-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZdX6zRuov0honmSTxb8HDLB3QCYahVuuq+0pURBMkFY6hyEVhZzGoDqWrZC5K03 a1SYYwY4IbL1gwNiw67UUQ== 0000950144-97-008824.txt : 19970813 0000950144-97-008824.hdr.sgml : 19970813 ACCESSION NUMBER: 0000950144-97-008824 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 621534743 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12011 FILM NUMBER: 97656528 BUSINESS ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 BUSINESS PHONE: 9017677005 MAIL ADDRESS: STREET 1: 850 RIDGE LAKE BLVD STE 220 CITY: MEMPHIS STATE: TN ZIP: 38120 10-Q 1 RFS HOTEL INVESTORS, INC. FORM 10-Q 06-30-97 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 34-0-22164 RFS HOTEL INVESTORS, INC. (Exact name of registrant as specified in its charter) Tennessee 62-1534743 (State or other Jurisdiction of (I.R.S. employer Incorporation or Organization) identification no.) 850 Ridge Lake Boulevard, Suite 220, (901) 767-7005 Memphis, TN 38120 (Registrant's Telephone Number (Address of Principal Executive Offices) Including Area Code) (Zip Code) n/a (Former address, if changed since last report) Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. X Yes No The number of shares of Registrant's Common Stock, $.01 par value, outstanding on June 30, 1997 was 24,389,000. 2 RFS HOTEL INVESTORS, INC. INDEX
Form 10-Q Report Page ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RFS Hotel Investors, Inc. Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 3 Consolidated Statements of Income - For the three months ended June 30, 1997 and 1996 and the six months ended June 30, 1997 and 1996 4 Consolidated Statements of Cash Flows - For the six months ended June 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 RFS, Inc. Balance Sheets - December 31, 1996 and June 30, 1997 9 Income Statements - For the three months ended June 30, 1997 and 1996 and the six months ended June 30, 1997 10 Statements of Cash Flows - For the six months ended June 30, 1997 and 1996 11 Notes to Financial Statements 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of RFS Hotel Investors, Inc. and RFS, Inc. 14 Item 4. Submission of Matters to a Vote of Security Holders 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS Investment in Hotel Properties, net $ 562,230 $ 415,618 Hotels under development 8,714 7,325 Cash and cash equivalents 4,368 57,935 Accounts receivable-Lessees 13,788 7,187 Deferred expenses, net 3,416 3,598 Prepaid and other assets 2,009 1,402 Escrow deposits 10 6,064 --------- --------- $ 594,535 $ 499,129 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,939 $ 2,258 Accrued real estate taxes 3,150 1,774 Borrowings on line of credit 108,000 50,000 Bonds 73,355 74,769 Other debt 7,672 8,295 Minority interest 36,404 4,551 --------- --------- 230,520 141,647 --------- --------- Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized, 973,684 shares outstanding 10 10 Common Stock, $.01 par value, 100,000,000 shares authorized, 24,389,000 and 24,384,000 shares outstanding 244 244 Paid-in capital 362,976 356,548 Undistributed income 2,741 3,005 Unearned directors' and officers' compensation (1,956) (2,325) --------- --------- Total shareholders' equity 364,015 357,482 --------- --------- $ 594,535 $ 499,129 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FOR THE FOR THE FOR THE THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 ------------------------------------------------------------------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Leases $ 21,736 $ 16,100 $ 39,599 $ 29,368 Interest 11 74 55 143 -------- -------- -------- -------- Total revenue 21,747 16,174 39,654 29,511 -------- -------- -------- -------- Expenses: Real estate taxes and property and casualty insurance 1,985 1,448 3,932 2,909 Depreciation 4,284 2,627 8,192 5,140 Amortization of franchise fees and unearned compensation 222 194 443 331 Compensation 606 444 1,227 913 Franchise taxes 75 65 150 130 General and administrative 392 619 916 927 Loss on sale of a hotel property 244 Amortization of loan costs 266 89 410 177 Interest expense, net 2,548 701 4,486 1,409 -------- -------- -------- -------- Total expenses 10,378 6,187 19,756 12,180 -------- -------- -------- -------- Income before minority interest 11,369 9,987 19,898 17,331 Minority interest (1,061) (137) (1,896) (245) -------- -------- -------- -------- Net income 10,308 9,850 18,002 17,086 Preferred stock dividends (352) (352) (700) (484) -------- -------- -------- -------- Net income applicable to common shareholders $ 9,956 $ 9,498 $ 17,302 $ 16,602 ======== ======== ======== ======== Net income per common and common equivalent share $ 0.41 $ 0.39 $ 0.71 $ 0.68 Weighted average shares and partnership units outstanding 26,959 24,716 26,946 24,716
