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UNITED STATES | ||||||
SECURITIES AND EXCHANGE COMMISSION | ||||||
Washington, D.C. 20549 | ||||||
| FORM 10-Q |
| ||||
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the Quarterly Period Ended June 30, 2017 | ||||||
| OR |
| ||||
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
| For the transition period from ______ to ______. |
| ||||
| Commission file number: 001-34087 |
| ||||
CONDOR HOSPITALITY TRUST, INC. | ||||||
| (Exact name of registrant as specified in its charter) |
| ||||
Maryland (State or other jurisdiction of incorporation or organization) |
| 52-1889548 (IRS Employer Identification Number) | ||||
4800 Montgomery Lane Ste. 220, Bethesda, MD 20814 (Address of principal executive offices) Telephone number: (402) 371-2520
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated file,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.
|
|
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐(Do not check if a smaller reporting company) | Small reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act YES ☐ NO ☐
Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).YES ☐ NO ☒
As of July 31, 2017 there were 11,630,357 shares of common stock, par value $.01 per share, outstanding.
Condor Hospitality Trust, Inc. and Subsidiaries
Table of Contents
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Part I. |
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Item 1. |
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| Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 | 3 | ||
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| Consolidated Statements of Operations for the Three and Six Months ended June 30, 2017 and 2016 | 4 | ||
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| Consolidated Statements of Equity for the Six Months ended June 30, 2017 and 2016 | 5 | ||
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| Consolidated Statements of Cash Flows for the Six Months ended June 30, 2017 and 2016 | 6 | ||
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| 7 | |||
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 34 | ||
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Item 3. | 51 | |||
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Item 4. | 52 | |||
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Part II. |
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Item 1. | 52 | |||
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Item 1A. | 53 | |||
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Item 2. | 53 | |||
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Item 3. | 53 | |||
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Item 4. | 53 | |||
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Item 5. | 53 | |||
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Item 6. | 54 |
2
PART I. FINANCIAL INFORMATION
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited - In thousands, except share and per share data)
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| As of | ||||
|
| June 30, |
| December 31, | |||
|
| 2017 |
| 2016 | |||
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| |
Assets |
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| |
Investment in hotel properties, net |
| $ | 187,737 |
| $ | 96,158 | |
Investment in unconsolidated joint venture |
|
| 8,772 |
|
| 9,036 | |
Cash and cash equivalents |
|
| 5,930 |
|
| 8,326 | |
Restricted cash, property escrows |
|
| 4,542 |
|
| 5,350 | |
Accounts receivable, net of allowance for doubtful accounts of $25 and $21 |
|
| 1,727 |
|
| 1,416 | |
Prepaid expenses and other assets |
|
| 1,614 |
|
| 1,666 | |
Derivative assets, at fair value |
|
| 339 |
|
| - | |
Investment in hotel properties held for sale, net |
|
| 3,800 |
|
| 18,713 | |
Total Assets |
| $ | 214,461 |
| $ | 140,665 | |
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Liabilities and Equity |
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Liabilities |
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Accounts payable, accrued expenses, and other liabilities |
| $ | 6,882 |
| $ | 4,698 | |
Dividends payable |
|
| 2,267 |
|
| 1,125 | |
Derivative liabilities, at fair value |
|
| - |
|
| 8 | |
Convertible debt, at fair value |
|
| 1,050 |
|
| 1,315 | |
Long-term debt, net of deferred financing costs |
|
| 90,176 |
|
| 56,775 | |
Long-term debt related to hotel properties held for sale, net of deferred financing costs |
|
| 421 |
|
| 5,945 | |
Total Liabilities |
|
| 100,796 |
|
| 69,866 | |
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Equity |
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Shareholders' equity |
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Preferred stock, 40,000,000 shares authorized: |
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6.25% Series D, 6,700,000 shares authorized, $.01 par value, 6,245,156 shares outstanding, liquidation preference of $63,427 |
|
| - |
|
| 61,333 | |
6.25% Series E, 925,000 shares authorized, $.01 par value, 925,000 shares outstanding, liquidation preference of $9,250 |
|
| 10,050 |
|
| - | |
Common stock, $.01 par value, 200,000,000 shares authorized; 11,628,139 and 762,590 shares outstanding |
|
| 116 |
|
| 8 | |
Additional paid-in capital |
|
| 228,069 |
|
| 118,655 | |
Accumulated deficit |
|
| (125,843) |
|
| (112,024) | |
Total Shareholders' Equity |
|
| 112,392 |
|
| 67,972 | |
Noncontrolling interest in consolidated partnership (Condor Hospitality Limited Partnership), redemption value of $786 and $2,008 |
|
| 1,273 |
|
| 2,827 | |
Total Equity |
|
| 113,665 |
|
| 70,799 | |
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Total Liabilities and Equity |
| $ | 214,461 |
| $ | 140,665 |
See accompanying notes to consolidated financial statements.
3
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited - In thousands, except per share data)
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| ||||||
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| Three months ended June 30, |
| Six months ended June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenue |
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Room rentals and other hotel services |
| $ | 14,252 |
| $ | 14,155 |
| $ | 24,613 |
| $ | 26,658 |
Operating Expenses |
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Hotel and property operations |
|
| 9,224 |
|
| 9,889 |
|
| 16,837 |
|
| 19,600 |
Depreciation and amortization |
|
| 1,769 |
|
| 1,289 |
|
| 2,820 |
|
| 2,698 |
General and administrative |
|
| 1,511 |
|
| 1,277 |
|
| 3,003 |
|
| 2,725 |
Acquisition and terminated transactions |
|
| 215 |
|
| 53 |
|
| 717 |
|
| 147 |
Equity transactions |
|
| - |
|
| - |
|
| 343 |
|
| - |
Total operating expenses |
|
| 12,719 |
|
| 12,508 |
|
| 23,720 |
|
| 25,170 |
Operating income |
|
| 1,533 |
|
| 1,647 |
|
| 893 |
|
| 1,488 |
Net gain on disposition of assets |
|
| 4,852 |
|
| 8,856 |
|
| 4,849 |
|
| 12,223 |
Equity in earnings of joint venture |
|
| 25 |
|
| - |
|
| 136 |
|
| - |
Net gain on derivatives and convertible debt |
|
| 227 |
|
| 162 |
|
| 402 |
|
| 6,279 |
Other income (expense), net |
|
| (39) |
|
| 23 |
|
| (40) |
|
| 2 |
Interest expense |
|
| (1,092) |
|
| (1,248) |
|
| (2,063) |
|
| (2,577) |
Loss on debt extinguishment |
|
| - |
|
| (976) |
|
| (800) |
|
| (1,149) |
Impairment loss, net |
|
| (479) |
|
| (121) |
|
| (750) |
|
| (914) |
Earnings from continuing operations before income taxes |
|
| 5,027 |
|
| 8,343 |
|
| 2,627 |
|
| 15,352 |
Income tax expense |
|
| 35 |
|
| - |
|
| 35 |
|
| - |
Earnings from continuing operations |
|
| 4,992 |
|
| 8,343 |
|
| 2,592 |
|
| 15,352 |
Gain from discontinued operations, net of tax |
|
| - |
|
| - |
|
| - |
|
| 678 |
Net earnings |
|
| 4,992 |
|
| 8,343 |
|
| 2,592 |
|
| 16,030 |
Earnings attributable to noncontrolling interest |
|
| (67) |
|
| (178) |
|
| (17) |
|
| (567) |
Net earnings attributable to controlling interests |
|
| 4,925 |
|
| 8,165 |
|
| 2,575 |
|
| 15,463 |
Dividends declared and undeclared and in kind dividends deemed on preferred stock |
|
| (271) |
|
| (1,057) |
|
| (11,874) |
|
| (18,797) |
Net earnings (loss) attributable to common shareholders |
| $ | 4,654 |
| $ | 7,108 |
| $ | (9,299) |
| $ | (3,334) |
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Earnings per Share |
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Continuing operations - Basic |
| $ | 0.40 |
| $ | 9.36 |
| $ | (1.28) |
| $ | (5.25) |
Discontinued operations - Basic |
|
| - |
|
| - |
|
| - |
|
| 0.86 |
Total - Basic Earnings per Share |
| $ | 0.40 |
| $ | 9.36 |
| $ | (1.28) |
| $ | (4.39) |
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Continuing operations - Diluted |
| $ | 0.37 |
| $ | 1.17 |
| $ | (1.28) |
| $ | (5.25) |
Discontinued operations - Diluted |
|
| - |
|
| - |
|
| - |
|
| 0.86 |
Total - Diluted Earnings per Share |
| $ | 0.37 |
| $ | 1.17 |
| $ | (1.28) |
| $ | (4.39) |
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See accompanying notes to consolidated financial statements. |
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4
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited - In thousands, except per share amounts)
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| Six months ended June 30, 2016 | |||||||||||||||||||||||||
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| Shares of Preferred stock |
| Preferred stock |
| Shares of Common stock |
| Common stock |
| Additional paid-in capital |
| Accumulated deficit |
| Total Shareholders' equity |
| Noncontrolling interest |
| Total equity | |||||||||
Balance at December 31, 2015 |
|
| 3,803 |
| $ | 38 |
|
| 760 |
| $ | 8 |
| $ | 138,428 |
| $ | (105,858) |
| $ | 32,616 |
| $ | 1,879 |
| $ | 34,495 |
Stock-based compensation |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 54 |
|
| - |
|
| 54 |
|
| - |
|
| 54 |
Long-term incentive plan |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 85 |
|
| 85 |
Series D Preferred dividends declared |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (1,139) |
|
| (1,139) |
|
| - |
|
| (1,139) |
Redemption of Series A and B Preferred |
|
| (803) |
|
| (8) |
|
| - |
|
| - |
|
| (7,390) |
|
| (5,107) |
|
| (12,505) |
|
| - |
|
| (12,505) |
Exchange of Series C Preferred and issuance of Series D Preferred |
|
| 3,245 |
|
| 61,351 |
|
| - |
|
| - |
|
| (12,517) |
|
| (20,417) |
|
| 28,417 |
|
| - |
|
| 28,417 |
Net earnings |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 15,463 |
|
| 15,463 |
|
| 567 |
|
| 16,030 |
Balance at June 30, 2016 |
|
| 6,245 |
| $ | 61,381 |
|
| 760 |
| $ | 8 |
| $ | 118,575 |
| $ | (117,058) |
| $ | 62,906 |
| $ | 2,531 |
| $ | 65,437 |
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| Six months ended June 30, 2017 | |||||||||||||||||||||||||
|
| Shares of Preferred stock |
| Preferred stock |
| Shares of Common stock |
| Common stock |
| Additional paid-in capital |
| Accumulated deficit |
| Total Shareholders' equity |
| Noncontrolling interest |
| Total equity | |||||||||
Balance at December 31, 2016 |
|
| 6,245 |
| $ | 61,333 |
|
| 763 |
| $ | 8 |
| $ | 118,655 |
| $ | (112,024) |
| $ | 67,972 |
| $ | 2,827 |
| $ | 70,799 |
Stock-based compensation |
|
| - |
|
| - |
|
| 88 |
|
| 1 |
|
| 71 |
|
| - |
|
| 72 |
|
| - |
|
| 72 |
Long-term incentive plan |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 85 |
|
| 85 |
Conversion of Series D Preferred to common stock and issuance of Series E Preferred |
|
| (5,320) |
|
| (51,283) |
|
| 6,005 |
|
| 60 |
|
| 61,273 |
|
| (11,030) |
|
| (980) |
|
| - |
|
| (980) |
Issuance of Common stock |
|
| - |
|
| - |
|
| 4,772 |
|
| 47 |
|
| 45,841 |
|
| - |
|
| 45,888 |
|
| - |
|
| 45,888 |
Fractional common shares settled in reverse stock split |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
| - |
|
| (1) |
|
| - |
|
| (1) |
Issuance of common units |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 285 |
|
| 285 |
Cancellation of LTIP units |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 1,941 |
|
|
|
|
| 1,941 |
|
| (1,941) |
|
| - |
Series D Preferred dividends declared |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (650) |
|
| (650) |
|
| - |
|
| (650) |
Series E Preferred dividends declared |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (194) |
|
| (194) |
|
| - |
|
| (194) |
Common stock dividends declared ($0.39 dividend per share) |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (4,520) |
|
| (4,520) |
|
| - |
|
| (4,520) |
Warrant exchange |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 289 |
|
| - |
|
| 289 |
|
| - |
|
| 289 |
Net earnings |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2,575 |
|
| 2,575 |
|
| 17 |
|
| 2,592 |
Balance at June 30, 2017 |
|
| 925 |
| $ | 10,050 |
|
| 11,628 |
| $ | 116 |
| $ | 228,069 |
| $ | (125,843) |
| $ | 112,392 |
| $ | 1,273 |
| $ | 113,665 |
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See accompanying notes to consolidated financial statements.
5
Condor Hospitality Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited – In thousands)
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|
|
| Six months ended June 30, | ||||
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|
| 2017 |
|
| 2016 |
Cash flows from operating activities: |
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|
|
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|
|
Net earnings |
| $ | 2,592 |
| $ | 16,030 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization expense |
|
| 2,820 |
|
| 2,698 |
Net gain on disposition of assets |
|
| (4,849) |
|
| (12,904) |
Net gain on derivatives and convertible debt |
|
| (402) |
|
| (6,279) |
Equity in earnings of joint venture |
|
| (136) |
|
| - |
Amortization of deferred financing costs |
|
| 416 |
|
| 349 |
Loss on extinguishment of debt |
|
| 800 |
|
| 1,149 |
Impairment loss |
|
| 750 |
|
| 914 |
Stock-based compensation and long term incentive plan expense |
|
| 157 |
|
| 139 |
Warrant issuance costs |
|
| 289 |
|
| 12 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Increase in assets |
|
| (341) |
|
| (1,150) |
Increase in liabilities |
|
| 1,895 |
|
| 1,283 |
Net cash provided by operating activities |
|
| 3,991 |
|
| 2,241 |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Additions to hotel properties |
|
| (1,554) |
|
| (1,890) |
Distribution in excess of cumulative earnings from joint venture |
|
| 400 |
|
| - |
Hotel acquisitions |
|
| (83,619) |
|
| - |
Proceeds from sale of hotel assets |
|
| 19,300 |
|
| 24,957 |
Net change in capital expenditure escrows |
|
| 1,033 |
|
| 920 |
Net cash provided by (used in) investing activities |
|
| (64,440) |
|
| 23,987 |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Deferred financing costs |
|
| (3,550) |
|
| (21) |
Proceeds from long-term debt |
|
| 109,000 |
|
| 10,040 |
Principal payments on long-term debt |
|
| (87,422) |
|
| (27,313) |
Debt early extinguishment penalties |
|
| (454) |
|
| (939) |
Proceeds from common stock issuance |
|
| 45,888 |
|
| - |
Series A and B Preferred Stock redemption, including accumulated dividends |
|
| - |
|
| (20,167) |
Series D Preferred Stock issuance |
|
| - |
|
| 28,930 |
Series E Preferred Stock issuance costs |
|
| (1,130) |
|
| - |
Cash dividends paid to common shareholders |
|
| (2,402) |
|
| - |
Cash dividends paid to preferred shareholders |
|
| (1,820) |
|
| (2,623) |
Other items |
|
| (57) |
|
| (6) |
Net cash provided by (used in) financing activities |
|
| 58,053 |
|
| (12,099) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
| (2,396) |
|
| 14,129 |
Cash and cash equivalents, beginning of period |
|
| 8,326 |
|
| 4,870 |
Cash and cash equivalents, end of period |
| $ | 5,930 |
| $ | 18,999 |
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
Interest paid |
| $ | 1,651 |
| $ | 2,279 |
Income taxes paid |
| $ | 88 |
| $ | - |
|
|
|
|
|
|
|
Schedule of noncash investing and financing activities: |
|
|
|
|
|
|
Fair value of CHLP common units issued in acquisitions |
| $ | 285 |
| $ | - |
In kind dividends deemed on preferred stock |
| $ | 9,900 |
| $ | 20,218 |
Debt assumed in acquisition |
| $ | 9,096 |
| $ | - |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”) was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels. As of June 30, 2017, the Company owned 19 hotels in 11 states, including one hotel owned through an 80% interest in an unconsolidated joint venture (the “Atlanta JV”).
