee to Parent of $9.54 million. In certain other circumstances, including termination by the Company for the NHT Parties’ failure to close or for a material breach by the NHT Parties, NHT Parent will be required to pay the Company a termination fee of $11.925 million upon termination of the Merger Agreement.



During the term of the Merger Agreement, without the consent of the NHT Parties, the Company may not pay cash dividends to holders of the Company common stock or the Series E Preferred Stock. The holders of the Series E Preferred Stock have agreed to waive accrual of any unpaid dividends between signing and closing.



Basis of Presentation



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



We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. Entities are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (“VIE”) or we maintain control of the asset through our voting interest or other rights in the operation of the entity.  The Company has concluded that our operating partnership meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company consolidates the operating partnership. The Company’s sole significant asset is its investment in the operating partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the operating partnership. All of the Company’s debt is an obligation of the operating partnership.



The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2020 or any future period. These consolidated

8

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

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, 2019.



Estimates, Risks, and Uncertainties



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



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



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



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

·

Amending its secured credit facility with KeyBank National Association and the other lenders party thereto (the “credit facility”) on March 30, 2020 to provide extension options out to March 1, 2022, waivers / modifications of certain covenants, and establishment of interest reserves for near term debt service payments as necessary (see further discussion of the Sixth Amendment to the credit facility in Note 6).

·

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

·

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

·

Applications by Condor and its hotel operators for Paycheck Protection Program loans authorized under the recently congressionally approved CARES Act.

·

Seeking potential recovery of certain losses through insurance coverage.

·

Pursuing corporate cost reductions, including staffing reductions resulting in an approximately 20% decrease in non-consulting expenses compared to historical operations.

·

With its credit facility amended, representing over 53% of Condor’s loans, Condor has approached three of its remaining lenders for potential modifications to provide interest reserves or accruals during the second

9

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

quarter of 2020. Two lenders representing approximately 26% of Condor’s loans have agreed, while discussions are in process with the third lender representing approximately 15% of Condor’s loans.

·

Capital improvement projects have been suspended except for emergency circumstances and will remain on hold for immediate future, with the potential for the suspension to continue through 2020.

·

The Company has determined that it is advisable and the best business practice to cause a temporary closure of 30 to 90 days of two of its hotels in April 2020, the Solomons Hilton Garden Inn and at the Leawood Aloft.  The Company is evaluating on a daily basis similar temporary closures at the Lake Mary Hampton Inn & Suites, the San Antonio SpringHill Suites, and the Round Rock Home2 Suites, however, all other hotels currently remain open.



While we cannot assure you that that the assumptions used to estimate our future liquidity will be correct, the Company believes it can generate the liquidity required to operate through the crisis through a combination of the continued operation of a majority of our portfolio with significant cost reduction measures in place and, if necessary, additional debt and equity financings.  However, there can be no assurance that the Company will be able to obtain such financing on acceptable terms or at all.



Additionally, although the Company was in compliance with all its debt covenants as of March 31, 2020, management has determined that the Company may violate certain financial covenants under its debt agreements within the next twelve months if covenant waivers or amendments are not obtained. If the Company were to violate one or more financial covenants, the lenders could declare the Company in default and could accelerate the amounts due under a portion or all of the Company’s outstanding debt. The Company believes it will receive such waivers before any covenants are violated. However, any waivers would be granted at the sole discretion of the lenders, and there can be no assurance that the Company will be able to obtain such waivers.



Based on a combination of these factors and the guidance in U.S. generally accepted accounting principles (“U.S. GAAP”) that requires that in making this determination for the one year period following the date of the financial statements, the Company cannot consider future fundraising activities or the likelihood of obtaining covenant waivers, all of which are outside of the Company's sole control, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for the one year period after the date the financial statements are issued.  Management believes it will obtain required waivers from its lenders before any covenants are violated given that conditions are not exclusive to the Company and based on the actions of lenders thus far in this crisis including waivers already granted to the Company.  However, there can be no assurance that the Company will be able to obtain waivers on acceptable terms or at all.  The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.



Investment in Hotel Properties



At the time of acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures, and equipment, and intangible assets, if any, and the fair value of liabilities assumed, including debt. Acquisition date fair values are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers including discounted cash flows and capitalization rates. 



Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business.  As such, if substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.    We concluded that the Company’s purchase of the remaining 20% of the joint venture that owns the Atlanta Aloft property (the “Atlanta JV”), completed in the first quarter of 2020, was the acquisition of assets and as such acquisition costs were capitalized as part of this transaction (see Note 3). 



10

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

The Company’s investments in hotel properties are recorded at cost and are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and improvements and 3 to 12 years for furniture and equipment. 



Renovations and/or replacements that improve or extend the life of the hotel properties are capitalized and depreciated over their useful lives. Repairs and maintenance are expensed as incurred.



The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life of the franchise agreements using the straight-line method.  Amortization expense is included in depreciation and amortization in the consolidated statements of operations.



On an ongoing basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified.  These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel.  If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s estimated fair value.



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, prior to our acquisition of the remaining 20% interest in the Atlanta JV (see Note 3), allocations of the profits and losses of our Atlanta JV were potentially allocated disproportionately to nominal ownership percentages due to specified preferred return rate thresholds.



Distributions received from a joint venture are classified in the consolidated statements of cash flows using the cumulative distributions approach. Distributions are classified as cash inflows from operating activities unless cumulative distributions, including those from prior periods not designated as a return of investment, exceed cumulative recognized equity in earnings of the joint venture. Excess distributions are classified as cash inflows from investing activities as a return of investment.



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



Assets Held for Sale and Discontinued Operations



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



Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results are presented as discontinued operations.  The disposition completed in 2019 did not meet this

11

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

definition, and we anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.



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



Cash and Cash Equivalents and Restricted Cash



Cash and cash equivalents includes cash and highly liquid investments with original maturities of three months or less when acquired, and are carried at costs which approximates fair value.



Restricted cash consists of cash held in escrow for the replacement of furniture and fixtures, real estate taxes, property insurance, and debt service 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.   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 March 31,



 

2020

 

2019

Rooms

 

$

12,526 

 

$

15,151 

Food and beverages

 

 

349 

 

 

359 

Other

 

 

352 

 

 

393 

Total revenue

 

$

13,227 

 

$

15,903 



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

12

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the IRS would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.



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



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).



13

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

Recently Adopted Accounting Standards



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which superseded most existing lease guidance in U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability and additional qualitative and quantitative disclosures. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard, and ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The Company adopted this standard on January 1, 2019.  The Company elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for the Company's future obligations under the operating leases for which the Company is the lessee. See Notes 2 and 15 to the accompanying consolidated financial statements for additional disclosures related to the adoption of this standard.



NOTE 2.  INVESTMENT IN HOTEL PROPERTIES



Investment in hotel properties consisted of the following at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 



As of



 

March 31, 2020

 

December 31, 2019

Land

 

$

34,925 

 

 

$

20,200 

Buildings, improvements, vehicle

 

 

243,978 

 

 

 

206,971 

Furniture and equipment

 

 

24,511 

 

 

 

21,805 

Initial franchise fees

 

 

1,784 

 

 

 

1,784 

Construction-in-progress

 

 

 

 

 

100 

Right of use asset

 

 

76 

 

 

 

80 

Investment in hotel properties

 

 

305,283 

 

 

 

250,940 

Less accumulated depreciation

 

 

(31,565)

 

 

 

(28,877)

Investment in hotel properties, net

 

$

273,718 

 

 

$

222,063 



 

 

 

 

 

 

 

On January 1, 2019, the Company adopted ASU 842, Leases, and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently on January 1, 2019, the Company recognized right-of-use assets and related liabilities related to its operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used incremental borrowing rates, with a weighted average rate of  5.2% at March 31, 2020.  The right-of-use assets and liabilities are amortized to rent expense, included in either hotel and property operations expenses or general and administrative expenses depending on the nature of the lease, over the term of the underlying lease agreements.  The weighted average remaining life of the Company’s operating leases, including options to extend when it is reasonably certain the Company will exercise such options, was 6.5 years at March 31, 2020.



As of March 31, 2020, the Company's right-of-use assets, net of $76 are included in investment in hotel properties, net and its related lease liabilities of $76 are presented in accounts payable, accrued expenses, and other liabilities in the Company's consolidated balance sheets. The adoption of this standard had minimal impact on the Company's consolidated statements of operations.