The accompanying notes are an integral part of these consolidated financial statements. 4 5 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE SIX FOR THE SIX MONTHS MONTHS JUNE 30, JUNE 30, 1997 1996 ----------- ----------- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 18,002 $ 17,086 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,045 5,648 Income allocated to minority interest 1,896 245 Loss on sale and write-down of hotel properties 244 Changes in assets and liabilities: Accounts receivable-Lessees (6,601) (4,012) Prepaids and other assets (607) (1) Accounts payable and other liabilities 1,057 249 --------- --------- Net cash provided by operating activities 22,792 19,459 --------- --------- Cash flows from investing activities: Investment in hotel properties and hotels under development (111,976) (44,080) Proceeds from sale of hotel property 3,891 Escrow deposits and prepayments under purchase agreements (1,421) Refund on franchise agreements 8 --------- --------- Net cash used by investing activites (111,968) (41,610) --------- --------- Cash flows from financing activities: Net proceeds from issuance of preferrred stock 18,143 Net proceeds from issuance of common stock 72 Distributions to common and preferred shareholders (18,266) (16,434) Distributions to limited partners (1,850) (218) Borrowings on revolving credit agreement 58,000 32,750 Payments on revolving credit agreement (12,000) Payments on debt and bonds (2,037) (20) Loan fees paid (310) (59) --------- --------- Net cash provided by financing activities 35,609 22,162 --------- --------- Net increase (decrease) in cash and cash equivalents (53,567) 11 Cash and cash equivalents at beginning of period 57,935 2,680 --------- --------- Cash and cash equivalents at end of period $ 4,368 $ 2,691 ========= ========= Supplemental disclosures of non-cash investing and financing activities: In 1997, the Company recorded a $6,356 allocation to paid-in capital from minority interest. In 1997, the Partnership issued 2,244,934 limited partnership units valued at $38.2 million in connection with the purchase of four hotels. In 1997, the Partnership applied deposits of $6,064 towards the purchase of hotels. In 1996, the Partnership applied deposits of $140 towards the purchase of a hotel.
The accompanying notes are an integral part of these consolidated financial statements. 5 6 RFS HOTEL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE, UNIT AND PER SHARE DATA) 1. ORGANIZATION AND PRESENTATION. RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee on June 1, 1993, and is a self-administered real estate investment trust ("REIT"). The Company contributed substantially all of the net proceeds of its public offerings to RFS Partnership, L.P. (the "Partnership") in exchange for the sole general partnership interest in the Partnership. The Partnership began operations in August 1993. At June 30, 1997, the Company owned approximately 90.5% of the Partnership. RFS Managers, Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed effective January 1, 1995 to provide management services to the Company. During 1996, RFS Financing Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single purpose Tennessee limited partnership, which is wholly owned by the Company, was formed to issue commercial mortgage bonds (the "Bonds"). The Company, through its subsidiary partnerships, acquires or develops and owns hotel properties. These unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company included in the Company's 1996 Annual Report on Form 10-K. The following notes to the consolidated financial statements highlight significant changes to notes included in the Form 10-K and present interim disclosures required by the SEC. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. 2. DECLARATION OF DIVIDEND. On July 23, 1997, the Company declared a $0.36 dividend on each share of Common Stock outstanding to shareholders of record on August 5, 1997. The dividend will be paid on August 15, 1997. 3. ACQUISITIONS OF REAL ESTATE. In June 1997, the Partnership consummated the acquisition of the Beverly Heritage Hotel in Milpitas, CA for a purchase price of $33.7 million. The purchase price was paid with borrowings under the Company's line of credit (the "Credit Line"). 4. IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS. In March 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of operations and requires a reconciliation of the numerator and the denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The Company will adopt the 6 7 disclosure of the requirements of FAS 128 beginning December 31, 1997. The Company does not expect the adoption of FAS to have a material impact on its financial position, results of consolidated operations, or cash flows. 5. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net income per common and common equivalent share is computed as follows for the three and the six months ended June 30, 1997 and 1996:
