Credit Facilities and Mortgage Debt

9 Months Ended

Sep. 30, 2013

3. Credit Facilities and Mortgage Debt

In March 2012, the Company entered into a $60 million unsecured revolving 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. Under the terms of the credit agreement, the Company may make voluntary prepayments in whole or in part at any time. The Company entered into a modification of this facility during the second quarter of 2013 in order to extend the maturity date of the facility; the Company also increased the available borrowing commitment to $70 million. The credit facility, as amended, matures in April 2015; however, the Company has the right, upon satisfaction of certain conditions, including covenant compliance and payment of an extension fee, to extend the maturity date to April 2016. Interest payments are due monthly, and the interest rate is equal to either one-month LIBOR (the London Inter-Bank Offered Rate for a one-month term) plus a margin ranging from 2.25% to 3.00%, depending on the Company’s leverage ratio as calculated under the terms of the credit agreement, or the prime interest rate plus a margin ranging from 1.25% to 2.00%, at the Company’s option. The Company is also required to pay an unused facility fee of 0.25% to 0.35% on the average unused portion of the credit facility.

As of September 30, 2013 and December 31, 2012, the credit facility had an outstanding principal balance of $64.5 million and $45.3 million and an annual interest rate of approximately 2.93% and 3.21%, respectively. The Company incurred loan modification costs of approximately $0.4 million, which are being amortized as interest expense from the date of modification to the loan’s April 2015 maturity date. The credit facility contains customary affirmative covenants, negative covenants and events of defaults. The amended credit facility contains the following quarterly financial covenants (capitalized terms are defined in the credit agreement):

·	Tangible Net Worth must exceed $275 million;

·	Total Debt to Asset Value must not exceed 55%;

Distributions, net of proceeds from the Company’s Dividend Reinvestment Program, cannot exceed $16.5 million during the second quarter of 2013 and $12.5 million during any quarter thereafter, and quarterly dividends cannot exceed $0.1169 per share, effective with the second quarter of 2013, unless such Distributions are less than total Funds From Operations for the quarter;

·	Loan balance must not exceed 50% 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 September 30, 2013.

In April 2013, the Company entered into a term loan agreement with the same commercial bank providing for up to $15 million in unsecured borrowings. Proceeds of the term loan facility were used for general working capital purposes, including reduction of the Company’s outstanding balance on its unsecured credit facility. Borrowings under this facility bore interest at 2.5% plus one-month LIBOR. In June 2013, this term loan facility was paid in full and extinguished.

In April 2013, the Company entered into a modification of loan terms with the lender for the mortgage note payable jointly secured by the Company’s Burbank, California Residence Inn and Oceanside, California Residence Inn. The mortgage loan’s maturity was extended from January 2015 to January 2017, with an option for the Company to extend the maturity for one additional year. The mortgage loan’s variable interest rate was reduced from one-month LIBOR plus 4.25% to one-month LIBOR plus 3.24%. Additionally, effective in January 2015, the loan’s variable rate interest will be further reduced by 0.10% to an interest rate of one-month LIBOR plus 3.14%. The mortgage loan had a balance outstanding of approximately $39.5 million at September 30, 2013; interest and principal payments of $65,000 are payable each month through maturity of the loan. The Company incurred loan modification costs of approximately $0.2 million, which are being amortized as interest expense from date of modification to the loan’s January 2017 maturity date. To effectively fix the interest rate on the mortgage loan for the period from the original maturity date in January 2015 through the modified maturity date in January 2017, the Company entered into a forward interest rate swap agreement with the same commercial lender simultaneous with the loan modification agreement. Under terms of the interest rate swap agreement, the Company agrees, effective in January 2015, to pay a monthly fixed interest rate of 1.10% and receive a floating rate of interest equal to the one-month LIBOR, effectively fixing the interest rate of the modified mortgage loan at 4.24% for the period from January 2015 through maturity in January 2017. The Company also has an interest rate swap through the original maturity of January 2015 that effectively fixes the interest rate from the date of amendment through January 2015 at 4.24%. The notional amounts of the swaps will amortize in tandem with the amortization of the loan.

In June 2013, the Company entered into an $8.3 million secured revolving credit facility with a commercial bank that is available for working capital, hotel renovations, and other general corporate funding purposes, including the payment of redemptions and distributions. This facility is jointly secured by the Company’s Texarkana, Texas Courtyard and Texarkana, Texas TownePlace Suites. The credit facility matures in June 2014. Interest payments are due monthly, and the interest rate is equal to the greater of the prime interest rate or 4.50%. The Company incurred loan origination costs of approximately $0.1 million, which are being amortized as interest expense from date of origination to the credit facility’s June 2014 maturity date. As of September 30, 2013, the credit facility had an outstanding principal balance of $0.1 million and an annual interest rate of 4.50%. The credit facility is subject to the same financial covenants as the Company’s unsecured credit facility.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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