Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
NOTE 1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Condor Hospitality Trust, Inc. (“C
ondor”
), a Maryland corporation, is
a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high
-quality select-service, limited-
service, extended stay, and comp
act full service hotels. As of
June 30
,
2019
, the Company
owned
1
5
hotels in
eight
states
, including
one
hotel owned through an
80%
interest in an unconsolidated joint venture (
the
“
Atlanta
JV”).
References to
the “Company”,
“we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
The Company
, thro
ugh its wholly owned subsidiary
Condor H
ospitality REIT Trust,
owns a controlling interest in Condor Hospitality Limi
ted Partnership (
the
“
operating partnership
”), for which we serve as general partner
. The operating partnership
, including its various
subsidiaries
, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of
all
properties held by TRS Leasing, Inc.) and conducts all of its operations. At
June 30
, 2019
, the Company owned
99.
5
%
of the
common
operating units (“
common units”) of the operating partnership
with
the remaining common units
owned by
other limited partners
.
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any
of our hotels. Therefore, the operating partnership
and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in
turn engages third-party eligible independent contra
ctors to manage the hotels. The operating partnership
, the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company,
as well as the accounts of the operating partnership
and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We evaluate each of our investments and contractual relationships to determine whether they meet the guidelines for consolidation. Entities are consolidated if the determination is made that we are
the primary beneficiary in a variable interest entity (“VIE
”) or we maintain control of the asset through our voting interest or other rights in the operation of the entity. The Company has
c
oncluded that our operating partnership
meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company
consolidates the operating partnership
. The Company’s sole significant
asset is its investment in the operating partnership
, and consequently, substantially all of the Company’s assets and liabilities represent thos
e assets and liabilities of the operating partnership
. All of the Company
’s debt is an obligation of the operating partnership
.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the
consolidated
financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for t
he year ending December 31, 201
9
or any future period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
accompanying notes included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2018
.
Estimates, Risks, and Uncertainties
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as revenue and expenses recognized during the reporting period. Actual results could differ from those estimates. Because the state of the economy and the real estate market can significantly impact hotel operating performance and the estimated fair value of our assets, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change.
Investment in Hotel Properties
At the time of acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures, and equipment, and intangible assets, if any, and the fair value of liabilities assumed, including debt. Acquisition date fair values are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers including discounted cash flows and capitalization rates.
Effective January 1, 2018, we adopted
Financial Accounting
Standards Board (“FASB”)
Accounting Standards Update (“ASU”)
No. 2017-01,
Clarifying the Definition of a Business
. As such, if substantially
all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.
This guidance is applied prospectively. We concluded that all hotel acquisitions completed in 2018
were
the acquisition of assets and as such acquisition costs were capitalized as part of these transactions (see Note 3).
The Company’s investments in hotel properties
are
recorded at cost and are depreciated using the straight-line method over an estimated useful life of
15
to
40
years for buildings and improvements and
3
to
12
years for furniture and equipment.
Renovations and/or replacements that improve or extend the life of the hotel properties are capitalized and depreciated over their useful lives. Repairs and maintenance are expensed as incurred.
The initial fees incurred to enter into the franchise agreements are capitalized and amortized over the life
of the franchise agreements using the straight-line method.
Amortization expense is included in depreciation and amortization in the consolidated statements of operations.
On an ongoing basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified. These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s estimated fair value.
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Investment in Joint Venture
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a
VIE
or through our voting interest in a voting interest entity (“VOE”) and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee. Pursuant to our Atlanta JV agreement, allocations of the profits and losses of our Atlanta JV may be allocated disproportionately to nominal ownership percentages due to specified preferred return rate thresholds.
Distributions received from a joint venture are classified in the consolidated statements of cash flows using the cumulative distributions approach. Distributions are classified as cash inflows from operating activities unless cumulative distributions, including those from prior periods not designated as a return of investment, exceed cumulative recognized equity in earnings of the joint venture. Excess distributions are classified as cash inflows from investing activities as a return of investment.
On an annual basis or at interim periods if events and circumstances indicate that the investment may be impaired, the Company reviews the carrying value of its investment in unconsolidated joint venture to determine if circumstances indicate impairment to the carrying value of the investment that is other than temporary.
The investment is considered impaired if its estimated fair value is less than the carrying amount of the investment and that impairment is other than temporary.
Assets Held for Sale and Discontinued Operations
A hotel is considered held for sale (a) when a contract for sale is entered into, a substantial, nonrefundable deposit has been committed by the purchaser, and sale is expected to occur within one year, or (b) if management has committed to and is actively engaged in a plan to sell the property, the property is available for sale in its current condition, and it is probable the sale will be completed within one year. If a hotel is considered held for sale as of the most recent balance sheet presented or was sold prior to that balance sheet date, the hotel property and the debt it collateralizes are shown as held for sale in all periods presented. Depreciation of our hotels is discontinued at the time they are considered held for sale.
Only
disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results
are
presented as discontinued o
perations
.
None of the dispositions completed in 2018 or 2019 to date have met this definition, and we
anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required. If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the decision not to sell.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents includes cash and highly liquid investments with original maturities of three months or less when acquired, and are carried at costs which approximates
fair value.
Restricted cash consists of cash held in escrow for the replacement of furniture and fixtures or for real estate taxes and property insurance as required under certain loan agreements.
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Revenue Recognition
Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer's hotel stay
at the daily contract
rate
.
Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at
the contract rate at
the point in time or over the time period that goods or services are provided to the customer
and the related performance obligations are fulfilled
. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or
agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue ba
sed upon the gross sales price.
Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses
.
Sales, use, occupancy, and similar taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue in the
consolidated
statements of operations.
Hotel operating revenues
can be disaggregated into
the
following
categories to demonstrate how economic factors affect the nature, amount, timing, and uncerta
inty of revenue and cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Rooms
|
|
$
|
15,464
|
|
$
|
16,961
|
|
$
|
30,615
|
|
$
|
32,888
|
Food and beverages
|
|
|
396
|
|
|
411
|
|
|
755
|
|
|
786
|
Other
|
|
|
317
|
|
|
462
|
|
|
710
|
|
|
839
|
Total revenue
|
|
$
|
16,177
|
|
$
|
17,834
|
|
$
|
32,080
|
|
$
|
34,513
|
Income Taxes
The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended. In general, under such Code provisions, an entity which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed to shareholders. A REIT will incur a
100%
tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the IRS would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a
100%
prohibited transaction tax.
Taxable income from non-REIT activities managed through the TRS is subject to federal, state, and local income taxes. We account for the federal income taxes of our TRS using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on the consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not (defined as a likelihood of more than
50%
) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities
and equity instruments
, to perform impairment assessments, to account for hotel acquisitions,
in the valuation of stock-based compensation, a
nd for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value are
determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or valuation techniques may have a material effect on estimated fair value measurements. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
With the exception of fixed rate debt (see Note
8
) and other financial instruments carried at fair value, the carrying amounts of the Company’s financial instruments approximates their fair values due to their short-term nature or variable market-based interest rates.
Fair Value Option
Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for
the
treatment of the Company’s convertible debt entered in
to on March 16, 2016 (see Note 7
).
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or serv
ices to customers. The ASU
replace
d
most existing revenue recognition guida
nce in U.S. GAAP when it became
effective. The
standard was effective for the Company on January 1, 2018 and was adopted on that date using the modified retrospective transition method. Due to the short-term nature of the Company’s revenue streams, the adoption of this standard had no
impact on the Company’s revenue or net income, and therefore, no adjustment was recorded to the Company’s opening accumulated deficit. The adoption of this standard resulted in additional disclosures.
Furthermore, for real estate sales to third parties, primarily a result of disposition of real estate in exchange for cash with few contingencies,
the standard did not
impact the recognition of our accounting for these sales.
In Au
gust 2016, the FASB issued ASU 2
016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payment
, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to reduce the current diversity in practice. This guidance is effective for the Company for years be
ginning after December 15, 2017. The Company has adopted ASU 2016-15 for the year beginning on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which clarifies how companies should present restricted cash and restricted cash equivalents in the statement of cash
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
flows. This guidance requires companies to show the changes in the total of cash, cash equivalents, and restricted cash equivalents in the statement of cash flows. This guidance is effective for the Company for years beginning after December 15, 2017, including interim
periods within those years. The Company has adopted ASU 2016-18 for the year beginning on January 1, 2018. The adoption of ASU No. 2016-18 changed the presentation of the
consolidated
statements of cash flows for the Company
to include changes to cash and cash equivalents and restricted cash for all periods presented
.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or business combinations. As a result of the standard, we anticipate that the majority of our hotel purchases will be considered asset purchases as opposed to business combinations and as such the related acquisition costs will be capitalized. However, the determination will be made on a t
ransaction-by-transaction basis.
This standard
is
applied on a prospective basis and, therefore, it does not affect the accounting for any of our previous transactions. This standard
was
effective for annual periods beginning after December 15, 2017, although early adoption is permitted
. The Company has adopted ASU 2017-01 for the year beginning on January 1, 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which
superseded
most existing lease guidance in U.S. GAAP. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability and additional qualitative and quantitative disclosures.
In July 2018, the FASB issued ASU 2018-10,
Codification Improvements to Topic 842, Leases
, to clarify how to apply
certain aspects of the new leases standard, and ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The Company adopted this standard on January 1, 2019. The Company elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for the Company's future obligations under the operating leases for which the Company
is the lessee. See Notes 2
and 15 to the accompanying consolidated financial statements for additional disclosures related to the adoption of this standard.
NOTE 2. INVESTMENT IN HOTEL PROPERTIES
Investment
in hotel properties consisted of the following at
June 30
, 2019 and December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Total
|
|
Held for sale
|
|
Held for use
|
|
Total
|
Land
|
|
$
|
20,201
|
|
$
|
2,304
|
|
$
|
20,200
|
|
$
|
22,504
|
Buildings, improvements, vehicle
|
|
|
206,931
|
|
|
4,462
|
|
|
206,821
|
|
|
211,283
|
Furniture and equipment
|
|
|
21,531
|
|
|
719
|
|
|
20,554
|
|
|
21,273
|
Initial franchise fees
|
|
|
1,784
|
|
|
25
|
|
|
1,784
|
|
|
1,809
|
Construction-in-progress
|
|
|
175
|
|
|
7
|
|
|
323
|
|
|
330
|
Right of use asset
|
|
|
251
|
|
|
-
|
|
|
-
|
|
|
-
|
Investment in hotel properties
|
|
|
250,873
|
|
|
7,517
|
|
|
249,682
|
|
|
257,199
|
Less accumulated depreciation
|
|
|
(24,181)
|
|
|
(3,425)
|
|
|
(19,504)
|
|
|
(22,929)
|
Investment in hotel properties, net
|
|
$
|
226,692
|
|
$
|
4,092
|
|
$
|
230,178
|
|
$
|
234,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2019, the Company adopted ASU 842,
Leases,
and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently on January 1, 2019, the Company
recognized right-of-use assets and related liabilities related to its operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used in
cremental borrowing rates, with a weighted average rate of
5.2
0
%
at
June 30
, 2019.
The right-of-use assets and liabilities are amortized
to rent expense, included in either Hotel and
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
property operations expenses or General and administrative expenses depending on the nature of the lease,
over the term of the underlying lease
agreements. The weighted average
remaining life of the Company’s operating leases, including options to extend when it is reasonably certain the Company will exercise such options, was
3.8
years at
June 30
, 2019.
As of
June 30
, 2019, the Company's right-of-use assets
, net
of
$
251
are included in Investment in hotel p
roperties
, net
and its related lease liabilities of
$
257
are presented in Accounts payable, accrued expenses, and other liabilities
in the Company's consolidated balance sheets. The adoption of this standard had minimal impact on the Company's
consolidated
statements of operations.
NOTE 3. ACQUISITION OF HOTEL PROPERTIES
During the
six
months ended
June 30
, 2018
, the Company acquired
two
wholly owned hotel properties
, each of which was acquired in the first quarter of 2018
. The allocation of the purch
ase price based on fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 TownePla
ce S
uites and Summerville Hom
e
2 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).
|
I
ncluded in the
consolidated statement
s
of operation
s
for the
three and six
months
en
ded
June 30
, 2018 are total revenues of
$2,
161
and
$3
,
574
, respectively,
and total operating income of
$
639
and
$1,167
, respectively,
related to
the results of operations
for the
two
hotels acquired in 2018 since the date of acquis
ition.
All
purchase price allocations were determined using Level 3 fair value inputs.
Pro Forma Results
The following condensed
pro forma financial data is presented as if
the two
acquisitions completed in 2018
w
ere completed on January 1, 2017
.
Supplemental pro forma earnings were adjusted to exclude all acquisition expense
s
recognized in the periods presented as if these acquisition costs had been incurred in prior periods but were not adjusted to remove the results of hotels sold during and between the periods. Results for periods prior to the Company’s ownership are based on information provided by the prior
owners, adjusted for differences in interest expense, depreciation expense, and management fees following the Company’s ownership
and have not been audited or reviewed by our independent auditors
. All hotels were in operation for all
of the
periods presented
.
The condensed pro forma financial data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the acquisitions had bee
n consummated on January 1, 2017
, nor do they purport to represent the results of operations for future periods.
|
|
|
|
Six months ended June 30
,
2018
|
Total revenue
|
$
|
35,156
|
Operating income
|
$
|
5,309
|
Net earnings attributable to common shareholders
|
$
|
3,482
|
Net earnings per share - Basic
|
$
|
0.29
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Net earnings per share - Diluted
|
$
|
0.29
|
NOTE 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On August 1, 2016, the Company entered into a joint venture
, the Atlanta JV,
with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire an Aloft hotel i
n downtown Atlanta, Georgia
. The Atlanta Aloft acquisition had a total purchase price of
$43,550
and closed on August 22, 2016.
The Company accounts for the Atlanta JV under the equity method. Condor owns
80%
of the Atlanta JV with TWC owning the remaining
20%
. The Atlanta JV is comprised of
two
companies: Spring Street Hote
l Property II LLC, of which the operating partnership
indirectly owns an
80%
equity interest, and Spring Street Hotel OpCo II LLC, of which our TRS indirectly owns an
80%
equity interest. TWC owns the remaining
20%
equity
interest
in these
two
companies.
The purchase was partially funded with a
$33,750
term loan secured by the property.
The term loan, obtained from LoanCore Capital Credit REIT LLC, has an initial term of
24
months with
three
12
-month extension periods
,
which may be exercised at the Atlanta JV’s option subject to certain conditions and fees.
The first of these extension options was exercised by the Atlanta JV on September 9, 2018.
The interest rate is a floating rate calculated on the
one-month LIBOR
plus
5.0%
, and as a condition at the time of the extension
, the Atlanta JV purchased a LIBOR cap of
3.0%
. The term loan remains outstanding at
June 30
, 2019
and has a current interest rate of
7
.