Condor, through its wholly owned subsidiary Condor Hospitality REIT Trust, owns a controlling interest in Condor Hospitality Limited Partnership (“CHLP”), for which we serve as general partner. CHLP, including its various subsidiaries, holds substantially all of the Company’s assets (with the exception of the furniture and equipment of 16 properties held by TRS Leasing, Inc.) and conducts all of its operations. At June 30, 2017, the Company owned 99.4% of the partnership operating units (“partnership units”) of CHLP with the remaining partnership units owned by other limited partners. The Company’s 100% owned E&P Financing Limited Partnership no longer owns any assets or conducts any operations following the sale of its last remaining property in January 2016.
In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required by the Internal Revenue Service (“IRS”) for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, CHLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned subsidiaries (the “TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. CHLP, the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements. References to “we,” “our,” and “us” herein refer to Condor Hospitality Trust, Inc., including, as the context requires, its direct and indirect subsidiaries.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually. The results of the hotels acquired in and since 2015, because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include the accounts of the Company, as well as the accounts of CHLP and its subsidiaries and our wholly owned TRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Effective on March 15, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1-for-6.5. No fractional shares of common stock were issued as fractional shares were settled in cash. Unless otherwise noted, impacted amounts and share information included in the financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented. Certain amounts in the notes to the financial statements may be slightly different than previously reported due to rounding of fractional shares as a result of the reverse stock split.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the general instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the financial statements for the periods presented. Interim results are not necessarily indicative of full-year performance for the year ending December 31, 2017 or any future period. These consolidated financial
7
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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. Acquisition costs, such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees, are expensed as incurred.
The Company’s investments in hotel properties and franchise fees 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.
Investment in Joint Venture
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a variable interest entity (“VIE”) or through our voting interest in a voting interest entity (“VOE”) and we have the ability to provide significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliate as they occur, with losses limited to the extent of our investment in, advances to, and commitments to the investee. Pursuant to our Atlanta JV agreement, allocations of the profits and losses of our Atlanta JV may be allocated disproportionately to nominal ownership percentages due to specified preferred return rate thresholds.
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.
8
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Assets Held for Sale and Discontinued Operations
A hotel is considered held for sale (a) when a contract for sale is entered into, a substantial, nonrefundable deposit has been committed by the purchaser, and sale is expected to occur within one year, or (b) if management has committed to and is actively engaged in a plan to sell the property, the property is available for sale in its current condition, and it is probable the sale will be completed within one year. If a hotel is considered held for sale as of the most recent balance sheet presented or was sold prior to that balance sheet date, the hotel property and the debt it collateralizes are shown as held for sale in all periods presented. Depreciation of our hotels is discontinued at the time they are considered held for sale.
Historically, we have presented the results of operations of hotel properties that have been sold or are considered held for sale as discontinued operations in all periods presented. In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 changed the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other significant disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations that have a major effect on an entity’s operations and financial results should be presented as discontinued operations subsequent to adoption. The Company adopted this pronouncement on October 1, 2014. As a result of this adoption, only the operations of hotels meeting the criteria to be considered held for sale prior to October 1, 2014 are included in discontinued operations for all periods presented as no individual hotel disposition represents a strategic shift in operations or has a major effect on our operations or financial results.
Impairment Losses
On a quarterly basis, the Company reviews the carrying value of each held for use hotel to determine if certain circumstances, known as triggering events, exist indicating impairment to the carrying value of the hotel or that depreciation periods should be modified. These triggering events include a significant change in the cash flows of or a significant adverse change in the business climate for a hotel. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on these undiscounted future cash flows. If the investment is not recoverable based on this analysis, an impairment charge will be taken, if necessary, to reduce the carrying value of the hotel to the hotel’s fair value.
At the end of each reporting period, if the fair value of a held for sale property less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. Impairment losses on held for sale properties may be subsequently recovered up to the amount of the cumulative impairment losses taken while the property is held for sale should future revisions to fair value estimates be required. If active marketing ceases or the property no longer meets the criteria to be classified as held for sale, the property is reclassified to held for use and measured at the lower of its (a) carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held for use, or (b) its fair value at the date of the decision not to sell.
Income Taxes
The Company qualifies and intends to continue to qualify as a REIT under the applicable provisions of the Internal Revenue Code (the “Code”), as amended. In general, under such Code provisions, a trust which has made the required election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its REIT taxable income, will not be subject to federal income tax to the extent of the income currently distributed to shareholders. A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the IRS would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.
9
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Taxable income from non-REIT activities managed through the TRS, which is taxed as a C-Corporation, is subject to federal, state, and local income taxes. We account for the federal income taxes of our TRS using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of the TRS and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on the consideration of available evidence, including tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not (defined as a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities and equity instruments, to perform impairment assessments, to account for hotel acquisitions, in the valuation of stock-based compensation, and for disclosure purposes. Fair value measurements are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable inputs other than quoted prices included in Level 1. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
Level 3: Unobservable inputs for which there is little or no market data, which require a reporting entity to develop its own assumptions.
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or valuation techniques may have a material effect on estimated fair value measurements. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
With the exception of fixed rate debt (see Note 8) and other financial instruments carried at fair value, the carrying amounts of the Company’s financial instruments approximates their fair values due to their short-term nature or variable market-based interest rates.
Fair Value Option
Under U.S. GAAP, the Company has the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for the treatment of the Company’s convertible debt entered into on March 16, 2016 (see Note 7).
Recently Adopted Accounting Standards
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity, which clarifies certain of the criteria for determining whether derivative features in a hybrid financial instrument should be separately recognized. ASU 2014-16 is effective for fiscal years beginning after December 15, 2015 and permits either a retrospective or cumulative effect transition method. ASU 2014-16 was adopted by the Company on January 1, 2016 and was utilized in determining the accounting for the 6.25% Series D Cumulative
10
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Convertible Preferred Stock (“Series D Preferred Stock”) issued in March 2016 and the 6.25% Series E Cumulative Convertible Preferred Stock (“Series E Preferred Stock”) issued in March 2017 (see Note 10).
In February 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance effecting both the VIE and VOE consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The Company adopted this standard on January 1, 2016 and concluded that CHLP now meets the criteria to be considered a VIE of which the Company is the primary beneficiary and, accordingly, the Company continues to consolidate CHLP. The Company’s sole significant asset is its investment in CHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of CHLP. All of the Company’s debt is an obligation of CHLP. This ASU was also used in the determination of the accounting for the Atlanta JV entered into in August 2016 (see Note 4).
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the consolidated balance sheet as a direct deduction from the associated debt liability. The Company adopted this standard on January 1, 2016 and presents all debt issuance costs as a direct deduction from the carrying value of the debt liability. Adoption of this standard was applied retrospectively for all periods presented, effecting only the presentation of the consolidated balance sheet. The adoption of this standard did not have a material impact on the Company's financial position and had no impact on the results of operations or cash flows.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The original updated accounting guidance was effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016, however, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017. As such, the standard will be effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has begun to evaluate each of its revenue streams under the new model. Based on preliminary assessments, the Company does not expect the adoption of this guidance to materially affect the amount or timing of revenue recognition for revenues from room, food and beverage, and other hotel level sales. Furthermore, for real estate sales to third parties, primarily a result of disposition of real estate in exchange for cash with few contingencies, we do not expect the standard to significantly impact the recognition of or accounting for these sales.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes most existing lease guidance in U.S. GAAP when it becomes effective. ASU 2016-02 requires, among other changes to the lease accounting guidance, lessees to recognize most leases on-balance sheet via a right of use asset and lease liability and additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company for annual periods in fiscal years beginning after December 15, 2018, permits early adoption, and mandates a modified retrospective transition method. The Company is required to adopt ASU 2016-02 on January 1, 2019. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU-2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payment, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to reduce the current diversity in practice. This guidance is effective for the Company for years beginning after December 15, 2017 but earlier adoption is permitted. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents in the statement of cash flows. This guidance requires companies to show the changes in the total of cash, cash equivalents, and restricted
11
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 and should be applied retroactively. Early adoption is permitted. The Company does not anticipate that this guidance will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or business combinations. As a result of the standard, we anticipate that the majority of our hotel purchases will be considered asset purchases as opposed to business combinations and as such the related acquisition costs will be capitalized. However, the determination will be made on a transaction-by-transaction basis and we do not expect the determination to materially change the recognition of the assets and liabilities acquired. This standard will be applied on a prospective basis and, therefore, it does not affect the accounting for any of our previous transactions. This standard will be effective for annual periods beginning after December 15, 2017, although early adoption is permitted.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to conform to current year presentation.
Liquidity
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and working capital, short-term borrowings under our $150,000 secured revolving credit facility (the “credit facility”), and the release of restricted cash upon the satisfaction of usage requirements. At June 30, 2017, the Company had $5,930 of cash and cash equivalents on hand and $18,961 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 Series E Preferred Stock. Prior to the consideration of any asset sales or our ability to refinance debt subsequent to June 30, 2017, contractual principal payments on our debt outstanding, which include only normal amortization, total $1,296 through September 30, 2018. We also presently expect to invest approximately $4,000 to $5,000 in capital expenditures related to hotel properties we currently own through September 30, 2018.
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.
Our longer-term liquidity requirements consist primarily of the cost of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made related to our hotel properties, and scheduled debt payments, including maturing loans. Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings, proceeds from public or private issuances of debt or equity securities, and additional borrowings under our existing credit facility.
12
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
NOTE 2. INVESTMENT IN HOTEL PROPERTIES
Investments in hotel properties consisted of the following at June 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of | ||||||||||||||||
|
| June 30, 2017 |
| December 31, 2016 | ||||||||||||||
|
| Held for sale |
| Held for use |
| Total |
| Held for sale |
| Held for use |
| Total | ||||||
Land |
| $ | 526 |
| $ | 20,043 |
| $ | 20,569 |
| $ | 2,392 |
| $ | 14,020 |
| $ | 16,412 |
Buildings, improvements, vehicle |
|
| 4,896 |
|
| 165,627 |
|
| 170,523 |
|
| 23,118 |
|
| 85,565 |
|
| 108,683 |
Furniture and equipment |
|
| 1,879 |
|
| 19,399 |
|
| 21,278 |
|
| 5,233 |
|
| 12,108 |
|
| 17,341 |
Initial franchise fees |
|
| 31 |
|
| 1,444 |
|
| 1,475 |
|
| 194 |
|
| 668 |
|
| 862 |
Construction-in-progress |
|
| - |
|
| 277 |
|
| 277 |
|
| 23 |
|
| 63 |
|
| 86 |
Investment in hotel properties |
|
| 7,332 |
|
| 206,790 |
|
| 214,122 |
|
| 30,960 |
|
| 112,424 |
|
| 143,384 |
Less accumulated depreciation |
|
| (3,532) |
|
| (19,053) |
|
| (22,585) |
|
| (12,247) |
|
| (16,266) |
|
| (28,513) |
Investment in hotel properties, net |
| $ | 3,800 |
| $ | 187,737 |
| $ | 191,537 |
| $ | 18,713 |
| $ | 96,158 |
| $ | 114,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3. ACQUISITION OF HOTEL PROPERTIES
During the six months ended June 30, 2017, the Company acquired five wholly owned hotel properties. The allocation of the purchase price based on fair value, which was determined using Level 3 fair value inputs, was as included in the table below.
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|
|
|
|
|
|
|
|
| Date of acquisition |
| Land |
| Buildings, improvements, and vehicle |
| Furniture and equipment |
| Intangible asset |
| Estimated earn out |
| Total purchase price |
| Debt originated at acquisition |
| Issuance of CHLP partnership units |
| Net cash | |||||||||
Home2 Suites | 03/24/2017 |
| $ | 905 |
| $ | 14,204 |
| $ | 1,351 |
| $ | 40 |
| $ | - |
| $ | 16,500 |
| $ | 16,455 |
| $ | 45 |
| $ | - |
Lexington, KY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home2 Suites | 03/24/2017 |
|
| 1,087 |
|
| 14,345 |
|
| 1,285 |
|
| 33 |
|
| - |
|
| 16,750 |
|
| 16,705 |
|
| 45 |
|
| - |
Round Rock, TX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home2 Suites | 03/24/2017 |
|
| 1,519 |
|
| 18,229 |
|
| 1,727 |
|
| 25 |
|
| - |
|
| 21,500 |
|
| 21,442 |
|
| 58 |
|
| - |
Tallahassee, FL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home 2 Suites | 04/14/2017 |
|
| 1,311 |
|
| 16,792 |
|
| 897 |
|
| - |
|
| - |
|
| 19,000 |
|
| 9,096 |
|
| 52 |
|
| 9,852 |
Southaven, MS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton Inn & Suites | 06/19/2017 |
|
| 1,200 |
|
| 16,432 |
|
| 1,773 |
|
| - |
|
| (155) (1) |
|
| 19,250 |
|
| 19,165 |
|
| 85 |
|
| - |
Lake Mary, FL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| $ | 6,022 |
| $ | 80,002 |
| $ | 7,033 |
| $ | 98 |
| $ | (155) |
| $ | 93,000 |
| $ | 82,863 |
| $ | 285 |
| $ | 9,852 |
(1) | The Lake Mary purchase price is subject to a post-closing adjustment of up to $250 to be paid to the seller if the hotel achieves a stipulated hotel net operating income level in 2017. This contingent consideration is included in the purchase price allocation at its estimated fair value on the date of the acquisition. |
The total purchase price of $93,000 for these hotels was funded with the assumption of one loan with an aggregate outstanding principal balance of $9,096, draws on the credit facility totaling $73,767, the issuance of 1,211,648
13
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
partnership units from CHLP with a total value at issuance of $285, and cash of $9,852. The assumed loan bears interest at a fixed rate of 4.54%, requires monthly principal and interest payments of $48, and matures on August 1, 2024.
During the three and six months ended June 30, 2017, included in the consolidated statement of operations from the hotels we acquired during the six months ended June 30, 2017 is revenue totaling $4,325 and $4,630, respectively, and net earnings, excluding the consideration of acquisition costs, totaling $831 and $968, respectively.
The Company had no acquisitions of wholly owned properties during the six months ended June 30, 2016.
Pro Forma Results
In addition to the five properties discussed above, the Company also entered into the Atlanta JV which then acquired one hotel in August of 2016 (see Note 4) and the Company acquired one wholly owned property, the Aloft Leawood / Overland Park (Kansas City), for a purchase price of $22,500 on December 14, 2016. The following condensed pro forma financial data is presented as if all acquisitions completed in 2016 and 2017, including that completed by the Atlanta JV, had been completed on January 1, 2016. Supplemental pro forma earnings were adjusted to exclude all acquisition expense recognized in the periods presented as if these acquisition costs had been incurred in prior periods 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. 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 been consummated on January 1, 2016, nor do they purport to represent the results of operations for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, |
| Six months ended June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Total revenue |
| $ | 15,442 |
| $ | 20,949 |
| $ | 30,594 |
| $ | 39,443 |
Operating income |
| $ | 2,229 |
| $ | 3,477 |
| $ | 3,272 |
| $ | 4,520 |
Net earnings (loss) attributable to common shareholders |
| $ | 5,127 |
| $ | 7,883 |
| $ | (8,066) |
| $ | (2,764) |
Net earnings (loss) per share attributable to common shareholders - Basic |
| $ | 0.44 |
| $ | 10.37 |
| $ | (1.11) |
| $ | (3.64) |
Net earnings (loss) per share attributable to common shareholders - Diluted |
| $ | 0.41 |
| $ | 1.26 |
| $ | (1.11) |
| $ | (3.64) |
NOTE 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On August 1, 2016, the Company entered into a joint venture with Three Wall Capital LLC and certain of its affiliates (“TWC”) to acquire an Aloft hotel in downtown Atlanta, Georgia for $44,550 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 Hotel Property II LLC, of which CHLP indirectly owns an 80% equity interest, and Spring Street Hotel OpCo II LLC, of which our TRS indirectly owns an 80% equity interest. TWC owns the remaining 20% equity interest in these two companies.
The purchase price for the Atlanta Aloft was partially paid with $33,750 of proceeds from a 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 interest rate is a floating rate calculated on the one-month LIBOR plus 5.0%, and as a condition to closing, the Atlanta JV purchased a LIBOR cap of 3.0%. The current interest rate on the loan is 6.19%. 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.
14
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 $93 and $182 for the three and six months ended June 30, 2017.
Net cash flow from the Atlanta JV will be distributed each fiscal year first with a 10% preferred return on capital contributions to Condor, second with a 10% preferred return on capital contributions to TWC, and third with any remainder distributed to the partners based on their pro-rata equity ownership. Profits are allocated in the same proportion as net cash flow. Losses are allocated based on pro-rata equity ownership. The Atlanta JV agreement also includes buy-sell rights for both members (generally after three years of hotel ownership for Condor and after five years for TWC) and Condor has a purchase option for TWC’s Atlanta JV ownership interest exercisable between the third and fifth anniversary of the hotel closing.