14

 


 

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



On February 14, 2020, the Company purchased the remaining 20% interest in the Atlanta JV from our joint venture partner (see detailed description of the Atlanta JV in Note 4) for $7,300 as allowed by the purchase option included in the original joint venture agreements.  The $7,300 was funded from the Company’s credit facility, and the Company became the primary obligator on the $34,080 New Term Loan (as defined in Note 4) as part of the transaction.  As the Atlanta JV was previously accounted for under the equity method and the acquisition was considered the acquisition of assets, the liabilities assumed as part of the transaction were recorded at fair value while the assets purchased in the transaction were recorded based on a pro-rata fair value allocation of the total available basis, which included the fair value of liabilities assumed, the cash purchase price paid, the balance of the investment in the unconsolidated joint venture at the time of the acquisition, and the acquisition costs incurred.  The purchase was recognized as follows: 





 

 

Cash purchase price

$

7,300 

Investment in unconsolidated joint venture

 

3,844 

Acquisition costs

 

104 

Total investment in net assets

$

11,248 



 

 

Cash

$

125 

Working capital

 

(462)

Land

 

14,723 

Buildings, improvements, and vehicle

 

37,008 

Furniture and equipment

 

2,431 

Debt assumed at acquisition

 

(34,080)

Land option liability (1)

 

(8,497)

Total allocation to net assets

$

11,248 



(1)

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



Included in the consolidated statements of operations for the three months ended March 31, 2020 are total revenues of $813 and total operating loss of $287 related to the results of operations for Atlanta Aloft hotel since the date of its acquisition.



All purchase price allocations were determined using Level 3 fair value inputs.



NOTE 4.  INVESTMENT IN UNCONSOLIDATED JOINT VENTURE



On August 1, 2016, the Company entered into a joint venture, the Atlanta JV, with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire an Aloft hotel in downtown Atlanta, Georgia.  The Atlanta Aloft acquisition had a total purchase price of $43,550 and closed on August 22, 2016.  Prior to the purchase of the remaining interest in the Atlanta JV on February 14, 2020 (see Note 3), the Company accounted for the Atlanta JV under the equity method.  Condor owned 80% of the Atlanta JV with TWC owning the remaining 20%.  The Atlanta JV was comprised of two companies: Spring Street Hotel Property II LLC, of which the operating partnership indirectly owned an 80% equity interest, and Spring Street Hotel OpCo II LLC, of which our TRS indirectly owned an 80% equity interest.  TWC owned the remaining 20% equity interest in these two companies.



The purchase was partially funded with a $33,750 term loan secured by the property.  On August 9, 2019, the operating partnership and the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, closed on a $34,080 term loan pursuant to a term loan agreement with KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Agent for the Lenders (the “New Term Loan”).  The proceeds of the New Term Loan were used to repay the original term loan, which was terminated following the repayment.  The New Term Loan was included in full on the balance sheet of the Atlanta JV prior to the acquisition of the remaining interest by the Company in 2020.



15

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

The New Term Loan matured upon the earlier to occur of (a) consummation of the merger under the Merger Agreement (see Note 1) and (b) May 8, 2020. The New Term Loan was refinanced in May 2020 (see Note 16).  The New Term Loan bore interest, at the Borrower’s option, at either LIBOR plus 2.25% or a base rate plus 1.25%.  The New Term Loan required monthly interest payments and principal is due on the maturity date.  The Borrowers could, at any time, voluntarily prepay the New Term Loan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).  The New Term Loan was secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts and general intangibles.  The New Term Loan was guaranteed by the Company and certain of its subsidiaries.



Under the Atlanta JV agreement, the Atlanta JV was managed by TWC in accordance with business plans and budgets approved by both partners.  Major decisions as detailed in the agreement also required joint approval.  Condor could remove TWC as manager of the Atlanta JV and appoint a new manager only upon the occurrence of certain events.  The Atlanta Aloft hotel was managed by Boast Hotel Management Company LLC (“Boast”), an affiliate of TWC.  The Atlanta JV paid to Boast total management fees of $61 and $116 for the three months ended March 31, 2020 and  2019, respectively.  The management of the Atlanta Aloft hotel was moved to Aimbridge Hospitality on March 1, 2020 following the acquisition of the remaining interest in the Atlanta JV by Condor.