For the Three Months For the Six Months Ended Ended June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 ------------- ------------- ------------- ------------- Income before minority interest $11,369 $ 9,987 $19,898 $17,331 Less preferred stock dividend (352) (352) (700) (484) ------- ------- ------- ------- $11,017 $ 9,635 $19,198 $16,847 ======= ======= ======= ======= Weighted average common shares and common stock equivalents outstanding 26,959 24,716 26,946 24,716 Net income per common share $ 0.41 $ 0.39 $ 0.71 $ 0.68
7 8 6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro forma condensed statements of income for the six months ended June 30, 1997 and 1996 of the Company are presented as if the hotel properties owned at June 30, 1997 were owned since January 1, 1996. These unaudited pro forma condensed statements of income are not necessarily indicative of what actual results of operations of the Company would have been assuming such transactions had been completed as of January 1, 1996, nor does it purport to represent the results of operations for future periods. The pro forma effects related to the issuance of preferred stock are not reflected in the following.
1997 1996 ---- ---- Operating Data: Total revenue $41,774 $36,960 Real estate taxes and casualty insurance 4,317 3,502 Depreciation and amortization 10,579 10,204 Compensation 1,227 913 Franchise taxes 150 130 General and administrative 916 927 Loss on sale of a hotel property 244 Interest expense 5,681 4,559 ------- ------- Income before allocation to minority interest 18,904 16,481 Less minority interest (1,801) (1,571) ------- ------- Net income $17,103 $14,910 ======= ======= Net income per common share $ 0.68 $ 0.59 Weighted average shares and partnership units outstanding 26,959 26,959
8 9 RFS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, June 30, 1996 1997 ---- ---- Assets - ------ Cash and cash equivalents $ 7,108 $ 14,505 Accounts receivable, net 3,287 4,864 Due from Parent 1,749 4,274 Other 522 455 -------- -------- Total current assets 12,666 24,098 Notes and other receivables, net of current portion 3,000 3,000 Investment in RFS Hotel Investors, Inc. 20,032 19,993 Leasehold improvements and office equipment, net 300 298 Capitalized franchise costs 2,563 2,471 Deferred costs and other assets, net 656 1,754 -------- -------- $ 39,217 $ 51,614 ======== ======== Liabilities and Stockholder's Equity - ------------------------------------ Accounts payable and accrued expenses $ 6,350 $ 9,085 Note payable 324 0 Lease payable 6,775 12,358 -------- -------- Total current liabilities 13,449 21,443 Net deficit in partnerships and ventures 314 314 Deferred income taxes 61 0 -------- -------- Total liabilities 13,824 21,757 -------- -------- Common stock, no par value; 5,000 shares authorized, 100 shares issued and outstanding 282 282 Additional paid-in capital 18,500 18,500 Unearned employee compensation (141) (105) Unrealized gain on marketable securities 114 136 Retained earnings 6,638 11,044 -------- -------- Total stockholder's equity 25,393 29,857 -------- -------- $ 39,217 $ 51,614 ======== ========
The accompanying notes are an integral part of these financial statements. 9 10 RFS, INC. INCOME STATEMENTS (DOLLARS IN THOUSANDS)
Three months ended Six months ended March 30, June 30, --------------------------- --------------------------- 1997 1996 1997 1996 --------------------------- --------------------------- (unaudited) (unaudited) Revenues: Management and consulting fees $ 446 $ 79 $ 828 $ 115 Hotel revenues 50,953 38,431 95,724 72,723 Other fees and income 418 437 809 632 Total revenues 51,817 38,947 97,361 73,470 -------- -------- -------- -------- Operating Expenses: General and administrative 1,020 877 2,010 1,846 Hotel expenses 46,701 35,304 88,211 67,113 Depreciation and amortization 72 85 145 116 Total operating expenses 47,793 36,266 90,366 69,075 -------- -------- -------- -------- Operating Income 4,024 2,681 6,995 4,395 Interest expense (1) -- (4) (11) Interest income 75 67 150 146 ------- -------- -------- --------- Income before taxes 4,098 2,748 7,141 4,530 Provision for income taxes (1,570) (965) (2,735) (1,586) -------- -------- -------- -------- Net Income $ 2,528 $ 1,783 $ 4,406 $ 2,944 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 10 11 RFS, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Six Months Ended June 30, ------------------------- 1997 1996 ---- ---- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 4,406 $ 2,944 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 145 116 Other non-cash expenses 58 177 Deferred