Credit Facilities, Mortgage Debt and Net Gain from Mortgage Debt Restructuring and Extinguishment

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Text Block]

Note 3

Credit Facilities, Mortgage Debt, and Net Gain from Mortgage Debt Restructuring and Extinguishment

Credit Facilities

In March 2012, the Company entered into a new $60 million unsecured credit facility with a commercial bank that is utilized for working capital, hotel renovations, and other general corporate funding purposes, including the payment of redemptions and distributions.  Interest is payable monthly on the outstanding balance

based on an annual rate of either one-month LIBOR (the London Inter-Bank Offered Rate) plus 3.0%, or the prime interest rate plus 2.0%, at the Company’s option.  The Company is also required to pay a fee of 0.35% on the average unused balance of the credit facility.  Under the terms and conditions of the credit facility, the Company may make voluntary prepayments in whole or in part, at any time.  The credit facility matures in March 2013; however, the Company has the right and intends, upon satisfaction of certain conditions including covenant compliance and payment of an extension fee, to extend the maturity date to March 2014.

At closing in March 2012, the Company borrowed approximately $48 million under the credit facility to pay all outstanding balances and extinguish its previously existing $75 million and $20 million credit facilities, and pay transaction costs.  At December 31, 2012, the outstanding balance under the credit facility was $45.3 million, and had an interest rate of approximately 3.21%.  Loan origination costs totaling approximately $0.4 million are being amortized as interest expense through the March 2013 maturity date.  The credit facility contains the following quarterly financial covenants (capitalized terms are defined in the loan agreement):

·   Tangible Net Worth must exceed $275 million;

·   Total Debt to Asset Value must not exceed 50%;

·   Distributions, net of proceeds from the Company’s Dividend Reinvestment Program, cannot exceed $17 million during any calendar quarter in 2012 (and must not exceed $68 million in any cumulative 12 month period thereafter), and quarterly Distributions cannot exceed $0.1375 per share, unless such Distributions are less than total Funds From Operations for the quarter;

·   Loan balance must not exceed 45% of the Unencumbered Asset Value;

·   Ratio of Net Operating Income, for the Company’s unencumbered properties compared to an Implied Debt Service for the properties must exceed two; and

·   Ratio of net income before depreciation and interest expense to total Fixed Charges, on a cumulative 12 month basis, must exceed two.

The Company was in compliance with each of these covenants at December 31, 2012.

The Company’s prior unsecured credit facility originated in October 2010 and was modified in August 2011.  At time of its extinguishment in March 2012, the $75 million facility had an applicable annual interest rate equal to the one-month LIBOR plus 2.25%, subject to an interest rate floor of 3.75%.  The applicable interest rate on borrowings under the facility was 3.75% at December 31, 2011.  Prior to the credit facility’s modification in August 2011, the applicable interest rate floor was 3.50%.

In April 2011, the Company entered into a Loan Agreement (the “Loan Agreement”) with a commercial bank. The Loan Agreement provided for a revolving credit facility of $20 million and a maturity date of April 19, 2012. Interest was payable quarterly on the outstanding balance based on an annual rate of LIBOR plus 2.0%. The Loan Agreement was guaranteed by Glade M. Knight, the Company’s Chairman and Chief Executive Officer and was secured by assets of Mr. Knight. Mr. Knight did not receive any consideration in exchange for providing this guaranty and security. Proceeds of the loan were used by the Company for general working capital purposes, including the payment of redemptions and distributions. The independent directors of the Company’s Board of Directors approved Mr. Knight providing a guaranty under the Loan Agreement. At December 31, 2011, the Loan Agreement had an outstanding principal balance of $20.0 million, at an interest rate of approximately 2.29%.  The Loan Agreement was paid off and extinguished in full in March 2012.

In October 2010 the Company entered into a $25 million term loan with a credit facility lender.  The loan was secured by two properties and had a maturity date of October 2012.  Payments of interest only were due monthly at LIBOR plus 2.25%, with a floor interest rate of 3.50%.  The term loan was paid off and extinguished in full in October 2011.

Mortgage Debt

In conjunction with the acquisition of 15 hotel properties in 2008, the Company assumed mortgage notes payable, secured by the applicable hotel property.  The Company entered into three mortgage loan agreements, secured by four additional hotel properties, during 2012 and four mortgage loan agreements, secured by four additional hotel properties, during 2011. In addition, two mortgage loans were extinguished during 2011. The following table summarizes the hotel property, interest rate, maturity date, principal amount assumed or originated, and the outstanding balance as of December 31, 2012 and 2011 for the Company’s mortgage loan obligations.  All dollar amounts are in thousands.