Net cash flow from the Atlanta JV was distributed each quarter first with a 10% annual preferred return on capital contributions to Condor, second with a 10% annual preferred return on capital contributions to TWC, and third with any remainder distributed to the partners based on their pro-rata equity ownership. Profits were allocated in the same proportion as net cash flow. Losses were allocated based on pro-rata equity ownership. Cash distributions totaling $480 and $200 in the three months ended March 31, 2020 and 2019, respectively, were received by the Company from the Atlanta JV.  



The Atlanta JV agreement also included buy-sell rights for both members (generally after three years of hotel ownership for Condor and after five years for TWC) and Condor had a purchase option for TWC’s Atlanta JV ownership interest exercisable between the third and fifth anniversary of the hotel closing.



The following table represents the total assets, liabilities, and equity, including the Company’s share, of the Atlanta JV as of December 31, 2019:







 

 

 



 

As of



 

December 31, 2019

Investment in hotel properties, net

 

$

45,547 

Cash and cash equivalents

 

 

661 

Accounts receivable, prepaid expenses, and other assets

 

 

279 

Total Assets

 

$

46,487 



 

 

 

Accounts payable, accrued expenses, and other liabilities

 

$

1,026 

Land option liability

 

 

6,190 

Long-term debt, net of deferred financing costs

 

 

33,966 

Total Liabilities

 

 

41,182 

Condor equity

 

 

4,244 

TWC equity

 

 

1,061 

Total Equity

 

 

5,305 

Total Liabilities and Equity

 

$

46,487 



The table below provides the components of net earnings, including the Company’s share of the Atlanta JV, for the three months ended March 31, 2020 and 2019.



16

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 





 

 

 

 

 

 



 

 

For the period of January 1 to February 14,

 

 

Three months ended March 31,



 

2020

 

2019

Revenue

 

 

 

 

 

 

Room rentals and other hotel services

 

$

1,522 

 

$

3,874 

Operating Expenses

 

 

 

 

 

 

Hotel and property operations

 

 

960 

 

 

2,177 

Depreciation and amortization

 

 

181 

 

 

371 

Total operating expenses

 

 

1,141 

 

 

2,548 

Operating income

 

 

381 

 

 

1,326 

Net loss on derivative

 

 

 -

 

 

(1)

Interest expense

 

 

(281)

 

 

(684)

Net earnings

 

$

100 

 

$

641 



 

 

 

 

 

 

Condor allocated earnings

 

$

80 

 

$

513 

TWC allocated earnings

 

 

20 

 

 

128 

Net earnings

 

$

100 

 

$

641 















NOTE 5.  DISPOSITIONS OF HOTEL PROPERTIES



As of March 31, 2020 and December 31, 2019, the Company had no hotels classified as held for sale. 



During the three months ended March 31, 2020, the Company sold no hotels.  During the three months ended March 31, 2019, the Company sold one hotel resulting in a total gain of $62.    







NOTE 6.  LONG-TERM DEBT



On February 14, 2020, with the purchase of the remaining interest in the Atlanta JV (see Note 3), the Company became the primary obligator on the New Term Loan and drew an additional $7,300 under its credit facility with Key Bank to fund the transaction.    The New Term Loan was refinanced using the credit facility subsequent to quarter end as discussed in Subsequent Events (see Note 16).



On March 30, 2020, the Company entered into a Sixth Amendment to its credit facility with Key Bank which, among other things, makes the following changes to the credit facility:

·

Sets the size of the credit facility at $102,000 and removes the ability to reborrow under the credit facility in the future (without lender approval).

·

Extends the maturity date of the credit facility to April 1, 2021, and provides for two extension options (six months and five months) with the satisfaction of certain conditions, including payment of extension fees, no defaults existing, delivery of evidence of pro forma compliance with financial covenants and delivery of updated appraisals.

·

Provides for principal prepayments with certain proceeds and cash flows through a cash management system / cash flow waterfall.

·

Implements a collateral-specific minimum debt yield (ratio of adjusted net operating income for the borrowing base properties to indebtedness outstanding under the credit facility) of 10%.  The covenant is first tested on September 30, 2020 and for purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Maintains the maximum consolidated leverage ratio (ratio of consolidated total indebtedness to consolidated total asset value) of 60% but provides for updated appraisals to determine consolidated total asset value (if required by the lenders).