income taxes (61) -- (Increase) decrease in accounts receivable (1,577) 905 (Increase) decrease in other assets 67 (57) Increase in current liabilities 8,318 5,147 -------- -------- NET CASH PROVIDED BY OPERATIONS 11,356 9,232 -------- -------- Cash flows from investing activities: Purchases of furniture and equipment (51) (16) Investment in RFS Hotel Investors, Inc. 39 (18,500) Increase in deferred costs and other assets (1,098) (2,626) Loans to owners of managed hotels, net -- (3,000) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (1,110) (24,142) -------- -------- Cash flows from financing activities: Advances from (repayments to) Parent (2,525) 18,500 Principal repayments (324) (672) -------- -------- NET CASH provided BY FINANCING ACTIVITIES (2,849) 17,828 -------- -------- Net increase in cash and cash equivalents 7,397 2,918 Cash and cash equivalents at beginning of year 7,108 9,238 -------- -------- Cash and cash equivalents at end of year $ 14,505 $ 12,156 ======== ========
The accompanying notes are an integral part of these financial statements. 11 12 RFS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRESENTATION. Effective February 27, 1996, RFS, Inc. became a wholly owned subsidiary of Doubletree Corporation ("Doubletree") in a transaction accounted for as a pooling of interests. RFS, Inc. generates substantially all of its revenue from operating and managing leased hotels owned the Partnership. Substantially all of the hotels owned by the Partnership (the "Hotels") are separately leased by the Partnership to RFS, Inc. or other wholly-owned subsidiaries of Doubletree (the "Lessees") under individual lease agreements (collectively, the "Percentage Leases"). The Percentage Leases provide for the payment of annual rent equal to the greater of (i) fixed base rent or (ii) percentage rent based on a percentage of gross room revenue, food revenue and beverage revenue at the Hotels. In connection with the February 27, 1996 merger with Doubletree, the Partnership amended each of the individual Percentage Leases. RFS, Inc. was granted a 10-year right of first refusal to manage and lease future hotels acquired or developed by the Partnership subject to certain exceptions. These unaudited financial statements of the Lessee have been prepared pursuant to the Securities and Exchange Commission ("SEC") rules and regulations and should be read in conjunction with the financial statements and notes thereto of the Company and RFS, Inc. included in the Company's 1996 Annual Report on Form 10-K. The following notes to the consolidated financial statements highlight changes to notes included in the Form 10-K and present interim disclosures required by the SEC. The accompanying financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain financial statement items from prior years have been reclassified to be consistent with the current year financial statement presentation. 2. INVESTMENT IN RFS HOTEL INVESTORS, INC. RFS, Inc. purchased 973,684 shares of the Company's convertible preferred stock for $19 per share or $18,500,000. This investment is recorded at cost as there is no ready market for these securities. The convertible preferred stock pays a fixed annual dividend of $1.45 per share and is convertible on a one-for-one basis for shares of common stock of the Company at the end of seven years. 12 13 3. NOTES AND OTHER RECEIVABLES. In June 1996, RFS, Inc. obtained management agreements for eight hotel properties owned by entities unrelated to the Company. In connection with obtaining these contracts, RFS, Inc. loaned $3,000,000 to the owners, principally for renovations. The loan bears interest at 10% and is repayable as follows: $300,000 on December 31, 1998 $600,000 on December 31, 1999 $300,000 on December 31, 2000 $1,800,000 on December 31, 2001 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RFS HOTEL INVESTORS, INC. BACKGROUND The Company commenced operations in August 1993 upon completion of its initial public offering and the simultaneous acquisition of seven hotels with 1,118 rooms. The following chart summarizes information regarding the 61 hotels (the "Hotels") owned at June 30, 1997:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ Full Service Hotels: Holiday Inn .....................6............................1,206 Sheraton.........................4..............................814 Doubletree.......................1..............................220 Independent......................2..............................311 -- ----- Sub-total..............13............................2,551 -- ----- Extended Stay Hotels: Residence Inn...................12............................1,575 Homewood Suites..................2..............................197 Hawthorn Suites..................1..............................280 -- ----- Sub-total..............15............................2,052 Limited Service Hotels: Hampton Inn.....................19............................2,360 Courytard by Marriott............1..............................102 Comfort Inn......................6..............................787 Holiday Inn Express..............7..............................861 -- ----- Sub-total..............33............................4,110 -- ----- Total..................61............................8,713 == =====