44
%
.
The loan is non-recourse to the Atlanta JV, subject to specified exceptions. The loan is also non-recourse to Condor, except for certain customary carve-outs which are guaranteed by the Company.
Under the Atlanta JV agreement, the Atlanta JV is managed by TWC in accordance with business plans and budgets approved by both partners. Major decisions as detailed in the agreement also require joint approval. Condor may remove TWC as manager of the Atlanta JV and appoint a new manager only upon the occurrence of certain events. The Atlanta Aloft hotel is managed by Boast Hotel Management Company LLC (“Boast”), an affiliate of TWC. The Atlanta JV paid to Boast total management fees of
$
96
and
$
9
3
for
the three
months
ended
June 30
, 2019
and
2018
,
respectively
, and
$
212
and
$191
for the six months ended June 30, 2019 and 2018, respectively.
Net cash flow
from the Atlanta JV is distributed each quarter
first with a
10%
annual
preferred return on capital contributions to Condor, second
with a
10%
annual
preferred
return on capital contributions to TWC, and third with any remainder distributed to the partners based on their pro-rata equity ownership.
Profits are allocated in the same proportion as net cash flow.
Losses are allocated based on pro-rata equity ownership.
Cash distributions totaling
$
653
and
$
600
in the three
months ended
June 30
, 2019 and 2018
, respectively
,
and
$
853
and
$960
in the six months ended June 30, 2019 and 2018, respectively,
were received by the Company from the Atlanta JV
. The
Atlanta JV agreement also includes buy-sell rights for both members (generally after
three
years of hotel ownership for Condor and after
five
years for TWC) and Condor has a purchase option for TWC’s Atlanta JV ownership interest exercisable between the
third
and
fifth
anniversary of the hotel closing.
The following table represent
s
the tot
al assets, liabilities,
and
equity
, including the Company’s share, of the Atlanta JV as of
June 30
, 2019 and December 31, 2018
:
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
|
|
|
|
|
|
|
|
|
As of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Investment in hotel properties, net
|
|
$
|
46,271
|
|
$
|
46,933
|
Cash and cash equivalents
|
|
|
533
|
|
|
913
|
Restricted cash, property escrows
|
|
|
880
|
|
|
366
|
Accounts receivable, prepaid expenses, and other assets
|
|
|
627
|
|
|
294
|
Total Assets
|
|
$
|
48,311
|
|
$
|
48,506
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses, and other liabilities
|
|
$
|
1,283
|
|
$
|
1,375
|
Land option liability
|
|
|
6,190
|
|
|
6,190
|
Long-term debt, net of deferred financing costs
|
|
|
33,722
|
|
|
33,608
|
Total Liabilities
|
|
|
41,195
|
|
|
41,173
|
Condor equity
|
|
|
5,693
|
|
|
5,866
|
TWC equity
|
|
|
1,423
|
|
|
1,467
|
Total Equity
|
|
|
7,116
|
|
|
7,333
|
Total Liabilities and Equity
|
|
$
|
48,311
|
|
$
|
48,506
|
The table below provides the c
omponents of net earnings
,
including the Company’s share of the Atlanta JV
,
for the three
and six
months ended
June 30
,
2019 and 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Room rentals and other hotel services
|
|
$
|
3,184
|
|
$
|
3,106
|
|
$
|
7,058
|
|
$
|
6,378
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel and property operations
|
|
|
1,900
|
|
|
2,008
|
|
|
4,077
|
|
|
4,013
|
Depreciation and amortization
|
|
|
374
|
|
|
364
|
|
|
745
|
|
|
721
|
Total operating expenses
|
|
|
2,274
|
|
|
2,372
|
|
|
4,822
|
|
|
4,734
|
Operating income
|
|
|
910
|
|
|
734
|
|
|
2,236
|
|
|
1,644
|
Net loss on disposition of assets
|
|
|
-
|
|
|
(8)
|
|
|
-
|
|
|
(17)
|
Net loss on derivative
|
|
|
-
|
|
|
-
|
|
|
(1)
|
|
|
-
|
Interest expense
|
|
|
(702)
|
|
|
(647)
|
|
|
(1,386)
|
|
|
(1,262)
|
Net earnings
|
|
$
|
208
|
|
$
|
79
|
|
$
|
849
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condor allocated earnings
|
|
$
|
166
|
|
$
|
63
|
|
$
|
679
|
|
$
|
292
|
TWC allocated earnings
|
|
|
42
|
|
|
16
|
|
|
170
|
|
|
73
|
Net earnings
|
|
$
|
208
|
|
$
|
79
|
|
$
|
849
|
|
$
|
365
|
NOTE 5.
DISPOSITIONS OF HOTEL PROPER
TIES
As of
June 30
, 2019
, the Company had
no
hotels
classified as
held for sale. At
December 31, 2018
, the Company had
one
hotel
held for sale
.
During
the
three
months ended
June 30
, 2019
, the Company sold
no
hotels. During the three months ended June 30, 2018
, the Company sold
one
hotel
resulting in
a total gain
of
$
1,947
.
During
the
six
months ended
June 30, 2019 and 2018
, the Company sold
one
hotel and
three
hotels, respectively,
resulting in total gains of
$62
and
$
1,984
,
respectively
.
One
of the hotels sold during
the
first quarter of 2018
had been previously impaired and a recovery of impairment totaling
$93
was recognized upon the sale.
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
NOTE 6
. LONG-TERM DEBT
Long-term debt
related to wholly owned properties
, including debt related to hotel properties held for sale, consisted of the following loans payable at
June 30
, 2019 and December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
|
|
|
Balance at June 30, 2019
|
|
Interest rate at June 30, 2019
|
|
Maturity
|
|
Amortization provision
|
|
Properties encumbered at June 30, 2019
|
|
Balance at December 31, 2018
|
Fixed rate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18
|
|
$
|
8,729
|
|
4.54%
|
|
08/2024
|
|
25 years
|
|
1
|
|
$
|
8,817
|
Great Western Bank
(1)
|
|
|
13,468
|
|
4.33%
|
|
12/2021
(5)
|
|
25 years
|
|
1
|
|
|
13,615
|
Great Western Bank
(1)
|
|
|
1,081
|
|
4.33%
|
|
12/2021
(5)
|
|
7 years
|
|
-
|
|
|
1,171
|
Total fixed rate debt
|
|
|
23,278
|
|
|
|
|
|
|
|
|
|
|
23,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo
|
|
|
25,831
|
|
4.83%
(2)
|
|
11/2022
(6)
|
|
30 years
|
|
3
|
|
|
26,048
|
KeyBank credit facility
(3)
|
|
|
86,845
|
|
5.40%
(4)
|
|
10/2020
(7)
|
|
Interest only
|
|
9
|
|
|
89,487
|
Total variable rate debt
|
|
|
112,676
|
|
|
|
|
|
|
|
14
|
|
|
115,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
135,954
|
|
|
|
|
|
|
|
|
|
$
|
139,138
|
Less: Deferred financing costs
|
|
|
(1,925)
|
|
|
|
|
|
|
|
|
|
|
(2,208)
|
Total long-term debt, net of deferred financing costs
|
|
|
134,029
|
|
|
|
|
|
|
|
|
|
|
136,930
|
Less: Long-term debt related to hotel properties held for sale, net of deferred financing costs of
$0
and
$18
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(1,120)
|
Long-term debt related to hotel properties held for use, net of deferred financing costs of
$1,925
and
$2,190
|
|
$
|
134,029
|
|
|
|
|
|
|
|
|
|
$
|
135,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Both loans are collateralized by Aloft Leawood.
(2)
Variable rate of
30-day LIBOR
plus
2.39%
,
effectively fixed at
4.44%
after giving effect to interest rate swap (see Note 8).
(3)
$150,000
credit facility that includes an accordion feature that would allow the credit facility to be increased to
$400,000
with additional lender commitments. Available borrowing capacity under the credit facility is based on a borrowing base formula for the pool of hotel properties securing the facility. Total unused availability under this credit facility was
$
9,020
at
June 30
, 201
9
. The commitment fee on unused facility is
0.20%.
(4) Borrowings under the facility accrue interest based on a leverage-based pricing grid, at the Company’s option, at either LIBOR plus a spread ranging from
2.25%
to
3.00%
(depending on leverage) or a base rate plus a spread ranging from
1.25%
to
2.00%
(depending on leverage)
.
30-day LIBOR
for
$30,000
notional capped at
3.35%
after giving effect to market rate cap (see Note 8).
(5)
Term
may
be extended for additional
two
years subject to interest rate adjustments.
(6)
Two
one
-year extension options subject to the satisfaction of certain conditions.
(7)
The maturity of the credit facility was extended to
October 1, 2020
on May
3
, 2019.
Two
extension
options
, extending the maturity of the credit facility to
March 1, 2021
and
March 1, 2022
, are
available subject to certain conditions including the completion of specific capital achievements.
Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below based on its contractual
maturity although the balances are expected to be repaid within
one
year upon the sale of the related hotel p
roperties. Aggregate annual principal payments o
n debt for the remainder of 2019
and thereafter are
as follows:
|
|
|
|
|
|
Total
|
Remainder of 2019
|
|
$
|
594
|
2020
|
|
|
88,076
|
2021
|
|
|
14,344
|
2022
|
|
|
24,886
|
2023
|
|
|
214
|
Thereafter
|
|
|
7,840
|
Total
|
|
$
|
135,954
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Financial Covenants
We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility:
|
·
|
|
Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed
60%
.
Commencing on April 1, 2020
, the foregoing leverage ratio will no longer be applicable, and in lieu thereof, the ratio of consolidated total indebtedness to adjusted consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the most recently ended four fiscal quarters cannot exceed
6.25
to 1.
|
|
·
|
|
Secured Leverage Ratio: The ratio of consolidated secured indebtedness (excluding the credit facility) to consolidated total asset value cannot exceed
40%
.
|
|
·
|
|
Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA for the most recently ended four fiscal quarters to consolidated fixed charges for the most recently ended four fiscal quarters cannot be less than
1.50
to 1.
|
|
·
|
|
Tangible Net Worth: Consolidated tangible net worth cannot be less than
$55
million plus
80%
of net offering proceeds.
|
|
·
|
|
Unhedged Variable Rate Debt: Consolidated unhedged variable rate debt cannot exceed
25%
of consolidated total asset value.
|
|
·
|
|
Distributions: The Company is permitted to make distributions during any period of four fiscal quarters in an aggregate amount of up to
95%
of fu
nds available for distribution. The Company
did not meet this covenant for the period ended
June 30, 2019. On August 9, 2019
, an amendment
to the credit facility
was received to increase
this threshold to 105% of funds available for distribution for the period ending June 30, 2019
which put the Company in compliance with the covenant
.
|
Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility have the meanings given to them in the credit facility, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our credit facility contains cross-default provisions which would allow the lenders
under our credit facility
to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan.
As of
June 30
, 2019
, we are not in default of any of our loan
s.
NOTE 7.
CONVERTIBLE DEBT AT FAIR VALUE
As part of an Exchange A
greement entered into on March 16, 2016 with Real Estate Strate
gies, L.P. (“RES”, which also includes affiliated entities)
, the Company issued to RES a Convertible Promissory Note (the “Note”), bearing interest at
6.25%
per annum, in the principal amount of
$1,012
.
The
Note
is
convertible
directly into
97,269
shares of common stock at any time at the option of RES or automatically when the
Series E Cumulative Convertible Preferred Stock (“Series E Preferred Stock”)
is required to be converted or is redeemed in whole (see Note 10).
The Note is not convertible to the extent that a conversion would cause
RES, together with its affiliates,
to
beneficially own more than
49%
of the voting stock of the Company
at the time of the conversion. Any conversion
reduce
s
the principal amount of the Note proportionally.
The Company has made an irrev
ocable election to record this convertible d
ebt in its entirety at
fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gain on derivatives and convertible debt within net earnings each reporting period. Gains
(losses)
related to this Note were recognized
totaling
(
$
24
)
and
(
$
1
)
duri
ng the three months ended
June 30
, 201
9 and 2018
, respectively
, and totaling
(
$
72
)
and
$
19
during the six months ended
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
June 30, 2019 and 2018, respectively
. The fair value of the Note is determined using a trinomial lattice
-based model, which is a generally accepted computational model typically used for pricing options. The fair value of the Note on the date of issuance was determined to be equal to its principal amount. Interest expense
related to this Note is recorded separately from other changes in its fair value within interest expense each period
.
The following table represent
s
the difference between the fair value and the unpaid principal balance of the Note as of
June 30
, 2019
:
|
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2019
|
|
Unpaid principal balance as of June 30, 2019
|
|
Fair value carrying amount over/(under) unpaid principal
|
6.25%
Convertible Debt
|
$
|
1,072
|
|
$
|
1,012
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
NOTE 8.
FAIR VALUE MEASUREMENTS AND DERIVATIVE INSTRUMENTS
Our determination of fair value measurements is based on the assumptions that market participants would use in pricing the asset or liability.
At
June 30
, 2019
, the Compan
y’s convertible debt (see Note 7
) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis. Nonrecurring fair value measurements were utilized
in the determination of the fair valu
e of acquired properties
in
2018
(se
e Note
3
)
,
in the valuation of
the stock-based compensation grants (see Note 12)
,
and
in the assessment of
impaired
and potentially impaired
hotels
during
the three
and six
months ended
June 30
, 2019 and 2018
.
Derivative Instruments
C
urrently, the Company uses derivatives, such as interest rate swaps and caps, to manage its interest rate risk. The fair value of interest rate positions is determined using the standard market methodology of netting discounted expected future cash receipts and payments. Variable interest rates used in the calculation of projected receipts and payments on the positions are based on expectations of future interest rates derived from observable market interest rate curves and volatilities. Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the agreements. The Company believes it minimizes this credit risk by transacting with major creditworthy financial institutions. These interest rate positions at
June 30
, 2019
and
/or
December
31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated debt
|
|
Type
|
|
Terms
|
|
Effective Date
|
|
Maturity Date
|
|
|
Notional amount at June 30, 2019
|
|
|
Notional amount at December 31, 2018
|
Wells Fargo
|
|
Swap
|
|
Swaps 30-day LIBOR for fixed rate of
2.053%
|
|
11/2017
|
|
11/2022
|
|
$
|
25,831
(1)
|
|
$
|
26,048
(1)
|
Credit facility
|
|
Cap
|
|
Caps 30-day LIBOR at
2.50%
|
|
03/2017
|
|
03/2019
|
|
$
|
Not applicable
|
|
$
|
50,000
|
Credit facility
|
|
Cap
|
|
Caps 30-day LIBOR at
3.35%
|
|
4/1/2019
|
|
10/2020
|
|
$
|
30,000
|
|
$
|
Not applicable
|
|
(1)
|
|
Notional amount
amortize
s
consistently with the principal amor
tization 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
on the consolidated balance sheet
s
and are adjusted to their fair
value at each reporting date.
