Debt Financing

A summary of the Company’s long term debt as of September 30, 2014 is as follows (dollars in thousands):



			Interest
Fixed Rate Debt	Balance		Rate		Maturity

Lender
Great Western Bank	$	7,614	4.50	%	6/2015
GE Franchise Finance Commercial LLC		14,195	7.17	%	12/2014
Citigroup Global Markets Realty Corp		11,974	5.97	%	11/2015
Great Western Bank		1,452	5.00	%	6/2015
Trevian Capital		8,300	12.50	%	6/2015
Elkhorn Valley Bank		2,629	5.50	%	6/2016
GE Franchise Finance Commercial LLC		11,459	7.17	%	2/2017
Cantor		5,963	4.25	%	11/2017
Morgan Stanley		28,893	5.83	%	12/2017
Total fixed rate debt	$	92,479

Variable Rate Debt

Lender
GE Franchise Finance Commercial LLC		4,727	3.73	%	2/2018
Total variable rate debt	$	4,727

Subtotal debt		97,206

Less: debt associated with hotel properties held for sale		16,235

Total long-term debt	$	80,971

On January 9, 2014, the Company entered into an unsecured convertible loan agreement with RES, whereby the Company may borrow up to $2.0 million from time to time in revolving loans, subject to the conditions therein. During the first quarter, the Company borrowed the full amount of $2.0 million available under the loan agreement. On June 11, 2014, the effective purchase date, the loan was converted and used to purchase 1,250,000 shares of common stock in a subscription rights offering by the Company. See “Convertible Loan” above. Per the loan agreement the annual interest rate increased from variable at LIBOR plus 700 basis points to a 12.5% fixed rate back to the origination date of the loan because the subscription rights offering was not completed by April 15, 2014.

On March 10, 2014 the Company sold a Super 8 in Shawano, Wisconsin (55 rooms) for gross sale proceeds of $1.1 million. Net proceeds were used to pay off the associated loan and reduce the balance of the revolving credit facility with Great Western Bank.

On March 14, 2014, the Company received a waiver from GE Franchise Finance Commercial LLC (“GE”) for non-compliance with covenants, as formulated at that time, with respect to our before dividend fixed charge coverage ratio (FCCR) covenant with respect to our GE-encumbered properties (actual of 1.25:1 versus requirement of 1.30:1), our before dividend consolidated FCCR covenant (actual of 0.98:1 versus requirement of 1.20:1), and our after dividend consolidated FCCR covenant (actual of 0.84:1 versus requirement of 1.00:1) in each case, as of March 31, 2014.

The financial covenants under our loan facilities with GE require that, through the term of the loans, we maintain: (a) a minimum before dividend FCCR with respect to our GE-encumbered properties (based on a rolling 12-month period) of 1.15:1 as of September 30, 2014, which requirement increases to 1.20:1 as of December 31, 2014; (b) a maximum loan to value ratio with respect to our GE-encumbered properties of 70% as of September 30, 2014, which requirement decreases to 60% as of December 31, 2014; (c) a minimum before dividend consolidated FCCR (based on a rolling 12-month period) of 0.75:1 as of September 30, 2014, which requirement increases to 1.00:1 as of December 31, 2014; and (d) a minimum after dividend consolidated FCCR (based on a rolling 12-month period) of 0.70:1 as of September 30, 2014, which requirement increases to 1.00:1 as of December 31, 2014.

The consolidated FCCRs are not required to be tested as of the end of any fiscal quarter if the loan to value ratio with respect to our GE-encumbered properties is 60% or less. The required payment of a $380,000 modification fee for amendments to our loan facilities with GE in connection with the waiver we received on March 14, 2014 was paid on June 27, 2014.

On April 24, 2014, the Company sold a Baymont Inn in Brooks, Kentucky (65 rooms) for gross sale proceeds of $1.7 million. Net proceeds were used to pay down debt with GE.

On May 6, 2014, the Company sold a Super 8 in Omaha, Nebraska (West Dodge) (101 rooms) for gross sale proceeds of $1.6 million. Net proceeds were used to pay down the associated term loan with Great Western Bank.