The Hotels are located in 24 states. To maintain the Company's federal income tax status as a REIT, neither the Company nor the Partnership can operate hotels. The Partnership leases the hotels to wholly-owned subsidiaries of Doubletree Corporation, (collectively, the "Lessees") pursuant to leases (the "Percentage Leases") which provide for annual rent equal to the greater of (i) fixed base rent, or (ii) rent payments based on percentages of the Hotels' revenues. Base rent is payable monthly. Percentage rent is payable quarterly. The Lessees operate 57 Hotels. Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc. pursuant to management agreements between RFS, Inc. and Alpha Inn Management Company and TMH, Inc. RFS, Inc. has a right of first refusal, subject to certain exceptions, to lease hotels acquired by the Partnership, through February 27, 2006. 14 15 RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 1997 to 1996 and the Six Months Ended June 30, 1997 to 1996 Increases in lease revenue for the three and the six months ended June 30, 1997 over 1996 are due to (i) an increased number of hotels being owned by the Partnership and leased to the Lessees during the 1997 periods, and (ii) increases in revenue per available room ("REVPAR") at the hotels owned throughout both periods. At December 31, 1995, the Partnership owned 48 hotels. The Partnership acquired or opened six hotels during 1996 (the number of hotels is indicated in parenthesis following the date): January (1), May (1), July (1), November (2), and December (1). These hotels were owned the entire six months in 1997. One hotel was sold in March of 1996. The following table shows statistical data regarding the Hotels on an actual and a pro forma basis. The pro forma assumes 52 of the 61 hotels owned at June 30, 1997 were owned by the Partnership throughout both periods; it excludes seven newly opened hotels and two expanded hotels where the room additions were not open for all of both periods presented.
for the three months ended June 30, 1997 --------------------------------------------------------------------------------- Actual Pro Forma ------ % Increase --------- % Increase 1997 1996 (Decrease) 1997 1996 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 78.3% 81.0% (3.3) 80.0% 80.7% (0.9) ADR $75.18 $68.58 9.6 $77.15 $71.51 7.9 RevPAR $58.87 $55.58 5.9 $61.69 $57.68 7.0 for the six months ended June 30, 1997 --------------------------------------------------------------------------------- Actual Pro Forma % Increase ------ % Increase --------- 1997 1996 (Decrease) 1997 1996 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 75.1% 77.1% (2.6) 76.5% 77.1% (0.8) ADR $74.56 $67.63 10.2 $76.39 $70.77 7.9 RevPAR $56.02 $52.16 7.4 $58.46 $54.57 7.1
Increases in real estate taxes and property and casualty insurance and depreciation in 1997 over 1996 are due to the increased number of hotels owned by the Partnership during 1997 over 1996 and increased real estate tax assessments. Increased compensation expense in 1997 over 1996 is primarily due to additional employees in the 1997 period. 15 16 Decreases in general and administrative expense for the three months ended June 30, 1997 over 1996 are primarily due to decreased costs related to potential acquisitions in the 1997 period. General and administrative expense remained flat for the six months ended June 30, 1997 over 1996 due to increased office and moving expenses, including rent, which were offset by decreased costs related to potential acquisitions. Increases in amortization of loan costs in the three and the six months ended June 30, 1997 are due to amortization in the 1997 periods of costs related to the Bonds and amortization of increased costs related to the Credit Line. Interest expense increased in 1997 over 1996 due to Bonds being outstanding during the 1997 periods and increased borrowings on the Credit Line. LIQUIDITY AND CAPITAL RESOURCES In July 1997, the Company entered into a new bank line of credit (the "Line of Credit"), for $175 million, of which $100 million is unsecured. Borrowings under the Line of Credit bear interest at LIBOR plus 1.75%. The Line of Credit is secured by first priority mortgages on 29 hotels and agreements restricting the