All gains and losses on derivative instruments are
included in net gain on derivatives and convertible debt and with the exception of realized gains and losses related to the interest
rate instruments, which are included in interest expense on the consolidated statements of
operations. Net gains
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
(losses)
of
(
$
432
)
and
$
15
7
for the th
ree months ended
June 30
, 2019 and 2018
, respectively
,
and (
$
621
) and
$584
for the six months ended June 30, 2019, respectively,
were recognized related to derivative instruments.
Recurring Fair Value Measurements
The following tables provide the fair value of the Company’s financial
assets and (
liabilities
)
carried at fair value and measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Interest rate derivatives
|
|
$
|
(372)
|
|
$
|
-
|
|
$
|
(372)
|
|
$
|
-
|
Series E Preferred embedded redemption option
|
|
|
398
|
|
|
-
|
|
|
-
|
|
|
398
|
Convertible debt
|
|
|
(1,072)
|
|
|
-
|
|
|
-
|
|
|
(1,072)
|
Total
|
|
$
|
(1,046)
|
|
$
|
-
|
|
$
|
(372)
|
|
$
|
(674)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Interest rate derivatives
|
|
$
|
350
|
|
$
|
-
|
|
$
|
350
|
|
$
|
-
|
Series E Preferred embedded redemption option
|
|
|
289
|
|
|
-
|
|
|
-
|
|
|
289
|
Convertible debt
|
|
|
(1,000)
|
|
|
-
|
|
|
-
|
|
|
(1,000)
|
Total
|
|
$
|
(361)
|
|
$
|
-
|
|
$
|
350
|
|
$
|
(711)
|
There were
no
transfers between levels during
the three
or six
months
ended
June 30
, 2019 or 2018
.
The following table
present
s
a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that use significant unobservable inputs (Level 3) and the related gains
and losses
recorded in the consolidated statements of operations during the period
s
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2019
|
|
2018
|
|
Series E Preferred embedded redemption option
|
|
Convertible debt
|
|
Total
|
|
Series E Preferred embedded redemption option
|
|
Convertible debt
|
|
Total
|
Fair value, beginning of period
|
$
|
356
|
|
$
|
(1,048)
|
|
$
|
(692)
|
|
$
|
280
|
|
$
|
(1,049)
|
|
$
|
(769)
|
Net gains (losses) recognized in earnings
|
|
42
|
|
|
(24)
|
|
|
18
|
|
|
(14)
|
|
|
(1)
|
|
|
(15)
|
Fair value, end of period
|
$
|
398
|
|
$
|
(1,072)
|
|
$
|
(674)
|
|
$
|
266
|
|
$
|
(1,050)
|
|
$
|
(784)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) during the period included in earnings related to instruments held at end of period
|
$
|
42
|
|
$
|
(24)
|
|
$
|
18
|
|
$
|
(14)
|
|
$
|
(1)
|
|
$
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2019
|
|
|
2018
|
|
Series E Preferred embedded redemption option
|
|
Convertible debt
|
|
Total
|
|
Series E Preferred embedded redemption option
|
|
Convertible debt
|
|
Total
|
Fair value, beginning of period
|
|
$
|
289
|
|
$
|
(1,000)
|
|
$
|
(711)
|
|
$
|
314
|
|
$
|
(1,069)
|
|
$
|
(755)
|
Net gains (losses) recognized in earnings
|
|
|
109
|
|
|
(72)
|
|
|
37
|
|
|
(48)
|
|
|
19
|
|
|
(29)
|
Fair value, end of period
|
|
$
|
398
|
|
$
|
(1,072)
|
|
$
|
(674)
|
|
$
|
266
|
|
$
|
(1,050)
|
|
$
|
(784)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Total unrealized gains (losses) during the period included in earnings related to instruments held at end of period
|
|
$
|
109
|
|
$
|
(72)
|
|
$
|
37
|
|
$
|
(48)
|
|
$
|
19
|
|
$
|
(29)
|
Fair Value of Long-Term Debt
The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of debt obligati
ons with similar credit risks
. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level
2 of the fair value hierarchy. Both t
he carrying value
and estimated fair value of
the Company’s long-term debt are
presented
net of deferred financing costs
in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of
|
|
Estimated fair value as of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
June 30, 2019
|
|
December 31, 2018
|
Held for use
|
|
$
|
134,029
|
|
$
|
135,810
|
|
$
|
134,197
|
|
$
|
134,773
|
Held for sale
|
|
|
-
|
|
|
1,120
|
|
|
-
|
|
|
1,120
|
Total
|
|
$
|
134,029
|
|
$
|
136,930
|
|
$
|
134,197
|
|
$
|
135,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Hotel Properties
In the performance of impairment analysis for both held for sale and held for use properties, fair value is determined with the assistance of independent real estate brokers and through the use of
operating results and
revenue multiples based on the Company’s experience with hotel sales as well as available industry information. For held for sale properties, estimated selling costs are based on our experience with similar asset sales. These are co
nsidered Level 3 measurements
.
The amount of impairment and recovery of previously recorded impairment recognized in the
six
months ended
June 30
, 2018
is shown in the table below:
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
Number of hotels
|
|
|
Impairment recovery
|
Sold hotels:
|
|
|
|
|
Impairment recovery
|
1
|
|
$
|
93
|
NOTE 9. COMMON STOCK
The Company’s common stock is duly authorized, fully paid, and non-assessable.
On September 20, 2017, the Company entered into an equity distribution agreement with KeyBanc Capital Markets Inc. and BMO Capital Markets Corp. (collectively, the “Sales Agents”), pursuant to which we may sell, from time to time, up to an aggregate sales price of
$50,000
, subject to decrease in compliance with General Instruction I.B.6 of Registration Statement on Form S-3, of shares of our common stock pursuant to a prospectus supplement we filed with the
Securities and Exchange Commission (“SEC”)
through the Sales Agents acting as sales agent and/or principal, through an at-the-market offering program (our “ATM program”). Pursuant to Instruction I.B.6 to Registration Statement on Form S-3, we may not sell more than the equivalent of one-third of our public float during any 12 consecutive months so long as our public float is less than
$75,000
.
There were
no
sales of common stock under the ATM program during the three
or six
months ended
June 30
, 2019.
During the three months
and six
months
ended
June 30
, 2018, we sold
16,
140
and
28,474
shares
, respectively,
of common stock under the ATM program at an average sales price of
$10.40
per share
in both periods
for gross proceeds totaling
$1
6
8
and
$296
, r
espectively,
and net proceeds totaling
$
15
4
and
$257
, respectively.
Since the
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
inception of the ATM program, we have sold
1
97
,478
shares of common stock at an average sales price of
$10.1
8
per share for gross proceeds totaling
$
2,01
1
and net proceeds totaling
$1,
87
9
.
NOTE 10.
PREFERRED STOCK
Series E
Redeemable
Convertible Preferred Stock
The Company has
925,000
shares
outstanding
of Series E Preferred Stock.
The Series E Preferred Stock ranks senior to the Company’s common stock and any other preferred stock issuances and receives preferential cumulative cash dividends at a rate of
6.25%
per annum
, payable quarterly of the
$10.00
face value per share. If the Company fails to pay a dividend then during the period that dividends are not paid, the dividend rate increases to
9.50%
per annum. Dividends on the Series E Preferr
ed Stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared, and whether or not such dividends are prohibited by agreement.
Each
share of Series E Preferred Stock is convertible, at the option of the holder, at any time on or after February 28, 2019, into a number of shares of common stock determined by dividing the conversion price of
$13.845
into an amount equal to the
$10.00
face value per share plus accrued and unpaid dividends, if any. Upon liquidation, each share of Series E Preferred Stock is entitled to
$10.00
per share and
accrued and unpaid dividends. The conversion price is subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends. Following a specific equity offering or offerings, from time to time a number of shares of Series E Preferred Stock automatically converts into common stock if the common stock trades at
120%
of the conversion price for
60
trading days, and the number of shares converted will be determined by certain trading volumes measures.
The
Company has rights
to redeem up to
490,250
shares of the Series E Preferred Stock at prices from
110%
to
130%
of its liquidation value. The
holders have put rights commencing March 16, 2021 to put the Series E Preferred Stock to the Company at
130%
of its liquidation preference, which the Company can satisfy with cash or common stock. The Series E Preferred Stock votes as a class on matters generally affecting the Series E Preferred Stock, and as long as
434,750
shares of Series E Preferred Stock (
47%
of the originally issued shares of Series E Preferred Stock) remain outstanding, then
75%
approval of the Series E Preferred Stock will be required to approve merger, consolidation, liquidation or winding up of Condor, related party transactions exceeding
$120
, payment of dividends on common stock except from funds from operations or to maintain REIT status, the grant of exemptions from Condor’s charter limitation on ownership of
9.9%
of any class or series of its securities (exclusive of persons currently holding exemptions), issuance of preferred stock or commitment or agreement to do any of the foregoing.
The Series E Preferred Stock was determined to have a fair value of
$9,900
on the date of issuance as measured using a trinomial lattice-based model. From this value, the embedded redemption option (see Note 8), which was determined to be an asset with a fair value on the date of issuance of
$150
using the same model, was bifurcated and will be accounted for at fair value at each period end. These are considered Level 3 fair value measurements.
NOTE 11
. NONCONTROLLING INTEREST
IN THE OPERATING PARTNERSHIP
Noncontrolling interest in the operating partnership
represents the limited partners’ proportionate share of the equity in the operating partnership. Earnings and loss are allocated to noncontrolling interest in accordance with the weighted a
v
erage percentage ownership of the operating partnership
during the period.
Our ownership interest in the operating partnership
was
99.5
%
as
of
June 30
, 2019
and
December
31, 2018
.
At
June 30
, 2019 and December 31, 2018
,
3,021,439
and
3,281,124
common units
owned by
minority interest holders were
outstanding,
all of which were held by
limited partners
.
The total
redemption value for the
common units
was
$
52
7
and
$
435
at
June 30
,
2019 and December 31, 2018
, respectively.
Each limited partner of
the operating partnership
may, subject to cer
t
ain limitations, require that the operating partnership
redeem all or a portion of his or her
common
units at any time after a specified period following the date the units were acquired, by delivering a redempt
ion notice to the operating partnership
. When a limited partner
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
tenders
common
units for redemption, the Company can, at its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock at a rate of one shar
e of common stock for each
52
common
units redeemed or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited partner would have received if the Company chose to
purch
ase the units for common stock.
No
common units were redeemed during the three months ended June 30, 2019.
During t
he six
months ended
June 30
, 2019,
2
5
9,685
common units were redeemed for cash totaling
$42
.
No
common units were redeemed during the three
or six
months ended
June 30
, 2018.
NOTE 12. STOCK-BASED COMPENSATION
The Company currently has in place the
Condor 2016 Stock Plan, which was approved by the Company’s shareholders at the annual shareholders meeting on June 15, 2016. The 2016 Stock Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, deferred stock units, and other forms of stock-based compensation. The maximum number of shares of the Company’s common stock that may be issued under the 2016 Stock Plan is
7
61,538
following
an amendment to the plan to increase the number of available shares by
300,000
that was approved by shareholders on May 17, 2018 at the annual meeting of shareholders
. As of
June 30
, 2019
, there were
557
,
606
common shares available for issuance under the 2016 Stock Plan.
Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basi
s over the requisite service period. Stock
-based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is
determined to be probable. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of our stock, expected dividend yield, expected term, and assumptions of whether these awards will achieve performance thresholds. We believe that the assumptions and estimates utilized are appropriate based on the information available to management
at the point of measurement.
Compensation cost is recognized
as additional paid-in capital for awards of the Company’s common stock
. The Company has elected to account for forfeitures of stock-based compensation as they occur.
Service Condition Share Awards
From time to time, the Company awards restricted shares of common stock to employees, officers, and members of the Board of Directors under the 2016 Stock Plan. These shares generally vest ratably over
five
years for employees and officers and
three
years for members of the Board of Directors based on continued service or employment.
Dividends paid on these restricted shares during the vesting period are not forfeited in the event that the shares fail to vest. The following table presents a summary of the service condition unvested share activity for the
six
months ended
June 30
, 2019 and 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
2019
|
|
2018
|
|
|
Shares
|
|
Weighted-average grant date fair value
|
|
Shares
|
|
Weighted-average grant date fair value
|
Unvested at December 31
|
|
76,500
|
|
$
|
10.48
|
|
95,832
|
|
$
|
10.54
|
Granted
|
|
19,659
|
|
$
|
8.29
|
|
21,239
|
|
$
|
10.25
|
Vested
|
|
(40,821)
|
|
$
|
9.83
|
|
(21,536)
|
|
$
|
10.59
|
Forfeited
|
|
(1,407)
|
|
$
|
9.23
|
|
(11,644)
|
|
$
|
10.33
|
Unvested at June 30
|
|
53,931
|
|
$
|
10.21
|
|
83,891
|
|
$
|
10.48
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
The fair value of the
service co
ndition unvested share awards was
determined based on the closing price of the Company’s common stock on the grant date.
Market Based
Share
Awards
Pursuant to an amendment of an employment agreement o
n June 28, 2017,
an executive officer may earn shares of common stock if certain market share prices of common stock are attained. Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan. The executive officer will earn and be issued
36,692
common shares each time stock market price targets of
$11.00
to
$18.00
(in
one
dollar increments) per common share are first achieved prior to
March 31
, 2022
based on the weighted-average common stock price for
60
consecutive trading days.
Additionally, the shares vest to the extent of the value received per share of common stock in connection with a change in control, with the payout in such case to be prorated for the portion of the value above a stock market price target but below the next stock market price target.
The compensation cost related to awards
that are
contingent upon achieving a market based criteria is measured at the fair value of the award on the date of gran
t
using the Monte Carlo simulation, including consideration of the market criteria, and amortized on a straight line basis over the derived performance period which is also estimated using this model.
The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company
and its peer group and mini
mize standard error.
The total
grant date fair value of this market based share award
, including additional value assessed at the time of subsequent amendment of the award,
was
$1,3
80
.
Performance Based Share Awards
Pursuant to an amendment of an employment agreement on June 28, 2017, an executive officer may earn shares of common stock if certain operating results of the Company are obtained
. Any such shares, if earned, will be issued under the 2016 Stock Plan or another shareholder approved plan
. For each of the Company’s fiscal years 2017 through
2021
, if the Company achieves between
85%
and
101%
of budgeted Funds from Operations (“FFO”) as approved by the Board of Directors, the executive shall earn and be issued between
11,741
and
19,569
shares of common stock, determined on a straight-line basis based on the percentage of budgeted FFO achieved. In addition, for any fiscal year in which the Company achieves in excess of
101%
of budgeted FFO, an additional
391
shares of common stock will be earned for each
two
percent
actual FFO exceeds
101%
of budgeted FFO, up to a total of
3,910
additional shares of common stock per year.