The following tables represent the total assets, liabilities, equity, and components of net earnings, including the Company’s share, of the Atlanta JV as of and for the three and six months ended June 30, 2017:
|
|
|
|
|
|
| |
|
| As of June 30, 2017 | |
Investment in hotel properties, net |
| $ | 48,659 |
Cash and cash equivalents |
|
| 1,860 |
Restricted cash, property escrows |
|
| 910 |
Accounts receivable, prepaid expenses, and other assets |
|
| 485 |
Total Assets |
| $ | 51,914 |
|
|
|
|
Accounts payable, accrued expenses, and other liabilities |
| $ | 1,491 |
Land option liability |
|
| 6,190 |
Long-term debt, net of deferred financing costs |
|
| 33,268 |
Total Liabilities |
|
| 40,949 |
Condor equity |
|
| 8,772 |
TWC equity |
|
| 2,193 |
Total Equity |
|
| 10,965 |
Total Liabilities and Equity |
| $ | 51,914 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, 2017 |
| Six months ended June 30, 2017 | ||
Revenue |
|
|
|
|
|
|
Room rentals and other hotel services |
| $ | 3,061 |
| $ | 6,050 |
Operating Expenses |
|
|
|
|
|
|
Hotel and property operations |
|
| 2,062 |
|
| 3,923 |
Depreciation and amortization |
|
| 412 |
|
| 823 |
Total operating expenses |
|
| 2,474 |
|
| 4,746 |
Operating income |
|
| 587 |
|
| 1,304 |
Net loss on disposition of assets |
|
| (3) |
|
| (4) |
Net loss on derivative |
|
| (2) |
|
| (2) |
Interest expense |
|
| (523) |
|
| (1,128) |
Net earnings |
| $ | 59 |
| $ | 170 |
|
|
|
|
|
|
|
Condor allocated earnings |
| $ | 25 |
| $ | 136 |
TWC allocated earnings |
|
| 34 |
|
| 34 |
Net earnings |
| $ | 59 |
| $ | 170 |
15
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
NOTE 5. DISPOSITIONS OF HOTEL PROPERTIES AND DISCONTINUED OPERATIONS
As of June 30, 2017, the Company had two hotels classified as held for sale. At the beginning of 2017, the Company had seven hotels held for sale and during the three and six months ended June 30, 2017 sold three and five properties, respectively. None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. As a result, only hotels classified as held for sale prior to October 1, 2014 (excluding those subsequently reclassified as held for use), the last of which was sold in January 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations.
In the three months ended June 30, 2017 and 2016, the Company sold three and seven hotels, respectively, resulting in total gains of $5,031 and $8,886, respectively, all of which was included in continuing operations. In the six months ended June 30, 2017 and 2016, the Company sold five and 11 hotels, respectively, resulting in total gains of $5,031 and $12,945, respectively, of which $5,031 and $12,264, respectively, was included in continuing operations. The hotels sold during the three months ended March 31, 2017 had been previously impaired and recoveries of impairment totaling $80 were recognized upon their sale.
The Company allocates interest expense to discontinued operations for debt that is to be assumed or that is required to be repaid as a result of disposal transactions. The following table sets forth the components of discontinued operations for the six months ended June 30, 2016, all of which was recognized in the first quarter of 2016:
|
|
|
|
|
| ||
|
| Six months ended June 30, 2016 | |
Revenue |
| $ | 6 |
Hotel and property operations expense |
|
| (4) |
Net gain (loss) on disposition of assets |
|
| 681 |
Interest expense |
|
| (5) |
Gain from discontinued operations, net of tax |
| $ | 678 |
|
|
|
|
Capital expenditures |
| $ | - |
NOTE 6. LONG-TERM DEBT
On March 1, 2017, a significant portion of the Company’s debt (including all debt outstanding at December 31, 2016 with the exception of the two variable rate Western Alliance Bank loans and the two fixed rate Great Western Bank loans) was refinanced with the credit facility that matures on March 1, 2020. The credit agreement was entered into with KeyBank National Association, as administrative agent and lender, KeyBanc Capital Markets Inc. and The Huntington National Bank, as joint leader arrangers, and other lenders and agents party thereto.
The original credit agreement provided for a $90,000 senior secured credit facility and includes an accordion feature that would allow the credit facility to be increased to $400,000 with additional lender commitments. On May 11, 2017, the Company closed on an increase in the credit facility from $90,000 to $150,000 with the credit facility continuing to retain its $400,000 accordion feature. Available borrowing capacity under the credit facility is based on a borrowing base formula for the pool of hotel properties securing the facility. As of the closing date, the collateral pool consisted of 14 hotel properties and total available borrowing capacity under the credit facility was $41,050. At June 30, 2017, following the subsequent purchases and sales of hotels subsequent to March 1, 2017
16
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
(see Notes 3 and 5) and the common stock equity raise (see Note 9), the collateral pool consisted of 14 hotel properties and total available borrowing capacity under the credit facility totaled $73,743.
The credit facility is guaranteed by the Company and its material subsidiaries that do not have stand-alone financing. Borrowings under the credit 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). The credit facility matures in March 2020 and has two one-year extension options, subject to certain conditions, including the completion of specific capital achievements. The credit facility contains customary representations and warranties, covenants and events of default.
Upon the closing of the credit facility, $34,250 was immediately drawn down to repay existing debt and related expenses. Prior to June 30, 2017, net proceeds from the Company’s hotel sales (see Note 5) were used to pay down a total of $17,218 on the credit facility, proceeds from the credit facility totaling $74,750 were used to fund the Company’s acquisitions plus related expenses (see Note 3), and a portion of the proceeds from the Company’s common stock offering totaling $37,000 (see Note 9) was used to pay down the credit facility.
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, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender |
|
| Balance at June 30, 2017 |
| Interest rate at June 30, 2017 |
| Maturity |
| Amortization provision |
| Properties encumbered at June 30, 2017 |
|
| Balance at December 31, 2016 |
Fixed rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Western Bank (1) |
| $ | 14,143 |
| 4.33% |
| 12/2021 |
| 25 years |
| 1 |
| $ | 14,326 |
Great Western Bank (1) |
|
| 1,498 |
| 4.33% |
| 12/2021 |
| 7 years |
| - |
|
| 1,599 |
Morgan Stanley Bank of America Merrill Lynch Trust 2014-C18 |
|
| 9,069 |
| 4.54% |
| 08/2024 |
| 25 years |
| 1 |
|
| - |
Western Alliance Bank |
|
| - |
| - |
| - |
| - |
| - |
|
| 4,806 |
Western Alliance Bank |
|
| - |
| - |
| - |
| - |
| - |
|
| 2,803 |
Cantor Commercial Real Estate Lending |
|
| - |
| - |
| - |
| - |
| - |
|
| 5,713 |
Morgan Stanley Mortgage Capital Holdings, LLC |
|
| - |
| - |
| - |
| - |
| - |
|
| 912 |
Total fixed rate debt |
|
| 24,710 |
|
|
|
|
|
|
|
|
|
| 30,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Alliance Bank |
|
| 4,824 |
| 4.46% (2) |
| 11/2020 |
| 25 years |
| 1 |
|
| 4,882 |
Western Alliance Bank |
|
| 9,747 |
| 4.46% (2) |
| 11/2020 |
| 25 years |
| 1 |
|
| 9,863 |
KeyBank credit facility (3) |
|
| 54,782 |
| 3.72% (4) |
| 03/2020 |
| Interest only |
| 14 |
|
| - |
The Huntington National Bank |
|
| - |
| - |
| - |
| - |
| - |
|
| 7,361 |
LMREC 2015 - CREI, Inc. (Latitude) |
|
| - |
| - |
| - |
| - |
| - |
|
| 11,124 |
Total variable rate debt |
|
| 69,353 |
|
|
|
|
|
|
| 18 |
|
| 33,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
| $ | 94,063 |
|
|
|
|
|
|
|
|
| $ | 63,389 |
Less: Deferred financing costs |
|
| (3,466) |
|
|
|
|
|
|
|
|
|
| (669) |
Total long-term debt, net of deferred financing costs |
|
| 90,597 |
|
|
|
|
|
|
|
|
|
| 62,720 |
Less: Long-term debt related to hotel properties held for sale, net of deferred financing costs of $24 and $55 |
|
| (421) |
|
|
|
|
|
|
|
|
|
| (5,945) |
Long-term debt related to hotel properties held for use, net of deferred financing costs of $3,442 and $614 |
| $ | 90,176 |
|
|
|
|
|
|
|
|
| $ | 56,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Both loans are collateralized by Aloft Leawood
(2) 90-day LIBOR plus 3.25%
(3) Total unused availability under this credit facility was $18,961 at June 30, 2017; 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 $50,000 notional capped at 2.5% after giving effect to market rate cap (see Note 8)
17
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 principal payments on debt for the remainder of 2017 and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Held for sale |
| Held for use |
| Total | |||
Remainder of 2017 |
| $ | - |
| $ | 509 |
| $ | 509 |
2018 |
|
| - |
|
| 1,057 |
|
| 1,057 |
2019 |
|
| - |
|
| 1,105 |
|
| 1,105 |
2020 |
|
| 445 |
|
| 68,822 |
|
| 69,267 |
2021 |
|
| - |
|
| 13,867 |
|
| 13,867 |
Thereafter |
|
| - |
|
| 8,258 |
|
| 8,258 |
Total |
| $ | 445 |
| $ | 93,618 |
| $ | 94,063 |
|
|
|
|
|
|
|
|
|
|
Financial Covenants
The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage, required loan-to-value and leverage ratios, required levels of tangible net worth, and place certain restrictions on dividends. As of June 30, 2017, we were in compliance with our financial covenants.
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, 2017, we are not in default of any of our loans.
NOTE 7. CONVERTIBLE DEBT AT FAIR VALUE
As part of an agreement entered into on March 16, 2016 (the “Exchange Agreement”) with Real Estate Strategies, L.P. (“RES”) (see Note 10), 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 initially convertible into shares of Series D Preferred Stock, which could be subsequently converted into 97,269 shares of common stock. Following the conversion of all of the outstanding Series D Preferred Stock into common stock and the issuance of the Series E Preferred Stock on March 1, 2017, the Note was amended to be convertible directly into 97,269 shares of common stock at any time at the option of RES or automatically when the Series E Preferred Stock is required to be converted or is redeemed in whole (see Note 10). The Note is not convertible to the extent at the time the conversion would cause RES, together with its affiliates, to beneficially own more than 49% of the voting stock of the Company. Any conversion reduces the principal amount of the Note proportionally.
The Company has made an irrevocable election to record this Convertible Debt in its entirety at fair value utilizing the fair value option available under U.S. GAAP in order to more accurately reflect the economic value of this Note. As such, gains and losses on the Note are included in net gain on derivatives and convertible debt within net earnings each reporting period. Gains (losses) related to this Note were recognized totaling $25 and $208 during the three months ended June 30, 2017 and 2016, respectively, and $265 and ($179) during the six months ended June 30, 2017 and 2016, respectively. The fair value of the Note was 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.
18
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
The following table represents the difference between the fair value and the unpaid principal balance of the Note as of June 30, 2017:
|
|
|
|
|
|
|
|
|
| Fair value as of June 30, 2017 |
| Unpaid principal balance as of June 30, 2017 |
| Fair value carrying amount over/(under) unpaid principal | |||
6.25% Convertible Debt | $ | 1,050 |
| $ | 1,012 |
| $ | 38 |
|
|
|
|
|
|
|
|
|
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, 2017, the Company’s convertible debt (see Note 7) and certain derivative instruments were the only financial instruments measured in the financial statements at fair value on a recurring basis. Nonrecurring fair value measurements were utilized in the determination of the fair value of acquired properties in 2017 (see Note 3), in the accounting for the Company’s equity transactions that occurred in March 2016 and 2017 (see Note 10), and in the valuation of the stock-based compensation grants (see Note 12) and impaired hotels during the three and six months ended June 30, 2017 and 2016.
Derivative Instruments
Currently, the Company uses derivatives, such as interest rate swaps and caps, to manage its interest rate risk. The fair value of interest rate positions is determined using the standard market methodology of netting discounted expected future cash receipts and payments. Variable interest rates used in the calculation of projected receipts and payments on the positions are based on expectations of future interest rates derived from observable market interest rate curves and volatilities. Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the agreements. The Company believes it minimizes this credit risk by transacting with major creditworthy financial institutions. These interest rate positions at June 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated debt |
| Type |
| Terms |
| Effective date |
| Maturity date |
|
| Notional amount at June 30, 2017 |
|
| Notional amount at December 31, 2016 |
Credit facility |
| Cap |
| Caps 30-day LIBOR at 2.50% |
| 03/2017 |
| 03/2019 |
| $ | 50,000 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington |
| Swap |
| Swaps 30-day LIBOR + 2.25% for fixed rate of 4.13% cancellable at Company's option anytime after 11/01/2018 without penalty |
| 11/2015 |
| 11/2020 |
| $ | - |
| $ | 7,361 |
Latitude |
| Cap |
| Caps 30-day LIBOR at 1.0% |
| 03/016 |
| 06/2017 |
| $ | - |
| $ | 11,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, prior to the execution of the Exchange Agreement (see Note 10) on March 16, 2016, which extinguished the instrument, the Company was required to bifurcate and include on the consolidated balance sheet at fair value the embedded conversion option in the 6.25% Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) due to the presence of an antidilution provision that required an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instrument’s original conversion price of $52.00 per share.
Similarly, at December 31, 2015, prior to the execution of the Exchange Agreement, the terms of the common stock warrants issued to the holders of the Series C Preferred Stock (see Note 10) also included an antidilution provision that required a reduction in the warrant’s exercise price of $62.40 should the conversion ratio of the Series C Preferred Stock be adjusted due to its antidilution provisions. Accordingly, the warrants did not qualify for equity classification, and, as a result, the fair value of the warrants was shown as a derivative liability on the consolidated
19
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
balance sheet. With the execution of the Exchange Agreement, this provision of these warrants was effectively eliminated and the conversion price was locked permanently at its current amount on the date of the extinguishment of the Series C Preferred Stock ($12.48). Following this modification of terms, the warrants qualified for equity classification and were reclassified to additional paid-in capital at their fair value of $611 on the date of the modification.
The fair value of the derivative liabilities recognized in connection with the Series C Preferred Stock was determined using the Monte Carlo simulation method. 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 minimize standard error.
Included in the Series E Preferred Stock issued on March 1, 2017 is a redemption right that allows the Company, upon the occurrence of a Qualified Offering (defined as a single offering of common stock of at least $50,000 or up to three offerings in the aggregate of at least $75,000, all with certain minimum prices per share and a potential make whole payment required in certain scenarios), 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). Because this redemption right is contingent upon the occurrence of a Qualified Offering, the Company was required to bifurcate and include on the consolidated balance sheet at fair value the embedded redemption right. This option was determined to be an asset with a fair value on the date of issuance of $150 using a trinomial lattice-based model, considered a Level 3 fair value measurement. A Qualified Offering was completed on March 29, 2017 (see Note 9).
All derivatives recognized by the Company are reported as either derivative assets or liabilities on the consolidated balance sheets and are adjusted to their fair value at each reporting date. All gains and losses on derivative instruments are included in net gain on derivatives and convertible debt and with the exception of realized gains and losses related to the interest rate instruments, which are included in interest expense on the consolidated statements of operations. Net gains (losses) of $202 and ($46) for the three months ended June 30, 2017 and 2016, respectively, and $137 and $6,458 for the six months ended June 30, 2017 and 2016, 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, 2017 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
Interest rate derivatives |
| $ | 6 |
| $ | - |
| $ | 6 |
| $ | - |
Series E Preferred embedded redemption option |
|
| 333 |
|
| - |
|
| - |
|
| 333 |
Convertible debt |
|
| (1,050) |
|
| - |
|
| - |
|
| (1,050) |
Total |
| $ | (711) |
| $ | - |
| $ | 6 |
| $ | (717) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value at |
|
|
|
|
|
|
|
|
| |
|
| December 31, 2016 |
| Level 1 |
| Level 2 |
| Level 3 | ||||
Interest rate derivatives |
| $ | (8) |
| $ | - |
| $ | (8) |
| $ | - |
Convertible debt |
|
| (1,315) |
|
| - |
|
| - |
|
| (1,315) |
Total |
| $ | (1,323) |
| $ | - |
| $ | (8) |
| $ | (1,315) |
There were no transfers between levels during the three or six months ended June 30, 2017 or 2016.