transfer, pledge or other hypothecation of 10 hotels (collectively, the "Collateral Pool"). The Line of Credit contains various covenants including maintenance of a minimum net worth, minimum debt coverage and interest coverage ratios, total indebtedness and total liabilities limitations and borrowing base to value limitations. The Company borrowed $111.8 million on the Line of Credit in July 1997, which was used to repay the Credit Line and other borrowings. The Company had a $75 million line of credit which was terminated and paid-off at the closing of the new Line of Credit in July 1997. Borrowings under the Credit Line bore interest at the 90-day LIBOR plus 1.75%. The Company had outstanding borrowings of $73.0 million on the Credit Line at June 30, 1997. In June 1997, the Company borrowed $35 million from a bank to purchase a property. This loan was unsecured and bore interest at LIBOR plus 1.75%. This loan was paid off with borrowings under the new Line of Credit. In November 1996, the Company, through a subsidiary, issued $75 million of commercial bonds, (the "Bonds") series 1996-1 as follows:
Class Initial Principal Amount Interest Rate Stated Maturity ----- ------------------------ ------------- --------------- Class A $50 million 6.83% August 20, 2008 Class B $25 million 7.30% November 21, 2011
Principal payments on the Class A bonds are payable based on a 141-month amortization schedule beginning in December 1996; principal payments on the Class B bonds are payable based on a 39-month amortization schedule beginning in September 2008. The total monthly principal and interest payments approximate $0.7 million. In connection with the purchase of a hotel in Fishkill, NY, the Partnership assumed indebtedness pursuant to industrial development bonds issued in 1988 and which are due 16 17 December 1, 2002. The current outstanding balance due on the bonds is approximately $1.8 million. The industrial development bonds bear interest at a variable rate which, as of December 31, 1995, was approximately three percent (3%) per annum. Principal is payable in installments of $0.6 million every three years with the next installment due in 2000. In connection with the purchase of a hotel in Atlanta, GA, the Partnership assumed a promissory note payable with a principal balance of approximately $5.9 million. The promissory note bears interest at 10.15% and is due in monthly principal and interest installments of $53,000. The note is due July 1, 1998 and contains a severe prepayment premium. On February 27, 1996, the Company issued 973,684 of Series A convertible preferred stock to RFS, Inc. for an aggregate purchase price of $18.5 million. The Company has budgeted $23.0 million for capital expenditures in 1997 at the 53 hotels owned at December 31, 1996. At June 30, 1997, the Partnership had spent approximately $7.5 million of the budgeted amounts. The Company will use cash generated from operations and borrowings under the Line of Credit to fund these expenditures. The Company intends to substantially complete these improvements by the end of 1997. The Partnership is developing the following hotels:
ESTIMATED ESTIMATED NUMBER OF DEVELOMENT OPENING FRANCHISE LOCATION ROOMS/SUITES COSTS QUARTER(Q) --------- -------- ------------ ----- ---------- Residence Inn Jacksonville, FL 120 $8.3 million 3Q97 Residence Inn West Palm Beach, FL 78 $6.5 million 4Q97 Homewood Suites Chandler, AZ 83 $6.6 million 1Q98 Hampton Inn Jacksonville, FL 118 $6.5 million 1Q98 Marriott Courtyard Crystal Lake, IL 90 $6.1 million 2Q98
The Partnership is constructing a 42-suite addition to the Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.7 million. Completion of the addition is expected in the third quarter of 1997. There can be no assurance that any or all of such hotels will be completed as scheduled. In addition to purchasing existing hotel properties at targeted rates of return, management anticipates that the Company will both develop additional hotels and enter into contracts to acquire hotels from third parties after completion of development. It is expected that future investments in hotel properties will be financed, in whole or in part, with cash generated from 17 18 operations, short-term investments, proceeds from additional issuances of equity securities, borrowings under the Line of Credit or other borrowings. The Company in the future may seek to increase further the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments. In June 1996, the Company's shareholders approved an amendment to the Company's charter to delete the charter limitation on indebtedness. Although the Company no longer has any charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a policy limiting the amount of indebtedness that the Company will incur to