The fair value of the performance based share awards is based on the closing price of the Company’s common stock on the grant date, discounted for estimated common stock dividends to be declared prior to the shares being issued. The grant date occurs on an annual basis when budgeted FFO is approved by the Board of Directors.
Du
ring the first quarter of 2019,
13,778
shares with a grant date fair value totaling
$
122
were awarded to the executive based on 2018 FFO. Simultaneously
,
2,550
fully vested shares were issued to the executive with a fair value of
$22
as a discretionary grant.
During the
first quarter of 2018
,
21,133
shares with a grant date fair value totaling
$212
were awarded to the executive based on 2017 FFO. T
he total
g
rant date fair value of the 2019
portion of this performance based share award, assuming that
100%
of budgeted FFO is achieved,
was
$
147
.
Warrants
On March 2, 2015, the Company granted a warrant to
an
executive officer of the Company
as an
inducement material to the executive’s acceptance of employment.
The Black-Scholes
option pricing
model was utilized at issuance for the determination of the fair value of the award.
The warrant entitled the executive to purchase a
total of
101,213
authorized
but previously unissued shares of the Company’s common stock
at a price of
(i)
$9.88
per share (the adjusted closing bid price of the common stock on Nasdaq on March 2, 2015) if at least
one
-third but not more than
one
-half of the shares were purchased on or prior to March 17, 2015, and (ii)
$12.48
per share for shares
purchased
after that date. The warrant had
a
three
-year term. The executive officer exercised the warrant in part to purchase
35,060
shares on
March 11, 2015 at the price of
$9.88
per share. The
remaining warrant
expired unexercised on March 2, 2018.
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Director Fully Vested Share Compensation
Independent directors serving as members of the Investment Committee of the Board of Directors receive their monthly Investment Committee fees in the form of shares of the Company’s common stock.
Certain independent directors also elect to receive a portion of their director fees in the form of shares
of the Company’s common stock.
A total of
3,693
and
3,090
shares
were issued during the three months ended
June 30
, 2019 and 2018, respectively,
and
8,102
and
6,012
were issued during the six months ended June 30, 2019
and 2018
, respectively,
to independent directors
under the
2016 Stock Plan
with respect to these fees
.
Stock-Based
Compensation Expense
The expense recognized in the consolidated financial statements for stock-based compensation, including LTIP units, related to employees and directors for the three months ended
June 30
, 2019 and 2018
was
$
424
and
$
263
, respectively
,
and for the six months ended June 30, 2019 and 2018 was
$760
and
$665
, respectively,
all of which is included in general and administrative expense.
Total unrecognized compensation cost related to all awards at
June 30
, 2019
was
$
709
, which is expected to be recognized over a weighted-average remaining service period of
2.
7
years.
NOTE 13. INCOME TAXES
During
the three
months ended
June 30
, 2019 and 2018
, income tax expense totaling
$
4
61
and
$
54
, respectively,
was recognized
primarily related to
income earned by the TRS. During the six months ended June 30, 2019 and 2018, income tax expense totaled
$
647
and
$
183
, respectively.
Management believes the combined federal and state effective income tax rate for the TRS will be approximately
26%
.
After consideration of limitations related to a change in control as
defined under
Code Section 382
, the TRS’s net operating loss carryforward at
June 30
, 2019
as determined for federal income tax purposes was
$3,
208
.
The availability of the loss carryforwards will expire from
202
7
through
203
4
, with an indefinite carryforward for losses arising after December 31, 2017.
NOTE 14
.
EARNINGS PER SHARE
The two-class method is utilized to compute earnings per common share (“EPS”) as our unvested restricted stock awards with non-forfeitable dividends are considered participating securities. Under the two-class method, losses are allocated only to those securities that have a contractual obligation to share in the losses of the Company. Our unvested restricted stock is not obligated to absorb Company losses and accordingly is not allocated losses.
The following is a reconciliation of basic and dilu
ted EPS
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator: Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common shareholders
|
|
$
|
(1,408)
|
|
$
|
2,741
|
|
$
|
(1,537)
|
|
$
|
3,383
|
Less: Allocation to participating securities
|
|
|
(11)
|
|
|
(20)
|
|
|
(28)
|
|
|
(36)
|
Net earnings (loss) attributable to common shareholders, net of amount allocated to participating securities
|
|
$
|
(1,419)
|
|
$
|
2,721
|
|
$
|
(1,565)
|
|
$
|
3,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common shareholders, net of amount allocated to participating securities
|
|
$
|
(1,419)
|
|
$
|
2,721
|
|
$
|
(1,565)
|
|
$
|
3,347
|
Interest and fair value adjustment on Convertible Debt
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
13
|
Total Diluted
|
|
$
|
(1,419)
|
|
$
|
2,738
|
|
$
|
(1,565)
|
|
$
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - Basic
|
|
|
11,847,868
|
|
|
11,782,594
|
|
|
11,832,856
|
|
|
11,764,231
|
Performance Based Share Awards
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,571
|
Convertible Debt
|
|
|
-
|
|
|
97,269
|
|
|
-
|
|
|
97,269
|
Weighted average number of common shares - Diluted
|
|
|
11,847,868
|
|
|
11,879,863
|
|
|
11,832,856
|
|
|
11,870,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share
|
|
$
|
(0.12)
|
|
$
|
0.23
|
|
$
|
(0.13)
|
|
$
|
0.28
|
Diluted Earnings (Loss) per Share
|
|
$
|
(0.12)
|
|
$
|
0.23
|
|
$
|
(0.13)
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the weighted average number of potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted EPS as they are antidilutive:
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Unvested restricted stock
|
66,432
|
|
91,667
|
|
74,300
|
|
95,665
|
Warrants - Employees
(2)
|
-
|
|
-
|
|
-
|
|
22,295
|
Series E Preferred Stock
|
668,111
|
|
668,111
|
|
668,111
|
|
668,111
|
Convertible debt
|
97,269
|
|
-
|
|
97,269
|
|
-
|
Operating partnership common units
(1)
|
58,105
|
|
92,499
|
|
59,926
|
|
91,064
|
Total potentially dilutive securities excluded from the denominator
|
889,917
|
|
852,277
|
|
899,606
|
|
877,135
|
|
(1)
|
|
Common
units of the operating partnership
have been omitted from the denominator for the purpose of computing diluted EPS since the effect of including these amounts in the numerator and denominator would have no impact on calculated EPS.
|
|
(2)
|
|
Amounts above are weighted average amounts outstanding for the
periods presented
. These
instrument
s were
no longer outstanding at
June 30
, 2019
.
|
NOTE 15
. COMMITMENTS AND CONTINGENCIES
Management Agreements
Our TRS engages eligible independent contractors as property managers for each of our hotels in accordance with the requirements for qualification as a REIT. The hotel management agreements provide that the management companies have control of all operational aspects of the hotels, including employee-related matters. The management companies must generally maintain each hotel under their management in good repair and condition and perform routine maintenance, repairs, and minor alterations. Additionally, the management companies must operate the hotels in accordance with the national franchise agreements that cover the hotels, which includes, as applicable, using franchisor sales an
d reservation systems and
abiding by
the
franchisors’ marketing standards. The management agreements generally require the TRS to fund debt service, working capital needs, and capital expenditures and to
fund
the management companies
’
third-party operating
expenses
, except those expenses not related to the
operation of the hotels. The TRS also is responsible for obtaining and maintaining certain insurance policies with respect to the hotels.
Each of the management companies employed by the TRS
at
June 30
,
2019
receive
s
a base monthly management fee of
3.0%
to
3.5%
of
hotel revenue, with incentives for performance
,
which increase such fee to a maximum of
5.0%
of hotel revenue
.
Base
management fees
totaled
$
47
2
and
$
524
,
respectively,
for the three months ended
June 30
, 2019 and 2018
,
and
$946
and
$
1,019
, respectively, for the six months ended June 30, 2019 and 2018,
all of which was included as hotel an
d property operations expense.
Incentive management fees
totaled
$
33
and
$
116
, respectively, for the three months ended
June 30
,
201
9
and 201
8, and
$
77
and
$181
, respectively, for the six months ended June 30, 2019 and 2018.
The management agreements generally have initial terms of
one
to
three
years and renew for additional terms of
one
year unless either party to the agreement gives the other party written notice of termination at least
90
days before
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
the end of a term. The Company may terminate a management agreement, subject to cure rights, if certain performance metrics tied to both individual hotel and total managed portfolio performance are not met. The Company may also terminate a management agreement with respect to a hotel at any time without reason upon payment of a termination fee. The management agreements terminate with respect to a hotel upon sale of the hotel, subject to certain notice requirements.
Franchise Agreements
As
of
June 30
, 2019
,
all of our
properties operate under franchise licenses from national hotel companies. Under our franchise agreements, we are required to pay franchise fees generally between
3.3%
and
5.5%
of room revenue
, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between
2.5%
and
6.0%
of room revenue. The franchise agreements typically have
10
to
25
year terms although certain agreements may be
terminated by either party on certain anniversary dates specified in the agreements. Further, each agreement provides for early termination fees in the event the agreement is term
inated before the stated term.
Franchise fee expense totaled
$
1,2
46
and
$
1,
2
95
for the three months ended
June 30
, 2019 and 2018
, respectively
,
and
$2,473
and
$2,517
for the six
months ended June 30, 2019 and 2018, respectively,
and
all of which was included as hotel and property operations expense.
The franchisor of two of our hotels advised us in February
2019 that both of the hotels have
dropped below the required level for guest satisfaction
surveys, and that if the hotels do
not achieve compliance, it reserves the right to elect to terminate the relevant franchise agreement. The Company is actively addressing the matter relating to the surveys and has plans in place which it believes will resolve these issues.
Leases
The C
ompany has
no
land lease agreement
s in place related to properties owned at
June 30
, 2019.
The Company entered into
three
new office lease agreements in 2016, replacing all existing office lease
agreements
. These leases expire in
2019
through
2021
and have combined rent expense of approximately
$15
4
annually.
Office lease expense totaled
$
39
in
both
the three months ended
June 30
, 2019 and 2018
,
and
$78
in both the six months ended June 30, 2019 and 2018,
and is included in
gen
eral and administrative expense. The Company also has in place operating leases for miscellaneous equipment at its hotel properties.
The maturity of the lease liabilities for the Company’s operating leases is as follows:
|
|
|
Maturity of lease liabilities
|
|
|
Year ended December 31,
|
|
|
Remainder of 2019
|
$
|
60
|
2020
|
|
91
|
2021
|
|
81
|
2022
|
|
20
|
2023
|
|
4
|
Thereafter
|
|
30
|
Total lease payments
|
$
|
286
|
Less: Imputed interest
|
|
(29)
|
Present value of lease liabilities
|
$
|
257
|
As of December 31, 2018,
prior to adoption of ASC 842,
the future minimum lease payments applicable to non-
cancellable operating leases were
as follows:
|
|
|
|
|
|
|
Lease rents
|
2019
|
|
$
|
138
|
2020
|
|
|
61
|
2021
|
|
|
47
|
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
Litigation
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. We are not currently involved in any material litigation, nor, to our knowledge, is any material litigation threatened against us. The Company has insurance to cover potential material losses and we believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.
NOTE 1
6
.
SUBSEQUENT EVENTS
Agreement and Plan of Merger
On July 19, 2019, the Company, the operating partnership
,
NHT Operating Partnership, LLC (“Parent”), NHT REIT Merger Sub, LLC (“Merger Sub”) and NHT Operating Partnership II, LLC (“Merger OP
,
”
and together with Parent and Merger Sub, the “Parent Parties”
), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger O
P will merge with and into the operating p
artnership (the “Partnership Merger”), and, Merger Sub will merge with and into the Company (the “Company Merger” and, together with the Partnership Merger, the “Mergers”). Upon completion of the Partnership Merger, Merger OP will survive and
the separate existence of the o
p
erating p
artnership will cease. Upon completion of the Company Merger, the Company will survive and the separate existence of Merger Sub will cease. The Mergers and the other transactions contemplated by the Merger Agreement were unanimously approved by the Company’s Board of Directors (the “Company Board”).
Pursuant to the terms and conditions in the Merger Agreement,
upon completion of the Company Merger
, each share of
the Company’s
common stock
(
other than
treasury
shares
and shares
held by the
Parent Parties, which will be cancelled and retired and will cease to exist with
no
considerati
on being delivered in exchange therefor)
,
par value
$0.01
per share (the “Company common stock”)
,
will be conv
erted into the right to receive
$11.10
per
share in cash, and
each share of
Series E Preferred Stock
will be
converted into the right to receive
$10.00
in cash, each without interest and less any applicable withholding taxes. Upon completion of the Partnership Merger, each comm
on unit of
partnership interest in the operating partnership (excluding operating partnership common units held by the general partner of the operating partnership) will be converted into the right to receive
$0.21346
in
cash
, witho
ut interest and less any applicable withholding taxes.
Pursuant to the terms and cond
itions of
the Merger Agreement
, each of the outstanding awards granted pursuant to the Company’s equity incentive plans will automatically become fully vested and all restrictions thereon will laps
e, and thereafter, all Company c
ommon
stock
represented thereby will be considered outstanding for all purposes under the Merger Agreement
and will only have the right to receive an amount equal to
$11.10
in cash, without interest and less any applicable withholding taxes.
Pursuant to the terms of the Merger Agreement, the Company has agreed to exercise its right to acquire the remaining
20%
equity interest of the Atlanta JV that it does not own, pursuant to the terms of the Atlanta JV organizational documents, with the purchased financed from
the Company’s line of credit under the credit facility.
The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to in all material respects carry on its business in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by Parent, Merger Sub or Merger OP.
The consummation of the Mergers is subject to certain customary closing conditions, including, among others,
adoption and
approval of the Merger Agreement
, as it may be amended from time to time, and the transactions
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, e
xcept share and per share data)
contemplated by the Merger Agreement, including, without limitation, the Company Merger (collectively, the “Merger Proposal”) by
the
affirmative vote of
(1) a
majority of
the
votes en
titled to be cast
by
the
holders of the Company common stock, and (2) the holders of
75%
of the outstanding Series E
preferred stock,
voting as separate classes (the “Company Shareholder Approval”). The Merger Agreement requires the Company to convene a shareholders’ meeting for purposes of obtaining the Company Shareholder Approval.