·

Modifies the fixed charge coverage ratio (ratio of adjusted consolidated Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) to consolidated fixed charges) to (a) 1.25 to 1 as of the end of

17

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

the fiscal quarter ending September 30, 2020 and (b) 1.50 to 1 as of the end of the fiscal quarter ending December 31, 2020 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Implements a maximum borrowing base leverage ratio (ratio of indebtedness outstanding under the credit facility to borrowing base asset value (based on updated appraisals required by the lenders) of 65%.  The covenant is first tested on June 30, 2021.

·

Eliminates the financial covenants regarding secured leverage ratio, tangible net worth and variable rate debt.

·

Modifies the covenant on dividends and distributions to provide that no cash dividends or distributions may be made to common or preferred shareholders.

·

Modifies the covenants on recourse debt and investments to provide that no additional recourse debt or investments will be permitted.

·

Adds certain monthly reporting obligations.

·

Increases the interest rate for the credit facility to LIBOR plus 3.25% or a base rate plus 2.25%, and further increases the interest rate spreads by 0.25% at six month intervals.  The LIBOR rate is subject to a floor of 0.25%.

·

Provides for an interest reserve account, which was funded with $1,720 on March 30, 2020.  The funds are available to make interest payments under the credit facility upon the satisfaction of certain conditions, including if the Company’s unrestricted cash balance is less than $1,500.



Additionally, on March 30, 2020, the Company entered into an agreement with Great Western Bank to defer the monthly principal and interest payments due under that loan on April 1, 2020, May 1, 2020, and June 1, 2020 until the loan’s maturity date in December 2021.



Subsequent to quarter end, the Company amended its credit facility with Key Bank and its loan agreements with Wells Fargo and Great Western Bank as discussed in Subsequent Events (see Note 16).



Long-term debt related to wholly owned properties, including debt related to hotel properties held for sale, consisted of the following loans payable at March 31, 2020 and December 31, 2019:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lender

 

 

Balance at March 31, 2020

 

Interest rate at March 31, 2020

 

Maturity

 

Amortization provision

 

Properties encumbered at March 31, 2020

 

Balance at December 31, 2019

Fixed rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18

 

$

8,593 

 

4.54%

 

08/2024

 

25 years

 

 

$

8,639 

Great Western Bank (1)

 

 

13,199 

 

4.33%

 

12/2021 (5)

 

25 years

 

 

 

13,290 

Great Western Bank (1)

 

 

915 

 

4.33%

 

12/2021 (5)

 

7 years

 

 -

 

 

971 

Total fixed rate debt

 

 

22,707 

 

 

 

 

 

 

 

 

 

 

22,900 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo

 

 

25,499 

 

3.97% (2)

 

11/2022 (6)

 

30 years

 

 

 

25,612 

KeyBank credit facility (3)

 

 

95,865 

 

4.84% (4)

 

4/2021 (7)

 

Interest only

 

 

 

86,845 

KeyBank Aloft

 

 

34,080 

 

3.05% (8)

 

5/2020 (9)

 

Interest only

 

 

 

 -

Total variable rate debt

 

 

155,444 

 

 

 

 

 

 

 

15 

 

 

112,457 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term debt

 

$

178,151 

 

 

 

 

 

 

 

 

 

$

135,357 

Less: Deferred financing costs

 

 

(1,426)

 

 

 

 

 

 

 

 

 

 

(1,356)

Total long-term debt, net of deferred financing costs

 

$

176,725 

 

 

 

 

 

 

 

 

 

$

134,001 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Both loans are collateralized by Aloft Leawood.

(2) Variable rate of 30-day LIBOR plus 2.39%,  effectively fixed at 4.44% after giving effect to interest rate swap (see Note 8).

(3) Prior to March 30, 2020, the $150,000 credit facility included an accordion feature that would allow the credit facility to be increased to $400,000 with additional lender commitments. Available borrowing capacity under the credit facility was based on a borrowing base formula for the pool of

18

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

hotel properties securing the facility.  The commitment fee on the unused facility was 0.20%.  On March 30, 2020, the Sixth Amendment to the credit facility, as discussed above, modified this availability to set the size of the facility at $102,000 with no ability to reborrow under the facility in the future without lender approval.