The following tables present 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 periods:
20
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, | |||||||||||
|
|
| 2017 |
| 2016 | |||||||||
|
|
| Series E Preferred embedded redemption option |
| Convertible debt |
| Total |
| Convertible debt |
| ||||
Fair value, beginning of period |
|
| $ | 93 |
| $ | (1,075) |
| $ | (982) |
| $ | (1,399) |
|
Net gains recognized in earnings |
|
|
| 240 |
|
| 25 |
|
| 265 |
|
| 208 |
|
Purchase and issuances |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
Sales and settlements |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
Gross transfers into Level 3 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
Gross transfers out of Level 3 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
Fair value, end of period |
|
| $ | 333 |
| $ | (1,050) |
| $ | (717) |
| $ | (1,191) |
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
Total unrealized gains during the period included in earnings related to instruments held at end of period |
|
| $ | 240 |
| $ | 25 |
| $ | 265 |
| $ | 208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, | |||||||||||||||||||
|
|
| 2017 |
|
| 2016 | |||||||||||||||
|
| Series E Preferred embedded redemption option |
| Convertible debt |
| Total |
| Series C Preferred embedded derivative |
| RES warrant derivative |
| Convertible debt |
| Total | |||||||
Fair value, beginning of period |
| $ | - |
| $ | (1,315) |
| $ | (1,315) |
| $ | (6,271) |
| $ | (2,411) |
| $ | - |
| $ | (8,682) |
Net gains (losses) recognized in earnings |
|
| 183 |
|
| 265 |
|
| 448 |
|
| 4,848 |
|
| 1,800 |
|
| (179) |
|
| 6,469 |
Purchase and issuances |
|
| 150 |
|
| - |
|
| 150 |
|
| - |
|
| - |
|
| (1,012) |
|
| (1,012) |
Sales and settlements |
|
| - |
|
| - |
|
| - |
|
| 1,423 |
|
| - |
|
| - |
|
| 1,423 |
Gross transfers into Level 3 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Gross transfers out of Level 3 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 611 (1) |
|
| - |
|
| 611 |
Fair value, end of period |
| $ | 333 |
| $ | (1,050) |
| $ | (717) |
| $ | - |
| $ | - |
| $ | (1,191) |
| $ | (1,191) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) during the period included in earnings related to instruments held at end of period |
| $ | 183 |
| $ | 265 |
| $ | 448 |
| $ | - |
| $ | - |
| $ | (179) |
| $ | (179) |
(1) | RES warrants were permanently reclassified to additional paid-in capital as discussed above |
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 obligations 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 the 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, 2017 |
| December 31, 2016 |
| June 30, 2017 |
| December 31, 2016 | ||||
Held for use |
| $ | 90,176 |
| $ | 56,775 |
| $ | 90,175 |
| $ | 56,842 |
Held for sale |
|
| 421 |
|
| 5,945 |
|
| 421 |
|
| 6,378 |
Total |
| $ | 90,597 |
| $ | 62,720 |
| $ | 90,596 |
| $ | 63,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 considered Level 3 inputs. The amount of impairment and recovery of previously recorded impairment recognized in the three and six months ended June 30, 2017 and 2016 is shown in the tables below:
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, | ||||||||
| 2017 |
| 2016 | ||||||
| Number of hotels |
|
| Impairment (loss) recovery |
| Number of hotels |
|
| Impairment (loss) recovery |
Held for sale hotels: |
|
|
|
|
|
|
|
|
|
Impairment loss | 2 |
| $ | (479) |
| 1 |
| $ | (5) |
Impairment recovery | - |
|
| - |
| - |
|
| - |
Sold hotels: |
|
|
|
|
|
|
|
|
|
Impairment loss | - |
|
| - |
| 1 |
|
| (116) |
Impairment recovery | - |
|
| - |
| - |
|
| - |
Total net impairment loss: | 2 |
| $ | (479) |
| 2 |
| $ | (121) |
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, | ||||||||
| 2017 |
| 2016 | ||||||
| Number of hotels |
|
| Impairment (loss) recovery |
| Number of hotels |
|
| Impairment (loss) recovery |
Held for sale hotels: |
|
|
|
|
|
|
|
|
|
Impairment loss | 2 |
| $ | (830) |
| 1 |
| $ | (512) |
Impairment recovery | - |
|
| - |
| - |
|
| - |
Sold hotels: |
|
|
|
|
|
|
|
|
|
Impairment loss | - |
|
| - |
| 2 |
|
| (402) |
Impairment recovery | 2 |
|
| 80 |
| - |
|
| - |
Total net impairment loss: | 4 |
| $ | (750) |
| 3 |
| $ | (914) |
NOTE 9. COMMON STOCK
The Company’s common stock is duly authorized, fully paid, and non-assessable.
On February 28, 2017, the holders of the Series D Preferred Stock voluntarily converted their shares into 6,004,957 shares of common stock (adjusted for the reverse stock split discussed below) at $10.40 per share pursuant to the terms of the preferred stock (see Note 10).
Effective on March 15, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1-for-6.5. No fractional shares of common stock were issued as fractional shares were settled in cash. A total of 73 shares were settled for $1. Unless otherwise noted, impacted amounts and share information included in the consolidated financial statements and notes thereto have been retroactively adjusted for the stock split as if such stock split occurred on the first day of the first period presented.
On March 29, 2017, the Company closed an underwritten public offering of 4,772,500 shares of its common stock, including 622,500 shares issued pursuant to the full exercise of an option to purchase additional shares of common stock granted to the underwriters, at a public offering price per share of $10.50. Net proceeds, after the payment of related expenses, from this offering totaled $45,888.
NOTE 10. PREFERRED STOCK
On March 16, 2016, the Company entered into a series of agreements providing for:
22
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
· | the issuance and sale of Condor’s Series D Preferred Stock under a private transaction to SREP III Flight-Investco, L.P. (“SREP”), an affiliate of StepStone Group LP; |
· | the exchange of all of Condor’s outstanding Series C Preferred Stock for Series D Preferred Stock; and |
· | the cash redemption of all of Condor’s outstanding 8% Series A Cumulative Preferred Stock (“Series A Preferred Stock”) and 10% Series B Cumulative Preferred Stock (“Series B Preferred Stock”). |
In connection with these transactions, the Company and SREP entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) dated March 16, 2016 pursuant to which Condor issued and sold 3,000,000 shares of Series D Preferred Stock to SREP on the March 16, 2016 for an aggregate purchase price of $30,000. The Stock Purchase Agreement required that $20,147 of the purchase price be deposited into an escrow account for the purpose of effecting the redemption of the Series A and Series B Preferred Stock and that the remaining amount of the purchase price be delivered to Condor.
Simultaneously, the Company entered into the Exchange Agreement with RES pursuant to which all 3,000,000 outstanding shares of Series C Preferred Stock were exchanged for 3,000,000 shares of Series D Preferred Stock. Under the Exchange Agreement, in lieu of payment of accrued and unpaid dividends in the amount of $4,947 on the Series C Preferred Stock, Condor (a) paid to RES an amount of cash equal to $1,484, (b) issued to RES 245,156 shares of Series D Preferred Stock (such that RES, IRSA and their affiliates do not beneficially own in excess of 49% of the voting stock of Condor) and (c) issued to RES a convertible promissory note, bearing interest at 6.25% per annum, in the principal amount of $1,012 (see Note 7).
Pursuant to the Stock Purchase Agreement, on April 15, 2016, Condor redeemed all of the outstanding Series A and Series B Preferred Stock, in accordance with redemption notices issued on March 16, 2016, as follows:
· | all 803,270 outstanding shares of the Series A Preferred Stock at the redemption price of $10.00 per share plus $2.084940 per share in accrued and unpaid dividends (plus compounded interest) through the redemption date for a total redemption price of $9,707; and |
· | all 332,500 outstanding shares of the Series B Preferred Stock at the redemption price of $25.00 per share plus $6.354167 per share in accrued and unpaid dividends through the redemption date for a total redemption price of $10,425. |
On February 28, 2017, the holders of the Series D Preferred Stock voluntarily converted their shares into 6,004,957 shares of common stock at $10.40 per share pursuant to the terms of the preferred stock. The terms of the Series D Preferred Stock provided for automatic conversion following certain future common stock offerings, and also provided for potential additional payments to the holders depending on the sales price of common stock in the offerings. As a result of the voluntary conversion, the holders are no longer entitled to the potential payments. To induce the holders of the Series D Preferred Stock to voluntarily convert their shares, the Company issued the holders 925,000 shares of a new series of preferred stock, the Series E Preferred Stock.
The effect of these transactions on the Company’s preferred stock and the key terms of the remaining series of the Company’s preferred stock are discussed individually below.
Series A Preferred Stock
On April 15, 2016, the remaining 803,270 outstanding shares of Series A Preferred Stock were redeemed.
The difference between the recorded value of the Series A Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series A Preferred Stock plus related expenses, a total of $2,326, was recorded as a reduction of accumulated deficit during the six months ended June 30, 2016 as the amount is considered a deemed dividend on the Series A Preferred Stock. $2,288 of this amount was recorded during the three months ended March 31, 2016 upon the Series A Preferred Stock becoming mandatorily redeemable and liability classified prior to its redemption. Of these amounts, $38 and $874 for the three and six months ended June 30, 2016, respectively, was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividends that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
23
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Series B Redeemable Preferred Stock
On April 15, 2016, the remaining 332,500 shares of Series B Preferred Stock were redeemed.
The difference between the recorded value of the Series B Preferred Stock prior to the issuance of the redemption notice and the redemption value of the Series B Preferred Stock, a total $2,781, was recorded as a reduction of accumulated deficit during the six months ended June 30, 2016 as the amount is considered a deemed dividend on the Series B Preferred Stock. $2,740 of this amount was recorded during the three months ended March 31, 2016 upon the Series B Preferred Stock becoming mandatorily redeemable and liability classified prior to its redemption. Of these amounts, $41 and $911 for the three and six months ended June 30, 2016, respectively, was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
Series C Convertible Preferred Stock and Warrants
On March 16, 2016, the Series C Preferred Stock was extinguished under the Exchange Agreement discussed above. Upon this extinguishment, the difference between the recorded value of the Series C Preferred Stock prior to the exchange and the fair value of the consideration received in the exchange, a total of $20,366, was recorded as a reduction of accumulated deficit as the amount is considered a deemed dividend on the Series C Preferred Stock. Of this amount, $15,874 was recorded as a reduction of net earnings attributable to common shareholders as the portion of this deemed dividend that was in excess of preferred dividends deducted to arrive at net earnings attributable to common shareholders in previous periods.
On January 24, 2017, the Company exchanged 23,160 new warrants (the “New Warrants”) to purchase common stock of the Company for 576,923 warrants (the “Old Warrants”) held by RES. The number of New Warrants issued in exchange for the Old Warrants equals the number of shares of common stock issuable upon exercise of the Old Warrants pursuant to a cashless exercise provisions of the Old Warrants. The New Warrants are exercisable for 23,160 shares of common stock, have an exercise price of $0.0065 for each common share, and expire on January 24, 2019. On the date of the exchange, the New Warrants had a fair value in excess of the Old Warrants of $289, which is reflected as other expense and an increase in additional paid-in capital as the exchange is assumed to be equivalent to the modification of an equity classified instrument. The New Warrants remain outstanding in their entirety at June 30, 2017.
Series D Convertible Preferred Stock
Following the execution of the Stock Purchase Agreement and Exchange Agreement on March 16, 2016, there were 6,245,156 shares of Series D Preferred Stock outstanding.
The Series D Preferred stockholders ranked senior to the Company’s common stock and any other preferred stock issuances and received preferential cumulative cash dividends at a rate of 6.25% per annum, payable quarterly in arrears on each March 31, June 30, September 30, and December 31, or, if not a business day, the next succeeding business day, of the $10.00 face value per share. Dividends on the Series D Preferred Stock accrued whether or not the Company had earnings, whether or not there were funds legally available for the payment of such dividends, whether or not such dividends were declared, and whether or not such dividends were prohibited by agreement. If the dividends on the Series D Preferred Stock had been in arrears for four consecutive quarters, then upon notice by holders of in the aggregate not less than 40% of the outstanding Series D Preferred Stock, the Company would (a) take all appropriate action reasonably within its means to maximize the assets legally available for paying such dividends and to monetize such assets (for example, but without limiting the generality of the foregoing, by selling or liquidating all of some of the Company’s assets or by selling the Company as a going concern), (b) pay out of all such assets legally available (including any proceeds from any sale or liquidation of such assets) the maximum possible amount of such unpaid dividends, and (c) thereafter, at any time and from time to time when additional assets of the Company (including any proceeds from any sale or liquidation of such assets) became legally available to pay such unpaid dividends, pay such remaining unpaid dividends until all dividends accumulated on the Series D Preferred Stock had been fully paid. Dividends were paid when due throughout the life of the instrument.
24
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Each share of Series D Preferred Stock was convertible, at the option of the holder, at any time into a number of shares of common stock determined by dividing the conversion price of $10.40 into an amount equal to the $10.00 face value per share plus accrued and unpaid dividends, if any. The conversion price was subject to anti-dilution adjustments upon the occurrence of stock splits and stock dividends. Each outstanding share of Series D Preferred Stock would be converted into a number of shares of common stock determined by dividing the conversion price of $10.40 into the $10.00 face value per share, which was equal to a rate of 0.9615385 shares of common stock for each share of Series D Preferred Stock, automatically upon closing of a Qualified Offering without any further action by the holders of such shares or the Company.
The Series D Preferred Stock was redeemable by the Company at any time subject to certain restrictions, in whole or in a partial redemption of up to $30,000, at $12.00 per share on or before March 16, 2019, $13.00 per share from March 16, 2019 to March 16, 2020, and $14.00 per share on or after March 16, 2020, plus all accrued and unpaid dividends. If a Qualified Offering had not occurred on or before September 30, 2021, holders that hold in the aggregate not less than 40% of the outstanding shares of the Series D Preferred Stock had the right to elect to have the Company fully liquidate in a commercially reasonable manner as determined by the Board of Directors of the Company to provide for liquidation distributions to the holders of the Series D Preferred Stock in an amount per share equal to $14.00 in cash plus accrued and unpaid dividends. Once this right had been exercised and the Company had been notified, the dividend rate on the Series D Preferred Stock after September 30, 2021 would increase from 6.25% per annum to 12.5% per annum. The holders of Series D Preferred Stock voted their Series D Preferred Stock as a single class with the holders of the common stock on all matters submitted to such holders for vote or consent. For each such vote or consent, each share of Series D Preferred Stock entitled the holder to cast one vote for each whole vote (rounded to the nearest whole number) that such holder would be entitled to cast had such holder converted its Series D Preferred Stock into shares of common stock as of the date immediately prior to the record date for determining the shareholders of the Company eligible to vote on any such matter.
The fair value of the Series D Preferred Stock was determined to be equal to its face value on the date of issuance.
As discussed above, on February 28, 2017, the holders of the Series D Preferred Stock voluntarily converted their shares into 6,004,957 shares of common stock at $10.40 per share pursuant to the terms of the preferred stock. At the time of conversion, the Series D Preferred Stock holders were issued 925,000 shares of newly created Series E Preferred Stock.
Series E Redeemable Convertible Preferred Stock
Following the voluntary conversion of the Series D Preferred Stock on February 28, 2017, the only shares of preferred stock outstanding are 925,000 shares 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 Preferred 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.
25
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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.
RES and SREP are the only shareholders of the Series E Preferred Stock. RES and SREP are also parties to director designation agreements pursuant to which each of RES and SREP have rights to designate directors for election, the number of which is determined by the percentage voting power they have in the election of directors. All of the directors designated by RES and SREP have been determined by the Company’s Board of Directors to be independent under applicable stock exchange rules. However, notwithstanding that all of the directors designed by RES and SREP are independent directors under exchange rules and neither RES or SREP may alone designate a majority of the Company’s Board of Directors, because RES and SREP hold all of the Series E Preferred Stock and the directors designated by them collectively constitute a majority of the Board of Directors, as of March 31, 2017, they were deemed to have potential influence on the put and call options discussed above, and therefore the Series E Preferred Stock was at that time classified as temporary equity. During the three months ended June 30, 2017, the Board of Directors established a special committee, which excludes the directors designated by RES and SREP, with the sole power to govern the put and call options, and as such, the Series E Preferred Stock was reclassified into permanent equity during that period.