The Merger Agreement restricts the Company’s ability to solicit other acquisition proposals (as defined in the Merger Agreement), or to provide information to or engage in discussions with third parties regarding other acquisition proposals. Subject to certain conditions, the Company board of directors is permitted to change its recommendation with respect to the Merger Proposal in response to a superior proposal (as defined in the Merger Agreement) and, upon payment of a $9,540 termination fee, the Company is permitted to terminate the Merger Agreement and enter into an agreement with respect to a superior proposal; provided such superior proposal must occur no later than August 18, 2019.
Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termina
tion fee to Parent of
$9,540
. In certain other circumstances, Parent will be required to pay the Company
a termination fee of
$11,925
upon termination of the Merger Agreement.
The closing of the Mergers may not occur prior to October 1, 2019 without the consent of the parties. If the Company notifies Parent that it is prepared to close and all conditions to Parent’s obligations to close are met, then Parent, at its option, may
extend the closing time for a
30-day period (or such shorter period so as not to extend beyond December 31, 2019), provided, that no Parent Party is then in breach of the merger agreement in any material respect. Parent may exercise an extension up to three times during the term of the Merger Agreement.
During the term of the Merger Agreement, the Company may not pay cash dividends to holders of the Company common stock or the Series E Preferred Stock, except the Company is permitted to declare and pay a dividend to shareholders during the month in which an extension option for
the
closing
of the transactions contemplated by the Merger Agreement
is exercised by the Parent, subject to limitations
as set forth in the Merger Agreement and the disclosure schedule delivered therewith
on amount and
our
prior month adjusted funds from operations.
The holders of the Series E Preferred Stock have agreed to waive accrual of any unpaid dividends between signing and closing.
Aloft Atlanta
JV
Refinancing
On August 9, 2019, the operating partnership and the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, closed on a
$34,080
term loan pursuant to a term loan agreement with KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank
National Association, as Agent for the L
enders (the “New Term Loan
”).
The proceeds of the New Term L
oan were used to repay
$33,750
of indebtedness outstanding under a term loan agreement dated August 22, 2016 between the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, and LoanCore Capital Credit REIT LLC, as Lender, which indebtedness was secured by the Aloft Atlanta hotel. In connection with the repayment of this term loan on August 9, 2019, the term loan agreement and related loan documents were terminated.
The New Term L
oan matures upon the earlier to occur of (a) consummation of the merger under the Merger Agreement
and (b)
February 9, 2020
. The New Term L
oan bears interest, at the Borrower’s option, at either LIBOR plus
2.25%
o
r a base rate plus
1.25%
. The New Term L
oan requires monthly interest payments and principal is due on the maturity date. The Borrowers may, at an
y time, voluntarily prepay the New Term L
oan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).
The New Term L
oan is secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts
and general intangibles. The New Term L
oan is guaranteed by the Company and certain of its subsidiaries.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for
the year ended December 31, 2018
and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.
References to “we,” “our,” “us,” and
the
“Company” refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
Forwar
d-Looking Statements
Certain information both included and incorporate
d by reference in this Form 10-Q
may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.
Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies
,
and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions generally and
in
the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts), availability of capital, risks associated with debt financing, interest rates, competition, supply and demand for hotel rooms in our current and proposed market areas, policies and guidelines applicable to real estate investment trusts, and other risks and uncertainties described herein, and in our filings with the
Securities and Exchange Commission (“
SEC
”)
from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements inclu
ded in this report which speak only as of the date of this report.
Background
Condor Hospitality Trust, Inc. (“Condor” or the “Company”), 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
June 30
, 2019, the Company owned 15 hotels, representing 1,908 rooms, in eight states, including one hotel owned through an 80% interest in an unconsolidated joint venture (“Atlanta JV”).
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership,
Condor Hospitality
Limited Part
nership and its subsidiaries (the “operating partnership
”), for which we serve as general partner. As of
June 30, 2019, we owned
approximate
ly
99.5% of the common operating units (“common units”)
in
the operating partnership. In the future, the operating partnership
may issue limited partnership interests to third parties from time to time in connection with our acquisition of hotel properties or the raising of capital.
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 cont
ractors 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.
Overview
Agreement and Plan of Merger
Subsequent to the end of the quarter, on July 19, 2019, the Company and the operating partnership entered into an Agreement and Plan of Merger under which, if consummated, the Company’s common shareholders will receive $11.10 per share. The details of this Agreement and Plan of Merger are further discussed below with
Liquidity, Capital Resources, and Equity Transactions.
Completion of the transaction, which is expected to occur in the fourth quarter of 2019, is subject to customary closing conditions, including the approval of Condor’s common and preferred shareholders. There can be no assurances that any such conditions will be satisfied or waived or that the acqui
sition of the Portfolio will be
completed.
Financial Highlights
Revenue in the three months ended June 30, 2019 totaled $16.2 million, a decrease of $1.6 million, or 9.3%, from the comparable period in 2018. This decrease was primarily the result of revenue related
to
properties sold between the periods totaling $1.4 million in the second quarter of 2018. Between these quarters, same-store Revenue per Available Room (“RevPAR”) decreased 0.7%. Additionally, net earnings (loss) attributable to common shareholders decreased to ($1.4 million), or ($0.12) per diluted share, compared to $2.7 million, $0.23 per diluted share, in the prior year.
The largest drivers of the decrease in net earnings (loss) were a decrease in gains on the disposition of assets of $1.9 million, an increase in net losses on derivatives and convertible debt of $0.6 million, and expenses related to equity transactions and strategic alternatives of $0.8 million in the second quarter of 2019, and decreased income earned from sold properties of $0.4 million.
Adjusted Funds from Operations (“AFFO”) was $3.4 million, or $0.28 per diluted share, decreased from $4.2 million, or $0.34 per diluted share, in prior year. Hotel
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) decreased to $7.5 million from $8.0 million, a decrease of $0.5 million, or 6.8%. Similarly to revenue, this decrease in hotel EBITDA was driven by hotel EBITDA recognized on properties sold between the periods totaling $0.4 million.
Portfolio Activity
The Company’s investment strategy is to assemble a portfolio of premium-branded, select-service hotels in the top 100 Metropolitan Statistical Areas (“MSAs”) with a particular focus on MSAs
ranked between 20 to 60. Since restarting its portfolio transformation in 2015, the Company has acquired 14 high-quality select-service hotels representing 1,808 rooms in its target markets for a total purchase price of $276.6 million. Additionally, during this time, the Company has sold 55 legacy assets for a total gross sales price of $169.9 million.
Balance Sheet Activity
As of
June 30
, 2019, the Company had cash and cash equivalents (including restricted cash) of $
8.9
million and available revolver borrowing capacity of $
9.0
million. As of
June 30
, 2019, the Company had total outs
tanding long-term debt of $136.0
million, all
of which was associated with assets held for use, with a weighted average maturity of
2.0
years and a weighted average interest rate of
5.12
%.
Dividends
On
May 23
, 2019, the Board of Directors declared a quarterly cash common stock dividend of $0.195 per share for the
second quarter of 2019
. The common stock dividend represented an annualized yield of approximately
8.1
% based on the closing price of the Company’s common shares on
June 7, 2019
. The
second
quarter dividend was paid on
July 1
, 2019 to shareholders of record as of
June 24
, 2019.
Pursuant to the
Agreement and Plan of Merger
, the Company will not pay cash dividends to holders of Company common shares and Series E Pref
erred Stock, except in certain circumstances. S
ee
Liquidity
, Capital Resources, and Equity
Transactions
below.
Hotel Property Portfolio and Activity
Hotel Property Portfolio
The following table sets forth certain information with respect
to the hotels owned by us as of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Hotel Name
|
|
City
|
|
State
|
|
Rooms
|
|
Acquisition Date
|
|
Purchase Price
(in thousands)
|
Hilton Garden Inn
|
|
Dowell/Solomons
|
|
MD
|
|
100
|
|
05/25/2012
|
|
$11,500
|
SpringHill Suites
|
|
San Antonio
|
|
TX
|
|
116
|
|
10/01/2015
|
|
$17,500
|
Courtyard by Marriott
|
|
Jacksonville
|
|
FL
|
|
120
|
|
10/02/2015
|
|
$14,000
|
Hotel Indigo
|
|
College Park
|
|
GA
|
|
142
|
|
10/02/2015
|
|
$11,000
|
Aloft
(1)
|
|
Atlanta
|
|
GA
|
|
254
|
|
08/22/2016
|
|
$43,550
|
Aloft
|
|
Leawood
|
|
KS
|
|
156
|
|
12/14/2016
|
|
$22,500
|
Home2 Suites
|
|
Lexington
|
|
KY
|
|
103
|
|
03/24/2017
|
|
$16,500
|
Home2 Suites
|
|
Round Rock
|
|
TX
|
|
91
|
|
03/24/2017
|
|
$16,750
|
Home2 Suites
|
|
Tallahassee
|
|
FL
|
|
132
|
|
03/24/2017
|
|
$21,500
|
Home2 Suites
|
|
Southaven
|
|
MS
|
|
105
|
|
04/14/2017
|
|
$19,000
|
Hampton Inn & Suites
|
|
Lake Mary
|
|
FL
|
|
130
|
|
06/19/2017
|
|
$19,250
|
Fairfield Inn & Suites
|
|
El Paso
|
|
TX
|
|
124
|
|
08/31/2017
|
|
$16,400
|
Residence Inn
|
|
Austin
|
|
TX
|
|
120
|
|
08/31/2017
|
|
$22,400
|
TownePlace Suites
|
|
Austin
|
|
TX
|
|
122
|
|
01/18/2018
|
|
$19,750
|
Home2 Suites
|
|
Summerville
|
|
SC
|
|
93
|
|
02/21/2018
|
|
$16,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
1,908
|
|
|
|
$287,925
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This property is owned through an 80% interest in our unconsolidated Atlanta JV
.
|
All of our properties
are encumbered by either our
$150.0 million secured revolving credit facility (the “credit facility”)
or by mortgage debt at
June 30, 2019
.
Dispositions
Consistent with our strategic repositioning, the following hotel sale was
executed in the
six months ended June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Date of sale
|
|
Location
|
|
Brand
|
|
Condor lender
|
|
Number of rooms
|
|
Gross proceeds (in thousands)
|
03/22/2019
|
|
Solomons, MD
|
|
Quality Inn
|
|
Credit facility
|
|
59
|
|
$
|
4,320
|
|
|
|
|
|
|
Total
|
|
59
|
|
$
|
4,320
|
The
net proceeds, after the payment
of related expenses, from this disposition
totaled $4.2
million. All
net proceeds were used to repay borrowings und
er the
credit facility.
Based on the criteria discussed in the footnotes to the consolidated financial statements,
at December 31, 2018, the Company had one hotel held for sale. As of June 30, 2019, subsequent to the sale of the Solomons Quality Inn during the first quarter of 2019, the Company had no hotels classified as held for sale.
Operating Performance Metrics
The following table
s present
our
same-store occupancy
,
average daily rate (“ADR”)
, and
RevPAR for all our hotels owned at June 30, 2019. Same-store occupancy, ADR, and RevPAR reflect the performance of hotels during the entire period, regardless of our ownership during the period presented. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us or audited or reviewed by our independent auditors. The performance metrics for the hotel acquired through our Atlanta JV, also presented below, reflect 100% of the operating results of the property, including our interest and the interest of our partner.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2019
|
|
2018
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
Wholly owned new investment platform properties
|
83.07%
|
|
$
|
123.68
|
|
$
|
102.74
|
|
84.64%
|
|
$
|
122.69
|
|
$
|
103.84
|
Atlanta Aloft JV
|
79.81%
|
|
$
|
146.54
|
|
$
|
116.95
|
|
81.20%
|
|
$
|
141.89
|
|
$
|
115.21
|
Total Same-Store Portfolio
|
82.64%
|
|
$
|
126.62
|
|
$
|
104.63
|
|
84.18%
|
|
$
|
125.15
|
|
$
|
105.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
|
Occupancy
|
|
ADR
|
|
RevPAR
|
Wholly owned new investment platform properties
|
81.43%
|
|
$
|
124.75
|
|
$
|
101.59
|
|
82.54%
|
|
$
|
123.11
|
|
$
|
101.61
|
Atlanta Aloft JV
|
79.98%
|
|
$
|
163.51
|
|
$
|
130.78
|
|
80.35%
|
|
$
|
147.26
|
|
$
|
118.32
|
Total Same-Store Portfolio
|
81.24%
|
|
$
|
129.83
|
|
$
|
105.47
|
|
82.24%
|
|
$
|
126.25
|
|
$
|
103.84
|
Total same-store RevPAR decreased by 0.7% in the second quarter of 2019, driven by a decrease in occupancy of 1.8% w
hich was partially offset by an in
crease
in ADR of 1.2%. In the second quarter, the largest RevPAR changes related to the San Antonio SpringHill Suites (decrease of 14.6%) and the Tallahassee Home2 Suites (increase of 10.3%). At the San Antonio SpringHill Suites, the decrease was driven by a much weaker 2019 convention schedule and the timing of athletic events when compared to 2018. At the Tallahassee Home2 Suites, the increase in RevPAR, which was driven by both a 5.3% increase
in occupancy
and a 4.8% increase in ADR
, was primarily due to extended stay Federal Emergency Management Agency (“FEMA”) business following the hurricanes that struck Florida in 2018.
Total same-store RevPAR increased by 1.6% during the six months ended June 30, 2019, driven by a 2.8% increase in ADR which was partially offset by a decrease in occupancy of 1.2%. The largest RevPAR increases during this period were the Tallahassee Home2 Suites (increase of 13.0%), the El Paso Fairfield Inn (increase of 9.3%), and the Atlanta Aloft (JV) (increase of 10.5%). These increases were partially offset by a decreases in RevPAR at the Austin TownePlace Suites (decrease of 15.2%) and the San Antonio Sprin
gHill
Suites (decrease of 10.2%).
The conditions effecting the Tallahassee Home2 Suites and the San Antonio SpringHill Suites in the six month periods are similar to the conditions effecting second quarter performance as discussed above. At the El Paso Fairfield Inn, the increase in RevPAR was driven by both increases in occupancy (4.3%) and ADR (4.8%) resulting from increased business in the market due to border and immigration issues and increased activity at Fort Bliss. The performance of the Atlanta Aloft, which was almost entirely due to an increase in ADR of 11.0%, resulted from the 2019 Super Bowl in the market. At the Austin TownePlace Suite, the decrease in RevPAR was due t
o both decreased occupancy (10.6%) and ADR (5.2
%) and was attributable to the loss of FEMA business in the market in 2018 following the
2017 hurricane season.