Location	Brand	Interest Rate			Maturity Date	Principal Assumed or Originated		Outstanding Principal Balance as of Dec. 31, 2012		Outstanding Principal Balance as of Dec. 31, 2011
Oceanside, CA(4)	Residence Inn			(1)	1/13/2015	$	16,000	$	16,000	$	0
Burbank, CA(4)	Residence Inn			(1)	1/13/2015		24,000		24,000		0
Overland Park, KS	Residence Inn		5.74	%	4/1/2015		7,079		6,259		6,453
Westford, MA	Residence Inn			(2)	10/1/2015		7,199		6,704		6,844
Kansas City, MO	Residence Inn		5.74	%	11/1/2015		11,645		10,839		11,029
Fayetteville, NC	Residence Inn		5.14	%	12/1/2015		7,204		6,721		6,864
Hilton Head, SC	Hilton Garden Inn		6.29	%	4/11/2016		6,371		5,746		5,898
Virginia Beach, VA(3)	Courtyard		6.02	%	11/11/2016		14,500		14,235		14,479
Virginia Beach, VA(3)	Courtyard		6.02	%	11/11/2016		17,500		17,180		17,475
Charlottesville, VA(3)	Courtyard		6.02	%	11/11/2016		15,500		15,217		15,478
Carolina Beach, NC(3)	Courtyard		6.02	%	11/11/2016		12,500		12,272		12,482
Winston-Salem, NC	Courtyard		5.94	%	12/8/2016		8,000		7,595		7,705
Savannah, GA	Hilton Garden Inn		5.87	%	2/1/2017		5,679		5,143		5,277
Greenville, SC	Residence Inn		6.03	%	2/8/2017		6,512		6,128		6,220
Birmingham, AL	Homewood Suites		6.03	%	2/8/2017		11,815		11,118		11,286
Jacksonville, FL	Homewood Suites		6.03	%	2/8/2017		17,159		16,161		16,405
Concord, NC	Hampton Inn		6.10	%	3/1/2017		5,143		4,814		4,891
Suffolk, VA	TownePlace Suites		6.03	%	7/1/2017		6,630		6,286		6,286
Suffolk, VA	Courtyard		6.03	%	7/1/2017		8,644		8,195		8,195
Somerset, NJ(4)	Courtyard		4.73	%	10/6/2022		9,000		8,970		0
Tukwila, WA(4)	Homewood Suites		4.73	%	10/6/2022		9,700		9,667		0
						$	227,780	$	219,250	$	163,267

(1) The interest rate on this mortgage is a variable rate based on 1-month LIBOR. An interest rate swap agreement entered into in January 2012, when the loan was originated, results in an effective annual fixed interest rate of 5.25%.

(2) The interest rate on this mortgage is a variable rate based on 1-month LIBOR. An interest rate swap agreement entered into in October 2010, when this loan was refinanced, results in an effective annual fixed interest rate of 5.30%.

(3) Loan was originated in 2011.

(4) Loan was originated in 2012.

In September 2012, the Company entered into two secured mortgage loan agreements with a commercial lender.  A mortgage loan for $9.7 million is secured by the Company’s Tukwila, Washington Homewood Suites; a separate mortgage loan for $9.0 million is secured by the Company’s Somerset, New Jersey Courtyard.  Combined scheduled payments of interest and principal of $106 thousand are due monthly for each loan, and each loan will amortize on a 25 year term with a balloon payment due at maturity in October 2022.  Each mortgage loan has an applicable fixed interest rate of approximately 4.73%.  At closing, the Company used proceeds from each loan to reduce the outstanding balance on its credit facility, and to pay transaction costs.   Combined total loan origination costs of approximately $0.2 million are being amortized as interest expense through the October 2022 maturity date of each loan.

In January 2012, the Company entered into a secured mortgage loan agreement with a commercial bank for $40 million.  The loan is jointly secured by the Company’s Burbank, California Residence Inn and Oceanside, California Residence Inn.  Interest is payable monthly on the outstanding balance of the loan at a variable interest rate of one-month LIBOR plus 4.25%.  The loan matures in January 2015 with an option for the Company to extend the maturity for one year.  Interest only is payable for the first year of the loan, with monthly principal payments of $65,000 required beginning in February 2013.  Loan origination costs totaling

approximately $0.5 million are being amortized as interest expense through the January 2015 maturity date.

To effectively fix the interest rate on the $40 million variable rate mortgage loan and reduce the Company’s exposure to interest rate risk, simultaneous with the closing of the loan the Company entered into an interest rate swap agreement with the same commercial bank.  Under terms of the interest rate swap agreement, the Company pays a monthly fixed interest rate of 1.0% and receives a floating rate of interest equal to the one-month LIBOR, effectively fixing the interest rate of the $40 million loan at 5.25%.  The notional amount of $40 million for the interest rate swap amortizes in tandem with the amortization of the loan and matures with the loan agreement in January 2015.  At closing on the loan and swap agreements in January 2012, the Company used the proceeds to reduce the outstanding balance on its prior credit facility and to pay transaction costs.