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. The issuance of the Series E Preferred Stock is considered an inducement to convert the Series D Preferred Stock to common stock and as such, its fair value at issuance, plus related expenses totaling $127 and $1,130 in the three and six months ended June 30, 2017, respectively, are reflected as a reduction of retained earnings and an increase in dividends declared and undeclared and in kind dividends deemed on preferred stock.
Impact of Preferred Stock on Net Earnings (Loss) Attributable to Common Shareholders
The components of dividends declared and undeclared and in kind dividends deemed on preferred stock are as follows:
26
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, |
| Six months ended June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Preferred A dividends accrued at stated rate |
| $ | - |
| $ | 32 |
| $ | - |
| $ | 222 |
Preferred A additional deemed dividends upon redemption |
|
| - |
|
| 6 |
|
| - |
|
| 652 |
Preferred B dividends accrued at stated rate |
|
| - |
|
| 35 |
|
| - |
|
| 243 |
Preferred B additional deemed dividends upon redemption |
|
| - |
|
| 6 |
|
| - |
|
| 668 |
Preferred C dividends accrued at stated rate |
|
| - |
|
| - |
|
| - |
|
| 455 |
Preferred C additional deemed dividends at exchange |
|
| - |
|
| - |
|
| - |
|
| 15,419 |
Preferred D dividends accrued at stated rate |
|
| - |
|
| 978 |
|
| 650 |
|
| 1,138 |
Preferred D inducement to convert |
|
| 127 |
|
| - |
|
| 11,030 |
|
| - |
Preferred E dividends accrued at stated rate |
|
| 144 |
|
| - |
|
| 194 |
|
| - |
Dividends declared and undeclared and in kind dividends deemed on preferred stock |
| $ | 271 |
| $ | 1,057 |
| $ | 11,874 |
| $ | 18,797 |
NOTE 11. NONCONTROLLING INTEREST OF PARTNERSHIP UNITS IN CHLP
Noncontrolling interest in CHLP represents the limited partners’ proportionate share of the equity in the operating partnership and long-term incentive plan (“LTIP”) units (see Note 12). Earnings and loss are allocated to noncontrolling interest in accordance with the weighted average percentage ownership of CHLP during the period.
Our ownership interest in CHLP as of June 30, 2017 was 99.4% and as of December 31, 2016 was 97.8%, which includes consideration of the partnership units of the limited partners as well as the LTIP units. At June 30, 2017 and December 31, 2016, 3,821,439 and 7,872,943 CHLP partnership units owned by minority interest holders were outstanding, respectively, which includes 3,821,439 and 2,609,791 partnership units held by limited partners, respectively, and 5,263,152 LTIP units outstanding at December 31, 2016 that were subsequently cancelled on June 28, 2017 (see Note 12). The combined redemption value for the partnership units and LTIP units was $786 and $2,008 at June 30, 2017 and December 31, 2016, respectively.
Each limited partner of CHLP may, subject to certain limitations, require that CHLP redeem all or a portion of his or her partnership units at any time after a specified period following the date the units were acquired, by delivering a redemption notice to CHLP. When a limited partner tenders partnership 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 share of common stock for each 52 partnership 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 purchase the units for common stock. No partnership units were redeemed during the three or six months ended June 30, 2017 or 2016.
NOTE 12. STOCK-BASED COMPENSATION
The Company previously had in place a 2006 Stock Plan which had been approved by the Company’s shareholders. The 2006 Stock Plan authorized the grant of stock options, stock appreciation rights, restricted stock, and stock bonuses of up to 9,615 shares of common stock. The 2006 Stock Plan expired on December 31, 2015. As a replacement for the 2006 Stock Plan, the Board of Directors adopted 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 461,538. As of June 30, 2017, there were 371,012 common shares available for issuance under the 2016 Stock Plan.
27
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 basis 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 and as noncontrolling interest for LTIP awards of CHLP partnership units. The Company has elected to account for forfeitures of stock-based compensation as they occur.
Service Condition Share Awards
On March 31, 2017, the Company granted awards of 13,656 restricted shares of common stock to two executive officers for incentive performance pursuant to their annual incentive objectives. On June 28, 2017, the Company granted an award of 73,385 restricted shares of common stock awards to one executive officer. All of the shares of restricted stock just described were issued under the 2016 Stock Plan and have five year ratable vesting periods based on continued 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, 2017:
|
|
|
|
|
|
|
| Shares |
| Weighted-average grant date fair value | |
Unvested at December 31, 2016 |
| - |
| $ | - |
Granted |
| 87,041 |
| $ | 10.60 |
Vested |
| - |
| $ | - |
Forfeited |
| - |
| $ | - |
Unvested at June 30, 2017 |
| 87,041 |
| $ | 10.60 |
The fair value of the service condition unvested share awards was determined based on the closing price of the Company’s common stock on the grant date. The total unrecognized compensation cost related to service condition unvested share awards at June 30, 2017 was $960, which is expected to be recognized over weighted-average remaining service period of 4.9 years.
Market Based Awards
Pursuant to an amendment of an employment agreement on 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.
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 grant 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 grant date fair value of this award was determined using the following assumptions:
28
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Volatility |
| 25.0 | % |
Stock price |
| $ 10.60 |
|
Dividend yield |
| 7.4 | % |
Risk free interest rate |
| 0.89% - 1.81% based upon expected time of vesting |
|
The total grant date fair value of this market based share award, all of which is unrecognized compensation cost at June 30, 2017, was $1,305, which is expected to be recognized over the weighted-average remaining derived service period of 1.3 years.
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 percentage 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. The total grant date fair value of the 2017 portion of this performance based share award, assuming that 100% of budgeted FFO is achieved, all of which is unrecognized compensation cost at June 30, 2017, was $191, which, after adjustment for the reassessment of the performance condition at each reporting date, is expected to be recognized over the remaining service period of 0.5 years.
Warrants
On March 2, 2015, the Company granted a warrant to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The Black-Scholes 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 has 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 warrant remains exercisable for 66,153 shares at an exercise price of $12.48 per share. As of June 30, 2017, the total unrecognized compensation cost related to these warrants was $66, which is expected to be recognized over the remaining service period of 0.7 years.
Long-Term Incentive Plan Awards
On March 2, 2015, the Company granted an equity award of 5,263,152 LTIP units, representing profit interests in CHLP, to an executive officer of the Company. A Monte Carlo simulation was utilized at issuance for the determination of the fair value of the award. The LTIP units were to be earned in one-third increments upon the Company’s common stock achieving price per share milestones of $22.75, $29.25, and $35.75, respectively. Earned LTIP units were to vest in March 2018, or earlier upon a change in control of the Company, and upon vesting could be converted into CHLP partnership units which can be redeemed at the rate of one share of common stock for each 52 earned LTIP units for up to 101,213 common shares. These LTIP units were cancelled on June 28, 2017 pursuant to an amendment of the employment agreement with the executive officer.
29
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Investment Committee 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 if issuance is available under a shareholder approved stock plan, priced as the average of the closing price of the stock for the first 20 trading days of the calendar year. A total of 409 and 1,123 shares, respectively, were issued to the independent directors of the Investment Committee during the three and six months ended June 30, 2017 under the 2016 Stock Plan. On July 15, 2016, the Company issued 1,837 shares of common stock under the 2016 Stock Plan to the independent directors of the Investment Committee for their service during the six months ended June 30, 2016.
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, 2017 and 2016 was $80 and $70, respectively, and for the six months ended June 30, 2017 and 2016 was $157 and $139, respectively, all of which is included in general and administrative expense.
NOTE 13. INCOME TAXES
We have provided a full valuation allowance against our net deferred tax asset during all periods presented due to the uncertainty of realization resulting from past operating losses which results in no tax expense or benefit for the three and six months ended June 30, 2017 and 2016 with the exception of an alternative minimum tax estimate of $35 recorded in the TRS in 2017 as a result of the application of limits on the use of net operating losses under that system of taxation. After consideration of limitations related to a change in control as defined under Internal Revenue Code Section 382 (“Section 382”) following the Company’s 2012 transactions with RES (see Note 10), the TRS’s net operating loss carryforward at June 30, 2017 as determined for federal income tax purposes was $2,020. The availability of the loss carryforwards will expire from 2022 through 2035. The Company is currently in the process of evaluating whether the Company’s 2016 and 2017 equity transactions (see Notes 9 and 10) will require further limitation of the usage of net operating losses under Section 382.
30
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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 diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, |
| Six months ended June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Numerator: Basic (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 4,654 |
| $ | 7,108 |
| $ | (9,299) |
| $ | (3,988) |
Discontinued operations |
|
| - |
|
| - |
|
| - |
|
| 654 |
Total Net earnings (loss) attributable to common shareholders |
|
| 4,654 |
|
| 7,108 |
|
| (9,299) |
|
| (3,334) |
Less: Allocation to participating securities |
|
| (20) |
|
| - |
|
| (20) |
|
| - |
Net earnings (loss) attributable to common shareholders, net of amount allocated to participating securities |
| $ | 4,634 |
| $ | 7,108 |
| $ | (9,319) |
| $ | (3,334) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Diluted (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common shareholders from continuing operations, net of amount allocated to participating securities |
| $ | 4,634 |
| $ | 7,108 |
| $ | (9,319) |
| $ | (3,988) |
Dividends on Series D Preferred Stock |
|
| - |
|
| 978 |
|
| - |
|
| - |
Dividends and fair value adjustment on Series E Preferred Stock |
|
| (95) |
|
| - |
|
| - |
|
| - |
Interest and fair value adjustment on Convertible Debt |
|
| (9) |
|
| (192) |
|
| - |
|
| - |
Continuing operations - Diluted |
|
| 4,530 |
|
| 7,894 |
|
| (9,319) |
|
| (3,988) |
Discontinued operations - Diluted |
|
| - |
|
| - |
|
| - |
|
| 654 |
Total Diluted |
| $ | 4,530 |
| $ | 7,894 |
| $ | (9,319) |
| $ | (3,334) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - Basic |
|
| 11,541,085 |
|
| 760,129 |
|
| 7,263,158 |
|
| 760,129 |
Unvested restricted stock |
|
| - |
|
| 111 |
|
| - |
|
| - |
Series D Preferred Stock |
|
| - |
|
| 6,004,957 |
|
| - |
|
| - |
Series E Preferred Stock |
|
| 668,111 |
|
| - |
|
| - |
|
| - |
Warrants - RES |
|
| 23,146 |
|
| 20,294 |
|
| - |
|
| - |
Convertible Debt |
|
| 97,269 |
|
| 97,269 |
|
| - |
|
| - |
Weighted average number of common shares - Diluted |
|
| 12,329,611 |
|
| 6,882,760 |
|
| 7,263,158 |
|
| 760,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations - Basic |
| $ | 0.40 |
| $ | 9.36 |
| $ | (1.28) |
| $ | (5.25) |
Discontinued operations - Basic |
|
| - |
|
| - |
|
| - |
|
| 0.86 |
Total - Basic Earnings per Share |
| $ | 0.40 |
| $ | 9.36 |
| $ | (1.28) |
| $ | (4.39) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations - Diluted |
| $ | 0.37 |
| $ | 1.17 |
| $ | (1.28) |
| $ | (5.25) |
Discontinued operations - Diluted |
|
| - |
|
| - |
|
| - |
|
| 0.86 |
Total - Diluted Earnings per Share |
| $ | 0.37 |
| $ | 1.17 |
| $ | (1.28) |
| $ | (4.39) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The earnings or loss attributable to noncontrolling interest is allocated between continuing and discontinued operations for the purpose of the EPS calculation |
31
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
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, | ||||
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Outstanding stock options | 481 |
| 865 |
| 481 |
| 865 |
Unvested restricted stock | 15,269 |
| - |
| 7,677 |
| 161 |
Warrants - RES | - |
| - |
| 96,587 |
| 576,923 |
Warrants - Employees | 66,153 |
| 66,153 |
| 66,153 |
| 66,153 |
Series C Preferred Stock | - |
| - |
| - |
| 1,204,564 |
Series D Preferred Stock | - |
| - |
| 1,957,300 |
| 57,185 |
Series E Preferred Stock | - |
| - |
| 450,239 |
| - |
Convertible debt | - |
| - |
| 97,269 |
| - |
LTIP partnership units (1) | 98,989 |
| 101,213 |
| 100,095 |
| 101,213 |
CHLP partnership units (1) | 65,920 |
| 46,074 |
| 58,539 |
| 46,074 |
Total potentially dilutive securities excluded from the denominator | 246,812 |
| 214,305 |
| 2,834,340 |
| 2,053,138 |
(1) | LTIP and partnership units of CHLP 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. All LTIP units were cancelled effective June 28, 2017 (see Note 12). |
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 and 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, 2017 receive a base monthly management fee of 3.0% to 3.5% of gross hotel revenue, with incentives for performance which increase such fee to a maximum of 5.0%. Base management fees totaled $440 and $452, respectively, for the three months ended June 30, 2017 and 2016, and $764 and $851, respectively, for the six months ended June 30, 2017 and 2016, all of which was included in continuing operations as hotel and property operations expense. Incentive management fees, included in continuing operations in their entirety, totaled $8 and $0, respectively, for the three months ended June 30, 2017 and 2016, and $33 and $21, respectively, for the six months ended June 30, 2017 and 2016.
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 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.
32
Condor Hospitality Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited – In thousands, except share and per share data)
Franchise Agreements
As of June 30, 2017, 17 of our 18 wholly owned 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 terminated before the stated term. Franchise fee expense totaled $947 and $884, for the three months ended June 30, 2017 and 2016, respectively, and $1,615 and $1,643, for the six months ended June 30, 2017 and 2016, respectively, all of which was included in continuing operations as hotel and property operations expense.
Leases
The Company has no land lease agreements in place related to properties owned at June 30, 2017. Land lease expense related to properties previously owned totaled $0 and $30, respectively, for the three months ended June 30, 2017 and 2016, and $9 and $53, respectively, for the six months ended June 30, 2017 and 2016, all of which was included in continuing operations as hotel and property operations expense.
The Company entered into three new office lease agreements in 2016, replacing all existing office lease agreements which expired in 2016. These leases expire in 2019 through 2021 and have combined rent expense of approximately $157 annually. Office lease expense totaled $39 and $48 in the three months ended June 30, 2017 and 2016, respectively, and $77 and $94 in the six months ended June 30, 2017 and 2016, respectively, and is included in general and administrative expense.
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 16. SUBSEQUENT EVENTS
On July 17, 2017, the Company entered into hotel purchase agreements to purchase three Texas properties, the Fairfield Inn & Suites El Paso Airport for $16,100, the TownePlace Suites Austin North Tech Ridge for $21,750, and the Residence Inn Austin Airport for $21,750. The closing of these acquisitions is subject to customary closing conditions including accuracy of representations and warranties and compliance with covenants and obligations. The closings of the El Paso and Austin Airport properties are expected to occur in the late third quarter of 2017 while the closing of the Austin North Tech Ridge property is expected to occur in the first quarter of 2018. However, there can be no guarantee that these transactions will close. Should the Company close on these acquisitions, the Company may accelerate the disposition of up to five more of the legacy assets.
The Company’s common stock began trading on the NYSE MKT under its current symbol “CDOR” beginning at the open of market trading on July 21, 2017. The Company’s common stock previously traded on the NASDAQ Stock Market.
33
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, 2016 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.
Certain information both included and incorporated 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 included in this report which speak only as of the date of this report.
Background
Condor Hospitality Trust, Inc. (“CDOR,” “Condor,” or the “Company”) was incorporated in Virginia on August 23, 1994 and was reincorporated in Maryland on November 19, 2014. CDOR is a self-administered real estate investment trust (“REIT”) for federal income tax purposes that specializes in the investment and ownership of high quality select service, limited service, extended stay, and compact full service hotels. As of June 30, 2017, the Company owned 19 hotels, representing 2,260 rooms, in 11 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 Partnership and its subsidiaries (“CHLP”), for which we serve as general partner. As of June 30, 2017, we owned an approximate 99.4% ownership interest in CHLP. In the future, CHLP 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, CHLP and its subsidiaries lease our hotel properties to the Company’s wholly owned taxable REIT subsidiary, TRS Leasing, Inc., and its wholly owned
34
subsidiaries (“the TRS”). The TRS in turn engages third-party eligible independent contractors to manage the hotels. CHLP, the TRS, and their respective subsidiaries are consolidated into the Company’s financial statements.