On June 4, 2014, the Company sold a Super 8 in Boise, Idaho (108 rooms) for gross sale proceeds of $2.8 million. Net proceeds were used to pay down the associated debt with GE.

On June 11, 2014, the Company sold a Super 8 in Clarinda, Iowa (40 rooms) for gross sale proceeds of $1.7 million. Net proceeds were used to pay down the associated debt with Great Western Bank.

On June 23, 2014, the Company sold a Super 8 in Norfolk, Nebraska (64 rooms) for gross sale proceeds of $1.4 million. Net proceeds were used to pay down the associated debt with First State Bank.

On July 15, 2014, the Company sold a Savannah Suites in Jonesboro, Georgia (172 rooms) for gross sale proceeds of $1.4 million. Net proceeds were used to pay down debt with GE.

On August 1, 2014, our credit facilities with Great Western Bank were amended to, among other things, extend the maturity date of the revolving credit facility from August 30, 2014 to June 30, 2015, reduce the interest rate on the revolving credit facility from 4.95% to 4.50% and provide for the application of net proceeds of certain hotels to the loans under the credit facilities.

On August 21, 2014, the Company sold a Savannah Suites in Stone Mountain, Georgia (140 rooms) for gross sale proceeds of $1.5 million. Net proceeds were used to pay down debt with GE.

On September 19, 2014, the Company sold a Super 8 in Moberly, Missouri (60 rooms) for $1.7 million. Net proceeds were used to pay down the associated debt with Great Western Bank.

On September 30, 2014, the Company sold a Super 8 in Omaha, Nebraska (“M” Street) (116 rooms) for gross sale proceeds of $1.9 million. Net proceeds were used to pay down the associated debt with Great Western Bank.

At September 30, 2014, the Company had long-term debt of $81.0 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 2.2 years and a weighted average interest rate of 6.4%. The weighted average fixed rate was 6.5%, and the weighted average variable rate was 3.7%. Debt is classified as held for use if the properties collateralizing it are included in continuing operations. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is classified in the table below as due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2014 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):



	Held For Sale		Held For Use		TOTAL
Remainder of 2014	$	16,235	$	660	$	16,895
2015		0		30,266		30,266
2016		0		4,510		4,510
2017		0		42,678		42,678
2018		0		2,857		2,857
Thereafter		0		0		0
	$	16,235	$	80,971	$	97,206

At September 30, 2014, the Company had $16.9 million of principal due in 2014; of that amount, $16.2 million is related to the debt associated with assets held for sale. Included in the $16.2 million is the $14.2 million of GE debt maturing in December of 2014. The approximate $0.7 million classified as held for use in the table above is the principal amortization on mortgage loans for the remainder of 2014.

On October 18, 2014, the Company agreed to sell four hotels which collateralize borrowings from GE for a total purchase price of $15.15 million. All of the GE loans are cross collateralized and the 17 assets securing the loans outstanding at September 30, 2014 are treated as a pool. If the four assets currently under contract are sold, the Company believes that the net proceeds from the sale of these hotels will be sufficient to satisfy the debt with GE that matures in December 2014. The sale is subject to the completion of a contingency period for inspections and investigations of the hotels. If the hotels are not sold, the Company will attempt to extend or refinance this debt with GE or some other lender. If we are unable to extend or refinance this GE debt, we may be forced to sell the hotels on disadvantageous terms, or we could be compelled to file for reorganization.

We are required to comply with certain financial covenants for some of our lenders. As of September 30, 2014, we were either in compliance with our financial covenants or obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.

Our credit facilities with Great Western Bank require us to maintain a consolidated leverage ratio (as defined in the loan agreement) of 4.25:1 or less. As of September 30, 2014, our consolidated leverage ratio (as defined in the loan agreement) was 4.30:1. On November 12, 2014, the Company received a waiver for non-compliance with this covenant as of September 30, 2014. The Company currently anticipates that it will not be compliant with respect to this covenant as of December 31, 2014. In the event the Company is not in compliance with this covenant, the Company will seek a waiver from the lender. Although the Company has received waivers from lenders in the past with respect to covenants, there is no assurance that the Company would be successful in obtaining waivers in the future.