Results of Operations
Comparison of the three months ended
June 30, 2019
to the three months ended
June 30, 2018
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2019
|
|
2018
|
|
Variance
|
Revenue
|
$
|
16,177
|
|
$
|
17,834
|
|
$
|
(1,657)
|
Hotel and property operations expense
|
|
(9,755)
|
|
|
(10,756)
|
|
|
1,001
|
Depreciation and amortization expense
|
|
(2,394)
|
|
|
(2,444)
|
|
|
50
|
General and administrative expense
|
|
(1,572)
|
|
|
(1,605)
|
|
|
33
|
Acquisition and terminated transactions expense
|
|
(7)
|
|
|
(71)
|
|
|
64
|
Equity transaction and strategic alternatives
|
|
(834)
|
|
|
-
|
|
|
(834)
|
Net gain (loss) on disposition of assets
|
|
(16)
|
|
|
1,895
|
|
|
(1,911)
|
Equity in earnings of joint venture
|
|
166
|
|
|
63
|
|
|
103
|
Net gain (loss) on derivatives and convertible debt
|
|
(456)
|
|
|
156
|
|
|
(612)
|
Other expense, net
|
|
(24)
|
|
|
(20)
|
|
|
(4)
|
Interest expense
|
|
(2,094)
|
|
|
(2,091)
|
|
|
(3)
|
Income tax expense
|
|
(461)
|
|
|
(54)
|
|
|
(407)
|
Net earnings (loss)
|
$
|
(1,270)
|
|
$
|
2,907
|
|
$
|
(4,177)
|
Revenue
Revenue decreased by a total of $1,657, or 9.3%, primarily as a result of decreased revenue from properties sold during and between the periods of $1,428. Revenue related to new investment platform properties owned throughout both periods decreased in total by $229 as a result of the changes in RevPAR discussed above.
Operating Expenses and Interest Expense
Hotel and property operations expense also decreased by $1,001, also primarily as a result of decreased expenses from properties sold during and between the periods of $997. In total, hotel and property operations expenses remained a consistent percentage of total revenue at 60.3% in both periods.
Interest expense was largely unchanged between the periods, increasing in total by $3, with a decrease in debt outstanding as a result of the smaller property portfolio being offset by an increase in the weighted average interest rate on total debt outstanding due to changing market conditions (from 4.84% at June 30, 2018 to 5.27% at June 30, 2019).
Gener
al and administrative expense de
creased by $33 driven by
decreased professional fees as a result of de
creased transactional activity which was largely offset by
accelerated stock compensation costs related to the second quarter 2019
departure of a senior executive.
In the second quarter of 2019, $834
of expenses were recognized as e
quity transaction and strategic alternatives expenses which included the removal of previously capitalized costs related to the Company’s shelf registration and at-the-market offering program and costs incurred related to the Company’s strategic alternatives initiative that generated the Agreement and Plan of Merger discussed further
below with
Liquidity, Capital Resources, and Equity Transactions.
Net Gain (Loss) on Disposition of Assets
During the three months ended June 30, 2019 and 2018, the Company sold no hotels and one hotel, respectively, resulting in total gains of $0 and $1,947
,
respectively.
The net gains (losses) appearing in the financial statements also include net losses on disposals due to repairs, replacements, and other renovations.
Net Gain (Loss) on Derivatives and Convertible Debt
The change in net gain (loss) on derivatives and convertible debt was driven by changes in value of the Company’s interest rate swap on its Wells Fargo debt which is adjusted to fair market value each period. Due to differences in
the interest rate environment, during the second quarter of 2018, the Company recognized an unrealized gain of $171 on this instrument while in the second quarter of 2019, an unrealized loss of $464 was recognized.
Income Tax Expense
Income tax expense in both periods was driven primarily by income earned by the TRS. Management believes the combined federal and state income tax rate for the TRS will be approximately 26% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.
Comparison of the six months
ended June 30, 2019 to the six
months ended June 30, 2018 (in thousands)
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
Variance
|
Revenue
|
$
|
32,080
|
|
$
|
34,513
|
|
$
|
(2,433)
|
Hotel and property operations expense
|
|
(19,548)
|
|
|
(21,170)
|
|
|
1,622
|
Depreciation and amortization expense
|
|
(4,756)
|
|
|
(4,703)
|
|
|
(53)
|
General and administrative expense
|
|
(3,235)
|
|
|
(3,474)
|
|
|
239
|
Acquisition and terminated transactions expense
|
|
(14)
|
|
|
(90)
|
|
|
76
|
Equity transaction and strategic alternatives
|
|
(834)
|
|
|
-
|
|
|
(834)
|
Net gain on disposition of assets
|
|
23
|
|
|
1,871
|
|
|
(1,848)
|
Equity in earnings of joint venture
|
|
679
|
|
|
292
|
|
|
387
|
Net gain (loss) on derivatives and convertible debt
|
|
(693)
|
|
|
603
|
|
|
(1,296)
|
Other expense, net
|
|
(53)
|
|
|
(34)
|
|
|
(19)
|
Interest expense
|
|
(4,257)
|
|
|
(4,019)
|
|
|
(238)
|
Impairment recovery, net
|
|
-
|
|
|
93
|
|
|
(93)
|
Income tax expense
|
|
(647)
|
|
|
(183)
|
|
|
(464)
|
Net earnings (loss)
|
$
|
(1,255)
|
|
$
|
3,699
|
|
$
|
(4,954)
|
Revenue
Revenue decrea
sed by a total of $2,433, or 7.0
%, primarily as a result of decreased revenue from properties sold during and between the periods of $3,025 which was partially offset by revenue from properties acquired during the first quarter of 2018 which increased by $251. Revenue related to new investment platform properties owned throughout both periods increased in total by $341 as a result of the changes in RevPAR discussed above.
Operating Expenses and Interest Expense
Hotel and property operations expense also decreased by $1,622, also primarily as a result of decreased expenses from properties sold during and between the periods of $2,234 which was partially offset by expenses from properties acquired during the first quarter of 2018 which increased by $381.
In total, hotel and property operations expenses decreased as a percentage of total revenue to 60.9% from 61.3%.
I
nterest expense increased by $238
, with a decrease in debt outstanding as a result of the smaller property portfolio being more than offset by an increase in the weighted average interest rate on total debt outstanding due to changing market conditions (from 4.84% at June 30, 2018 to 5.27% at June 30, 2019).
General and administrative expense decreased by $239 between the periods largely due to decreased professional fees as a result of decreased transactional activity which were partially offset by accelerated stock compensation costs related to the second quarter 2019 departure of a senior executive.
In the second quarter of 2019, $834 of expenses were recognized as Equity transaction and strategic alternatives expenses which
included the removal of previously capitalized costs related to the Company’s shelf registration and at-the-market offering program and costs incurred related to the Company’s strategic alternatives initiative that generated the Agreement and Plan of Merger discussed further
below with
Liquidity, Capital Resources, and Equity Transactions.
Net Gain (Loss) on Disposition of Assets and Impairment Recovery, net
During the six months ended June 30, 2019 and 2018, the Company sold one hotel and three hotels, respectively, resulting in total gains of $62 and $1,984
respectively.
The net gains (losses) appearing in the financial statements also include net losses on disposals due to repairs, replacements, and other renovations.
One of the properties sold in the first quarter of 2018 had been previously impaired and a recovery of impairment of $93 was recognized upon the sale.
Equity in Earnings of Joint Venture
The increase in equity in earnings of joint venture was due to the significantly increased operating performance of the Atlanta Aloft hotel in 2019, which, as previously discussed, was largely due to the 2019 Super Bowl being held in the market.
Net Gain (Loss) on Derivatives and Convertible Debt
The change in net gain (loss) on derivatives and convertible debt was driven by changes in value of the Company’s interest rate swap on its Wells Fargo debt which is adjusted to fair market value each period. Due to differences in the interest rate environment, during the first half of 2018, the Company recognized an unrealized gain of $626 on this instrument while in the
first half
of 2019, an unrealized loss of $719 was recognized.
Income Tax Expense
Income tax expense in both periods was driven primarily by income earned by the TRS. Management believes the combined federal and
state income tax rate for the TRS will be approximately 26% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.
Non-GAAP Financial Measures
Non-GAAP financial measures are measures of our historical financial performance that are different from measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We report Funds from Operations (“FFO”), Adjusted FFO (“AFFO”), Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”),
EBITDA for real estate (“EBITDA
re
”),
Adjusted EBITDA
re
, and Hotel EBITDA as non-GAAP measures that we believe are useful to investors as key measures of our operating results and which management uses to facilitate a periodic evaluation of our operating results relative to those of our peers. Our non-GAAP measures should not be considered as an alternative to U.S. GAAP net earnings as an indication of financial performance or to U.S. GAAP cash flows from operating activities as a measure of liquidity. Additionally, these measures are not indicative of funds available to fund cash needs or our ability to make cash distributions as they have not been adjusted to consider cash requirements for capital expenditures, property acquisitions, debt service obligations,
or other commitments.
Funds from Operations (“FFO”) & Adjusted FFO (“AFFO”)
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net earnings or loss computed in accordance with GAAP, excluding gains or losses from sales of real estate assets, impairment, and the depreciation and amortization of real estate assets. FFO is calculated both for the Company in total and as FFO attributable to common shares and common units, which is FFO reduced by preferred stock dividends. AFFO is FFO attributable to common shares and common units adjusted to exclude items we do not believe are representative of the results from our core operations, including non-cash gains or losses on derivatives and convertible debt, stock-based compensation expense, amortization of certain fees, losses on debt extinguishment, and in-kind dividends above stated rates, and cash charges for acquisition and equity
transaction
and strategic alternatives
costs. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.
We consider FFO to be a useful additional measure of performance for an equity REIT because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance. We believe that AFFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net
earnings
and FFO, is beneficial to an investor’s understanding of our operating performance.
The following tab
le reconciles net earnings (loss)
to FFO and AFFO for the three
and six months
ended
June 30, 2019
and 201
8
(in thousands). All amounts presented include
our portion of the results of our unconsolidated Atlanta JV
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
Reconciliation of Net earnings (loss) to FFO and AFFO
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net earnings (loss)
|
$
|
(1,270)
|
|
$
|
2,907
|
|
$
|
(1,255)
|
|
$
|
3,699
|
Depreciation and amortization expense
|
|
2,394
|
|
|
2,444
|
|
|
4,756
|
|
|
4,703
|
Depreciation and amortization expense from JV
|
|
299
|
|
|
292
|
|
|
596
|
|
|
577
|
Net (gain) loss on disposition of assets
|
|
16
|
|
|
(1,895)
|
|
|
(23)
|
|
|
(1,871)
|
Net loss on disposition of assets from JV
|
|
-
|
|
|
7
|
|
|
-
|
|
|
14
|
Impairment recovery, net
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(93)
|
FFO
|
|
1,439
|
|
|
3,755
|
|
|
4,074
|
|
|
7,029
|
Dividends declared on preferred stock
|
|
(144)
|
|
|
(145)
|
|
|
(289)
|
|
|
(289)
|
FFO attributable to common shares and common units
|
|
1,295
|
|
|
3,610
|
|
|
3,785
|
|
|
6,740
|
Net loss (gain) on derivatives and convertible debt
|
|
456
|
|
|
(156)
|
|
|
693
|
|
|
(603)
|
Net loss on derivatives from JV
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
Acquisition and terminated transactions expense
|
|
7
|
|
|
71
|
|
|
14
|
|
|
90
|
Equity transaction and strategic alternatives
|
|
834
|
|
|
-
|
|
|
834
|
|
|
-
|
Stock-based compensation expense
|
|
424
|
|
|
263
|
|
|
760
|
|
|
665
|
Amortization of deferred financing fees
|
|
322
|
|
|
364
|
|
|
695
|
|
|
717
|
Amortization of deferred financing fees from JV
|
|
46
|
|
|
46
|
|
|
91
|
|
|
91
|
AFFO attributable to common shares and common units
|
$
|
3,384
|
|
$
|
4,198
|
|
$
|
6,873
|
|
$
|
7,700
|
Earnings Before Interest, Taxes, Depreciation,
and Amortization (“EBITDA”), EBITDAre,
Adjusted EBITDA
re, and Hotel EBITDA
We calculate EBITDA
, EBITDA
re,
and Adjusted EBITDA
re
by adding back to net earnings or loss certain non-operating expenses and certain non-cash charges which are based on historical cost accounting that we believe may be of limited significance in evaluating current performance. We believe these adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods. In calculating EBITDA, we add back to net earnings or loss interest expense, loss on debt extinguishment, income tax expense, and deprec
iation and amortization expense. NAREIT adopted EBITDA
re
in order to promote an industry-wide measure of REIT operating performance. We adjust EBITDA by adding back
net gain/loss on disposition of assets
and impairment charges to calculate EBITDA
re.
To calculate
Adjusted EBITDA
re
, we adjust EBITDA
re
to add back
acquisit
ion and terminated transactions expe
nse
and equity transaction
and strategic alternatives
expense, which are cash charges. We also add back
stock –based compensation expense and gain/
loss on derivatives and convertible debt, which are non-cash charges. EBITDA
, EBITDA
re,
and Adjusted EBITDA
re
, as presented, may not be comparable to similarly titled measures of other companies.
We believe EBITDA
, EBITDA
re,
and Adjusted EBITDA
re
to be useful additional measures of our operating performance, excluding the impact of our capital structure (primarily interest expense), our asset base (primarily depreciation and amortization expense), and other items we do not believe are representative of the results from our core operations.
The Company further excludes general and administrative expenses, other non-operating income or expense, and certain hotel and property operations expenses that are not allocated to individual properties in assessing hotel performance (primarily certain general liability and other insurance costs, land lease costs, and office and banking
fees) from Adjusted EBITDA
re
to calculate Hotel EBITDA. Hotel EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
Hotel EBITDA is intended to isolate property level operational performance over which the Company’s hotel operators have direct control. We believe Hotel EBITDA is helpful to investors as it better communicates the comparability of our hotels’ operating results for all of the Company’s hotel properties and is used by management to measure the performance of the Company’s hotels and the effectiveness of the operators of the hotels.