(4) Prior to March 30, 2020, borrowings under the facility accrued interest based on a leverage-based pricing grid, at the Company’s option, at either LIBOR plus a spread ranging from 2.25% to 3.00% (depending on leverage) or a base rate plus a spread ranging from 1.25% to 2.00% (depending on leverage)On March 30, 2020, these terms were modified with the Sixth Amendment to the credit facility, as discussed above, to increase the interest rate to LIBOR (with a floor of 0.25%) plus 3.25% or a base rate plus 2.25%, with further increases to interest rate spreads of 0.25% at six month intervals.  The 30-day LIBOR for $30,000 notional capped at 3.35% after giving effect to market rate cap (see Note 8). 

(5) Term may be extended for additional two years subject to interest rate adjustments.

(6) Two one-year extension options subject to the satisfaction of certain conditions.

(7) With the signing of the Sixth Amendment to the credit facility as discussed above,  two extension options (six months and five months) are available subject to the satisfaction of certain conditions.

(8) Borrowings accrue interest at the Company’s option at LIBOR plus 2.25% or a base rate plus 1.25%.

(9) Matures upon the earlier to occur of (a) consummation of the merger under the Merger Agreement (see Note 1) and (b) May 8, 2020.  This loan was refinanced using the credit facility subsequent to quarter end as discussed in Subsequent Events (see Note 16).



Aggregate annual principal payments on debt for the remainder of 2020 and thereafter are as follows:









 

 

 



 

Total

Remainder of 2020

 

$

35,002 
2021 

 

 

110,209 
2022 

 

 

24,886 
2023 

 

 

214 
2024 

 

 

7,840 

Thereafter

 

 

 -

Total

 

$

178,151 



After consideration of the refinancing of the New Term Loan on May 13, 2020 as discussed above, aggregate annual principal payments on debt for the remainder of 2020 and thereafter are as follows:







 

 

 



 

Total

Remainder of 2020

 

$

922 
2021 

 

 

144,289 
2022 

 

 

24,886 
2023 

 

 

214 
2024 

 

 

7,840 

Thereafter

 

 

 -

Total

 

$

178,151 



Financial Covenants



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

·

Debt Yield:  The ratio of adjusted net operating income for the borrowing base properties to indebtedness outstanding under the credit facility cannot be less than 10%.  The covenant is first tested on September 30, 2020 and for purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

·

Consolidated Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed 60%.

·

Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA to consolidated fixed charges cannot be less than (a) 1.25 to 1 as of the end of the fiscal quarter ending September 30, 2020 and (b) 1.50 to 1 as of the end of the fiscal quarter ending December 31, 2020 and each fiscal quarter thereafter.  For purposes of calculating compliance with the covenant, annualized results are used until June 30, 2021 when the calculation is based on the most recently ended four fiscal quarters.

19

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

·

Borrowing Base Leverage Ratio:  The ratio of indebtedness outstanding under the credit facility to borrowing base asset value (based on updated appraisals required by the lenders) cannot exceed 65%.  The covenant is first tested on June 30, 2021.



Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility have the meanings given to them in the credit facility, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.



As a result of the actual and anticipated impact of the COVID-19 virus on the hotel industry generally, the Company has received waivers from Great Western Bank with respect to compliance with its quarterly debt service coverage ratios (consolidated and for the Leawood Aloft collateral) for March 31, 2020 and June 30, 2020 and modifications for September 30, 2020, December 31, 2020, March 31, 2021, and June 30, 2021 (providing for lower collateral covenant and use of annualized results).



If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our credit facility contains cross-default provisions which would allow the lenders under our credit facility to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan.



As of March 31, 2020, we are not in default of any of our loans.



NOTE 7.  CONVERTIBLE DEBT AT FAIR VALUE



As part of an Exchange Agreement entered into on March 16, 2016 with Real Estate Strategies, L.P. (“RES”, which also includes affiliated entities), the Company issued to RES a Convertible Promissory Note (the “Note”), bearing interest at 6.25% per annum, in the principal amount of $1,012.    The Note is convertible directly into 97,269 shares of common stock at any time at the option of RES or automatically when the Series E Preferred Stock is required to be converted or is redeemed in whole (see Note 10).  The Note is not convertible to the extent that a conversion would cause RES, together with its affiliates, to beneficially own more than 49% of the voting stock of the Company at the time of the conversion.  Any conversion reduces the principal amount of the Note proportionally. 