Historically, as a result of the geographic areas in which we operate, the operations of our hotels have been seasonal in nature. Generally, occupancy rates, revenue, and operating income have been greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters annually. The results of the hotels acquired in and since 2015, because of their locations and chain scale, are expected to be less seasonal in nature than our legacy portfolio of assets.
Overview
The Company continues to execute its stated strategy with multiple noteworthy accomplishments in the second quarter of 2017. In the second quarter of 2017, the Company successfully closed an increase to its secured credit facility to $150.0 million, closed on the sale of three legacy assets, and declared and paid its fifth consecutive common dividend. Subsequent to the close of the quarter, the Company executed an agreement to acquire three Marriott-branded Hotels in Texas and transferred its common stock to the NYSE MKT. Management believes all of these achievements have positioned the company extremely well to continue to deliver shareholder value.
The key second quarter 2017 accomplishments are further detailed below:
Revenue: Condor’s second quarter 2017 revenue from continuing operations was $14.3 million compared to $14.2 million in the same 2016 period.
Net Earnings: Second quarter net earnings attributable to common shareholders was $4.7 million, or $0.40 per basic and $0.37 per diluted share, compared to $7.1 million, or $9.36 per basic and $1.17 per diluted share for the same 2016 period.
4.4% New Investment Platform RevPAR Growth: For the second quarter, Revenue per Available Room (“RevPAR”) for the 11 hotels considered the new investment platform hotels (includes the Hampton Inn & Suites Lake Mary acquired in 2017, the four Home2 Suites acquired in 2017, the two Alofts acquired in 2016, the three hotels acquired in 2015, and the Hilton Garden Inn acquired in 2012) increased by 4.4% to $102.09 from $97.74 for the same period in 2016 (comparable operating results given for these hotels include results prior to the Company’s ownership based on information obtained from the prior owners). The increase is attributable to a 1.3% increase in Average Daily Rate (“ADR”) over the same period 2016 and a 3.1% increase in occupancy.
Increased Secured Revolving Credit Facility to $150 Million: On May 12, 2017, the Company announced that it had successfully closed on an increase to its senior secured revolving credit facility from $90.0 million to $150.0 million. The revolving credit facility now provides for up to $150.0 million of committed borrowing capacity and continues to include an accordion feature that would allow the Company to increase the size of the facility up to $400.0 million with additional lender commitments.
Closed Two Hotel Acquisitions, the Home2 Suites Memphis/Southaven and the Hampton Inn & Suites Lake Mary: On April 17, 2017, the Company announced that it had closed on the acquisition of the Home2 Suites Memphis/Southaven (Mississippi) for $19.0 million. This purchase completed the Company’s acquisition of the four Home2 Suites hotels announced in January of 2017. On June 20, 2017, the Company announced that it had closed on the acquisition of the 130-room Hampton Inn and Suites in Lake Mary, Florida for $19.3 million just 51 days after the signing of the purchase contract. The closing of the Hampton Inn and Suites Lake Mary represented the tenth high-quality premium-branded select-service hotel acquired in the past six quarters. The Company now owns 11 high-quality, premium-branded select service hotels with an average age of 4 years.
Sold Three Legacy Assets: In the second quarter of 2017, the Company continued to successfully dispose of legacy assets at what the Company considers to be attractive valuations. The Company sold three assets in the second quarter resulting in $13.3 million of gross proceeds. Year-to-date the Company has sold five legacy assets totaling $20.1 million in gross proceeds. Currently, the Company has placed under contract two additional legacy hotels; however, there can be no guarantee these transactions will close. The Company has announced that due to the
35
signing of the contact to acquire three hotels in Texas, with one of these assets expected to close in 2018, the Company may accelerate the disposition of up to five more of the legacy assets. Should the Company close on the new acquisitions and decide to accelerate additional legacy hotel dispositions, the Company would anticipate to have sold or have under contract to be sold these additional assets by year-end 2017.
Declared and Paid Second Quarter Common Dividend: On June 13, 2017, the Board of Directors declared a common stock dividend of $0.195 per share related to the second quarter of 2017. This represents $0.78 per share on an annualized basis and a yield of 7.5% based on Condor’s closing stock price prior to the announcement. The second quarter dividend was paid on July 7, 2017 to shareholders of record on June 30, 2017.
Subsequent to the close of the first quarter, the Company achieved the following significant accomplishments:
Executed Agreement to Acquire Three Marriott-Branded Hotels in Texas: On July 18, 2017, the Company announced that it had executed agreements to purchase a portfolio of three Marriott-branded hotels for $59.6 million. The portfolio hotels are: the Fairfield Inn & Suites El Paso Airport, the TownePlace Suites Austin North Tech Ridge, and the Residence Inn Austin Airport. The Company expects that the hotels will continue to be managed by Aimbridge Hospitality. This acquisition presents a unique opportunity to acquire three high-quality hotels that fit squarely within our investment strategy of investing in newer, premium-branded select-service assets in secondary markets. The hotels have an average age of less than two years, have a design aesthetic that we believe appeals to the modern traveler, and are located in growing, attractive secondary markets. We expect to close the acquisition of the Fairfield Inn & Suites and Residence Inn in the third quarter of 2017 and the TownePlace Suites in early 2018.
Transferred Common Stock to the NYSE MKT and Rang the Opening Bell of the New York Stock Exchange: On July 21, 2017, President and Chief Executive Officer Bill Blackham accompanied by the Executive team rang the opening bell of the New York Stock Exchange to celebrate the Company’s transfer of trading of its common stock from the NASDAQ Stock Market to the NYSE MKT. Mr. Blackham was joined by Senior Vice President and Chief Financial Officer Jonathan Gantt, Senior Vice President and Chief Operating Officer Jeff Dougan, Chief Accounting Officer Arinn Cavey, and General Counsel Lauren Green, together with other key Condor team members and alliance partners. The Company's common stock trades under the trading symbol "CDOR", its previous trading symbol, on the NYSE MKT and began trading at the opening bell on Friday, July 21, 2017.
Outlook and Performance
The hotel sector headlines continue to focus on the continued deceleration of Revenue per Available Room (“RevPAR”) growth and this headline is reinforced by RevPAR outlooks for the remainder of 2017 detailed by many of our public peers. We believe that our unique investment strategy of focusing on the secondary markets will deliver outperformance in the near-term. More specifically, we expect that the secondary markets we target, defined as the top 100 Metropolitan Statistical Areas (“MSAs”) with a particular focus on the top 20-60 MSAs, will deliver higher than national average RevPAR growth. The combination of slower supply growth combined with increasing demand due to continued economic expansion in these markets should lead to RevPAR outperformance, as evidenced by our RevPAR performance for the first and second quarters of 2017. Factors that might affect our performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and other documents that we may file with the SEC in the future. We will continue to monitor lodging demand and rates in our markets, our third-party hotel managers, and our performance overall. The Company currently expects to continue the positive momentum of the first half of 2017 through the end of the year.
36
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, 2017:
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|
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|
|
Brand |
| City |
| State |
| Rooms |
|
|
|
|
|
|
|
New Investment Platform |
|
|
|
|
|
|
Hilton Garden Inn |
| Dowell |
| Maryland |
| 100 |
Hotel Indigo |
| Atlanta (Airport) |
| Georgia |
| 142 |
SpringHill Suites |
| San Antonio (Downtown) |
| Texas |
| 116 |
Courtyard by Marriott |
| Jacksonville |
| Florida |
| 120 |
Aloft |
| Leawood-Overland Park |
| Kansas |
| 156 |
Aloft |
| Atlanta (Downtown) (1) |
| Georgia |
| 254 |
Home 2 Suites |
| Lexington (2) |
| Kentucky |
| 103 |
Home 2 Suites |
| Round Rock (2) |
| Texas |
| 91 |
Home 2 Suites |
| Tallahassee (2) |
| Florida |
| 132 |
Home 2 Suites |
| Southaven (2) |
| Mississippi |
| 105 |
Hampton Inn and Suites |
| Lake Mary (2) |
| Florida |
| 130 |
|
|
|
|
|
| 1,449 |
Legacy Hotels Held for Use |
|
|
|
|
|
|
Comfort Suites |
| South Bend |
| Indiana |
| 135 |
Comfort Suites |
| Fort Wayne |
| Indiana |
| 127 |
Comfort Inn & Suites |
| Warsaw |
| Indiana |
| 71 |
Quality Inn |
| Solomons |
| Maryland |
| 59 |
Super 8 |
| Creston |
| Iowa |
| 121 |
Supertel Inn |
| Creston |
| Iowa |
| 41 |
|
|
|
|
|
| 554 |
Legacy Hotels Held for Sale |
|
|
|
|
|
|
Quality Inn |
| Morgantown |
| West Virginia |
| 81 |
Days Inn |
| Bossier City |
| Louisiana |
| 176 |
|
|
|
|
|
| 257 |
|
|
|
| Total Rooms |
| 2,260 |
(1) | This property is owned through an 80% interest in our unconsolidated Atlanta JV |
(2) | This property was newly acquired in 2017 |
All of our properties are encumbered by either our credit facility or by mortgage debt at June 30, 2017.
37
Acquisitions
In the six months ended June 30, 2017, the Company acquired five wholly owned properties, including, on March 24, 2017, the Home2 Suites Lexington University / Medical Center (Kentucky), the Home2 Suites Austin / Round Rock, and the Home 2 Suites Tallahassee State Capitol; on April 14, 2017, the Home2 Suites Memphis / Southaven; and on June 19, 2017, the Hampton Inn & Suites Orlando / Lake Mary. The allocations of purchase price based on fair value was as included in the table below (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
| Date of acquisition |
| Land |
| Buildings, improvements, and vehicle |
| Furniture and equipment |
| Intangible asset |
| Estimated earn out |
| Total purchase price |
| Debt originated at acquisition |
| Issuance of CHLP partnership units |
| Net cash | |||||||||
Home2 Suites | 03/24/2017 |
| $ | 905 |
| $ | 14,204 |
| $ | 1,351 |
| $ | 40 |
| $ | - |
| $ | 16,500 |
| $ | 16,455 |
| $ | 45 |
| $ | - |
Lexington, KY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home2 Suites | 03/24/2017 |
|
| 1,087 |
|
| 14,345 |
|
| 1,285 |
|
| 33 |
|
| - |
|
| 16,750 |
|
| 16,705 |
|
| 45 |
|
| - |
Round Rock, TX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home2 Suites | 03/24/2017 |
|
| 1,519 |
|
| 18,229 |
|
| 1,727 |
|
| 25 |
|
| - |
|
| 21,500 |
|
| 21,442 |
|
| 58 |
|
| - |
Tallahassee, FL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home 2 Suites | 04/14/2017 |
|
| 1,311 |
|
| 16,792 |
|
| 897 |
|
| - |
|
| - |
|
| 19,000 |
|
| 9,096 |
|
| 52 |
|
| 9,852 |
Southaven, MS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton Inn & Suites | 06/19/2017 |
|
| 1,200 |
|
| 16,432 |
|
| 1,773 |
|
| - |
|
| (155) (1) |
|
| 19,250 |
|
| 19,165 |
|
| 85 |
|
| - |
Lake Mary, FL |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| $ | 6,022 |
| $ | 80,002 |
| $ | 7,033 |
| $ | 98 |
| $ | (155) |
| $ | 93,000 |
| $ | 82,863 |
| $ | 285 |
| $ | 9,852 |
(1) | The Lake Mary purchase price is subject to a post-closing adjustment of up to $250 to be paid to the seller if the hotel achieves a stipulated hotel net operating income level in 2017. This contingent consideration is included in the purchase price allocation at its estimated fair value on the date of the acquisition. |
The total purchase price of $93.0 million for these hotels was funded with the assumption of one loan with an aggregate outstanding principal balance of $9.1 million, draws on the credit facility totaling $73.8 million, the issuance of 1,211,648 partnership units from CHLP with a total value at issuance of $0.3 million, and cash of $9.8 million. The assumed loan bears interest at a fixed rate of 4.54%, requires monthly principal and interest payments of approximately $0.05 million, and matures on August 1, 2024.
The Company had no acquisitions of wholly owned properties during the six months ended June 30, 2016.
Additionally, on July 17, 2017, the Company entered into hotel purchase agreements to purchase three Texas properties, the Fairfield Inn & Suites El Paso Airport for $16.1 million, the TownePlace Suites Austin North Tech Ridge for $21.8 million, and the Residence Inn Austin Airport for $21.8 million. The closing of these acquisitions is subject to customary closing conditions including accuracy of representations and warranties and compliance with covenants and obligations. The closings of the El Paso and Austin Airport properties are expected to occur in the late third quarter of 2017 while the closing of the Austin North Tech Ridge property is expected to occur in the first quarter of 2018. However, there can be no guarantee that these transactions will close.
38
Dispositions
Consistent with our strategic repositioning, the following hotel sales were executed in the six months ended June 30, 2017:
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| Condor |
| Number of |
| Gross proceeds | |
Date of sale |
| Location |
| Brand |
| lender |
| rooms |
| (in thousands) | |
03/27/2017 |
| New Castle, PA |
| Comfort Inn |
| Credit facility |
| 79 |
|
| 2,500 |
03/28/2017 |
| Billings, MT |
| Super 8 |
| Credit facility |
| 106 |
|
| 4,250 |
04/03/2017 |
| Harlan, KY |
| Comfort Inn |
| Unencumbered |
| 61 |
|
| 1,850 |
04/18/2017 |
| Lafayette, IN |
| Comfort Suites |
| Credit facility |
| 62 |
|
| 3,885 |
05/17/2017 |
| Key Largo, FL |
| Key West Inn |
| Credit facility |
| 40 |
|
| 7,600 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
| Total |
| 348 |
| $ | 20,085 |
All net proceeds from the hotel dispositions in 2017 to date were used to repay borrowings under the Company’s $150.0 million credit facility with the exception of the net proceeds from the sale of Harlan, which was unencumbered at the time of its sale. In the three months ended June 30, 2016, seven hotels with a total of 447 rooms were sold for gross proceeds of $16.6 million, and net proceeds, after expenses and debt repayment, of $4.6 million. In the six months ended June 30, 2016, 11 hotels with a total of 872 rooms were sold for gross proceeds of $26.0 million, and net proceeds, after expenses and debt repayment, of $8.4 million.
Based on the criteria discussed in the footnotes to the consolidated financial statements, as of June 30, 2017, the Company had two hotels classified as held for sale. At the beginning of 2017, the Company had seven hotels held for sale and during the three and six months ended June 30, 2017 sold two and five properties, respectively. None of the hotels reclassified as held for sale since the Company’s adoption of ASU 2014-08 on October 1, 2014 represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. As a result, only hotels classified as held for sale prior to October 1, 2014 (excluding those subsequently reclassified as held for use), the last of which was sold in January 2016, are included in discontinued operations with all other hotels, including those subsequently sold or classified as held for sale, reported in continuing operations.
As previously discussed, the Company currently has three properties under contract for purchase. Should the Company close on these acquisitions, the Company may accelerate the disposition of up to five additional legacy assets. Should these assets be reclassified as held for sale in future periods, the Company may recognize impairment expense at the time of reclassification.
Operating Performance Metrics
The following tables present our same property occupancy, Average Daily Rate (“ADR”), and RevPAR for all our hotels owned at June 30, 2017. Same property 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. 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.