The following table reconciles
net earnings (loss) to EBITDA, EBITDA
re,
Adjusted EBITDA
re
, and Hotel EBITDA
for the three
and six months
ended
June 30, 2019 and 2018
(in thousands). All amounts presented
our portion of the results of our unconsolidated Atlanta JV
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
Reconciliation of Net earnings (loss) to EBITDA, EBITDA
re
, Adjusted EBITDA
re
, and Hotel EBITDA
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net earnings (loss)
|
$
|
(1,270)
|
|
$
|
2,907
|
|
$
|
(1,255)
|
|
$
|
3,699
|
Interest expense
|
|
2,094
|
|
|
2,091
|
|
|
4,257
|
|
|
4,019
|
Interest expense from JV
|
|
562
|
|
|
518
|
|
|
1,109
|
|
|
1,010
|
Income tax expense
|
|
461
|
|
|
54
|
|
|
647
|
|
|
183
|
Depreciation and amortization expense
|
|
2,394
|
|
|
2,444
|
|
|
4,756
|
|
|
4,703
|
Depreciation and amortization expense from JV
|
|
299
|
|
|
292
|
|
|
596
|
|
|
577
|
EBITDA
|
|
4,540
|
|
|
8,306
|
|
|
10,110
|
|
|
14,191
|
Net (gain) loss on disposition of assets
|
|
16
|
|
|
(1,895)
|
|
|
(23)
|
|
|
(1,871)
|
Net loss on disposition of assets from JV
|
|
-
|
|
|
7
|
|
|
-
|
|
|
14
|
Impairment recovery, net
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(93)
|
EBITDA
re
|
|
4,556
|
|
|
6,418
|
|
|
10,087
|
|
|
12,241
|
Net loss (gain) on derivatives and convertible debt
|
|
456
|
|
|
(156)
|
|
|
693
|
|
|
(603)
|
Net loss on derivative from JV
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
Stock-based compensation expense
|
|
424
|
|
|
263
|
|
|
760
|
|
|
665
|
Acquisition and terminated transactions expense
|
|
7
|
|
|
71
|
|
|
14
|
|
|
90
|
Equity transaction and strategic alternatives
|
|
834
|
|
|
-
|
|
|
834
|
|
|
-
|
Adjusted EBITDA
re
|
|
6,277
|
|
|
6,596
|
|
|
12,389
|
|
|
12,393
|
General and administrative expense, excluding stock compensation expense
|
|
1,148
|
|
|
1,342
|
|
|
2,475
|
|
|
2,809
|
Other expense, net
|
|
24
|
|
|
20
|
|
|
53
|
|
|
34
|
Unallocated hotel and property operations expense
|
|
22
|
|
|
59
|
|
|
67
|
|
|
148
|
Hotel EBITDA
|
$
|
7,471
|
|
$
|
8,017
|
|
$
|
14,984
|
|
$
|
15,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
16,177
|
|
$
|
17,834
|
|
$
|
32,080
|
|
$
|
34,513
|
JV revenue
|
|
2,546
|
|
|
2,484
|
|
|
5,646
|
|
|
5,102
|
Condor and JV revenue
|
$
|
18,723
|
|
$
|
20,318
|
|
$
|
37,726
|
|
$
|
39,615
|
Hotel EBITDA as a percentage of revenue
|
|
39.9%
|
|
|
39.5%
|
|
|
39.7%
|
|
|
38.8%
|
Liquidity,
Capital Resources
, and Equity Transactions
Agreement and Plan of Merger
On July 19, 2019, the Company, the operating partnership, NHT Operating Partnership, LLC (“Parent”), NHT REIT Merger Sub, LLC (“Merger Sub”) and NHT Operating Partnership II, LLC (“Merger OP,” and together with Parent and Merger Sub, the “Parent Parties”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger 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”).
Pursuant to the terms and conditions in the Merger Agreement, upon completion of the Company Merger, each share of the Company’s common stock (other than treasury shares and shares held by the Parent Parties, which will be
cancelled and retired and will cease to exist with no consideration being delivered in exchange therefor),
par value
$0.01 per share (the “Company common stock”)
,
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. Upon completion of the Partnership Merger, each comm
on unit of
partnership interest in the operating partnership (excluding operating partnership common units held by the general partner of the operating partnership) will be converted into the right to receive $0.21346 in
cash
, without interest and less any applicable withholding taxes.
Pursuant to the terms and cond
itions of
the Merger Agreement, each of the outstanding awards granted pursuant to the Company’s equity incentive plans will automatically become fully vested and all restrictions thereon will 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 has agreed to exercise its right to acquire the remaining 20% equity interest of the Atlanta JV that it does not own, pursuant to the terms of the Atlanta JV organizational documents, with the purchased financed from the Company’s line of credit under the credit facility.
The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to in all material respects carry on its business in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by Parent, Merger Sub or Merger OP.
The consummation of the Mergers is subject to certain customary closing conditions, including, among others, adoption and approval of the Merger Agreement, as it may be amended from time to time, and the transactions contemplated by the Merger Agreement, including, without limitation, the Company Merger (collectively, the “Merger Proposal”) by
the
affirmative vote of
(1) a
majority of
the
votes en
titled to be cast
by
the
holders of the Company common stock, and (2) the holders of 75% of the outstanding Series E preferred stock, voting as separate classes (the “Company Shareholder Approval”). The Merger Agreement requires the Company to convene a shareholders’ meeting for purposes of obtaining the Company Shareholder Approval.
The Merger Agreement restricts the Company’s ability to solicit other acquisition proposals (as defined in the Merger Agreement), or to provide information to or engage in discussions with third parties regarding other acquisition proposals. Subject to certain conditions, the Company board of directors is permitted to change its recommendation with respect to the Merger Proposal in response to a superior proposal (as defined in the Merger Agreement) and, upon payment of a $9,540 termination fee, the Company is permitted to terminate the Merger Agreement and enter into an agreement with respect to a superior proposal; provided such superior proposal must occur no later than August 18, 2019.
Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termination fee to Parent of $9,540. In certain other circumstances, Parent will be required to pay the Company a termination fee of $11,925 upon termination of the Merger Agreement.
The closing of the Mergers may not occur prior to October 1, 2019 without the consent of the parties. If the Company notifies Parent that it is prepared to close and all conditions to Parent’s obligations to close are met, then Parent, at its option, may extend the closing time for a 30-day period (or such shorter period so as not to extend beyond December 31, 2019), provided, that no Parent Party is then in breach of the merger agreement in any material respect. Parent may exercise an extension up to three times during the term of the Merger Agreement.
During the term of the Merger Agreement, the Company may not pay cash dividends to holders of the Company common stock or the Series E Preferred Stock, except the Company is permitted to declare and pay a dividend to shareholders during the month in which an extension option for the closing of the transactions contemplated by the Merger Agreement is exercised by the Parent, subject to limitations as set forth in the Merger Agreement and the
disclosure schedule delivered therewith on amount and our prior month adjusted funds from operations. The holders of the Series E Preferred Stock have agreed to waive accrual of any unpaid dividends between signing and closing.
Liquidity Requirements
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our credit facility, and the release of restricted cash upon the satisfaction of usage requirements. At June 30, 2019, the Company had $3.2 million of cash and cash equivalents, $5.7 million of restricted cash on hand, and $
9.0
million of unused availability under its credit facility. Our short-term liquidity requirements consist
primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotels in accordance with brand standards, interest expense and scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, and the payment of dividends in accordance with the REIT requirements of the Code and as required in connection with our 6.25% Series E Cumulative Convertible Preferred Stock (“Series E Preferred Stock”).
Prior
to the consideration of any asset sales or our ability to refinance debt
subsequent to June 30, 2019
, contractual principal payments on our debt outstanding, which include only normal amortization, total $
1.0
million through
September 30
, 2020.
To the extent the transactions contemplated by the Merger Agreement are not consummated, prior
to its current
October
1, 2020 maturity, the Company anticipates refinancing the credit facility with its existing lenders or other lenders. We believe we will be able to refinance this debt on similar terms, however, we cannot guarantee we will be successful in our efforts to refinance or repay our maturing debt. We also presently expect to invest approximately $
2.5
million to $
3.5
million in capital expenditures related to hotel properties
we currently own through
September 30, 2020
.
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.
Without consideration of the Merger Agreement discussed above, our longer-term liquidity requirements consist primarily of the cost of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made related to our hotel properties, and scheduled debt payments, including maturing loans. Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings, proceeds from public or private issuances of debt
or equity securities, and additional borrowings under our existing credit facility.
Sources and Uses of Cash
Cash provided by Operating Activities.
Our cash provided by operations was $4.4 million and $6.7 million for the six months ended June 30, 2019 and 2018, respectively. The
de
crease in operating cash flows was the net result of a decrease in net income, after adjustments for non-cash items, of $1.6 million and differences in the changes in operating assets and liabilities between the periods that decreased cash by $0.7 million, none of which were individually significant.
Cash provided by (used in) Investing Activities
. Our cash flows related to investing activities were $4.0 million and ($21.2 million) for the six months ended June 30, 2019 and 2018, respectively. The increase in these cash flows in 2019 was driven by decreased cash spent on hotel acquisitions of $35.6 million, partially offset by a decrease in net proceeds from the sale of hotels of $10.6 million between the periods.
Cash provided by (used in) Financing Activities
. Our cash flows provided by (used in) financing activities were ($8.6 million) and $15.5 million for the six months ended June 30, 2019 and 2018, respectively. This decrease was primarily the result of decreased net cash inflows from debt activities of $23.7 million, resulting primarily from the lack of property acquisitions during the first six months of 2019.
Outstanding Indebtedness
Significant Debt Transactions
Subsequent to December 31, 2018,
net proceeds from the Com
pany’s hotel sale
were used to pay
down a total of
$
4.2 million on the credit facility and an additional $1.5 million was drawn under the facility for corporate purposes.
Available
borrowing capacity
under the
credit
facility is based on a borrowing base formula for the pool of hotel pr
operties securing the facility. As of June 30, 2019
, the collateral pool consisted of
nine
hotel properties and
total available borrowing capacity
under the
credit
facility w
as
$
9.0
million
.
At June 30, 2019, $86.8 million was outstanding under the credit facility.
On March 8, 2019, the credit facility was amended to extend its maturity from March 1, 2020 to April 1, 2020. On May 3, 2019, the
maturity of the credit facility was
further
extended to October 1, 2020. Two extension options, extending the maturity of the credit facility to Marc
h 1, 2021 and March 1, 2022, remain
available subject to certain conditions including the completion of specific capital achievements.
Aloft Atlanta JV Refinancing
Subsequent to the end of the quarter, o
n August 9, 2019, the operating partnership and the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, closed on a $34,080 term loan pursuant to a term loan agreement with KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Agent for the L
enders (the “New Term Loan
”).
The proceeds of the New Term L
oan were used to repay $33,750 of indebtedness outstanding under a term loan agreement dated August 22, 2016 between the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, and LoanCore Capital Credit REIT LLC, as Lender, which indebtedness was secured by the Aloft Atlanta hotel. In connection with the repayment of this term loan on August 9, 2019, the term loan agreement and related loan documents were terminated.
The New Term L
oan matures upon the earlier to occur of (a) consummation of the merger under the Merger Agreement
and (b) February 9, 2020. The New Term L
oan bears interest, at the Borrower’s option, at either LIBOR plus 2.25% o
r a base rate plus 1.25%. The New Term L
oan requires monthly interest payments and principal is due on the maturity date. The Borrowers may, at an
y time, voluntarily prepay the New Term L
oan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).
The New Term L
oan is secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts
and general intangibles. The New Term L
oan is guaranteed by
the Company and certain of its
subsidiaries.
Outstanding Debt
At June 30, 2019, we had long-term debt of $136.0 million, all of which was associated with assets held for use, with a weighted average term to maturity of 2.0 years and a weighted average interest rate of 5.12%. Of this total, at June 30, 2019, $23.3 million was fixed rate debt with a weighted average term to maturity of 1.6 years and a weighted average interest rate of 4.41% and $112.7 million was variable rate debt with a weighted average term to maturity of 2.7 years and a weighted average interest rate of 5.27%.
At December 31, 2018, we had long-term debt of $138.0 million associated with assets held for use with a weighted average term to maturity of 2.1 years and a weighted average interest rate of 5.15%. Of this total, at December 31, 2018, $23.6 million was fixed rate debt with a weighted average term to maturity of 1.9 years and a weighted average interest rate of 4.41% and $114.4 million was variable rate debt with a weighted average term to maturity of 2.9 years and a weighted average interest rate of 5.30%.
Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below based on its contractual maturity although the balances are expected to be repaid within one year upon the sale of
the related hotel properties.
Aggregate annual principa
l payments on debt for the remainder of 2019
and thereafter are as follows
(in thousands)
:
|
|
|
|
|
|
Total
|
Remainder of 2019
|
|
$
|
594
|
2020
|
|
|
88,076
|
2021
|
|
|
14,344
|
2022
|
|
|
24,886
|
2023
|
|
|
214
|
Thereafter
|
|
|
7,840
|
Total
|
|
$
|
135,954
|
Financial Covenants
We are required to satisfy various financial covenants within our debt agreements, including the following financial covenants within our credit facility:
|
·
|
|
Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed 60%. Commencing on April 1, 2020, the foregoing leverage ratio will no longer be applicable, and in lieu thereof, the ratio of consolidated total indebtedness to adjusted consolidated EBITDA for the most recently ended four fiscal quarters cannot exceed 6.25 to 1.
|
|
·
|
|
Secured Leverage Ratio: The ratio of consolidated secured indebtedness (excluding the credit facility) to consolidated total asset value cannot exceed 40%.
|
|
·
|
|
Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA for the most recently ended four fiscal quarters to consolidated fixed charges for the most recently ended four fiscal quarters cannot be less than 1.50 to 1.
|
|
·
|
|
Tangible Net Worth: Consolidated tangible net worth cannot be less than $55 million plus 80% of net offering proceeds.
|
|
·
|
|
Unhedged Variable Rate Debt: Consolidated unhedged variable rate debt cannot exceed 25% of consolidated total asset value.
|
|
·
|
|
Distributio
ns: The Company is permitted to make distributions during any period of four fiscal quarters in an aggregate amount of up to 95% of fu
nds available for distribution. The Company did not meet this covenant for the period ended June 30, 2019.
On August 9, 2019, an amendment to the credit facility was received to increase this threshold to 105% of funds available for distribution for the period ending June 30, 2019 which put the Company in compliance with the covenant.
|
Certain of the terms used in the foregoing descriptions of the financial covenants within our credit facility have the meanings given to them in the credit facility, and certain of the financial covenants are subject to pro forma adjustments for acquisitions and sales of hotel properties and for specific capital events.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness, and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our credit facility contains cross-default provisions which would allow the lenders under our credit facility to declare a default and accelerate our indebtedness to them if we default on our other loans and such default would permit that lender to accelerate our indebtedness under any such loan.
As of
June 30, 2019
, we are not in default of any of our loan
s.
Contractual Obligations
Below is a
summary of our contractual obligations
as
of June 30, 2019 and the effect such obligations are expected to have on our future liquidity and cash flows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual obligations
|
|
Total
|
|
Remainder of 2019
|
|
2020-2021
|
|
2022-2023
|
|
2024 and After
|
Long-term debt including interest
(1)
|
|
$
|
151,906
|
|
$
|
6,388
|
|
$
|
110,585
|
|
$
|
26,854
|
|
|
8,079
|
Office leases
|
|
|
176
|
|
|
47
|
|
|
129
|
|
|
-
|
|
|
-
|
Equipment leases
|
|
|
110
|
|
|
13
|
|
|
43
|
|
|
24
|
|
|
30
|
Total contractual obligations
|
|
$
|
152,192
|
|
$
|
6,448
|
|
$
|
110,757
|
|
$
|
26,878
|
|
$
|
8,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rate payments on our variable rate debt have been estimated us
ing interest rates in effect at June 30, 2019.
|
We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. We also have management agreements in place for the management and operation of our hotel properties.