 In October 2011, the Company entered into four separate secured loan agreements with a commercial real estate lender.  Each loan is secured by one of the following Company hotels:  Carolina Beach, North Carolina Courtyard; Charlottesville, Virginia Courtyard; Virginia Beach, Virginia Courtyard North; and Virginia Beach, Virginia Courtyard South.  Each loan matures in November 2016, and will amortize based on a 25 year term with a balloon payment due at maturity.  Interest is payable monthly on the outstanding balance of each loan at an annual rate of 6.015%.  The total proceeds of $60.0 million under the four loan agreements were used to extinguish the Company’s $25.0 million secured term loan due in October 2012, reduce the outstanding balance on the Company’s prior $75.0 million unsecured line of credit facility, and to pay loan origination and other transaction costs of approximately $1.1 million.

In May 2011, the two mortgage loans secured by the Suffolk, Virginia TownePlace Suites and Courtyard were modified and returned to current status; the Company had previously suspended payments due in March 2011 in order to renegotiate terms of the loans with the loan servicer.  Under the modified agreements, the Company is required to make monthly interest payments at an annual rate of 5.031%, with no payment of principal until March 1, 2013. During this period, interest will continue to accrue at 6.031%, with the 1% difference accrued and payable at maturity. Certain lender expenses were reimbursed to the lender as part of the restructuring of the two loans and a modification fee of approximately 0.75% of the principal balance of approximately $14 million at date of modification will be due at maturity.

The aggregate amounts of principal payable under the Company’s notes payable (mortgage debt and the balance outstanding under the Company’s credit facility), for the five years subsequent to December 31, 2012 and thereafter are as follows (in thousands):

	Total
2013	$	49,533
2014		4,568
2015		70,786
2016		69,660
2017		53,522
Thereafter		16,481
		264,550
Fair Value Adjustment of Assumed Debt		(531	)
Total	$	264,019

A fair value adjustment was recorded for the assumption of above and below market rate mortgage loans in connection with some of the Company’s mortgage debt assumptions and originations.  These fair value adjustments will be amortized into interest expense over the remaining term of the related indebtedness using a method approximating the effective interest rate method.  The effective interest rates on the applicable debt obligations assumed ranged from 5.4% to 6.9% at the date of assumption.  The total amortization adjustment resulted in an addition to interest expense of $209,000 and $40,000 for the years ended December 31, 2012 and 2011, respectively, and a reduction to interest expense of $340,000 for the year ended December 31, 2010.

With the assumption of mortgage loans on purchased hotels and with its originated loans and credit facilities, the Company incurred loan origination and modification costs.  In 2012 and 2011 in conjunction with its debt origination and refinancing activities, loan origination costs totaled $1.2 million and $1.1 million, respectively.  All such costs are amortized over the period to maturity of the applicable mortgage loan or credit agreement, or to termination of the applicable mortgage loan or credit agreement, as an addition to interest expense.  Amortization of such costs totaled $1.0 million, $0.9 million, and $0.4 million for the years ended

December 31, 2012, 2011 and 2010, respectively.

The Company’s Interest expense in its Consolidated Statements of Operations is net of capitalized interest of $0.4 million and $0.1 million for the years ended December 31, 2012 and 2010.  Interest capitalized during the year ended December 31, 2011 was not significant.  The interest was capitalized in conjunction with hotel renovations.

Net Gain from Mortgage Debt Restructuring and Extinguishment

In August 2011, the Company recognized a net gain from mortgage debt restructuring and extinguishment of $1.1 million.  Negotiations with the single mortgage servicer on three of the Company’s non-recourse mortgage loans resulted in the early extinguishment, at a discount to the principal amount outstanding, of the mortgage loan secured by the Company’s Tampa, Florida TownePlace Suites property.  The mortgage loan was extinguished by the Company for a payment of $6.0 million, excluding applicable fees and legal costs; the loan’s principal balance at extinguishment was $8.0 million.  Simultaneously, the Company’s mortgage loans secured by the Winston-Salem, North Carolina Courtyard and the Greenville, South Carolina Residence Inn properties were returned to current status, with the Company agreeing to payment of applicable fees and reimbursement of the loan servicer’s expenses incurred in connection with the restructuring and extinguishment transactions.  The Company had previously suspended payments due under the three mortgage loans in March 2011, in order to renegotiate terms of the agreements with the loan servicer.  In addition to the loan servicer’s fees and reimbursed costs for all three loans, and the Company’s legal and advisory costs incurred with the transactions, the net gain reflects the servicer’s assumption of certain mortgage escrow balances and the Company’s write-off of the deferred financing fees and unamortized fair market adjustment for the Tampa, Florida TownePlace Suites mortgage loan at date of extinguishment.