39
|
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|
| Three months ended June 30, | ||||||||||||||
| 2017 |
| 2016 | ||||||||||||
| Occupancy |
| ADR |
| RevPAR |
| Occupancy |
| ADR |
| RevPAR | ||||
Wholly owned new investment platform properties | 82.90% |
| $ | 121.02 |
| $ | 100.33 |
| 81.11% |
| $ | 118.23 |
| $ | 95.90 |
Atlanta Aloft JV | 84.16% |
| $ | 131.12 |
| $ | 110.35 |
| 78.31% |
| $ | 135.88 |
| $ | 106.41 |
Total New investment platform | 83.13% |
| $ | 122.81 |
| $ | 102.09 |
| 80.62% |
| $ | 121.24 |
| $ | 97.74 |
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|
|
Legacy hotels held for sale | 50.83% |
| $ | 50.71 |
| $ | 25.78 |
| 52.09% |
| $ | 47.33 |
| $ | 24.65 |
Legacy hotels held for use | 71.94% |
| $ | 80.13 |
| $ | 57.65 |
| 65.44% |
| $ | 79.20 |
| $ | 51.83 |
Total Legacy | 65.32% |
| $ | 72.95 |
| $ | 47.65 |
| 61.21% |
| $ | 70.60 |
| $ | 43.21 |
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|
|
Total portfolio as of June 30, 2017 | 76.75% |
| $ | 107.61 |
| $ | 82.59 |
| 73.64% |
| $ | 106.11 |
| $ | 78.15 |
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|
|
| Six months ended June 30, | ||||||||||||||
| 2017 |
| 2016 | ||||||||||||
| Occupancy |
| ADR |
| RevPAR |
| Occupancy |
| ADR |
| RevPAR | ||||
Wholly owned new investment platform properties | 80.99% |
| $ | 121.69 |
| $ | 98.56 |
| 78.39% |
| $ | 117.11 |
| $ | 91.81 |
Atlanta Aloft JV | 83.34% |
| $ | 133.09 |
| $ | 110.92 |
| 73.92% |
| $ | 139.52 |
| $ | 103.13 |
Total New investment platform | 81.40% |
| $ | 123.73 |
| $ | 100.72 |
| 77.61% |
| $ | 120.85 |
| $ | 93.79 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy hotels held for sale | 43.67% |
| $ | 49.23 |
| $ | 21.50 |
| 47.28% |
| $ | 46.06 |
| $ | 21.78 |
Legacy hotels held for use | 69.09% |
| $ | 75.67 |
| $ | 52.28 |
| 59.55% |
| $ | 76.97 |
| $ | 45.84 |
Total Legacy | 61.10% |
| $ | 69.73 |
| $ | 42.60 |
| 55.70% |
| $ | 68.73 |
| $ | 38.28 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio as of June 30, 2017 | 74.13% |
| $ | 107.78 |
| $ | 79.89 |
| 69.70% |
| $ | 105.82 |
| $ | 73.76 |
In the new investment platform hotels, total RevPAR increased by 4.4% in the second quarter of 2017, driven by increases in both ADR of 1.3% and occupancy of 3.1%. Within this same portfolio, total RevPAR increased 7.4% in 2017 year-to-date through the second quarter, also driven by both increases in ADR of 2.4% and occupancy of 4.9%. The largest increases in RevPAR for these hotels in both periods related to the San Antonio SpringHill Suites, the Lexington Home2 Suites, the Tallahassee Home2 Suites, and the Lake Mary Hampton Inn and Suites. At the SpringHill Suites, the increase was driven both by increased convention business following the completion in the third quarter of 2016 of a significant expansion and renovation of the convention center as well as increased government business following a focused sales effort to increase this sector. At the Lexington Home2 Suites, the increase was driven by an increased relationship with the University of Kentucky as well as a soft 2016 during a period of absorption of the opening of a new hotel nearby. At the Tallahassee Home2 Suites, the increase in RevPAR was primarily the result of a changed meeting schedule used by the state legislature combined with increased awareness of the property by both area colleges and government travelers. At the Lake Mary Hampton Inn and Suites, 2016 results were impacted by ongoing renovations.
In the legacy held for use portfolio of hotels, total RevPAR increased by 11.2% in the second quarter of 2017, driven by increases in both ADR of 1.2% and occupancy of 9.9%. Within this same portfolio, total RevPAR increased 14.0% in 2017 year-to-date through the second quarter, driven by an increase in occupancy of 16.0% slightly offset by a decrease in ADR of 1.7%. These increases in RevPAR were driven both by the completion of renovations that were ongoing in 2016 in three hotels in Indiana and an increase in construction business in one hotel.
40
Results of Operations
Comparison of the three months ended June 30, 2017 to the three months ended June 30, 2016 (in thousands)
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|
|
|
|
|
|
| |||||||
| Three months ended June 30, | |||||||
| 2017 |
| 2016 |
| Variance | |||
Revenue | $ | 14,252 |
| $ | 14,155 |
| $ | 97 |
Hotel and property operations expense |
| (9,224) |
|
| (9,889) |
|
| 665 |
Depreciation and amortization expense |
| (1,769) |
|
| (1,289) |
|
| (480) |
General and administrative expense |
| (1,511) |
|
| (1,277) |
|
| (234) |
Acquisition and terminated transactions expense |
| (215) |
|
| (53) |
|
| (162) |
Net gain on disposition of assets |
| 4,852 |
|
| 8,856 |
|
| (4,004) |
Equity in earnings of joint venture |
| 25 |
|
| - |
|
| 25 |
Net gain on derivatives and convertible debt |
| 227 |
|
| 162 |
|
| 65 |
Other income (expense), net |
| (39) |
|
| 23 |
|
| (62) |
Interest expense |
| (1,092) |
|
| (1,248) |
|
| 156 |
Loss on extinguishment of debt |
| - |
|
| (976) |
|
| 976 |
Impairment loss, net |
| (479) |
|
| (121) |
|
| (358) |
Income tax expense |
| (35) |
|
| - |
|
| (35) |
Net earnings | $ | 4,992 |
| $ | 8,343 |
| $ | (3,351) |
Revenue
Revenue between the periods remained relatively stable in total, increasing by $97, or 0.7%. Revenue from properties acquired after the second quarter of 2016 totaled $6,027 during the three months ended June 30, 2017 while revenue decreased by $7,037 as a result of decreased revenue from held for sale and sold properties. Revenue related to held for use properties increased in total by $1,107 as a result of the changes in RevPAR on the new investment platform hotels and legacy held for use hotels discussed above.
Expenses
Hotel and property operations expense decreased by $665, which was driven by decreased expenses from held for sale or sold properties of $4,908, partially offset by expenses from newly acquired properties of $3,499 in the three months ended June 30, 2017. In totality, hotel and operations expenses decreased as a percentage of total revenue to 64.7% and 69.9% for the three months ended June 30, 2017 and 2016, respectively. This decrease was both a result of increased ADR in our hotel portfolio and because the legacy hotels that remain in our portfolio and new investment platform hotels have higher operating margins than the hotels that were sold during and between the periods.
Depreciation expense increased by $480 between the periods as a result of an increase in the value of the Company’s held for use hotel property portfolio between the periods (from $111,361 gross investment at June 30, 2016 to $206,790 gross investment at June 30, 2017), largely due to the five acquisitions made during 2017 to date with values totaling $93,000.
Despite an increase in debt balances between the periods (from $70,263 at June 30, 2016 to 94,063 at June 30, 2017), interest expense decreased by $156. Interest expense was favorably impacted by a decrease in the weighted average interest rate on total debt outstanding between the periods, from 5.16% at June 30, 2016 to 4.02% at June 30, 2017, largely as a result of the lower than historical interest rate obtained on the credit facility refinancing in the first quarter of 2017.
General and administrative expense increased by $234 between the periods largely as a result of increased payroll costs as well as professional fees primarily related to control evaluation procedures undertaken relative to the new management companies engaged by the Company, partially offset by period over period savings on the Company’s Directors and Officers insurance coverage.
Acquisition and terminated transaction costs will fluctuate period to period based on our acquisition activities. Acquisition costs typically consist of transfer taxes, legal fees, and other costs associated with acquiring a hotel
41
property as well as transactions that were terminated during the year and expense incurred pursuing potential acquisitions. The increase in these expenses between the periods of $162 was a result of increased acquisition activity in 2017, including the consummation of two acquisitions during the second quarter.
Net Gain on Disposition of Assets
In the three months ended June 30, 2017, three hotels were sold with gains totaling $5,031. In the three months ended June 30, 2016, seven hotels were sold with gains totaling $8,886.
Loss on Extinguishment of Debt
The loss on the extinguishment of debt that was incurred in the second quarter of 2016 was a result of prepayment penalties upon the disposal of a properties encumbered by the Company’s Morgan Stanley debt. There were no prepayment penalties incurred in the second quarter of 2017.
Impairment Loss, net
In the three months ended June 30, 2017, we incurred $479 of impairment losses. In the three months ended June 30, 2016, we recognized impairment losses totaling $121. All impairments recognized in both periods related either to hotels held for sale or sold at some point during the periods.
Income Tax Expense
As of June 30, 2017 and 2016 and throughout the three months then ended, a full valuation allowance was recorded against the Company’s net deferred tax asset due to the uncertainty of realization because of historical operating losses. As such, no income tax expense or benefit was recorded in the three months ended June 30, 2017 or 2016 with the exception of $35 recorded in the second quarter of 2017 for alternative minimum tax related to the use of net operating losses during the period. Management believes the combined federal and state income tax rate for the TRS will be approximately 38% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.
42
Comparison of the six months ended June 30, 2017 to the six months ended June 30, 2016 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, | |||||||||||||
| 2017 |
| 2016 |
|
| |||||||||
| Continuing operations and Total |
| Continuing operations |
| Discontinued operations |
| Total |
| Continuing operations variance | |||||
Revenue | $ | 24,613 |
| $ | 26,658 |
| $ | 6 |
| $ | 26,664 |
| $ | (2,045) |
Hotel and property operations expense |
| (16,837) |
|
| (19,600) |
|
| (4) |
|
| (19,604) |
|
| 2,763 |
Depreciation and amortization expense |
| (2,820) |
|
| (2,698) |
|
| - |
|
| (2,698) |
|
| (122) |
General and administrative expense |
| (3,003) |
|
| (2,725) |
|
| - |
|
| (2,725) |
|
| (278) |
Acquisition and terminated transactions expense |
| (717) |
|
| (147) |
|
| - |
|
| (147) |
|
| (570) |
Equity transactions expense |
| (343) |
|
| - |
|
| - |
|
| - |
|
| (343) |
Net gain on disposition of assets |
| 4,849 |
|
| 12,223 |
|
| 681 |
|
| 12,904 |
|
| (7,374) |
Equity in earnings of joint venture |
| 136 |
|
| - |
|
| - |
|
| - |
|
| 136 |
Net gain on derivatives and convertible debt |
| 402 |
|
| 6,279 |
|
| - |
|
| 6,279 |
|
| (5,877) |
Other income (expense), net |
| (40) |
|
| 2 |
|
| - |
|
| 2 |
|
| (42) |
Interest expense |
| (2,063) |
|
| (2,577) |
|
| (5) |
|
| (2,582) |
|
| 514 |
Loss on extinguishment of debt |
| (800) |
|
| (1,149) |
|
| - |
|
| (1,149) |
|
| 349 |
Impairment loss, net |
| (750) |
|
| (914) |
|
| - |
|
| (914) |
|
| 164 |
Income tax expense |
| (35) |
|
| - |
|
| - |
|
| - |
|
| (35) |
Net earnings | $ | 2,592 |
| $ | 15,352 |
| $ | 678 |
| $ | 16,030 |
| $ | (12,760) |
Revenue
Revenue from continuing operations between the periods decreased by $2,045, or 7.7%. Revenue from properties acquired after the second quarter of 2016 totaled $7,735 during the six months ended June 30, 2017 while revenue decreased by $12,128 as a result of decreased revenue from held for sale and sold properties included in continuing operations. Revenue related to held for use properties increased in total by $2,348 as a result of the changes in RevPAR on the new investment platform hotels discussed above.
Expenses
Hotel and property operations expense from continuing operations decreased by $2,763, which was driven by decreased expenses from held for sale or sold properties included in continuing operations of $9,056, partially offset by expenses from newly acquired properties of $4,617 in the six months ended June 30, 2017. In totality, hotel and operations expenses from continuing operations decreased as a percentage of total revenue to 68.4% and 73.5% for the six months ended June 30, 2017 and 2016, respectively. This decrease was both a result of increased ADR in our hotel portfolio and because the legacy hotels that remain in our portfolio and new investment platform hotels have higher operating margins than the hotels that were sold during and between the periods.
Depreciation expense increased by $122 between the periods as a result of an increase in the value of the Company’s held for use hotel property portfolio between the periods as discussed above, largely due to the five acquisitions made during 2017 to date with values totaling $93,000.
Despite an increase in debt balances between the periods as discussed above, interest expense decreased by $514. Interest expense was favorably impacted by a decrease in the weighted average interest rate on total debt outstanding between the periods, from 5.16% at June 30, 2016 to 4.02% at June 30, 2017, largely as a result of the lower than historical interest rate obtained on the credit facility refinancing in the first quarter of 2017.
General and administrative expense increased by $278 between the periods largely as a result of increased payroll costs as well as professional fees primarily related to control evaluation procedures undertaken relative to the new management companies engaged by the Company, partially offset by period over period savings on the Company’s Directors and Officers insurance coverage.
Acquisition and terminated transaction costs will fluctuate period to period based on our acquisition activities. Acquisition costs typically consist of transfer taxes, legal fees, and other costs associated with acquiring a hotel property as well as transactions that were terminated during the year and expense incurred pursuing potential
43
acquisitions. The increase in these expenses between the periods of $570 was a result of increased acquisition activity in 2017, including the consummation of five acquisitions during the first two quarters of the year.
Equity transaction costs totaled $343, all of which was incurred in the first quarter of 2017 as a result of the one-time non-cash expense of $289 associated with the exchange of warrants as well as expenses associated with this transaction.
Net Gain/(Loss) on Disposition of Assets
In the six months ended June 30, 2017, five hotels were sold with gains totaling $5,031. In the six months ended June 30, 2016, five hotels were sold with gains totaling $12,945.
Net Gain on Derivatives and Convertible Debt
In the six months ended June 30, 2017, the Company recognized a net gain on derivatives and convertible debt of $402, including both a gain on convertible debt of $265 and a gain on derivatives of $137. In the six months ended June 30, 2016, the Company recognized a net gain totaling $6,279 primarily as a result of a decrease in the Company’s stock price, which in turn decreased the value assigned to the conversion feature of the Series C Preferred Stock and the outstanding common stock warrants, partially offset by a loss of $179 on the fair value of the convertible debt entered into on March 16, 2016 due to an increase in stock price from the date that note was entered into through June 30, 2016.
Loss on Extinguishment of Debt
The Company incurred a loss on the extinguishment of debt of $800 in the first quarter of 2017 as a result of the refinancing of a significant portion of the Company’s existing debt with the credit facility during the period. The loss on the extinguishment of debt that was incurred in the first two quarters of 2016 was a result of prepayment penalties upon the disposal of a properties encumbered by the Company’s Morgan Stanley debt.
Impairment Loss, net
In the six months ended June 30, 2017, we incurred $750 of impairment losses. In the six months ended June 30, 2016, we recognized impairment losses totaling $914. All impairments recognized in both periods related either to hotels held for sale or sold at some point during the periods.
Income Tax Expense
As of June 30, 2017 and 2016 and throughout the six months then ended, a full valuation allowance was recorded against the Company’s net deferred tax asset due to the uncertainty of realization because of historical operating losses. As such, no income tax expense or benefit was recorded in the six months ended June 30, 2017 or 2016 with the exception of $35 recorded in the second quarter of 2017 for alternative minimum tax related to the use of net operating losses during the period. Management believes the combined federal and state income tax rate for the TRS will be approximately 38% and income tax benefit or expense will vary based on the taxable earnings or loss of the TRS.
44
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”), Adjusted EBITDA, 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 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 partnership units, which is FFO excluding preferred stock dividends. AFFO is FFO attributable to common shares and partnership units adjusted to exclude items we do not believe are representative of the results from our core operations, such as non-cash gains or losses on derivative liabilities 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 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 and AFFO to be useful additional measures of performance for an equity REIT because they facilitate 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 and AFFO provide a meaningful indication of our performance.
45
The following table reconciles net earnings to FFO and AFFO for the three and six months ended June 30, 2017 and 2016 (in thousands). All amounts presented include both continuing and discontinued operations as well as our portion of the results of our unconsolidated Atlanta JV.