Off Balance Sheet Financing Transactions
We have not entered into any off balance sheet financing transactions.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances.
Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments.
All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for t
he year ended December 31, 2018.
Recent Accounting Standards
See Note 1,
Organization and Summary of Significant Accounting Policies
, to our consolidated interim financial statements for additional information relating to recently
adopted and recently
issued accounting pronouncements.
ITEM 3.
QUA
NTITATIVE AND QUALITATIVE DISCLOSU
RES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that effect market-sen
sitive instruments. At
June 30
, 2019
, our market risk arises primarily from interest rate risk relating to variable rate borrowings and the market risk related to our convertible debt and the embedded redemption right in the Series E Preferred Stock that fair value will fluctuate following changes in the Company’s common stock price or changes in interest rates.
Interest Rate Sensitivity
We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such
conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging agreements. At
June 30
, 2019
, we have an interest rate swap in place which effectively locks the variable interest rate on our Wells Fargo debt (
June 30
, 2019
balance of $
25.8
million) at 4.44%
and an interest rate cap in place which caps the 30-day LIBOR interest rate on $30.0 million of our credit facility (June 30, 2019 balance of $86.8 million) at 3.35%
.
We do not intend to enter into derivative or interest rate transact
ions for speculative purposes.
The table below provides information about financial instruments that are sensitive to changes in interest rates. The table presents scheduled maturities, including the amortization of principal and related weighted-average interest rates for the debt maturing in each
specified period
(dollars in thousands). For the purposes of this presentation, the Wells Fargo debt is considered fixed rate debt as the variable interest rate is effectively locked with the previously discussed interest rate swap.
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2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Fixed rate debt
|
|
$
|
594
|
|
|
$
|
1,231
|
|
|
$
|
14,344
|
|
|
$
|
24,886
|
|
|
$
|
214
|
|
|
$
|
7,840
|
|
|
$
|
49,109
|
|
Average fixed interest rate
|
|
|
4.40
|
%
|
|
|
4.40
|
%
|
|
|
4.34
|
%
|
|
|
4.44
|
%
|
|
|
4.54
|
%
|
|
|
4.54
|
%
|
|
|
4.43
|
%
|
Variable rate debt
|
|
$
|
-
|
|
|
$
|
86,845
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
86,845
|
|
Average variable interest rate
|
|
|
-
|
%
|
|
|
5.40
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
5.40
|
%
|
Total debt
|
|
$
|
594
|
|
|
$
|
88,076
|
|
|
$
|
14,344
|
|
|
$
|
24,886
|
|
|
$
|
214
|
|
|
$
|
7,840
|
|
|
$
|
135,954
|
|
Total average interest rate
|
|
|
4.40
|
%
|
|
|
5.39
|
%
|
|
|
4.34
|
%
|
|
|
4.44
|
%
|
|
|
4.54
|
%
|
|
|
4.54
|
%
|
|
|
5.05
|
%
|
At June 30
, 2019
, approximately
36.1
% of our outstanding debt, excluding debt related to hotel properties held for sale, is subject to fixed interest rates or effectively locked with an interest rate swap, while
6
3.9
% of our debt is subject to floating rates. Assuming no increase in the level of our variable debt outstanding at
June 30
, 2019
and after giving effect to our interest rate swap, if interest rates increased by 1.0% our cash flow related to hotel properties held for use would decrease by approximately $
0.9
million per year.
ITEM 4.
C
ONTROLS AND PROCED
URES
Disclosure Controls and Procedures
An evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of
June 30
, 2019
, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (a) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow
for
timely decisions regarding required disclosures and (b) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes to our internal control over financial reporting during our most recent fiscal quarter that have materially effected, or are reasonably likely to materially effect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. We are not currently involved in any material litigation, nor, to our knowledge, is any
material litigation threatened against us. The Company has insurance to cover potential material losses and we
believe it is not reasonably possible that such matters will have a material impact on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
The Company’s Annual Report on Form 10-K for the year ended December 31, 2018 includes detailed discussions of the Company’s risk factors under the heading “Risk Factors.” Set forth below are certain changes from the risk factors previously disclosed in the Annual Report on Form 10-K, which the Company is including in this Quarterly Report on Form 10-Q as a result of the execution of the Merger Agreement on July 19, 2019, as further described above.
There may be unexpected delays in the completion of the Company Merger, or the Company Merger may not be completed at all.
If our shareholders approve the Company Merger at the special meeting to be held for that purpose, and assuming that the other conditions to the mergers are satisfied or waived, we anticipate that the mergers will become effective during the 4th quarter of 2019. The Merger Agreement provides that either the Company or Parent may terminate the Merger Agreement if the Mergers have not occurred by December 31, 2019, if the party terminating the Merger Agreement is not in material breach that causes the Mergers not to be consummated by that date. Certain events may delay the completion of the Mergers or result in a termination of the Merger Agreement. Some of these events are outside the control of the parties. The Company may incur significant additional costs in connection with any delay in completing the Mergers or termination of the Merger Agreement, in addition to significant transaction costs, including legal, financial advisory, accounting, and other costs the Company has already incurred. The Company can neither assure you that the conditions to the completion of the Mergers will be satisfied or waived or that any adverse change, effect, event, circumstance, occurrence or state of facts that could give rise to the termination of the Merger Agreement will not occur, and the Company cannot provide any assurances as to whether or when the Mergers will be completed.
In addition, under the terms of the Merger Agreement, the Company may not declare or pay any future dividends to the holders of the Company’s common shares or Series E Preferred Stock during the term of the Merger Agreement without the prior written consent of Parent, subject to certain limited exceptions during extensions of the closing by Parent. Depending on when the Mergers are consummated, these restrictions may prevent holders of the Company’s common shares from receiving dividends that they might otherwise have received.
Failure to complete the Mergers in a timely manner or at all could negatively affect the Company’s share price and future business and financial results.
Delays in completing the Mergers or the failure to complete the Mergers at all could negatively affect the Company’s future business and financial results, and, in that event, the market price of the Company’s common shares may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Mergers will be completed. If the Mergers are not completed for any reason, the Company will not achieve the expected benefits thereof and will be subject to several risks, including the diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the Mergers, any of which could materially adversely affect the Company’s business, financial condition, results of operations and the value of the Company’s securities.
The pendency of the Mergers could adversely affect the Company’s business and operations.
In connection with the pending Mergers, some of the Company’s current or prospective hotel management companies or lenders may delay or defer decisions, which could negatively impact the Company’s revenues, earnings, cash flows and expenses, regardless of whether the Mergers are completed. In addition, under the Merger Agreement, the Company is subject to certain restrictions on the conduct of the Company’s business prior to completing the Mergers. These restrictions may prevent the Company from pursuing certain strategic transactions, acquiring and disposing assets, undertaking certain capital projects, undertaking certain financing transactions and otherwise pursuing other actions that are not in the ordinary course of business, even if such actions could prove beneficial. These restrictions may impede the Company’s growth, which could negatively impact the Company’s
revenue, earnings and cash flows. Additionally, the pendency of the Mergers may make it more difficult for the Company to effectively recruit, retain and incentivize key personnel and may cause distractions from the Company’s strategy and day-to-day operations for current employees and management.
We may be required to pay a termination fee to NHT Operating Partnership, LLC or reimburse its expenses under certain circumstances.
Upon termination of the Merger Agreement under certain circumstances, the Company may be required to pay NHT Operating Partnersh
ip, LLC a ter
mination fee of $9.540 million
.
If the Merger Agreement is terminated because the Company shareholder approval is not obtained or because of a Company breach, the Company will be required to pay expenses of NHT Operating Partnership, LLC of up to $3.18 million and may be subject to other damages.
If the Company incurs either of the termination fee or expense reimbursement it will have an adverse effect on the Company’s profitability.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
.
ITEM 5. OTHER INFORMA
TION
Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the information below is being disclosed under this Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement), Item 1.02 (Termination of a Material Definitive Agreement) and Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant) of Form 8-K.
Credit Facility Amendment
On August 9, 2019, the Company entered into a Fifth Amendment to Credit Agreement among the operating partnership, as borrower, the Company and the subsidiary guarantors party thereto, as guarantors, KeyBank National Association and the other lenders party thereto, as lenders, and KeyBank National Association, as administrative agent (the “Fifth Amendment”). The Fifth Amendment amends the Credit Agreement dated as of March 1, 2017, as amended by the First Amendment dated as of May 11, 2017, Second Amendment dated as of December 13, 2017, Third Amendment dated as of March 8, 2019 and Fourth Amendment dated as of May 3, 2019 (collectively, the “Credit Agreement”). The Credit Agreement is described in the Company’s Current Reports on Form 8-K dated March 1, 2017, May 11, 2017, December 13, 2017 and March 5, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 and is incorporated herein by reference.
The Fifth Amendment, among other things, (a) increased the amount of distributions the Company was permitted to make during the four fiscal quarter period ended on June 30, 2019 from 95% of funds available for distribution to 105% of funds available for distribution and (b) modified various provisions under the Credit Agreement to permit the refinancing of the Aloft Atlanta hotel discussed below.
Some of the lenders in the Credit Agreement and / or their affiliates have other business relationships with the Company involving the provision of financial and bank-related services, including cash management and treasury services, and have participated in the Company’s prior debt financings and sales of securities.
Aloft Atlanta R
efinancing
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 $34,080,000 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 “Term Loan Agreement”).
The proceeds of the term loan we
re used to repay $33,750,000
of indebtedness outstanding under a term loan agreement dated August 22, 2016 between the owner and lessee of the Aloft Atlanta hotel in the Atlanta JV (Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, respectively), as Borrowers, and LoanCore Capital Credit REIT LLC, as Lender, which indebtedness was secured by the Aloft Atlanta hotel. In connection with the repayment of this term loan on August 9, 2019, the term loan agreement and related loan documents were terminated.
The term loan matures upon the earlier to occur of (a) consummation of the merger under the Merger Agreement and (b) February 9, 2020. The term loan bears interest, at the Borrower’s option, at either LIBOR plus 2.25% or a base rate plus 1.25%. The term loan requires monthly interest payments and principal is due on the maturity date. The Borrowers may, at any time, voluntarily prepay the term loan in whole or in part without premium or penalty (other than customary LIBOR breakage costs).
The term loan is secured by a first priority lien and security interest on the Aloft Atlanta hotel and the tangible and intangible personal property used in connection with such hotel, including inventory, equipment, fixtures, accounts and general intangibles. The term loan is guaranteed by the Company and certain of its subsidiaries.
The Term Loan Agreement contains customary representations and warranties and affirmative and negative covenants. In addition, the Term Loan Agreement requires the Borrowers to satisfy certain financial covenants, including the following:
|
·
|
|
Property Debt Yield: The ratio of adjusted net operating income for the Aloft Atlanta hotel to the outstanding principal balance of the term loan cannot be less than 10%.
|
|
·
|
|
Leverage Ratio: The ratio of consolidated total indebtedness to consolidated total asset value cannot exceed 60%.
|
|
·
|
|
Secured Leverage Ratio: The ratio of consolidated secured indebtedness (excluding the obligations under our credit facility) to consolidated total asset value cannot exceed 40%.
|
|
·
|
|
Fixed Charge Coverage Ratio: The ratio of adjusted consolidated EBITDA for the most recently ended four fiscal quarters to consolidated fixed charges for the most recently ended four fiscal quarters cannot be less than 1.50 to 1.
|
|
·
|
|
Tangible Net Worth: Consolidated tangible net worth cannot be less than $55 million plus 80% of net offering proceeds.
|
|
·
|
|
Unhedged Variable Rate Debt: Consolidated unhedged variable rate debt (excluding the term loan) cannot exceed 25% of consolidated total asset value.
|
|
·
|
|
Distributions: The Company is permitted to make distributions during any period of four fiscal quarters in an aggregate amount of up to (a) 105% of funds available for distribution for the period ending on June 30, 2019 and (b) 95% of funds available for distribution for any period thereafter.
|
Certain of the terms used in the foregoing descriptions of the financial covenants have the meanings given to them in the Term Loan Agreement.
The Term Loan Agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, following any applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the term loan to be immediately due and payable.
Some of the lenders in the Term Loan Agreement and/or their affiliates have other business relationships with the Company involving the provision of financial and bank-related services, including cash management and treasury services, and have participated in the Company’s prior debt financings and sales of securities.
ITEM 6. EXHIBITS
|
10
|
2.1
|
Agreement and Plan of Merger, dated as of July 19, 2019, by and among NHT Operating Partnership, LLC, NHT REIT Merger Sub, LLC, NHT Operating Partnership II, LLC, the Company and Condor Hospitality Limited Partnership (incorporated by reference to Exhibit 2.1 filed with the Company’s Form 8-K dated July 18, 2019 (001-34087)).
|
3.1
|
Bylaws of the Company (incorporated by reference to Exhibit 3.1 filed with the Company’s Form 8-K dated July 18, 2019 (001-34087)).
|
10.
1
|
Fourth Amendment to Credit Agreement dated as of May 3, 2019 among Condor Hospitality Limited Partnership, as Borrower, the Company and the subsidiary guarantors party thereto, as Guarantors, KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Administrative Agent (incorporated by reference to Exhibit 10.3 filed with the Company’s Form 10-Q for the quarter ended March 31, 2019 (001-34087)).
|
10.2*
|
Fifth Amendment to Credit Agreement dated as of August 9, 2019 among Condor Hospitality Limited Partnership, as Borrower, the Company and the subsidiary guarantors party thereto, as Guarantors, KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Administrative Agent.
|
10.3*
|
Term Loan Agreement dated as of August 9, 2019 among Condor Hospitality Limited Partnership, Spring Street Hotel Property LLC and Spring Street Hotel OpCo LLC, as Borrowers, KeyBank National Association and the other lenders party thereto, as Lenders, and KeyBank National Association, as Administrative Agent.
|
10.4*
|
Unconditional Guaranty of Payment and Performance dated as of August 9, 2019 by the Company and Condor Hospitality REIT Trust to KeyBank National Association.
|
31.1*
|
Section 302 Certificate of Chief Executive Office
|
31.2*
|
Section 302 Certificate of Chief Financial Officer
|
32.1*
|
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
|
101.1*
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30
, 2019
, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.
|
*
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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|
Condor Hospitality Trust, Inc.
|
|
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|
|
August
12
, 2019
|
|
|
|
|
|
|
|
|
/s/
J. William Blackham
|
|
|
|
|
|
|
J. William Blackham
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Arinn Cavey
|
|
|
|
|
|
|
Arinn Cavey
|
|
|
|
|
|
|
Chief Financial Officer and Chief Accounting Officer
|
|
|
|