The Company has made an irrevocable election to record this convertible debt in its entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gain on derivatives and convertible debt within net earnings each reporting period. Gains (losses) related to this Note were recognized totaling $40 and ($48) during the three months ended March 31, 2020 and 2019, respectivelyThe fair value of the Note is determined using a trinomial lattice-based model, which is a generally accepted computational model typically used for pricing options. The fair value of the Note on the date of issuance was determined to be equal to its principal amount. Interest expense related to this Note is recorded separately from other changes in its fair value within interest expense each period.



The following table represents the difference between the fair value and the unpaid principal balance of the Note as of March 31, 2020:





 

 

 

 

 

 

 

 



Fair value as of March 31, 2020

 

Unpaid principal balance as of March 31, 2020

 

Fair value carrying amount over/(under) unpaid principal

6.25% Convertible Debt

$

1,040

 

$

1,012

 

$

28



 

 

 

 

 

 

 

 









20

 


 

Condor Hospitality Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

 

NOTE 8. FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS



Our determination of fair value measurements is based on the assumptions that market participants would use in pricing the asset or liability. At March 31, 2020, the Company’s convertible debt (see Note 7) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis.  Nonrecurring fair value measurements were utilized in the determination of the fair value of acquired property in 2020 (see Note  3),  in the valuation of the stock-based compensation grants (see Note 12), and in the assessment of impaired and potentially impaired hotels during the three months ended March 31, 2020 and 2019.    No impairments or recoveries of impairment were recognized during the three months ended March 31, 2020 or March 31, 2019.



Derivative Instruments



Currently, the Company uses derivatives, such as interest rate swaps and caps, to manage its interest rate risk.  The fair value of interest rate positions is determined using the standard market methodology of netting discounted expected future cash receipts and payments. Variable interest rates used in the calculation of projected receipts and payments on the positions are based on expectations of future interest rates derived from observable market interest rate curves and volatilities.  Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the agreements.  The Company believes it minimizes this credit risk by transacting with major creditworthy financial institutions.  These interest rate positions at March 31, 2020 and December 31, 2019 are as follows:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Associated debt

 

Type

 

Terms

 

Effective Date

 

Maturity Date

 

 

Notional amount at March 31, 2020

 

 

Notional amount at December 31, 2019

Wells Fargo

 

Swap

 

Swaps 30-day LIBOR for fixed rate of 2.053%

 

11/2017

 

11/2022

 

$

25,499 (1)

 

$

25,612 (1)

Credit facility

 

Cap

 

Caps 30-day LIBOR at 3.35%

 

4/1/2019

 

10/2020

 

$

30,000 

 

$

30,000 



(1)

Notional amount amortizes consistently with the principal amortization of the associated loan.



Additionally, included in the Series E Preferred Stock issued on March 1, 2017 is a redemption right that allows the Company to redeem up to a total of 490,250 shares of Series E Preferred Stock for specific percentages of its liquidation preference (see Note 10).  This option requires bifurcation and as such is treated as a separate derivative instrument.



All derivatives recognized by the Company are reported as derivative assets or liabilities on the consolidated balance sheets and are adjusted to their fair value at each reporting date. All gains and losses on derivative instruments are included in net gain on derivatives and convertible debt and with the exception of realized gains and losses related to the interest rate instruments, which are included in interest expense on the consolidated statements of operations. Net losses of $799 and $189 for the three months ended March 31, 2020 and 2019, respectively, were recognized related to derivative instruments.



Recurring Fair Value Measurements



The following tables provide the fair value of the Company’s financial assets and (liabilities) carried at fair value and measured on a recurring basis:





 

 

 

 

 

 

 

 

 

 

 

 



 

Fair value at

 

 

 

 

 

 

 

 

 



 

March 31, 2020

 

Level 1

 

Level 2

 

Level 3

Interest rate derivatives

 

$

(1,143)

 

$

 -

 

$

(1,143)

 

$

 -

Series E Preferred embedded redemption option

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Convertible debt

 

 

(1,040)

 

 

 -

 

 

 -

 

 

(1,040)

Total

 

$

(2,183)

 

$

 -

 

$

(1,143)

 

$

(1,040)