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
Reconciliation of Net earnings to FFO and AFFO | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net earnings | $ | 4,992 |
| $ | 8,343 |
| $ | 2,592 |
| $ | 16,030 |
Depreciation and amortization expense |
| 1,769 |
|
| 1,289 |
|
| 2,820 |
|
| 2,698 |
Depreciation and amortization expense from JV |
| 247 |
|
| - |
|
| 658 |
|
| - |
Net gain on disposition of assets |
| (4,852) |
|
| (8,856) |
|
| (4,849) |
|
| (12,904) |
Net loss on disposition of assets from JV |
| 2 |
|
| - |
|
| 3 |
|
| - |
Impairment loss, net |
| 479 |
|
| 121 |
|
| 750 |
|
| 914 |
FFO |
| 2,637 |
|
| 897 |
|
| 1,974 |
|
| 6,738 |
Dividends declared and undeclared and in kind dividends deemed on preferred stock |
| (271) |
|
| (1,057) |
|
| (11,874) |
|
| (18,797) |
FFO attributable to common shares and partnership units |
| 2,366 |
|
| (160) |
|
| (9,900) |
|
| (12,059) |
Net gain on derivatives and convertible debt |
| (227) |
|
| (162) |
|
| (402) |
|
| (6,279) |
Net loss on derivative from JV |
| 2 |
|
| - |
|
| 2 |
|
| - |
Acquisition and terminated transactions expense |
| 215 |
|
| 53 |
|
| 717 |
|
| 147 |
Equity transactions expense |
| - |
|
| - |
|
| 343 |
|
| - |
Loss on debt extinguishment |
| - |
|
| 976 |
|
| 800 |
|
| 1,149 |
Stock-based compensation and LTIP expense |
| 80 |
|
| 70 |
|
| 157 |
|
| 139 |
Amortization of deferred financing fees |
| 280 |
|
| 174 |
|
| 416 |
|
| 349 |
Non-recurring dividends above stated rates declared and undeclared and in kind dividends deemed on preferred stock |
| 127 |
|
| 12 |
|
| 11,030 |
|
| 16,739 |
AFFO attributable to common shares and partnership units | $ | 2,843 |
| $ | 963 |
| $ | 3,163 |
| $ | 185 |
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), Adjusted EBITDA, and Hotel EBITDA
We calculate EBITDA and Adjusted EBITDA by adding back to net earnings 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 interest expense, loss on debt extinguishment, income tax expense, and depreciation and amortization expense. In calculating Adjusted EBITDA, we adjust EBITDA to add back net gain/loss on disposition of assets, acquisition and terminated transactions expense, and equity transactions expense, which are cash charges. We also add back impairment and gain or loss on derivatives and convertible debt, which are non-cash charges. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
We believe EBITDA and Adjusted EBITDA 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 to calculate Hotel EBITDA. Hotel EBITDA is similar to the non-GAAP measure of Property Operating Income (“POI”) presented in filings prior to the September 30, 2016 Form 10-Q except that Hotel EBITDA also excludes the unallocated hotel and property operations expenses previously included in POI. Hotel EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
46
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 to EBITDA, Adjusted EBITDA, and Hotel EBITDA for the three and six months ended June 30, 2017 and 2016 (in thousands). All amounts presented include both continuing and discontinued operations as well as our portion of the results of our unconsolidated Atlanta JV.
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended | ||||||||
| June 30, |
| June 30, | ||||||||
Reconciliation of Net earnings to EBITDA, Adjusted EBITDA, and Hotel EBITDA | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net earnings | $ | 4,992 |
| $ | 8,343 |
| $ | 2,592 |
| $ | 16,030 |
Interest expense |
| 1,092 |
|
| 1,248 |
|
| 2,063 |
|
| 2,582 |
Interest expense from JV |
| 297 |
|
| - |
|
| 902 |
|
| - |
Loss on debt extinguishment |
| - |
|
| 976 |
|
| 800 |
|
| 1,149 |
Income tax expense |
| 35 |
|
| - |
|
| 35 |
|
| - |
Depreciation and amortization expense |
| 1,769 |
|
| 1,289 |
|
| 2,820 |
|
| 2,698 |
Depreciation and amortization expense from JV |
| 247 |
|
| - |
|
| 658 |
|
| - |
EBITDA |
| 8,432 |
|
| 11,856 |
|
| 9,870 |
|
| 22,459 |
Net gain on disposition of assets |
| (4,852) |
|
| (8,856) |
|
| (4,849) |
|
| (12,904) |
Net loss on disposition of assets from JV |
| 2 |
|
| - |
|
| 3 |
|
| - |
Impairment loss, net |
| 479 |
|
| 121 |
|
| 750 |
|
| 914 |
Net gain on derivatives and convertible debt |
| (227) |
|
| (162) |
|
| (402) |
|
| (6,279) |
Net loss on derivative from JV |
| 2 |
|
| - |
|
| 2 |
|
| - |
Stock-based compensation and LTIP expense |
| 80 |
|
| 70 |
|
| 157 |
|
| 139 |
Acquisition and terminated transactions expense |
| 215 |
|
| 53 |
|
| 717 |
|
| 147 |
Equity transactions expense |
| - |
|
| - |
|
| 343 |
|
| - |
Adjusted EBITDA |
| 4,131 |
|
| 3,082 |
|
| 6,591 |
|
| 4,476 |
General and administrative expense, excluding stock comp and LTIP expense |
| 1,431 |
|
| 1,207 |
|
| 2,846 |
|
| 2,586 |
Other expense (income), net |
| 39 |
|
| (23) |
|
| 40 |
|
| (2) |
Unallocated hotel and property operations expense |
| 65 |
|
| 162 |
|
| 197 |
|
| 278 |
Hotel EBITDA | $ | 5,666 |
| $ | 4,428 |
| $ | 9,674 |
| $ | 7,338 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue | $ | 14,252 |
| $ | 14,155 |
| $ | 24,613 |
| $ | 26,664 |
JV revenue |
| 1,851 |
|
| - |
|
| 4,840 |
|
| - |
Condor and JV revenue | $ | 16,103 |
| $ | 14,155 |
| $ | 29,453 |
| $ | 26,664 |
Hotel EBITDA as a percentage of revenue |
| 35.2% |
|
| 31.3% |
|
| 32.8% |
|
| 27.5% |
47
Liquidity, Capital Resources, and Equity Transactions
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, 2017, the Company had $5.9 million of cash and cash equivalents on hand and $19.0 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 Series E Preferred Stock. Prior to the consideration of any asset sales or our ability to refinance debt subsequent to June 30, 2017, contractual principal payments on our debt outstanding, which include only normal amortization, total $1.3 million through September 30, 2018. We also presently expect to invest approximately $4.0 million to $5.0 million in capital expenditures related to hotel properties we currently own through September 30, 2018.
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements, and other factors that the Board of Directors deems relevant.
Our longer-term liquidity requirements consist primarily of the cost of acquiring additional hotel properties, renovations and other one-time capital expenditures that periodically are made related to our hotel properties, and scheduled debt payments, including maturing loans. Possible sources of liquidity to fund debt maturities and acquisitions and to meet other obligations include additional secured or unsecured debt financings, 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 $4.0 million and $2.2 million for the six months ended June 30, 2017 and 2016, respectively. The increase in operating cash flows was the result of an increase in net income, after adjustments for non-cash items, of $0.3 million as well as differences in the changes in operating assets and liabilities between the periods, none of which were individually significant.
Cash provided by (used in) Investing Activities. Our cash flows from investing activities were ($64.4) million and $24.0 million for the six months ended June 30, 2017 and 2016, respectively. The decrease in these cash flows in 2017 was primarily the result of increased cash expenditures related to hotel acquisitions totaling $83.6 million and decreased net proceeds from the sale of properties of $5.7 million between the periods.
Cash provided by (used in) Financing Activities. Our cash flows from financing activities were $58.1 million and ($12.1) million for the six months ended June 30, 2017 and 2016, respectively. This increase was the result of increased cash flows from equity issuances, which included the issuance of common stock of $45.9 million in the first quarter of 2017 and the net cash flows from preferred stock issuances and redemptions in the first quarter of 2016 of $8.8 million. Additionally, the Company had increased net cash inflows related to debt activity in the first two quarters of 2017 of $35.8 million resulting from increased debt issuances related to the properties acquired and credit facility during the period, including consideration of the payment of related deferred financing costs and early extinguishment penalties.
48
Significant Equity Transactions
On February 28, 2017, the holders of the Series D Preferred Stock voluntarily converted their shares into 6,004,957 shares of common stock at $10.40 per share pursuant to the terms of the preferred stock. The terms of the Series D Preferred Stock provided for automatic conversion following certain future common stock offerings, and also provided for potential additional payments to the holders depending on the sales price of common stock in the offerings. As a result of the voluntary conversion, the holders are no longer entitled to the potential payments. To induce the holders of the Series D Preferred Stock to voluntarily convert their shares, the Company issued the holders $9,250 in face value of a new series of preferred stock, the Series E Preferred Stock.
The terms of the Series E Preferred Stock are discussed in Note 10, Preferred Stock, to our consolidated interim financial statements.
Effective on March 15, 2017, the Company effected a reverse stock split of its common stock at a ratio of 1-for-6.5. No fractional shares of common stock were issued as fractional shares were settled in cash.
On March 29, 2017, the Company closed an underwritten public offering of 4,772,500 shares of its common stock, including 622,500 shares issued pursuant to the full exercise of an option to purchase additional shares of common stock granted to the underwriters, at a public offering price per share of $10.50. Net proceeds, after the payment of related expenses, from this offering totaled $45.9 million.
Subsequent to the end of the quarter, the Company’s common stock began trading on the NYSE MKT under its current symbol “CDOR” beginning at the open of market trading on July 21, 2017. The Company’s common stock previously traded on the NASDAQ Stock Market.
Outstanding Indebtedness
Significant Debt Transactions
On March 1, 2017, a significant portion of the Company’s debt (including all debt outstanding at December 31, 2016 with the exception of the two variable rate Western Alliance Bank loans and the two fixed rate Great Western Bank loans) was refinanced with the credit facility that matures on March 1, 2020. The credit agreement was entered into with KeyBank National Association, as administrative agent and lender, KeyBanc Capital Markets Inc. and The Huntington National Bank, as joint leader arrangers, and other lenders and agents party thereto.
The original credit agreement provided for a $90.0 million senior secured credit facility and includes an accordion feature that would allow the credit facility to be increased to $400.0 million with additional lender commitments. On May 11, 2017, the Company closed on an increase in the credit facility from $90.0 million to $150.0 million with the credit facility continuing to retain its $400.0 million accordion feature. Available borrowing capacity under the credit facility is based on a borrowing base formula for the pool of hotel properties securing the facility. As of the closing date, the collateral pool consisted of 14 hotel properties and total available borrowing capacity under the credit facility was $41.05 million. At June 30, 2017, following the subsequent purchases and sales of hotels subsequent to March 1, 2017 and the common stock equity raise, the collateral pool consisted of 14 hotel properties and total available borrowing capacity under the credit facility totaled $73.7 million.
The credit facility is guaranteed by the Company and its material subsidiaries that do not have stand-alone financing. Borrowings under the credit 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). The credit facility matures in March 2020 and has two one-year extension options, subject to certain conditions, including the completion of specific capital achievements. The credit facility contains customary representations and warranties, covenants and events of default.
Upon the closing of the credit facility, $34.25 million was immediately drawn down to repay existing debt and related expenses. Prior to June 30, 2017, net proceeds from the Company’s hotel sales were used to pay down a total of $17.2 on the credit facility, proceeds from the credit facility totaling $74.8 were used to fund the Company’s
49
acquisitions plus related expenses, and a portion of the proceeds from the Company’s common stock offering totaling $37.0 million was used to pay down the credit facility.
In connection with the acquisition of the Home2 Suites Memphis / Southaven, on April 14, 2017 the Company assumed an existing securitized loan on the property with outstanding principal totaling approximately $9.1 million. The loan bears interest at a fixed rate of 4.54%, required monthly principal and interest payments of $0.05 million, and matures on August 1, 2024.
Outstanding Debt
At June 30, 2017, we had long-term debt of $93.6 million associated with assets held for use with a weighted average term to maturity of 3.5 years and a weighted average interest rate of 4.02%. Of this total, at June 30, 2017, $24.7 million was fixed rate debt with a weighted average term to maturity of 5.4 years and a weighted average interest rate of 4.41% and $68.9 million was variable rate debt with a weighted average term to maturity of 2.8 years and a weighted average interest rate of 3.88%. At December 31, 2016, we had long-term debt of $57.4 million associated with assets held for use with a weighted average term to maturity of 2.9 years and a weighted average interest rate of 4.89%. Of this total, at December 31, 2016, $26.1 million was fixed rate debt with a weighted average term to maturity of 2.8 years and a weighted average interest rate of 4.78% and $31.3 million was variable rate debt with a weighted average term to maturity of 2.9 years and a weighted average interest rate of 4.98%.
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 principal payments on debt for the remainder of 2017 and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Held for sale |
| Held for use |
| Total | |||
Remainder of 2017 |
| $ | - |
| $ | 509 |
| $ | 509 |
2018 |
|
| - |
|
| 1,057 |
|
| 1,057 |
2019 |
|
| - |
|
| 1,105 |
|
| 1,105 |
2020 |
|
| 445 |
|
| 68,822 |
|
| 69,267 |
2021 |
|
| - |
|
| 13,867 |
|
| 13,867 |
Thereafter |
|
| - |
|
| 8,258 |
|
| 8,258 |
Total |
| $ | 445 |
| $ | 93,618 |
| $ | 94,063 |
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Financial Covenants
The Company’s debt agreements contain requirements as to the maintenance of minimum levels of debt service and fixed charge coverage, required loan-to-value and leverage ratios, required levels of tangible net worth, and place certain restrictions on dividends. As of June 30, 2017, we were in compliance with our financial covenants.
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, 2017, we are not in default of any of our loans.
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Contractual Obligations
Below is a summary of certain obligations that will require capital as of June 30, 2017 (in thousands):
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| Payments due by period | ||||||||||
Contractual obligations |
| Total |
| Remainder of 2017 |
| 2018-2019 |
| 2020-2021 |
| After 2022 | |||||
Long-term debt including interest (1) |
| $ | 106,806 |
| $ | 2,399 |
| $ | 9,594 |
| $ | 85,574 |
| $ | 9,239 |
Office leases |
|
| 484 |
|
| 79 |
|
| 297 |
|
| 108 |
|
| - |
Total contractual obligations |
| $ | 107,290 |
| $ | 2,478 |
| $ | 9,891 |
| $ | 85,682 |
| $ | 9,239 |
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(1) | Interest rate payments on our variable rate debt have been estimated using interest rates in effect at March 31, 2017 |
Long-term debt and office lease payments above include only amounts related to properties classified as held for use. Future debt payments, including interest, related to the two held for sale properties that are expected to be sold within the next 12 months of $0.5 million are not included in the table above.
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. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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-sensitive instruments. At June 30, 2017, 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.
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Interest Rate Sensitivity
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, excluding $0.4 million of debt related to hotel properties held for sale (dollars in thousands):
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| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total | ||||||||||||||
Fixed rate debt |
| $ | 344 |
|
| $ | 715 |
|
| $ | 747 |
|
| $ | 778 |
|
| $ | 13,867 |
|
| $ | 8,258 |
|
| $ | 24,709 |
|
Average fixed interest rate |
|
| 4.38 | % |
|
| 4.38 | % |
|
| 4.38 | % |
|
| 4.38 | % |
|
| 4.33 | % |
|
| 4.54 | % |
|
| 4.41 | % |
Variable rate debt |
| $ | 165 |
|
| $ | 342 |
|
| $ | 358 |
|
| $ | 68,044 |
|
| $ | - |
|
| $ | - |
|
| $ | 68,909 |
|
Average variable interest rate |
|
| 4.46 | % |
|
| 4.46 | % |
|
| 4.46 | % |
|
| 3.87 | % |
|
| - | % |
|
| - | % |
|
| 3.88 | % |
Total debt |
| $ | 509 |
|
| $ | 1,057 |
|
| $ | 1,105 |
|
| $ | 68,822 |
|
| $ | 13,867 |
|
| $ | 8,258 |
|
| $ | 93,618 |
|
Total average interest rate |
|
| 4.41 | % |
|
| 4.41 | % |
|
| 4.41 | % |
|
| 3.87 | % |
|
| 4.33 | % |
|
| 4.54 | % |
|
| 4.02 | % |
At June 30, 2017, we have an interest rate cap in place which caps the 30-day LIBOR interest rate on our credit facility (June 30, 2017 balance on the credit facility of $54.8 million) at 2.5%. We do not intend to enter into derivative or interest rate transactions for speculative purposes.
At June 30, 2017, approximately 26.4% of our outstanding debt, excluding debt related to hotel properties held for sale, is subject to fixed interest rates, while 73.6% of our debt is subject to floating rates. Assuming no increase in the level of our variable debt outstanding at June 30, 2017, if interest rates increased by 1.0% our cash flow related to hotel properties held for use would decrease by approximately $0.7 million per year.
ITEM 4. CONTROLS AND PROCEDURES
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 March 31, 2017, 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.
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.
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There have been no material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2016.
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.
None.
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3.1 | |
3.2 | |
3.3 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
31.1* | |
31.2* | |
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, 2017 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
54
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 7, 2017 |
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| /s/ J. William Blackham |
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| J. William Blackham |
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| Chief Executive Officer |
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| /s/ Jonathan Gantt |
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| Jonathan Gantt |
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| Senior Vice President and Chief Financial Officer |
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55