an amount not in excess of approximately 40% of the Company's investment in hotel properties, at cost, after giving effect to the Company's use of proceeds from any indebtedness and accounting for all investments in hotel properties under the purchase method of accounting. Any debt incurred or issued by the Company may be secured or unsecured, long-term or short-term, may charge a fixed or variable interest rate and may be subject to such other terms as the Board of Directors of the Company in its discretion, may approve. The Company has filed a Shelf Registration Statement on Form S-3 (the "Shelf") with the Securities and Exchange Commission for the issuance from time to time of preferred stock, common stock and depositary shares representing entitlement to all rights and preferences of a fraction of a share of preferred stock of a specified series ("Depositary Shares") in the aggregate amount of up to $250 million. The Shelf became effective July 30, 1996. The Company has also filed a shelf registration statement registering the issuance and/or re-sale of up to 2,569,609 shares of common stock which may be issued upon redemption of partnership interests in the Partnership. The Company intends to fund cash distributions to shareholders principally out of cash generated from operations. The Company may incur, or cause the Partnership to incur, indebtedness to meet distribution requirements imposed on a REIT under the Internal Revenue Code (including the requirement that a REIT distribute to its shareholders annually at least 95% of its taxable income) to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. In 1997, the Partnership has, through June 30, 1997, made cash distributions to its partners, including the Company, of $20.1 million or $0.72 per Partnership unit, from which the Company made cash distributions to common shareholders of $17.6 million, or $0.72 per share. The Company also made cash distributions to the preferred shareholder of $.7 million, or $.725 per share. The Company and the Partnership utilized available cash to fund such distributions. SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy during the second and third quarters. This seasonality can be expected to cause fluctuations in the Partnership's quarterly lease revenue to the extent that it receives Percentage Rent. 18 19 FUNDS FROM OPERATIONS The National Association of Real Estate Investment Trusts has adopted a new definition of funds from operations ("FFO"). Under the definition, FFO represents net income excluding gains (or losses) from debt restructuring or sales of properties, plus depreciation of real property and after adjustments for unconsolidated partnerships and joint ventures. Under this definition, the Company's FFO is computed as follows:
For the Three Months Ended For the Six Months Ended June 30 June 30 ------------------ --------------- 1997 1996 1997 1996 ---- ---- ---- ---- (in thousands, except per share amounts) Income before allocation to minority interest $11,369 $ 9,987 $19,898 $17,331 Add depreciation 4,284 2,627 8,192 5,140 Add loss on sale of hotel 244 Less preferred dividend (352) (352) (700) (484) ------- ------- ------- ------- FFO $15,301 $12,262 $27,390 $22,231 ======= ======= ======= ======= Weighted average shares and partnership units outstanding 26,959 24,716 26,946 24,716 FFO per share $ 0.57 $ 0.50 $ 1.02 $ 0.90
19 20 RFS, INC. BACKGROUND RFS, Inc. leases 60 and operates 56 of the Hotels owned by Partnership. RESULTS OF OPERATIONS Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996 Total revenues increased $12.9 million or 33% to $51.8 million for the three months ended June 30, 1997 compared to $38.9 million for the three months ended June 30, 1996. The increase in hotel revenues of $12.5 million was attributable, in part, to the net addition of eleven leased properties as compared to the comparable period of 1996. Hotel revenues also increased due to same-store growth; on a same-store basis, the average daily rate increased approximately $2.85 to $70.79, while occupancy declined slightly to 79.7%. The margin on hotel results (hotel revenues less hotel expenses) increased $1.1 million or 36% from $3.1 million to $4.3 million reflecting the addition of the eleven properties and an improvement in the operating margins of the hotels from 8.1% in the three months ended June 30, 1996 to 8.3% in the three months ended June 30, 1997. Management and franchise fees increased to $0.4 million reflecting the net addition of eight management contracts that commenced in the second quarter of 1996. Other fees and income remained flat at $0.4 million for the three months ended June 30, 1997 and 1996, respectively. General and administrative expenses increased slightly to $1.0 million for the three months ended June 30, 1997 compared to $0.9 million for the three months ended June 30, 1996, reflecting increased costs associated with the addition of the properties discussed above. Depreciation and amortization decreased nominally. Interest income represents interest earned on the loan made to the owner of certain hotels managed by RFS. The provision for income taxes reflects an effective tax rate of 35.0% in 1996 and 38.3% in 1997, respectively (the consolidated effective tax rates for Doubletree Corporation in those years). Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996 Total revenues increased $23.9 million or 33% to $97.4 million for six months ended June 30, 1997 compared to $73.5 million for the six months ended June 30, 1996. The increase in hotel revenues of $23.0 million was attributable, in part, to the net addition of eleven leased properties as compared to the comparable period of 1996. On a same-store basis, hotel revenues increased due to an increase of approximately $2.83 in the average daily rate to $70.01; occupancy declined slightly to 76.0%. The margin on hotel results (hotel revenues less hotel expenses) increased $1.9 million or 34% from $5.6 million to $7.5 million reflecting the addition 20 21 of the eleven properties in comparison to the prior and an improvement in the margins of the hotels from 7.7% in the first half of 1996 to 7.8% in the first half of 1997. Management and franchise fees increased to $0.8 million reflecting the net addition of eight management contracts that commenced late in the second quarter of 1996. Other fees and income increased by approximately $0.2 million, principally attributable to dividend income generated from the investment in the convertible preferred stock of the Company made in late February 1996. General and administrative expenses increased by $0.2 million or 9% to $2.0 million for the six months ended June 30, 1997 compared to $1.8 million for the six months ended June 30, 1996, reflecting increased costs associated with the addition of the properties discussed above. Depreciation and amortization increased nominally. Interest income represents interest earned on the loan made to the owner of certain hotels managed by RFS. The provision for income taxes reflects an effective tax rate of 35.0% in 1996 and 38.3% in 1997, respectively (the consolidated effective tax rates for Doubletree Corporation in those years). LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1997, RFS, Inc. generated cash flow from operations of $11.4 million as compared to $9.2 million for the comparable period of 1996. The increase was principally attributable to an increase in the lease payment due to the Company that is paid on a quarterly basis in arrears and increased earnings. The principal source of cash, other than capital contributions from Doubletree Corporation, will come from operations. Since inception, RFS, Inc. has been able to meet its rent obligations under the Percentage Leases. To the extent that future operations are not sufficient to meet the rent obligations when due, RFS, Inc. will seek additional capital from Doubletree Corporation which has agreed to maintain a minimum net worth of $15.0 million in RFS, Inc. 21 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 24, 1997, the annual meeting of shareholders was held to elect three Class I directors to serve on the Board of Directors until the annual meeting of shareholders in 2000 and to elect one Class III director to serve until the annual meeting of shareholders in 1999. The shareholders voted to elect the four following directors:
Votes For Votes Against --------- ------------- Class I Directors: Michael S. Starnes 21,479,838 45,284 John W. Stokes, Jr. 21,076,638 448,484 Minor W. Perkins 21,478,838 46,284 Class III Director: R. Lee Jenkins 21,077,638 447,484
The following directors terms of office continued after the meeting: Class II Directors (terms expiring in 1998) - Bruce E. Campbell, Jr. and H. Lance Forsdick, Sr. Class III Directors (terms expiring in 1999) - Robert M. Solmson and Harry J. Phillips, Sr. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 - Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K - None. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. RFS HOTEL INVESTORS, INC. August 8, 1997 /s/ Michael J. Pascal - -------------- -------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) August 8, 1997 /s/ Robert M. Solmson - -------------- -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 23 EX-27 2 FINANICAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 4,368 0 13,788 0 0 0 593,693 31,463 594,535 0 189,027 0 10 244 363,761 594,535 21,736 21,747 0 0 7,830 0 2,548 11,369 0 11,369 0 0 0 10,308 0.41 0
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